What is Net Income?

What the sources say
How net income is calculated

Net income is what a business has left from its revenue for a period after every expense has been subtracted: the cost of what it sold, operating expenses such as rent and salaries, interest, and income tax. It's the last line of the income statement, which is why it's called the bottom line. If expenses are larger than revenue, the result is a net loss instead.

Billed publishes this page. The definitions below come from the open textbooks Principles of Accounting, Volume 1: Financial Accounting and Principles of Finance (OpenStax), and from the US Securities and Exchange Commission's Beginners' Guide to Financial Statements (last reviewed or updated February 6, 2017). All were opened on October 29, 2026. This is general information, not accounting or tax advice; ask your accountant where judgment is needed.

What the sources say

The SEC's guide describes the last step of the income statement this way: "Finally, income tax is deducted and you arrive at the bottom line: net profit or net losses." It adds: "Net profit is also called net income or net earnings."

OpenStax Principles of Finance (section 5.1, the income statement) says: "Net income (or loss) reflects the net impact of all financial transactions for the firm, including those that are caused by events outside the normal course of business."

OpenStax Principles of Accounting, Volume 1 (section 2.3) notes: "It is important to note that an organization will have either net income or net loss for the period, but not both."

How net income is calculated

OpenStax section 6.6 describes the multi-step income statement (section 6.6). It "deducts cost of goods sold from net sales to obtain a gross margin." Then: "Deducting the operating expenses from gross margin produces income from operations." Finally: "Other revenue and expenses added to (or deducted from) income from operations produces net income (loss)."

As steps:

Revenue minus cost of goods sold (or the direct cost of services) gives gross profit.
Gross profit minus operating expenses gives operating income, also called income from operations. Operating income is the basis of EBIT and of operating margin.
Operating income plus other revenue, minus other expenses such as interest, gives income before taxes.
Income before taxes minus income tax expense gives net income.

Whether income tax appears as an expense on the business's own income statement depends on how the business is organized, so ask your accountant how it applies to yours. The full statement is covered in what is a profit and loss statement.

Worked example: a year at a design studio

The business and figures here are a sample, invented for this example. The studio is organized as a corporation that records its own income tax expense.

Revenue: $250,000.
Cost of services (contractors who work on client projects): $90,000.
Gross profit: $250,000 − $90,000 = $160,000.
Operating expenses: salaries $80,000 + rent $18,000 + software $6,000 + other $8,000 = $112,000.
Operating income: $160,000 − $112,000 = $48,000.
Interest expense on a loan: $3,000.
Income before taxes: $48,000 − $3,000 = $45,000.
Income tax expense: $9,000.
Net income: $45,000 − $9,000 = $36,000.

As a share of revenue, that's $36,000 ÷ $250,000 = 0.144, or 14.4%. OpenStax Principles of Finance (section 6.6) calls this ratio profit margin and gives the formula as net income divided by net sales.

Suppose $20,000 of the year's invoices are still unpaid at year end. That $20,000 is in revenue and in net income, but it hasn't reached the bank yet.

Net income is not the same as cash

The SEC's guide says cash flows "are related, but not equivalent, to net income shown on the income statement." Some of the reasons:

Unpaid invoices. Under accrual accounting, revenue counts when it's earned, as in the example above, even if the client hasn't paid.
Equipment. A large purchase leaves the bank at once, but depreciation spreads its cost across the years you use it.
Loan repayments. The principal you repay reduces cash, but only the interest is an expense.

Read net income alongside the cash flow statement, which shows where cash actually came from and went.

Common mistakes

Treating net income as money you can spend, before setting aside what you owe in tax.
Comparing a month with a one-time gain or expense, such as selling equipment or a legal settlement, against a normal month without noting the difference.
Mixing owner draws into expenses, or leaving business expenses out because they were paid personally. Ask your accountant how to record both.
Reading a cash basis report as if it showed accrual net income, or the other way round.

Where Billed fits

Billed's financial reporting page lists "Income vs Expense Reports" among the built-in reports in Billed, and says "Each report can be filtered by date range and exported." Its features page describes the report as a way to "see how profitable your business is." The financial reporting page also says "All reports in Billed can be exported for use with your accountant, bookkeeper, or tax software." Billed's expense and receipt tracking page says an expense in Billed records "who you paid, when, how much and which category it belongs to, with the receipt attached to the same entry." For revenue, the invoices you send with Billed's invoice software are the record of what you've billed. Ask your accountant how these reports line up with the net income on your income statement.

When this guide isn't for you

This page covers net income for a small business. If you report under US GAAP or IFRS to investors or lenders, consolidate several entities, or need to present adjusted figures, work with an accountant on the specific rules.

Frequently Asked Questions

What is net income?

It's revenue minus all expenses for a period, including the cost of what you sold, operating expenses, interest and income tax. The SEC's guide calls it the bottom line and says "Net profit is also called net income or net earnings."

How do you calculate net income?

Start with revenue and subtract the cost of goods sold to get gross profit. Subtract operating expenses to get operating income. Add other revenue and subtract other expenses such as interest to get income before taxes, then subtract income tax expense.

What is the difference between net income and operating income?

Operating income is gross profit minus operating expenses, before interest and income tax. Net income comes after interest, other revenue and expenses, and income tax. In the sample design studio, operating income was $48,000 and net income was $36,000.

Can net income be negative?

Yes. When expenses are larger than revenue, the result is a net loss. OpenStax notes that "an organization will have either net income or net loss for the period, but not both."

Why is net income different from the cash in my bank account?

Net income can include revenue you haven't collected yet, and it spreads some costs, such as equipment, over several years. The SEC's guide says cash flows are related to net income but not equivalent to it, so read the cash flow statement alongside the income statement.

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What Is Net Income? A Simple Guide for Small Business