Updated on July 18, 2023
Net income, also known as net profit or net earnings, refers to the amount of income a person or business retains after deducting all allowable expenses, taxes, and deductions from their gross income. It represents the final amount of money that remains after all expenses and obligations have been subtracted, reflecting the true profitability or disposable income. Net income is an important financial metric used to assess the financial health and profitability of individuals, businesses, and organizations.
Points to consider while understanding net income
Calculation – Net income is calculated by deducting all allowable expenses, such as business expenses, depreciation, interest, and taxes, from gross income.
Taxable income – Net income is the amount on which taxes are levied, as it represents the income that is subject to taxation after deductions and exemptions.
Financial assessment – Net income is a key indicator of an individual’s or business’s financial health and profitability, providing insights into their ability to cover expenses, repay debts, and generate savings.
Reporting – Net income is reported on income tax returns and financial statements, allowing individuals and businesses to track and assess their financial performance over time.
Evaluation of financial goals – Net income helps individuals and businesses evaluate their progress towards financial goals, such as saving for retirement, making investments, or expanding their business operations.
Planning and budgeting – Understanding net income is crucial for effective financial planning and budgeting, as it provides an accurate picture of available funds for personal or business expenses.
Impact on creditworthiness – Net income plays a role in determining an individual’s creditworthiness, as lenders often consider it when assessing loan eligibility and repayment capacity.
Comparison and benchmarking – Net income can be compared with industry averages or previous financial periods to gauge performance, identify areas for improvement, and make informed financial decisions.