The net income formula is used to calculate the net earnings of the business. Net income is equal to the value of revenue generated minus expenses, interest, and taxes. It is applicable at different levels, from an individualto a group to an organization. Net income for a business is equal to the total revenue of the company minus the operating costs, business expenses, and tax. The net income formula tells us about the net income for an individual is equal to thepersonal gross income (total earnings before taxation) minus the deductions and tax. The net income formula is explained below along with the solved examples.
Formula for Net Income
The net income formula is the difference between the total revenue generated and the total expenses generated in the process. The formulas for the net income are listed below:
1) Net Income = Total Revenue - Total Expenses
- Total revenueis the total amount generated by the sales of goods and services.
- Total expenses arethe cost of operations that any company or human experiences to generate revenue.
2) Net income = gross income -expenses
3) Net income = (revenue - the cost of goods sold) - expenses
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Examples Using Net Income Formula
Example 1: Using the net income formula calculate the net income of an organizationif the total revenue of the organizationis $250000 and total expenseis $150000
Solution:
Given: Total revenue = $250000, total expenses =$150000
Using net income formula,
Net Income = Total Revenue - Total Expenses
Net income =$250000 -$150000 = $100000
Net income of the organization is$100000.
Example 2:Given is the income statement (2019-20)by an organization. Find the net income of the organization by using the net income formula.
| Description | ||
| Net sales | Total revenue due to products and services | Rs. 22,98,00,000 |
| Cost of Sales | Total costs spent in the production of goods and provision of services | Rs. 10,57,00,000 |
| Operating Expenses | Includes R&D cost, selling, general and administrative expenses | Rs. 5,05,00,000 |
| Tax | --- | Rs. 1,10,00,000 |
Solution
Net Income = Total Revenue - Total Expenses
= Net Sales - (Cost of sales + Operating Expenses + Tax)
=22,98,00,000 - (10,57,00,000 +5,05,00,000 + 1,10,00,000)
= Rs. 6,26,00,000
Answer: Net income of the organization (for the year 2019-20) isRs. 6,26,00,000
Example 3: The Owner of a bakery shop wants to find its net income for the first quarter of 2021. Given below are the figures the shop owneris working with.
| Total revenues | $20,000 |
| Cost of items sold | $8,000 |
| Payroll | $4000 |
| Utilities | $1500 |
| Advertising | $500 |
| Rent | $2000 |
| Interest Expenses | $1,000 |
Help the owner in calculating net income using the net income formulas.
Solution
First, the bakery owner should calculate his gross income by subtracting the cost of items sold from total revenues:
Gross income = $20,000 - $8,000 = $12,000
Let us now sum up the total expenses for the quarter period.
Expenses = $4,000 + $15,00 + $500 + $2,000 + $1,000 = $9,000
Now, to calculate the net income we need tosubtract total expenses from the total gross income:
Net income = $12,000 - $9,000 = $3,000
The bakery owner's net income for the quarter is $3,000
FAQ's on Net IncomeFormula
How To Derive Total RevenueFormula Using Net Income Formula?
Total revenue is defined as the sum of the net income and total expenses. It is given as:
Total Revenue = Net Income+Total Expenses
How To Derive Total Expenses Formula Using Net Income Formula?
Total expensesare defined as the differencebetween the total revenue and the net income. It is given as:
Total Expenses= Total Revenue - Net Income
How To DefineNet Income Formula?
The difference between the total revenue generated and the total expenses is known as the net income formula. It is given as:
Net Income = Total Revenue - Total Expenses.
What IsGeneral Net Income Formula?
Net income formula is expressed as,Net Income = Total Revenue - Total Expenses
