Learn something new every day More Info... by email
Net amount is a term commonly used in business accounting, although it is sometimes borrowed by personal finance professionals. It is often used interchangeably with net income. The personal finance definition refers to the income left over after taxes have been deducted, often called take-home pay. The accounting definition is a bit more complex and refers to a company’s profit after the cost of doing business and all other expenses, both tangible and intangible, have been deducted.
Accountants use the following formula to determine net amount: (Sales Revenue – Cost of Goods Sold) – (Operating Expenses + Interest Paid + Depreciation + Taxes). As can be seen, it's what is left over after everything that contributed to the production of the goods for sale has been subtracted. To fully understand what the amount represents, it is best to look at what is deducted.
The first element to be subtracted from revenue is the cost of goods sold, which is simply the raw cost of the stock-in-trade. This is calculated by placing a value on the remaining stock-in-trade by finding out how much is on-hand at the statement date. Accountants calculate an average figure for stock used in the period using the following formula: (Opening Stock + Purchases) – Closing Stock. When the cost of the goods sold for the period is subtracted from sales revenue, what is left is called gross profit or the gross amount. Operating expenses, interest paid, depreciation, and taxes are all then deducted from the gross profit.
Operating expenses refer to all costs of production, from salaries to utilities. Interest paid is just that: any interest paid on loans undertaken during the course of business. Depreciation is an accounting measure intended to spread the cost of an asset across its useful life. This allows for the cost of a capital asset to be divided into smaller amounts over the term that the asset is expected to be used instead of writing off a large amount in one accounting period. Taxes are a part of running a business and must be paid before declaring an official profit, which is the reason they are deducted here.
Once all the deductions have been made from any revenue produced by the organization, the net amount or bottom line is the result. The bottom line is often used as the result is the last entry on the profit statement, so this amount is therefore considered to be a pure profit figure because it is the surplus of income that is left after all other contributing factors have been deducted. The number is as close as accountants get to announcing a true picture of any profit made by the company.