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Net Income Formula | Example | Calculator | Definition

The best definition of Net Income Formula

Net Income Formula calculation

Net income formula is also known as net profit which is used to measure the total revenue amount that exceeds total expenses. In order words, it shows, how much revenue is left after the payment of all the expenses of the business. Net income is the amount that a company can save to pay off debt or the investment in new projects. This measurement is at the bottom of the income statement because of which many people prefer this as the bottom line.

Business net income is an important indicator and Investors, creditors, and management focus on the net income calculation. Because of this calculation, they can know the financial health of the company and the ability of the company to manage its assets. Investors want to find whether they can pay the dividend on their investment or not. Whereas creditors want to know whether the company has the ability to pay off current debt with successful operations or not. Management analyzes the ability of the company to pay salaries and bonuses to its employees by using this ratio.

The formula of Net Income

Business net income calculators help investors to calculate net income. The net income formula can be calculated by subtracting the total expenses of the business from the total revenue. You can Calculate annual net income as well.

Net Income = Total revenue – total expenses

From this equation management, investors, and creditors find the ability of the company to produce a profit.

If the revenue is not in the income statement then instead of revenue we can use net income from the gross profit. You do not need to subtract the cost of goods sold twice. Instead of revenue, you can use total revenue. Because of the simplicity of this equation, you do not need to use the net income calculator for this.

To understand net income in a better way we use the example calculation.

Examples of net income and revenue

There is the database and server technology company of Andrew.  From different medical companies, he manages the security, data, and server. From this, he makes the high revenue with fewer expenses. The list of expenses for 1year listed in the income statement is

  • Revenue = 200,000 dollars
  • Computer expenses =10,000 dollars
  • Salaries =50,000 dollars
  • Utilities = 5,000 dollars
  • Taxes = 2500 dollars

From the above figure Andrew calculate his net income. Total expenses are calculated by adding all the above expenses of salaries, utilities, and taxes which is equal to 67,500 dollars.

132,500 = 200,000 – 67,500

From the above result, it is clear that Andrew gets the revenue of 132,000 dollars which is the total profit, Andrew. If the revenue value is less than the value of the expenses then the company is at a loss. For example, in the above equation if the company have a profit of 50,000 dollars which is less than 67,000 dollars it means that the company has a loss of 17,500 dollars. You can understand wee how to calculate income yield.

Net Income Analysis 

If the net income is high then it is favourable for the business because this profit may be used to pay off current debt and for new investment.

Some company pays tax according to the profit because of which management reduce the profit on the tax basis to reduce the taxable income. due to this reason company have the book to tax adjustment at the end of each year. For the reflection of the tax, management adjusts their book income to get an advantage. For an instant, some companies use FIFO for the book purpose and LIFO for tax for showing the reduced income on the tax return.

If the company shows less income to pay less amount as a tax on income, then the company have the problem to show high income to show for the approval of the loan to the bank. To overcome this problem there are some revenue recognition rules which may be used.

For more Financial Ratios Check: 
Margin of safety

Marginal revenue

Net debt

Learn from Envestopedia about Financial Ratios, Banking and Financial terms.

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