How is net income calculated?

How is net income calculated?

• A. Revenue - Expenses = Income
• B. Assets - Liabilities = Income
• C. Liabilities + Equity = Income
• D. Revenue + Expenses = Income

Answer: (A)

Net income shows how profitable the business was over a period, and it’s found by subtracting expenses from revenues. In other words, Net income = Revenues minus Expenses. This reflects what’s left after the costs of doing business are paid. If revenues exceed expenses, you have a positive net income; if expenses exceed revenues, you have a net loss. The other formulas don’t measure profit: assets minus liabilities equals owner’s equity, not income; liabilities plus equity equals assets, not income; and simply adding revenues and expenses isn’t a valid way to determine profitability.

Net income shows how profitable the business was over a period, and it’s found by subtracting expenses from revenues. In other words, Net income = Revenues minus Expenses. This reflects what’s left after the costs of doing business are paid. If revenues exceed expenses, you have a positive net income; if expenses exceed revenues, you have a net loss. The other formulas don’t measure profit: assets minus liabilities equals owner’s equity, not income; liabilities plus equity equals assets, not income; and simply adding revenues and expenses isn’t a valid way to determine profitability.