Net Income Formula (Table of Contents)
Net Income Formula
Net income is total earning or profit. It is the net income or Revenue Company is generating after paying all expenses, interest, taxes, dividend to the investor. The net income is calculated from the income statement. Net income tells about the profit or losses of a company also help to find profitability and grow of the company. Investors, stakeholders analyze net income and its trend to take the decision of investment and decision related to growth and expansion of the company. Net income is revenue minus cost of goods minus operating expense minus gain and losses minus other revenue expense plus income from the operations of a discounted component plus Gain from disposal of a discounted component minus loss from the operations of a discounted component minus loss from disposal of a discounted component. The formula for net income is as follows:-
Net Income = Revenue – Cost of goods sold – Operating expense – Gain and losses – Other revenue expense +/- Income/loss from the operations of a discounted component +/- Gain/loss from disposal of a discounted component
In short, Net income is total revenue minus total expense which can be written as:-
Where,
- Revenue: It is the actual amount the company earned over a period of time.
- Expense: It means what the company pays for an operational expense, salary for the employee, taxes on income, interest etc.
Examples
Now, let’s see an example to understand net income formula.
Net Income Formula – Example #1
Suppose, a company named MILO Pvt. Ltd has a total revenue of $100,000 and a total expense of $45,800.
Net Income of the MILO Pvt. is Calculated using below formula-
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- Net Income = Total Revenue – Total Expense
- Net Income = $100,000 – $45,800
- Net Income = $54,200
Net Income Formula – Example #2
A company has revenue of $50,000, the cost of goods sold is $15,000, operating expense $5,000 and loss from the operations of a discounted component is $1,200.
Net Income of the company is calculated using below formula-
- Net Income = Total Revenue – Total Expense
- Net Income = $50,000 – ($15,000 + $5,000 + $1,200)
- Net Income = $50,000 – $21,200
- Net Income = $28,800
The net income is a simple formula which measures excess revenue above total expense. One can use the gross profit to calculate net income, gross profit is total revenue minus cost of goods sold. All revenue and all expense of company are included while calculating net income. Net income provides information about the ratio for financial ratio analysis and financial statement analysis. Through these analyses, one can measure financial health and financial position of the company. Net income also tells stakeholder whether the company will be able to pay dividend or not. Net income helps to measure and calculate earnings per share, the profitability of the company and helps the investor to take the decision of investment.
Net Income Formula – Example #3
Suppose, a company named Viz. Pvt. Ltd has below income statement for the year 2018, total revenue of the company is $100,500, cost of goods sold is 20,000 this gives a gross profit of $167,971.18, the total expense of $50,321.72 which result in net income.
| Income Statement | |
| [USD $ millions] | |
| 2018 | |
| Total Revenue | $100,500.00 |
| Cost of Goods Sold | $(20,000.00) |
| Gross Profit | $167,971.18 |
| Salary | $18,520.00 |
| Rent | $7,804.60 |
| Depreciation | $5,000.00 |
| Equipment Maintenance | $1,200.00 |
| Operational Expense | $32,524.60 |
| Interest | $1,000.00 |
| Taxes (10%) | $16,797.12 |
| Total Expense | $50,321.72 |
| Net Income | $117,649.46 |
Net Income of the Viz. Pvt. Ltd is Calculated using below formula-
- Net Income = Gross Profit – Total Expense
- Net Income = $167,971.18 – $50,321.72
- Net Income = $117,649.46
Net profit is used for financial measurement, net income varies from company to company and industry to industry and helps to find the best company for investment.
The net profit margin is the ratio of net income to the net revenue. If the net profit margin is positive that means business is profitable and if the profit margin is negative that means business is not profitable. Net profit margin tells about how business is performing.
Net Profit Margin = Net Income / Net Revenue
The net profit margin helps to find the profitability of the company.
Net Income Formula – Example #4
Let’s take an example to calculate net profit margin.
Suppose a company has a net income of $45,000 and net revenue of $60,000 in the year 2018.
The net profit margin is calculated as:-
- Net Profit Margin = Net Income / Net Revenue
- Net Profit Margin = $45,000 / $60,000
- Net Profit Margin = $0.75
So, the net profit margin of the company is $0.75.
The best tool for calculating net income is by using accounting software and the type of software depends on the size of business, cost of software, amount of transactions and type of business.
These tools help to track business, transaction, and calculation of financial ratios.
Net Income Formula – Example #5
Let’s see an income statement of printing company named Arts & Printer Pvt. Ltd for the year 2018 and 2017.
| Income Statement | ||
| [USD $ millions] | ||
| 2018 | 2017 | |
| Total Revenue | $200,000.00 | $150,000.00 |
| Cost of Goods Sold | $(45,000.00) | $(30,000.00) |
| Gross Profit | $157,018.00 | $122,017.00 |
| Selling Expense | $14,000.00 | $8,000.00 |
| Salary | $18,520.00 | $17,452.00 |
| Rent | $7,804.60 | $7,004.00 |
| R&D Expense | $15,000.00 | $15,000.00 |
| Depreciation | $5,000.00 | $5,000.00 |
| Equipment Maintenance | $1,200.00 | $1,200.00 |
| Operational Expense | $47,524.60 | $45,656.00 |
| Interest | $1,000.00 | $1,000.00 |
| Taxes (10%) | $15,701.80 | $12,201.70 |
| Total Expense | $64,226.40 | $58,857.70 |
| Operating Income | $14,520.00 | $11,230.00 |
| Gain on Discounted Operations | $2,000.00 | $1,400.00 |
| Other Income | $16,520.00 | $12,630.00 |
| Net Income | $109,311.60 | $75,789.30 |
| Net Profit Margin | 0.55 | 0.51 |
Net Income of the Arts & Printer Pvt. Ltd for 2018 is Calculated as:-
- Net Income = Total Revenue – Total Expense
- Net Income = (Gross Profit + Other Income) – Total Expense
- Net Income2018 = 157,018 + 16,520 – 64,226.40
- Net Income2018 = $109,311.60
Net Profit Margin of the Arts & Printer Pvt. Ltd for 2018 is Calculated as:-
- Net Profit Margin = Net Income / Net Revenue
- Net Profit Margin2018 = 109,311.60 / 200,000
- Net Profit Margin2018 = 0.55
Net Income of the Arts & Printer Pvt. Ltd for 2017 is Calculated as:-
- Net Income = Total Revenue – Total Expense
- Net Income = (Gross Profit + Other Income) – Total Expense
- Net Income2017 = 122,017 + 12,630 – 58,857.70
- Net Income2017 = $75,789.30
Net Profit Margin of the Arts & Printer Pvt. Ltd for 2017 is Calculated as:-
- Net Profit Margin = Net Income / Net Revenue
- Net Profit Margin2017 = 75789.30 / 150,000
- Net Profit Margin2017 = 0.51
Here, we can see that the company is growing in terms of profit and revenue from 2017 to 2018. Net profit margin is 55%. Higher profits are preferred then lower one but higher profit is not always favorable as company reinvests its profit into a fixed asset, machinery, paying a dividend which may lead to loss to the company in next year.
Significance and Use of Net Income Formula
Uses of Net Income formula are as follows:-
- Earnings per Share
Net income helps to calculate earnings per Share which are net income minus the dividends on preferred stock and same divided by the average outstanding share. This indicates the company’s profitability.
- Profitability
Net income tells about the profitability of the company.
- Efficiency
Net income helps the investor to calculate the efficiency of a company that means it tells about how much revenue the company can generate investment in that company will generate profit or not.
So, from the above points, we can see the use of net income apart from that there are other ratios which also helps one to understand the performance of the company. Net income tells about the performance of the company. Net income does not measure cash that the company had earned over a period as it shows non-cash expenses like depreciation and amortization. Net income formula may not be reliable as it just does the calculation which may have a fraudulent report of profit which is generated by twisting rules of accounting. This false presentation of net income is done to pay less income tax.
Net Income Formula Calculator
You can use the following Net Income Calculator
| Total Revenue | |
| Total Expense | |
| Net Income Formula | |
| Net Income Formula = | Total Revenue – Total Expense |
| = | 0 – 0 |
| = | 0 |
Net Income Formula in Excel (With Excel Template)
Here we will do the same example of the Net Income formula in Excel. It is very easy and simple. You need to provide the two inputs i.e Total Revenue and Total Expense
You can easily calculate the Net Income using Formula in the template provided.
Net Income of the MILO Pvt. is Calculated as:-
Net Income of the company is calculated as:-
Net Income of the Viz. Pvt. Ltd is Calculated as:-
The net profit margin is calculated as:-
Net Income of the Arts & Printer Pvt. Ltd for 2018 and 2017 is calculated as:-
Net profit margin of the Arts & Printer Pvt. Ltd for 2018 and 2017 is calculated as:-
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