Calculating a business’s income is essentially deducting the costs and expenses from its profits. The Securities and Exchange Commission recommends that you think of it as a set of stairs, where you start at the top with the total amount of sales made during the accounting period, and with each step down you make a deduction for certain costs or other operating expenses associated with earning the revenue. At the bottom of the stairs, after deducting all of the expenses, you learn how much the company earned or lost during the accounting period. Most accounting software, such as QuickBooks, calculates the business income automatically based on the information you enter throughout the accounting period.
Add together the money brought in from sales or services. Only include revenue that the business has earned and received, not income that is expected or accounts receivable. The result is the company’s gross revenue.
Calculate the money that the company does not expect to collect, returns and allowances. This could be from accounts unsuccessfully recovered through collection, returns or refunds.
Sum up the various kinds of inventory and operating expenses. This includes the cost of goods sold, salaries and overhead. Do not include the cost of inventory that has yet to be sold.
Calculate asset depreciation. If the business has assets such as machinery, tools and furniture that will be used for a long period of time, it can spread its costs over the life of the asset. There are several methods for calculating depreciation, such as straight-line and expedited. Discuss with an accountant the best method to use for your business’ specific circumstances.
Add up the company’s expenses with the additional expenses. The result of these two numbers is the company’s total expenses.
Total the amounts computed for Steps 2, 3, 4 and 5 to come up with the total expenses.
Subtract the company’s total expenses from the gross revenue. This final number is the company’s net income, or business income.
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