Knowing the net income data is really important because it gives an accurate measure of the money you will have available. It is a calculation that can be applied to both individuals and companies, although companies usually have these calculations automated.
Among all the definitions of practical economics that interest us, users, it is necessary to know what it is, how it works and how net income is calculated.
What is net income?
Net income is the amount of money we earn after taxes, costs, and other expenses have been deducted.
For example, net income in business refers to the money left over after all expenses have been taken care of. These expenses include salaries, the cost of raw materials, taxes, rents or depreciation, etc.
In other words, this would be the money left over after all expenses have been deducted. In a company, this would usually be called profit. It would be the money we have available to cover our costs in household finances.
It is important to know that the net income has to be significantly higher than the expenses for good financial health. An economy in which expenditure exceeds net income is in debt: this is unsustainable in the long term for a person or company.
How is net income calculated?
The basic net income calculation is really simple: we take the total amount of money that has been earned and then deduct taxes, interest, and associated payments. This calculation is not always the same for everyone. It will depend on how taxes or expenses are applied in some cases.
For example, for an individual, net income is the money you receive directly from your work before deductions are made from your salary. But if you have other secondary income, the total net income is higher (after deducting expenses from each income).
In the case of companies, as we have seen, the issue is more complicated. Companies’ net income has more to do with the final result in the profit and loss account. That is, when, over a while, all expenses have been deducted from income, and the money left in the balance can be considered profit.
However, also within the company, this is variable. Note that many companies may automatically consider an amount of money earmarked for things like reinvestment. That may or may not be regarded as an expense. It will depend on the individual company.
Another important difference in calculating net income between a company and an individual is that companies usually have automated systems for this type of task.
Why do these revenue calculations matter so much?
To calculate what is available to you as net income is crucial. It is also essential for a company. It lets you know how much money you can spend on day-to-day expenses.
For example, let’s imagine a person who has a gross income of $5000, but, with all the deductions, his real disposable income is reduced to $3500. Obviously, the calculation of what you can spend monthly on your living expenses, etc., cannot be done on the gross amount; you must do it on the net amount.
In the company’s case, it is the same, although the perception may be different since, as we have seen, not all companies allocate profit money in the same way. For example, those companies that set aside money for reinvestment, dividend distributions, etc.
In short, the calculation of net income is one of those financial operations that are not complex but that you should always consider to know the state of health of your finances.
For years I have studied American finance regulations. All the information in this blog is sourced from official or contrasted sources from reliable sites.
Salesforce Certified SALES & SERVICE Cloud Consultant in February 2020, Salesforce Certified Administrator (ADM-201), and Master degree in “Business Analytics & Big Data Strategy” with more than 13 years of experience in IT consulting.