Few of them ordinary people will be able to answer the question of how income differs from profit. Both concepts mean arrival Money and the possibility of their investment in the future. And how these indicators relate to revenue is also a mystery to those unskilled in economic issues reader. However, this oversight is easy to eliminate; just understand the terminology.
What is meant by the term "revenue"
The first is the difference between revenue and accounting (that is, explicit, calculated) costs.
Taking into account economic costs, including implicit costs associated with an alternative in conditions of limited resources, we will now talk about economic profit: revenue minus economic costs.
Let's look at an example. Since the head of a passenger transportation company at one time chose the path of an entrepreneur, rather than the path of an employee with savings in a bank, he faced alternative economic costs, for example, the following:
- savings in a bank account that were invested in business development - 60 tr.
- lost interest on money remaining in the bank - 6 tr.
- lost wages from hired work per year - 180 tr.
It turns out that the annual profit of 240 tr, which we calculated earlier, should be reduced by the amount of economic costs:
240 t.r. - (180 t.r.+60t.r.+6t.r.) = -6 t.r.
This business for an entrepreneur will not pay for itself in a year. If the company’s accountant congratulates the manager on his annual profit, the entrepreneur himself will assess the business’s performance as satisfactory.
Summary
Let’s summarize and answer the question of how income differs from profit, what is the difference between them and revenue, highlighting the main points briefly:
- Revenue and income are always positive economic indicators. Profit can be positive (the company is profitable), negative (the company is unprofitable) and equal to zero (the company is at the break-even point).
- Income includes profit, as well as costs for remuneration of employees of the enterprise and the social component of internal policy.
- Profit is a calculated indicator. It can take into account implicit economic costs. Income can always be calculated and entered into the balance sheet.
- Another difference between income and profit is the legislative connection: commercial enterprises work to achieve profit, non-profit enterprises should not receive profit at all, and municipal enterprises can be profitable, but subsidies only imply breaking even. All businesses can receive income.
Thus, revealing small terminological nuances of the profitable part of enterprises’ activities will allow readers to become more savvy in economic issues.
Profit reflects the increase in the initially advanced cost of the production and economic activities of the organization to ensure its activities. It is determined by measuring the organization’s income and expenses.
Depending on the conditions of its formation, the following types of profit are distinguished.
1) Based on the volume of distribution costs, economic and accounting profit are distinguished.
§ Accounting profit is simple difference between sales income (sales income) and expenses (current costs).
§ Economic (net) profit is the amount that is obtained by deducting additional expenses from accounting profit. Such expenses may include uncompensated own expenses that were not taken into account in the cost of the product, additional bonuses for employees, costs for officials, etc.
That is, net profit is income minus absolutely all costs.
2) According to the value of the final result, profit can be:
§ normative or prescribed,
§ maximum possible or minimum acceptable,
§ not received (lost profit), with a negative result (loss).
3) By the nature of taxation we can distinguish:
§ taxable profit,
§ and not taxable.
4) Depending on the types of activities performed, profit can be:
§ From financial activities. This is the effect that is obtained from attracting capital from other sources on favorable terms.
§ From production activities. This is the result of production and marketing.
§ From investment activities. This is income from deposits and ownership securities, income received from participation in joint activities with other companies or the sale of property upon completion of the investment project.
5) According to the regularity of formation, profit can be:
§ seasonal,
§ normalized
§ excessive.
§ Marginal profit is the additional profit received from the sale of an additional unit of production.
Gross profit is a parameter that reflects the difference between the income received by the enterprise and the cost of goods (services) sold, but without deducting income tax.
Gross profit- this is the total income of the company, which is received over a fixed period of time. It takes into account the profit from all types of company activities (both production and non-production areas are taken into account) minus production costs. The calculated figure is recorded in the balance sheet.
Gross Profit - the difference between revenue and cost products sold or services (English: Cost of sales or Cost of goods sold - COGS). It should be kept in mind that gross profit differs from operating profit (profit before taxes, penalties and interest, interest on loans).
Net sales income is calculated as follows:
· Net sales income = Total sales income − Cost of returned goods and discounts provided.
Gross profit is calculated:
· Gross profit = Net sales income − Cost of products and services sold including depreciation.
Based on gross profit data, you can calculate net profit:
· Net profit = Gross profit – Sum of taxes, penalties and fines, interest on loans.
Cost of goods sold is calculated differently for manufacturing and trading.
In general, this indicator reflects the profit of the transaction, excluding indirect costs.
For retail, gross profit is revenue minus the cost of goods sold. For the manufacturer, direct costs are the costs of materials and other Consumables to create a product. For example, the cost of electricity to run a machine is often considered a direct cost, while the cost of lighting a machine room is often considered an overhead cost. Wages can also be direct wages if workers are paid a price per unit of goods produced. For this reason, service industries that sell their services on an hourly basis are often classified as wages as for direct expenses.
Gross profit is an important indicator of profitability, but indirect costs must be taken into account when calculating net income.
Net profit- This is part of the enterprise’s balance sheet profit, which remains at its disposal after the formation of the wage fund and payment of taxes, fees, deductions and other obligatory payments to the budget, to higher organizations and banks. Unlike economic profit, net profit is used to expand production and increase working capital, is the main source of the formation of funds, reserves, reinvestment in production and cash savings of the enterprise.
Net profit is an indicator of how profitable it really is to work in one direction or another, whether it is worth developing the business further or is it better to suspend it. This is the most important factor affecting the profitability of any enterprise.
Net profit is included in cost estimates or forms accumulation funds (production development fund or production and scientific-technical development fund, fund social development) and consumption funds (material incentive fund), as well as a charitable fund.
The volume of net profit depends on the volume of gross profit and the amount of taxes. Dividends to the shareholders of the enterprise are calculated based on the volume of net profit.
Net profit
+ Income tax expenses
- Refunded tax at a profit
(+ Extraordinary expenses)
(- Extraordinary income)
+ Interest paid
- Interest received
+ Depreciation charges for material and intangible assets
- Revaluation of assets
Hello! In this article we will talk about related, but not identical concepts: revenue, income and profit.
Today you will learn:
- What is included in the company's revenue?
- What is the company's income and profit derived from?
- What are the main differences between these concepts?
What is revenue
Revenue – earnings from the direct activities of the company (from the sale of products or services). The concept of revenue is found exclusively in business and entrepreneurship.
Revenue characterizes the overall efficiency of the enterprise. It is revenue, not income, that is reflected in accounting.
There are several ways to account for revenue in an enterprise.
- The cash method defines revenue as the actual money received by the seller for providing services or selling goods. That is, when providing an installment plan, the entrepreneur will receive proceeds only after actual payment.
- Another accounting method is accrual. Revenue is recognized when the contract is signed or the buyer receives the goods, even if actual payment occurs later. However, advance payments do not count towards such revenue.
Types of revenue
Revenue in an organization is:
- Gross– the total payment received for a job (or product).
- Clean– used in . Indirect taxes (), duties, and so on are subtracted from gross revenue.
The total revenue of the enterprise consists of:
- Revenue from core activities;
- Investment proceeds (sales of securities);
- Financial revenue.
What is income
The definition of the word “income” is not at all identical to the term “revenue,” as some entrepreneurs mistakenly believe.
Income - the sum of all the money earned by the enterprise through its activities. This is an increase in the economic benefit of an enterprise due to an increase in the company's capital by the receipt of assets.
A detailed interpretation of the ways of generating income and their classification are contained in the Regulations on Accounting “Income of Organizations”.
If cash revenue is funds received by the company’s budget in the course of its core activities, then income also includes other sources of funds (sale of shares, receipt of interest on a deposit, and so on).
In practice, enterprises often conduct diverse activities and, accordingly, have different channels for generating income.
Income – the overall benefit of the company, the result of its work. This is an amount that increases the organization's capital.
Sometimes income is equal in value to the organization’s net revenue, but most often companies have several types of income, and there can be only one revenue.
Income is found not only in entrepreneurship, but also in Everyday life a private person not engaged in business. For example: scholarship, pension, salary.
Receiving funds outside the scope of reference entrepreneurial activity will be called income.
The main differences between revenue and income are given in the table:
| Revenue | Income |
| Summary of main activities | The result of both main and auxiliary activities (sale of shares, interest on bank deposits) |
| Arises only as a result of conducting commercial activities | Allowed even for unemployed citizens (benefits, scholarships) |
| Calculated from funds received as a result of the company’s work | Equal to revenue minus expenses |
| Cannot be less than zero | Let's say it goes negative |
What is profit
Profit is the difference between total income and total expenses (including taxes). That is, this is the same amount that in everyday life could easily be put into a piggy bank.
In an unfavorable situation, and even with a large income, the profit can be zero, or even go negative.
The main profit of the company is formed from the profit and loss received from all areas of work.
The science of economics identifies several main sources of profit:
- The company's innovative work;
- An entrepreneur’s skills to navigate the economic situation;
- Application and capital in production;
- Company monopoly in the market.
Types of profit
Profit is divided into categories:
- Accounting. Used in accounting. Based on it, they are formed accounting reports, taxes are calculated. To determine accounting profit, explicit, justified costs are subtracted from total revenue.
- Economic (excess profit). A more objective indicator of profit, since its calculation takes into account all economic costs incurred in the work process.
- Arithmetic. Gross income minus miscellaneous expenses.
- Normal. Necessary income for the company. Its value depends on lost profits.
- Economic. Equal to the sum of normal and economic profit. Based on it, decisions are made on the use of the profit received by the enterprise. Similar to accounting, but calculated differently.
Gross and net profit
There is also a division of profit into gross and net. In the first case, only costs associated with the work process are taken into account, in the second - all possible costs.
For example, the formula by which gross profit in trade is calculated is the selling price of a product minus its cost.
Gross profit is most often determined separately for each type of activity if the company operates in several directions.
Gross profit is used when analyzing areas of work (the share of profit from which activity is greater), when the bank determines the creditworthiness of the company.
Gross profit, from which all costs (loan interest, etc.) have been subtracted, forms net profit. It is accrued to the shareholders and owners of the enterprise. And it is net profit that is reflected in and is the main indicator of business performance.
EBIT and EBITDA
Sometimes, instead of the understandable word “profit,” entrepreneurs encounter such mysterious abbreviations as EBIT or EBITDA. They are used to evaluate the performance of a business when the objects being compared operate within different countries or are subject to different taxes. Otherwise, these indicators are also called cleared profit.
EBIT represents earnings as they were before taxes and various interest. It was decided to separate this indicator into a separate category, since it is located somewhere between gross and net profit.
EBITDA- This is nothing more than profit without taking into account taxes, interest and depreciation. It is used exclusively to evaluate the business and its characteristics. Not used in domestic accounting. for commercial equipment.
Thus, income is funds received by an entrepreneur, which he can subsequently spend at his own discretion. Profit is the balance of funds minus all expenses.
Both income and profit can be predicted if we take into account revenue for past periods of work, constant and variable costs.
The differences between profit and revenue are as follows:
The line between the concepts may be unclear for an ordinary worker; it does not matter to him how revenue differs from profit, but for an accountant there is still a difference.
Profit is the difference between the income from the sale of a product and the financial costs of its production. This is the most important economic indicator reflecting the efficiency economic activity enterprises. Let us consider in detail the types of profit and methods for calculating them, but we will immediately make a reservation that the terms “revenue” and “profit” should be distinguished.
The amount obtained after subtracting costs from revenue is profit. Thus, general formula The profit calculation will look like this:
Profit = Revenue - Costs (in financial terms).
What is net profit
The net profit of an enterprise is the funds remaining from the balance sheet profit after deducting taxes, fees, deductions and other established payments to the budget. It is used to invest in manufacturing process, for the organization of reserve funds and for increasing. Its size depends on several factors:
- tax burden on the organization, additional payments;
- enterprise revenue;
- etc.
How to calculate net profit
To do this, you must first perform the following operations:
- Calculate all production costs (including material costs).
- Calculate gross income (the difference between funds received from sales and the costs of manufacturing products).
- Now you can calculate your net profit. The formula for calculating it is as follows:
Net profit = Gross income - mandatory payments (and other payments).
What is gross profit
Gross profit is the difference between the amount received from the sale of a product and the cost of that product. The difference between gross and net is that gross is the profit that is received before the deduction of mandatory deductions and deductions. It does not include expenses for paying taxes and other established payments.
There are two categories of factors that influence gross profit. The first includes factors depending on the head of the organization:
- growth rates of production volumes;
- efficiency of product sales;
- expansion of the range;
- implementation of measures aimed at improving the quality of goods;
- cost reduction;
- maximum use of production capacity;
- conducting an effective marketing campaign.
TO external factors that cannot be influenced include:
- geographical and territorial location;
- environmental and natural conditions;
- current legislature;
- government measures to stimulate business;
- political and economic situation in the state and other world powers;
- external factors affecting the provision of the enterprise with resources and transport.
The formula for calculating gross profit is very simple. To obtain its value, it is necessary to subtract the cost of goods or services provided from the net income from sales:
VP = BH - C,
Where:
VP - gross profit;
BH - net income;
WITH - the cost of a product or service.
Net income in this case is the total sales income from which the amount of discounts provided and returned goods has been subtracted.
What is contribution margin
Contribution margin is the difference between revenue from selling a product and variable costs. In this aspect, variable costs are considered to be all costs directly related to the production of a particular product. They include both the costs of raw materials and materials needed for production, as well as employee salaries, energy costs and other expenses - but only in the proportion that was spent on a specific product. Marginal profit makes it easy to produce any specific goods or services. In addition, this indicator is also considered part of the revenue, from which net profit will be formed directly and fixed expenses will be repaid.
Marginal analysis of manufactured products allows us to determine which products are the most profitable and which are not profitable to produce. Two main indicators regulating the value marginal profit, is price and variable costs. To increase the profit margin, you need to either sell goods at a higher cost.
Marginal profit is calculated using the following formula:
MP=OD-PZ,
Where:
MP - marginal profit;
OD - total income;
PZ - variable costs.
What is operating profit
Operating profit is the difference between gross income and operating expenses. In other words, operating profit - this is the amount remaining after deducting depreciation, rent, payment for fuel and lubricants and other current expenses from profit. Operating profit does not exclude funds for paying taxes and overpayments on the loan.
It is calculated in general view, according to the following formula:
OP=VP - KR - UR - PrR + PrD + Prts,
Where:
OP- operating profit;
VP- gross profit;
KR- commercial expenses;
UR- administrative expenses;
PrR- other expenses;
PrD- other income;
Prts- interest payable.
In general, operating profit allows you to view the complex of costs and income of the enterprise as a whole, while simultaneously making it possible to evaluate in detail the most profitable or, conversely, unprofitable budget columns. In addition, it makes it possible to finally prepare accounting documents for the preparation of balance sheet profit.
What is book profit
Balance sheet profit is the total profit of an organization recorded on its balance sheet for a specific period of time. Balance sheet profit combines income received from all types of production and non-production operations. Balance sheet profit represents net profit before taxes and other established payments. The balance sheet profit indicator reflects the effectiveness of the strategy implemented at the enterprise and the effectiveness decisions made manuals.
To assess the implementation of the plan and compare it with indicators for the previous period, a balance sheet analysis is carried out. This is necessary in order to establish the reasons for failure to fulfill the plan, identify shortcomings in the management system, find sources of losses and generate resources to increase profits.
The main elements forming balance sheet profit are:
- income (or damage) from the sale of goods;
- income (or damage) from additional sales;
- income (or damage) from non-operating operations.
Book profit can be easily obtained from operating profit, or vice versa. The formula for calculating it looks like this:
BP = OP - Prts,
Where:
BP — balance sheet profit;
OP - Operating profit;
Prts - interest payable.
General concept of revenue
Revenue - funds received from the sale of goods or services. The activities of any enterprise are focused on generating revenue. The difference between revenue and profit is that profit is the difference between revenue received and production costs incurred. Revenue can come from several sources:
- revenue from the sale of goods received as a result of the organization's activities. Sales revenue is the money received from the sale of products for a certain period;
- investment income;
- revenue received from financial transactions.
Total revenue is calculated by adding the funds received from all of the above sources.
What is gross revenue
Gross revenue is the total amount of money received from the sale of goods, services and material assets. The majority of gross revenue comes from sales of products. Gross revenue is determined in the following form:
Gross revenue = Number of goods produced * Price of goods.
Gross revenue is not a decisive indicator, since it does not include expenses incurred. The gross revenue indicator cannot be considered as a separate element for assessing the organization’s activities. However, in a comprehensive valuation, gross revenue is important.
