How to Calculate Net Income From a Trial Balance: Worked Example

To calculate net income from a trial balance, add up every revenue and gain account, subtract any contra-revenue balances, then subtract the total of every expense and loss account. The formula is Net Income = Total Revenue and Gains − Total Expenses and Losses. The math is easy. The work is making sure you’re pulling the right accounts and that the trial balance has already been adjusted.

Pull Only the Temporary Accounts

A trial balance lists every general ledger account with its ending debit or credit balance, but only some of those accounts belong in a net income calculation. Permanent accounts such as Cash, Accounts Receivable, Inventory, Accounts Payable, and Retained Earnings sit on the balance sheet and stay out of the formula entirely. They carry forward from one period to the next.

The accounts you want are the temporary ones, which measure activity during a single period and get zeroed out at its close. They come in three flavors:

Revenue accounts such as Sales Revenue, Service Revenue, and Interest Income. These carry credit balances.
Expense accounts such as Cost of Goods Sold, Rent Expense, Salaries Expense, Depreciation Expense, and Utilities Expense. These carry debit balances.
Contra-revenue accounts such as Sales Returns and Allowances and Sales Discounts. These carry debit balances even though they belong with revenue, and they reduce your revenue total rather than adding to your expenses.

Where an account sits tells you what it is. Revenue and gains cluster together with credit balances; expenses and losses cluster together with debit balances. Misclassifying a balance sheet account as an income statement account, or the other way around, throws off the entire calculation.

Work From an Adjusted Trial Balance, Not an Unadjusted One

An unadjusted trial balance captures raw transactions from the general ledger, but at period-end it almost never reflects reality. Expenses get incurred before they’re paid. Revenue gets collected before it’s earned. Assets lose value gradually. None of that shows up in the accounts until someone posts adjusting entries.

Three kinds of adjustments matter most:

Accruals. Revenue earned but not yet billed, and expenses incurred but not yet paid. Salaries employees have earned through the end of the period but will be paid next period are the classic case: debit Salaries Expense, credit Salaries Payable.
Deferrals. Cash received before the work is done, and cash paid before the benefit is consumed. If you paid a full year of insurance upfront, only the portion used during this period belongs in the current expense total; the rest stays on the balance sheet as a prepaid asset.
Estimates. Depreciation on equipment, buildings, and vehicles spreads their cost across their useful life. An allowance for doubtful accounts estimates how much of your receivables won’t be collected.

Skip these and your revenue and expense totals are wrong before you even reach the subtraction. If the trial balance in front of you is labeled “unadjusted,” stop and post the adjusting entries first. Only the adjusted trial balance produces a meaningful net income.

Total Revenue and Gains

Pull every account with a credit balance that represents earned revenue or a gain: Sales Revenue, Service Revenue, Interest Income, Gain on Sale of Equipment, and anything similar. A gain on selling a company vehicle for more than its book value belongs in this total alongside ordinary sales.

Then check for contra-revenue accounts. Sales Returns and Allowances and Sales Discounts show up as debit balances and reduce gross revenue. If Sales Revenue is $250,000 and Sales Returns and Allowances is $5,000, net sales is $245,000. Overlooking a contra-revenue account inflates income, and if that error carries through to a tax return, it can trigger an accuracy-related penalty of 20% on the resulting underpayment.¹

Add net revenue, any secondary income, and all recorded gains into a single number. That’s the starting figure for the formula.

Total Expenses and Losses

Now add every expense and loss account. All of these carry debit balances. The main categories:

Cost of Goods Sold: direct materials, labor, and manufacturing overhead tied to the products sold during the period.
Operating expenses: rent, utilities, salaries, office supplies, insurance, advertising, and other costs of running the business. These are deductible as ordinary and necessary business expenses under the tax code.²
Payroll tax expense: the employer’s share of Social Security tax (6.2% of wages up to $184,500 in 2026) and Medicare tax (1.45% with no wage cap).³⁴
Depreciation and amortization: non-cash charges that spread the cost of long-lived assets across their useful life. Easy to miss because no cash moves, but they reduce net income just like any other expense.
Non-operating expenses and losses: interest on loans, losses from asset disposals, and any other costs outside core operations.

Every debit-balance expense account has to go in. Depreciation is the one that gets skipped most, usually when the adjusting entry was posted but whoever pulled numbers from the trial balance didn’t notice it. An incomplete expense total overstates profit, which can mean paying more tax than you owe.

Do the Subtraction

Once both totals are in front of you, run the formula:

Net Income = Total Revenue and Gains − Total Expenses and Losses

A positive number is net income. A negative number is a net loss. The difficulty was never the arithmetic; it was making sure the inputs were complete and adjusted.

A Worked Example

Here is a condensed adjusted trial balance showing only the temporary accounts for a small retail business at year-end:

Sales Revenue: $250,000 (credit)
Service Revenue: $15,000 (credit)
Gain on Sale of Equipment: $2,000 (credit)
Sales Returns and Allowances: $5,000 (debit)
Cost of Goods Sold: $100,000 (debit)
Salaries Expense: $60,000 (debit)
Rent Expense: $24,000 (debit)
Depreciation Expense: $8,000 (debit)
Utilities Expense: $6,000 (debit)
Interest Expense: $3,000 (debit)

Total revenue and gains: $250,000 + $15,000 + $2,000 − $5,000 = $262,000.

Total expenses and losses: $100,000 + $60,000 + $24,000 + $8,000 + $6,000 + $3,000 = $201,000.

Net income: $262,000 − $201,000 = $61,000.

That $61,000 is the figure that flows to the income statement and, after closing entries are posted, into Retained Earnings on the balance sheet.

Book Income Is Not Taxable Income

The net income you calculate from a trial balance is book income. It is not the number you owe tax on. Book income and taxable income start from the same place but diverge because tax rules differ from the accounting standards set by the Financial Accounting Standards Board.⁵ Depreciation methods, meal deductions, and certain accruals can all create differences between what the books show and what the return reports.

Getting the trial balance right is still the cheapest defense against tax problems. A substantial understatement of income tax, defined as the greater of 10% of the tax due or $5,000, can trigger a penalty equal to 20% of the underpayment.¹ Clean bookkeeping at the trial balance stage keeps that risk small.

After the net income figure is set, the temporary accounts get closed out through closing entries so they start the next period at zero, and the net income lands in Retained Earnings. That’s the next step in the cycle, but it doesn’t change the number you just calculated.

1
Office of the Law Revision Counsel. 26 USC 6662 – Imposition of Accuracy-Related Penalty on Underpayments
2
Office of the Law Revision Counsel. 26 USC 162 – Trade or Business Expenses
3
Social Security Administration. What Is the Current Maximum Amount of Taxable Earnings for Social Security
4
Internal Revenue Service. Employers Tax Guide for Use in 2026
5
Financial Accounting Standards Board (FASB). About the FASB