Net Income
Definition of Net Income
What is Net Income?
Net Income is the amount you keep after subtracting all of your expenses from all your income. For example, if a business had a total income of $100,000 and it spent $60,000 to obtain its income, its Net Income would equal $40,000. The calculation for Net Income is all income minus all expenses.
Net Income = Total Income - Total Expenses
The term "income" refers to "incoming" payments. Examples of income are sales to customers and interest earned from banking investments.
The term "expenses" refers to an "exodus" of property.
Net Income is the most important value in accounting because it represents the financial state of a business. If a business has a positive Net Income, it is making money in excess of its costs. A positive Net Income is referred to as "being in the black". If a business has a zero Net Income, it is neither making or losing money. A zero Net Income is referred to as "breaking even". If a business has a negative Net Income, its expenses are greater than its income and it is losing money. A negative Net Income is referred to as "being in the red".
Net Income can also be described in terms of Gross Profit after all other expenses.
Net Income = Total Gross Profit - Common Expenses
Gross Profit is used to calculate the direct profit on the sale of a particular good or service. For example, if a business sold smoothies and sandwiches, the Gross Profit on smoothies would be the price sold to customers minus the costs of its ingredients. The same is true for a sandwich.
Gross Profit (Smoothies) = Price - Costs
Gross Profit (Sandwiches) = Price - Costs
Total Gross Profit = Smoothie Gross Profit + Sandwich Gross Profit
Common costs, such as rent and insurance, are not included in Gross Profit calculations but are included in the Net Income calculation because they are common costs to all products and not just smoothies or sandwiches.
Net Income = Total Gross Profit - Common Costs
Let's say a smoothie costs $2 to make and and a sandwich costs $3. The smoothie sells for a price of $6 and the sandwich sells for a price $8.
Gross Profit (Smoothie) = Price - Costs
Gross Profit = $6 - $2
Gross Profit = $4
Gross Profit (Sandwich) = Price - Costs
Gross Profit = $8 - $3
Gross Profit = $5
Let's say a business sells 1,000 of each in a week. Let's calculate Gross and Net Income.
Total Gross Profit = Smoothie Gross Profit + Sandwich Gross Profit
Total Gross Profit = ($4 x 1,000) + ($5 x 1,000)
Total Gross Profit = $9,000
Now let's calculate Net Income for the week. Let's say the business's rent is $250 per week and its insurance is $25 per week. Its total common costs for the week is $275.
Net Income = Total Gross Profit - Common Expenses
Net Income = $9,000 - $275
Net Income = $8,725
This was a crash course explanation of Net Income. If you want to learn more, check out our online lesson where you will learn to measure and compare the three forms of profit: profit margin, gross profit and net profit.
Net Income = Total Income - Total Expenses
The term "income" refers to "incoming" payments. Examples of income are sales to customers and interest earned from banking investments.
The term "expenses" refers to an "exodus" of property.
Net Income is the most important value in accounting because it represents the financial state of a business. If a business has a positive Net Income, it is making money in excess of its costs. A positive Net Income is referred to as "being in the black". If a business has a zero Net Income, it is neither making or losing money. A zero Net Income is referred to as "breaking even". If a business has a negative Net Income, its expenses are greater than its income and it is losing money. A negative Net Income is referred to as "being in the red".
Net Income can also be described in terms of Gross Profit after all other expenses.
Net Income = Total Gross Profit - Common Expenses
Gross Profit is used to calculate the direct profit on the sale of a particular good or service. For example, if a business sold smoothies and sandwiches, the Gross Profit on smoothies would be the price sold to customers minus the costs of its ingredients. The same is true for a sandwich.
Gross Profit (Smoothies) = Price - Costs
Gross Profit (Sandwiches) = Price - Costs
Total Gross Profit = Smoothie Gross Profit + Sandwich Gross Profit
Common costs, such as rent and insurance, are not included in Gross Profit calculations but are included in the Net Income calculation because they are common costs to all products and not just smoothies or sandwiches.
Net Income = Total Gross Profit - Common Costs
Let's say a smoothie costs $2 to make and and a sandwich costs $3. The smoothie sells for a price of $6 and the sandwich sells for a price $8.
Gross Profit (Smoothie) = Price - Costs
Gross Profit = $6 - $2
Gross Profit = $4
Gross Profit (Sandwich) = Price - Costs
Gross Profit = $8 - $3
Gross Profit = $5
Let's say a business sells 1,000 of each in a week. Let's calculate Gross and Net Income.
Total Gross Profit = Smoothie Gross Profit + Sandwich Gross Profit
Total Gross Profit = ($4 x 1,000) + ($5 x 1,000)
Total Gross Profit = $9,000
Now let's calculate Net Income for the week. Let's say the business's rent is $250 per week and its insurance is $25 per week. Its total common costs for the week is $275.
Net Income = Total Gross Profit - Common Expenses
Net Income = $9,000 - $275
Net Income = $8,725
This was a crash course explanation of Net Income. If you want to learn more, check out our online lesson where you will learn to measure and compare the three forms of profit: profit margin, gross profit and net profit.
Continue Learning about Net Income in an Interactive Bookkeeping Textbook
Over 4+ Hours of Free Lessons
The Addictive Accounting training course has a purpose:
To help you quickly master the fundamentals of bookkeeping and accounting!
If you are a student who is planning on studying accounting, or a student who is struggling to learn the concepts, this course is for you. If you want an A grade, take this prep course! If you are business owner who wants to fully understand their personal bookkeeping, this course is also for you.
To help you quickly master the fundamentals of bookkeeping and accounting!
- Simplified - created for students and business owners
- Comprehensive - an interactive bookkeeping and accounting textbook
- Practice Make Perfect - in a hands-on bookkeeping simulator
- Learn Finance - cash, profit, equity, and balance statements
- Quiz Yourself - test your comprehension with instant feedback
- Career Boost - communicate finance with confidence
- At Your Pace - complete the course in a week or a weekend
- Teacher's Aid - can be used as an auxiliary tool to enhance learning
- CPA Exam Prep - review fundamentals to greatly improve your score
If you are a student who is planning on studying accounting, or a student who is struggling to learn the concepts, this course is for you. If you want an A grade, take this prep course! If you are business owner who wants to fully understand their personal bookkeeping, this course is also for you.
Practice Net Income in an Accounting Simulator
Rather than just read about net profit, learn and practice calculating net profit as a bookkeeper in a hands-on accounting simulation. Learn more about our accounting simulation app or see what you can learn for free in the Addictive Accounting course.
Over 4 Hours of Free Course Content,
No Ads,
and No Personal Data Collected
