How to Find the Profit Just Using the Balance Sheet
Through the careful analysis of a balance sheet, it is possible to determine the net income or profit earned for an accounting period. Accounts of interest on the balance sheet affecting net income are dividends payable (current liability account) and retained earnings or income (equity account). By calculating the changes in the retained earnings or income account, along with the effect of dividends, you can determine the amount of profit or net income for the period.
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Instructions
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1
Obtain a balance sheet for the current and previous accounting periods. The balance sheets must be for consecutive accounting periods. For example, if you are looking for the net income or profit amount for fiscal year 2010, obtain the balance sheets of fiscal years 2009 and 2010.
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2
Identify whether dividends were declared or an income distribution to owners occurred in the current accounting period. For a public company that has declared dividends in the current period, look for a dividends payable account under liabilities. The amount reported for this account, if present, reduced retained earnings when recorded and should be taken into account when determining the net income amount for the period. For non-public companies, evaluate the change in the owner's capital account. An increase in the current capital account from the previous period can serve as an estimate of profits distributed to owners.
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3
Calculate the profit or net income by evaluating the change in the income or retained earnings account. Evaluate the change in this account from the previous accounting period to the current one. The amount of the increase in the balance is part of the profit earned in the period. Based on the results from Step 2, add the amount of dividends payable or additions to owner capital to the increase in retained earnings/income account to arrive at the total profit or net income for the period.
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Tips & Warnings
Use this example as a reference: Pricey Corporation had retained earnings of $10 in 2009 and $25 in 2010. In 2010, dividends of $10 were declared. The net income for 2010 is $25
($25 minus $10 plus $10).
References
- "Financial: CPA Exam Review"; DeVry/Becker Educational Development Corp.; 2009
