How to Determine Net Income in Accounting
Set up an income statement., Gather the required information., Make sure that you are using the proper formula., Make sure that you have a calculator handy.
Step-by-Step Guide
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Step 1: Set up an income statement.
In order to correctly calculate net income, you will have to go through the steps of filling out an income statement.Actually filling out an income statement while calculating net income is an easy way to organize your information.
This can be done either by hand or using a data management program.
See how to write an income statement for more information.
An income statement covers a specific period of time, i.e, January 1, 2014 to December 31,
2014.
The time can be any period, but is usually monthly, quarterly, or annually. -
Step 2: Gather the required information.
In order to calculate net income, you will need all of the information required on the income statement.
This includes a large amount of information about the business's revenues and expenses.
Again, see how to write an income statement for more information on the requisite information.
The required information is also covered in more detail in the next section.
In general, an income statement will include a business's sources of income (mainly sales but also things like interest income) and a list of expenses by category, including costs of creating products, operations, administrations, interest paid on debts, and income taxes. , The calculation of net income follows a very specific formula.
This formula parallels the organization of the income statement.
However, should you choose to simply calculate net income without creating a balance sheet, you will need to be sure you are subtracting the right expenses at the right points in the calculation.
The general structure of the calculation is as follows:
Calculate "net sales" — Gross sales less returns and discounts.
Subtract cost of goods sold from net sales to get gross profit.
Subtract selling, general, and administrative expenses from gross profit to get EBITDA (earnings before interest, taxes, depreciation, and amortization).
Subtract depreciation and amortization expenses from EBITDA to get EBIT (earnings before interest and taxes).
Subtract interest expenses from EBIT to get EBT (earnings before taxes).
Subtract tax expense from EBT to get net income. , Depending on the size of the business, calculating net income may involve large numbers or advanced calculations.
To ensure accuracy, keep a simple calculator nearby when doing your calculations. -
Step 3: Make sure that you are using the proper formula.
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Step 4: Make sure that you have a calculator handy.
Detailed Guide
In order to correctly calculate net income, you will have to go through the steps of filling out an income statement.Actually filling out an income statement while calculating net income is an easy way to organize your information.
This can be done either by hand or using a data management program.
See how to write an income statement for more information.
An income statement covers a specific period of time, i.e, January 1, 2014 to December 31,
2014.
The time can be any period, but is usually monthly, quarterly, or annually.
In order to calculate net income, you will need all of the information required on the income statement.
This includes a large amount of information about the business's revenues and expenses.
Again, see how to write an income statement for more information on the requisite information.
The required information is also covered in more detail in the next section.
In general, an income statement will include a business's sources of income (mainly sales but also things like interest income) and a list of expenses by category, including costs of creating products, operations, administrations, interest paid on debts, and income taxes. , The calculation of net income follows a very specific formula.
This formula parallels the organization of the income statement.
However, should you choose to simply calculate net income without creating a balance sheet, you will need to be sure you are subtracting the right expenses at the right points in the calculation.
The general structure of the calculation is as follows:
Calculate "net sales" — Gross sales less returns and discounts.
Subtract cost of goods sold from net sales to get gross profit.
Subtract selling, general, and administrative expenses from gross profit to get EBITDA (earnings before interest, taxes, depreciation, and amortization).
Subtract depreciation and amortization expenses from EBITDA to get EBIT (earnings before interest and taxes).
Subtract interest expenses from EBIT to get EBT (earnings before taxes).
Subtract tax expense from EBT to get net income. , Depending on the size of the business, calculating net income may involve large numbers or advanced calculations.
To ensure accuracy, keep a simple calculator nearby when doing your calculations.
About the Author
Peter Stevens
Creates helpful guides on home improvement to inspire and educate readers.
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