People far from the economy do not see the difference between the concepts of "income" and "profit". However, the difference between the two categories is quite significant. They are one of the main indicators of the feasibility of financial and economic activities of enterprises.
To understand what each of these categories means, it is necessary to consider their exact definition. Profit and income are involved in the calculation of the net financial result of the company. How to calculate and apply them, every entrepreneur should know.
General information
Studying the system of constructing a report on the financial result of the activities of enterprises and organizations, one cannot but note the need to clearly understand each definition. Profit, income, sales revenue, gross profit have a specific calculation methodology.
At first glance, such a heap of synonymous concepts may seem unnecessary. However, if you look closely, there is a certain sense in this. Legislation, statistics, taxation and regulatory authorities apply these terms without fail.
Therefore, even the owner of a small business simply needs to understand the methodology for calculating his net profit. After all, it is precisely for its receipt that companies and organizations are created. Even for those who are far from the economy, it will be useful for the general development to understand the difference between these categories.
Cash approach
The amount of money that the company receives after the sale of its goods and services is revenue. This is a pretty general definition. Profit at the time of receipt of revenue is not yet known to the owner of the company.
Selling its goods, the company receives cash injections into its accounts. This is a box office approach. In the modern world, the phenomenon of payments on credit or by installments is often. Therefore, the proceeds from the sale of each unit of goods can only be calculated after the consumer has fully paid for his purchase.
It should also be noted that the profit of the organization can be calculated even before the disposal of finished products from production. If the client transferred the advance to the company account, these funds are already accounted for as revenue. This must be understood before performing the calculations.
Shipping Method
The profit of the organization, which it receives in the reporting period, can be calculated using another method. For this, the basis of the calculation will be the revenue from the shipment. The amount can be presented ready for settlement if the goods were transferred to the buyer or an act on the provision of services was signed. However, funds may not yet be transferred to the company account.
With this approach, the advance payment received from the customer is not included in the amount of revenue. By the way, it is more common, as it is more convenient for large companies in which the turnover is very high.
Small organizations can use the cash method of calculating income for accuracy of calculations.
Income concept
Profit and loss statement is familiar to every owner of an enterprise or organization. This is a statutory form of accounting. With its detailed consideration, the difference between all categories of calculating the financial result becomes clear.
Income is an increase in funds in the accounts of the enterprise or the sum of all transactions with customers at the end of the reporting period. This is the receipt of money from the main activity.
Cash flow comes from financial, operating and investment activities. In addition to fees for the provision of services or the sale of products, this should include, for example, collection from counterparties, interest on deposits, receipts from the sale of shares, etc.
But the sum of these revenues cannot provide information on the efficiency and feasibility of the enterprise.
Profit concept
As you progress in the study of the topic, you need to understand what is profit. Indeed, it is this indicator that seeks to obtain and increase any enterprise. Based on the available data on various types of profit, you can make an assessment of the company.
The organization receives profit if the total income exceeded the total expenses. A positive financial result indicates a competent disposal of the company's management of available resources.
Profit growth is possible when conducting regular analytical activities and planning. The prosperity and sustainability of the company depends on the correctness of global and local decisions at all levels of management.
Formula: Calculation
To make it clearer what each of these categories is, you should present them in the form of formulas. They will help to correctly understand the essence of the financial results obtained by the enterprise. The income formula is as follows:
Income = Revenue from operating, financial and investment activities.
Profit, the formula of which is discussed below, is calculated a little more complicated. It looks like this:
Profit = Income - Expense.
This is an indicator that can provide information about the real situation in the enterprise. It should be understood as the final indicator of the financial result accumulated by the enterprise.
Profit is also a major factor in financing the development and expansion of the enterprise. In addition to all of the above, it is also a source of state budget revenues. Pourings into it occur due to deduction from tax profit.
Profit Types
Studying the profit, the calculation formula of which was presented above, it is necessary to highlight several of its varieties. They are defined differently. They are evaluated to obtain data on the status of the company from various points of view.
The first is calculated gross profit. It is defined as the difference between sales revenue and cost. This indicator is often used when analyzing and comparing the economic efficiency of various enterprises.
Banks study gross margin to assess the creditworthiness of an organization. Therefore, it is important for the governing bodies to control the changes in this indicator.
Net profit is obtained by subtracting from the previous indicator of income tax, fines, interest on the use of borrowed capital and other expenses. This is the result of the enterprise. Owners can distribute the received funds among themselves in whole or in part to direct them to the expansion, development of production. These injections will be reflected in the balance sheet as retained earnings.
To assess the company's performance by international investors, such indicators of net profit as EBIT, EBITDA are used. They allow you to evaluate the effectiveness of domestic enterprises in comparison with foreign organizations. The first indicator is pre-tax profit, and the second does not take into account depreciation, taxes, and loan payments.
