Calculating net income in QuickBooks can seem complicated for many small business owners.
However, by following a few simple steps you can easily generate net income reports in QuickBooks to gain valuable insights into your financial performance.
In this post, you'll learn step-by-step how to navigate QuickBooks to calculate net income, understand key reports like the income statement, and leverage tools like custom reports to automatically track net income over time.
Introduction to Calculating Net Income in QuickBooks
Net income, also known as profit, is a key metric for assessing the financial health and performance of a business. For QuickBooks users, accurately tracking net income is essential to make informed decisions and maintain proper books.
This article will provide an overview of defining net income, understanding the relevant QuickBooks reports to extract the data, steps to calculate net income from the revenue report, setting up automated reports, and analyzing the importance of net income trends over time.
Defining Net Income vs Revenue in QuickBooks
Net income represents total revenues minus total expenses over a period of time. It differs from revenue, which only reflects the amount of sales or services provided to customers. While revenue offers insight into sales volume, net income factors in the actual profit after accounting for the costs of operating the business.
As a QuickBooks user, you likely rely heavily on revenue reports to assess sales performance. However, net income is crucial for determining the true bottom-line profitability and viability of your business operations. Monitoring both metrics is key.
Understanding the Income Statement in QuickBooks Online
The main report for calculating net income in QuickBooks Online is the income statement. This financial statement subtracts total expenses from total revenue to determine your net profit or loss over a specified period.
You can also reference the QuickBooks revenue report to view sales data. But the income statement incorporates critical expense line items like payroll, supplies, utilities, etc. Using the income statement as the basis for net income is most accurate.
Navigating to the QuickBooks Revenue Report
While the income statement contains the necessary data, you may also want to leverage the QuickBooks revenue report for a detailed breakdown of sales and fees collected from customers.
To find the revenue report in QuickBooks Online, go to the Reports section and select “Sales” followed by “Revenue”. Choose a date range to analyze then run the report.
This provides visibility into revenue components like product/service sales, shipping income, tax collected, etc. You’ll need to subtract expenses from the total revenue amount to reach net income.
Automating Net Income Tracking with QuickBooks Custom Reports
Instead of extracting data from multiple reports to manually calculate net income each period, you can create memorized reports in QuickBooks to compute this automatically.
Build a custom report that incorporates key fields from both the income statement and revenue reports. Set it to memorize with your desired date range, filters, and net income formula.
With this customized report, QuickBooks will run your net income calculation automatically on demand. It's an efficient way to monitor this vital metric.
Analyzing Financial Performance with Net Income Calculations
Viewing net income trends over time can provide pivotal insights into the financial trajectory and health of your small business. As you work to increase sales, keep an eye on profitability.
If net income is consistently lower than expected given your revenue growth, take a closer look at expenses. Identifying ways to streamline operations or cut unnecessary costs can help boost bottom-line profitability.
Monitoring net income in QuickBooks provides visibility into what’s driving growth - or lack thereof. Leverage these metrics to make smart financial decisions for your business.
What is the formula for net income?
The formula for net income is:
Net Income = Total Revenue - Total Expenses
Where:
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Total Revenue is the total amount of money a business brings in from sales and other business operations. This is also known as the "top line."
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Total Expenses are all the costs a business incurs related to generating revenue. This includes things like:
- Cost of goods sold
- Operating expenses (rent, payroll, utilities, etc.)
- Interest
- Taxes
To calculate net income:
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Determine total revenue earned over a period of time (e.g. monthly, quarterly, annually)
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Add up all expenses incurred over the same period
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Subtract total expenses from total revenue
The resulting number is net income (also called net profit).
For example:
- Total revenue = $100,000
- Total expenses = $75,000
Net income = Total Revenue - Total Expenses = $100,000 - $75,000 = $25,000
So the net income is $25,000 for that period.
Net income shows the profitability of a business after accounting for all expenses. It is a key number monitored by business owners, investors, and analysts to evaluate financial performance. Higher net income generally indicates greater profitability.
How do you calculate income net?
To calculate net income in QuickBooks, follow these steps:
View the Income Statement Report
- Go to the Reports menu and select Company & Financial
- Choose Income Statement Standard
- Set the date range for the period you want to analyze
This will show your total revenue and expenses, with the net income amount at the bottom.
Analyze Revenue and Expenses
- Revenue - This shows all money brought in from sales and services. Review the different revenue accounts listed.
- Cost of Goods Sold - The direct costs related to providing products or services.
- Gross Profit - Revenue minus COGS. This represents profit after deducting direct production costs.
- Operating Expenses - All overhead, administrative, R&D, marketing and other indirect costs.
- Net Income - Gross profit minus operating expenses. This is the final profit earned.
Key Takeaways
- Net income is total revenue minus total expenses over a period of time. It represents the actual profit earned.
- Check that transactions are coded to the right accounts to avoid skewing the net income calculation.
- Compare net income over time to spot trends and opportunities to improve profitability.
Monitoring net income regularly in QuickBooks can help you understand the true profitability of your business. This allows you to make informed decisions to control costs and boost earnings.
What QuickBooks report shows net income?
The Balance Sheet report in QuickBooks shows the net income for the current fiscal year. Specifically, the net income on the Balance Sheet report should match the net income shown on the Profit & Loss report for the same fiscal year.
For example, if today is January 10, 2023, the net income for fiscal year 2023 on both the Balance Sheet and Profit & Loss reports in QuickBooks should match. The Balance Sheet shows the accumulated net income up until the current date, while the Profit & Loss shows the details of revenues, expenses, and net income for the specified date range such as the current fiscal year.
So in summary, to see the current net income in QuickBooks, check either the Balance Sheet or Profit & Loss report. Just keep in mind that the Balance Sheet shows the cumulative net income, while the Profit & Loss breaks down the individual revenue and expense transactions that make up that net income figure.
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Is net income and gross profit the same thing?
No, net income and gross profit are not the same. Here is a quick overview of the key differences:
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Gross profit is the profit a company makes after deducting the costs associated with making and selling its products or services. It does not include operating expenses or taxes.
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Net income, also called net profit, is the profit a company makes after deducting all expenses, including operating expenses, taxes, interest, and depreciation. It is the "bottom line" that shows how much the company actually earned or lost during the period.
So in short:
- Gross profit = Total revenue - Cost of goods sold
- Net income = Gross profit - Operating expenses - Interest - Taxes
The key difference is that net income factors in all expenses incurred in the business operations, whereas gross profit simply looks at the direct costs of production.
For example:
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Company A sells $1 million worth of products and the cost of goods sold is $500,000.
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The gross profit is $1,000,000 - $500,000 = $500,000
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But Company A also had $200,000 in operating expenses. So the net income is $500,000 - $200,000 = $300,000.
So the net income shows the company's actual bottom line earnings after accounting for all expenses. Understanding both metrics provides an overall view of a company's profitability.
Income Statement QuickBooks Desktop: Calculating Net Income
Accessing the Income Statement QuickBooks Desktop
To generate an income statement in QuickBooks Desktop, first navigate to the "Reports" menu and select "Company & Financial". Next choose "Income Statement" from the list of available reports.
You can customize the income statement to your desired date range and reporting options. Make sure to select "Accrual" as the "Basis" to match your revenue recognition method. The key output is net income, which can be found on the last line of the income statement report.
Understanding Net Income on QuickBooks Desktop Financial Statements
Net income represents total revenues minus total expenses over a period of time. It appears as the last line item on the income statement in QuickBooks Desktop.
You can also locate net income on the balance sheet under the Equity section. Here it is labeled as Retained Earnings, which reflects the company's cumulative net income over time. Changes in retained earnings from one balance sheet to the next indicate increases or decreases in net income.
Comparing Net Income vs Revenue in QuickBooks Desktop
While revenue reflects only sales and services provided to customers, net income factors in the costs required to generate those revenues.
For example, if a company has $1 million in revenue but spent $800,000 on employee salaries, materials, rent, etc., the net income would be $200,000. Comparing revenue and net income shows profitability after accounting for expenses.
Customizing Income Statement Reports in QuickBooks Desktop
You can edit the income statement format in QuickBooks Desktop to focus on net income details. Useful customizations include:
- Adding columns for net income percentages or breakdowns by department, product line, etc.
- Including only expense accounts relevant to net income
- Comparing net income over multiple date ranges in one report
Following these steps will lead to income statements tailored for analyzing net income trends and performance drivers.
Where to Find Net Revenue on Financial Statements in QuickBooks
Identifying Net Revenue on the QuickBooks Income Statement
The income statement in QuickBooks provides the key numbers needed to calculate net revenue. Specifically, you'll want to locate the revenue, sales discounts, and sales returns figures.
To find the income statement in QuickBooks Desktop:
- Go to Reports > Company & Financial > Income Statement
- Select the date range to analyze
- Scroll down to view the Revenue and Discounts and Credits sections
Net revenue can then be calculated as:
Revenue
- Discounts and Credits
- Sales Returns and Allowances
= Net Revenue
So if revenue was $100,000, discounts were $2,000, and returns were $1,000, net revenue would be $97,000.
Analyzing income statement net revenue trends over time provides insight into the real sales performance after accounting for returns and discounts.
Extracting Net Revenue from QuickBooks Sales Reports
In addition to the income statement, QuickBooks sales reports also contain the raw data needed to calculate net revenue.
For example, the Sales by Customer Summary report under Reports > Sales shows per-customer revenue figures along with returns and discounts/credits.
To find net revenue in this report:
- Go to Reports > Sales > Sales by Customer Summary
- Select a date range
- Scroll to the right to view the Credits and Returns columns
- Calculate net revenue = Total Sales - Returns - Credits for each customer
The Sales Graph and Sales by Item Summary reports can also be used to find net revenue by analyzing returns and discounts.
Customizing QuickBooks Reports to Highlight Net Revenue
You can customize income and sales reports in QuickBooks to prominently display net revenue:
- Memorize a customized version of the report with net revenue calculated
- Add net revenue as a new column in the report
- Group by net sales instead of total sales
For example, you could:
- Customize the Sales by Item Summary report
- Add a "Net Revenue" column
- Calculate as Revenue - Returns - Discounts
- Memorize the customized report
Now your saved report will always show net revenue by item!
Interpreting Net Revenue for Business Insights
Regularly analyzing net revenue metrics in QuickBooks reports provides valuable insights into:
- True sales performance after returns and discounts
- Profitability by customer and product
- Trends and growth opportunities
- Effectiveness of pricing and discount policies
For example, if net revenue declines while returns and discounts increase, you may need to revisit pricing or contract policies.
Monitoring net revenue over time can help inform key business decisions to boost profitability.
Best Practices for Tracking Net Income in QuickBooks
Frequent Updating of QuickBooks Accounts for Accurate Net Income
It is important to frequently update your QuickBooks accounts with all business transactions to ensure your net income figures are accurate and up to date. Best practices include:
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Enter all sales receipts, invoices, bills, checks, and credit card charges into QuickBooks daily or at least weekly. The more frequently transactions are entered, the more accurate your profit and loss statements will be.
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Reconcile bank and credit card accounts in QuickBooks every month. This will catch any missing transactions and allow you to enter them.
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Set reminders to enter recurring transactions on a schedule. Things like rent, subscriptions, etc should have their own transaction schedules set up.
Standardizing Income Statement Reporting in QuickBooks
Generating standardized income statements in QuickBooks on a consistent schedule is key for reliably monitoring net income over time. Steps to take include:
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Schedule monthly income statement generation in QuickBooks. Standardizing the cadence ensures net income is reviewed at regular intervals.
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Save the income statement as a memorized report with a standard name like "June 2023 Income Statement." This enables easy period-over-period comparisons.
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Include both accrual- and cash-basis income statement views to monitor how net income differs between the two accounting methods.
Leveraging QuickBooks Automation for Financial Report Distribution
Automating the delivery of key income statements with net income figures increases visibility into profitability and ensures appropriate stakeholders are informed. To leverage automation:
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Set up scheduled email delivery of memorized income statement reports on the 1st of each month to provide self and accountant the latest profit and loss data.
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Configure net income dashboard snapshots to be automatically exported from QuickBooks and distributed on a weekly basis to executives/management.
Conducting Thorough Net Income Reviews During QuickBooks Account Reconciliations
Completing monthly account reconciliations in QuickBooks provides an opportunity to closely evaluate net income trends. As part of the reconciliation process:
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Scrutinize income and expense accounts with unusual balances or activities compared to averages. Investigate the drivers behind net income fluctuations.
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Verify reconciled transactions have been properly categorized to avoid net income distortion from miscoded items.
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Use the reconciliation adjustments screen to input missing transactions uncovered during the process to improve net income accuracy.
Conclusion: Mastering Net Income Calculation in QuickBooks
Recap of Net Income Calculation Techniques in QuickBooks
Calculating net income accurately in QuickBooks is critical for understanding the financial health and performance of your small business. This article covered key techniques for effectively tracking net income over time in both QuickBooks Desktop and QuickBooks Online.
We discussed how net income represents your bottom line profitability after subtracting expenses from revenues. Monitoring changes in net income allows you to gauge whether your business strategies are working.
Some best practices included:
- Using QuickBooks' built-in reports like the Income Statement to regularly review net income figures
- Customizing Income Statement reports to focus specifically on net income line items
- Comparing net income across periods to identify trends and growth opportunities
- Distinguishing between revenue and net income, which are often confused
- Tracking both overall net income as well as net income by product line or department
Consistently following these net income calculation approaches in QuickBooks provides the visibility you need to make smart financial decisions and improve profitability.
Implementing Net Income Monitoring for Business Growth
To build on the QuickBooks techniques covered, here are some next steps to better leverage net income tracking:
- Set up automated Excel dashboards connected to QuickBooks to visualize net income trends
- Establish quarterly reviews of net income results by department to identify high vs. low performers
- Use net income per product calculations to guide pricing and product development decisions
- Set net income goals and benchmarks to motivate performance
- Build staff bonuses or incentives around net income targets
Closely monitoring net income does require some additional work but pays off exponentially in unlocking business insights. Take the first step today in one of the areas above for sustainable growth. Reach out to a QuickBooks expert for help optimizing what works best for your small business.
