Net income is the residual income

Income

Income is the consumption and savings opportunity gained by an entity within a specified time frame, which is generally expressed in monetary terms. However, for households and individuals, "income is the sum of all the wages, salaries, profits, interests payments, rents and other forms of earnings...

 of a firm after adding total revenue

Revenue

In business, revenue is income that a company receives from its normal business activities, usually from the sale of goods and services to customers. In many countries, such as the United Kingdom, revenue is referred to as turnover....

 and gains and subtracting all expense

Expense

In common usage, an expense or expenditure is an outflow of money to another person or group to pay for an item or service, or for a category of costs. For a tenant, rent is an expense. For students or parents, tuition is an expense. Buying food, clothing, furniture or an automobile is often...

s and losses for the reporting period. Net income can be distributed among holders of common stock as a dividend

Dividend

Dividends are payments made by a corporation to its shareholder members. It is the portion of corporate profits paid out to stockholders. When a corporation earns a profit or surplus, that money can be put to two uses: it can either be re-invested in the business , or it can be distributed to...

 or held by the firm as an addition to retained earnings

Retained earnings

In accounting, retained earnings refers to the portion of net income which is retained by the corporation rather than distributed to its owners as dividends. Similarly, if the corporation takes a loss, then that loss is retained and called variously retained losses, accumulated losses or...

. As profit

Profit (accounting)

In accounting, profit can be considered to be the difference between the purchase price and the costs of bringing to market whatever it is that is accounted as an enterprise in terms of the component costs of delivered goods and/or services and any operating or other expenses.-Definition:There are...

 and earnings

Earnings

Earnings are the net benefits of a Corporation's operation. Earnings is also the amount on which corporate tax is due. For an analysis of specific aspects of corporate operations several more specific terms are used as EBIT -- earnings before interest and taxes, EBITDA - earnings before...

 are used synonymously for income

Income

Income is the consumption and savings opportunity gained by an entity within a specified time frame, which is generally expressed in monetary terms. However, for households and individuals, "income is the sum of all the wages, salaries, profits, interests payments, rents and other forms of earnings...

 (also depending on UK and US usage), net earnings and net profit are commonly found as synonyms for net income. Often, the term income is substituted for net income, yet this is not preferred due to the possible ambiguity. Net income is informally called the bottom line because it is typically found on the last line of a company's income statement

Income statement

Income statement is a company's financial statement that indicates how the revenue Income statement (also referred to as profit and loss statement (P&L), statement of financial performance, earnings statement, operating statement or statement of operations) is a company's financial statement that...

 (a related term is top line, meaning revenue

Revenue

In business, revenue is income that a company receives from its normal business activities, usually from the sale of goods and services to customers. In many countries, such as the United Kingdom, revenue is referred to as turnover....

, which forms the first line of the account statement).

The items deducted will typically include tax expense

Tax expense

At its simplest, a company's tax expense, or tax charge, as it sometimes called, is computed in by multiplying the income before tax number, as reported to shareholders, by the appropriate tax rate...

, financing expense (interest expense

Interest expense

Interest expense relates to the cost of borrowing money. It is the price that a lender charges a borrower for the use of the lender's money. Interest expense is different from OPEX and CAPEX, for it relates to the capital structure of a company. Interest expense is usually tax-deductible....

), and minority interest

Minority interest

Minority interest in business is an accounting concept that refers to the portion of a subsidiary corporation's stock that is not owned by the parent corporation...

. Likewise, preferred stock

Preferred stock

Preferred stock, also called preferred shares, preference shares, or simply preferreds, is a special equity security that has properties of both an equity and a debt instrument and is generally considered a hybrid instrument...

 dividends will be subtracted too, though they are not an expense. For a merchandising

Merchandising

Merchandising is the methods, practices, and operations used to promote and sustain certain categories of commercial activity. In the broadest sense, merchandising is any practice which contributes to the sale of products to a retail consumer...

 company

Company

A company is a form of business organization. It is an association or collection of individual real persons and/or other companies, who each provide some form of capital. This group has a common purpose or focus and an aim of gaining profits. This collection, group or association of persons can be...

, subtracted costs may be the cost of goods sold

Cost of goods sold

Cost of goods sold refers to the inventory costs of those goods a business has sold during a particular period. Costs are associated with particular goods using one of several formulas, including specific identification, first-in first-out , or average cost...

, sales discounts, and sales returns and allowances. For a product company advertising

Advertising

Advertising is a form of communication used to persuade an audience to take some action with respect to products, ideas, or services. Most commonly, the desired result is to drive consumer behavior with respect to a commercial offering, although political and ideological advertising is also common...

, manufacturing

Manufacturing

Manufacturing is the use of machines, tools and labor to produce goods for use or sale. The term may refer to a range of human activity, from handicraft to high tech, but is most commonly applied to industrial production, in which raw materials are transformed into finished goods on a large scale...

, and design and development costs are included.

An equation for net income

Net sales (revenue)

– Cost of goods sold

Cost of goods sold

Cost of goods sold refers to the inventory costs of those goods a business has sold during a particular period. Costs are associated with particular goods using one of several formulas, including specific identification, first-in first-out , or average cost...

= Gross profit

Gross profit

In accounting, gross profit or sales profit is the difference between revenue and the cost of making a product or providing a service, before deducting overhead, payroll, taxation, and interest payments...

– SG&A

SG&A

SG&A is an acronym used in accounting to refer to Selling, General and Administrative Expenses, which is a major non-production costs presented in an Income statement....

 expenses (combined costs of operating the company)

= EBITDA

– Depreciation

Depreciation

Depreciation refers to two very different but related concepts:# the decrease in value of assets , and# the allocation of the cost of assets to periods in which the assets are used ....

 & amortization

Amortization

Amortization is the process of decreasing, or accounting for, an amount over a period. The word comes from Middle English amortisen to kill, alienate in mortmain, from Anglo-French amorteser, alteration of amortir, from Vulgar Latin admortire to kill, from Latin ad- + mort-, mors death.When used...

= EBIT

Earnings before interest and taxes

In accounting and finance, earnings before interest and taxes is a measure of a firm's profit that excludes interest and income tax expenses. Operating income is the difference between operating revenues and operating expenses...

– Interest expense

Interest expense

Interest expense relates to the cost of borrowing money. It is the price that a lender charges a borrower for the use of the lender's money. Interest expense is different from OPEX and CAPEX, for it relates to the capital structure of a company. Interest expense is usually tax-deductible....

 (cost of borrowing money)

= EBT

Earnings before taxes

Earnings before taxes is the money retained by the firm before deducting the money to be paid for taxes. E.B.T includes the money paid for interest. Thus, it can be calculated by subtracting the interest from EBIT ....

– Tax expense

Tax expense

At its simplest, a company's tax expense, or tax charge, as it sometimes called, is computed in by multiplying the income before tax number, as reported to shareholders, by the appropriate tax rate...

= Net income (EAT)

See also

• Dividend
  Dividend
  Dividends are payments made by a corporation to its shareholder members. It is the portion of corporate profits paid out to stockholders. When a corporation earns a profit or surplus, that money can be put to two uses: it can either be re-invested in the business , or it can be distributed to...
  
  
• Economic value added
  Economic value added
  In corporate finance, Economic Value Added or EVA, a registered trademark of Stern Stewart & Co., is an estimate of a firm's economic profit – being the value created in excess of the required return of the company's investors . Quite simply, EVA is the profit earned by the firm less the cost of...
  
  
• Gross income
  Gross income
  Gross income in United States tax law is receipts and gains from all sources less cost of goods sold. Gross income is the starting point for determining Federal and state income tax of individuals, corporations, estates and trusts, whether resident or nonresident."Except as otherwise provided" by...
  
  
• Income statement
  Income statement
  Income statement is a company's financial statement that indicates how the revenue Income statement (also referred to as profit and loss statement (P&L), statement of financial performance, earnings statement, operating statement or statement of operations) is a company's financial statement that...
  
  
• Liquidating dividend
  Liquidating dividend
  A liquidating distribution, sometimes called a liquidating dividend, is a type of nondividend distribution made by a corporation to its stockholders during its partial or complete liquidation. Like nondividend distributions, they are not paid out of the earnings and profits of the corporation...
  
  

• Net income per employee
  Net income per employee
  Net Income per Employee or Revenue per employee is a company's net income divided by the number of employees. In general, the higher the number, the more efficient the company uses its employees, however the numbers are only directly comparable when comparing companies of a very similar nature...
  
  
• Operating income
  Earnings before interest and taxes
  In accounting and finance, earnings before interest and taxes is a measure of a firm's profit that excludes interest and income tax expenses. Operating income is the difference between operating revenues and operating expenses...
  
  
• Operating Income Before Depreciation and Amortization
• Opportunity cost
  Opportunity cost
  Opportunity cost is the cost of any activity measured in terms of the value of the best alternative that is not chosen . It is the sacrifice related to the second best choice available to someone, or group, who has picked among several mutually exclusive choices. The opportunity cost is also the...
  
  
• Profit (accounting)
  Profit (accounting)
  In accounting, profit can be considered to be the difference between the purchase price and the costs of bringing to market whatever it is that is accounted as an enterprise in terms of the component costs of delivered goods and/or services and any operating or other expenses.-Definition:There are...