Definition Definition

What Is Net Income? Understanding the Net Income with Practical Example

What is Net Income?

The account balance generated by a person or company in a certain duration of time, excluding taxes, costs, and debts, is known as Net Income.

Understanding Net Income

On a firm’s financial statements, sales revenue is one of the items you'll observe. It appears on the bottom line of financial documents, and that is why the phrase 'bottom line' is frequently used instead of 'net income.'

After organizational costs are subtracted, net income is the firm‘s profit. This is used to figure out the net profit margin, that is net income like a proportion of earnings. After costs have been deducted, this displays how much income is turned into actual profit. 

Measuring your company's net income can assist you in determining its success, deciding whether to grow or cut activities, planning finances, and communicating data to managers.

It is possible to have a favorable or unfavorable net income. One might have a surplus if the income exceeds the costs. A company may have a negative total profit, also referred to as a net loss, when business spending exceeds the earnings. To determine net income, use the given equations:

Net Income = Revenue – (Cost of Goods Sold + Expenses)

Practical Example

For the year 2019, a company called Hk limited generated $ 200,000 in sales revenue. It spent $ 30,000 on staff salaries, $ 70,000 on construction resources and commodities, and $ 6,000 on administrative and manufacturing services. The business made $ 5000 in interest and contributed $ 4000 in customs. What is the Corporation Hk limited's net income?

The Total Revenue of the Company 

= Sales + Interest Income

= 200000 + 5000 

= 205,000

The Total Expenses 

= Salary + construction expenses + administrative costs + custom expenses

= 30,000 + 70,000 + 6000 + 4000 

= $ 110,000

The Net Income 

= Total Revenue – Total Expenses

= 205,000 – 110,000

= $ 95,000

In Sentences

  • After costs and taxes, net income is the entire sum of money left over.
  • Income that can be transferred to firm areas of business or used in corporate investment is referred to as net income.


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