Net Income Formula | How to Calculate Net Income?

Let's begin well first of all what is net income formula. That is above First in the prior question when we say net income is the most looked after the numbers in the financial statement of the company. So net income equation is basically I'll just write net income formula is equal to your total revenue minus total expenses.

So this is what the formula goes now net income or the net profit is calculated. So that the investors can measure the amount by which the total revenue exceeds the total expense of the company that is quite evident from the formula now the total revenues let me just spin off the first the total revenues with that we have an idea the total revenue includes the earnings from the sales of the goods and also not only the goods part but also these services parts.

Then we have the interest income and then the income from the sale of business or other income and then the total expenses this was a total revenue then the total expenses when we talk about the total expenses we have it includes the cost of goods sold operating expenses like salaries it also includes wages if any office maintenance that is also part of it. the utilities depreciation amortization and then the interest income and if there are any taxes this are the items that are included.


Net Income Formula

Let's say this a company called ABC Inc. it has revenues from the sale so standing at$1,00,000 for 2017. It is paid 20000 as employee wages as 20000 the raw material of the goods is $5,000 and so yet the wages is 50,000 as raw materials of goods and 5000 for other office expenses okay now the company has an interest income interest income to the tune of 3,000 and it's paid taxes to the tune of 2500. So what is the net income here of company ABC Inc.

The total revenue of the company is equal to revenue from the sale plus the interest income. So here the total revenue will be how much your wages the total revenue 100000+3000 as your interest income and then the total expenses we need to add all of this 20+50+5 right plus 2500 I hope I've missed out anything that's interest income yes well that is it. We get net income formula that is total revenue minus total expenses 103000 minus 77500 is 25500 that's your net income.


Net Income Formula

Let us see the profit and loss treatment of apple. You know in the net income that is reported by Net Income is most looked after the numbers in financial statement of company.Net Income formula is equal to total revenue minus total expenses. In snapshot basically from the 10 k filing of the company two SEC a calculation of the net income is done at the bottom here.

Okay bottom line of the profit and loss statement or the statement of the operations which is also known as so the net income of the company is highlighted in yellow your net sales minus cost of sales gross margin all your operating expenses and then you get the net income right okay now what is the relevance before example number two tell me one thing what are these relevance’s or think about it or of the net income well the net income equation is used to calculate the net income of the company very simple.

net income formula

But it is the most important number of the company the analyst investors shareholders of the company as they look at it why because it measures of what profit that is earned by the company over the period of time okay and a lot of financial ratios are impacted by the net income number so the shareholders they keenly follow the give a strong follow-up on this.

Because it is a metric as the amount of the dividend it is paid to the shareholder depends on the net income of the biker company or reported by the comfortable although net income is important metric in terms of profit earned by the company it is not an actual cash to remember this into consideration not before that not an actual cash on company so the statement of the operations or the profit and loss statement.

net income formula

Net Income Formula

The company it includes a lot of non-cash items such as like depreciation amortization does any change in the net income or the financial ratios as such should be properly analyzed because remember one thing lower the net income what will happen it may be due to the lower net income it can be due to lot of factors let's include a poor sales in that poor management probably higher expenses and so on.

Net income varies from companies to companies industry to industry it can vary due to the sizes of the company and the industry in which it works some companies have heavy we can say that have very business assets models those the depreciation expenses will be high while the others may have you they have different other expenses

I mean the growth factors in industry is like you know it depends on the debt levels the common taxes because that affects the net income numbers of the company overall now let's look at the another example of net income equation and try to solve it in Excel let's say company XYZ has the total revenue.


Net Income Formula

Here you can see 500000 the cost of the goods sold by the company is let's say COGS is 120000 that is your COGS okay the company paid salary in wages to employees to the tune of let's say 30000 here and to 20,000 for let's say rent or office expenses and now company recorded what 20,000 as your depreciation expenses.

The company also pays interest that is to the tune of 10,000 for the long-term expenses and pay taxes to the tune of 20,000 so the calculation of the net income can be done simply by subtracting all the expenses from the revenues and the calculation net income equation.

You see the total revenue cost of goods sold and the gross profit write a minus B that that gives you a gross profit then all your expenses which are basing your operating expenses when you add that okay once you add that you get the total operating expenses then the inter interest in the taxes when you add both of them.

What you get is the total expenses right so this result both the total expenses here I hope you are getting it now once you go down here you see the net income is a total revenue minus total expenses that is B 8 the operating profit is what it is after deducting the total revenue total revenues right that is B 8 minus B12 the operating profit minus the total expenses right. I hope you're getting it what things are happening here and your net income will be same b 8 minus B 12.