Most companies maintain the accounting equation using a double-entry bookkeeping system to record financial data. Under this system, a change in one account must be matched in another account. These changes are made by debits and credits and for every entry, the sum of debits must equal the sum of credits. More precisely, a company uses assets to generate revenue; this is everything that the company owns.

• Your business’s gross income is the revenue you have after subtracting your cost of goods sold .
• This lets you determine which product or line produces the most income.
• Net income, also called net profit, is a calculation that measures the amount of total revenues that exceed total expenses.
• As such, Aaron is able to make large amounts of revenue while keeping his expenses low.
• The company, like all publicly traded companies in the U.S., regularly reports its revenues and expenses to the SEC four times per year.
• The income statement and your net income also allow you to plan for the future.

It is the revenue generated by a business after paying off its taxes, expenses, and other costs. For businesses that are looking for funding, a higher net income will help with a loan application because creditors often have loan covenants that require a certain profit threshold each year. This can pose a problem to management because they want to show less profit to reduce taxes, but also maintain enough profitability to ensure they meet the lender requirements. Similarly, a creditor will look to net income as a way to determine whether the company is healthy and able to use its net income to pay back its debts. Management will also use want to use net income so they are able to effectively communicate with investors and creditors about the performance of the company, as well as to pay salaries and bonuses.

What Is Net Income (NI)?

With NetSuite, you go live in a predictable timeframe — smart, stepped implementations begin with sales and span the entire customer lifecycle, so there’s continuity from sales to services to support. To help you gain a better understanding of this key financial figure, we’ll discuss what net income is, how to calculate it, and why it matters to your business.

Understand what the accounting equation is, learn the elements of the basic accounting equation, and see examples. Net income is the positive result of a company’s revenues and gains minus its expenses and losses. (There are a few gains and losses which are not included in the calculation of net income. However, they are part of comprehensive income). A high net income means that a company is profitable and can repay its debts, shareholders’ dividends, and may have the ability to expand.

How to calculate net income (net income equation):

The balance sheet provides a look at a business at a snapshot in time, often at the end of a quarter or year. In some cases, the accounts on the balance sheet — assets, liabilities, and equity — can also shed light into items that would normally be found on the income net income accounting equation or cash flow statement. In the cash flow statement, net earnings are used to calculate operating cash flows using the indirect method. Here, the cash flow statement starts with net earnings and adds back any non-cash expenses that were deducted in the income statement.

• We have to subtract any investments back out from the change in equity from year to year.
• This is a pretty easy equation, so you don’t really need a net income calculator to figure it out.
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• Net income is also used to calculate net profit margin, which is net income expressed as a percentage of revenue.

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