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Net Income is the total amount of money an individual or business earns in a given period, less taxes, expenses, and interest. A companys net income, also known as net profit, net profit or simply profit, measures the companys profitability. Net income is the opposite of net loss when a business loses money. In addition to sales, the annual surplus is the most important key figure in accounting. Have you ever heard someone say that a company is in the red or in the red? This is because accountants used to record net loss in red ink and net income in black ink. Although many small businesses dont start calculating their profitability until a lender or investor forces them to, tracking net income is one of the best ways to monitor a companys financial health. If your net income is increasing, youre probably on the right track. If not, it may be time to cut costs. It is also an important indicator for lenders and investors. Lenders want to make sure you have enough money to pay off all your debts. Investors want to know how much cash the company has left to pay dividends, reinvest in the company or put it aside for worse times. Once you know your total income and total expenses, you can calculate your net income: Net Income = Total Income - Total Expense When calculating net income, most business owners need to prepare an income statement, which is one of the three main financial statements. A business income statement, also known as an income statement or income statement, is designed to show how you arrived at your net income. The income statement does this by taking your total income for the period (usually the first line of the statement) and then subtracting each of your expenses and losses line by line until it spits out your net income on the last line. For this reason, you can sometimes hear people refer to net income as the bottom line. Useful resources:Coffee Roster Enterprises Inc. Example of an income statement showing net income at the bottom: Coffee Roaster Enterprises Inc. Income statement for the year ended December 31, 2021 Category Amount Sales revenue $57,050.68 Cost of goods sold (COGS) $24,984 Pro $69 8 Pro.95. General expenses $11,049.55 * Rent $9,000 * Bank and ATM fees $9.43 * Equipment cost $742.40 * Marketing costs $503.53 * Vendor fees $794.19 Operating income $21,016.34 . Understanding the Income Statement (Definition and Examples) It is important not to confuse gross income with net income. Gross income, also known as gross margin or gross profit, is your income less cost of goods sold (COGS), which are the direct costs associated with producing your products or services. In equation form, it looks like this: Gross Revenue = Revenue - Cost of Goods Sold (COGS) Typically, your companys cost is listed at the top of your Income Statement, just below Revenue. Typical cost examples include: raw materials, labour, packaging, transportation and shipping; energy and media costs for the production plant; expenses for depreciation of production equipment and equipment. Please note that the COGS does not include indirect costs (also known as overheads) of operating costs. or operating costs). These operating expenses include, for example, lawyers fees, accountants fees, management fees, administrative costs, utilities, insurance and interest income. This includes operating expenses (also known as selling, general and administrative (SAG) expenses), which are expenses incurred by the company that are not related to production. Operating expenses do not include non-operating expenses such as interest, taxes, depreciation...The business income equation is: Business Income = Gross Income – Business Expenses Gross income, business income, and net income are the three most popular ways to measure a companys profitability, and they are all related. By writing all three formulas, you can see how gross profit, operating income, and net income differ, but still more conservative measures of profitability in a given accounting period: Revenue - COGS = Gross Profit Revenue - COGS - Operating Expenses = Operating Income Revenue - COGS - Operating Expenses – Non-Operating Expenses = Net Income. Notice that the net income equation includes all three major types of costs: primary costs, operating costs, and non-operating costs? It is the most conservative and reliable measure of profitability. Additional Income Statement Line Items for Small Business Resources Definition of Net Income (After Tax Income) Net Profit Rate; h - Retained earnings. Business expenses incurred over a period. In accounting, net income is the amount of revenue left over after accounting for all expenses, such as: B. the following costs and expenses: Cost of Goods Sold (COGS) - Direct costs associated with a companys main revenue-generating activities. Operating Expenses (OpEx) – Indirect costs associated with running a business (eg selling, overhead and administrative costs). Net Non-Operating Expenses - Non-Operating Expenses - minus any non-operating income (eg marketable securities, short transactions). - term deposits). Taxes – Local, state and federal taxes due and payable to the government. Since every item above net income, such as income and expenses, is recorded in accordance with accrual accounting standards, net income is also considered a measure of the companys accounting profit. Formal definition of net income.