What is net income?
Net income is the most complete measure of profit. It shows what the business earned for its owners over a period after every cost is accounted for. If expenses exceed revenue, the result is a net loss.
Formula
Net income = Revenue − [Cost of goods sold](/glossary/cost-of-goods-sold) − [Operating expenses](/glossary/operating-expenses) − Interest − Taxes ± Other income and expenses
Example
- Revenue: $800,000
- COGS: $480,000 → [Gross profit](/glossary/gross-profit) $320,000
- Operating expenses: $200,000 → Operating profit $120,000
- Interest: $15,000 → Profit before tax $105,000
- Tax at 25%: $26,250
- Net income: $78,750
Where it goes
Net income flows into [retained earnings](/glossary/retained-earnings) on the [balance sheet](/glossary/balance-sheet), unless paid out as [dividends](/glossary/dividend). It is also the starting point for the indirect [cash flow statement](/glossary/cash-flow-statement).
Net income vs cash
Net income is an accrual figure. It includes non-cash items such as depreciation and ignores the timing of collections and payments, so a business with strong net income can still be short of cash.
Related metrics
- [Net profit margin](/glossary/net-profit-margin) = Net income ÷ Revenue
- [Earnings per share](/glossary/earnings-per-share) = Net income ÷ Shares
- Return on equity = Net income ÷ Equity