Net income, also known as profit or earnings, is a crucial financial metric that represents a company’s profitability over a specific accounting period. It is calculated by deducting total expenses, including operating expenses, interest, taxes, and other costs, from total revenue. For instance, if a company generates $1 million in revenue and incurs $700,000 in expenses, its net income would be $300,000.
Calculating net income is vital for managerial accounting as it provides insights into a company’s financial performance and profitability. It helps managers make informed decisions regarding pricing, cost control, and resource allocation. Historically, the concept of net income has evolved alongside accounting practices, with the development of accrual accounting and the increasing complexity of business operations.