What equation is used to calculate net income?

The formula for calculating net income is Total Revenues minus Total Expenses. This equation reflects the core concept of profitability in accounting. Net income, also known as net profit, represents the amount of money a company earns after all expenses have been deducted from total revenues.

When businesses generate revenue through sales or services, they incur various expenses necessary to operate, such as cost of goods sold, operating expenses, interest, and taxes. By subtracting these total expenses from total revenues, you effectively determine the financial outcome for the period. A positive result indicates profitability, while a negative result shows a loss.

The other options pertain to different calculations and do not accurately represent the net income calculation. For instance, calculating total sales plus total assets or total expenses plus total liabilities doesn’t address profit but refers to different aspects of financial analysis, such as overall sales performance or a company’s financial position. Gross profit is a different measure that focuses on sales revenue minus the cost of goods sold and is not used to compute net income directly. Thus, the correct calculation for net income is indeed Total Revenues minus Total Expenses.