Calculating Net Income and Retained Earnings

Objectives

After completing this lesson, you will be able to:

  • Calculate net income and retained earnings

Net Income and Retained Earnings Calculations

Reported financial data is usually collected with an initial imbalance in the balance sheet and income statement. The initial imbalance of the balance sheet must correspond to the imbalance of the profit and loss statement (or income statement). This imbalance includes data released from accounting and may also include imported data.

To correct the imbalance, the Calculate Net Income task has to be run.

The system posts the annual net income and current year retained earnings when you run the task. This ensures that the balance sheet and the profit and loss statement are consistent. Once the adjustment is posted, the two statements (balance sheet and profit and loss statement) balance again.

In the data monitor, you calculate net income and retained earnings every period by running the Calculate Net Income task. The annual net income is calculated and written to the current year retained earnings FS item in the balance sheet and the annual net income FS item in the income statement.

The Calculate net income and current year retained earnings figure below illustrates an example of calculating net income:

In this example, the initial imbalance of the balance sheet (-100) corresponds to the imbalance of the income statement (100).

Note

The system calculates the annual net income using the same document type as the reported data. For data that is released from accounting, the system calculates the annual net income using document type 05. Also, in the delivered chart of accounts, current year retained earnings is in the 317000 FS item and annual net income is in the 799000 FS item.

Calculate Net Income Report on the Results

Business Scenario

At ABC Corporation, you've imported data from a file and released data from accounting. The financial data now needs to have the annual net income and current year retained earnings calculated and recorded.

What skills will you develop in this practice exercise?

  • Calculate net income and retained earnings
  • Report on the updated results

Task 1: Calculate Net Income and Retained Earnings

Task 2: Report on Results After Net Income Calculation

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