Net Income Formula | Calculator | Definition
Net income Formula, also called net profit, is a calculation that measures the number of total revenues that exceed total expenses. It other words, it shows how much revenues are left over after all expenses have been paid. This is the amount of money that the company can save for a rainy day, use to pay off debt, invest in new projects, or distribute to shareholders. Many people refer to this measurement as the bottom line because it generally appears at the bottom of the income statement.
Investors, creditors, and company management tend to focus on the net income calculation because it is a good indicator of the company’s financial position and ability to manage assets efficiently. Investors what to know that their investment will continue to appreciate and that the company will have enough cash to pay them a dividend. Creditors want to know the company is financially sound and able to pay off its debt with successful operations. Company management is typically concerned with both investor and credit concerns along with the company’s ability to pay salaries and bonuses.
Net Operating Income Formula
Net Income is the most looked after the number in the financial statement of a Company. Net Income equation is as below –
Net Income Formula = Total Revenues – Total Expenses.
- Net Income or Net profit is calculated so that investors can measure the amount by which the total revenue exceeds the total expenses of the Company.
- Total revenue includes earnings from the sale of goods and services, interest income and income from the sale of the business or other income
- Total expenses include the cost of goods and services sold, operating expenses like salaries and wages, office maintenance, utilities and depreciation, and amortization, interest income, and taxes.
Net Income Formula Accounting
Let’s take a few simples to advanced examples to understand Net Income equation –
Net Income Formula – Example
Company ABC Inc. had revenue from the sale of $ 100,000 for the year 2017. It paid $ 20,000 as employee wages, $ 50,000 for raw materials and goods, $ 5,000 for other office and factory maintenance expenses. The Company had interest income of $ 3000 and paid $ 2500 in taxes. What is the net income of the Company ABC Inc.?
Total revenue of the Company = Revenue from sale + Interest Income
- Total revenue = 100000 + 3000 = 103,000
Total expenses = Employee wages + raw materials + office and factory maintenance + interest income + taxes
- Total expenses = 20000 + 50000 + 5000 + 3000 + 2500 = $ 80, 500
Net Income Formula = Total revenue – total expenses
- Net income = 103000 – 80500
- Net income = $ 22,500
Net Income Percentage Formula
A component percentage analysis shows the relationship between specific line items on a financial statement and the total amount on the statement. For example, to calculate the net income, take the total sales and subtract expenses and taxes. To show the relationship between the line item – sales and the total amount that includes the line item – and net income, you divide net income by total sales. The result is the net income component percentage.
To demonstrate by example, assume a company has $50,000 in sales for the year. Its expenses, such as the cost of goods sold, operating expenses, interest expenses, and income taxes total $35,000. This makes net income $50,000 – $35,000 = $15,000. To find the net income component percentage, the company divides net income by total sales so that $15,000 / $50,000 = 0.30. The company must then change the decimal into a fraction by multiplying it by 100. So, 100 x 0.30 = 30. The net income component percentage is 30 percent.
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