Net income can be defined in various ways, depending on the context and who calculates it. Companies, individuals, households, governments, charitable organizations, and other organizations and entities need to calculate their net income.
In general, net income means total income minus all expenses.
Net Income for a Business
A company prepares an income statement that reports its gross revenues and all business-related expenses. If a company’s revenues exceed its expenses, it will have a positive net income (i.e., net profit). If a company spends money on capital expenditures, those amounts are generally not included as an expense in arriving at net income.
Example Calculation
Company A generates $500,000 in gross sales, and its expenses total $400,000, which include insurance, office supplies, payroll, marketing, taxes, and utilities. The company also spent $50,000 on a plot of undeveloped land.
The company’s net income is $100,000 ($500,000 minus $400,000 of expenses). The company does not deduct the $50,000 land purchase as an expense because it is an investment in a fixed asset.