The question states "If the owner's euity as of Jan 1, 1985 was $2000 and if J. Small made no investments and received no withdrawals during the year, determine the net income or net loss for the year ended Dec 31, 1985." On the balance sheet provided with this example, it shows he had a $200 in Accounts Payable, and his OE was $3200.

When I try to figure this on my own using a T account, I come up with the net income of $1800. I got this by taking the $2000 in his Capital account less the $200 in Accounts Payable. Is this correct? If not, where did I do my calculations wrong?

Four things affect capital:
+Investments
- Withdrawals
+ Revenues
- Expenses

And since Revenues less Expenses = Net Income, then those two can be netted into just the one number of net income.

Payables has nothing to do with it. Liabilities and equity are two different types of accounts and don't affect each other. Equity is the net worth, which is assets less liabilities, but liabilities are coming directly off equity like that.

Taking beginning capital and reducing it by a liability doesn't make net income. If you already had $2000 at the beginning of the year, would owing someone $200 mean you had income of $1800 this year? Where's the relationship?

They've given you the beginning and ending balances. You can't change those balances - they are what they are. You need to find what gets you from beginning to end.

Try this again.