• The formula
  • Operating vs. non-operating items

Operating income is what a business earns from its day-to-day operations: gross margin minus operating expenses. Revenue and expenses that don't come from daily operations, such as interest or income from subletting space, are left out and shown below it on the income statement. OpenStax calls this line income from operations and defines it as "gross margin less deductions for operating expenses".

Billed publishes this page. Definitions are quoted from the open textbooks OpenStax Principles of Accounting, Volume 1: Financial Accounting and OpenStax Principles of Finance 2e, opened on October 30, 2026.

The formula

Operating income = gross margin − operating expenses

Gross margin is what's left of net sales after the cost of goods sold; see what is gross profit. OpenStax defines operating expenses as "daily operational costs not associated with the direct selling of products or services".

The same line goes by more than one name: OpenStax's finance textbook says income from operations is "also commonly called operating income."

Operating vs. non-operating items

The skill in calculating operating income is sorting each item into the right group:

  • Operating: sales, the cost of goods sold, and operating expenses such as rent, salaries and software.
  • Non-operating: what OpenStax calls other revenue and expenses, "revenues and expenses not associated with daily operations, or the sale of goods and services". Examples include interest paid on a loan and rent received from subletting part of an office.

Non-operating items come after operating income on the income statement. They change net income, but not operating income.

Sample: sorting one year's income statement

The figures here are a sample, invented for this example. A design studio's year:

  1. Net sales: $150,000
  2. Cost of goods sold: $60,000
  3. Gross margin: $150,000 − $60,000 = $90,000
  4. Operating expenses: rent $24,000 + salaries $36,000 + software $6,000 = $66,000
  5. Operating income: $90,000 − $66,000 = $24,000
  6. Other revenue and expenses: sublet income $3,000, interest expense $1,500, so +$3,000 − $1,500 = +$1,500
  7. Income before income tax: $24,000 + $1,500 = $25,500

The sublet income and the interest are real money, but they don't come from the studio's design work, so they're kept out of operating income.

Related measures

Where Billed fits

Billed's financial reporting page says: "See how profitable your business is with Income vs Expense report." Its expense tracking page says: "Give every expense a category so your spending is already sorted when you file taxes or hand the year to your accountant." Ask your accountant which of your items count as operating.

When this guide isn't for you

If you're planning cash for loan payments or setting aside money for provisions, see liquidity management tips and accounting provisions.

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Frequently Asked Questions

What is operating income?

The income from a business's daily operations. OpenStax defines income from operations as "gross margin less deductions for operating expenses".

How do you calculate operating income?

Subtract operating expenses from gross margin. In this page's sample, $90,000 − $66,000 = $24,000.

Is interest included in operating income?

No. OpenStax's finance textbook says: "The most common items deducted from operating income to arrive at net income include interest expense, gains/losses, and income tax expense."

What is the difference between operating income and net income?

Operating income stops after operating expenses. Net income also includes non-operating items and income tax.

Is operating income the same as income from operations?

Yes. OpenStax's finance textbook says the firm's income from operations is "also commonly called operating income."

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