Question

Can you please tell me, in detail, what the relationship between net income and owner's equity is?
I need a 175 word count for my study guide. Thank you so much for your help.

Answer 1

Answer is as under :

Net income and owner's equity are directly related as when net income increases , owner equity 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. Net income contributes to a company's assets and can therefore affect the book value, or owner's equity. 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. On the flip side, if a company generates a profit but its costs of doing business exceed that profit, then the owner's equity generally decreases. A companies positive net income will lead to increase in owner's equity and vice a versa. Net income will lead to increase in share price of the organization. Owner's equity is dependent on net income for final figure. The relationship between net income and owner's equity is through retained earnings, which is a balance sheet account that accumulates net income.

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