How is net income best defined?

Net income is best defined as the difference between revenue and expenses. This measurement is fundamental in financial accounting as it reflects the profitability of an organization over a specific period. Revenue includes all income earned from business operations, while expenses encompass all costs incurred to generate that revenue. The formula for net income is straightforward: when you subtract total expenses from total revenue, the resulting figure indicates how much profit (or loss) the organization has made.

Understanding net income is crucial for evaluating the financial health of an organization. It allows stakeholders, such as managers and investors, to assess the effectiveness of operations and make informed decisions based on that assessment. A positive net income indicates that the organization is generating more revenue than it spends, while a negative net income signals that expenses exceed revenues, potentially prompting necessary adjustments in operational efficiency or cost management.

This definition distinctly captures the essence of profitability, whereas definitions involving totals of assets and liabilities or net assets dilute the focus on income performance from operational activity. Therefore, recognizing net income as the profit derived from operations after covering all expenses provides a clear and robust understanding of a company's financial performance.