In
business
and
accounting
,
net income
(also
total comprehensive income
,
net earnings
,
net profit
,
bottom line
,
sales profit
, or
credit sales
) is an entity's
income
minus
cost of goods sold
, expenses,
depreciation
and
amortization
,
interest
, and taxes for an
accounting period
.
[1]
[2]
It is computed as the residual of all revenues and gains less all expenses and losses for the period,
[3]
and has also been defined as the net increase in
shareholders' equity
that results from a company's operations.
[4]
It is different from
gross income
, which only deducts the cost of goods sold from revenue.
For
households
and individuals,
net income
refers to the (gross) income minus taxes and other deductions (e.g. mandatory
pension
contributions).
Net income can be distributed among holders of common stock as a
dividend
or held by the firm as an addition to
retained earnings
. As
profit
and
earnings
are used synonymously for
income
(also depending on UK and US usage),
net earnings
and
net profit
are commonly found as synonyms for net income. Often, the term
income
is substituted for net income, yet this is not preferred due to the possible ambiguity. Net income is informally called the
bottom line
because it is typically found on the last line of a company's
income statement
(a related term is
top line
, meaning
revenue
, which forms the first line of the account statement).
In simplistic terms, net profit is the money left over after paying all the expenses of an endeavor. In practice this can get very complex in large organizations. The
bookkeeper
or
accountant
must itemise and allocate revenues and expenses properly to the specific working scope and context in which the term is applied.
Net income is usually calculated per annum, for each
fiscal year
. The items deducted will typically include
tax expense
, financing expense (
interest expense
), and minority interest. Likewise,
preferred stock
dividends will be subtracted too, though they are not an expense. For a
merchandising
company, subtracted costs
may be the
cost of goods sold
, sales discounts, and sales returns and allowances. For a product company,
advertising
,
manufacturing
, & design and development costs are included. Net income can also be calculated by adding a company's operating income to non-operating income and then subtracting off taxes.
[5]
The net
profit margin
percentage is a related ratio. This figure is calculated by dividing net profit by revenue or turnover, and it represents profitability, as a percentage.
An equation for net income
edit
Net profit: To calculate net profit for a venture (such as a company, division, or project), subtract all costs, including a fair share of total corporate overheads, from the gross revenues or turnover.
[6]
A detailed example of a net income calculation:
Net profit is a measure of the fundamental profitability of the venture. "It is the revenues of the activity less the costs of the activity. The main complication is . . . when needs to be allocated" across ventures. "Almost by definition, overheads are costs that cannot be directly tied to any specific" project, product, or division. "The classic example would be the cost of headquarters staff." "Although it is theoretically possible to calculate profits for any sub-(venture), such as a product or region, often the calculations are rendered suspect by the need to allocate overhead costs." Because overhead costs generally do not come in neat packages, their allocation across ventures is not an exact science.
[7]
Net profit on a P & L (profit and loss) account:
- Sales revenue
= price (of product) × quantity sold
- Gross profit
= sales revenue ? cost of sales and other direct costs
- Operating profit = gross profit ? overheads and other indirect costs
- EBIT
(earnings before interest and taxes) = operating profit + interest income + other non-operating income
- EBT
(Pretax profit, earnings before taxes) = EBIT ? interest expenses ? other non-operating expenses
- Net profit = EBT ? tax
- Retained earnings
= Net profit ? dividends
Another equation to calculate net income:
Net sales
(revenue) -
Cost of goods sold
=
Gross profit
-
SG&A
expenses (combined costs of operating the company) -
Research and development
(R&D) =
Earnings before interest, taxes, depreciation and amortization
(EBITDA) -
Depreciation
and
amortization
=
Earnings before interest and taxes
(EBIT) -
Interest expense
(cost of borrowing money) =
Earnings before taxes
(EBT) -
Tax expense
= Net income (EAT)
- ^
"Net income meaning - Google Search"
.
www.google.com
. Retrieved
2024-04-12
.
- ^
"IAS 1 Presentation of Financial Statements"
(PDF)
. IFRS Foundation. 2012
. Retrieved
April 14,
2012
.
- ^
Stickney, et al. (2009) Financial Accounting: An Introduction to Concepts, Methods, and Uses. Cengage Learning
- ^
Needles, et al. (2010) Financial Accounting. Cengage Learning.
- ^
"Net Income Formula"
. New Business Playbook. Archived from
the original
on 2013-10-19.
- ^
"Gross Profit vs. Net Income: What's the Difference?"
. Investopedia.
- ^
Farris, Paul W.; Neil T. Bendle; Phillip E. Pfeifer; David J. Reibstein (2010).
Marketing Metrics: The Definitive Guide to Measuring Marketing Performance.
Upper Saddle River, New Jersey: Pearson Education, Inc.
ISBN
0137058292
. Content from this book used in this article has been licensed for modification and reuse under the Creative Commons Attribute Share Alike 3.0 and Gnu Free Documentation licenses. See talk. The
Marketing Accountability Standards Board (MASB)
endorses the definitions, purposes, and constructs of classes of measures that appear in
Marketing Metrics
as part of its ongoing
Common Language in Marketing Project
.