Net Income: Definition, Formula and Examples for Beginners

net income equation

Keep reading to learn everything businesses need to know about net income. Get instant access to video lessons taught Bookkeeping & Accounting for Lawyers by experienced investment bankers. Learn financial statement modeling, DCF, M&A, LBO, Comps and Excel shortcuts.

  • To find gross income, you need to know your business’s total revenue and cost of goods sold.
  • They can choose the same cash method for business financial statements to maintain only one set of books.
  • Conversely, if your business expenses are more than the total amount of revenue, you’ll have negative results, which is also known as a net loss.
  • Interestingly enough, you can be profitable and not have a positive cash flow.
  • The best tool for calculating net income is using accounting software, and the type of software depends on the size of the business, cost of software, amount of transactions, and type of business.

Net profit will tell you the amount of money left over after all expenses and taxes have been deducted while cash flow will tell you how much money you have coming into your business. You can calculate taxable income by subtracting deductions from gross income. This formula can also help investors and creditors understand how efficiently companies make money. It’s also worth mentioning that if you don’t know your total revenues for whatever reason, you can take the gross profit amount and subtract the cost of goods sold. Let’s talk about what total revenues are and what total expenses are to gain a better understanding of what goes into this calculation.

How to prepare your business for its busy season

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net income equation

Expenses like depreciation and amortization aren’t cash expenses. While they play a valuable role in accounting, they often skew the net income figure. The net income is the last line item in the company’s income statement. For more information on this check out our page on revenue vs. profit. But paying attention to trends in net income can help you understand whether your company is on a path to profitability even when you’re burning cash. Because even though you aren’t expected to be profitable now — it’s always the end goal for a business.

Examples of how to calculate net income

This example is a bit less complicated than most businesses, but it gives you a general idea of how the equation works. It’s no easy feat to be in charge of the finances of a business, especially when you have to keep spot on records of all transactions. You can easily calculate the Net Income using the Formula in the template provided. Here we will do the same example of the Net Income formula in Excel.

How to calculate EBIT?

  1. Revenue – represents the total amount of money earned from product sales.
  2. COGS – represents the cost of goods sold, including equipment, raw materials, employee labor, and shipping.


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