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How to Calculate Net Income
To understand whether your business is profitable or not, it is essential to be able to calculate its net income. While revenue gives you a general idea of how much money you get, you can know the exact sum you earned only once you subtract all the expenses. Here you can learn how to compute net income easily.
What Is Net Income?
To begin, let’s answer the main question – what is net income? When it comes to net income definition, it is a simple concept. Net income refers to the total profit earned by your company once all the necessary business expenses are deducted. There are other terms used for this type of income, including net profit and earnings. The expenses that you would need to subtract can be different depending on your business type. They might include the salary of employees, operating expenses, utilities, rent, interest, taxes, and more.
If you find out that your revenue is greater than your expenses during your net calculation, it means that you have a positive net income. On the contrary, when you realize that your expenses have been more significant, you have the so-called net loss or negative net income.
Net Income Formula
Now that you know what net income is, it is important to understand how to calculate net income correctly so that you consider all the factors.
The net income formula that you can use for your business to calculate your profit properly:
Another term to remember is gross income. The definition refers to the subtraction of the cost of sold products from the revenue. In this way, you can look at the formula differently – you have to subtract expenses from the gross income, and you will get the right revenue sum.
Regardless of the period for which you calculate, the formula remains the same. You can use it to get an idea of your monthly, quarterly, or annual revenue so that you know exactly how your business is doing.
Example of Net Income Calculation
It is easier to understand how to find net income by using an example. For instance, you want to see the net income of your clothing business for January. Firstly, you should have the exact numbers when it comes to your gross income. They include:
- Cost of sold products: $10,000
- Total revenue: $35,000
Next, you should add up all the expenses that you had in January. This might include the following:
- Utilities: $300
- Store rent: $1.800
- Employee’s salary: $3,500
- Taxes: $750
- Any additional purchases: $900
By subtracting the cost of sold products from the total revenue, we get the gross income of $15,000. The expenses for the month come to $7250, which means that the net income of this clothing store for January is $15,000 - $7,250 = $7,750. By using this example on how to get net income, you can now quickly calculate yours.
Net Operating Income Formula
There exist different types of net income formulas, and another one that should be mentioned is the net operating income formula. In the case of lenders or investors, the net operating income can often be more informative and allows us to see how much revenue certain business activities bring. To calculate net operating income, you should do the following:
It is important to note that net operating income is calculated before tax, so it’s not taken into account when using the formula. When you calculate net operating income, you subtract only operating expenses while the net income formula subtracts all types of expenses, both operating and non-operating ones.
For instance, an office building can bring $150,000 of income on rent, but the operating expenses might include maintenance, property taxes, insurance, and vacant weeks. If all these expenses add up to $50,000, the final net operating income will be $150,000 - $50,000 = $100,000.
Net Income and Taxes
The Form 1040 used for reporting annual earnings requires you to provide your taxable income and gross income. But, when filing income taxes, you may also see the net income section. If this happens, all you have to do is take the taxable income and subtract the total tax.
The easiest way to fill out tax forms is online, as you don’t have to deal with a post office and worry that your tax forms might get lost or stolen. Also, using a digital signature and sending your tax form via email saves your time. There are many online platforms where you can sign a document out there, including a tax form, and one of the convenient options is PDFLiner. This tool streamlines the process of creating and managing legal documents and helps to fill out tax forms, ensuring that everything is perfectly filled out and no mistakes are made.
Calculating Your Net Income Is Essential
It’s easy to get confused with all the expenses and revenues, but it’s important to start calculating your net income as soon as possible. Now that you know how to calculate net income from the balance sheet, you can see exactly the money you earn each month. If your net income happens to be negative, you will be able to make correct adjustments.
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