How is net income calculated?

Net income is calculated by taking gross income and subtracting tax deductions and various expenses. Gross income refers to the total income earned before any deductions are made. Tax deductions can include taxes owed, while expenses encompass costs like operational costs, salaries, rent, and other necessary expenditures related to generating income. By subtracting these amounts from the gross income, you arrive at the net income, which represents the actual profit or income that can be retained or reinvested after all obligations have been met. This formula is fundamental in accounting and for understanding a business's financial health, as net income reflects the true earning capacity.