How to Find Net Income on a Balance Sheet: Formula and Example

To find net income using a balance sheet, calculate it from the change in retained earnings: subtract the beginning retained earnings balance from the ending balance, then add back any dividends paid during the period. Net income itself is not a line on the balance sheet. It lives on the income statement and then flows into the equity section of the balance sheet through an account called retained earnings, so the balance sheet only shows it indirectly.

Why Net Income Doesn’t Appear on the Balance Sheet

Net income is the last line on the income statement, the profit left after subtracting operating costs, interest, and taxes from revenue.¹ Once a period closes, that figure gets rolled into retained earnings inside the stockholders’ equity section of the balance sheet. The balance sheet never labels a line “net income.” What you see instead is the cumulative result of every profit and loss the company has ever booked, bundled together in one running total.

That’s why a balance sheet alone won’t tell you how the most recent quarter or year went. It shows accumulated history. To isolate one period, you either need the income statement or you back into the number using the retained earnings math below.

The Formula

Under U.S. GAAP, profits that aren’t paid out as dividends stay in retained earnings, which securities regulations require companies to break out as a separate line inside stockholders’ equity.² Each period, the account starts at its prior ending balance, goes up by net income (or down by a net loss), and goes down by any dividends declared. Rearranging that relationship gives you the formula:

Net Income = Ending Retained Earnings − Beginning Retained Earnings + Dividends Paid

You add dividends back because they were already taken out of earnings during the period. The company’s actual profit had to be large enough to fund both what stayed in the business and what went out to shareholders.¹

A Worked Example

A company’s balance sheet at the end of 2025 shows retained earnings of $800,000. The prior year-end balance was $650,000. During 2025, the company paid $50,000 in dividends. Running the numbers:

Net Income = $800,000 − $650,000 + $50,000 = $200,000

The company earned $200,000. Of that, $50,000 went to shareholders and $150,000 stayed in the business, which is exactly why retained earnings grew by $150,000.

When the Result Is Negative

A negative answer means the company ran a net loss. Sustained losses can push retained earnings below zero, at which point the line is often relabeled “accumulated deficit.” The formula still works the same way.

Where to Find Each Number

You need three figures. Here’s where each one lives.

Ending retained earnings. Bottom of the most recent balance sheet, inside stockholders’ equity. Regulation S-X requires it as a separate caption.²
Beginning retained earnings. The retained earnings figure from the prior period’s ending balance sheet. Public companies usually present two fiscal year-ends side by side in the same annual filing, so both balances may sit on one page.³
Dividends paid. Cash flow statement, under financing activities, listed as a cash outflow. The statement of changes in stockholders’ equity also shows dividends declared inside the retained earnings column.

For public companies, all of this is on file with the SEC. Form 10-K (annual) and Form 10-Q (quarterly) contain the balance sheet, income statement, cash flow statement, and statement of stockholders’ equity. Search any registrant through EDGAR at sec.gov/edgar/search.⁴

Equity Lines That Are Not Retained Earnings

The equity section holds several line items, and mistaking any of them for retained earnings will produce a wrong answer.

Accumulated other comprehensive income (AOCI). This line captures gains and losses that skip the income statement entirely, including unrealized changes in certain investment values, foreign currency translation adjustments, and pension adjustments. These items never touch net income or retained earnings, so ignore AOCI when applying the formula.²
Additional paid-in capital. Money shareholders paid above par value when shares were originally issued. It moves when the company issues or retires shares, not when it earns a profit.
Treasury stock. Shares the company has bought back, recorded as a contra-equity account. A large buyback can shrink total equity while the company is still profitable.

Only the retained earnings line goes into the formula. Movements in AOCI, paid-in capital, and treasury stock are capital transactions, not operating results.

Things That Can Distort the Answer

The formula assumes retained earnings changed for only two reasons during the period: net income and dividends. A few other events can move that balance, and if you miss them your derived figure will be off.

Prior Period Adjustments

When a company discovers a material error in previously issued statements, GAAP has it correct the mistake by restating the opening retained earnings balance rather than running it through the current income statement. If a restatement happened between the two balance sheets you’re comparing, this year’s beginning balance may not match last year’s ending balance. Check the footnotes for any mention of restatements or error corrections before trusting the number.

Stock Dividends

A stock dividend distributes additional shares instead of cash. Under GAAP, the fair value of those shares moves out of retained earnings and into capital stock and paid-in capital. No cash leaves the business, but retained earnings drops. Miss the stock dividend and you’ll underestimate net income, because retained earnings fell by more than cash dividends alone can explain. The statement of changes in stockholders’ equity lists stock dividends separately.

Discontinued Operations

Gains and losses from business segments the company shut down or sold during the period are folded into net income but shown on the income statement below “income from continuing operations.” The formula still catches the full number, because retained earnings absorbs all of net income. Just be aware that the derived figure includes one-time results from closing a division, so it may overstate or understate the company’s ongoing profitability.

Book Income Is Not Taxable Income

The net income you derive this way is book income, calculated under GAAP. It usually differs from taxable income, which follows the Internal Revenue Code. Corporations with total assets of $10 million or more reconcile the two on Schedule M-3 of the federal return; smaller corporations use Schedule M-1.⁵

Common sources of the gap:

Tax-exempt interest on certain municipal bonds counts on the books but not on the return.
Fines, penalties, political contributions, and entertainment expenses reduce book income but aren’t deductible for tax.
GAAP and the tax code often allow different depreciation schedules for the same asset, creating temporary timing differences.
Only 50 percent of business meal expenses are deductible for tax, even though the full cost hits the books.

If you’re using the balance sheet to estimate what a company owes in tax, remember that this derived number won’t match the return. The reconciliation schedules filed with the IRS are the reliable source for the actual taxable figure.⁵

1
U.S. Securities and Exchange Commission. What Is an Income Statement
2
eCFR. 17 CFR 210.5-02 – Balance Sheets
3
U.S. Securities and Exchange Commission. Financial Reporting Manual – Topic 1 – Registrants Financial Statements
4
U.S. Securities and Exchange Commission. EDGAR Full Text Search
5
Internal Revenue Service. Instructions for Form 1120