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 revenue over the expenses incurred during a financial year.
Net Profit Formula
Net Income: Total Revenue – Total expenses
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.
The total expense of the company includes:
- Cost of goods sold and services provided,
- Selling and administration expenses,
- All sorts of operating expenses, such as salaries, office maintenance, utilities, etc.
- 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.
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
|Add: Interest Income||$20,000|
|Add: Power and Fuel Cost||$2,000|
|Cost of good sold||$52,000|
|Add: Selling & Distribution expenses||$5000|
|Office & Factory expenses||$1500|
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 using Concept of Profit
|Less: Cost of Goods sold|
|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|
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.
|Particulars||Amount in $|
|Less: Cost of Goods sold||2,10,000|
|Less: selling, general and administrative expense- (45,000+25,000)||70,000|
|Earnings Before depreciation, tax, and interest(EBITDA) or PBIDTA||2,20,000|
|Less: Depreciation and amortization expenses||22,000|
|Earnings before Interest Tax (EBT) or PBIT||1,98,000|
|Less: Interest expenses||12,000|
|Earnings before tax||1,86,000|
|Less: tax expenses||87,000|
|Profit after tax or Net income||99,000|
So, the net income of the company is $ 99,000.
Use Net Income Calculator for a quick result.
Relevance of Net Profit
- 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 determine the potential uses of profit for further expansion and growth.
- 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 company’s net earnings. 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.
- And in the cash flow statement 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.
- 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.
- 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.