In business, net income (total comprehensive income, net earnings, net profit, 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, and has also been defined as the net increase in shareholders' equity that results from a company's operations. In the context of the presentation of financial statements, the IFRS Foundation defines net income as synonymous with profit and loss.
Net income is a distinct accounting concept from profit but the same as net profit. Net income can also be calculated by adding a company's operating income to non-operating income and then subtracting off taxes.
Definition
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)
- â€" Cost of goods sold
- = Gross profit
- â€" SG&A expenses (combined costs of operating the company)
- â€" Research and development (R&D)
- = Earnings before interest, taxes, depreciation and amortization (EBITDA)
- â€" Depreciation and amortization
- = Earnings before interest and taxes (EBIT)
- â€" Interest expense (cost of borrowing money)
- = Earnings before taxes (EBT)
- â€" Tax expense
- = Net income (EAT)
Other terms
- Net sales = gross sales â€" (customer discounts, returns, and allowances)
- Gross profit = net sales â€" cost of goods sold
- Operating profit = gross profit â€" total operating expenses
- Net profit = operating profit â€" taxes â€" interest
- Net profit = net sales â€" cost of goods sold â€" operating expense â€" taxes â€" interest
See also
References
