The goal of any business is simple–to sell.
Revenue, income and profit are terms that describe money businesses collect through product sales. But they are commonly mixed up. Many people can’t pinpoint the difference between them.
In this article, we will provide clear and easy-to-understand definitions of revenue, profit, and income and explain their differences and similarities. We will investigate how revenue and income figures influence your business and what you should know about them for taxes and reporting.
Meaning: revenue vs. profit vs. income
Revenue, income (net income), and profit are all financial terms that measure a company's earnings, but they represent different stages in the calculation.
The calculation is used to measure your company's financial health.
This is what the terms "revenue," "profit," and "income" mean:
Revenue is the total amount of money a company generates from selling goods or services. It's the income at the most basic level, like the total sales a store makes in a day.
Profit is a general term for a financial situation where a company's income is greater than its expenses.
Net income is a specific type of profit, but there can be other profits, too, like gross profit, which considers only a subset of expenses.
In simple terms, revenue is what comes in the door, income is what's left after paying the bills, and profit is a general term for when there's more money left than what was spent.
Income is the money a company has left after subtracting all its expenses from its revenue. It's commonly referred to as net income.
Think of income as revenue minus the cost of everything it took to generate that revenue (rent, salaries, materials, etc.). It's the company's actual profit, often referred to as the "bottom line" on an income statement. Income can be broken up into two categories–gross and net.
Gross Income: Gross income is the total income recorded before any taxes and expenses are deducted. Gross income may also be referred to as gross profit or gross margin. It is found on the income statement.
Net Income: Net income is calculated by taking revenues and subtracting the costs of doing business, such as depreciation, interest, taxes, and other expenses. The bottom line, or net income, describes how efficient a company is with its spending and managing its operating costs. This figure appears on a company's income statement and is an important measure of the profitability of a company.
How to calculate revenue?
To calculate revenue use this formula:
Revenue Formula = number of goods sold x sales price
Revenue Formula = number of customers x average price of services
And follow these steps:
1. Identify the Total Quantity Sold: Determine the number of units sold of a product or service.
2. Determine the Unit Price: Find out the average selling price per unit of the product or service.
3. Calculate Gross Revenue: Multiply the total quantity sold by the unit price to get the gross revenue.
4. Subtract Deductions: From the gross revenue, subtract any discounts, allowances, and returns to arrive at the net revenue.
Example: if you sold 100 units of a product at $50 each, with a $200 discount overall, the revenue calculation would be: Net Revenue = (100 units x $ 50/unit)−$200 = $4800. This formula gives you the net revenue, reflecting the actual revenue generated after accounting for all deductions.
How to calculate profit?
To calculate profit, use this formula:
Profit = total revenue − total expenses
And follow these steps:
1. Identify Total Revenue: Determine the total amount of money generated from all sales.
2. Calculate Total Expenses: Sum up all direct and indirect costs associated with the business. Direct costs might include materials and staff wages, while indirect costs encompass overhead expenses such as rent and utilities.
3. Subtract Total Expenses from Total Revenue: Use the formula:
For example, if the total revenue is $10,000 and the total expenses are $1,500 (where $1,000 are direct costs like dog treats and $500 are indirect costs like marketing materials), then the profit would be: Profit = $10,000 − $1,500 = $8,500. This result shows the financial gain achieved after covering all operational costs.
How to calculate income?
To calculate income use this formula:
Gross Income = revenue - cost of goods sold (COGS)
Net Income = total revenue - total expenses
OR
Net Income = gross income - operating expenses - other business expenses - taxes - interest on debt + other income
Key Differences
Revenue vs. Income:
Revenue is simply the total sales, while income considers all the expenses and reflects the company's actual profit.
Profit vs. Income:
Profit is a general term, and net income is a specific type of profit calculated after considering all operating expenses. There can be other profits like gross profit, which only considers a subset of expenses.
Revenue vs. Profit:
To put it simply, revenue answers the question: "How much money did the company bring in?" While profit answers the question: "How much money did the company keep after paying its bills?" A company can have high revenue but low profit, or even a loss, if their expenses are greater than their revenue.
Key Similarities
These three accounting terms are closely related to each other. These are the main similarities between them:
- Financial Performance Indicators: All three—profit, income, and revenue—are crucial metrics that indicate the financial health and performance of a business.
- Components of Financial Statements: They are all found within a company's financial statements, providing insights into its operational efficiency and profitability.
- Calculation Base: Each is calculated based on the company's financial activities, derived from sales, services, and other income-generating operations.
- Taxation Influence: Profit, income, and revenue figures play a role in determining the tax obligations of a business.
- Decision-Making Tools: Businesses use these metrics to make informed decisions regarding growth strategies, cost management, pricing, and investment opportunities.
- Interest to Stakeholders: Investors, creditors, and management are all keenly interested in these figures as they assess the company's success, sustainability, and growth prospects.
What defines revenue, profit and income?
In the U.S., Generally Accepted Accounting Principles (GAAP) define how to recognize all financial reporting metrics, including revenue, income and profit, as well as how to prepare income statements.
GAAP is the set of accounting rules set forth by the Financial Accounting Standards Board (FASB) that U.S. companies are expected to follow when putting together their financial statements.
The goal of GAAP is to ensure that a company's financial statements are complete, consistent, and comparable. GAAP may be contrasted with pro forma accounting, which is a non-GAAP financial reporting method.
GAAP is used mainly in the U.S., while most other countries follow the International Financial Reporting Standards (IFRS).
Frequently Asked Questions (FAQs)
What's more important - profit or income?
Profit, or net income, is more important than revenue because it reflects the actual financial health of a company after all expenses have been paid. While revenue indicates the total income earned from business operations, it does not account for the costs involved in generating that revenue. Profit shows the leftover money after operating costs, taxes, interest, and dividends are subtracted, making it an accurate measure of a company's financial success and sustainability. High revenue doesn't guarantee a healthy profit margin if expenses are too high, underscoring the critical role of efficient cost management and operational sustainability for long-term profitability.
What is operating revenue?
Operating revenue refers to the revenue generated from the company's primary business activities. Depending on the type of business, operating revenue can be generated from the provision of services or sales of products.
What is the difference between operating profit and net income?
Operating profit is the company's profit calculated after taking out the expenses but before accounting for the taxes, debt, and costs of certain one-off items. Net income, on the other hand, is the company's profit after accounting for all the expenses.
Why revenue is so important?
Revenue is a key measure of a company’s profitability and financial health, indicating its ability to generate income from core operations. It’s a critical measure of a company’s financial performance.
What is one key difference between IFRS and GAAP?
The primary difference between the two systems is that GAAP is rules-based, and IFRS is principles-based. This difference appears in specific details and interpretations. IFRS guidelines provide much less overall detail than GAAP.
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