Differences Between Profit and Income
There is a slight difference between Profit vs Income. They are two important terms that are useful in determining the financial strength of a company.
The terms Profit and Income are often synonymous, especially net profit and net income which are quite similar but are different from the point of view of accounting.
- Profit in simple terms is the surplus amount left after deducting all the expenses from the revenue.
- Income in simple terms is the actual amount of money earned by a company.
Even if both income vs profit deal with the positive flow of cash, income vs profit are two concepts which differ in few scenarios.
In general, profit is the reward for the risk taken in the business by the company. Profit is the net amount of money left after deducting all costs, expenses, and taxes from the revenue. Profit works as a tool in the calculation of tax of the enterprise. We can describe profit as the difference between the selling price and the cost price of a product/service.
- Profit in company accounting can be divided into two – gross profit and net profit. Gross profit is the revenue minus cost of goods sold.
- Also, please note that Income is also divided into two – earned income and unearned income. Earned income is the income from the sales of goods or services. Unearned income is the passive income made through investments made in other places.
Profit vs Income Infographics
Here are the top 4 differences between Profit vs Income that you must know.
Profit vs Income Example
Let’s take an example to illustrate this.
For example, suppose Mr. B purchased some goods for $1000 and paid $40 on account of a carriage and $20 as octroi duty. He sold the goods for $1400.
- Gross profit = Total sales – Cost of goods sold
- Total Sales = 1400
- Cost of goods sold = 1060
- (Total Sales – Cost of goods sold) = 1400 – 1060
- Gross profit = 340
Net profit is the gross profit minus indirect expenses
Suppose in the above example, Mr. B paid $100 as salaries and $50 as rent. His net profit will be $190.
- Net profit = Gross profit – All indirect expenses
- Gross Profit = $340
- All indirect expenses = $150
- (Gross profit – All indirect expenses) = $340 – $150
- Net profit = $190
Income of the company can also be termed as net earnings. When we deduct the preferred dividend from the net profit, we get net earnings. It is the residual amount left with the company which can either be held by the company as retained earnings or distributed among the equity shareholders as the dividend. It can also be said that it is the net increase in the equity shareholder’s fund.
If the dividends distributed was $10, the Net Income would have been $190 – $10 = $180.
Key Differences Between Profit vs Income
Here are the key differences between profit vs income –
- Both income vs profit are calculated from revenue.
- Profit is realized after reducing the expenses from the revenue and the net income is further realized after reducing other expenses like preference shares and dividends.
- Profits are being calculated at various points in time by companies to know their financial strength and the areas they are lacking. But it is the income through which company can make the final decision whether the income should be put back into the business or not.
- Profit is an indicator of how much cash flow exceeds the total costs. Income indicates how much money a firm can utilize.
Head to Head Differences Between Profit vs Income
Here are the main differences between profit vs income –
|The basis of comparison||Profit||Income|
|Meaning||Difference between the amount earned and the amount spent in buying, operating, or producing something||The actual amount of money earned|
|Categories||Gross Profit and Net Profit||Earned Income and Unearned Income|
|Dependents||Profit is very much dependent on the revenue||Income is dependent on both revenue and profit|
|Indicator||It indicates how much a firm has earned over the total cost of sales.||It indicates what amount would be distributed among the shareholders or reinvested into the business.|
Profit vs Income – Final thoughts
There’s a very slight difference between the profit vs income. The actual difference is in the direction. The profit indicates how much money exceeds beyond the total cost of the company during a particular time frame. The income, on the other hand, indicates how much money the company can keep for reinvestment and how much dividend they would pay to the equity shareholders.
An individual who has started out in business, the profit and income are the same things. But it always helps if one understands the technical difference between the profit and income and what income vs profit indicate.
This has a been a guide to the top differences between Profit vs Income. Here we also discuss the Profit and Income differences with examples, infographics, and comparison table. You may also have a look at the following articles for gaining further knowledge in Accounting –
- Retained Earnings Formula
- Profit Margin
- Days Inventory Outstanding
- Gross Profit Margin Formula
- Days in Inventory Formula