The Relationship Between Net Income & Owner's Equity
Original post by Alexis Lawrence of Demand Media
The net income of a company is the amount of money the company earns after subtracting its expenses and any money owed to creditors. The owner's equity of a company is the worth of the company as far as stockholders are concerned. The net income and owner's equity of a company have a close relationship.
Figuring Net Income
When figuring the net income of a company, consider all of the company's profits, including those garnered from product and service sales, and any money earned through the sale of company stock. The sum of all of these sources of income equals the company's total profits. Any money that a company pays out, including equipment purchases, property rentals and stock dividends, are taken away from these total profits to compute its net profits or net income.
Net Income and Net Worth
The net income of a company increases the company's total net worth. For example, if a company begins a year with a net worth of $1 million, and during the year it earns $400,000 in net income, the company's net worth increases to $1.4 million. Like net income, net worth is based upon the money that belongs to the company free and clear to use as working capital, minus the money it pays out or owes to creditors.
Net Worth and Owner's Equity
Owner's equity, also known as stockholder equity, is the amount that a company is worth to stockholders. It equals the net worth of the company. So if a company's net worth increases from $1 million to $1.4 million during a single year, the owner's equity in the company also increases from $1 million to $1.4 million. This increase generally causes a rise in stock prices, which results in profits for current stockholders.
What Changes Income and Equity
Net income in a company can be influenced by a number of factors. The main factor that increases or decreases net income is the company's sales throughout the year. The more products sold or the more projects that a company is contracted for during the year, the more money it takes in. This can offset expenses, such as rent and dividends, to ensure a profitable net income. On the flip side, unexpected expenses, such as equipment repair or loss of product, can be a blow against profits, resulting in a negative net income or a loss.
- Dave Manuel: Stock Dividends; Feb. 4, 2008
- Principles of Accounting: Owners' Equity; Larry Walther
- University of Massachusetts: Cash Dividends; C.P. Carter
- University of Texas at El Paso: Shareholders' Equity; Sid Glandon
About the Author
Alexis Lawrence is a freelance writer, filmmaker and photographer with extensive experience in digital video, book publishing and graphic design. An avid traveler, Lawrence has visited at least 10 cities on each inhabitable continent. She has attended several universities and holds a Bachelor of Science in English.