Let's say a company has a net income of 100K for the quarter. That will get added to retained earnings on a balance sheet, but then how does the B/S get balanced?
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Flows through to retained earnings as you pointed out. On the asset side will flow through via cash generally (net income has to be received by you in some way). May also come through as another asset e.g. accrued revenue. Assets go up and equity goes up, where retained earnings is housed.
got it. So if net income is 100K, I can add 100K to cash and add 100K to retained earnings? is that how this works?
Would probably advise you to go through the 400IBD document.
Essentially, the way it's typically done is from your income statement -> CFS -> Balance sheet. That being said, the 100k net income will flow through the CFS, taking into account operating, investing and financing activities. Assuming the numbers on these are 0 (which is impossible), this leads to your cash increasing by 100k too.
So, to answer your question, Dr Cash, Cr Retained Earnings by 100k. So both an asset and equity increase by 100k, allowing your balance sheet to balance.
Bad assumption to put it all in cash. Receivables (A/R, Interest Receivable, etc) will usually accumulate some of the Net Income
Bad assumption to put it all in cash. Receivables (A/R, Interest Receivable, etc) will usually accumulate some of the Net Income
Yup agree that it should never be all into cash - which is why I mentioned that it goes through the CFS for changes to working cap, non-cash, capex etc. Stated assumption as 0 to CFS items for simplicity sake to answer the main question. Would recommend OP to look through some financial modelling course to get a more detailed answer.
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