Are you curious about what your net income is? Or you simply want to know if you have used the right net income formula? If that’s the case – great! You have come to the right place. In this article, we will break down the net income formula into simple and easy to follow steps.
What is Net Income?
Some people even call it net profit, but what does it represent? Well, net income is used when measuring the number of total revenues that exceed total expenses. In other words, net income equals total revenues minus total expenses. It shows how much revenues are left over after all expenses have been paid.
Why is Net Income Important?
Usually, a company’s net income shows the current financial position as well as the ability to manage assets efficiently. That’s why investors, creditors, and other company representatives want to know what a person’s or a company’s net income is. For instance, based on the company’s net income, investors can objectively consider whether they should invest their money in the company in question or look for another one.
Also, the net income of a company allows investors to understand in which direction the company is moving compared to previous years. All they need to do is compare the data for the last few years so that they can understand whether the company is safe, whether their investment will continue to appreciate and whether it will pay them the promised dividends.
In short, net income is an essential indicator for the company, analysts, investors, and shareholders of the company as it measures the profit earned by the company over a period of time. However, net income is not the actual cash earned by the company!
Furthermore, net income depends on the size of the company and the industry in which it works. Moreover, growth factors in industries, debt levels, government taxes also affect the net income numbers of the Company.
On the other hand, the net income data will help creditors make their final decision. They use this indicator to understand if the company would be able to pay off its debt with successful operations. Moreover, it is a proper measurement for the company’s ability to pay salaries and bonuses. All of this makes the net income calculation even more critical.
How To Calculate Net Income
In short, the calculation of the formula is simple, as long as you know the formula itself. You have to subtract the total expenses amount from the total revenues amount. Remember, you have to include all expenses as well as all revenues. Here’s the easy step by step guide to calculating net income.
Step 1. List all revenues
Total revenue = earnings from the sale of goods and services. Also, it includes interest income as well as income from the sale of the business or other income.
Step 2. List all expenses
Total expenses = the cost of all goods and services that have been sold. Moreover, it includes all operating expenses such as salaries,wages, office maintenance, utilities, depreciation, amortization, interest income, as well as taxes.
Step 3. Subtract total expenses from total revenues
Here’s a really simple example for net income calculation. You own an online business and you run it out of your house. As you have many clients, you have people working for you. Let’s take a look at your income statement items for the year.
- Revenue (Sales) = $100,000
- Salaries = $20,000
- Computer expenses = $5,000
- Utilities $5,000
- Taxes $2,500
Total revenues = $100,000
Total expenses = $20,000 + $5,000 + $5,000 + $2,500 = $32,500
Net Income = Total Revenues – Total Expenses
Net Income = $100,000 – $32,500
Net Income = $67,500