Net income

Source: Wikipedia, the free encyclopedia.
For personal income net of taxes, see Disposable and discretionary income.
"Bottom line" redirects here. For other uses, see Bottom line (disambiguation).
Part of
Early 19th-century German ledger
Major types
  • Tax
Key concepts
Selected accounts
Management Accounting Principles
Notes to the financial statements
Double-entry system
  • FIFO and LIFO
  • Journal
  • Ledger / General ledger
  • Trial balance
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    		•
    People and organizations
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    In

    accounting, net income (also total comprehensive income, net earnings, net profit, bottom line, sales profit, or credit sales) is an entity's income minus cost of goods sold, expenses, depreciation and amortization, interest, and taxes for an accounting period.[1]

    It is computed as the residual of all revenues and gains less all expenses and losses for the period,[2] and has also been defined as the net increase in shareholders' equity that results from a company's operations.[3] It is different from gross income, which only deducts the cost of goods sold from revenue.

    For households and individuals, net income refers to the (gross) income minus taxes and other deductions (e.g. mandatory pension contributions).

    Definition

    Net income can be distributed among holders of common stock as a

    top line, meaning revenue
    , which forms the first line of the account statement).

    In simplistic terms, net profit is the money left over after paying all the expenses of an endeavor. In practice this can get very complex in large organizations. The

    bookkeeper or accountant
    must itemise and allocate revenues and expenses properly to the specific working scope and context in which the term is applied.

    Net income is usually calculated per annum, for each fiscal year. The items deducted will typically include tax expense, financing expense (interest expense), and minority interest. Likewise, preferred stock dividends will be subtracted too, though they are not an expense. For a merchandising company, subtracted costs may be the cost of goods sold, sales discounts, and sales returns and allowances. For a product company, advertising, manufacturing, & design and development costs are included. Net income can also be calculated by adding a company's operating income to non-operating income and then subtracting off taxes.[4]

    The net profit margin percentage is a related ratio. This figure is calculated by dividing net profit by revenue or turnover, and it represents profitability, as a percentage.

    An equation for net income

    Net profit: To calculate net profit for a venture (such as a company, division, or project), subtract all costs, including a fair share of total corporate overheads, from the gross revenues or turnover.

    Net profit = sales revenue − total costs

    Net profit is a measure of the fundamental profitability of the venture. "It is the revenues of the activity less the costs of the activity. The main complication is . . . when needs to be allocated" across ventures. "Almost by definition, overheads are costs that cannot be directly tied to any specific" project, product, or division. "The classic example would be the cost of headquarters staff." "Although it is theoretically possible to calculate profits for any sub-(venture), such as a product or region, often the calculations are rendered suspect by the need to allocate overhead costs." Because overhead costs generally do not come in neat packages, their allocation across ventures is not an exact science.[5]

    Example

    Net profit on a P & L (profit and loss) account:

    1. Sales revenue = price (of product) × quantity sold
    2. Gross profit
      = sales revenue − cost of sales and other direct costs
    3. Operating profit = gross profit − overheads and other indirect costs
    4. EBIT (earnings before interest and taxes) = operating profit + non-operating income
    5. Pretax profit (
      EBT
      , earnings before taxes) = operating profit − one-off items and redundancy payments, staff restructuring − interest payable
    6. Net profit = Pre-tax profit − tax
    7. Retained earnings = Net profit − dividends

    Another equation to calculate net income:

    Earnings before taxes (EBT) - Tax expense
    = Net income (EAT)

    Another equation to calculate net income:

    gross sales
    – (customer discounts + returns + allowances)
    Gross profit =
    net sales – cost of goods sold
    Gross profit percentage = [(
    net sales
    ] × 100%.
    Operating profit = gross profit – total operating expenses
    Net income =
    operating profit
    – taxes – interest

    Other terms

    gross sales
    – (customer discounts, returns, and allowances)
    net sales – cost of goods sold
    gross profit – total operating expenses
    operating profit
    – taxes – interest
    net sales – cost of goods sold – operating expense
    – taxes – interest

    See also

    References

    1. ^ "IAS 1 Presentation of Financial Statements" (PDF). IFRS Foundation. 2012. Retrieved April 14, 2012.
    2. ^ Stickney, et al. (2009) Financial Accounting: An Introduction to Concepts, Methods, and Uses. Cengage Learning
    3. ^ Needles, et al. (2010) Financial Accounting. Cengage Learning.
    4. ^ "Net Income Formula". New Business Playbook. Archived from the original on 2013-10-19.
    5. Marketing Accountability Standards Board (MASB) endorses the definitions, purposes, and constructs of classes of measures that appear in Marketing Metrics as part of its ongoing Common Language in Marketing Project
      .
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