Net income is the bottom line of the income statement: what a business has left for a period once every expense and loss has been taken out of its revenue, gains and other income, including the cost of what it sold, its operating expenses, interest and income tax expense. It covers a stretch of time, a month, a quarter or a year, rather than a balance at a single date. Net profit, net earnings and the bottom line generally name the same figure.
The Subtraction Chain
The chain runs in a fixed order, and the most explicit statement of that order is a securities rule rather than an accounting one. Regulation S-X sets the form and content of financial statements filed with the SEC as part of registration statements and Exchange Act reports (17 CFR 210.1-01). Its statement of comprehensive income rule runs from net sales and gross revenues at caption 1, through costs and expenses applicable to sales and revenues at caption 2 and the operating, non-operating, interest and income tax captions that follow them, to net income or loss at caption 18 (17 CFR 210.5-03). A company that files nothing with the Commission is not preparing statements under that rule.
In plain terms that is four subtractions on a period with nothing non-operating in it, and the subtotal names below are the ones ordinary practice puts on the steps rather than captions of the regulation. Revenue less the cost of the goods or services sold is gross profit. Gross profit less operating expenses is operating income. Operating income less interest is income before income tax expense. That figure less income tax expense is net income.
A period carrying anything else runs through more captions than those four. Dividends, interest on securities and profits on securities net of losses are non-operating income at caption 7, and losses on securities and miscellaneous income deductions are non-operating expenses at caption 9. Both feed income or loss before income tax expense at caption 10 (17 CFR 210.5-03).
The bottom line is not always one subtraction below the tax line either. Income tax expense is caption 11, and between it and net income or loss at caption 18 come equity in earnings of unconsolidated subsidiaries and 50 percent or less owned persons at caption 12, income or loss from continuing operations at caption 13, and discontinued operations at caption 14 (17 CFR 210.5-03). The first of those is the reporting company’s share of the earnings of companies it does not consolidate.
Say a firm’s books for a year close on the amounts below, with subtracted amounts shown in parentheses.
Revenue 500,000
Cost of services (180,000)
Gross profit 320,000
Operating expenses (210,000)
Operating income 110,000
Interest expense (10,000)
Income before income tax expense 100,000
Income tax expense (21,000)
Net income 79,000Only the last line is net income. Every subtotal above it is a real figure in its own right, and none of them is the bottom line.
Where Net Income Lands in a Firm’s Work
Net income is an output of the close, not an input to it. Balances are proved out and accruals booked first, and only then does the period’s revenue and expense activity resolve into one figure that closes to equity. The sequence that gets there is in the month-end close checklist.
On the return, book net income is where the book-to-tax reconciliation starts, not the number the return finishes on. The corporate reconciliation opens at line 1, net income (loss) per books (IRS, Form 1120, Schedule M-1), and the partnership return opens its own Schedule M-1 on the same line (IRS, Form 1065, Schedule M-1).
What Net Income Is Not
It Is Not Revenue or Gross Profit
Revenue is the top line, before anything has been taken out, and gross profit is revenue after only the cost of the goods or services sold. Both sit above operating expenses, interest and tax on the same statement, and net income is what survives all three.
It Is Not Comprehensive Income
Comprehensive income is the wider figure and net income is a section inside it. Topic 220 divides comprehensive income into net income and other comprehensive income, and an entity reporting comprehensive income in a single continuous financial statement presents its components in two sections, net income and other comprehensive income (FASB Accounting Standards Update 2011-05, paragraph 220-10-45-1A). Other comprehensive income holds the gains and losses the standard keeps out of net income, so comprehensive income comprises all components of net income and all components of other comprehensive income (FASB Accounting Standards Update 2011-05, Master Glossary). This is the US framework, and how it diverges from the international one is in GAAP versus IFRS.
The same boundary is visible on the face of the statement. Net income or loss is caption 18, other comprehensive income is caption 21, and comprehensive income is caption 22 (17 CFR 210.5-03).
It Is Not Taxable Income
Book net income and taxable income are two numbers computed under two different regimes, which is why the return reconciles between them at all. Income tax expense is one subtraction line here and nothing more, and measuring the book-to-tax difference inside the statements is the income tax provision.
It Is Not Cash
Net income is an accrual accounting result, so a period can close with positive net income and less cash in the bank than it started with. Revenue is recognized when the work is delivered rather than when the client pays, and the asset that carries the amount across that gap is accounts receivable.
Common Questions
After. Income tax expense comes out above the bottom line, so a figure quoted before tax is income before income tax expense, a different line with a different name.
Gross is a figure with something still in it, and net is the same figure with that thing taken out. Net sales of tangible products, for instance, is defined at caption 1(a) as gross sales less discounts, returns and allowances (17 CFR 210.5-03). Net income is what is left after every expense and loss the period carries, tax included.
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