Net Income
The “bottom line” — total earnings after all expenses, interest and taxes are deducted from revenue.
Formula
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Example
Revenue $500k − expenses $430k = $70k net income
How it works
Net income shows how much money a business has left after paying for everything required to run it, including operating costs, interest, and taxes. It works because you start with total revenue and subtract all the expenses that reduce the amount the business actually keeps. If the result is positive, the business earned a profit; if it is negative, it made a loss.
When to use it
Use this formula when you want to find a company’s profit for a period such as a month, quarter, or year. It is also useful when comparing how efficiently different businesses turn sales into actual earnings.
Worked example, step by step
Revenue = $125,000 Expenses = $98,500 NI = Revenue - Expenses NI = $125,000 - $98,500 NI = $26,500 Final answer: Net income = $26,500
Common mistakes to avoid
- subtracting only operating costs and forgetting interest or taxes if they are included in expenses
- using gross profit instead of total revenue
- mixing up net income with cash in the bank, which can be different
Did You Know?
A company can post record revenue and still report a net loss if expenses outrun it.
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BasicThe foundation of double-entry bookkeeping: everything a business owns is financed either by debt or by owners’ capital.
Cost of Goods Sold
BasicThe direct cost of the inventory actually sold during a period.
Gross Profit
BasicWhat remains from sales after subtracting the direct cost of the goods sold, before operating expenses.
Retained Earnings
BasicCumulative profit kept in the business rather than paid out to shareholders.
Current Ratio
IntermediateA liquidity measure of whether a firm can cover its short-term obligations with short-term assets.
Quick Ratio (Acid Test)
IntermediateA stricter liquidity test that excludes inventory, which can be slow to convert to cash.