To calculate net income, you subtract all expenses, interest, and taxes from total revenue. The general formula is: Net Income = Total Revenue – Cost of Goods Sold (COGS) – Operating Expenses – Interest – Taxes Here is a step-by- step breakdown:
- Start with Total Revenue (all income earned).
- Subtract Cost of Goods Sold (COGS) , which are direct costs related to producing goods or services.
- The result is Gross Income.
- Subtract Operating Expenses such as rent, utilities, payroll, advertising, and other overhead costs.
- Subtract Interest Expense on debts or loans.
- Subtract Taxes owed based on taxable income.
The remaining amount is the Net Income , which represents the company’s profit after all costs and expenses have been deducted
Example:
If a business has:
- Total Revenue = $500,000
- COGS = $200,000
- Operating Expenses = $160,000
- Interest = $9,000
- Taxes = $11,000
Then:
- Gross Income = $500,000 – $200,000 = $300,000
- Total Expenses = $160,000 + $9,000 + $11,000 = $180,000
- Net Income = $300,000 – $180,000 = $120,000
Alternatively, subtracting all expenses directly from total revenue:
- Net Income = $500,000 – ($200,000 + $160,000 + $9,000 + $11,000) = $120,000
For individuals, net income (take-home pay) is calculated by subtracting taxes, retirement contributions, and other deductions from gross salary
. In summary, net income is the "bottom line" profit after all costs, expenses, interest, and taxes are deducted from total revenues.
