Profit and revenue are two different concepts, but they accompany the activities of any company constantly. Their meanings are quite close to each other, as they are often used in the same context. But there is a difference between them.
Revenue
The company's revenue is cash receipts from the sale of goods, services or work on the market. It represents the result of the activities of the entire company for a certain period of time. In another way, the revenue is called the gross income of the company.
Revenue is reflected in accounting on account 90 “Revenue”, serves to determine the amount of tax paid by companies operating on a simplified taxation regime.
Revenue is the most common measure of a company's performance. However, not everything can be considered revenue. As a rule, these are income from the main activity. When compiling the balance sheet, revenue is taken into account net of indirect taxes, in particular VAT, which is actually withheld from the buyer.
Revenue can be predicted. Based on the data of previous sales volumes and cash receipts, the accountant can predict the expected revenue in the next reporting period. The total revenue of the enterprise for the reporting period consists of:
- Proceeds from core activities (sale of goods, provision of various services or performance of work);
- Proceeds from investment activities (financial result from the sale of non-current assets or the sale of any securities owned by the company);
- Income from the financial activities of the company.
Profit
Profit is an important indicator of a company's performance. It is economic and accounting.
Economic profit - the difference between the total income of the enterprise and the costs (explicit and implicit). This indicator shows how efficiently the company worked in a certain period of time. Economic profit can be distributed among the founders. Accounting profit is profit used for accounting purposes. Taxes are deducted from it, and it is reflected in the Profit and Loss Statement. It is equal to the difference between the total income and the explicit costs of the enterprise.
The main profit of the organization consists of indicators:
- Profit (or loss) from the main activity (sales of products, provision of services or performance of work);
- Profit (or loss) from ancillary activities (for example, profit from renting a warehouse or performing additional work under a contract).
The relationship between profit and revenue is that profit is the difference between the total revenue and the total costs of the enterprise. Profit can be negative (loss), while revenue is not.
Many people dream of starting their own business, but not everyone knows where to start. Economists advise: start by learning the basics of economics, and only after understanding the basic principles, start building your business. If you find it difficult to flip through volumes of economic theory and pore over financial activities, then you can immediately move on to practice, but this does not mean that you will immediately make a profit. Although, perhaps the income from your activities will be significant. If you have not yet figured out whether there is a difference between profit and income, we suggest that you familiarize yourself with the differences between these two concepts.
Definition of income and profit
Income- these are all monetary or material values received by an individual, legal entity, organization or state for a certain period.
Profit- something for which the activity of the entrepreneur is carried out, that is, the financial resources remaining after deducting the costs of production and sale of products.
Formula for calculating income and profit
These two financial performance indicators have a specific calculation formula.
So, income is calculated as follows:
Income = total revenue
Moreover, the sample is made for a certain period.
Profit is calculated using a different formula:
Profit \u003d income - all costs of production and sales.
Moreover, net profit, or, in simple terms, the money remaining in the hands of an entrepreneur, is profit from which taxes and other deductions have already been deducted.
Findings site
- Income is all the cash generated over a period of time, while profit is cash minus taxes, production costs, and other costs.
- Income is calculated as the total amount of money received as a result of the sale of goods or services, and profit is income minus the costs of producing, acquiring and selling goods or services.
Why do giant corporations with billions of dollars of trading volume and revenues suffer losses? And how do small firms show very high profits, having a maximum of several hundred employees in their assets? Economic terms have a lot of overlap with each other, and juggling with concepts can be used to manipulate. It is especially important to separate categories such as "profit" and "revenue". Despite the seeming synonymy, they denote completely different concepts.
Revenue is all funds received by an individual or legal entity for goods or services, excluding the cost of their acquisition. Thus, the composition of the proceeds will include all material benefits received from trade, production, and consulting services. There are various ways to calculate this value. Revenue can be cash (at the time of receipt of funds) or accrued (at the time of transfer of goods, regardless of the time of payment for it).
Profit is the difference between the company's revenue and the cost of obtaining it. This value can be either positive or negative. Profit is expressed in cash and in kind and corresponds to the balance of funds after deducting all costs associated with the conduct of business activities.
Thus, if there are no production costs, then the profit will be equal to the revenue, but in practice this rarely happens. In other cases, the concepts will be different, reflecting different aspects of the enterprise. Thus, revenue is always either positive or zero. Profit can be both plus and minus, which is associated with the peculiarities of doing business.
Revenue can be calculated based on the volume of shipped products. After all, factoring, leasing schemes and deferred payment have been established today. Profit is calculated only upon receipt of money. You can calculate the revenue by adding up all the receipts of funds to the account of the enterprise. To establish the amount of profit, you need to subtract from income all the financial costs associated with doing business.
Regardless of the approaches to calculation (real or nominal), revenue remains constant. As for profit, it can be total (the difference between income and expenses) and net (the one that remains after paying taxes and fees). Understatement of real profit is one of the ways to reduce the tax burden on the enterprise. Overestimation of revenue, on the contrary, is a means to improve the image, create more financial "weight" of the company.
Findings site
- Calculus. Revenue is always greater than zero, if it is lower, then they speak of its complete absence. As for profit, this value can be either positive or negative.
- Compound. To calculate revenue, it is necessary to calculate the sum of all funds received by an individual or legal entity for a certain period of time. Calculating profit is more complicated: first you need to know the value of all income and expenses.
- Real expression. Revenue can be "virtual", for example, if the company works with a deferred payment, giving its customers the opportunity to deposit money later. Profit can be expressed only upon the fact of all settlements, when the funds are either received in hand or transferred to a bank account.
- Expression. Revenue is a single-digit value, since it consists of all receipts. Profit can be gross (general) and net (remaining after payment of all fees in favor of the state).
Many people think that "profit" and "revenue" is the same thing. However, there are many differences between these two financial concepts. Both "profit" and "revenue" are financial and business terms. Their meanings are close to each other because they are often used in the same context. Both of these terms are used in accounting and economic disciplines.
Revenue is the total amount of money that a business receives as a result of its activities, such as the sale of a product or service, but can also be received indirectly. A business can receive indirect income by investing money in something.
Profit
On the other hand, profit or net income is the money that remains in the business after deducting all costs and expenses from the revenue. Litigation and expenses include operating costs (salary, maintenance of equipment, safety, raw materials costs and many others), depreciation and capital. Costs can be divided into different types (usually in tandem) and include fixed and variable costs, direct and indirect costs, etc. Profits can be classified as positive or negative (plus or minus).
The difference between revenue and profit
For an ordinary employee, profit and revenue are one and the same. If an employee received a salary, this is his profit and revenue, because all taxes and pension payments are automatically deducted from the salary of employees, so what the employee receives in his hands is the remainder after all deductions.
They are also calculated differently. Profit is calculated by subtracting costs and expenses from total revenue. Revenue is calculated by multiplying the price by the number of units sold.
In economics, profit and revenue have a broader meaning. Economics looks at the profits and income of an entire industry or an entire country. This perspective allows a country or industry to assess growth or decline.
basic information
- “Profit” and “revenue” are concepts used in business, finance and economics, it is money or its equivalent received by an economic entity (business, companies or governments) or an individual (employees).
- Both concepts are used for different levels: personal, business and national. Accounting generally uses the personal and business levels to calculate profits and revenues. The economy counts nationally or globally.
- “Revenue” is generated after a business produces and sells goods and services. Revenue is calculated by multiplying the price by the number of units sold. Profit is calculated after all deductions and expenses are calculated.
- Profit and revenue are constantly involved in the production cycle. "Revenue" is the starting point for profit, and profit provides cash for the next cycle of production and increase in revenue.
For many people, it remains not completely clear what is the profit of the enterprise and income. And if you delve into this topic, then a lot of clarifying terms pop up: gross profit, EBITDA, net profit.
It turns out that when publishing their figures, economists, accountants and statisticians have in mind strictly defined meanings of each term. Such definitions are given in state legislative documents, and their knowledge is mandatory for all reporting employees. But since the sphere of profitability and profitability is of interest to many non-professionals, it would be useful to understand the essence of the concepts under discussion.
What is revenue?
The most easily perceived concept of the modern economy is revenue. Indeed, revenue is the funds received by an organization or private entrepreneur in payment for a product or service. It seems that everything is simple.
However, revenue has its own characteristics at the time of its recognition as such. In everyday life, revenue is understood as real money at the time the seller receives it - revenue is determined by payment. There is a name for this case: the cash method of accounting for revenue. That is, the company can give its goods to the buyer with a deferred payment, and until the money is credited to the current account, there will be no revenue. The downside of the cash method is the need to treat all advances received as revenue.
Another, more common method of accounting for revenue is usually used in large companies. This is an accrual method of accounting for revenue. That is, revenue is recognized as such already when the goods are transferred to the buyer or at the time of signing the act of services rendered, regardless of the actual date of receipt of money. In this case, advances for delivery are not considered revenue.
Revenue can be gross and net. Gross revenue is the total amount of money received for a product or service. Or the full cost of the barter agreement, if we are talking about barter transactions. This indicator is of little interest, since there are mandatory taxes and excises, as well as duties, which are directly included in the price of a product (service). Hence, they must be extracted from the buyer's payment and returned to the state.
So there is another indicator - net revenue. It characterizes the activity of the enterprise, regardless of the composition and size of taxes and excises included in the sale price. Net revenue is always indicated in one of the main reporting accounting documents - the profit and loss statement.
What is income?
Income is the amount by which the capital of the enterprise grows. How can he even grow? One way is by making contributions by the owners of the enterprise, and the other is by its activities. After all, any enterprise is created with the sole purpose of generating income.
The classification of income and expenses is such an important matter that statesmen have devoted many documents to it. The most significant of them are the Tax Code and PBU. The Regulations on Accounting “Income of Organizations” provide full explanations of the methods of formation and types of income of an enterprise.
Without delving into the intricacies of these monumental works, it can be noted that operating income is net sales proceeds. Revenues can be equal to revenue, but this is a rare case. Typically, an enterprise carries out a variety of activities, including different types of income.
In addition to income from direct statutory activities, the company may receive other income. For example, interest from the maintenance of own money on deposit or penalties collected from partners. These incomes are classified as other, but they also participate in the formation of the profit of the enterprise.
What is gross profit?
By summing the income received from various activities and reducing them by the costs associated with them, the gross profit is obtained. For example, the main activity for the sale of goods or services generates income, and the cost of these goods or services is an expense. The difference between them will give the gross profit for the main activity. The same approach applies to the determination of gross profit from other activities.
Interestingly, in trade, gross profit from the main activity is the difference between the selling price of goods and their cost. And for the industry, this indicator is more difficult to calculate, the cost includes many cost elements that are taken into account according to special rules.
Gross margin is a favorite indicator for comparing the performance of different businesses. In addition, you can determine the gross profit from various activities within the same enterprise and show the efficiency of the production of different goods. Gross profit is very popular with bank employees when calculating the creditworthiness of an enterprise. However, for the owners of the enterprise, another indicator is more important - net profit.
What is Net Income?
The result of all operations in the activities of the enterprise for a certain period is expressed as an indicator of net profit. It is obtained by reducing gross profit by the sum of all costs paid out of it. Such costs are classified according to the rules specified in the laws. In the general case, these are income tax, fines that the company must pay, loan interest and other operating expenses.
Gross profit minus these expenses creates the base from which dividends are accrued to the owners (shareholders) of the enterprise.
It is the net profit that shows the final effect of the enterprise, which is displayed in the main accounting document of the accounting department - the balance sheet.
Other types of income - EBIT and EBITDA
The importance of state regulation in the formation of net profit is difficult to overestimate. In fact, the state sets the rules of the game, regulating the costs by which an enterprise has the right to reduce its profits until the tax is charged on it. These costs, as well as the amount of income tax, may differ by state or even by area within each country.
If an analysis is made of the activities of enterprises operating in different countries or under different taxation systems, then no conclusions can be drawn on the basis of net profit. Therefore, other types of profit are used for comparison: gross, or specially cleared. Cleared earnings include EBIT (earnings before taxes and interest) and EBITDA (earnings before depreciation, taxes and interest).
The first acquaintance with the main economic categories of the enterprise's work took place. Now you know what profit and income are and how revenue differs from them.
