How does net income affect the Balance Sheet?

Net income is a key component that directly influences the equity section of the Balance Sheet. After a company has calculated its net income for a given period, it ultimately affects the retained earnings, which is a cumulative total of all past net incomes, less any dividends paid out to shareholders.

When net income is positive, it represents a profit for the company, which, instead of being distributed, can be reinvested in the business or held for future use. Therefore, this profit is added to the retained earnings on the Balance Sheet. This increase reflects the company's performance and capacity to generate value over time.

It's important to note that this process enhances shareholder equity, showing that the business has an accumulation of earnings that can be utilized for future growth or investment. Thus, a rise in retained earnings is a fundamental indicator of a company's financial health and its ability to create shareholder value.