Suppose a company has no transactions with its owners during 20X1. That is, paid-in capital remains unchanged and retained earnings increases by the entire amount of the net income. During 20X1 the company's net income is $100,000. At the beginning of the year, the company's balance sheet equation was:
assets = liabilities + stockholders' equity
$500,000 = $200,000 + $300,000
What do you know about the balance sheet equation at the end of 20X1?
As of the end of 20X1, we know that retained earnings will increase by $100,000. The formula will then be 500 = 200 + 400.
Using the basic accounting formula, what can be known about the balance sheet? There are two solutions to solve the unknown amount in the equation.