What is Net Income?
In finance, net income, which is also known as net profit or net earnings, is a term used to describe income that is adjusted to account for expenses, depreciation, the cost of goods sold, and taxes.
It is calculated as revenues and gains over losses and expenses in an accounting period.
Net income increases the shareholders’ equity from the operations of a company.
It is recorded in a company’s income statement and is a key indicator of its profitability.
Net income is one of the most important metrics in investing – but beware – it is also one of the most easily manipulated.
Net income can be spread among stockholders as a dividend or added to the retained earnings of the company.
Calculating net income:
Start by using the net revenue of a company and subtracting the cost of sales and any other expenses incurred during the period to get an earnings before tax number. Then subtract taxes from this amount to calculate the company’s net income.
According to merriam-webster.com, net income is:
“The balance of gross income remaining after deducting related costs and expenses usually for a given period and losses allocable to the period.”
The ‘Bottom Line’
Net income is sometimes known as ‘the bottom line’ as it is normally found on the last line of a company’s income statement.
| Company X Statement | 2013 |
|---|---|
| Total revenue | $200,000 |
| Cost of Goods Sold | ($22,000) |
| Gross Profit | $178,000 |
| Operating Expenses | |
| Wages | ($23,000) |
| Utilities | ($14,000) |
| Rent | ($19,000) |
| Depreciation | ($7,000) |
| Total Operating Expenses | ($63,000) |
| Taxes | ($24,000) |
| Net Income | $91,000 |
Net income is Revenue minus Cost of Goods Sold, minus Total Operating Expenses, Minus Taxes.
Net income translates as: French Revenue net; German, Nettoergebnis; Spanish, Ingresos netos; Chinese, 净利; and Japanese, 純利益.
For an employee, net income is the same as disposable income or take home pay, i.e. his or her salary minus taxes and social security contributions.
Disposable income is closely monitored by economists to gauge the overall state of a country’s economy.
Video – What is net income?