How To Calculate Net Income

Net income is a metric that every business owner should understand. Whether you're running a clothing store or growing an SME, knowing how to calculate net income will give you insight into your income after all expenses are paid—so you have a clear picture of your business’ health.

Here, we’ll take you through how to calculate net income or loss, cover why it’s important, and lay out the simple net income formula.

Key Takeaways

• Net income represents your total revenue minus all business expenses, taxes, and costs.
• The net income formula is simple: Total Revenue – Total Expenses = Net Income.
• It's the "bottom line" on your income statement and indicates true profitability.
• Net income is different from gross income and net operating income.
• Regularly calculating your business’s net income helps you track its financial health and make informed decisions.
• QuickBooks simplifies net income tracking with automated financial reports.

What is net income?

Net income is the profit your business earns after deducting all expenses from total revenue. Also known as the "bottom line", it appears at the end of your income statement and represents the actual money your business keeps.

For Philippine businesses, knowing how to calculate net income is important for tax reporting to the BIR, securing financing, and measuring true profitability beyond your sales figures. A positive net income indicates your business is profitable, while a negative net income signals a loss. Each figure is an important indicator of growth and helps to understand how well your business is being run.

Net income vs net operating income

Net income and net operating income serve different purposes:

• Net income includes all revenues and expenses, including operating costs, taxes, depreciation, and administrative expenses.
• Net operating income focuses only on profit from core business operations, and doesn’t consider taxes and interest.

Businesses use net operating income to evaluate their operational efficiency, while net income provides the complete profitability picture for stakeholders and tax purposes.

Gross income vs net income

Gross income and net income are easy to confuse, but they measure different stages of profitability:

• Gross income = Revenue – Cost of Goods Sold (COGS). This shows the direct costs of production or service delivery, such as materials and labor.
• Net income = Revenue – All Expenses. The expenses counted here include COGS, taxes, administrative costs, utilities, rent, and operating expenses.

While gross income shows how effective your markups are, net income reveals whether your business is truly profitable after all of your obligations are met.

Why is net income important?

Knowing your net income figures provides you with the most complete view of your business’s financial health. Unlike gross revenue, which can look impressive on paper, net income reveals your actual profitability after accounting for all expenses—from supplier payments to BIR tax obligations. This metric is essential for:

• Operational efficiency: Rising net income indicates that your business has effective cost management, while declining figures signal that you might need to review your expenses.
• Business growth decisions: Understanding your true profit helps you with financial planning and knowing whether you can afford expansion, new equipment, or additional staff.
• Tax compliance: Without an accurate net income calculation, the figures in your BIR reporting might be incorrect.

How to calculate net income

Knowing how to calculate net income or loss is important for understanding your business's true profitability. The process involves gathering all revenue and expense data, then applying a straightforward formula to find your bottom line.

Net income formula

The net income formula is simple:

Net Income = Total Revenue – Total Expenses

Here’s how to get net income figures:

• Find your total revenue: Start with gross revenue (all sales income).
• List all expenses: Include COGS, operating costs, administrative expenses, taxes, interest, utilities, rent, and payroll.
• Subtract total expenses from total revenue: This result is your net income.

Net operating income formula

Net operating income focuses specifically on profit from your core business activities, excluding financing costs and taxes. This metric helps business owners evaluate operational performance:

Net Operating Income = Total Revenue – Operating Expenses

Operating expenses include:

• Cost of Goods Sold (COGS)
• Employee salaries and wages
• Rent and utilities
• Office supplies
• Depreciation
• Marketing and advertising costs

Unlike net income, net operating income excludes taxes and interest payments. This makes it valuable for comparing operational efficiency across different periods, regardless of your capital structure or tax situation.

Net income calculation example

Let's walk through a practical example for a small café in Manila calculating first quarter net income.

Your income statement shows:

• Total revenue: ₱450,000
• Cost of goods sold: ₱120,000
• Rent: ₱60,000
• Utilities: ₱15,000
• General expenses: ₱20,000
• Operating expenses: ₱25,000
• Payroll: ₱90,000
• Interest: ₱8,000
• Taxes: ₱32,000

First, calculate total expenses by adding all costs: ₱120,000 + ₱60,000 + ₱15,000 + ₱20,000 + ₱25,000 + ₱90,000 + ₱8,000 + ₱32,000 = ₱370,000

Now apply the net income formula:

Net income = total revenue (₱450,000) – total expenses (₱370,000)

Net income = ₱80,000

That means your café earned ₱80,000 in net income during the first quarter—the actual profit available for reinvestment or distribution.

How to record net income

Net income appears as the final line on your income statement, which is why it's often called the "bottom line." Here's how to properly record it:

• Create your income statement: List all revenue sources at the top, followed by COGS, operating expenses, interest, and taxes in sequence.
• Calculate progressively: Work down from gross revenue to gross income, then to operating income, and finally to net income.
• Record the bottom line: Net income (or net loss if it’s in the negative) is the last entry, representing your business's final profitability for the period.

Once calculated, you can use a free income statement template to organize these line items. 

Make your net income calculations easier with Intuit QuickBooks

Philippine businesses typically record net income quarterly for BIR reporting and monthly for internal management decisions—but calculating net income manually can be time-consuming and prone to errors, especially as your business grows. Intuit QuickBooks automates the entire process, from invoicing to tracking revenue and generating accurate reports. Instead of spending hours on calculations, you'll have real-time visibility into your net income, so you can make confident business decisions.