Accounting Net Income Flows
Accounting net income flows can be described as the revenues recognized during a specific financial period, less the expenditure recorded in the same period. The said amount is normally calculated using accrual accounting under which revenue and expenses are recorded in the period to which they relate. This is the reason as to why accounting net income flow is different from net cash flow.
The calculation for net income is as follows:
Net income = Net Revenue – Expenditures
For Example, the revenue of $50,000 and expenses of $40,000 yield an accounting net income of $10,000. In the said example, if the amount of expenditure had been more than the revenue generated, the result would be termed as a net loss rather than net income.
Accounting net income flow is the last item on the statement of comprehensive income/ income statement. However, some income statements have a separate section reconciling retained earnings at the beginning of the period with those appearing at the end of the period through net income and dividends (if any).
Other Names for Accounting Net Income
The bottom line of an entity’s statement of comprehensive income has 3 commonly used names:
- Net profit
- Net income
- Net earnings
All the above-mentioned terms have the same meaning which can confuse people at times especially those that are new to the field of accounting and finance.
Ties to Other Elements of the Financial Statements
The net income is very important as it is one of the mainline items in all three statements. It is arrived at in the statement of comprehensive income, it is also used in both the statement of cash flow and the statement of financial position.
Net income flows into the statement of financial position through retained earning appearing under the head of equity. The formula used for computing retained earnings at the end of a financial period is as follows:
Retained Earnings at the end of a period = Retained Earnings + Net income/ profit – Dividends
In the statement of cash flows, net income is used for calculating operating cash flows through the use of the indirect method.
Difference Between Cash flow and Net Income
Net earnings are an accounting metric and do not reflect/ represent the cash flow or economic profit of an entity. Net earnings include a number of non-cash expenses such as amortization, depreciation, provision for doubtful debts, bad debts, etc., it does not match the cash flow produced by a business during a specific financial period.