Net income is a fundamental accounting metric representing the total profit of a company after all expenses, taxes, interest, and operating costs have been deducted from total revenue. In simpler terms, net income shows how much money a business actually earns at the end of a financial period.
To calculate net income accurately, you would use this straightforward formula:
Net Income = Total Revenue – Total Expenses
However, this calculation typically involves multiple steps. First, determine total revenue, which includes revenue earned from sales and other income-generating activities within the reporting period. Second, subtract cost of goods sold (COGS), operating expenses, administrative costs, interest payments, and taxes to reveal the company's final profit or loss.
For example, imagine your company earned $200,000 in total revenues, spent $75,000 on COGS, $40,000 on operating expenses, paid $10,000 in interest, and paid $15,000 in taxes. You would calculate net income as follows:
Net Income = $200,000 – ($75,000 + $40,000 + $10,000 + $15,000)
Net Income = $200,000 – $140,000
Net Income = $60,000
Calculating net income is essential, as it provides a clear picture of profitability and helps stakeholders assess financial health and performance objectively.
