An income statement provides valuable insights into various aspects of a business. It includes readings on a company’s operations, the efficiency of its management, the possible leaky areas that may be eroding profits, and whether the company is performing in line with industry peers. Net income (NI), also called net earnings, is calculated as sales minus cost of goods sold, selling, general and administrative expenses, operating expenses, depreciation, interest, taxes, and other expenses. It is a useful number for investors to assess how much revenue exceeds the expenses of an organization. This number appears on a company's income statement and is also an indicator of a company's profitability.
Key Takeaways
- Net income (NI) is calculated as revenues minus expenses, interest, and taxes.
- Earnings per share are calculated using NI.
- Investors should review the numbers used to calculate NI because expenses can be hidden in accounting methods, or revenues can be inflated.
- NI also represents an individual's total earnings or pre-tax earnings after factoring deductions and taxes in gross income.
Net income also refers to an individual's income after taking taxes and deductions into account.
1:24
Calculating Net Income
Understanding Net Income (NI)
Businesses use net income to calculate their earnings per share. Business analysts often refer to net income as the bottom line since it is at the bottom of the income statement. Analysts in the United Kingdom know NI as profit attributable to shareholders.
Net income (NI) is known as the "bottom line" as it appears as the last line on the income statement once all expenses, interest, and taxes have been subtracted from revenues.
Calculating NI for Businesses
To calculate net income for a business, start with a company's total revenue. From this figure, subtract the business's expenses and operating costs to calculate the business's earnings before tax. Deduct tax from this amount to find the NI.
NI, like other accounting measures, is susceptible to manipulation through such things as aggressive revenue recognition or hiding expenses. When basing an investment decision on NI, investors should review the quality of the numbers used to arrive at the taxable income and NI.
Personal Gross Income vs. NI
Gross income refers to an individual's total earnings or pre-tax earnings, and NI refers to the difference after factoring deductions and taxes into gross income. To calculate taxable income, which is the figure used by the Internal Revenue Service to determine income tax, taxpayers subtract deductions from gross income. The difference between taxable income and income tax is an individual's NI.
For example, an individual has $60,000 in gross income and qualifies for $10,000 in deductions. That individual's taxable income is $50,000 with an effective tax rate of 13.88% giving an income tax payment $6,939.50 and NI of $43,060.50.
NI on Tax Returns
In the United States, individual taxpayers submit a version of Form 1040 to the IRS to report annual earnings. This form does not have a line for net income. Instead, it has lines to record gross income, adjusted gross income (AGI), and taxable income.
After noting their gross income, taxpayers subtract certain income sources such as Social Security benefits and qualifying deductions such as student loan interest. The difference is their AGI. Although the terms are sometimes used interchangeably, net income and AGI are two different things. Taxpayers then subtract standard or itemized deductions from their AGI to determine their taxable income. As stated above, the difference between taxable income and income tax is the individual's NI, but this number is not noted on individual tax forms.
NI on Paycheck Stubs
Most paycheck stubs have a line devoted to NI. This is the amount that appears on an employee's check. The number is the employee's gross income, minus taxes, and retirement account contributions.
Where is net income shown on a worksheet?
Net income appears in the Income Statement credit column and in the Balance Sheet debit column. The net income appears on a worksheet in the Income Statement Credit column as the net income has a credit balance and in the Balance Sheet debit column in the retained earnings account.
Where is net income recorded?
Net income (NI) is known as the "bottom line" as it appears as the last line on the income statement once all expenses, interest, and taxes have been subtracted from revenues.
What is net income listed as on a balance sheet?
Net income belongs on the income statement rather than the balance sheet. It is the bottom line – the field that summarizes all your income and expenses as well as the relationship between them.
