What Is Net Income?
Examples of Expenses
Examples of expenses that must be subtracted from a company’s total revenue include debts, cost of goods sold, interest, operating costs, depreciation and taxes along with other expenses unique to that company as well.
Net Income vs Profit
For instance, gross profit refers to revenue minus the cost of goods sold, while operating profit refers to revenue minus operating costs.
Net income, on the other hand, takes all expenses into account and thus is regarded as a very holistic and useful way to see how a company’s total profit, especially over time.
How to Calculate Net Income
To calculate net income, one must start with a company’s total revenue over a period of time, then tally up all of that company’s expenses over that same time period.
Then, subtract that number from the total revenue.
Net Income Formula (Simple)
Net Income Formula (Expanded)
Net Income Importance
Calculating net income shows whether or not a company is profitable.
A positive net income is often referred to as a profit while a negative net income is referred to as a net loss.
Earnings is another term to refer to net income, particularly after-tax net income.
Earnings are a major factor in determining the share price for a company and thus are studied closely.
Where Net Earnings Are Used
Earnings are used in many financial metrics such as return on equity, earnings per share, or price-to-earnings ratio.
How to Find Net Income
Net Income is often calculated by a company when it generates its quarterly or annual income statement, on which the net income is usually featured at the bottom, which is how the term gets its nickname of “bottom line.”
If a net income is not shown for some reason, it is easy to calculate using the equation above.
Gross Income vs Net Income
Gross income helps one determine how much total income he or she has before taxes.
Gross income can be calculated using a person’s total earnings, including those which are not taxable.
Net income, on the other hand, refers to a person’s income after factoring in taxes and deductions.
For a person making over $50,000 per year, for instance, there can be a several-thousand-dollar difference between net income and personal gross income.
What Is Net Income FAQs
About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.