How net income works
Net income starts with total revenue, then subtracts cost of goods sold to get gross profit, subtracts operating expenses like rent and payroll to get operating income, and finally subtracts interest and taxes. What is left is what the business actually earned during the period, after every cost is accounted for. Net income can also be affected by one-time items, like a gain on selling equipment, which are not part of normal operations.
Net income can be positive, meaning the business made a profit, or negative, meaning it operated at a loss. It is used to judge overall performance, but a single period of low net income does not always mean trouble, since one-time costs or growth spending can temporarily reduce it even in a healthy business. Comparing net income to prior periods, rather than looking at a single month in isolation, usually gives a clearer read on real performance.
Example
A business earns $500,000 in revenue, spends $300,000 on cost of goods sold, $150,000 on operating expenses, and $10,000 on interest and taxes combined. Net income equals $500,000 minus $300,000 minus $150,000 minus $10,000, which is $40,000. The business kept $40,000 in profit after every cost was covered.
Net income in QuickBooks Online vs Xero
QuickBooks Online and Xero both calculate net income automatically at the bottom of the Profit and loss report as transactions are recorded throughout the period. Neither requires a manual calculation, though the accuracy of the figure depends entirely on transactions being coded to the right accounts. Because every account feeds into this final figure, an error anywhere in the books can distort the net income shown at the bottom.
Related terms
How LedgerBPO handles net income
We close your books each month so your net income is accurate and reflects what actually happened, not just what looks right at a glance. A dedicated accountant reviews every account before the period closes under our Two-Tier Review process. You get a net income figure you can hand to a lender or investor with confidence. We flag unusual one-time items separately so they do not distort your read on regular operating performance.