People who are far from the economy do not see the difference between the concepts of "income" and "profit". However, the difference between these two categories is quite significant. They are one of the main indicators of the expediency of the 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. Every entrepreneur should know how to calculate and apply them.
General information
Studying the system for constructing a report on the financial result of enterprises and organizations, one cannot fail to note the need to clearly understand each definition. Profit, income, sales proceeds, gross profit have a specific calculation method.
At first glance, such a heap of synonymous terms may seem unnecessary. However, if you look closely, this makes some sense. Legislation, statistics, taxation and regulatory authorities apply these terms without fail.
Therefore, eventhe 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 overall development to understand the difference between these categories.
Cash approach
The amount of money that an enterprise receives after the sale of its goods and services is revenue. This is a fairly general definition. The profit at the time of receipt of the proceeds is not yet known to the owner of the company.
By selling their products, the company receives cash injections into its accounts. This is the cash approach. In the modern world, it is not uncommon to pay on credit or in installments. Therefore, the proceeds from the sale of each unit of goods can be calculated only after the consumer has paid in full 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 an advance to the company's account, these funds are already taken into account as revenue. This must be understood before performing calculations.
Shipping method
The profit of the organization, which it receives in the reporting period, can be calculated using another method. For this, the calculation base will be the shipment revenue. The amount can be presented ready for settlement if the goods have been handed over to the buyer or an act on the provision of services has been signed. However, funds may not yet be transferred to the company's account.
With this approach, the advance payment received from the customernot included in 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 income calculation for accuracy of calculations.
Income concept
The profit and loss statement is familiar to every owner of a business or organization. This is a legally established form of accounting. Upon its detailed consideration, the difference between all categories of calculating the financial result becomes clear.
Income is an increase in funds in the company's accounts or the amount of all transactions concluded with customers at the end of the reporting period. This is the receipt of money from the main activity.
Cash flow comes from financing, operating and investing activities. In addition to payment for the provision of services or the sale of products, this should include, for example, collections from counterparties, interest on deposits, proceeds from the sale of shares, etc.
But the amount of these receipts cannot give information about the efficiency and expediency of the enterprise.
Profit Concept
Moving forward in the study of the topic, it is necessary to understand what is profit. After all, it is this indicator that any enterprise seeks to obtain and increase. Based on the available data on various types of profits, it is possible to make an assessment of the company's performance.
The organization receives profit if the total income exceeded the total expenses. Positivethe financial result testifies to the competent management of the company's available resources.
Profit growth is possible with 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 the listed 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:
Revenue=Revenue from operating, financial and investment activities
Profit, the formula of which is discussed below, is calculated a little more complicated. She looks like this:
Profit=Income - Expense
This is the indicator that can provide information about the real state of affairs in the enterprise. It should be understood as the final indicator of the financial result accumulated by the enterprise.
Profit is also the main 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. Infusions into it occur due to the deduction of tax from profits.
Types of profits
Studying the profit, the calculation formula of which was presented above, it is necessary to highlight several of its varieties. They are defined in different ways. They are evaluated to obtain data on the state of activitycompanies from different perspectives.
Gross profit is calculated first. 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 examine gross profits to assess an organization's creditworthiness. Therefore, it is important for the governing bodies to keep changes in this indicator under control.
Net profit is obtained by deducting income tax, fines, interest charges for the use of borrowed capital and other expenses from the previous figure. This is the result of the enterprise. The owners can distribute the received funds among themselves in whole or in part direct them to the expansion and development of production. These injections will be reflected in the balance sheet as retained earnings.
To evaluate the company's activities by international investors, such indicators of net income as EBIT, EBITDA are used. They allow assessing the effectiveness of domestic enterprises in comparison with foreign organizations. The first indicator is profit before tax, and the second one does not take into account depreciation, taxes, loan fees.
Calculation example
To understand the difference between the presented indicators of financial performance, it is necessary to consider them with an example. Net profit and net income are necessarily studied in dynamics for several reporting periods. But aboutonly profit can tell the efficiency of a company.
Let's say a new company selling household appliances has been set up. In the first month, she received cash income of 500 thousand rubles. It is impossible to say how the organization worked during this period of time.
If after subtracting expenses, the company had a loss - the business is unpromising. Sometimes expenses equal income. In this case, the enterprise worked without loss.
The positive financial result speaks about the expediency of commercial activity. For example, if after paying all fees the company still has 20 thousand rubles left, this amount can be used to expand its activities. This business is profitable.
By looking at the above facts, one can understand the difference between the major economic categories. Their definition must be clearly understood. Profit is always less than income. This is what the company strives for and wants to increase it with each operating period.
