Differences Between Revenue and Profit
The key difference between Revenue and Profit is that Revenue refers to the income generated by any business entity by selling their goods or by providing their services in an accounting period during the normal course of its operations whereas Profit refers to the amount realized by the company after deducting the expenses from the total amount of revenue.
If revenue is a superset, the profit would be a subset. When a company doesn’t generate revenue, there’s no question of earning profits. Why?
Here’s why. Let’s say that Gigantic Inc. has made $100,000 at the end of the year 2017. Now, let’s say the profit is 10% of the revenue, i.e., $10,000 at the end of the year. Now, if there’s no revenue, what would be the profit? Yes, nil.
But at the same time, without revenue, the loss can exist.
Let’s say a business just started its operations. And upfront, it has incurred $40,000. But unfortunately, at the year-end, they generated no revenue. As a result, the entire expense of $40,000 would be considered a loss.
To understand the revenue vs. profit, one needs to master the income statement. Once you understand how the income statement works, the rest would be easy.
- The first item on the income statement is “gross sales.” “Gross sales” is the product of the number of units sold and the selling price per unit. We can say that this is revenue, but from this amount, the firm needs to deduct any sales return or sales discount (if any).
- Deducting the sales discount/sales return from the gross salesGross SalesGross Sales, also called Top-Line Sales of a Company, refers to the total sales amount earned over a given period, excluding returns, allowances, rebates, & any other discount. will give us “net sales.” And this is what we call “revenue.”
- Now, revenue can be of two types – operating revenueOperating RevenueOperating revenue is defined as revenue earned by an individual, corporation, or organization from the core activities that they undertake on a regular basis. There are several methods to earn revenue, but operational revenue is earned by the core business activities that the organization undertakes in its daily operations. (revenue that’s generated via operations) and non-operating revenue (revenue that’s generated from other sources).
- In the income statement, we would deduct the 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. from net sales, and we would get the gross profit. And then, from gross profit, we will deduct the operating costs, and we would get an operating profit, which is also called EBIT (Earnings before interests and taxes)Earnings Before Interests And Taxes)Earnings before interest and tax (EBIT) refers to the company's operating profit that is acquired after deducting all the expenses except the interest and tax expenses from the revenue. It denotes the organization's profit from business operations while excluding all taxes and costs of capital..
- Then from EBIT, we would deduct the interest and taxes (and add back any other incomes if at all), and we would get PAT (Profit After Taxes). PAT can also be termed as net profit.
Profit vs Revenue Infographics
- Profit cannot exist if there’s no revenue. Revenue isn’t dependent on profit. Rather revenue can exist without it (for example, if a start-up has more expenses than revenue, then there would be no profit, but revenue would exist).
- Profit is the result of deducting expenses from the revenue. On the other hand, we can calculate revenue by multiplying the number of goods sold with the selling price per unit.
- Profit can be of two types – gross profits (close to operating profit) and net profit (including the incomes from other sources). Revenue can also be of two types – operating revenue (revenue earned from the operations of the organization) and non-operating revenue (revenue earned from other sources).
- Both profit and revenue can be found in the income statementThe Income StatementThe income statement is one of the company's financial reports that summarizes all of the company's revenues and expenses over time in order to determine the company's profit or loss and measure its business activity over time based on user requirements.. If one understands the income statement well, understanding them would be quite easy.
Profit vs. Revenue Comparative Table
|Basis for comparison||Profit||Revenue|
|Meaning||It is the amount left after deducting the expenses from the revenue.||Revenue is the product of the number of goods sold and the selling price per unit. We can also include other incomes as part of the revenue.|
|Equation||Profit = Revenue – Expenses||Revenue = No. of units sold * Selling price per unit|
|Superset & Subset||It is a subset of revenue.||It is a superset of profit.|
|Dependence||Without it, there can be no profit.||Without it, revenue can be earned (if the revenue is lesser than expenses, there will be loss).|
|Types||Profit can basically be of two types – net and gross profitGross ProfitGross Profit shows the earnings of the business entity from its core business activity i.e. the profit of the company that is arrived after deducting all the direct expenses like raw material cost, labor cost, etc. from the direct income generated from the sale of its goods and services..||Revenue can also be of two types – operating revenue and non-operating revenue.|
|Found in||Profit can be found on the income statement. Rather net profit is the last item on the income statement.||It can also be found in the income statement. It’s the first item (if we start with net salesNet SalesNet sales is the revenue earned by a company from the sale of its goods or services, and it is calculated by deducting returns, allowances, and other discounts from the company's gross sales.) of the income statement.|
Profit is a part of revenue. And profit is an indicator that a company is financially healthy. When a business starts its operations, it may generate revenue, but rarely it makes profits since the upfront costs are quite high. After a few years of operations, an organization can break even and go beyond the break-even point to enjoy the profit.
Both are direct indicators of where a company is traversing.
Revenue vs. Profit Video
This has been a guide to Revenue vs. Profit. Here we discuss the top differences between them along with infographics and comparison table. You may also have a look at the following articles for gaining further knowledge in Accounting –