Calculating income is essentially deducting costs and expenses from profits. It starts with calculating the total amount of sales made during accounting and is followed by deductions for certain costs or other operating expenses. When all is said and done, the company learns how much it earned or lost during the accounting period.
The only revenue that should be included is money brought in from sales or services that has been earned and received, not monies expected or accounts receivable. The bottom line is the gross revenue. For deductions, money that a company does not expect to collect, as well as returns and allowances, should be added to the cost of goods sold, salaries, and overhead, but the cost of inventory that has yet to be sold should not be included. Asset depreciation for machinery, tools, and furniture should also be calculated.
The company’s expenses and additional expenses combined are known as the total expenses. When these total expenses are deducted from the gross revenue, that is the net income, or business income.