Definition of Net Income and Its Components

Definition

Net income is considered one of the most important financial indicators in accounting and financial management, representing the actual amount remaining from revenues after deducting all expenses and financial obligations. It's also called "net profit" or "net income after taxes," and is the figure that appears at the end of the income statement reflecting the true financial performance of a company or individual. This indicator is used to evaluate profitability, make investment decisions, and plan future finances, and serves as the basis for calculating returns on investment and distributing profits to shareholders.

Components

• Gross Revenues - Sales and operating and investment revenues
• Cost of Goods Sold - Direct costs of production or purchase
• Operating Expenses - Salaries, rent, utilities, and administrative expenses
• Financial Expenses - Loan interest and bank fees
• Taxes - Income tax and zakat
• Extraordinary Expenses - Non-recurring losses or investments

Formula: Net Income = Gross Revenues - (Cost of Goods + Operating Expenses + Financial Expenses + Taxes)

Difference Between Net Income and Related Concepts

Concept	Definition	Difference from Net Income
Gross Revenues	Total sales and revenues before any deductions	Includes all revenues before deducting expenses, while net income is after deducting all costs
Gross Profit	Revenues minus cost of goods sold only	Excludes operating expenses and taxes, while net income deducts them
Operating Profit	Profit before interest and taxes	Does not include financial expenses and taxes that net income deducts
Cash Flow	Actual money coming in and going out	Reflects actual cash movement, while net income is accounting-based and may differ
EBITDA	Earnings before interest, taxes, depreciation, and amortization	Excludes interest, taxes, and depreciation that net income includes
Income Before Taxes	Total profits before deducting taxes	Higher than net income by the amount of taxes due

Types of Net Income (Accounting and Tax)

Net income is divided into two main types: accounting and tax. Accounting net income is calculated according to internationally accepted accounting standards to show the company's true financial performance, used in preparing financial statements and reports for shareholders and investors, including all accounting revenues and expenses without distinction.

In contrast, tax net income is calculated according to local tax laws and regulations to determine the amount of tax due on the company, used in preparing tax returns submitted to tax authorities. Differences between the two types arise from different depreciation and amortization methods applied, acceptance or rejection of certain provisions and reserves, plus the existence of expenses acceptable accounting-wise but not tax-wise, making tax income usually lower than accounting income.

Relationship Between Net Income and Income Statement

Net income is the final result in the income statement, appearing in the last line as the outcome of all financial operations. The income statement begins with gross revenues, then deducts cost of goods sold to get gross profit, followed by operating expenses to reach operating profit, then financial expenses and taxes to finally reach net income.

The income statement shows the logical progression to reach net income, where each stage reveals a different level of profitability. Net income reflects the company's overall performance and is used to calculate earnings per share and profit distribution. It's also considered the link between the income statement and balance sheet, where it transfers to retained earnings in equity.