Net income Definition
Net income refers to the amount a company retains after subtracting all expenses from its total revenue.
If you run a business, you may be familiar with net income. Tracking this net income is very important because its increasing and decreasing scale determines your business’s efficiency and revenue.
Thus, business professionals should always be familiar with the right approach to calculating net income. Additionally, they must monitor and measure it periodically.
Well, this is just an introduction. There is more information about net income, and we’ll cover how to calculate it along with other key details. So enjoy your reading, but be attentive!
📌 Key Takeaways
- Determining net income is crucial for understanding whether a company is profitable.
- The formula for calculating Net Income is Net Income = Total Revenue – Total Expenses.
- Net income is mentioned last in the income statement, which is why it is called the bottom line.
- A net income above zero reflects a profit, whereas a net income below zero signifies a loss.
Do You Know?
Apple’s net income was $93.7 billion in 2024, 3% less than the previous year.
What Is Net Income?
Net income is the amount left after subtracting all the costs, taxes, and allowances from the total revenue. Thus, it indicates the company’s profitability and revenue. Other terms, such as net earnings, net profit, and bottom line, are also known as net income.
When total revenue is higher than total expenses, this indicates a good net income and is referred to as profitability. On the other hand, the company incurs a loss if its expenses exceed its revenue.
Net income is not limited to the company but also applies to individuals. It is the amount of money that individuals take home after deducting health insurance, taxes, and retirement contributions.
Finance professionals can easily predict their net income using a net income calculator and the net income formula, which is fairly straightforward.
Net Income Formula
Net income refers to the amount that is left over for the business after paying all its expenses. According to this, the formula is as follows:
Net Income = Total revenue – Cost of Goods Sold – Expenses
Or
Net Income = Total Revenue – Total Expenses
Here,
Cost of Goods Sold (COGS) – The direct cost associated with acquiring the goods and services.
Total revenue – The total amount of money that a business earns by selling its products or services.
Gross income – It is also known as gross profit or gross margin and is the total income from all sources.
Total expenses – These are the amounts spent to run the business. Rent, utility bills, taxes, and supplies are included in these expenses.
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How to Calculate Net Income?
We have defined the net income equation. We will now go over the steps for calculating net income through the following steps:
1. Determining the Total Revenue
You need to determine the total revenue generated from the business’s primary operations. This includes the sale of goods and services.
2. Calculate and Mention Expenses
Calculate all the expenses of your business for the particular period for which you want to calculate net income. When calculating net income, you must consider all expenses, both operational and non-operational.
3. Considering Interest
If the business has any outstanding loans or debts, you must include the interest expenditure. The details of this are easily found in the loan agreement.
4. Tax Calculation
Deduct any taxes from the total revenue according to the business structure and tax regulations in the particular state.
5. Calculating the Net Income
Once you gather all the information, you can perform a net income calculation using the formula below.
Net Income = Total Revenue – Operating Expenses – Interest Expenses – Income Taxes
6. Review & Interpret
A positive net income always indicates profitability, while a negative net income indicates a financial loss.
7. Take Informed Decisions
At last, you can make a decision based on the outcome of calculating the net income. This helps you to make better decisions and better plan for the future.
💡Pro Tip:
Business owners can claim the Section 199A deduction to claim the qualified business income deduction. This allows them to deduct up to 20% of their business income.
Net Income Example
Let’s understand net income through a net income example. Suppose a company named Appex Solutions generates $100,000 in revenue. The expenses of this company are as follows:
- Salary – $20,000
- Rent – $10,000
- Utilities – $4,000
- Taxes – $2,000
- Supplier – $1,000
Taking sum of all the expenses = salary + rent + utilities + taxes + supplier
= $20,000 + $10,000 + $4,000 + $2,000 + $1,000
= $37,000
Net Income = Total revenue – Total expenses
= $100,000 – $37,000
= $63,000
So, the company’s net income is $63,000.
Types of Net Income
After learning how to find net income, we now know the types of net income. There are two types of net incomes, as per their purpose and role:
1. Positive Net Income
When a company’s total earned revenue is more than its total expenses, it is referred to as having a positive net income or a profit. The major use of this profit is reinvestment or paying dividends to shareholders. Ultimately, it increases the company’s value.
2. Negative Net Income
Negative net income refers to a company’s expenses exceeding its revenue, indicating a loss. This signals financial instability, and investors will not be interested. Ultimately, it decreases the company’s value.
How to Detect Net Income on an Income Statement?
Net income is always mentioned in the last section of a company’s income statement or profit and loss statement, which is why it is called the “bottom line.”
An income statement includes total revenue at the top. All the expenses are mentioned in the middle, followed by the total revenue.
On subtracting all the expenses, the net income is shown at the bottom as shown below:
What Is Operating Net Income?
Operating net income is different from the net income in terms of the expression of the company’s profit. The formula for this is as follows:
Operating Net Income = Total Revenue – Operating Expenses
Operating income refers to the profit a company earns from its normal business operations. All expenses, such as office supplies, cost of goods sold, and utilities, are deducted to determine this profit.
Professionals can easily predict the amount of income a business generates from its core operations by using the company’s operating income.
Gross Profit vs. Net Income
Gross profit and net income are not interchangeable, even though both are useful for measuring profitability. They are different in the following ways.
| Aspect | Gross Profit | Net Income |
|---|---|---|
| Definition | It is the amount that the company holds after deducting the cost of goods sold from revenue. | It is the final profit that the company earns after deducting all expenses, cost of goods sold (COGS), and taxes. |
| Formula | Gross Profit = Revenue – Cost of Goods Sold | Net Income = Gross Profit – Operating Expenses – Interest – Taxes + Other Income |
| Focus | Service profitability or core production | Overall business profitability |
| Includes | Only direct cost | All the applicable costs |
| Purpose | It measures the production efficiency. | It measures the true profitability. |
Shocking Fact 😯
Commercial leasing in the US has a 51.6% profit margin in 2025.
How Net Income Is Different from Operating Income?
Companies consider net income and operating income as important financial metrics. However, these two terms are different and serve different purposes in a business’s financial performance.
The major difference between net income and operating income is that it considers non-operational income, such as taxes and interest.
Operating income (also known as EBIT, earnings before interest and taxes) does not include taxes and interest and focuses mainly on the company’s core business activities. On the other hand, net income is calculated after considering all expenses, both operational and non-operational.
Net Income vs. EBIT vs. EBITDA: What Is the Difference?
Net income, EBIT (Earnings Before Interest and Taxes), and EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) are the three important financial metrics. However, they are different in the following ways:
| Net Income | EBIT | EBITDA |
|---|---|---|
| It is the profit that the company makes after deducting all the expenses (operational and non-operational) from its total revenue. | It is the profit that the company makes after deducting all the operational expenses from the total revenue. It does not include interest and taxes. | It is the profit that the company makes after deducting all the operational expenses from the total revenue. It does not include interest, taxes, depreciation, and amortization. |
| It is calculated as –
Net income = Revenue – All Expenses |
It is calculated as –
EBIT = Net Income + Interest + Taxes |
It is calculated as –
EBITDA = Revenue – (COGS + Operating Expenses + Non-Cash Expenses) |
| It shows the true bottom line for the shareholders. | It measures the business performance while ignoring tax decisions. | It measures the pure operating cash flow capability before non-cash costs. |
| Investors and shareholders use net income to assess true profitability. | Professionals use this metric to compare operational efficiency across companies. | Professionals use this metric for valuation and cash flow analysis. |
What Is the Formula for Calculating the Net Income Ratio?
The net income ratio, also known as the net profit margin, represents the percentage of revenue that remains after deducting all expenses, interest, and taxes. Therefore, it is expressed in percentage form.
The net income ratio is calculated as follows:
Net Income Ratio = (Net Income/Revenue (or Sales)) x 100
Here,
Net Income – The final profit that the company made, deducting all the expenses (tax and interest) from the total revenue.
Revenue (sales) – This is the total amount that a company earns from selling goods and services.
For instance, if the company makes $10,000 net income on $100,000, then the net income ratio will be as follows:
= 10,000/100,000 x 100
= 10%
What Are the Limitations Associated With Net Income?
There are some limitations associated with the net income, which are as follows:
Less Useful to Evaluate Business Efficiency
Business professionals cannot predict business efficiency by relying wholly on the net income. Operating income, gross income, or EBITDA are more useful for evaluating business efficiency as compared to net income.
Net Income Is Not Identical to Cash Flow
Net income is a good indicator of business performance. However, there is no real scenario of cash moving in and out of the business. It records revenue and expenses when they are incurred rather than when the actual payment is received.
Non-cash items, such as amortization and depreciation, are always included in net income, so they never affect actual cash flow.
Why Net Income Is a Valuable Measurement of Financial Health?
Enhancing Decision Making
Calculating net income always helps make the right decision. Business professionals can easily make future decisions while analyzing which steps will benefit the company. A good net income attracts investors and indicates that your business is the right platform to invest in.
Financial Health Predictor
Net income is the amount left after subtracting expenses from revenue. This gives professionals clear insight into their profit margins. It is an important metric to consider when the owner wants to expand the business and attract investors.
Prediction Valuation
Professionals can use net income in business valuation, such as when calculating the price-to-earnings (P/E) ratio. The higher the net income, the higher the business valuation, which attracts investors and makes the business more profitable.
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Wrapping Up
Here, we are ending our journey on the query of how to calculate net income. Remember that net income is crucial to consider because it reflects the company’s financial performance. The stronger the net income, the more investment opportunities for your business. Professionals should regularly determine a company’s net income.
Frequently Asked Questions
Jayanti Katariya is the founder & CEO of Moon Invoice, with over a decade of experience in developing SaaS products and the fintech industry. He holds a degree in engineering. Since 2011, Jayanti's expertise has helped thousands of businesses, from small startups to large enterprises, streamline invoicing, estimation, and accounting operations. His vision is to deliver top-tier financial solutions globally, ensuring efficient financial management for all business owners.
