The key difference between Profit vs Income is that Profit of the business refers to the amount realized by the company after deducting the expenses from total amount of revenue earned during an accounting period, whereas, Income refers to the amount left as the earning in the organization after deducting other expenses such as dividends etc from the profit amount.
Differences Between Profit and Income
There is a slight difference between Profit vs. Income. They are two critical 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 that differ in a 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 soldCost Of Goods SoldThe cost of goods sold (COGS) is the cumulative total of direct costs incurred for the goods or services sold, including direct expenses like raw material, direct labour cost and other direct costs. However, it excludes all the indirect expenses incurred by the company..
- Also, please note that Income is also divided into two – earned income and unearned income. Earned incomeEarned IncomeEarned income is any amount earned by an individual, such as a salary, wages, or employee compensation. It can also be an individual's income through their own business. is the income from the sales of goods or services. Unearned income is the passive income made through investmentsPassive Income Made Through InvestmentsPassive investing is a strategy used by investors to maximize their returns by avoiding frequent portfolio churning by buying and selling securities and instead buying and holding a diverse range of securities. 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
The 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 earningsRetained EarningsRetained Earnings are defined as the cumulative earnings earned by the company till the date after adjusting for the distribution of the dividend or the other distributions to the investors of the company. It is shown as the part of owner’s equity in the liability side of the balance sheet of the company. 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.
Critical Differences Between Profit vs. Income
Here are the critical differences between profit vs. income –
- Both incomes 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 the 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 flowCash FlowCash Flow is the amount of cash or cash equivalent generated & consumed by a Company over a given period. It proves to be a prerequisite for analyzing the business’s strength, profitability, & scope for betterment. 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 IncomeUnearned IncomeUnearned income refers to any additional earnings made from the sources other than employment, such as returns on investments, dividends on bonds and equities, interest on savings, etc.|
|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 the total cost of the company during a particular time frame. The income, on the other hand, means how much money the company can keep for reinvestmentReinvestmentReinvestment is the process of investing the returns received from investment in dividends, interests, or cash rewards to purchase additional shares and reinvesting the gains. Investors do not opt for cash benefits as they are reinvesting their profits in their portfolio. and how much dividend they would pay to the equity shareholders.
An individual who has started in business, profit, and income are the same thing. But it always helps if one understands the technical difference between the profit and income and what income vs. profit indicates.
Profit vs. Income Video
This article has 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 tables. You may also have a look at the following articles for gaining further knowledge in Accounting –