How do you calculate net income?

Answer 1

Net income = Net sales - Expenses. So, we need to figure out what the expenses were for the period you are interested in. Now, expenses for a period is a temporary account under Equity just like revenue (net sales).

Net sales increase equity while expenses decrease equity. So, net income for a period will be the change in equity during that period.

Assets - Liabilities - Owners Equity = Net Income

The accounting equation: Assets = Liabilities + Equity can be rewritten to be

Assets - Liabilities = Equity In this equation, Equity refers to Total Equity which is Owners Equity plus Net Income.

You don't need the net sales figure for this question

Answer 2

Step 1

Determine your gross receipts. Any income that is connected to your business qualifies to be called business income. This includes any receipts in cash, checks, credit card payments, rents, dividends, promissory notes, waived off/canceled debts, damages, barter deals and economic injury payments.

Step 2

Subtract returns and allowances from the gross receipts and calculate the net receipts. Returns and allowances consist of refunds to customers, rebates, discounts or any allowance on the sales price.

Step 3

Determine the cost of goods sold. For that you need to consider the following: a) total inventory as on the first day of the year, b) net purchases and c) labor costs and other costs. From the sum of all these, deduct the total inventory as on the last day of the year and you will arrive at the cost of goods sold.

Step 4

Deduct the cost of goods sold from net receipts and add other income like fuel tax credits and you have your Gross Income.

Answer 3

Assets - Liabilities - Owner's Equity = Net Income

This is an adjustment to the Accounting Equation of Assets = Liabilities + Equity. In the case of this equation, Equity refers to Total Equity which is Owner's Equity + Net Income.