Question

Explain the relationship between net income and retained earnings and why net income may not be attributable to capital.

Answer 1

Answer is as under :

Explain the relationship between net income and retained earnings

Net income and retained earnings are directly related as when net income increases , retained earning increases. For any company or business organization net income play a significant role because it leads to increase in owner's equity. Net income is total revenue minus total expenses and taxes of the organization. Owner's equity means Total assets minus Total liabilities. Owner equity also mean total capital invested plus beinging to year end net income plus retained income. Net income contributes to a company's assets and can therefore affect the retained earning. When a company generates a profit and retains a portion of that profit after subtracting all of its costs, the owner's equity generally rises. A companies positive net income will lead to increase in retained earning and vice a versa. Net income will lead to increase in share price of the organization.

If the end result of income statement is loss than it will lead to decrease in owner's equity as there will be decrease in retained earning and hence decreases in owner's equity

why net income may not be attributable to capital.

Net Income is Balance of total revenue and total expenses where as capital is fund and resources bought in by owner's and stake holder. Hence net income cannot be attributable to capital