Net income is the excess of revenues over expenses. This measurement is one of the key indicators of company profitability, along with gross margin and before-tax income. A common calculation for net income is:
For example, revenues of $1,000,000 and expenses of $900,000 yield net income of $100,000. In this example, if the amount of expenses had been higher than revenues, the result would have been termed a net loss, rather than net income.
Net income is listed near the bottom of the income statement.
Net income is commonly used as a measure of company performance. However, it can yield misleading results under the following circumstances:
Cash flows (a better indicator of company health) may differ significantly from net profit, due to the inclusion of noncash revenues and expenses in the compilation of the net profit figure.
Net income derived under the cash basis of accounting can vary substantially from net income derived under the accrual basis of accounting, since the first method is based on cash transactions, and the latter method records transactions irrespective of changes in cash flows.
Fraudulent or aggressive accounting practices can yield unusually large net income that does not properly reflect the underlying profitability of a business.
Net income is also known as net profit, the bottom line, or profit and loss.