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Overview of Net Income (NI)
Definition of
Net Income (NI)
What is Net Income (NI)? Net Income (NI), often referred to as net profit, net earnings, or the "bottom line," is the amount of profit a business has left over after all operating expenses, interest expense, taxes, and other costs have been deducted from total revenue. It is a key indicator of a company's overall profitability during a specific accounting period and is prominently displayed on the Income Statement (or Profit & Loss Statement).
Activities Related to
Net Income (NI)
Here is a list of Net Income related activities:Â Calculating total revenues from all sources, Determining Cost of Goods Sold (COGS) to find Gross Profit, Subtracting all operating expenses to find Operating Profit, Deducting interest expenses and income taxes, Reporting net income on the Income Statement, Analyzing profitability trends and ratios (like Net Profit Margin), and Using net income figures for financial planning and investment decisions. Accurate bookkeeping is essential for these calculations.
The Importance of
Net Income (NI)
Net Income is critically important as it reflects the overall profitability of a business after all costs and expenses have been accounted for. It shows how much money the company has actually earned and can either reinvest into the business (as retained earnings) or distribute to owners/shareholders as dividends. Investors and lenders closely examine net income to assess financial health, performance, and growth potential. For small business owners, tracking net income helps in understanding the true success of their operations and in making strategic decisions for the future.
Key Aspects of
Net Income (NI)
"Bottom Line" Profitability
Represents the final profit figure after all revenues and all expenses have been considered.
Impact on Equity
Positive net income increases owner's equity (typically through Retained Earnings), while a net loss decreases it.
Performance Indicator
A key measure of a company's financial success and operational efficiency over a period.
Basis for Ratios
Used in calculating various important profitability ratios, such as the Net Profit Margin and Earnings Per Share (EPS) for corporations.
Concepts Related to
Net Income (NI)
Net Income (NI) is the final figure on an Income Statement (or P&L Statement). It starts with total Revenue, from which Cost of Goods Sold (COGS) is subtracted to get Gross Profit. Then, Operating Expenses are deducted to arrive at Operating Profit (or operating income). Finally, non-operating items like interest expense and taxes are subtracted to yield Net Income. It directly impacts Retained Earnings on the Balance Sheet.
Net Income (NI)
in Action:
The Adventures of Coco and Cami
After a busy month, Coco and Cami look at all the money they made from sales and subtract every single cost – ingredients, rent, utilities, loan interest, and even an estimate for taxes.
Professor A explains that the amount left over is their Net Income, or "bottom line" profit, showing them the true financial success of their shops for the period.