By What is Net Income?
Net income is a person or business’s earnings after expenses, allowances, and taxes.
After paying labor, supplies, and taxes, a business’s net income is what remains. For an individual, net income is their “take-home” money after taxes, health insurance, and retirement contributions. Net income should exceed expenditure to indicate financial soundness.
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How to calculate
Formula for Net Income
The net income calculation is simple to use:
Net Income = Total Revenue – Total Expenses
Let’s use an example to demonstrate the formula. Assume that Company XYZ brought in $100,000 in revenue overall and spent $60,000 on overhead, interest, and taxes.
- $100,000 – $60,000 = $40,000 is the net income.
- In this instance, the net income of Company XYZ is $40,000.
Formula for Operating Net Income
A subset of net income called operating net income is only concerned with the fundamental business operations of the organization. It provides a more accurate view of a company’s operational profitability by excluding non-operating revenue and costs.
The operating net income calculation is as follows:
Operating Revenue – Operating Expenses = Operating Net Income.
Now let’s go on to Company XYZ. We may determine the operating net income if the company’s operational revenue was $80,000 and its operating costs were $50,000.
- Operating Net Income (80,000 – $50,000 = $30)
- Thus, the operational net income of Company XYZ is $30,000.