In
business
Business is the practice of making one's living or making money by producing or Trade, buying and selling Product (business), products (such as goods and Service (economics), services). It is also "any activity or enterprise entered into for pr ...
and
accounting
Accounting, also known as accountancy, is the measurement, processing, and communication of financial and non financial information about economic entities such as businesses and corporations. Accounting, which has been called the "languag ...
, net income (also total comprehensive income, net earnings, net profit, bottom line, sales profit, or credit sales) is an entity's
income minus
cost of goods sold, expenses,
depreciation and
amortization,
interest, and taxes for an
accounting period.
It is computed as the residual of all revenues and gains less all expenses and losses for the period,
[Stickney, et al. (2009) Financial Accounting: An Introduction to Concepts, Methods, and Uses. Cengage Learning] and has also been defined as the net increase in
shareholders' equity that results from a company's operations.
[Needles, et al. (2010) Financial Accounting. Cengage Learning.] It is different from
gross income, which only deducts the cost of goods sold from revenue.
For households and individuals, net income refers to the (gross) income minus taxes and other deductions (e.g. mandatory
pension
A pension (, from Latin ''pensiō'', "payment") is a fund into which a sum of money is added during an employee's employment years and from which payments are drawn to support the person's retirement from work in the form of periodic payments ...
contributions).
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
Profit may refer to:
Business and law
* Profit (accounting), the difference between the purchase price and the costs of bringing to market
* Profit (economics), normal profit and economic profit
* Profit (real property), a nonpossessory intere ...
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
An income statement or profit and loss accountProfessional English in Use - Finance, Cambridge University Press, p. 10 (also referred to as a ''profit and loss statement'' (P&L), ''statement of profit or loss'', ''revenue statement'', ''stateme ...
, meaning
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
An accountant is a practitioner of accounting or accountancy.
Accountants who have demonstrated competency through their professional associations' certification exams are certified to use titles such as Chartered Accountant, Chartered Certifi ...
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
fiscal year. The items deducted will typically include
tax expense, financing expense (
interest expense
Interest expense relates to the cost of borrowing money. It is the price that a lender charges a borrower for the use of the lender's money. On the income statement, interest expense can represent the cost of borrowing money from banks, bond inve ...
), and minority interest. Likewise,
preferred stock dividends will be subtracted too, though they are not an expense. For a
merchandising
Merchandising is any practice which contributes to the sale of products to a retail consumer. At a retail in-store level, merchandising refers to displaying products that are for sale in a creative way that entices customers to purchase more i ...
company, subtracted costs
may be the
cost of goods sold, sales discounts, and sales returns and allowances. For a product company,
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.
The net
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.
:Net profit = sales revenue − total costs
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 don't come in neat packages, their allocation across ventures is not an exact science.
[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. . 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)
The Marketing Accountability Standards Board (MASB), authorized by the Marketing Accountability Foundation,MASB''Marketing Accountability Foundation (MAF)''. ited 8 December 2010/ref> is an independent, private sector, self-governing group of acad ...
endorses the definitions, purposes, and constructs of classes of measures that appear in ''Marketing Metrics'' as part of its ongoin
Common Language in Marketing Project
Example
Net profit on a P & L (profit and loss) account:
#
Sales revenue
In accounting, revenue is the total amount of income generated by the sale of goods and services related to the primary operations of the business.
Commercial revenue may also be referred to as sales or as turnover. Some companies receive revenue ...
= price (of product) × quantity sold
#
Gross profit = sales revenue − cost of sales and other direct costs
# Operating profit = gross profit − overheads and other indirect costs
#
EBIT EBIT, Ebit or ebit may refer to:
*EBIT, or Earnings before interest and taxes, in finance
*EBIT, or Electron beam ion trap, in physics
*An ebit (quantum state), a two-party quantum state with quantum entanglement
Quantum entanglement is the ph ...
(earnings before interest and taxes) = operating profit + non-operating income
# Pretax profit (
EBT, earnings before taxes) = operating profit − one-off items and redundancy payments, staff restructuring − interest payable
# Net profit = Pre-tax profit − tax
#
Retained earnings = Net profit − dividends
Another equation to calculate net income:
Net sales (revenue) -
Cost of goods sold =
Gross profit -
SG&A
SG&A (alternately SGA, SAG, G&A or SGNA) is an initialism used in accounting to refer to Selling, General and Administrative Expenses, which is a major non-production cost presented in an income statement (statement of profit or loss).
SGA exp ...
expenses (combined costs of operating the company) -
Research and development
Research and development (R&D or R+D), known in Europe as research and technological development (RTD), is the set of innovative activities undertaken by corporations or governments in developing new services or products, and improving existi ...
(R&D) =
Earnings before interest, taxes, depreciation and amortization (EBITDA) -
Depreciation and
amortization =
Earnings before interest and taxes
In accounting and finance, earnings before interest and taxes (EBIT) is a measure of a firm's profit that includes all incomes and expenses (operating and non-operating) except interest expenses and income tax expenses.
Operating income and op ...
(EBIT) -
Interest expense
Interest expense relates to the cost of borrowing money. It is the price that a lender charges a borrower for the use of the lender's money. On the income statement, interest expense can represent the cost of borrowing money from banks, bond inve ...
(cost of borrowing money) =
Earnings before taxes
In accounting and finance, earnings before interest and taxes (EBIT) is a measure of a firm's profit that includes all incomes and expenses (operating and non-operating) except interest expenses and income tax expenses.
Operating income and ope ...
(EBT) -
Tax expense = Net income (EAT)
Another equation to calculate net income:
::
Net sales =
gross sales
In bookkeeping, accounting, and financial accounting, net sales are operating revenues earned by a company for selling its products or rendering its services. Also referred to as revenue, they are reported directly on the income statement as ''Sal ...
– (customer discounts + returns + allowances)
::Gross profit =
net sales –
cost of goods sold
::Gross profit percentage = [(
net sales –
cost of goods sold)/
net sales] × 100%.
::Operating profit = gross profit – total operating expenses
::Net income = operating profit – taxes – interest
Other terms
See also
*
Cost of goods sold
*
Dividend
*
Economic value added
*
Gross income
*
Gross margin (the difference between the sales and the production costs)
*
Income statement
*
Liquidating distribution A liquidating distribution (or liquidating dividend) is a type of nondividend distribution made by a corporation or a partnership to its shareholders during its partial or complete liquidation. Liquidating distributions are not paid solely out of th ...
*
Net income per employee
Net Income per employee (NIPE) is a company's net income divided by the number of employees. This number shows the company how efficient it is with its employees. Theoretically, the higher the net income per employee the better. Aside from increas ...
*
Operating income
*
Operating Income Before Depreciation and Amortization (OIBDA)
*
Opportunity cost
In microeconomic theory, the opportunity cost of a particular activity is the value or benefit given up by engaging in that activity, relative to engaging in an alternative activity. More effective it means if you chose one activity (for example ...
*
Profit (accounting)
Profit, in accounting, is an income distributed to the ownership , owner in a Profit (economics) , profitable market production process (business). Profit is a measure of profitability which is the owner's major interest in the income-formati ...
*
Profit margin (the ratio of net income to net sales)
*
Revenue
References
{{Authority control
Profit
Accounting terminology
ja:利益#純利益