In the business of net income is a very familiar term. Especially for business investors, net income is the indicator they are most interested in. So exactly What is net income?? How to calculate net income in business? Well right now BankTop will show you clearly through today’s consultation and answer corner.
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What is Net Income?
Conceptual reality What is net income? has been explained in detail by many documents and books. But if you are a newbie, you can simply understand that net income is equivalent to net profit, which is calculated as revenue minus costs of cost of goods sold, sales, administrative costs, operating expenses, depreciation, interest, taxes and other expenses.
In English, people often use the abbreviation NI to denote this indicator and NI means Net Income or Net Profit.
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|Net income is called the “bottom line” because it appears as the last line on the income statement once all expenses, interest, and taxes have been subtracted from sales.|
The essence of the NI index is to show how much profit a business/investor achieves. However, this profit is calculated after deducting costs. Includes all costs involved in the production and distribution of the product.
Especially, the NI index is also known as the Bottom line by many people. This interpretation is explained by the position of the index in the income statement. That’s where the last line of the income statement is located. And investors when assessing the business situation of a business will always focus on the last line where the IN index exists..
See also: What is Profit Margin?
What does the Net Income Index (NI) mean?
To gauge how much revenue exceeds a company’s expenses, managers use the Net Income value, which is collected on company reports. Determining how much net income helps the company calculate earnings per share?
Net income is usually at the bottom of the statement, so it’s considered the bottom line when all expenses, interest and taxes have been deducted from sales.
The meaning of Net Income Index (NI) for investors and businesses is as follows:
- For investors, net profit is a useful value by which they can gauge how much revenue has exceeded a company’s costs. It is always on the company’s income statement and is itself an indicator of the company’s profitability.
- For companies or businesses, this type of earnings is often used to calculate earnings per share, so net income can also be considered profit for shareholders.
- Net Income is usually placed on the last line of a statement, so it is considered the bottom line after deducting all expenses, interest and taxes on revenue.
Formula for calculating net income
Concept What is net income? clearly shows you the importance of this indicator in business, investment. Therefore, it is very important to calculate the correct net income. So specifically, what formula is the net income currently calculated by businesses?
In fact, right from the concept of net income, it is clear how to calculate it. Specifically, the standard formula to calculate the NI index is quite simple:
Net Income (NI) = Total Revenue – Total Costs
In which total revenue is all the income of the business. Includes the following:
- Net Revenue
- Profit from financial activities
- Extraordinary incomes
Separate expenses also include many different items. As noted that is all related costs that the business needs to pay.
- Cost of goods sold
- Enterprise Cost Management
- Advertising and marketing expenses
- Extraordinary expenses
- Corporate taxes
For example: Enterprise A manufactures and trades sports shoes, in 2019 this business achieved a revenue of 200,000 USD. To generate this revenue, business A has spent the following expenses:
- Operating expenses: 40,000 USD;
- Equipment and machinery: 60,000 USD;
- Income tax: 30,000 USD;
- Loan interest: 20,000 USD
Applying the above formula, we can calculate the net income of company A as follows:
IN = 200,000 – 40,000 – 60,000 – 20,000 – 30,000 = $50,000.
After calculating net income, we can easily calculate the net profit rate of enterprise A. Accordingly:
Net profit margin = (net profit (net income) / total sales) x 100 = (50,000/200,000) x 100 = 25% or 0.25. Thus, a 25% profit margin shows that business A earns 25 cents of profit for every dollar it makes.
Reference: profit before tax and after tax
Features of the Net Income Index
Based on the calculation formula, you will see that the NI will be accurate when the revenues and expenses are listed correctly. Especially when the NI index has a positive value, it means that the business is efficient. On the contrary, there still exists a negative NI index and in this case it is called “hole.
It is important to remember that the NI index is not a standard basis for investment decisions. That is, as an investor you should not just look at the NI index. Instead, you need to evaluate the “quality, accuracy” of the NI index. Because in fact, through the formula, it is clear that the NI index does not reflect the problems of the business. Include both the actual gains and losses in the business of the enterprise.
Moreover, the NI index is also classified as a group of “numbers” in accounting. This means that businesses can manipulate the NI to their advantage when needed. It’s very simple, businesses just need to adjust related revenue and expenses. Thereby creating a dream NI index to attract investors.
Find out what is net profit?
Factors affecting net income
Net income of the Enterprise is affected by the following factors:
- Operating expenses of the business: Accordingly, the higher the operating costs of the business, the lower the net profit
- Original price of the product: This factor plays a major role in determining the operating costs of the business. Accordingly, the lower the original input price of the product, the higher the net profit. Therefore, in searching for sources of onions, businesses should diversify to find the most preferential source but still ensure quality.
- Corporate income tax: This is a fixed factor that has been clearly specified in the law and cannot be increased or decreased according to the individual wishes of the enterprise. In order to be profitable, businesses must find ways to raise the selling price of products, reduce the value of materials, and save costs in the most reasonable way.
Reference: What is compound interest?
What factors affect net income?
From the calculation formula and what is the concept of net income, we can see that the factors that affect this index include:
- Operating expenses of the business: The higher the operating costs of the business, the lower the Net Income index, and vice versa, the lower the operating costs of the business, the higher the Net Income index.
- Original price of the product: When the original input price of the product is higher, the index will decrease and vice versa.
- Corporate income tax: The amount of tax that each business must pay is clearly specified in the law. Therefore, businesses cannot increase or decrease this factor at will. To be profitable, businesses only have to increase the selling price of products or reduce the value of materials, saving costs in the most optimal way.
Compare net income and net income
Table comparing net income and net income:
|Comparative Criteria||Net income||Net income|
|Define||Net income or net profit is the profit earned by businesses or companies after deducting cost of goods sold, sales, administrative expenses, operating expenses, depreciation, interest, taxes and other costs.||Net income or net sales or net sales is the revenue after deducting all depreciation for: Import and export taxes, sales discounts, returned loss orders and excess profit. This amount is called net sales.|
|Nature||It is profit after tax (profit earned after deducting corporate income tax)||It is profit before tax (profit before deducting corporate income tax)|
|Calculation formula||Net income = Total Revenue – Total expenses (Cost of goods sold, General and administrative expenses, Marketing and selling expenses, Extraordinary expenses, Corporate taxes payable)||Net income = overall sales – sales commissions – sales returns – sales discounts – indirect taxes|
Find out what is profit margin?
Some related questions about Net Income
What is net profit margin?
Net profit margin is also known as profit-to-sales ratio. This is an index used to evaluate and monitor the profitability of a joint stock company. The profit margin reflects the relationship between the net return to shareholders and the company’s revenue.
Net interest rate is calculated according to the following formula:
Net profit margin = 100 x Net profit (or profit after tax)/Sales
What is an individual’s net income?
This is an individual’s income after taxes and other deductions have been paid.
What is net income from abroad?
This is the income of a national of that country when investing abroad minus the income of a foreign national investing in that country.
What is net income on tax returns?
In the US, individual taxpayers pay under Model 1040 give US Internal Revenue Service (IRS) to report annual income. This form does not have net income available, but instead contains lines for gross income, adjusted gross income, and taxable income.
After recording gross income, taxpayers deduct certain sources of income such as social security benefits and qualified deductions such as student loan interest. This difference is adjusted gross income (AGI). Taxpayers then continue to deduct the standard or itemized deductions from their AGI to determine their taxable income. As stated above, the difference between taxable income and income tax is net income individual, but this number is not noted on single tax forms.
What is net income on paychecks?
Most employee paycheck stubs have a line for net income. Net income is an employee’s total income minus taxes and retirement account contributions.
Thus, just deciphering the topic around the term “What is net income?“. Hope you will get the most accurate view of this indicator to be able to make the right decision. Besides, banktop.vn is also a support website borrow money online fastest now!
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