The statement of income that is used for real estate properties differs from that of conventional businesses.  A typical real estate income statement looks something like this:

Potential Gross Income (or PGI)
Plus: Other Income
Less: Vacancy and Bad Debt Expense
Equals: Effective Gross Income (or EGI)

Less: Operating Expenses
Equals: Net Operating Income (or NOI)

Less: Debt Service
Equals: Before-Tax Cash Flow

Less: Income Tax
Equals: After-Tax Cash Flow

Potential gross income represents a full year of rents assuming that the property involved is fully occupied.  Other income might include payments for parking, laundry facilities, or fees.

Operating expenses include property taxes, management fees, (and a replacement reserve when used for an appraisal).  Debt service includes both principal and interest payments.

Note that operating expenses exclude depreciation.  In fact, deprecation does not appear anywhere within this form of income statement.  (Depreciation expense is, however, considered when calculating the income tax requirement.)  Because this type of statement excludes depreciation and includes principal payments, the bottom line represents cash flow as opposed to “net income”.