Net income
Net income, which is also sometimes referred to as net earnings, is revenue minus expenses, interest and taxes. It is essentially the same as the overall profit of a business or its earnings, and is an indicator of a company’s profitability.
Net income is calculated as sales minus the cost of goods sold, selling, general and admin expenses, operating expenses, depreciation, interest, taxes and any other expenses. It’s a useful number for both managers and investors to be aware of in order to assess and understand how much revenue exceeds the overall expenses of the organisation.
Key takeaways from this section:
- Net income is calculated as revenue minus expenses, interest and taxes.
- Net Income represents an individuals or business’ total earning or pre-tax earnings after accounting for deductions and taxes in gross income.
- Net income is used to determine and measure a company’s profitability over time, and can help with setting future goals for revenues etc.
- If expenses and other reductions are greater than the actual income of the business, this will indicate a net loss.
Calculating net income for business
Most - if not all – businesses use net income to calculate their earnings per share. Many business analysts tend to refer to net income as the bottom line since it appears at the bottom of their business bank statements.
In order to calculate net income for businesses, you will have to start with the company’s total revenue, and then minus the business’ expenses and other operating costs in order to calculate the business’ overall earnings before tax. Then, minus the tax from this amount to get the net income.
Understanding net income
Net income in essence is an indicator of company profitability and is useful metric for managers and investors to assess exactly how much revenue exceeds the expenses of an organisation.
In many cases, investors, managers and creditors focus on the net income metric as not is it a good indicator of a company’s financial position but also demonstrates their ability to manage their assets efficiently.
Net income is also the perfect calculation to determine a company’s bottom line, make estimations and also make projections for the future.
Net income FAQs
What is net income?
Net income is the amount of accounting profit a company has left over after paying off all of its expenses. It’s calculated by subtracting cost of goods sold, selling, general and admin expenses, operating expenses, depreciation, interest, taxes and other expenses from overall sales to understand what your net earnings – or net income is.
What is the difference between net income and gross profit?
Whilst net income is total earnings and income minus taxes and any other expenses, gross profit can refer to the income or profit that remains after production costs have been subtracted from the revenue.
Both are critical and important profitability metrics for any business that can help to determine how much profit a company earns from the production and sale of its goods and services, determines how effectively a company has been managed and their overall profitability and much more.
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