View source for Finance:Net income

{{Short description|Measure of the profitability of a business venture}}
{{Accounting}}
In business and accounting, '''net income''' (also '''total comprehensive income''', '''net earnings''', '''net profit''', '''bottom line''', '''sales profit''', or '''credit sales''') is an entity's [[Finance:Income|income]] minus [[Finance:Cost of goods sold|cost of goods sold]], expenses, depreciation and [[Finance:Amortization (accounting)|amortization]], [[Finance:Interest|interest]], and taxes for an [[Finance:Accounting period|accounting period]].<ref name="ias1">{{cite web |publisher=IFRS Foundation |year=2012 |title= IAS 1 Presentation of Financial Statements |access-date= April 14, 2012 |url=http://eifrs.ifrs.org/eifrs/bnstandards/en/2012/ias1.pdf |format=PDF}}</ref>

It is computed as the residual of all revenues and gains less all expenses and losses for the period,<ref name="swsf">Stickney, et al. (2009) Financial Accounting: An Introduction to Concepts, Methods, and Uses. Cengage Learning</ref> and has also been defined as the net increase in [[Finance:Equity|shareholders' equity]] that results from a company's operations.<ref name="nnp">Needles, et al. (2010) Financial Accounting. Cengage Learning.</ref> It is different from [[Finance:Gross income|gross income]], which only deducts the cost of goods sold from revenue.

For [[Social:Household|households]] and individuals, '''net income''' refers to the (gross) income minus taxes and other deductions (e.g. mandatory [[Finance:Pension|pension]] contributions).

==Definition==
Net income can be distributed among holders of common stock as a [[Finance:Dividend|dividend]] or held by the firm as an addition to [[Finance:Retained earnings|retained earnings]]. As [[Finance:Profit (accounting)|profit]] and [[Finance:Earnings|earnings]] are used synonymously for [[Finance:Income|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 [[Finance:Income statement|income statement]] (a related term is top line, meaning [[Finance:Revenue|revenue]], which forms the first line of the account statement).

In simplistic terms, net profit is the money left over after paying all the expenses of an endeavor. In practice this can get very complex in large organizations. The bookkeeper or accountant must itemise and allocate revenues and expenses properly to the specific working scope and context in which the term is applied.

Net income is usually calculated per annum, for each [[Physics:Fiscal year|fiscal year]]. The items deducted will typically include [[Finance:Tax expense|tax expense]], financing expense ([[Finance:Interest expense|interest expense]]), and minority interest. Likewise, 
[[Finance:Preferred stock|preferred stock]] dividends will be subtracted too, though they are not an expense. For a merchandising company, subtracted costs 
may be the [[Finance:Cost of goods sold|cost of goods sold]], sales discounts, and sales returns and allowances. For a product company, [[Finance:Advertising|advertising]], 
manufacturing, & design and development costs are included. Net income can also be calculated by adding a company's operating income to non-operating income and then subtracting off taxes.<ref name="nbp">{{cite web|url=http://newbusinessplaybook.com/net-income-formula/|title=Net Income Formula|publisher=New Business Playbook|archive-url=https://web.archive.org/web/20131019070557/http://newbusinessplaybook.com/net-income-formula/|archive-date=2013-10-19|url-status=dead}}</ref>

The net [[Finance:Profit margin|profit margin]] percentage is a related ratio. This figure is calculated by dividing net profit by revenue or turnover, and it represents profitability, as a percentage.

==An equation for net income==
Net profit: To calculate net profit for a venture (such as a company, division, or project), subtract all costs, including a fair share of total corporate overheads, from the gross revenues or turnover.<ref>{{cite web |title=Gross Profit vs. Net Income: What's the Difference? |url=https://www.investopedia.com/ask/answers/101314/what-are-differences-between-gross-profit-and-net-income.asp |publisher=Investopedia}}</ref>

<math>\text{Net profit = Sales Revenue − Total Costs}</math>

A detailed example of a net income calculation:

<math>\text{Net Income = Gross Profit — Operating Expenses — Other Business Expenses — Taxes}</math>
<math>\text{— Interest on Debt + Other Income}</math>

Net profit is a measure of the fundamental profitability of the venture. "It is the revenues of the activity less the costs of the activity. The main complication is . . . when needs to be allocated" across ventures. "Almost by definition, overheads are costs that cannot be directly tied to any specific" project, product, or division. "The classic example would be the cost of headquarters staff." "Although it is theoretically possible to calculate profits for any sub-(venture), such as a product or region, often the calculations are rendered suspect by the need to allocate overhead costs." Because overhead costs generally do not come in neat packages, their allocation across ventures is not an exact science.<ref name="Marketing_Metrics2">Farris, Paul W.; Neil T. Bendle; Phillip E. Pfeifer; David J. Reibstein (2010). ''Marketing Metrics: The Definitive Guide to Measuring Marketing Performance.'' Upper Saddle River, New Jersey: Pearson Education, Inc. {{ISBN|0137058292}}. Content from this book used in this article has been licensed for modification and reuse under the Creative Commons Attribute Share Alike 3.0 and Gnu Free Documentation licenses. See talk. The Marketing Accountability Standards Board (MASB) endorses the definitions, purposes, and constructs of classes of measures that appear in ''Marketing Metrics'' as part of its ongoing [http://www.commonlanguage.wikispaces.net/ Common Language in Marketing Project].</ref>

=== Example ===
Net profit on a P & L (profit and loss) account:

# Sales revenue = price (of product) × quantity sold
# [[Finance:Gross profit|Gross profit]] = sales revenue − cost of sales and other direct costs
# Operating profit  = gross profit − overheads and other indirect costs
# [[Finance:Earnings before interest and taxes|EBIT]] (earnings before interest and taxes) = operating profit + interest income + other non-operating income
# EBT (Pretax profit, earnings before taxes) = EBIT − interest expenses − other non-operating expenses
# Net profit = EBT − tax
# [[Finance:Retained earnings|Retained earnings]] = Net profit − dividends

Another equation to calculate net income:

Net sales (revenue) - [[Finance:Cost of goods sold|Cost of goods sold]] = [[Finance:Gross profit|Gross profit]] - SG&A expenses (combined costs of operating the company) - [[Research and development]] (R&D) = [[Finance:Earnings before interest, taxes, depreciation and amortization|Earnings before interest, taxes, depreciation and amortization]] (EBITDA) - Depreciation and [[Finance:Amortization (accounting)|amortization]] = [[Finance:Earnings before interest and taxes|Earnings before interest and taxes]] (EBIT) - [[Finance:Interest expense|Interest expense]] (cost of borrowing money) = Earnings before taxes (EBT) - [[Finance:Tax expense|Tax expense]] = Net income (EAT)

==Other terms==

==See also==
{{colbegin}}
*{{annotated link|Finance:Cost of goods sold}}
*{{annotated link|Finance:Dividend}}
*{{annotated link|Finance:Economic value added}}
*{{annotated link|Finance:Gross income}}
*{{annotated link|Finance:Gross margin}} (the difference between the sales and the production costs)
*{{annotated link|Finance:Income statement}}
*{{annotated link|Finance:Liquidating distribution}}
*{{annotated link|Finance:Net income per employee}}
*{{annotated link|Finance:Earnings before interest and taxes|Operating income}}
*{{annotated link|Finance:Opportunity cost}}
*{{annotated link|Finance:Profit (accounting)}}
*{{annotated link|Finance:Profit margin}} (ratio of net income to net sales)
*{{annotated link|Finance:Revenue}}
{{colend}}

==References==
{{reflist}}

{{Accounting nav}}


[[Category:Profit]]
[[Category:Accounting terminology]]

ja:利益#純利益

{{Sourceattribution|Net income}}