How to Calculate Net Income Before Taxes

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Net income is very important in business. Net income shows how much money is made by the company by decreasing revenue and gains by expenses and losses. Having a positive net income means the company made more money than it spent, while having a negative net income means the company spent more money than it made. The most efficient and illustrative way to calculate net income is through a multi-step income statement approach. Net income can also be calculated for individuals. Breaking down an individual's net income using the multi-step approach also helps individuals budget.

  • Determine revenues. Revenues generally are sales of a product or a service. When calculating revenues, use any cash inflows, which relate directly to the company's business. If calculated net income for an individual, revenues are generally wages earned.

  • Determine gains. Gains are any cash inflows, which are not directly related to the operation of the business. Gains include things such as interest income or winning a lawsuit. For individuals, gains would include items such as interest from a savings account or investment, gains in the stock market, lottery winnings.

  • Add together revenues and gains for total cash inflows.

  • Determine expenses. Expenses are cash outflows associated with the company's ordinary business. Expenses include an employee's salary, inventory purchases or rent payments. For individuals, consider expenses as any cash outflow that is not unusual, such, such as groceries, mortgage payments and car payments.

  • Determine losses. Losses are cash outflows not associated with the company's ordinary business. Losses include items such as lawsuit losses and banking charges. For individuals, use any unusual expenses as losses. An unusual expense is something that is not recurring, like the cost to fix a car after an accident.

  • Add together the expenses and losses to determine total cash outflows.

  • Subtract the total cash outflows from total cash inflows to determine the net income before tax. Generally, this amount is the company's or individual's taxable amount without taking into consideration any more complex tax law.

References

  • Photo Credit financial report image by PaulPaladin from Fotolia.com
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