Income does not always mean profit.
In this lesson, you’ll learn what net income is and how to calculate it. You’ll also have a chance to take a brief quiz after the lesson to reinforce your knowledge.
Net Income Defined
Net income is the amount of revenue you have left over after you have subtracted all costs of doing business. The opposite of net income is net loss, which is when your costs and expenses actually exceed your income.
Net income (or loss) is reported on a company’s income statement. If any portion of net income is not distributed to the owners of the company, it is reflected as retained earnings on a company’s balance sheet.
Calculating Net Income
The formula to calculate net income is rather easy: Net Income = Total Revenue – Total ExpensesIf the equation results in a negative number, which is indicated in accounting by a number bounded by parentheses, then there is no net income, but rather a net loss.
Examples
Let’s say that you are an accountant for a small business and its owner has asked you to calculate the net income for the year. You collect the following data from your ledgers:
| Total revenue: | $500,000 |
| Costs of goods sold: | $75,000 |
| Salaries and wages: | $150,000 |
| Rent: | $120,000 |
| Utilities: | $5,000 |
| Interest payments: | $10,000 |
| Taxes: | $12,000 |
Net Income = Total Revenue – Total Expenses
- Net Income = $500,000 – ($75,000 + 150,000 + $120,000 + $5,000 + $10,000 + $12,000)
- Net Income = $500,000 – $372,000
- Net Income = $128,000
- Net Income = $500,000 – $372,000
Let’s look at one more example.
You are the president of a corporation and are in the process of preparing for the annual shareholders meeting. You need to calculate the net income for the past fiscal year. Are your shareholders going to be happy given the following numbers?
| Total revenue: | $15,750,000 |
| Costs of goods sold: | $10,600,000 |
| Salaries and wages: | $4,000,000 |
| Rent: | $1,200,000 |
| Utilities: | $75,000 |
| Interest payments: | $250,000 |
| Taxes: | $300,000 |
Net Income = Total Revenue – Total Expenses
- Net Income = $15,750,000 – ($10,600,000 + $4,000,000 + $1,200,000 + $75,000 + $250,000 + $300,000)
- Net Income = $15,750,000 – $16,425,000
- Net Income = ($675,000)
- Net Income = $15,750,000 – $16,425,000
Remember that a number inside parentheses means it’s a negative number.
Your company suffered a loss of $675,000. The shareholders might not be that happy.
Lesson Summary
Net income is what is left of the revenue a company generates after deducting all expenses of the company’s activities. If any portion of net income is kept with the company rather than distributed to the owners, it is also reflected on the company’s balance sheet as retained earnings. The formula to calculate it is: Net Income = Total Revenue – Total ExpensesIf the number resulting from the calculation is negative, then the company suffered a net loss.
Net income is reported on the company’s income statement.
Learning Outcomes
Some outcomes of this lesson on net income include being able to:
- Write the formal definition of net income
- State the formula for calculating net income
- Determine whether a company is suffering from a net loss
