Few ordinary people will be able to answer the question of how income differs from profit. Both concepts mean the arrival of funds and the possibility of investing in the future. And how these figures relate to revenue is also a mystery to the reader who is not knowledgeable in economic matters. However, this oversight is easy to eliminate, just understand the terminology.
What is meant by the term "revenue"
Find out what is the profit, income and revenue of the enterprise.
Revenue is the money received by the enterprise for the sale of goods (works and services) in a specific period of time. It can be calculated by individual groups of goods or by type of activity. Moreover, the company's revenue directly depends on the unit price of the product and the volume of sales.
Consider an example. Suppose an enterprise organizes passenger transportation and offers three types of services with a fixed price, that is, independent of mileage: a trip around the district - 50 rubles, a trip between regions - 100 rubles, a trip to the suburbs - 200 rubles. During the reporting month, 1000 services were sold, of which: 500 - in the district, 300 - between the regions, 200 - trips to the suburbs. You can calculate the revenue for each type of service.
The total revenue will be 95 TR, based on the calculation:
50 rubles * 500 + 100 rubles * 300 + 200 rubles * 200 = 25 tr. + 30 tr. +40 tr = 95 tr
In further examples, introducing additional data, we will see how income differs from profit.
In accounting, the following methods have been adopted for attributing received funds to revenue, namely: cash and accrual methods. According to the first method, the company's revenue arises at the moment when the funds are received, that is, when they arrived at the current account or at the cash desk. However, this method does not take into account offsets and requires advance payments also to be included in revenue. Therefore, some enterprises maintain revenue accounting on an accrual basis, according to which, revenue appears at the time of the conclusion of contracts for the supply and shipment of goods, while the money from the sale in fact may not yet be at the disposal of the enterprise.
Distinguish between gross and net revenue.
Gross and net revenue
Gross revenue is money received for the sale of goods (works and services) before taxes, duties and mandatory payments, which were included in the price. In addition to the main factors of price and quantity of products sold, the gross revenue of an enterprise is influenced by the following determinants:
- volume of production;
- proposed product range;
- quality of goods;
- availability of related services;
- labor productivity;
- level of effective demand, etc.
According to this principle, we can conclude how the gross income differs from gross profit. But let's talk about this further.
Net revenue is obtained after the “clearing” of gross revenue from VAT and other taxes, deductions, discounts and the cost of defective products returned by buyers after purchase. Similar indicators are calculated for both income and profit.
What is meant by the term "income"
Now let’s figure out how income and profit are different.
An enterprise may receive funds not only from its core business. The income of the enterprise is formed by receipts from all types of activities, reduced by the amount of material costs, excluding wages. The material costs that are calculated in the cost of production include:
- salary;
- social contributions to relevant extrabudgetary funds;
- raw materials, fuel and electricity;
- Depreciation
- other expenses.
What is the difference between income and profit? It turns out that income includes profit and labor costs.
Consider an example. Suppose that during the period under review, the passenger transportation company incurred the following costs:
- salary of staff together with deductions - 40 tr
- fuel - 20 tr
- depreciation - 10 TR
- other expenses - 5 TR
Total costs of the enterprise without taking into account wages will amount to 35 tr Then the income can be calculated as follows: 95 TR - 35 tr = 60 tr
Running a little ahead, we note that the profit will be 60 tr - 40 tr = 20 tr
Given the absence of seasonality and a uniform demand for carrier services, this business will bring the manager an annual profit of $ 240 tr.
If the company does not bear material costs, then the amount of income will completely coincide with the amount of revenue from sales.
Gross and net income
Income shows how much the company’s capital increased during the reporting period. It can be gross. Non-taxed gross income will be equal to net.
Note that income, as well as revenue, is always a positive economic indicator, while profit can also be negative in the case of a loss-making type of activity. This distinguishes gross income from profits.
After deducting tax and other obligatory payments, the income becomes net. Then it is divided into three components:
- The cost of labor and social policy of the enterprise or consumption fund.
- Money received from successful investment activities or investment income.
- Costs of insurance premiums or insurance income.
Income in microeconomics
In microeconomics, incomes are divided into three types:
- Total income, it represents the amount of money from the sale of a certain good. It is calculated as the product of the price of the goods by the volume of sales. In this case, total income is equal to sales revenue.
- Average income (average revenue), which corresponds to the income received from a unit of goods sold. The indicator is obtained by dividing total income by the amount of goods sold in physical terms.
- Marginal revenue shows the increment of income for each additional unit of good.
Next, consider the difference between income and profit.
And what does the term "profit" mean?
Profit is the difference between earned income and expenses incurred as a result of commercial activity. In a simplified form, profit is already laid in the cost of goods: Price = Costs + Profit.
It turns out that profit is the ultimate goal of the activities of commercial enterprises and entrepreneurs.
But non-profit enterprises are created to carry out socially significant activities related to:
- science;
- education;
- charity;
- Politics
- culture
- social sphere, etc.
These enterprises can conduct profitable activities if it is aimed at achieving the main non-profit goal. There is no question of profit here at all.
From the point of view of profitability, municipal enterprises are also interesting, for which subsidies are one of the income items. Nothing prohibits these enterprises from being profitable, but by definition they strive to at least break even. Moreover, payments from the budget are calculated only up to 0 in the financial result. The city acts as a customer for social services. And if these same services relate to the main activity of the enterprise, then profit can only be obtained from additional sources.
Gross and net profit
Gross profit is the calculated income from all types of activities of the enterprise, reduced by the costs associated with them.
What is the difference between net income and net profit? By analogy, net profit is a tax-free revenue indicator that the head of the enterprise can use at his discretion:
- to direct to the development of business, new or existing areas of activity;
- pay the loan body and interest on it;
- to encourage employees of the company with additional incentive payments;
- invest etc
Profit in microeconomics
In microeconomics there are two types of profit: accounting and economic.
The first is the difference between revenue and accounting (i.e., explicit, calculated) costs.
Taking into account economic costs, including implicit costs associated with the alternative to economic choice in conditions of limited resources, we will already talk about economic profit: revenue minus economic costs.
Consider an example. Since the head of the enterprise for passenger transportation at one time chose the path of an entrepreneur, and not the path of an employee with savings in a bank, he had the opportunity of economic costs, for example, such:
- savings in a bank account that were invested in business development - 60 tr
- the lost percentage of the stay of money in the bank - 6 TR
- lost wages from employment per year - 180 TR
It turns out that the annual profit of 240 tr, calculated by us earlier, should be reduced by the amount of economic costs:
240 TR - (180 tr. + 60t.r. + 6t.r.) = -6 tr.
This business for an entrepreneur will not pay off in a year. If the accountant of the enterprise congratulates the manager on the annual profit, then the entrepreneur himself will evaluate the business performance as satisfactory.
