Which formula correctly computes net income?

• A. Net Income = Revenues minus Expenses.
• B. Net Income = Expenses minus Revenues.
• C. Net Income = Revenues plus Expenses.
• D. Net Income = Assets minus Liabilities.

Answer: (A)

Net income measures profitability by showing how much is left after the business has paid its costs. It is calculated by subtracting expenses from revenues: net income = revenues minus expenses. Revenues are the inflows from selling goods or services, while expenses are the costs incurred to earn those revenues, such as wages, rent, and materials. When revenues exceed expenses, net income is positive, indicating a profit; if expenses exceed revenues, net income is negative, resulting in a net loss.

The other formulations don’t reflect how profitability works. Subtracting revenues from expenses would flip the relationship and produce a value that doesn’t represent what’s earned after costs. Adding revenues and expenses would mix inflows and costs inappropriately, inflating the figure. Assets minus liabilities gives net assets or equity, not net income.