Operating income is a financial figure that is derived by the employees of the accounting and finance department, at the end of a financial period: a week, one month, a quarter, or a year. Such a duration sometimes is also known as fiscal period. Operating income is often simply defined as the income or revenue of a firm or a company, that is derived from regular operations and sales.
Such an income is basically the total of all sales, minus the manufacturing cost of the goods and operating expenses. Before this income can be derived, another figure that is, gross income has to be calculated. Gross income is the revenue that is realized by the firm or company in one financial period, through its sales and operations minus, value of goods and services sold. It must be noted that depreciation, operating costs and related expenditures are included in this figure.
Operating income is derived from gross income. Once the gross income is calculated, total depreciation and operating expenses are subtracted from it.
Thus, the operating income formula goes as follows,
In some cases, companies also calculate operating income percentage. This type of figure is basically a ratio between operating income and gross income or operating income and expenditure.
Net Operating Income
From the point of view of accountancy, it is important to calculate net operating income at the close of any accounting period. This figure is derived by subtracting taxes paid or payable, from the operating income.
Operating Income Statement
In companies, especially in the accounting departments, income based figures are derived from structured statements. The following is a pro forma of the calculation statement.
This statement is quite a complex one and you may not even utilize all possible options such as the loss on sales. However, by using this statement, you will realize the profit that you have earned through your revenue.
Operating Income vs Net Income
Calculating both incomes and their percentage ratio with each other is a recommended task, as it drastically improves the accuracy of finance planning and revenue forecasting. In addition, you can calculate operating profit margin, which is a type of profitability ratio known as a margin ratio in the accounting world.
On the whole, calculation of operating income proves to be very beneficial and possess innumerable merits. Though, its derivation is not a statutory compliance, analyzing such figures creates an awareness about the financial position of a company or firm.