Net income

"Bottom line" redirects here. For other uses, seeBottom line (disambiguation).

Inbusinessandaccounting,net income(alsototal comprehensive income,net earnings,net profit,bottom line,sales profit,orcredit sales) is an entity'sincomeminuscost of goods sold,expenses,depreciationandamortization,interest,and taxes for anaccounting period.

It is computed as the residual of all revenues and gains less all expenses and losses for the period,and has also been defined as the net increase inshareholders' equitythat results from a company's operations.It is different fromgross income,which only deducts the cost of goods sold from revenue.

Forhouseholdsand individuals,net incomerefers to the (gross) income minus taxes and other deductions (e.g. mandatorypensioncontributions).

Definition

Net income can be distributed among holders of common stock as adividendor held by the firm as an addition toretained earnings.Asprofitandearningsare used synonymously forincome(also depending on UK and US usage),net earningsandnet profitare commonly found as synonyms for net income. Often, the termincomeis substituted for net income, yet this is not preferred due to the possible ambiguity. Net income is informally called thebottom linebecause it is typically found on the last line of a company'sincome statement(a related term istop line,meaningrevenue,which forms the first line of the account statement).

In simplistic terms, net profit is the money left over after paying all the expenses of an endeavor. In practice this can get very complex in large organizations. Thebookkeeperoraccountantmust itemise and allocate revenues and expenses properly to the specific working scope and context in which the term is applied.

Net income is usually calculated per annum, for eachfiscal year.The items deducted will typically includetax expense,financing expense (interest expense), and minority interest. Likewise, preferred stockdividends will be subtracted too, though they are not an expense. For amerchandisingcompany, subtracted costs may be thecost of goods sold,sales discounts, and sales returns and allowances. For a product company,advertising, manufacturing,& design and development costs are included. Net income can also be calculated by adding a company's operating income to non-operating income and then subtracting off taxes.

The netprofit marginpercentage is a related ratio. This figure is calculated by dividing net profit by revenue or turnover, and it represents profitability, as a percentage.

An equation for net income

Net profit: To calculate net profit for a venture (such as a company, division, or project), subtract all costs, including a fair share of total corporate overheads, from the gross revenues or turnover.

${\text{Net Profit}}={\text{Sales Revenue}}-{\text{Total Costs}}$

A detailed example of a net income calculation:

${\text{Net Income}}={\text{Gross Profit}}-{\text{Operating Expenses}}-{\text{Other Business Expenses}}-{\text{Taxes}}-{\text{Interest on Debt}}+{\text{Other Income}}$

Net profit is a measure of the fundamental profitability of the venture. "It is the revenues of the activity less the costs of the activity. The main complication is... when needs to be allocated" across ventures. "Almost by definition, overheads are costs that cannot be directly tied to any specific" project, product, or division. "The classic example would be the cost of headquarters staff." "Although it is theoretically possible to calculate profits for any sub-(venture), such as a product or region, often the calculations are rendered suspect by the need to allocate overhead costs." Because overhead costs generally do not come in neat packages, their allocation across ventures is not an exact science.

Example

Net profit on a P & L (profit and loss) account:

1. Sales revenue= price (of product) × quantity sold
2. Gross profit= sales revenue − cost of sales and other direct costs
3. Operating profit = gross profit − overheads and other indirect costs
4. EBIT(earnings before interest and taxes) = operating profit + interest income + other non-operating income
5. EBT(Pretax profit, earnings before taxes) = EBIT − interest expenses − other non-operating expenses
6. Net profit = EBT − tax
7. Retained earnings= Net profit − dividends

Another equation to calculate net income:

Net sales(revenue) -Cost of goods sold=Gross profit-SG&Aexpenses (combined costs of operating the company) -Research and development(R&D) =Earnings before interest, taxes, depreciation and amortization(EBITDA) -Depreciationandamortization=Earnings before interest and taxes(EBIT) -Interest expense(cost of borrowing money) =Earnings before taxes(EBT) -Tax expense= Net income (EAT)

Other terms

Net sales=gross sales– (customer discounts, returns, and allowances)

Gross profit=net sales–cost of goods sold

Operating profit=gross profit– totaloperating expenses

Net profit=operating profit– taxes – interest

Net profit=net sales–cost of goods sold–operating expense– taxes – interest

See also

• Cost of goods sold– Carrying value of goods sold during a particular period
• Dividend– Payment made by a corporation to its shareholders, usually as a distribution of profits
• Economic value added– Value of a firm's profit after deduction of capital costs
• Gross income– Sum of all earnings before taxes
• Gross margin– Gross profit as a percentage (the difference between the sales and the production costs)
• Income statement– Type of financial statement
• Liquidating distribution– distribution made by a liquidating company to pay out its entire equity to its shareholdersPages displaying wikidata descriptions as a fallback
• Net income per employee– accounting term; a company's net income divided by the number of employeesPages displaying wikidata descriptions as a fallback
• Operating income– Measure of a firm's profit
• Operating Income Before Depreciation and Amortization (OIBDA)– Accounting measure of a company's profitability
• Opportunity cost– Benefit lost by a choice between options
• Profit (accounting)– Income distributed to BSC
• Profit margin– Ratio between turnover and profit (ratio of net income to net sales)
• Revenue– Total amount of income generated by the sale of goods or services