How to calculate net income
Learn how to calculate net income using a simple formula, a worked example and clear steps to your bottom line.
December 2023 | Published by Xero
Published Monday 17 August 2026
Table of contents
Net income (and its equation) is the same as net profit.
Key takeaways
- Net income is your total revenue minus all expenses, taxes and deductions. It is also called net profit, net earnings or the bottom line, and it shows how much your business actually keeps.
- To calculate net income, start with your total revenue, subtract the cost of goods sold (COGS) to find gross profit, then subtract operating expenses, interest and taxes.
- Tracking net income regularly helps you assess profitability, plan budgets, apply for funding and make confident decisions about your business.
- Automating your bookkeeping with cloud accounting software makes it faster and easier to generate accurate profit and loss reports.
What is net income?
Net income is the total amount of money your business keeps after subtracting all expenses, taxes and deductions from your revenue. It is the figure that sits at the bottom of your financial statements, which is why it is often called the bottom line.
You might also hear net income referred to as net profit or net earnings. These terms all mean the same thing: the money left over once every cost of running your business has been accounted for.
Net income gives you a clear picture of your actual profitability. While revenue tells you how much money comes into your business, net income tells you how much you get to keep.
Why net income matters
Knowing your net income is one of the most practical ways to understand whether your business is financially healthy. It shows you whether you are making a profit or operating at a loss after every cost has been paid.
Net income helps you make better decisions about your business. You can use it to set realistic budgets, plan for growth and identify areas where you could cut costs or increase revenue.
If you are applying for a business loan or seeking investment, lenders and investors will look at your net profit as a key indicator of your business's viability. A strong bottom line builds confidence that your business can meet its financial obligations.
For sole proprietors and partnerships, net income forms the basis for calculating income tax. For Sdn Bhd companies, it determines your company (corporate) tax liability. Both are administered by the Inland Revenue Board of Malaysia (LHDN).
Net income formula
The net income formula is straightforward. At its simplest, it looks like this:
Net income = Total revenue – Total expenses – Taxes
For a more detailed calculation, you can break expenses down further:
Net income = Total revenue – COGS – Operating expenses – Interest – Taxes
Here is what each part means:
- Total revenue: the full amount your business earns from sales before any deductions
- Cost of goods sold (COGS): the direct costs of producing or purchasing the products you sell
- Operating expenses: the day-to-day costs of running your business, such as rent, utilities and salaries
- Interest: any interest paid on business loans or credit
- Taxes: income tax or company tax your business owes
How to calculate net income step by step
Calculating net income is a step-by-step process. Follow these steps to work out your business's net profit for any given period.
- Add up your total revenue. Start by calculating all income your business earned during the period. This includes sales revenue, service fees and any other income such as interest earned or rental income.
- Calculate your cost of goods sold. Work out the direct costs associated with producing or purchasing the goods you sold. This includes raw materials, manufacturing costs and direct labour. Subtract COGS from your total revenue to find your gross profit.
- Subtract your operating expenses. Deduct all the ongoing costs of running your business. These include rent, utilities, insurance, marketing, office supplies and employee salaries.
- Deduct interest payments. If your business has loans, credit lines or other forms of debt, subtract the interest you have paid during the period.
- Subtract taxes. Finally, deduct the taxes your business owes. For sole proprietors and partnerships this is income tax; for Sdn Bhd companies this is company tax. The figure you are left with is your net income.
Example of a net income calculation
Seeing the net income formula in action makes it easier to understand. Here is a worked example using a Malaysian small business.
Let us say your business sells RM35,000 worth of products in a quarter. Your costs break down as follows:
- Cost of goods sold: RM14,000
- Operating expenses (rent, salaries, utilities): RM3,000
- Taxes owed: RM6,000
The net income calculation would be:
RM35,000 – RM14,000 – RM3,000 – RM6,000 = RM12,000
Your gross profit is RM21,000 (RM35,000 revenue minus RM14,000 COGS). Your net income for the quarter is RM12,000. This is the profit your business gets to keep after all expenses and taxes have been paid. You could reinvest this back into the business, save it for future expenses or distribute it to owners.
Calculating net income from gross profit
If you already know your gross profit, you can calculate net income by subtracting your remaining expenses from that figure. This approach is useful when your accounting records separate direct costs from operating costs.
The formula looks like this:
Net income = Gross profit – Operating expenses – Interest – Taxes
Using the same figures from the example above, your gross profit is RM21,000 (RM35,000 revenue minus RM14,000 COGS). From there:
RM21,000 – RM3,000 – RM6,000 = RM12,000
The result is the same: RM12,000 net income. Starting from gross profit simply means you have already accounted for your cost of goods sold in a previous step.
Net income vs gross income
Gross income and net income measure different things, and understanding the difference is important for managing your finances accurately.
Gross income (or gross profit) is your total revenue minus the cost of goods sold. It shows how much money you make from selling your products or services before accounting for operating expenses, interest and taxes.
Net income goes further. It subtracts all remaining expenses from your gross income, giving you the final profit your business keeps. In short, gross income is your revenue minus cost of goods sold, while net income is your revenue minus all expenses and taxes.
If your gross income is healthy but your net profit is low, it could mean your operating costs are too high. Reviewing both figures side by side helps you pinpoint where your money is going. For a deeper comparison, it helps to review how gross profit and net profit differ.
Net income vs operating income
Operating income and net income are both measures of profitability, but they capture different stages of your earnings.
Operating income (sometimes called operating profit) is revenue minus COGS and operating expenses. It shows how much your core business activities generate before interest and taxes are deducted. This figure is closely related to EBIT (earnings before interest and taxes) and EBITDA (earnings before interest, taxes, depreciation and amortisation).
Net income takes operating income further by subtracting interest and taxes. It represents the true bottom line your business keeps. For a related concept, see the guide on net operating profit after tax.
Net income vs cash flow
Net income and cash flow are related but they do not always tell the same story. A profitable business on paper can still struggle with cash flow if payments come in slowly or large expenses hit at the wrong time.
Net income is an accounting measure. It is calculated based on revenue earned and expenses incurred during a period, regardless of when the actual money changes hands.
Cash flow tracks the actual movement of money in and out of your business. It includes everything from customer payments and loan repayments to money spent on equipment.
For Malaysian small businesses, keeping an eye on both figures is essential. Your net earnings might look strong, but if your customers are slow to pay their invoices, you could face a cash shortfall.
What is a good net income?
A good net income varies by industry and business size. Rather than focusing on a single ringgit amount, most business owners benchmark their performance using the net profit margin.
Net profit margin expresses net income as a percentage of revenue. Most small businesses aim for a net profit margin of 10–20%, though this varies depending on your sector. A higher margin generally indicates stronger profitability and more room for reinvestment or reserves.
Reviewing your margin over time helps you spot trends and set realistic goals.
Common mistakes when calculating net income
Getting your net income right depends on accurate data and careful calculations. Here are some of the most common errors to watch out for:
- Forgetting to include all expenses: it is easy to overlook smaller costs like bank fees, software subscriptions or professional services. Make sure every business expense is accounted for.
- Mixing up personal and business expenses: if you are a sole proprietor, keep your personal and business spending separate. Including personal costs in your business expenses will distort your net profit figure.
- Not accounting for depreciation: assets like equipment and vehicles lose value over time. Failing to include depreciation as an expense can make your net income look higher than it actually is.
- Using the wrong time period: make sure your revenue and expenses cover the same period. Mismatched dates lead to inaccurate results.
- Relying on manual calculations: spreadsheets are prone to human error. Using cloud accounting software to automate your bookkeeping reduces mistakes and saves you time.
Track your net income with Xero
Calculating net income does not have to be a manual process. Xero automatically pulls your revenue and expenses together, so you can generate a profit and loss report in seconds and see your bottom line at a glance.
With real-time reporting, bank feeds and automated reconciliation, you will spend less time on bookkeeping and more time running your business. Ready to simplify your finances? Get one month free.
FAQs on how to calculate net income
Here are some frequently asked questions about how to calculate net income.
Is net income the same as profit?
Net income is the same as net profit. Both terms refer to the amount left after subtracting all expenses and taxes from your total revenue. Gross profit, however, only accounts for the cost of goods sold and does not include operating expenses or taxes.
Is net income before or after tax?
Net income is calculated after tax. It represents your final profit once all expenses, including taxes, have been deducted from revenue.
What is a good net income for a small business?
A good net income depends on your industry and business size. As a general guide, a net profit margin of 10–20% is considered healthy for most small businesses.
What is the difference between net income and gross income?
Gross income (or gross profit) is revenue minus the cost of goods sold. Net income is revenue minus all expenses and taxes. Gross income shows your earnings before operating costs, while net income shows what your business actually keeps.
Is net income the same as your take-home pay?
No. A business's net income is its profit after all expenses and taxes. An individual's take-home pay is the salary remaining after statutory deductions such as EPF, SOCSO, EIS and PCB (monthly tax deduction). These are different concepts.
How often should you calculate net income?
Most businesses calculate net income monthly or quarterly to stay on top of their financial performance. Regular tracking helps you catch issues early and plan ahead.
Related terms
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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.