How to Calculate Net Profit Formula

What is Net Income and How To Calculate It

Subtract your total expenses from your total revenue to get your net income. This formula is especially easy to calculate if you already have a good accounting software, or accountant, that does excellent bookkeeping work. If this is the case, you can take the total revenues and subtract total expenses, and boom, you have your net income. Net income, as opposed to gross income, is determined by how much a company is taking home in profits alone. That means it’s determined by taking all total revenues and subtracting all the costs of business. Net income is the profit remaining after all expenses, including business taxes—which is why it’s also sometimes referred to as net income after taxes . A company’s income statement will also show its net income before taxes, which can be helpful when comparing businesses in states that have different tax rates.

Net income refers to the amount an individual or business makes after deducting costs, allowances and taxes. We are compensated in exchange for placement of sponsored products and, services, or by you clicking on certain links posted on our site. Therefore, this compensation may impact how, where and in what order products appear within listing categories. While we strive to provide a wide range offers, Bankrate does not include information about every financial or credit product or service. The modified adjusted gross income you report on your tax return is used to determine if you qualify for certain tax benefits. Adjusted gross income is your gross income minus certain adjustments.

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With an understanding of gross vs. net income, you can calculate your net income by taking your gross income and subtracting your expenses, taxes, and interest on debt. By calculating your operating income, you’ll know how much money your company generates from its day-to-day operations before paying taxes or any other one-off expenses. While both numbers refer to a business’s profits, gross income and net income represent different phases of the buying and selling process.

Net income can be calculated simply by subtracting all the expenses from the revenue. For example, the calculation of net income is shown in the below template. Financial Statement Of A CompanyFinancial statements are written reports prepared by a company’s management to present the company’s financial affairs over a given period . By itself, net income as a standalone metric is not too meaningful. Investors and lenders sometimes prefer to look at operating net income rather than net income.

Calculating Net Income for Businesses

Net Income is the profit or loss of a company after all expenses have been accounted for. Net income can be positive or negative, depending on whether a company has made more money than it has spent or not. It’s profit that can be distributed to business owners or invested in business growth. Investors and banks use net income to help decide whether a company is worthy of investment or a loan. Publicly traded companies use it to calculate earnings per share and distribution of dividends.

What is Net Income and How To Calculate It

For example, an individual has $60,000 in gross income and qualifies for $10,000 in deductions. That individual’s taxable income is $50,000 with an effective tax rate of 13.88% giving an income tax payment $6,939.50 and NI of $43,060.50.


While there are many ways profitability is analyzed, net income remains a definitive indicator of how a business is doing. All three of these terms mean the same thing, which can sometimes be confusing for people who are new to finance and accounting.

  • All of these tools, naturally, will keep track of your revenues and expenses, and provide a completely accurate net income calculation as well as any other answer to accounting questions.
  • For specific advice about your unique circumstances, consider talking with a qualified professional.
  • This number can be tracked over time to give investors, executives, and other stakeholders an idea of how the company is growing.

The bottom line in financial statements is net income, which is calculated by subtracting expenses from revenues. The primary users of net income are investors, who use it to measure a company’s profitability and financial health. The net income figure is also used by lenders to determine a company’s creditworthiness and by the government to assess a company’s tax liability. In addition, management uses net income to make decisions about where to allocate resources and how to grow the business. It reflects whether a business has made money after all expenses are deducted from total revenue. Demonstrating the ability to generate strong net income can help businesses more easily secure bank loans and investments.

Net income before tax is a measure of a company’s profitability that measures the company’s income before income taxes are paid. This measure is important to investors because it shows how much money a company has earned before it has to pay taxes. This measure is also used by analysts to calculate a company’s earnings per share. Net income is defined as a business’ total earnings, or its profits. This net income number will appear on every company’s income statement and is a track record of how profitable a company is.

What is net income vs gross salary?

However, Gross Salary is what a company pays to an employee before deductions and Net Salary is what an employee receives after deductions.

Here’s an example of a net income calculation for ABYZ Candy Co. The cost of manufacturing the candy during the period was $39,500, leaving a gross income of $35,500. The company’s operating expenses came to $12,500, resulting in operating income of $23,000.

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It tells you how much money you have made and spent during that particular accounting period. It is also important if you have investors in your business because they can use net income to calculate your business’s earnings per share. It’s calculated as the overall sales revenue of a business minus the general expenses, costs of goods sold, taxes, operational costs, and any other expenses. To come up with an accurate net income, you need What is Net Income and How To Calculate It to take into account all the expenses. Gross income refers to an individual’s total earnings or pre-tax earnings, and NI refers to the difference after factoring deductions and taxes into gross income. To calculate taxable income, which is the figure used by the Internal Revenue Serviceto determine income tax, taxpayers subtract deductions from gross income. The difference between taxable income and income tax is an individual’s NI.

What is Net Income and How To Calculate It

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