Net profit
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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 entity, economic entities such as businesses and corporations. Accounting, which has been calle ...
, net income (also total comprehensive income, net earnings, net profit, bottom line, sales profit, or credit sales) is an entity's
income Income is the Consumption (economics), consumption and saving opportunity gained by an entity within a specified timeframe, which is generally expressed in monetary terms. Income is difficult to define conceptually and the definition may be diff ...
minus
cost of goods sold Cost of goods sold (COGS) is the carrying value of goods sold during a particular period. Costs are associated with particular goods using one of the several formulas, including specific identification, first-in first-out (FIFO), or average cost. ...
, expenses,
depreciation In accountancy, depreciation is a term that refers to two aspects of the same concept: first, the actual decrease of fair value In accounting and in most schools of economic thought, fair value is a rational and unbiased Prediction, estim ...
and amortization,
interest In finance and economics, interest is payment from a debtor, borrower or deposit-taking financial institution to a lender or depositor of an amount above repayment of the principal sum (that is, the amount borrowed), at a particular rate. It is ...
, 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 A dividend is a distribution of Profit (accounting), profits by a corporation to its shareholders. When a corporation earns a profit or surplus, it is able to pay a portion of the profit as a dividend to shareholders. Any amount not distributed ...
or held by the firm as an addition to retained earnings. As profit and
earnings Earnings are the net benefits of a corporation A corporation is an organization—usually a group of people or a company—authorized by the State (polity), state to act as a single entity (a legal entity recognized by private and public law ...
are used synonymously for
income Income is the Consumption (economics), consumption and saving opportunity gained by an entity within a specified timeframe, which is generally expressed in monetary terms. Income is difficult to define conceptually and the definition may be diff ...
(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 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 ...
(a related term is top line, meaning
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 rev ...
, 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 Certifie ...
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 A fiscal year (or financial year, or sometimes budget year) is used in government accounting, which varies between countries, and for budget purposes. It is also used for financial reporting by businesses and other organizations. Laws in many ju ...
. The items deducted will typically include
tax expense A company's tax expense, or tax charge, is the income before tax multiplied by the appropriate tax rate. Generally, companies report income before tax to their shareholder under generally accepted accounting principles (GAAP). However, companies r ...
, 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 Preferred stock (also called preferred shares, preference shares, or simply preferreds) is a component of share capital that may have any combination of features not possessed by common stock, including properties of both an equity and a debt inst ...
dividends will be subtracted too, though they are not an expense. For a merchandising company, subtracted costs may be the
cost of goods sold Cost of goods sold (COGS) is the carrying value of goods sold during a particular period. Costs are associated with particular goods using one of the several formulas, including specific identification, first-in first-out (FIFO), or average cost. ...
, sales discounts, and sales returns and allowances. For a product company,
advertising Advertising is the practice and techniques employed to bring attention to a product or service. Advertising aims to put a product or service in the spotlight in hopes of drawing it attention from consumers. It is typically used to promote a ...
,
manufacturing Manufacturing is the creation or Production (economics), production of goods with the help of equipment, Work (human activity), labor, machines, tools, and chemical or biological processing or formulation. It is the essence of secondary secto ...
, & 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 Profit margin is a measure of profit (accounting), profitability. It is calculated by finding the net profit, profit as a percentage of the revenue. \text = = There are 3 types of profit margins: gross profit margin, operating profit margin and ...
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 aca ...
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 = 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 (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 Cost of goods sold (COGS) is the carrying value of goods sold during a particular period. Costs are associated with particular goods using one of the several formulas, including specific identification, first-in first-out (FIFO), or average cost. ...
= Gross profit - SG&A 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 In accountancy, depreciation is a term that refers to two aspects of the same concept: first, the actual decrease of fair value In accounting and in most schools of economic thought, fair value is a rational and unbiased Prediction, estim ...
and amortization =
Earnings before interest and taxes In accountancy, accounting and finance, earnings before interest and taxes (EBIT) is a measure of a firm's profit (accounting), profit that includes all incomes and expenses (operating and Non-operating income, non-operating) except interest expe ...
(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 (EBT) -
Tax expense A company's tax expense, or tax charge, is the income before tax multiplied by the appropriate tax rate. Generally, companies report income before tax to their shareholder under generally accepted accounting principles (GAAP). However, companies r ...
= Net income (EAT) Another equation to calculate net income: :: Net sales = gross sales – (customer discounts + returns + allowances) ::Gross profit = net sales
cost of goods sold Cost of goods sold (COGS) is the carrying value of goods sold during a particular period. Costs are associated with particular goods using one of the several formulas, including specific identification, first-in first-out (FIFO), or average cost. ...
::Gross profit percentage = [( net sales
cost of goods sold Cost of goods sold (COGS) is the carrying value of goods sold during a particular period. Costs are associated with particular goods using one of the several formulas, including specific identification, first-in first-out (FIFO), or average cost. ...
)/ net sales] × 100%. ::Operating profit = gross profit – total operating expenses ::Net income = operating profit – taxes – interest


Other terms


See also

*
Cost of goods sold Cost of goods sold (COGS) is the carrying value of goods sold during a particular period. Costs are associated with particular goods using one of the several formulas, including specific identification, first-in first-out (FIFO), or average cost. ...
*
Dividend A dividend is a distribution of Profit (accounting), profits by a corporation to its shareholders. When a corporation earns a profit or surplus, it is able to pay a portion of the profit as a dividend to shareholders. Any amount not distributed ...
* Economic value added * Gross income * Gross margin (the difference between the sales and the production costs) *
Income statement 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 ...
* Liquidating distribution * Net income per employee * 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 exampl ...
*
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 Profit margin is a measure of profit (accounting), profitability. It is calculated by finding the net profit, profit as a percentage of the revenue. \text = = There are 3 types of profit margins: gross profit margin, operating profit margin and ...
(the ratio of net income to net 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 rev ...


References

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