Net Income/Profit
What is Net Income?
Net income is what is left after all expenses have been deducted from sales.
How it Works
A business will earn income during an accounting period.
It will also incur expenses.
The difference will show net income.
Net income, also known as net profit, is shown on the period-end income statement.
Gross Income v’s Net Income
A trading company will sell goods to customers.
In order to make these sales, the company will first need to buy the goods.
The amount paid for them is known as the cost of goods sold (C.O.G.S)
The difference between sales and C.O.G.S is known as the gross profit or gross income.
From gross profit, the business needs to pay for operating expenses.
Operating expenses include those that directly relate to operating the business such as selling expenses, rent, insurance, and administration costs.
After this, the business pays for non-operating expenses.
This includes those expenses that are unrelated to operating the business, such as interest expense.
Finally, the bottom line will show net income or net profit.
© R.J. Hickman 2020