In business, net income (total comprehensive income, net earnings, net profit, informally, bottom line) is an entity's income minus cost of goods sold, expenses and taxes for an accounting period. It is computed as the residual of all revenues and gains over all expenses and losses for the period, and has additionally been defined as the net increase in shareholders' equity that results from a company's operations. In the context of the presentation of financial statements, the IFRS Foundation defines net income as synonymous with profit and loss.
Net income can be distributed amongst holders of common stock as a dividend or held by the firm as an addition to retained earnings. As profit and earnings are used synonymously for income (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 isn't preferred due to the possible ambiguity. Net income is informally called the bottom line because it is ordinarily found on the last line of a company's income statement (a related term is top line, meaning revenue, which forms the first line of the account statement).
The items deducted will ordinarily include tax expense, financing expense (interest expense), and minority interest. Likewise, preferred stock dividends will be subtracted too, though they aren't an expense. For a merchandising company, subtracted costs might be the cost of goods sold, sales discounts, and sales returns and allowances. For a product company advertising, manufacturing, and design and development costs are included.
An equation for net income
- Net sales (revenue)
- = Gross profit
- = EBITDA
- = EBIT
- – Interest expense (cost of borrowing money)
- = EBT
- = Net income (EAT)
- Net sales = Gross sales – (Customer Discounts, Returns, Allowances)
- Gross profit = Net sales – Cost of goods sold
- Operating Profit = Gross Profit – Total operating expenses
- Net profit = Operating Profit – taxes – interest
- Net profit = Net sales – Cost of goods sold – operating expense – taxes – interest