Money Matters

How to calculate Net Income (NI): formula and guide

Learn how to calculate Net Income (NI), including the formula to use, and discover how it can help you measure profitability, track financial performance, and make smarter business decisions.

Published July 30, 202613 min read Share

This article was originally published on February 5, 2025 but has been refreshed and re-published with new content on July 30, 2026.

Revenue tells you how much money your business brings in. Net Income (NI) tells you how much you keep.

Net income is the profit remaining after you subtract all business expenses from total revenue, including payroll, rent, inventory, interest, and taxes. It is one of the simplest ways to see whether your business is truly profitable.

In this guide, you’ll learn what net income is, what the net income formula is, how to calculate net income, where to find it on your financial statements, and how it compares with other key profitability metrics.

Key takeaways

• Net income is the profit remaining after all business expenses have been deducted from total revenue.
• The basic net income formula is: Total revenue – Total expenses = Net income.
• Net income helps you measure profitability, monitor financial performance, and make informed business decisions.
• Net income is typically reported at the bottom of the income statement, but it can also be estimated using balance sheet information when an income statement isn’t available.

Here’s what we’ll cover

What is net income (NI)?

Net income is the profit left after your business subtracts all expenses from total revenue. These expenses include the Cost of Goods Sold (COGS), operating expenses, interest, and taxes.

It’s also called net profit, net earnings, or simply, the “bottom line.”

If your revenue is higher than your total expenses, your business has a positive net income.

If your expenses are higher than your revenue, your business has a net loss.

Net income is one of the clearest indicators of profitability and financial performance. Knowing how to calculate it can help you track business performance, make informed decisions, and plan for future growth.

How to calculate net income

To calculate net income, subtract your total business expenses from your total revenue for a specific reporting period.

Before you start, make sure your revenue and expense figures are complete and accurate. To calculate net income, simply subtract total expenses from total revenue for the reporting period using the basic net income formula (also called the NI formula):

Total revenue – Total expenses = Net income

You may also see the formula shown in more detail as:

Total revenue – Cost of goods sold – Operating expenses – Interest – Taxes = Net income

Both versions of the accounting formula for net income can produce the same result, as long as “total expenses” includes all costs for the period, such as COGS, operating expenses, interest, taxes, and any other business expenses.

When using the net income formula (or NI formula), it’s important to understand what each component means:

• Total revenue: the total income your business earns from selling products or services during a specific period.
• COGS: the direct costs of producing or purchasing the goods or services you sell, such as raw materials, manufacturing costs, or inventory.
• Total expenses: the full cost of running your business during the reporting period, including COGS, operating expenses, interest, taxes, and other business expenses.
• Gross income: also called gross profit, this is the amount remaining after subtracting COGS from total revenue, before deducting operating expenses, interest, and taxes.

Net income formula example

To see how the net income formula works in practice, imagine you run a retail store that generates $500,000 in total revenue for the year.

Your business has the following expenses:

Item	Amount
COGS	$200,000
Operating expenses	$160,000
Interest	$9,000
Taxes	$11,000

Using the detailed formula:

Total revenue – Cost of goods sold – Operating expenses  – Interest – Taxes = Net income

The calculation would look like this:

$500,000 – $200,000 – $160,000 – $9,000 – $11,000 = $120,000

You can also use the simplified net income formula:

Total revenue – Total expenses = Net income

In this example, total expenses equal $380,000, so the calculation becomes:

$500,000 – $380,000 = $120,000

In both cases, the result is the same. The business keeps $120,000 in net income for the year.

Where is net income shown on an income statement?

Net income appears at the bottom of the income statement after all revenue, costs, and expenses have been accounted for. That’s why it’s often referred to as the “bottom line.”

An income statement starts with total revenue, then subtracts the COGS, operating expenses, interest, taxes, and any other applicable expenses.

The final figure shows how much profit the business made during the reporting period, after all costs were deducted. In simple terms, it shows what was left after the business earned revenue and paid its costs.

How to calculate net income from the balance sheet

Although net income is typically reported on the income statement, you can also estimate it using retained earnings and dividends.

The balance sheet shows what your business owns (assets), what it owes (liabilities), and what remains for the owners (equity) at a specific point in time. It doesn’t report net income directly. However, retained earnings can help you work backwards to estimate net income for a reporting period.

Here’s how:

1. Find your retained earnings: retained earnings are usually shown in the equity section of the balance sheet. They represent the profits your business has kept after dividends have been paid.
2. Calculate the change in retained earnings: compare retained earnings at the beginning and end of the reporting period.
3. Add back any dividends paid: dividends reduce retained earnings, so adding them back helps you estimate the profit earned during the period.

The formula is:

Ending retained earnings – Beginning retained earnings + Dividends paid = Net income

For example, suppose your business started the year with $300,000 in retained earnings and ended the year with $450,000. During the same period, it paid $50,000 in dividends.

$450,000 – $300,000 + $50,000 = $200,000

Based on these figures, estimated net income for the year would be $200,000.

This method can be useful when an income statement is not available, but the income statement is still the best source for calculating net income. For the most accurate result, check whether retained earnings were affected by any adjustments beyond net income and dividends.

Accounting software can help keep income statements, retained earnings, dividends, and other adjustments accurate and up to date, so you can calculate net income with more confidence.

What’s the difference between net income and gross income?

Net income and gross income are both measures of profitability, but they show profit at different stages.

Gross income shows how much profit is left after subtracting the cost of goods sold from total revenue. Net income shows how much profit is left after all business expenses have been deducted.

Gross income	Net income
Calculated by subtracting COGS from total revenue.	Calculated by subtracting all business expenses from total revenue.
Shows how profitable your core products or services are before operating expenses, interest, and taxes.	Shows your overall profitability after operating expenses, interest, taxes, and other business costs have been deducted.
Also known as gross profit.	Also known as net profit, net earnings, or the bottom line.

The formula for gross income is:

Total revenue – Cost of goods sold = Gross income

For example, if your business generates $500,000 in revenue and has $200,000 in COGS, your gross income would be $300,000.

Gross income shows how much profit your products or services generate before day-to-day business costs. Net income shows what is left once every cost has been included.

What’s the difference between net income and operating income?

Operating income shows how much profit your business makes from its core operations before interest and taxes. Net income shows your final profit after all expenses have been deducted.

Operating income	Net income
Measures the profitability of your core business operations.	Measures your overall profitability after all expenses have been deducted.
Does not factor in interest and taxes.	Includes interest, taxes, and other non-operating gains or losses.
Helps evaluate how efficiently your day-to-day operations perform.	Helps assess your business’s overall financial performance.

Operating income is calculated by subtracting operating expenses from gross income:

Gross income – Operating expenses = Operating income

For example, if your business generates $500,000 in revenue, has $200,000 in COGS, and $150,000 in operating expenses, your operating income would be $150,000.

Operating income is useful because it shows how profitable your core business activities are before financing costs and taxes. Net income goes further by including the final profit available after those are included.

What’s the difference between net income, EBIT, and EBITDA?

Net income, Earnings Before Interests and Taxes (EBIT), and Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) are profitability metrics. Each one shows profit at a different stage.

EBIT	EBITDA	Net income
Measures earnings before interest and taxes.	Measures earnings before interest, taxes, depreciation, and amortization.	Measures overall profitability after all business expenses have been deducted.
Helps compare businesses before the impact of financing structures and tax rates.	Helps compare operating performance before depreciation, amortization, and other non-cash expenses.	Shows the business’s final profit after operating and non-operating expenses.

EBIT can be calculated using this formula:

Net income + Interest + Taxes = EBIT

For example, if your business has $120,000 in net income, $10,000 in interest expenses, and $20,000 in taxes, your EBIT would be $150,000.

EBITDA builds on EBIT by adding back depreciation and amortization:

EBIT + Depreciation + Amortization = EBITDA

If your business has $150,000 in EBIT and $30,000 in depreciation and amortization, your EBITDA would be $180,000.

EBIT and EBITDA can help compare performance before certain costs are included. Net income gives the final profit figure because it includes operating expenses, non-operating expenses, interest, taxes, and other gains or losses.

Why is net income important?

Net income matters because it shows what your business keeps after costs. Revenue can show growth, but net income shows whether that growth is turning into profit.

Here’s why it matters:

Show what the business really keeps

Unlike gross income or operating income, net income includes operating expenses, interest, taxes and other costs, giving you the clearest picture of your business’s overall profitability.

Helps you make better decisions

Tracking net income can help you decide whether to reinvest in the business, expand operations, reduce costs, or protect cash flow. It can also give investors and lenders more confidence in your company’s financial performance.

Show performance over time

Comparing net income over time helps you identify trends, measure the impact of business decisions, and see whether profitability is improving or declining.

Supports business valuation

Net income is commonly used in business valuations and financial ratios, such as the Price-to-Earnings (P/E) ratio for public companies. Strong, consistent profitability can help improve your business’s valuation and financing opportunities.

Supports financial reporting

Net income is reported on the income statement and plays an important role in financial reporting, regulatory compliance, and performance analysis.

Ultimately, net income is one of the clearest measures of your business’s overall financial performance. Monitoring net income regularly helps you understand how your business is performing and where action may be needed.

What are the limitations of net income?

Net income is useful, but it is not the whole story. A business can report a profit and still face cash pressure, unusual costs, or accounting adjustments that change how the number should be interpreted.

Net income doesn’t equal cash flow

Net income shows profitability, but it does not always reflect the actual cash moving in and out of your business.

That’s because net income usually follows accrual accounting, where revenue and expenses are recorded when they are earned or incurred, not necessarily when cash is received or paid.

For example, if you make a sale on credit, the revenue may appear in net income before the customer has paid. Net income can also include non-cash expenses such as depreciation and amortization, which reduce profit without reducing cash.

As a result, a business can look profitable on paper while still struggling to cover short-term bills.

Accounting methods can affect net income

Net income is influenced by the accounting methods and assumptions your business uses.

For example, the way you record depreciation, value inventory, or recognize revenue can change your reported net income. Inventory valuation methods, such as the FIFO method, can affect COGS, while revenue recognition policies determine when revenue is recorded.

Revenue recognition software can help businesses apply these policies more consistently, especially when contracts, billing schedules, or performance obligations are complex.

This does not mean the figure is wrong, but it does mean net income should be reviewed in context.

One-time events can distort the picture

Net income can also be affected by one-off events that don’t represent your business’s normal operations.

For example, selling an asset may temporarily increase net income, while a restructuring charge may reduce net income. These events can make profitability look unusually high or low for a specific period.

To understand ongoing performance, it can help to review net income alongside adjusted profit figures that separate recurring activity from one-time events.

Net income may not reflect every future cost

Net income only includes costs that have been recorded for the reporting period. Some potential costs, such as unresolved legal claims or future obligations, may not be included until they become more certain.

This means a business may look more profitable than it would if those future costs were already known and recorded.

Net income does not show operational efficiency on its own

Net income tells you the final profit after all expenses, but it does not explain how efficiently your core business is operating.

To evaluate operational performance, review net income alongside metrics such as gross income, operating income, EBITDA, and cash flow.

Take control of your finances with accurate net income tracking

Calculating net income helps you understand whether your business is making money, managing costs, and staying on track with its financial goals.

But tracking net income accurately across every reporting period can take time, especially when revenue, expenses, tax, and adjustments are spread across different systems.

Sage accounting software can help by automating calculations, tracking income and expenses, and generating financial statements, so you can maintain accurate financial records with less manual effort.

With clearer financial data, you can make better decisions, monitor performance with confidence, and spend more time focusing on growth.

Frequently asked questions about net income formula