Net Income - Explained
What is Net Income?
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What is Net Income?
Net income of a business is calculated by deducting all expenses incurred in an accounting period from the total revenue earned in that same period.
Back to: ACCOUNTING, TAX, & REPORTING
How is Net Income Used?
The operating costs, interests, depreciation, taxes and all other expenses are deducted from the total revenue to get the net income of a business. As the net income is written at the bottom of an income statement, it is also called the bottom line. Net income is an indicator to measure a company's profitability and performance. If the income taxes and interests are not deducted from the revenue, then it is called operating profit. When accounting for an individuals net income, taxes and other deductions are to be considered. Net income is used for calculating a business's earning per share. At first, the business's expenses and operating costs are to be taken away from the business's earnings before tax. Then the tax amounts are to be deducted from this figure to get the net income. Net income of a company may be calculated by hiding expenses or using aggressive revenue recognition. Thus, the quality of the numbers used for calculating taxable income and net income needs to be inspected thoroughly before taking an investment decision. Gross income of an individual is the total pre-tax earnings and net income is calculated by deducting the taxes from the gross income. Taxable income minus income tax is ones net income. Taxable income is calculated by removing the deduction from the gross income. The IRS calculates the tax based on this amount. For example, suppose an individuals gross income is $50,000 and he or she qualifies for $10,000 tax deductions. Then, the taxable income of that individual stands at $50,000-$10,000= $40,000. Now, if his or her payable income tax is $5,000 then the net income of that individual would be $40,000-$5,000=$35,000. At the end of a financial year, the taxpayers need to submit Form 1040 to the Internal Revenue Services. This form doesn't record the net income, rather it records the gross income, adjusted gross income, and taxable income. Paycheck stubs generally mention the net income of the employee. The net income mentioned is paycheck is calculated by subtracting the taxes and retirement contributions from the gross income.