What Is Net Income
Net income is an accounting term, which can be taken into consideration in many ways. Businesses as well as individuals look at the net income as well as the gross income. Gross income is a very simple concept to understand as it is the entire amount earned by a person in a given period of time. However, net income has more to it and thus, is not clearly understood by many. This also has many deductions to consider while calculating the net income of a person or a business firm.
Net income can be calculated by adding all the revenues and gains to income and subtracting the expenses and losses. This will give the value of net income in any case for both firms as well as individuals. However, the elements in the calculation will be a little different from each other.
In a business firm, the calculations of the net income is different as there are various other deductions like payment of taxes, employee salaries, rent and other expenses. In this case, we can also take the profit earned by the company as the net income. This can also be after all the deductions and payments that the company makes. Netting is a term, which is used for the net profit or income of the firm. The amount of net profit is very much low when compared to the gross profit that the company gets. This also means that the company will not have a net income if all the profits go out in payments.
On the other hand, the calculation of net income of an individual is completely different. The income received by an individual will not get to reduce all the rent and taxes to declare their net income. They are liable to pay the taxes and all other payments with the income that they get. All of these reduce the gross income they receive. Thus, the final amount that the individual gets to spend on his personal expenses is called as net income.
The net income that the person gets will depend on the amount of tax rate that he pays. This will completely depend on the type of taxation method that the government follows. If it is a flat tax rate, then all income earners will have to pay the same rate irrespective of the amount that they are earning. This is not a fair system. On the other hand, the progressive system is one, which increases the tax rate from low to high according to the income that the employee earns. This ensures that he pays taxes as he earns.