Net Income Formula

Article byWallstreetmojo Team
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

What Is Net Income Formula?

The net Income formula is used for the calculation of the net income of the Company. It is the most important number for the Company, analysts, investors, and shareholders of the Company as it measures the profit earned by the Company over some time.

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It can also be referred to as net profit or net earnings, which is the total profit that the business has earned when all expenses are deducted from its total sales revenue. It is an essential metric that is very useful for both management and stakeholders of the company to evaluate its financial condition and make investment-related decisions.

Net Income Formula Explained

The net income formula in accounting calculates the net earning or profit of the company, represents the amount remaining in the books of accounts after subtracting all its expenses from the sales made during that period.  The formula for the calculation is as follows:

Net Income = Total Revenues – Total Expenses

Thus, net income formula in accounting represents how efficiently and effectively the management of the company is able to run the organization, keep a control over the costs and earn profits. If the formula depicts an increase in the year-on-year net profit, it is a good sign regarding the financial health of the company.

Investors will be interested in investment in such an entity with the expectation of getting good returns. It also shows that the business has good future prospects related to growth and expansion because it has funds to invest in upgradation, technological improvement and overall growth.  

Net Income Formula Video

How To Calculate?

Using the formula given above the net income can be calculated through the following steps.

  • Revenue determination – The first step is to collect all the information related to total revenue earned for the specific period. This may include, the sales figures, and interest income, service fees or any other sources that represent revenue from the core business operations.
  • Expense calculation – Next step is to identify and calculate the total expenses. The expenses related to administrative or operating procedures, any interest or tax related expense, etc fall in this category along with the cost of goods sold. All these figures need to be summed up for that particular period.
  • Calculate net income – The final step is to calculate net income formula by deducting the expense form the revenue.

The final figure will help us evaluate the profitability and the earning capacity of the business. However, if the figure is negative, then it will indicate loss. The formula depicts a very simple and straightforward process, but the entire procedure for calculation can be relatively complex, depending on the type and size of the business. The accounting principles, which are the cash basis and accrual basis, also plays an important role.

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Examples

Let us understand the concept of how to calculate net income formula with the help of some suitable examples.

You can download this Net Income Formula Excel Template here – Net Income Formula Excel Template

Example #1

Company ABC Inc. had revenue from the sale of $ 100,000 for 2017. It paid $ 20,000 in employee wages, $ 50,000 for raw materials and goods, and $ 5,000 for other office and factory maintenance expenses. In addition, the Company had an interest income of $ 3000 and paid $ 2500 in taxes. What is the net income of the Company ABC Inc.?

The Total revenue of the Company = Revenue from sale + Interest Income

  • Total revenue = 100000 + 3000 = 103,000

The Total expenses = Employee wages + raw materials + office and factory maintenance + interest income + taxes

  • Total expenses = 20000 + 50000 + 5000 + 3000 + 2500 = $ 80, 500

The Net Income = Total revenue – total expenses.

  • Net income = 103000 – 80500
  • Net income = $ 22,500

Example #2

Let us see Apple’s Profit and Loss statement and the company’s net income.

Snapshots from the annual 10-K filing of the Company to the SEC are as below. Calculating net income is done as the bottom lineBottom LineThe bottom line refers to the net earnings or profit a company generates from its business operations in a particular accounting period that appears at the end of the income statement. A company adopts strategies to reduce costs or raise income to improve its bottom line. read more of the profit and loss statement or the statement of operations. The net income of the Company is highlighted in yellow

Apple Net Income

source: Apple SEC filings

The above examples give us a clear idea about how the formula is used for calculation of net income while preparing the financial statement of an organization. They explain in detail what are the items that are taken into consideration while arriving at the figure by using the formula.

Calculator

We can use the following Net Income Calculator. This will not only make the calculation of target net income formula easy and faster, but there is less scope for error.

Total Revenues
Total Expenses
Net Income Formula
 

Net Income Formula = Total Revenues Total Expenses
0 0 = 0

Relevance And Uses

Some important and relevant uses of the annual net income formula in the financial market are highlighted below. Let us analyse the same in details.

Net Income Formula in Excel (with excel template)

Let us have a look at another example of annual net income formula and try to solve it in excel.

A Company XYZ has a total revenue of $ 500,000, and the Cost of goods sold by the CompanyCost Of Goods Sold By The CompanyThe Cost of Goods Sold (COGS) is the cumulative total of direct costs incurred for the goods or services sold, including direct expenses like raw material, direct labour cost and other direct costs. However, it excludes all the indirect expenses incurred by the company. read more is $ 120,000. The Company paid salaries and wages to its employees to $ 30,000. In addition, it spent $ 20,000 on rent and other utilities. The Company records $ 15,000 as a depreciation expense. The Company also pays interest on the long-term debt of $ 10,000 and pays taxes of $ 20,000.

Net income can be calculated simply by subtracting all the expenses from the revenue. For example, the calculation of net income is shown in the below template.

NI formula Excel 1

In the below given excel template, we used the Net Income formula to calculate Net Income.

NI Excel 1.2

The Net Income of the Company will be –

Net income Excel 1.3

Recommended Articles –

This has been a guide to what is Net Income Formula. We explain the formula in excel along with a calculator, how to calculate it with examples & uses. Here we also provide you with Net Income Calculator with a downloadable excel template. You can learn more about Excel Modeling from the following articles –

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  1. Bushriin says

    I like it this wey

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