Net Income
What is Net Income?
Net income represents the amount of money remaining after all operating expenses, interest, taxes and preferred stock dividends (but not common stock dividends) have been deducted from a company's total revenue. Net income is also referred to as the bottom line, net profit or net earnings.
Net Income Formula and Example
You can calculate net income by using the following formula:
Net Income = Total Revenue - Total Expenses
Net income is found on the last line of the income statement, which is why it's often referred to as the bottom line. Let's look at a hypothetical income statement for Company XYZ:
| Company XYZ's Annual Income Statement | ||||||||||||||||||||||
|
To find net income using this formula, along with figures from the example table above, start with the firm's revenue, then subtract all the expenses (salaries, rent, amortization, depreciation, interest expense, and tax in this example).
By using the formula we can see that:
Net Income = $2,000,000 - ($1,000,000 + $500,000 + $25,000 + $75,000 + $50,000 + $100,000) = $250,000
So after taking the company's $2 million in revenue and subtracting the $750,000 in total expenses it had over the year, Company XYZ was left with a net income of $250,000.
Comparing Gross Income vs Net Income
While net income shows a company's income after all expenses are taken out, gross income only shows a company's revenue minus the costs of sales/costs of goods sold -- the costs that are directly tied to the product or service being sold.
For example, if a car manufacturer sells $1,000,000 worth of cars to dealerships, and it cost $200,000 to build the cars (a direct cost of sales), then the manufacturer's gross income would be $800,000.
Gross income, which is near the top of the income statement, does not include all the company's fixed operating costs that extend down the income statement like salaries, rent, amortization, deprecation, and other expenses -- all of which would be included in the company's net income.
A company's net income will virtually always be a smaller amount than its gross income.