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In
business Business is the activity of making one's living or making money by producing or buying and selling products (such as goods and services). Simply put, it is "any activity or enterprise entered into for profit." Having a business name A trad ...

business
and
accounting Accounting or Accountancy is the measurement ' Measurement is the number, numerical quantification (science), quantification of the variable and attribute (research), attributes of an object or event, which can be used to compare with other ob ...
, net income (also total comprehensive income, net earnings, net profit, bottom line, sales profit, or credit sales) is an entity's
income In microeconomics, income is the Consumption (economics), consumption and saving opportunity gained by an entity within a specified timeframe, which is generally expressed in monetary terms.Smith's financial dictionary. Smith, Howard Irving. 190 ...
minus
cost of goods sold Cost of goods sold (COGS) is the carrying value In accounting, book value is the value of an asset according to its balance sheet account balance. For assets, the value is based on the original cost of the asset less any depreciation, amortization ...
, expenses,
depreciation In accountancy Accounting or 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 ...

depreciation
and
amortization Amortization (or amortisation; ) is paying off an amount owed over time by making planned, incremental payments of principal Principal may refer to: Title or rank * Principal (academia) The principal is the chief executive and the chief academi ...
,
interest In and , interest is payment from a or deposit-taking financial institution to a or depositor of an amount above repayment of the (that is, the amount borrowed), at a particular rate. It is distinct from a which the borrower may pay the len ...

interest
, and taxes for an
accounting period An accounting period, in bookkeeping Bookkeeping is the recording of financial transactions, and is part of the process of accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non fin ...
. 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 In finance, equity is ownership of asset In financial accountancy, financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce posi ...
that results from a company's operations.Needles, et al. (2010) Financial Accounting. Cengage Learning. It is different from
gross income For households and individuals, gross income is the sum of all wages A wage is the distribution from an employer Employment is the relationship between two party (law), parties, usually based on a employment contract, contract where work ...
, 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 Latin (, or , ) is a classical language A classical language is a language A language is a structured system of communication Communication (from Latin ''communicare'', meaning "to share" or "to be ...

pension
contributions).


Definition

Net income can be distributed among holders of common stock as a
dividend A dividend is a distribution of 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 ...

dividend
or held by the firm as an addition to
retained earnings The retained earnings (also known as plowback) 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 priva ...
. As
profit Profit may refer to: Business and law * Profit (accounting) Profit, in accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about economic entity, economic en ...
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 In microeconomics, income is the Consumption (economics), consumption and saving opportunity gained by an entity within a specified timeframe, which is generally expressed in monetary terms.Smith's financial dictionary. Smith, Howard Irving. 190 ...
(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'', ''statemen ...
(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'', ''statement ...
, meaning
revenue In accounting Accounting or Accountancy is the measurement ' Measurement is the number, numerical quantification (science), quantification of the variable and attribute (research), attributes of an object or event, which can be used to comp ...
, 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 Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about economic entity, economic entities such as businesses and corporati ...

accountant
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 report Financial statements (or financial reports) are formal ...
. The items deducted will typically include
tax expense A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity In law Law is a system A system is a group of Interaction, interacting or interrelated elements that act accord ...
, financing expense (
interest expense Interest expense relates to the cost In production, research Research is "creativity, creative and systematic work undertaken to increase the stock of knowledge". It involves the collection, organization, and analysis of information to i ...
), and minority interest. Likewise,
preferred stock Preferred stock (also called preferred shares, preference shares, or simply preferreds) is a component of share capital__NOTOC__ A corporation A corporation is an organization—usually a group of people or a company—authorized by the stat ...
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 Product may refer to: Business * Product (business), an item that serves as a solution to a specific consumer problem. * Product (project management), a deliverable or se ...
company, subtracted costs may be the
cost of goods sold Cost of goods sold (COGS) is the carrying value In accounting, book value is the value of an asset according to its balance sheet account balance. For assets, the value is based on the original cost of the asset less any depreciation, amortization ...
, sales discounts, and sales returns and allowances. For a product company,
advertising Advertising is a marketing communication that employs an openly sponsored, non-personal message to promote or sell a product, service or idea.William J. Stanton. ''Fundamentals of Marketing''. McGraw-Hill (1984). Sponsors of advertising are ...

advertising
,
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 sector ...
, & 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, net margin, net profit margin or net profit ratio is a measure of profitability An economic profit is the difference between the revenue a commerce , commercial entity has received from its outputs and the opportunity costs of its ...
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 Marketing refers to activities a company undertakes to promote the buying or selling of a product, service, or good. It is one of the ...
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 For households and individuals, gross income is the sum of all wages A wage is the distribution from an employer Employment is the relationship between two party (law), parties, usually based on a employment contract, contract where work ...
= 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 The retained earnings (also known as plowback) 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 priva ...
= Net profit − dividends Another equation to calculate net income:
Net sales In bookkeeping, accounting, and finance, 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 ''Sales'' or ''Net ...
(revenue) -
Cost of goods sold Cost of goods sold (COGS) is the carrying value In accounting, book value is the value of an asset according to its balance sheet account balance. For assets, the value is based on the original cost of the asset less any depreciation, amortization ...
=
Gross profit For households and individuals, gross income is the sum of all wages A wage is the distribution from an employer Employment is the relationship between two party (law), parties, usually based on a employment contract, contract where work ...
-
SG&A SG&A (alternately SGA, SAG, G&A or SGNA) is an initialism used in accountancy, 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 ...
expenses (combined costs of operating the company) -
Research and development Research and development (R&D, R+D), known in Europe Europe is a continent A continent is any of several large landmasses. Generally identified by convention (norm), convention rather than any strict criteria, up to seven geogra ...
(R&D) =
Earnings before interest, taxes, depreciation and amortization A company A company, abbreviated as co., is a legal entity In law, a legal person is any person A person (plural people or persons) is a being that has certain capacities or attributes such as reason, morality, consciousness or self ...
(EBITDA) -
Depreciation In accountancy Accounting or 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 ...

Depreciation
and
amortization Amortization (or amortisation; ) is paying off an amount owed over time by making planned, incremental payments of principal Principal may refer to: Title or rank * Principal (academia) The principal is the chief executive and the chief academi ...
=
Earnings before interest and taxes In accounting Accounting or Accountancy is the measurement ' Measurement is the number, numerical quantification (science), quantification of the variable and attribute (research), attributes of an object or event, which can be used to compar ...
(EBIT) -
Interest expense Interest expense relates to the cost In production, research Research is "creativity, creative and systematic work undertaken to increase the stock of knowledge". It involves the collection, organization, and analysis of information to i ...
(cost of borrowing money) =
Earnings before taxes In accounting Accounting or 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 call ...
(EBT) -
Tax expense A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity In law Law is a system A system is a group of Interaction, interacting or interrelated elements that act accord ...
= Net income (EAT) Another equation to calculate net income: ::
Net sales In bookkeeping, accounting, and finance, 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 ''Sales'' or ''Net ...
=
gross sales In bookkeeping, accounting Accounting or 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 h ...
– (customer discounts + returns + allowances) ::Gross profit =
net sales In bookkeeping, accounting, and finance, 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 ''Sales'' or ''Net ...
cost of goods sold Cost of goods sold (COGS) is the carrying value In accounting, book value is the value of an asset according to its balance sheet account balance. For assets, the value is based on the original cost of the asset less any depreciation, amortization ...
::Gross profit percentage = [(
net sales In bookkeeping, accounting, and finance, 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 ''Sales'' or ''Net ...
cost of goods sold Cost of goods sold (COGS) is the carrying value In accounting, book value is the value of an asset according to its balance sheet account balance. For assets, the value is based on the original cost of the asset less any depreciation, amortization ...
)/
net sales In bookkeeping, accounting, and finance, 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 ''Sales'' or ''Net ...
] × 100%. ::Operating profit = gross profit – total operating expenses ::Net income = operating profit – taxes – interest


Other terms


See also

*
Dividend A dividend is a distribution of 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 ...

Dividend
*
Economic value added#REDIRECT Economic value added In corporate finance, as part of fundamental analysis, economic value added is an estimate of a firm's economic profit, or the value created in excess of the Required rate of return, required return of the types of comp ...
*
Gross income For households and individuals, gross income is the sum of all wages A wage is the distribution from an employer Employment is the relationship between two party (law), parties, usually based on a employment contract, contract where work ...
*
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'', ''statemen ...
*
Liquidating dividendA liquidating distribution (or liquidating dividend) is a type of nondividend distribution made by a corporation or a partnership to its shareholder A shareholder (in the United States often referred to as stockholder) of a corporation A cor ...
* Net income per employee *
Operating income In accounting Accounting or Accountancy is the measurement ' Measurement is the number, numerical quantification (science), quantification of the variable and attribute (research), attributes of an object or event, which can be used to compar ...
* Operating Income Before Depreciation and Amortization *
Opportunity cost In microeconomic theory Microeconomics (from Greek prefix ''mikro-'' meaning "small" + ''economics'') is a branch of economics Economics () is the social science that studies how people interact with value; in particular, the Produ ...
*
Profit (accounting) Profit, in accounting Accounting or 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 h ...
*
Revenue In accounting Accounting or Accountancy is the measurement ' Measurement is the number, numerical quantification (science), quantification of the variable and attribute (research), attributes of an object or event, which can be used to comp ...
*
Cost of goods sold Cost of goods sold (COGS) is the carrying value In accounting, book value is the value of an asset according to its balance sheet account balance. For assets, the value is based on the original cost of the asset less any depreciation, amortization ...
*
Profit margin Profit margin, net margin, net profit margin or net profit ratio is a measure of profitability An economic profit is the difference between the revenue a commerce , commercial entity has received from its outputs and the opportunity costs of its ...
(the ratio of net income to net sales) *
Gross margin Gross margin is the difference between revenue In accounting Accounting or Accountancy is the measurement ' Measurement is the number, numerical quantification (science), quantification of the variable and attribute (research), attributes ...
(the difference between the sales and the production costs)


References

{{Authority control Profit Accounting terminology ja:利益#純利益