Financial Glossary
How to Calculate Net Income
Net income is calculated by subtracting all expenses from total revenue for a period: revenue minus cost of goods sold, operating expenses, interest, depreciation, and taxes equals net income. It is the bottom line of the income statement and represents the profit left after every cost is accounted for. A positive figure means the business earned more than it spent; a negative figure is a net loss.
Problem & Application
For owner-operated businesses, net income is the number lenders, investors, and tax authorities ultimately look at, so the calculation is only as trustworthy as the books behind it. Common distortions include missing accrued expenses, miscategorized owner draws, or revenue recognized in the wrong period, all of which inflate or understate the true result. Getting from raw transactions to a defensible net income figure is the practical work of clean monthly close.
In Short
Net income is a simple subtraction in theory, but a reliable figure depends on complete, correctly categorized financials underneath it.