How to Calculate Your Net Income From A Balance Sheet?

by Elena James Business analyst and Online Marketer

Net income is said to be influential among all the line items which are located on an income statement. An updated income statement is a single report through which small businesses attain success and growth. It is a fact that if you lack revenue, you do not have a business. Knowing only your income would not give you an exact picture of your business either. To attain that, you require to understand whether your business is earning profits after deducting expenses. That is where the net income equation comes into the picture. If you know more about how to calculate net income from a balance sheet, we have got you covered.

how to calculate net income from a balance sheet

How does a balance sheet work?

The balance sheet showcases a business’s financial health by listing its current assets, equity, and liabilities. In other words, assets are what a company owns, equity is what is left with the company, and liabilities are what a company owes. All these three elements fluctuate constantly, and the balance sheet provides the relation between them at a specified time. The balance of assets and liabilities must match. An accurate balance sheet is important to calculate net income from a balance sheet.

Net income: Equation

After subtracting all expenses of the business, a company’s total profit is the net income of the company. Many business owners refer to net income as the net earnings or net profit of the company. The total amount you are left with after paying shareholders, paying off debts, savings for future investments, investing in new inventory or projects.

The formula to calculate net income from a balance sheet -

Revenue - the cost of goods sold - Expenses = Net income

Subtracting the cost of goods sold from revenue is the formula used to calculate the gross income. So if we put it the other way around, the net income is:

Gross income - Expenses = Net income

Or in a simple way, you can calculate the net income through:

Total revenues - Total expenses = Net income

When a company has excess revenue than expenses, that gives a positive net income, but on the other hand, when the expenses are more than revenue, net income goes negative, which is known as a net loss.

By applying above mentioned formulas, you can simply calculate net income from a balance sheet for any specified period.

Example: How to calculate net income?

Let us assume that John Enterprises are looking for its first-quarter net income. The figures John is working with are:

Total revenue - $50,000

The Cost of goods sold - $15,000

Rent - $5,000

Utilities - $1,000

Payroll - $8,000

Advertising - $2,000

Interest expenses - $2,000
Firstly, John calculates its gross income.

Gross income = $50,000 - $15,000 = $35,000

Now, John adds his expenses.

Expenses = $5,000 + $1,000 + $8,000 + $2,000 + $2,000 = $18,000

John can calculate his net income by deducting expenses from gross income:

Net income = $35,000 - $18,000 = $17,000

John’s net income for the first quarter of 2021 is $17,000

Operating net income: Formula

Operating net income is somewhat similar to net income, but profits are counted from operations in particular. Operating net income includes interest expense, income tax, interest income, and losses from sales of any assets.

At times, referred as EBIT which stands for earnings before interest and taxes. The formula to ca;lculate operating net income -

Net income + Interest expense + taxes = operating net income

Gross profit - operating expense - amortization - depreciation = operating net income

At times, investors preferably go with operating net income despite of net income. This offer themes a better picture of the profitability of the business core operational activities.

Sometimes companies sell a fixed asset at a profit which will be included in the company’s net income showing the profitability of the company, but they are suffering net loss in operations. This shows the company is performing well but in reality, they are struggling to survive in the market.

Operating net income takes the profit out of consideration so the investors can get a transparent picture of the company’s performance. Calculating operating net income gives users a chance to know the health of an organization.

Example: How to calculate operating net income?

Let us take John Enterprise’s situation. If John wishes to calculate operating net income, he could add back the net income with interest expenses.

$17,000 + $2,000 = $19,000

John’s operating net income for the first quarter will be $19,000.

We believe the above article has provided you with all the information and examples you want to learn about how to calculate net income from a balance sheet. If you outsource best online bookkeeping services or a skilled accountant , calculating net income and operating net income is easy. In such cases, with profit and loss statements and income statements which already showcases your net income.