The Difference Between Net Income and Operating Income

The Difference Between Net Income and Operating Income

Income is probably the figure that most business owners care about the most. When calculating income earned from the revenue the business has generated, business owners may see two different types of income  in the financial statements, which are the net income and operating income. The accountants from an accounting firm in Johor Bahru will calculate both and present them in the financial statement (Also see Who Needs the Financial Statements?) of their clients. Now, let us look at what they mean and the difference between them.

Net income refers to the profit that is located at the bottom line of the profit and loss statement. When calculating net income, the accountants will deduct all the costs and expenses, the company’s liabilities, as well as extra income sources from the revenue (Also see Are Revenue and Profit the Same?) the business has generated. Net income takes all incomes and expenses into account, which include operating income as well as non-operating expenses. Non-operating expenses refer to the expenditure that will not happen regularly. For example, the money that business owners spend on the large machines is considered as non-operating expenses as this will only occur once in a few years.

On the contrary, operating income (Also see An Overview of Income Summary Account) is a figure that shows the money the company has earned solely from its business operations. It does not include non-operating income like the income earned from investments or the gains obtained by selling assets. Also, it has excluded all the fixed operating expenses as well as the variable expenses. This means operating income does not consider the costs incurred for daily business operations like employee’s salaries, rental, cost of goods sold, as well as the depreciation and amortisation expense.

From the explanation above, we get to know that net income is the net profit a company has generated. In contrast, operating income stands for the income a company earns from its business operations. As they carry different meanings, their calculations are different too. To calculate net income, one should sum up operating income, income from investments, and extraordinary income, then deduct interest expense, taxes and extraordinary expenses from the total. When calculating operating income, one needs to take gross income and add depreciation and amortisation expense on it, less cost of goods sold and all operating expenses.

Apart from telling how much the company has earned from its business operations, operating income can help in the calculation of operating margin. One can divide the operating income by the company’s sale revenue to arrive at the operating margin. In an ideal situation, the operating margin should steadily increase as time passes.

As a business owner, you need to understand both net income and operating income. These two figures can provide you with a clearer picture of how your company has been performing. With the help of the data, you can make any necessary changes or adjustments to ensure long-term success and sustainability of your business.

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