Net Income Formula of Your Company or Business

Since the origins of man, he has always had needs due to his nature: food, clothing, shelter, shelter, and even live in the community. These needs have led him to create individual and collective mechanisms to be met, which led him to invent, discover ways and methods that help him meet his own needs, even those of the society in which he found himself.

This is how he discovers fire, begins to hunt animals, fish, and even manages to produce his food through the creation of agricultural systems, such as planting, among others. From that moment on, his status was about what he owned thanks to hunting, fishing, fruit gathering, and even planting—always using nature as the main source of his possessions.

With time, the way of meeting these needs changed, emerging the economy as the science of obtaining and managing resources and, in principle, using the technique of barter and later using financial systems through the creation of currency as an essential element for the acquisition of goods and services.

Today, the reality is different; the economic needs of a human being are not the same; everything depends on the times, the Region, the culture of the country, and even the family influence in which the person is from.

However, each human being must do a productive activity, call it a job or business. This allows economic stability and the possibility of acquiring goods and services, without any problem, since they have the possible income to pay and benefit.

Currently, everyone must know how to manage the income received by their employers; people can do it through accounting as a financial management system.

Income: Net income

The proper use of accounting will allow control and registration of the income and expenses of a person or company. This is to maintain order on the economic movements made during a certain period: daily, weekly, monthly, or annual.

Experts define income as the number of financial resources received by natural or legal persons. This is for the provision of a service, or the performance of an economic activity, which translates into an economic benefit received to increase the assets of a company or a person, or failing that, reduces the debt or loss that they may possess.

In other words, income is the total sales of products that a company receives. On the other hand, for a natural person, it is the economic resource that he receive after doing a job.

Now, concerning the Net Income, it can be said that it is the money that remains from the income. After the company made all the deductions, concerning payments and pending debts.

A company’s net income is the total amount of money you have left after deducting all your expenses, including taxes, from your income.

Currently, there are two types of Net Income:

Real Net real income

It is the total income deducting the inflation rate existing in the country.

Nominal Net nominal income

It is the opposite, the total income without discounting the existing inflation rate.

This difference is important to know because if inflation grows a lot, real income will be less than nominal income.

Here you can see a damaging situation that the producing companies of a country could be experiencing at the time of inflation growth. The more inflation, the less income. Only by increasing production and costs could it be balanced.

Net Income Features

Although the terms of gross income, real income, or nominal income are different from each other, they tend to be confused.

Therefore, a gross income is that money received without deducting any expenses or taxes. Real income is the salary received from a worker, taking into account the effect of inflation. If a person’s salary increases 10% in a year and inflation is 6% in that year, real income will have increased by 4% in that year.

Consequently, nominal income is that which is received in its entirety, without subtracting expenses or that inflation has affected its value. A real income and a nominal income would be the same if inflation did not exist.

Therefore, net income is the total money received fewer expenses that decrease total income.

Thus, it is convenient to know that, unlike gross income, we must consider the following characteristics and deduct it from net income.

Tax:

Amount of money that must be paid to the Public Administration of a government

Commissions

It is the money that people use to pay an increase in salary, for good sales, this will depend on the seller.

Interest

It is the price paid for the use of money requested on credit

Credit

it is a contract where a person requests an amount of money from another person or an entity that provides it, with the final objective of returning it to them in the time stipulated by both.

Other types of associated expenses

Other deductions in expenses such as utility payments, rent payment, maintenance, or others; that will affect total income.

Determine your income

It is vitally important to know the sources of income that a natural or legal person accrue when it comes to knowing what your net income will be. Your net income, or annual gross income, represents total income before taxes or other deductions.

Some common sources of income include:

• Salaries, wages, and tips; is the money that people receive from your job or employment; to calculate your net income, be sure to deduct your respective expenses.
• Interest and dividends are the net interest income of the bank account, such as checking, savings, and deposit certificates. You can receive a dividend if you have shares in a company.
• Alquiler Rental income: is the total amount of money you receive from rentals after you have paid for the property.
• Social security: social and economic well-being that it receives to cover socially recognized needs such as health, old age, and disabilities.

Various Miscellaneous income: may include unemployment compensation, gambling winnings, donations received, or money withdrawn from a pension.

Net income formula

The net income formula is as follows:

Net income = gross income-Taxes-Commissions-Interest-Credits-Other expenses.

People can use the net income to pay the part of the profits that are periodically distributed among the shareholders or if it is not the part to be reinvested in the company.

The formula of net income conforms to it; net income equal gross income, fewer taxes, fewer commissions, less interest, fewer credits, and fewer other expenses associated with deductible expenses.

Here is an exercise to make your understanding more profitable.

Example n ° 1

Mr. Omar Montero creates a Travel agency and invests $ 2,000 to start his business activities. After the investment, the only income is the existing amount of $ 2,000; and since no deduction has been made from expenses or provider payments, the income remains the same.

However, in days, Mr. Montero considered the first operations of the company as:

1. Acquire furniture for $ 120, paid in cash.
2. Pay upfront $ 80 for the rental of the business premises
3. Acquire tools for $ 450 on credit
4. Sell ​​a ticket for $ 70.

We can describe the effect of these transactions below:

1. The money decreases to 1880, but the furniture increases in the same amount that the money decreases. The income is kept in balance. It is not altered since there has been a change of an asset for another asset with the same value.
2. An expense has occurred; the cash falls to 1800, as the rental cost of the premises is canceled, but they are still in the balance.
3. There is an obligation to pay $ 450 to purchase tools on credit, that is when determining the net income formula, this deduction must be taken into account, but the money is still in balance investment.
4. It shows an increase in the money of 70 dollars, originated by an income; even so, the income remains balanced.

Whatever the number of transactions carried out by the company, when making the corresponding records, great care must be taken to maintain the balance of income and deductions, to make it easier to determine the net income of the company.

How to determine net income in accounting?

Determine Income

Add all cash received and increases in accounts receivable. This is your company’s net income.

Sets the cost of income

adds the costs of raw materials used in production, the cost of direct labor (including staff wages and salaries), and any expenses associated with production. Once you have found this result, subtract it from the previously calculated income.

Calculate income, general and administrative expenses

These expenses such as rent, wages, salaries, advertising, and marketing, as well as any other expenses associated with the main operations of the company, subtract it from the gross income you previously had, to obtain the income before interest, taxes, commissions or amortizations or anything else.

Find the depreciation and amortization expenses

The depreciation expenses refer to the loss in the value of a tangible asset (like a machine), and the amortization expenses refer to the loss in the value of an intangible asset (like a patent).

Once you have calculated the depreciation and amortization expenses, subtract it from the previous result, and you will still get the gross income before interest, taxes, or commissions.

Calculate interest expenses

add any money you have earned in interest income. People can obtain that income by putting money in short-term investments. When you have calculated the interest expense, subtract it (or add it only if the interest income was higher than the interest expense).

Calculate tax expenses

these expenses are related to the income tax paid by the company during the corresponding period.

Subtract tax expenses from gross income

After subtracting tax expenses, you will have calculated net income.

What is the importance of net income?

Net income is a measure indicator, which quantifies the investments made by the company management. It is important to record details of all operations carried out, both income and expenses.

When this measure is informed to the owners of the company, they can know how much money they earn or lose with their investment.

From the accounting concept, the net income can be positive and negative. If it is the first case, it is because there are capital gains that can be reported. If the net income is negative, it could have a deductible loss of capital. When this happens, the company may have to realign its budget and implement spending cut measures.

One of the strategies to realign company income is perhaps borrowing money or injecting money as it is normally known. For them, the lending institutions will evaluate your gross and net income, before granting you a loan. So experts recommend that you try to keep a balance between income and expenses in your registry.

One of the benefits of calculating net income and the gross income is that it allows you to identify your biggest expenses, as well as your gains or losses. It is also allowing you to make improvements to the net income of your company.

Nevertheless, you can modify this net income depending on the factors that provide that change; among them, they can be considered.

• Possible changes in income movements, which can be affected by economic factors, inflation, or natural factors
• Variations in the price of raw materials, which affect production costs
• Human resources, labor, and costs

Final words

Finally, net income is a term that people must understand and explain correctly at the level of a company’s finances. It is important to know the differences in benefits, net profit, and net income; in this case, it refers to the total amount of income received or generated.

In conclusion, it is important to make periodic observations and know the existing competition in the market. Evaluate advertising campaigns, among other considerations, to gain control of the development of your company.