---
title: "Net income (net profit)"
description: "What net income is, how it is calculated from revenue through gross and operating profit, how it differs from cash flow and EBITDA, and a worked income statement."
canonical: https://ledgeriano.com/glossary/net-income
language: en
publisher: "Ledgeriano"
updated: 2026-11-06
---

# Net income (net profit)

> What net income is, how it is calculated from revenue through gross and operating profit, how it differs from cash flow and EBITDA, and a worked income statement.

Net income, or net profit, is the amount left from revenue after deducting every expense of the period: cost of sales, operating expenses, finance costs and income tax. It is the bottom line of the income statement, the basis for earnings per share and dividends, and it is added to retained earnings when the year is closed.

Net income measures profitability on the accrual basis, not cash. A growing business can report strong net income while its bank balance falls, because profit is tied up in receivables and inventory; the [cash flow statement](https://ledgeriano.com/glossary/cash-flow-statement) reconciles the two using the indirect method.

Dividing net income by revenue gives the net profit margin, and by average equity gives return on equity. These and other ratios are explained in the [financial ratio calculator](https://ledgeriano.com/tools/financial-ratio-calculator). At year end the [closing entry](https://ledgeriano.com/glossary/closing-entry) transfers net income through the income summary to retained earnings.

```
Net income = Revenue - Cost of sales - Operating expenses - Finance costs - Income tax
Net profit margin % = Net income / Revenue × 100
```

## Example: from revenue to net income

A consulting firm reports the figures below. Net income is 54,000, a net profit margin of 13.5%.

| Line | Amount |
| --- | --- |
| Revenue | 400,000 |
| Cost of services | (220,000) |
| Gross profit | 180,000 |
| Operating expenses | (105,000) |
| Finance costs | (7,000) |
| Profit before tax | 68,000 |
| Income tax | (14,000) |
| Net income | 54,000 |

### Is net income the same as cash flow?

No. Net income includes non-cash items such as depreciation and accruals, and ignores cash spent on assets or loan repayments. Operating cash flow can be higher or lower.

### Where does net income go after year end?

It is closed into retained earnings in equity, unless it is distributed as dividends.

Guide: https://ledgeriano.com/guides/financial-statements