Definition: Net income; also called income, earnings, or net profit; refers to a company’s financial position when total revenues exceed total expenses. In other words, net income is the profits of a company. This is the income that is left over after all the expenses have been paid. If total revenues are less than total expenses, the company would have a net loss instead of net income. Net income is calculated by subtracting total expenses from total revenues.
What Does Net Income Mean?
Net income appears at the bottom of the income statement or profit and loss statement after all of the cost of goods sold and operating expenses have been subtracted out. This is why many people call net income the “bottom line.”
Net income is also a good example of the matching principle. All income and expenses are matched for the given period. This means that all expenses that relate to income earned in the period must be included in the period regardless of whether the expenses were actually paid. Expenses that are incurred in the period but not paid are often called accrued expenses.
Payroll wages are a good example of accrued expenses. Employees working in December 2015 might not actually get paid until January 2016. These wages are related to the income earned in 2015, so the expenses should be matched with the 2015 income. The payroll wages are accrued at the end of 2015 and appear on the 2015 income statement lowering the net income for the year. There are many other accrued expenses and even some unearned income accounts that affect net income and also reflect the matching principle.