How to calculate net income

Net income (calculation)

Net income formula is business revenue minus expenses and annual taxes. It’s the same formula as net profit.

Net income formula is revenue minus expenses minus tax equals net income

Net income (and its equation) is the same as net profit.

Example of a net income calculation

Let’s say your business sells $35,000 worth of products and your expenses were $17,000, while your taxes were $6,000. The net income equation would go like this:

$35,000 - $17,000 - $6,000 = $12,000

Your net income after expenses and taxes would come to $12,000. Net income is the final profit, and can be reinvested in the business or distributed to owners. The net income is also called the bottom line.

Calculating net income from gross

Gross profit - Operating expenses - Tax = Net profit

Example of net income from gross

Your business sells $35,000 worth of products and it costs you $14,000 to make them, so your gross profit is $21,000. Your operating expenses come in at a further $3,000, plus you will owe tax of $6,000. The calculation would go like this:

$21,000 - $3,000 - $6,000 = $12,000

Why net income matters

Net income is the money that a business gets to keep after all expenses have been paid. It’s also the money that sole proprietors pay themselves with. Net income cash can be used for many helpful purposes, such as being banked to help smooth out cash flow in the year ahead or saved for a rainy day. It can also be reinvested into the business to maintain and grow operations, or be distributed amongst owners.

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Disclaimer

This glossary is for small business owners. The definitions are written with their requirements in mind. More detailed definitions can be found in accounting textbooks or from an accounting professional. Xero does not provide accounting, tax, business or legal advice.

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