What is Net Income?

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What is Net Income?

When a business or individual have been involved in commercial undertakings, they will at the end of the day have some earnings. These earnings will however have several obligations that attach to them and will not wholly belong to the business or individual. In financial terms, these earnings are known as gross income and will require having several deductions made so as to finally remain with what entirely belongs to the business or individual which is known as the net income. The deductions made to the gross income of an individual and businesses are not entirely similar. Though they do have some similarities, there are some significant differences.

For a business, the net income is calculated as follows. You will begin with the total revenue that the business has collected over the period under consideration. From this amount the cost of operations, interests, depreciation and taxes are deducted. Once these obligations have been deducted from the revenue of the business what remains is the net income of the company. This net income is what is often referred to as net profit. Having a negative net income means that the business made a net loss. The net income of a company is what is used to pay dividends to share holders or it can be reinvested in the business as additional capital. The success of a business lies in increasing its net income by raising revenues while lowering operation costs and other expenses. It is also important for a business to have competent tax attorneys or financial officials who can help the business efficiently pay its taxes.

In the case of an individual, net income is derived by taking the gross income and deducting taxes, allowances and other statutory deductions. There may be other voluntary deductions that are made to the gross income of the individual before arriving at the net income. The net income is commonly known as the take home pay. As you can see, the individual unlike the business does not get to deduct their expenses before arriving at the net income and will instead have to use their net income to cater for expenses. For individuals, raising their net income is normally only possible if their gross income is increased or if they opt out of the voluntary contributions that they are making. Another difference is that it is not possible for an individual to have a negative net income as their taxes and deductions cannot exceed their gross income.

There is usually a very big difference between the gross income and the net income for both individuals and businesses. The net income of a business or individual is usually considered when they are looking to access financing. It gives the financial institutions an idea of how much you have to spare to service the credit you are applying for. Those with a higher net income as well as excellent credit score are bound to find it easier to access financing as compared to those with lower net incomes.

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