Net Income Formula: How to Calculate Net Income (With Examples)
The net income formula, a line-by-line worked example, where to find net income on your P&L and balance sheet, and the bookkeeping errors that make the number wrong.
Net income is what is left after every cost of doing business is subtracted from every dollar of revenue. It is the bottom line of your profit and loss statement, the number a lender underwrites, and the number the IRS taxes. It is also the number most small business owners quote incorrectly, because they confuse it with revenue, with gross profit, or with the balance in their checking account.
This guide gives you the net income formula, a worked example you can follow line by line, the difference between net income and the four terms it gets mixed up with, and the three bookkeeping errors that make the number wrong before you ever calculate it.
The net income formula
Net income = Total revenue − Total expenses
That is the whole equation. "Total expenses" is what trips people up, because it has to include every category, not just the obvious ones:
- Cost of goods sold (materials, subcontractors, billable labor, freight in, merchant fees)
- Operating expenses (rent, insurance, software, admin payroll, marketing, professional fees)
- Depreciation and amortization
- Interest expense on loans and lines of credit
- Taxes
Expanded, the same formula reads:
Net income = Revenue − COGS − Operating expenses − Depreciation − Interest − Taxes
If the result is negative, it is a net loss. Same formula, different sign.
The step-by-step version
Accountants rarely calculate net income in one move. They walk down the P&L:
- Gross profit = Revenue − COGS
- Operating income = Gross profit − Operating expenses
- Pre-tax income = Operating income − Interest (+ any other income)
- Net income = Pre-tax income − Taxes
Each step answers a different question, which is why lenders read all four instead of just the last one.
Net income example, line by line
Take a Houston commercial HVAC contractor with a full year of clean books:
| Line | Amount |
|---|---|
| Revenue | $1,450,000 |
| Cost of goods sold | ($928,000) |
| Gross profit | $522,000 |
| Operating expenses | ($361,000) |
| Operating income | $161,000 |
| Depreciation | ($34,000) |
| Interest on equipment notes | ($19,000) |
| Pre-tax income | $108,000 |
| Taxes | ($22,700) |
| Net income | $85,300 |
Net income is $85,300 on $1.45M of revenue — a net profit margin of 5.9% ($85,300 ÷ $1,450,000 × 100). Revenue looks like a big business. The bottom line says the pricing has almost no room in it. That gap is exactly why net income, not revenue, is the number to manage.
Want to run your own numbers first? Use our free profit margin calculator to get gross, operating, and net margin in one pass, then come back for the interpretation.
Net income vs the four terms it gets confused with
Net income vs gross income
Gross income (gross profit) is revenue minus COGS only. It tells you whether the work itself is priced correctly. Net income subtracts everything else too. A business can have healthy gross income and still post a net loss because overhead, interest, and depreciation consume it.
Net income vs revenue
Revenue is the top line: everything you billed and earned. Net income is the bottom line. In the example above they differ by more than $1.3 million. When a lender asks "what did you make last year," they mean net income.
Net income vs net profit and earnings
Net income, net profit, net earnings, and "the bottom line" are the same number under different names. There is no calculation difference. Financial statements typically say "net income"; loan packages often say "net profit."
Net income vs cash flow
This is the one that costs owners real money. Net income is accrual: it recognizes revenue when earned and expenses when incurred. Cash flow is when money actually moves. You can post $85,000 of net income and still miss payroll if $180,000 sits in unpaid receivables or you made a large principal payment (principal is not an expense, so it never appears in net income). If your bottom line looks fine but the bank account does not, build a 13-week cash flow forecast alongside your P&L.
Where to find net income on your financial statements
- Profit and loss statement (income statement): the final line, usually labeled "Net income" or "Net ordinary income" in QuickBooks Online.
- Balance sheet: net income for the period flows into equity. Prior years accumulate in retained earnings; the current year often appears as "Net income" inside equity until the books close.
- Statement of cash flows: net income is the starting line, then adjusted for non-cash items and working capital changes to reach actual cash movement.
If those three statements do not tie together, the books are not closed — and any net income figure you pull from them is an estimate, not a fact.
Three bookkeeping errors that make net income wrong
1. Loan payments booked as expenses
Only the interest portion of a loan payment is an expense. Booking the full payment to an expense account understates net income and, on an equipment-heavy business, can turn a profitable year into a paper loss right when you are applying for financing.
2. Owner draws treated as payroll
Distributions to an owner of an LLC or S corp are equity, not expense. Running them through the P&L understates net income and distorts every margin above it.
3. Costs sitting in the wrong bucket
Materials coded to office supplies, or software coded to COGS, leave net income unchanged but destroy gross margin — so you cannot tell whether a pricing problem or an overhead problem is squeezing the bottom line. Lenders notice the inconsistency, and it costs you credibility during underwriting.
All three are cleanup problems, not math problems. If your last few months are behind or miscoded, our catch-up bookkeeping service reconstructs the period and re-states net income correctly.
What a good net income looks like
Net margin varies widely by industry, so compare yourself to your own trend before you compare to anyone else. Rough Greater Houston ranges we see in client books:
- Construction and specialty trades: 3% – 8%
- Professional services and law firms: 12% – 25%
- Retail and e-commerce: 2% – 6%
- Field services with recurring contracts: 8% – 15%
A falling net margin on rising revenue almost always means overhead was added faster than gross profit. That is a decision problem, and it is only visible if the books close monthly.
Frequently asked questions
What is the net income formula?
Net income = Total revenue − Total expenses. Expanded, that is revenue minus cost of goods sold, operating expenses, depreciation, interest, and taxes. A negative result is a net loss.
How do you find net income on a balance sheet?
The balance sheet does not calculate net income; it absorbs it. Current-period net income appears in the equity section, and prior periods roll into retained earnings. The calculation itself lives on the profit and loss statement.
Is net income the same as profit?
Net income is the same as net profit, net earnings, and the bottom line. It is not the same as gross profit, which subtracts only cost of goods sold, or operating profit, which stops before interest and taxes.
Why is my net income positive but my bank account empty?
Net income is accrual-based, so it includes invoices you have billed but not collected and excludes loan principal payments and owner draws, which both consume cash. A 13-week cash flow forecast reconciles the two.
Does net income include taxes?
Net income is calculated after tax expense. Pre-tax income is the line above it. For pass-through entities, income taxes are often paid personally by the owners, so many small business P&Ls show only franchise or state taxes — check which convention your books use before comparing years.
How often should I calculate net income?
Monthly, from closed and reconciled books. Annual-only net income tells you what happened; monthly net income lets you fix it while there is still time.
Get a net income number you can act on
A net income figure is only as good as the bookkeeping behind it. We close books monthly, deliver statements by the 15th, and produce lender-ready financials for a flat monthly fee — so the bottom line you quote to a bank, a buyer, or your own team is defensible.
Request a free file review and we will tell you whether your current net income is accurate before you rely on it. Prefer to compare costs first? See the 2026 Houston bookkeeping and CFO pricing benchmark or our flat monthly packages.
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