Net income is one of the most important numbers on your income statement, showing the profit your business keeps after covering all expenses. This article breaks down the net income formula, explains how to calculate it, and shares practical examples to help you apply it. A strong grasp of this key accounting formula can help you gain business insights and make smarter choices for long-term success.
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Net income is the profit that remains after all business expenses are subtracted from total revenue. Net income may also be referred to as net earnings, net profit, retained earnings, or “the bottom line.”
Understanding the net income formula helps business owners see how profitable their operations truly are. It allows them to make informed decisions, identify inefficiencies, and improve their overall financial strategy.
Net income represents the profit remaining after federal, state, and local taxes are deducted from revenue. You would also subtract expenses, such as:
Calculating and interpreting net income is essential for understanding your business’s financial performance, such as:
Use the following formula to calculate net income:
Net income = Total revenue - Total expenses
Below is a breakdown of what makes up the net income formula:
Here are two examples of how the net income formula works—one for a profitable business and one operating at a loss.
Scenario: A small coffee shop brings in strong sales throughout the year.
Total revenue: $150,000
Expenses:
Total expenses = $115,000
Net income = $150,000 – $115,000 = $35,000
The coffee shop ends the year with a net income of $35,000, reflecting a healthy profit after covering all costs.
Scenario: A new boutique clothing store has slower-than-expected sales in its first year.
Total revenue: $80,000
Expenses:
Total expenses = $98,000
Net income = $80,000 – $98,000 = –$18,000
The boutique operates at a net loss of $18,000 for the year, meaning expenses exceeded revenue, which is common in the early stages of a business.
Net income is typically found at the very bottom of an income statement. It’s often labeled as "Net Income" or "Net Profit" and shows the company’s total earnings after all expenses have been deducted from revenue.
Gross income and net income both reflect how much money a business earns, but they represent different stages in the financial picture. Gross income, sometimes called gross profit, shows profit minus the cost of goods sold, while net income reflects what’s left after subtracting all costs.
While net income provides a comprehensive view of your business's profitability, operating income focuses specifically on earnings from core business operations. Let’s take a closer look at how they differ:
Net income
Net income, as mentioned above, is the “bottom line.” It shows your total profit after all expenses, including operating costs, interest, taxes, and any other expenses, have been deducted.
Operating Income
Operating income is the profit your business earns from its primary business functions, like selling products, delivering services, or manufacturing goods. It excludes non-operating costs such as interest payments, taxes, and one-time gains or losses.
Properly recording your net income contributes to financial record accuracy and your understanding of business profitability. Here’s how it’s typically handled across financial statements and when using accounting software:
Net income is the final line item on your income statement (also called a profit and loss statement). Follow these steps to record it:
Step 1: Record total revenue
Identify and record all income earned (sales, service fees, interest, etc.) during the period.
Step 2: Record total expenses
List all business expenses (COGS, operating expenses, interest, taxes, etc.) for the same period.
Step 3: Subtract expenses from revenue
Subtract total expenses from total revenue to calculate your net income (or loss).
Formula: Net Income = Total Revenue – Total Expenses
Step 4: Record net income
Enter the net income figure as the final line item on your income statement. Review all entries for accuracy.
After you calculate net income, it’s added to the equity section of your balance sheet under retained earnings. Here are the steps:
Step 1: Calculate net income
Ensure net income has been accurately calculated.
Step 2: Add to retained earnings.
Transfer the net income to the equity section of your balance sheet under retained earnings.
Step 3: Adjust for profit and loss
If you make a profit, your retained earnings increase. If you have a loss, retained earnings decrease.
If you're using accounting software like QuickBooks, recording net income is handled automatically.
Step 1: Close your books
Once you close your books for the year, your accounting software system, such as QuickBooks, will automatically update the net income.
Step 2: Generate reports
Run reports like the "Profit and Loss" and "Balance Sheet" to view the correct net income figure.
Revenue and expenses are key to net income, but state-specific factors can significantly influence your final number. That’s because each state—and, in some cases, individual cities—imposes its own taxes, fees, and regulatory costs. These expenses directly impact the net income calculation by reducing the amount left after revenue is earned. Consider, for example, the lower cost of doing business in Texas compared to California and New York City.
These city-level taxes are in addition to New York State corporate taxes, which in 2025, include a base rate of 6.5% for most businesses. Corporations with more than $5 million in business income are taxed 7.25% on the business income base.
The bottom line? The bottom line matters. Net income is the true measure of profitability, and understanding it gives the clarity to make smart business decisions. This financial insight is essential for long-term success and sustainable growth.
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