How to Calculate Net Profit Formula


Bottom LineThe bottom line refers to the net earnings or profit a company generates from its business operations in a particular accounting period that appears at the end of the income statement. A company adopts strategies to reduce costs or raise income to improve its bottom line. To calculate net income, take the gross income — the total amount of money earned — then subtract expenses, such as taxes and interest payments.

Capital investments and revenues increase owner’s equity, while expenses and owner withdrawals decrease owner’s equity. In a partnership, there are separate capital and drawing accounts for each partner. The net income formula yields the residual amount of profit or loss remaining after all expenses are deducted from revenue. The results of this formula are closely watched, since they reveal whether a business is likely to be a viable operating entity. When there is no ongoing trend of positive net income, investors will sell off their shares, resulting in a long-term decline in the stock price.


A business can now use this equation to analyse transactions in more detail. We can begin this discussion by looking at the chart of accounts. The number comes last on the income statement, which is why it’s called the bottom line. The net profit can be paid out to owners or reinvested in the business.

Xero does not provide , tax, business or legal advice. This figure is calculated by dividing net profit by revenue or turnover, and it represents profitability, as a percentage. Finally, you subtract the added expenses from the total sales revenue. The outcome can be positive or negative if you have incurred a net loss. Businesses can record high revenue but still end up with a loss.

Accounting Equation for Profit & Loss Statements

You can select a different depreciation method that will decrease that deduction and add to your net income. If you are a manufacturing operation, analyze your cost of goods sold to determine if there is room to lower your manufacturing expenses. Decreasing your expenses and improving your income will increase the amount reported in your retained earnings account.

  • Before you reach for your calculator and financial statements, continue reading to learn more about each item used to calculate your net income.
  • Banks consider net income when approving a business loan application, as do investors when deciding whether to invest in a company.
  • (There are a few gains and losses which are not included in the calculation of net income. However, they are part of comprehensive income).
  • Calculate operating expenses and subtract them from gross income to obtain operating income.
  • It’s important to note that some expenses may also be tax-deductible if they are defined as ordinary and necessary for business operations.

The total amount of your business expenses decreases the retained earnings account in the stockholders’ equity section. Net income margin is a comparison of total revenue received during a time period to the income you have left after all expenses are subtracted. You divide the bottom line number on the income statement by the top line number to get a percentage.

What is the net profit formula?

The IRS uses the AGI to how much income tax you owe. The number is the employee’s gross income, minus taxes, and retirement account contributions. In the United States, individual taxpayers submit a version of Form 1040 to the IRS to report annual earnings. Instead, it has lines to record gross income, adjusted gross income , and taxable income. For example, an individual has $60,000 in gross income and qualifies for $10,000 in deductions. That individual’s taxable income is $50,000 with an effective tax rate of 13.88% giving an income tax payment $6,939.50 and NI of $43,060.50. modeling can be used to forecast revenue, expenses and cash flow, helping businesses make budgeting decisions about capital investments, staffing and other resource requirements. 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.

An equation for net income

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Is net income found on the balance sheet?

No, net income is not found on the balance sheet, it is rather found on the income statement. It shows the amount of money left after deducting expenses. Net income, however, affects the shareholder’s equity on the balance sheet. An increase or a decrease in a company’s net income will bring about an increase or a decrease in the shareholders’ equity.

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