Net Income Formula – Calculation and Example

Net Income Formula

Net Income Formula is a formula used for the calculation of the net earnings of the company. The net income formula helps us arrive at the amount of revenue/income left in the company after paying off all its expenses. Therefore, It is a useful tool for the companies, investors, shareholders, and analysts to arrive at the profit earned for the accounting period or period under analysis.

The net profit formula or net earning formula is synonymous with the net income formula. And the net profit formula calculates the net profit or net income of a company. Therefore, it acts as an indicator of a firm’s profitable operations by calculating excess of revenue over the expenses incurred during a financial year.

Net Profit Formula

Net Income: Total Revenue – Total expenses

Total Revenue

The total revenue is the sum of the total income earned by the company from the sales of goods and services, income from deposits and investments, etc., and other income.

Total Expenses

The total expense of the company includes:

  1. Cost of goods sold and services provided,
  2. Selling and administration expenses,
  3. All sorts of operating expenses, such as salaries, office maintenance, utilities, etc.
  4. Depreciation,
  5. Interest,
  6. Taxes and any other expenses.

The net income calculated is the bottom line or last line on the profit and loss statement or income statement. However, some income statements may have a further section at the bottom, showing additional adjustments and distribution of the dividend and final retained earnings.

Example

Company Mindap Inc. has revenue from sales of $150,000 for the year 2018. Moreover, during the year, the company earned an interest income of $20000. And the company incurred the following expenses.

Employee wages = $ 20,000.

Raw materials= $ 50,000.

Power and fuel cost= $2000

Selling and distribution expenses =$5000

Office and factory maintenance expense = $1500

Taxes = $3000

RevenueAmount
Sales$150,000
Add: Interest Income$20,000
Total Income$170,000
ExpensesAmount
Raw Material$50,000
Add: Power and Fuel Cost$2,000
Cost of good sold$52,000
Add: Selling & Distribution expenses$5000
          Office & Factory expenses$1500
           Taxes$3000
Total Expenditure$65,500

So, Net Income = Total Revenue minus Total expenditure = $170,000 – $65,500 = $104,500.

Moreover, the net income represents the profit after tax, hence also known as profit after tax. Thus, in the above example, the profit after tax is $104,500.

Net Income Formula

Net Income Formula using Concept of Profit

Sales
Less: Cost of Goods sold
Gross Profit
Less: selling, general and administrative expenses
Earnings Before depreciation, tax, and interest(EBITDA) or PBIDTA
Less: Depreciation and amortization expenses
Earnings before Interest & Tax (EBIT) or PBIT
Less: Interest expenses
Earnings before tax
Less: tax expenses
Profit after tax or Net income

Example

A company Glass Shine ltd. provides the following information to calculate the net income. And the information is:

  • sales $500,000,
  • cost of goods sold $210,000,
  • selling and distribution $25,000,
  • office and administrative expenses $45,000,
  • interest expenses $12,000,
  • depreciation $22,000 and
  • tax paid $87,000.
ParticularsAmount in $
Sales5,00,000
Less: Cost of Goods sold2,10,000
Gross Profit2,90,000
Less: selling, general and administrative expense- (45,000+25,000)70,000
Earnings Before depreciation, tax, and interest(EBITDA) or PBIDTA2,20,000
Less: Depreciation and amortization expenses22,000
Earnings before Interest Tax (EBT) or PBIT1,98,000
Less: Interest expenses12,000
Earnings before tax1,86,000
Less: tax expenses87,000
Profit after tax or Net income99,000

So, the net income of the company is $ 99,000.

Use Net Income Calculator for a quick result.

Relevance of Net Profit

  1. The net earnings of the company give insight into the financial position of the company. In other words, it indicates the firm’s profit-earning potential as it represents the earnings available to the firm after meeting all its expenses. And thus, the net income formula also helps the company to determine the potential uses of profit for further expansion and growth.
  2. Moreover, the net earning is an essential and critical line item that is found across the various vital statements -income, balance sheet, and cash flow. And from the income statement, we get the net earnings of the company. After that, it flows to the balance sheet under the head-retained earnings for calculation of the closing balance of the retained earnings. Therefore, Closing balance = Opening balance + Net Income for the period – Dividend.
  3. And in the cash flow statement, it is used for the calculation of operating cash flow. The cash flow statement begins with net earnings, then all non-cash expenses of the income statement are added back. Then, the net changes in working capital are also added to find the cash flow from operating activity.
  4. The net profit is also used to calculate the net profit margin. It is a formula that determines the profitability on a percentage basis as a comparison to the previous year’s figures or profits of the competitors.
  5. The net profit or net earnings again becomes a key reference point for the calculation of various financial ratios. The shareholder closely follows the net earnings as the dividend declaration depends upon this line item. It also determines the earnings per share of the company.

Points to Remember

  • Although the net income is a crucial figure for any business, it includes non-cash items also such as depreciation and amortization in its calculation. Hence any change in the net income or financial ratios need proper analysis concerning the impact of non-cash items.
  • The net profit may vary from organization to organization and industry to industry. An organization with huge assets has higher depreciation expenses than others with light assets. Thus, it affects the net income of the organization.
  • The net profit is affected by various factors such as growth in the industry, debt level, government taxes, quality of management, the status of the general economy, etc. Hence all these factors should be taken into consideration for analysis before arriving at any conclusion.


Sanjay Borad

Sanjay Bulaki Borad

Sanjay Borad is the founder & CEO of eFinanceManagement. He is passionate about keeping and making things simple and easy. Running this blog since 2009 and trying to explain "Financial Management Concepts in Layman's Terms".

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