The “net income accounting equation” is a formula that calculates a company’s net income, a crucial financial statistic representing its profitability over a specific period (e.g., a quarter or year). It’s calculated as Revenue – Expenses. For instance, if a company earns $1 million in revenue and incurs $700,000 in expenses, its net income would be $300,000.
Understanding net income is vital because it: 1) measures a company’s financial performance and profitability; 2) aids investors in evaluating a company’s financial health and growth potential; 3) historically, the development of double-entry accounting in the 14th century laid the foundation for the net income equation.