Net Income Definition
Net income, otherwise known as net profit, “the bottom line,” or net earnings, is the amount remaining after all expenses, interest and any other costs have been deducted from the total revenue. In other words, the “pure profit.”
For an individual, this figure could vary depending on one’s definition of “expenses,” which becomes a legal matter when such expenses are claimed to reduce his or her taxable income, and the Internal Revenue Service has a difference of opinion.
Generally speaking however, an individual’s net income can be understood to mean the amount of money he or she has left over after all living expenses, including rent, food, healthcare, etc., have been accounted for.
For a business or a company, it’s more straightforward, and such figures are routinely made available to stakeholders in whose interest it is to understand the financial health of the business or company.
Net Income Formula
The formula for calculating net income is the following:
Net Income = Total Revenues – Total Expenses
How to Calculate Net Income
First, calculate the gross annual income. If an individual earns an annual salary from his or her employer, then the gross annual income is this figure plus any additional income, like interest/dividends earned from investments or other financial products, sale of goods or property, alimony, pension or rental income. This sum is the Total Revenue.
From that, calculate the total taxable income by applying allowable adjustments and deductions. Then calculate the total tax owed.
Add to this all the deductions calculated earlier, plus other living expenses that could not be deducted (like non-business-related rent, food, transportation costs). This sum is the Total Expenses.
Then apply the formula, and deduct the Total Expenses from the Total Revenue to calculate the Net Income.
For a business, first, the gross revenue must be calculated. The gross revenue is the total sales volume for the year, plus any additional windfall outside of the line of business (a settlement sum from a lawsuit, for example). This sum is the Total Revenue.
Then, start with the sum total of any returned merchandise/canceled services. Add to this figure the cost of goods sold (COGS). To this figure, add all operating expenses, such as rent, utility, salaries, etc., and capital expenditure, such as equipment upgrade, acquisition of intellectual property, etc.
Then, as with individual net income, calculate the tax owed, and add. This sum is the Total Expenses.
The difference between the two sums is the Net Income.