# Net Income Meaning and Calculating

## Net Income Meaning and Calculating

Net income is the accounting profit amount that a company has left after paying its expenses. It is determined by net sales revenue and cost, general and administrative expenses, depreciation and amortization, interest expenses, taxes, and other expenses.

Net income is the last line on the income statement itself. Some income statements will have a separate section at the bottom that reconciles opening retained earnings to ending retained earnings through net income and dividends.

### Net Income Names

The company’s income statement has three used names:

• Net profit;
• Net profit;
• Net revenue.

All three terms mean the same thing, which can confuse newbies to finance and accounting.

## Key Findings

Business owners, shareholders, or investors in business development can share net profit.

Investors and banks consider net income to decide if investing in or lending money to a business is affordable. Accounting software helps keep track of financial performance, including net income.

Net income is the business’s profit after paying all expenses for a certain period, fiscal year, or quarter. These expenses include the reasonable production costs, operating fees, non-operating expenses, and taxes, all of which are subtracted from the company’s total income to arrive at net income.

Some small businesses are starting to track expenses and income with a simple spreadsheet, but even small companies and startups can benefit from accounting software.

## Gross Income Meaning

Gross income is the total amount business earns before expenses are deducted. Think of it as the profit you make from the services you provide — the sum of all your customer bills before any deductions, taxes, or withholdings.

### Why is Gross Income Significant?

Gross income is an excellent way to evaluate your business’s earning potential and how you perform year after year. By viewing your various revenue streams, you can see which clients and which types of projects generate the most and most negligible revenue. This understanding can influence the decision of putting time and effort or determine the future business goals you set.

### Why is Net Income Significant?

Net income helps you understand the health of your business. For example, if your gross income significantly exceeds your net income year after year, you can evaluate your expenses line by line to see what you can exclude or overestimate.

### Understanding Gross Income and Net Income

Knowing the gross and net income is essential for personally managing finances and small businesses’ successful running. It helps make important decisions about your income choices, such as when to raise your rates, whether certain expenses are necessary, and the types of income, projects, and clients you should focus on.

Gross and net income can give a different perspective on your goals and actions. As a business, gross income can indicate your yearly income, while net income shows how much you earn after expenses. If net income is lower than expected, consider cutting some costs.

## Net Income Formula

Net profit is the total profit of your company after all business expenses have been deducted. This is the money you leave to pay shareholders, invest in new projects or equipment, pay off debt, or save for the future. Net income is referred to as net income or simply your “bottom line” (because it is at the bottom of the income statement).

The net profit calculating formula:

Revenue – Sold Goods Costs- Expenses = Net Income

The first formula, part revenue less cost of goods sold, is also for gross income.

The net income formula looks like this:

Gross income – Expenses = Net income

The net income formula can be expressed as follows:

Total Revenue – Total Expenses = Net Profit.

Net income can be positive or negative. You have a positive net income when your company has more revenue than expenses. If your total costs exceed your payment, you have a negative net income, also known as a net loss.

You can find the company’s given period net income using the formula above: yearly, quarterly, or monthly, depending on which period is right for your business.

### Profitability and ROI

Net income is a handy measure of how profitable a company is in percentage terms compared to its past or other companies.

The method uses the net income margin to decompose the ROE return on equity. The basic formula breaks down ROE into three components:

ROE = Net Income Margin x Total Asset Turnover x Leverage

Analyzing a company’s ROE using this method allows the analyst to determine the company’s operating strategy. We can say that a company with a high ROE uses a product differentiation strategy due to increased net income.

## Summary

Net profit is the most fundamental indicator in accounting and finance. Higher returns are always preferable to lower returns. Companies can use higher returns to reinvest in new equipment, liquidate the debt, and even pay back shareholders, but higher returns are not always favorable.

Since corporations pay profit taxes, it would be wise for management to minimize tax-based earnings to reduce taxable income. Many companies keep a tax adjustment book at the end of each year to reflect their tax options. Some companies may use LIFO for tax purposes and FIFO for accounting purposes to reduce the income reported on a tax return and apply accelerated depreciation.

Many companies must earn a particular profit to comply with credit covenants with their creditors every year. These covenants present a problem. Management wants to show lower yields to lower taxes. However, they need to show a profit to meet the lender’s requirements. Here you can manipulate profit and net profit. Some revenue recognition rules are applied arbitrarily to meet management’s expectations. That’s why it’s essential to read the footnotes of the financial document and understand the measurements used to find net income in financial statements.