Net Income Definition | Formula | Example | Importance

net income definition

Net Income Definition and Example

Net Income Definition – “An organization’s profit after all expenses, including interest and taxes are subtracted from revenue”.

In simple words, net income is the difference between the revenues earned and expenses incurred. It shows how much the business has earned after providing for all the expenses. This is used to pay off the company’s debt, for investing in some project or distribute among the shareholders as dividend. It appears at the bottom of the Income statement. It is also known as Net Profit.

Formula

Net Income = Total Revenues – Total Expenses

In addition to this, one can also compute Net profit or income with Gross profit. For that you need to have the proper knowledge of the Income Statement.

Net Income Example

Let’s look at an example to understand net income definition more clearly. XYZ Pvt. Ltd. runs fast food chain in two cities, Bangalore and Chennai. The revenues from  here is Rs. 25,00,000, Salaries are Rs. 5,00,000, taxes are 3,00,000 and other utilities expenses are Rs. 1,00,000. Calculate the net income?

Net Income/ Profit = 25,00,000 – 9,00,000

= 16,00,000

Importance of Net Income – Why Net Income is Used?

From investors and shareholders perspective, net income is very important as it shows the organisation’s ability to manage its efficiently. Its the management of all the assets only which results in increasing the revenues of the company.

Investors want to know whether their investment will appreciate or not. Then only they will receive the dividend. At the same time if the company is not managing its assets properly, it results in decreasing the net income. Ultimately it leads to decrease in share of shareholder in the profit.

Similarly, if company is efficiently managing its operation, this means that it can take additional debts as well as pay off the existing one. So it is important that company efficiently manage its operation so that it not only satisfy its investors and creditors but is also able to pay off salaries and bonus to its employees.

Related Financial Terms of Net Income

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