Bookkeeping

# What is net income? Formula, calculations, and examples

Bringing in revenue should be one of your top priorities as a small business owner. However, the amount of revenue you earn doesn’t necessarily provide an accurate representation of how your business is performing. To fully understand the profitability of your business, you need to know how to calculate your net income.

## What is net income?

Net income is a company’s profit after business expenses are accounted for. It’s also referred to as net profit, net earnings, and the bottom line. To find your net income, you’ll subtract the following business expenses from your sales revenue:

• Cost of goods sold (COGS)
• Operating expenses
• General expenses
• Taxes
• Interest
• Depreciation
• Any other expenses

Your net income is typically found on the last line of your company’s income statement, which is why it’s often referred to as your bottom line.

### Net income formula

In other words, net income can be defined as follows:

Net income = total revenue – total expenses

### Why is net income important?

Net income gives you a better view of the financial health of your company since it represents the profit of the business after deducting expenses.

For example, your business may show a large income at the end of a quarter, but until you bring in your expenses and see the full scope of your business spending, your financial view is incomplete. Net income is the other piece of the profitability puzzle, (the first is total income), one that companies and shareholders rely on for the most accurate information.

## How to calculate net income

To calculate net income, you’ll use the following formula:

Net income = total revenue – total expenses

1. Find your total revenue, or gross income: Revenue minus cost of goods sold
2. Determine how much you earn before taxes: Subtract your business expenses, taxes, and operating costs from your gross income

### Net income formula tips

When using the net income formula, it’s important to remember what total revenue and total expenses include:

• Total revenue can also be referred to as gross income, which is your revenue minus your cost of goods sold.
• Your total expenses will include every cost you’re responsible for, including taxes, interest, debt, deductions, operating expenses, and general expenses.

With net income, you can also calculate the net profit margin by dividing your net income by revenue and multiplying it by 100 to get a percentage.

This percentage will show you how much money you bring in from each dollar of revenue.

Let’s say you run a small bakery and want to find your net income for the first quarter of the year. You crunch some numbers and create the following line items on your income statement:

• Total revenue: \$75,000
• Cost of goods sold: \$8,000
• Rent: \$10,000
• Utilities: \$2,000
• General expenses: \$3,500
• Operating expenses: \$4,500
• Payroll: \$7,000
• Interest: \$2,000
• Taxes: \$6,000

Looking at these numbers, you have your total revenue on hand (\$75,000).

Next, you’ll need to calculate your total expenses, including the cost of goods sold, rent, utilities, general expenses, operating expenses, payroll, interest, and taxes. This will give you \$43,000. Now you can plug both numbers into the net income formula:

Net income = total revenue (\$75,000) – total expenses (\$43,000)

Net income = \$32,000

In the first quarter, your bakery had a net income of \$32,000.

### Gross profit vs. net income

Gross profit and net income should not be used interchangeably. Both gross income and net income can measure profitability, but net income provides the clearest picture.

• Gross profit: Revenue minus the cost of goods sold. Cost of goods sold (COGS) is how much it costs to maintain production or perform a service. For example, materials and utilities are part of COGS.
• Net income: Revenue minus all other expenses such as the cost of goods sold, taxes, admin expenses, and operating costs.

## Where is net income recorded?

A business’s net income is recorded in the income statement and is typically seen on the bottom line. If you’d like to review the figures that determined your net income, simply read the income statement from top to bottom. Income statements show how profitable your company is, with profits and losses recorded over a given period—while the other two main financial statements (balance sheets and cash flow statements) serve different purposes.

### Net income and financial statements

The beauty behind the financial statements of a company is that they are all linked and tie back to one another. One common denominator on each of these statements is net income. Here’s the breakdown of the connection:

Income statement: Net income, also referred to as net earnings, is found at the very bottom of the income statement.

Balance sheet: Net income will be referred to here as retained earnings and can also be found toward the bottom of the balance sheet, along with shareholders’ equity and total liabilities.

Cash flow statement: Net income, or retained earnings, flow into the cash flow statement and provide the start point for the cash from operations factor.

## Operating net income

Not to be confused with plain old net income, operating net income is certainly different. The biggest difference is how it expresses a company's profit. This portrayal can best be seen through their formulas.

Net income = total revenue - total expenses

Operating net income = total revenue - operating expenses

So judging by the calculations, it’s clear that one mimics the other, but net income alone factors in expenses such as taxes and administration, while operating income includes the expenses only from operations. These include selling, general, and administrative expenses.

## Calculating net income for individuals

Individuals can also calculate their net income to see how much money they take home after certain deductions. If you’re wondering how much money you actually make, start by finding your gross income.

Your gross income is how much money you make before taxes and deductions, including taxable wages, tips, and income from interest and dividends. Then subtract taxes, payroll deductions, and other expenses from your gross income—this includes payroll taxes like Social Security, Medicare, and Medicaid, retirement account contributions to your 401(k) or IRA, and legal expenses like loans, wage garnishments, and child support. The result is your net income.

### Individual net income example

Assume you earn a base salary of \$50,000 spread across 24 paychecks. Each pay period, \$430 goes toward income taxes, including Social Security, Medicare, and Medicaid taxes, \$45 goes toward health insurance, and \$200 goes toward your 401(k).

This means that each year, \$10,320 goes toward taxes, \$1,080 goes toward health insurance, and \$4,800 goes toward your 401(k). This brings your total expenses to \$16,200. Here’s your net income using the net income formula:

Net income = total revenue (\$50,000) – total expenses (\$16,200)

Net income = \$33,800

Your net income for the year is \$33,800, or \$2,817 each month.

## Net income: Frequently asked questions

Understanding net income can take some time, especially when business owners are responsible for various financial statements. Below are answers to some of the most frequently asked questions regarding net income.

### Is net profit the same as net income?

Yes, net profit and net income are used interchangeably. Both measure the profitability of a business after total expenses are deducted from total revenue.

However, net profit is different from gross profit, which is the amount of money a company earns after subtracting the cost of goods sold.

Net profit can also be confused for operating profit, also known as earnings before interest and taxes (EBIT). Operating profit, another important metric, measures the profitability of a business before taxes and interest are deducted.

### What is the difference between net income and net loss?

When calculating net income, you find the difference between total revenue and total expenses. When you bring in more revenue than expenses, you’ll have a positive net income. However, when your total expenses are greater than your revenue, you’ll have a negative net income, also called a net loss.

Net income shows a business’s profitability. There are many reasons why net income is important, such as determining how much profit can be divided among investors and how much money can go toward new projects. With the net income formula, you can easily calculate how profitable your business is by finding the difference between your total revenue and total expenses.

To better understand your company’s financial strength, you can invest in accounting software like QuickBooks Online. With QuickBooks Online, you can easily generate income statements to see how your net income is affecting your financials. By streamlining your financial reporting, you can get a better understanding of where you stand so you can continue to scale your business.