How to calculate net income (with examples and formulas)

Net income is one of the most important numbers on your financial statements—and one of the easiest to get wrong if you’re not careful. 

Whether you're reviewing your income statement, preparing for tax season, or trying to understand profitability at a glance, knowing how to calculate net income is essential.

This guide breaks down the formula, walks through examples, and explains where to find net income in your accounting records. From solo founders to finance teams, you’ll come away with a clearer view of how your bottom line is really doing.

What is net income?

Net income is the amount your business earns after covering all expenses. It represents your “bottom line”—what’s left over after deducting costs like payroll, rent, supplies, interest, and taxes from your total revenue.

You’ll often hear net income referred to as:

• Net profit
• Net earnings
• Bottom line income

Unlike gross income—which only subtracts the cost of goods sold (COGS)—net income accounts for every major expense, including rent, payroll, interest, taxes, and depreciation. It tells you how much your business keeps after everything is paid.

This number isn’t just for accountants. Net income is one of the clearest indicators of financial health. It helps you make smarter decisions, track long-term sustainability, and gives investors or lenders a quick read on how your business is really doing.

The formula for calculating net income

The basic formula for net income is:

Net Income = Total Revenue – Total Expenses

But “total expenses” can cover a lot of ground. Here’s what’s typically included in a full net income calculation:

Main types of total expenses

• Operating expenses: Day-to-day costs of running the business—such as rent, payroll, utilities, software, and marketing.
• Cost of goods sold (COGS): Direct costs tied to producing your product or delivering your service (e.g., raw materials, labor).
• Interest payments: Any interest paid on loans, lines of credit, or other financing.
• Taxes: Income taxes owed to federal, state, or local authorities.
• Depreciation and amortization: Accounting methods used to spread out the cost of physical and intangible assets over time.
• Non-operating or one-time expenses: These might include legal settlements, asset write-downs, or restructuring costs.

Each of these categories reduces your net income. For most businesses, understanding how each line contributes to your bottom line is just as important as the final number itself.

Step-by-step: How to calculate net income

Let’s walk through a simple example using the full net income formula:

Net Income = Revenue – COGS – Operating Expenses – Interest – Taxes – Depreciation & Amortization

Let’s say your business earns $200,000 in total revenue this year. Plus, you have a range of business expenses here. Putting it all together:

The business earned $200,000 in revenue this year. From that amount, it spent $80,000 on the cost of goods sold, $50,000 on operating expenses, $5,000 on interest, $10,000 on taxes, and $5,000 on depreciation and amortization.

Net Income = $200,000 – $80,000 – $50,000 – $5,000 – $10,000 – $5,000
Net Income = $50,000

This final figure—$50,000—is your business’s net income. It tells you what’s left after all costs have been accounted for, and reflects your actual profit for the period.

Where to find net income on financial statements

Apart from calculating your net income, the most common place to find it is on your income statement—also known as a profit and loss (P&L) statement.

Net income appears at the very bottom, after all revenues and expenses have been accounted for. That’s why it's often called your “bottom line.”

For most businesses, this is reported monthly, quarterly, or annually. 

Here’s where to look:

• Standard income statements: If your business follows GAAP, net income will appear after all line items like COGS, operating expenses, interest, and taxes.
• Accounting software: Tools like QuickBooks, Xero, or NetSuite typically generate reports with net income shown clearly at the bottom of the P&L.
• Public companies: You can find net income in quarterly or annual filings like 10-Q or 10-K reports on the SEC’s EDGAR database.

If you're working with a small business or a less formal system, the structure may vary—but the final net income figure should always be clearly separated from gross profit and other intermediate totals.

Net income vs. other profit metrics

Net income gives you the full picture of profitability—but it’s not the only profit metric you’ll see on your financial statements. Here’s how it compares to other commonly used terms:

Here’s a summary of the profit metrics:

Each metric has its use:

• Use gross profit to understand margin on your product or service.
• Use operating income to assess how efficiently your core business is run.
• Use net income to evaluate overall profitability—including financing and tax impacts.

Need a quick refresher? The SEC’s investor basics has a helpful breakdown of how these show up on financial statements.

More FAQs about net income

1. Can net income be positive while cash flow is negative?

Yes. Net income includes non-cash expenses like depreciation and amortization, which reduce net income but don't affect cash flow. Conversely, significant cash outflows for capital expenditures or debt repayments can result in negative cash flow despite positive net income. 

2. Is net income the same as taxable income?

Not necessarily. Net income is an accounting measure that includes all revenues and expenses, while taxable income is calculated based on tax laws and may exclude certain expenses or include additional deductions. ​

3. How does net income relate to retained earnings?

Retained earnings represent the cumulative net income a company retains after distributing dividends. Each period's net income is added to retained earnings, which are reported under shareholders' equity on the balance sheet

4. How do I calculate net income as a percentage of sales?

Use the formula: (Net Income ÷ Total Revenue) × 100

For example, if you made $50,000 in net income from $200,000 in revenue, your net margin is 25%.

5. How is net income different from cash flow?

Net income measures profitability, including non-cash items like depreciation. Cash flow tracks actual money coming in and out of your business. You can be profitable and still have negative cash flow—or vice versa.

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Know your numbers, grow with clarity

Net income isn’t just a final line on your income statement—it’s a core signal of your business’s health. 

Whether you're evaluating performance, preparing for tax season, or planning ahead, knowing how to calculate and interpret net income helps you make smarter, faster decisions.

At Rho, we help finance teams and operators manage the inputs behind net income with greater control and visibility. Our platform brings together business banking, corporate cards, and AP automation—so you can track revenue, control expenses, and close your books with less friction.

If you're looking to streamline how money moves through your business, book a demo and see how Rho can support your growth.