Net income

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In business, net income (net earnings, net profit, and informally, bottom line) is an entity's income minus cost of goods sold, expenses and taxes for an accounting period. It is computed as the residual of all revenues and gains over all expenses and losses for the period,^[1] and has also been defined as the net increase in shareholders' equity that results from a company's operations.^[2] In the context of the presentation of financial statements, the IFRS Foundation defines net income as synonymous with profit and loss.^[3]

Net income is a distinct accounting concept from profit. Net income can also be calculated by adding a company's operating income to non-operating income and then subtracting off taxes.^[4]

Overview

Net income can be distributed among holders of common stock as a dividend or held by the firm as an addition to retained earnings. As profit and earnings are used synonymously for income (also depending on UK and US usage), net earnings and net profit are commonly found as synonyms for net income. Often, the term income is substituted for net income, yet this is not preferred due to the possible ambiguity. Net income is informally called the bottom line because it is typically found on the last line of a company's income statement (a related term is top line, meaning revenue, which forms the first line of the account statement).

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, and design and development costs are included.

An equation for net income

Net sales (revenue)

– Cost of goods sold

= Gross profit

– SG&A expenses (combined costs of operating the company)

– R&D

= EBITDA

– Depreciation and amortization

= EBIT

– Interest expense (cost of borrowing money)

= EBT

– Tax expense

= Net income (EAT)

See also

References

1. ↑ Stickney, et al. (2009) Financial Accounting: An Introduction to Concepts, Methods, and Uses. Cengage Learning.
2. ↑ Needles, et al. (2010) Financial Accounting. Cengage Learning.
3. ↑ "IAS 1 Presentation of Financial Statements" (PDF). IFRS Foundation. 2012. Retrieved April 14, 2012. 
4. ↑ "Net Income Formula". New Business Playbook.