Net Income Formula
The net income formula is typically:
Net Income = Total Revenues – Total Expenses
This formula represents the calculation of profit. It is a basic principle of accounting and finance. Total revenues represent the total money earned from a company’s main business operations. Total expenses represent the costs associated with running the business, including operating costs, taxes, and cost of goods sold, among others.
After subtracting total expenses from total revenues, the resulting value is the net income. If the net income is positive, the company has made a profit. If it is negative, the company has suffered a loss.
In some cases, the formula may be presented in a more detailed form:
Net Income = (Revenue – Cost of Goods Sold – Operating Expenses – Other Expenses – Interest – Taxes)
This breaks down the total expenses into their various components, providing a more detailed look at where a company’s money is going.
Example of the Net Income Formula
Let’s imagine a hypothetical small business called “Blue Jay Clothing.” Here’s a simplified breakdown of their finances for a given year:
- Total Revenue (income from selling products): $500,000
- Cost of Goods Sold (money spent to make the products): $150,000
- Operating Expenses (rent, salaries, utilities, etc.): $200,000
- Other Expenses (unexpected costs, such as repair or legal fees): $10,000
- Interest (from business loans or other debt): $15,000
- Taxes: $40,000
We can calculate Blue Jay Clothing’s Net Income by subtracting all costs from the revenue:
Net Income = Revenue – Cost of Goods Sold – Operating Expenses – Other Expenses – Interest – Taxes
Substituting the given values into the formula:
Net Income = $500,000 – $150,000 – $200,000 – $10,000 – $15,000 – $40,000 = $85,000
So, Blue Jay Clothing’s net income for this year would be $85,000. This means after all costs are accounted for, the business has a profit of $85,000.
