What is the difference between income and profit? What is the difference between income and profit, their features

2024 Author: Henry Conors | [email protected]. Last modified: 2024-02-12 02:46

Few ordinary people can answer the question of how income differs from profit. Both concepts mean the receipt of funds and the possibility of investing them in the future. And how these indicators relate to revenue is also a mystery to a reader who is not savvy in economic matters. However, this oversight is easy to eliminate, it is enough just to 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. At the same time, the company's revenue directly depends on the price of a unit of goods and the volume of sales.

Let's consider an example. Suppose an enterprise organizes passenger transportation and offers three types of services with a fixed, that is,price independent of mileage: a trip around the district - 50 rubles, a trip between districts - 100 rubles, a trip to the suburbs - 200 rubles. During the reporting month, 1000 services were implemented, of which: 500 - within the district, 300 - between districts, 200 - trips to the suburbs. You can calculate the revenue for each type of service.

Total revenue will be 95 tr., based on the calculation:

50 rub.500 + 100 rub.300 + 200 rub.200=25 tr.+30 tr. +40 tr.=95 tr.

In further examples, by entering additional data, let's see how income differs from profit.

The accounting department adopted the following methods of attributing funds received 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 are received on the current account or at the cash desk. However, this method does not take into account offsets and requires advance payments to be included in revenue as well. Therefore, some enterprises keep records of revenue 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 may not yet come to the disposal of the enterprise.

Distinguish between gross and net revenue.

Gross and net revenues

Gross revenue is the money received for the sale of goods (works and services) before taxes, duties and obligatory payments, which were included in the price. On the gross revenue of the enterprise, in addition to the main factors of price and quantityproducts sold are affected by the following determinants:

• production volume;
• offered product range;
• goods quality;
• availability of related service;
• labor productivity;
• level of effective demand, etc.

According to this principle, we can conclude how gross income differs from gross profit. But we'll talk about this later.

Net revenue is obtained after "cleaning" the gross revenue from VAT and other taxes, deductions, discounts and the cost of defective products returned by customers 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 differs from profit and revenue.

An enterprise can receive funds not only from its main activity. The income of the enterprise is formed by receipts from all types of activities, reduced by the amount of material costs, with the exception of wages. The material costs that are calculated in the cost of production include:

• wages;
• social contributions to the relevant off-budget 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.

Let's consider an example. Let us assume that for the consideredperiod, the passenger transportation company incurred the following costs:

• remuneration of staff along with deductions - 40 tr.
• fuel - 20 tr.
• depreciation - 10 tr.
• other expenses - 5 tr.

Total costs of the enterprise, excluding wages, will amount to 35 tr. Then income can be calculated as follows: 95 tr. - 35 tr.=60 tr.

Looking ahead a little, we note that the profit will be 60 tr. - 40 tr.=20 tr.

Assuming no seasonality and uniform demand for carrier services, this business will bring the manager an annual profit of 240 tr.

If the company does not incur material costs, then the amount of income will completely coincide with the amount of proceeds from sales.

Gross and net income

Income shows how much the company's capital has grown during the reporting period. It may be gross. Tax-free gross income will be equal to net income.

Note that income, as well as revenue, is always a positive economic indicator, while profit can be negative in case of a loss-making activity. This is the difference between gross income and profit.

After tax and other obligatory payments are deducted, income becomes net. Then it is divided into three components:

1. Employment costs and social policy of the enterprise or consumption fund.
2. Money received from successful investment activity orinvestment income.
3. Costs of premiums or insurance income.

Income in microeconomics

In microeconomics, income is divided into three types:

1. Total revenue, 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 and the volume of sales. In this case, total income equals sales revenue.
2. Average revenue, which corresponds to the income received per unit of the good sold. The indicator is obtained by dividing the total income by the amount of goods sold in physical terms.
3. Marginal revenue shows the amount of revenue increment for each additional unit of the good.

Next, let's look at the difference between income and profit.

And what does the term "profit" mean

Profit is the difference between earned income and costs incurred as a result of business activities. In a simplified form, profit is already included in the cost of goods: Price=Costs + Profit.

It turns out that profit is the ultimate goal of business 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.

Theseenterprises can conduct profitable activities if it is aimed at achieving the main non-commercial goal. There is no question of profit here at all.

Interesting from the point of view of profitability are municipal enterprises, in which subsidies are one of the income items. Nothing forbids these enterprises from being profitable, but by definition they strive at least to achieve 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 are related 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 activities of the enterprise, reduced by related expenses.

What is the difference between net income and net income? By analogy, net profit is a "tax-free" income indicator that the head of the enterprise can use at his discretion:

• direct to the development of business, new or existing activities;
• pay the body of the loan and interest on it;
• encourage employees of the enterprise 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 andaccounting (that is, explicit, calculated) costs.

Taking into account the economic costs, including the implicit costs associated with the alternative of economic choice in conditions of limited resources, we will talk about economic profit: revenue minus economic costs.

Let's consider an example. Since the head of the passenger transportation enterprise at one time chose the path of an entrepreneur, and not the path of an employee with savings in the bank, he has formed alternative economic costs, for example, as follows:

• savings in a bank account that were invested in business development - 60 tr.
• lost interest from the stay of money in the bank - 6 tr.
• lost wages from work for hire 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 t.r.+60t.r.+6t.r.)=-6 t.r.

This business for an entrepreneur will not pay off in a year. If the company's accountant congratulates the manager on the annual profit, then the entrepreneur himself will assess the performance of the business as satisfactory.

CV

Summarize and answer the question of how income differs from profit, what is the difference between them and revenue, highlighting the main points in thesis:

• Revenue and income are always positive economic indicators. Profits can be positiveprofitable), negative (the company is unprofitable) and equal to zero (the company is at the breakeven point).
• Income includes profit, as well as the cost of wages for employees of the enterprise and the social component of domestic policy.
• Profit is a calculated indicator. It can take into account implicit economic costs. Income can always be calculated and entered into the balance sheet.
• Another difference between income and profit is the legal binding: commercial enterprises work to achieve profit, non-profit enterprises should not receive profit at all, and municipal enterprises can be profitable, but subsidies only involve breaking even. All enterprises can receive income.

Thus, revealing the little terminological nuances of the profitable part of the activities of enterprises will allow readers to become more savvy in economic matters.