Two's complement representation allows binary arithmetic on signed integers to yield the correct results. Positive numbers are represented as simple binary, while negative numbers are the binary complement of the corresponding positive number. The most significant bit indicates the sign, with 0 being positive and 1 being negative. To calculate the two's complement of a number, invert and add 1 to its binary representation. Two's complement arithmetic follows the same rules as binary arithmetic. Overflow occurs when adding two numbers of the same sign yields a result with the opposite sign.