Is your business earning decent revenue? Of course, there are parameters to measure the growth of business and net earning is one of the ultimate proof that many entrepreneurs consider important while making crucial deals. Are you one of those owners who follow proper accounting principles and practices to boost sales? If so, you don’t have to waste time calculating your earnings, as you get stunning results by gathering financial data and making income statements.
What is net income?
Net income is the revenue your business earns in an accounting period after subtracting all the expenses and taxes. It is the total amount of money your business enjoys after completing all the formalities and liabilities. In short, net earning is the profit your company earns after selling goods and services. Additionally, accountants include these net earnings on the income statement including all the sources of expenses and revenues to drive the profitability.
Apart from including all the sources and measuring profitability, net earning is the opposite of net loss. The net loss is a tough situation where many businesses suffer from terrible losses and finding recovery isn’t easy in that scenario. Of course, they lose money and that’s why net earning is vital in accounting.
Importance of Net Income in Financial Analysis
The financial analysis takes place in every business under the excellence of accountants. In this analysis, experts analyze income statements and monitor the financial health of a business to finally calculate a company’s profit. If the profit of a company increases, then your business is on the right path and having a good time. On the other hand, if the profit decreases, then you need to plan things differently, and more likely you prefer to cut costs and unnecessary expenses.
Therefore, the companies also pay debts before calculating the profit. This also gives them the idea of how much money the business has left to pay dividends and also they get an opportunity to save money for bad days and that’s the importance of doing financial analysis.
How to Calculate Net Income with a Formula?
Every business wants to earn profit and without subtracting expenses, no business on this planet can make it happen. Of course, profit is the total earning of your business that comes out clean after all the taxes and debts have been paid. This is why, entities like to reinvest these earnings in future projects and also for buying new equipment that can help businesses grow faster and generate 10 x sales.
The process of calculating net earnings goes hand in hand with the income statement. So, there is a need for profit and loss statements as well to undergo an easy calculation process. Here is the formula for calculating income:
Revenue – Cost of Goods Sold – Expenses = Net Income
Revenue is the major part of the formula that covers the entire earnings of a business. To complete the formula, we subtract the cost of goods sold and expenses from the revenue to get income.
Another formula to find net earnings is as follows:
Gross Income – Expenses = Net Income
Further, you can also calculate your net earnings by following a simple formula:
Total Revenues – Total Expenses = Net Income
Net earnings have two aspects, as these can be good and bad at the same for the business. The income is positive when the business enjoys more revenue and it’s a good sign. On the other hand, your income appears to be negative when the expenses take over revenue and result in a net loss. Therefore, the formulas mentioned above are perfect for calculating income.
Net Income Formula with Example
Harry an entrepreneur wants to calculate net earnings for the first quarter of his toy shop: Here is an example to calculate the formula:
Total revenues: $50,000
Cost of goods sold: $15,000
Rent: $4,000
Utilities: $1800
Payroll: $7,000
Advertising: $500
Interest expense: $700
First of all, we’ll calculate the gross income of Harry by subtracting the cost of goods sold from revenue!
Gross income = $50,000 – $15,000 = $35,000
The second step is to include expenses for the quarter
Expenses = $4,000 + $1800 + $7,000 + $500 + $700 = $14,000
Finally, We will calculate Harry’s net earnings by subtracting expenses from gross income
Net income = $35,000 – $14,000 = $21,000
Harry’s net income for the quarter is $21,000
Difference Between Net Income and Gross Income
Whenever we search for net earnings, we can’t ignore gross income from the process during the accounting period. Gross income is the amount that a company earns before removing the taxes. Therefore, you may calculate your net amount by subtracting the cost of goods sold and expenses after totaling the gross income. However, the results may vary depending on the tax rules of the state.
Gross income is the money that your business earns after selling goods and services. It doesn’t include the cost of goods sold. Indeed, gross income is the total earnings of your business including expenses as well. For example, if you are selling ice cream and earn $45 in a day, it will be considered as your gross income. In simple words, net earning comes after subtracting the expenses, taxes, and interest.
If you are an accountant, make sure you don’t mix net earnings with gross earnings, as both are different in a broader sense. However, the cost of goods sold also plays an essential role in the income statement, as examples of COGS include labor, raw material, utility expenses, production expenses, energy costs, packaging, shipping, and depreciation expenses. Despite these expenses, indirect expenses aren’t included in the COGS.
Did You Know?
“Net income is the heartbeat of the business, pulsating with the rhythm of profitability and echoing the sound of financial success”.
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