Which balance sheet account is directly impacted by net income?

• A. Retained Earnings
• B. Accounts Receivable
• C. Accounts Payable
• D. Cash

Answer: (A)

Net income increases owners’ equity by boosting Retained Earnings. In accrual accounting, revenues minus expenses determine net income, and after closing the books, that amount is transferred into Retained Earnings, the accumulated profits kept in the business. That is why Retained Earnings on the balance sheet is the account directly affected by net income.

Accounts Receivable and Accounts Payable reflect specific transactions (sales on credit and obligations from purchases, respectively) and aren’t directly changed by the net income figure itself. Cash can be influenced indirectly through the cash consequences of revenues and expenses, but net income isn’t the same as cash under accrual accounting, so it isn’t the direct balance sheet impact.