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Net income

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From Wikipedia, the free encyclopedia

Measure of the profitability of a business venture

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

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Inbusiness andaccounting,net income (alsototal comprehensive income,net earnings,net profit,bottom line,sales profit, orcredit sales) is an entity'sincome minuscost of goods sold, expenses,depreciation andamortization,interest, and taxes, and other expenses for anaccounting period.^[1]^{[better source needed]}

It is computed as the residual of all revenues and gains less all expenses and losses for the period,^[2] and has also been defined as the net increase inshareholders' equity that results from a company's operations.^[3] It is different fromgross income, which only deducts the cost of goods sold from revenue.

Forhouseholds and individuals,net income refers to the (gross) income minus taxes and other deductions (e.g. mandatorypension contributions).

Definition

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Net income can be distributed among holders of common stock as adividend or held by the firm as an addition toretained earnings. Asprofit andearnings are used synonymously forincome (also depending on UK and US usage),net earnings andnet profit are commonly found as synonyms for net income. Often, the termincome is substituted for net income, yet this is not preferred due to the possible ambiguity. Net income is informally called thebottom line because 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. Thebookkeeper oraccountant must 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 stock dividends will be subtracted too, though they are not an expense. For amerchandising company, 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.^[4]

The netprofit margin percentage 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

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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.^[5]

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

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.^[6]

Example

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

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

Another equation to calculate net income:

[[Net

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

Other terms

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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

References

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^"IAS 1 Presentation of Financial Statements"(PDF). IFRS Foundation. 2012. RetrievedApril 14, 2012.
^Weil, Schipper, Francis. (2009) Financial Accounting: An Introduction to Concepts, Methods, and Uses. Cengage Learning
^Weil, Schipper, Francis. (2010) Financial Accounting. Cengage Learning.
^"Net Income Formula". New Business Playbook. Archived fromthe original on 2013-10-19.
^"Gross Profit vs. Net Income: What's the Difference?". Investopedia.
^Farris, Paul W.; Neil T. Bendle; Phillip E. Pfeifer; David J. Reibstein (2010).Marketing Metrics: The Definitive Guide to Measuring Marketing Performance. Upper Saddle River, New Jersey: Pearson Education, Inc.ISBN 0137058292. Content from this book used in this article has been licensed for modification and reuse under the Creative Commons Attribute Share Alike 3.0 and Gnu Free Documentation licenses. See talk. TheMarketing Accountability Standards Board (MASB) endorses the definitions, purposes, and constructs of classes of measures that appear inMarketing Metrics as part of its ongoingCommon Language in Marketing Project.

v t e Accounting
Type	Financial accounting Cost accounting Management accounting Forensic accounting Fund accounting Governmental accounting Social accounting Tax accounting
Statements	Income statement Balance sheet Statement of changes in equity Cash flow statement
Terms	Debits and credits Revenue Cost of goods sold Operating expense Capital expenditure Depreciation Gross income Net income