What is net income?
Net income is the entire amount an individual generates minus taxes and other deductions. For businesses and corporations, it is all the income generated after the direct costs, taxes, and any other deductions. In short, net income is the difference between gross income and tax plus other deductions.
Defining gross income to understand a net income further
Before starting to explain further on net income, let us talk about gross income first. For individuals, a gross income or gross profit talks about the total sum of money an individual earns before taxes and deductions. These earnings may come from full-time jobs, wages, gigs, stock dividends, savings account interest, real estate rental income, and many more.
For businesses, we can identify the gross income by subtracting the costs of producing goods or services from the total revenue. In short, the equation is sales minus direct expenses or costs. We do not include taxes in this equation because it is not a direct cost and not in any way related to producing the product or service. The income may come from sales, intellectual properties, capital gains from investments, etc.
Understanding net incomes of individuals
Now that we know what gross income means, we can now explain net income better. Net income is the sum of an individual’s total earnings (gross income) for a time frame minus taxes and other deductions. When we say taxes, we talk about health care insurance payments, health card deduction, social security system taxes, income taxes, retirement account contributions, and other obligations like loans.
When calculating an individual’s income, we can use this formula:
Total earnings or gross income — taxes and deduction = net income
Understanding net incomes of businesses
When we talk about a business or a corporation’s net income, it may have the same concept when we deduct the taxes and deductions, but it is different because we also subtract the costs of producing goods and services. In short, a business’s net income is the entire revenue minus the direct fees, taxes, and any other deductions. Companies need to know this when they prepare their financial statements. Also, the net income helps determine the earnings per share.
When calculating a business’s income, we can use this formula:
Total revenue or gross income — costs, taxes, and deductions = net income
Additional information
Other terms for net income are net profit, net earnings, and bottom line. We can refer to net income as the bottom line because it is the final item in a business’s financial statement.
Aside from the net income’s use in preparing the financial statement, investors may use it to know the financial health of investments. Banks may also use this as a basis when they determine whether they should give a person a loan or not. If the net income is a deficit or even just low, it may cause a significant impact and decrease in the company shares.
Citing an example with net income
Let’s say that Jake is an IT manager. He receives $1,000 every two weeks that makes his wage $2,000 per month and $24,000 annually. His deductions come every month. These deductions include his social security deductions at $100 monthly, contributions for his retirement account at $100 monthly, health card/Medicare at $50 monthly, and $100 monthly government taxes. If we add all his monthly deductions, we will come up with $4,200 annual deductions. Now, Jake’s net income will amount to $19,800 ($24,000 gross income — $4,200 deduction).
