How to Calculate Operating Income

This article will show you how to calculate one of the most common and useful measures of profit--operating income. And as someone who's taught accounting and finance, I'll walk you through the process step-by-step.

Difficulty: Moderately Easy

Instructions

1. ** What is operating income? **
   
   Before we begin learning how to calculate operating income, let's first briefly discuss what operating income is and why it's so important. Now in the world of accounting and corporate finance, there are many different types of "income," meaning profit.
   
   Operating income or operating profit is simply a measure of how profitable our day-to-day operation is. Knowing how profitable, and whether you are profitable at this level is extremely important! Why? Because if you're not running your business well day-to-day, then you're either in, or are heading for real financial trouble down the line! So it's very important to track and measure operating income to see if you're running your business well.

2. 
   Illustration: How to calculate operating income

   ** How do I calculate operating income? **
   
   Ok, now that you understand what operating income is and why it's so important, we can begin discussing how to calculate it. The first step is to take your total or net sales figure. This is the actual amount of sales you had during the period--cash and credit sales added together!
   
   Then you deduct your cost of goods or merchandise sold. In other words, how much it cost you to buy those goods you sold. After doing this subtraction, that will give you your gross income (profit) figure.
   
   The next step is to deduct your operating expenses. These are costs that go along with the day-to-day running of your business. In other words, they're the regular costs that go along with running your particular business. Subtracting-out your operating expenses will give you your operating income (profit) figure.

3. ** Example: Calculating operating income **
   
   Let's end with a real world example so you can practice what you've just learned. Suppose we have the following information:
   
   a) Total (net) sales = $500,000
   b) Cost of goods (merchandise) sold = $200,000
   c) Salaries = $35,000
   d) Utilities = $10,000
   e) Advertising = $20,000
   
   Let's now calculate operating income based off these figures.

4. 
   Illustration: Solving our example

   ** Solution to our example **
   
   We first need to calculate our gross income (profit) by taking total (net) sales and deducting our cost of merchandise (goods) sold. So we'd take $500,000 and subtract $200,000 to get $300,000 gross profit.
   
   Then we'd subtract-out our operating expenses. But if you notice, in this example, we don't have a single figure. We need to calculate this by adding our regular business operating expenses together. So we'd add the $35,000 in salaries + $10,000 in utilities + $20,000 in advertising. This gives us total operating expenses of $65,000.
   
   Operating income (profit) would be the $300,000 in gross profit (income) - $65,000 worth of operating expenses. And that gives us operating income (profit) of $235,000!

[maniks]

on 12/18/2008 Brother, i got a good accounts teacher....thank u very much