How is net income calculated?

Net income is calculated by subtracting total expenses from total revenues. This formula reflects a business's profitability over a specific period. Total revenues include all the income generated from sales and other business activities, while total expenses encompass all costs incurred in generating that revenue, including operating expenses, taxes, and interest.

By using this calculation, businesses can evaluate their financial performance. A positive net income indicates that the company is earning more than it spends, which is essential for sustaining operations and providing returns to investors. On the other hand, a negative net income suggests that expenses are exceeding revenues, signaling potential financial challenges that may need to be addressed. Thus, the correct method to determine net income is through the subtraction of total expenses from total revenues.