Business terminology can be confusing even for the most seasoned entrepreneurs. Two terms that are often incorrectly used interchangeably are “profit” and “revenue”. While these terms are related, it is important that you don’t mix them up. This article intends to help you better understand the difference between profit and revenue so that you don’t make this mistake!
What Is Revenue?
Revenue is simply the total income of a business over a specific time period. This includes money brought in from sales, as well as any other sources of income, such as investments or rent. Revenue can also be called turnover or gross income. You must consider the cost of goods sold (COGS) to calculate the revenue. The COGS is what it costs a company to produce the goods that it sells. It’s important to note that COGS does not include marketing or administrative costs.
Types Of Revenue
Accrual Accounting
A credit transaction refers to when a customer defers payment to a later date. It is shown on the income statement as a “sellers’ credit.” A business can offer goods on credit to customers in exchange for money that will be paid back later. However, because the transaction appears on the balance sheet as if the item was sold and the money was received at a later date, it is recognized as a sale for purposes of accounting.
Cash Accounting
This only includes sales that were made and cash that was received on the same day. So, this is what is used for tax purposes as it more accurately reflects what was actually brought into the business.
Also, revenue sources can include many departments that generate sales. Revenue is further classified into two types: operating revenue and non-operating revenue:
Operating Revenue
This is the income a company generates from selling products and services that are part of its normal business operations. We use this type of revenue to calculate gross profit, net profit, and other ratios.
Non-Operating Revenue
A company’s income from activities that are not part of its normal day-to-day operations is called non-operative revenue. For example, rental income from leasing out property or investment income from dividends. Non-operating revenue does not impact a company’s profitability ratios.
What Is Profit?
Two terms that we use interchangeably are profit and bottom line. In accounting, the bottom line has long been defined as the difference between income and expenditures. You need to deduct costs, taxes, charges, rental or mortgage payments, utility bills, and other operational costs from revenue to calculate the profit. It is also necessary to indicate whether profits were paid out as dividends or reinvested in order for the company to grow. Dividends can be paid out to shareholders or retained within an organization to assist its development.
The bottom line is a summary of the financial success of a company over a period of time. A business’s main objective is to create money. As a result, it must calculate its productivity by adding up its revenue and deducting expenses in order to produce a profit. The top line of income comes first, followed by the bottom line of operating expenditures. Finally, operating expenditures are deducted from the top line to determine the income’s bottom line.
Types Of Profit
There are three main types of profit:
Operating Profit
Primary business activity is the most profitable operation a business engages in. Operating profit is defined as the profit derived by the company’s principal line of business before any paid interest, taxes, or extra investment earnings are removed from the total profit figure.
Gross Profit
Gross profit is the money a company takes from sales minus what it costs to produce or purchase those products, but before other deductions, such as administrative and selling expenses, are made.
Net Profit
Net profit is left over after all expenses have been subtracted from revenue. This includes taxes, interest payments, and other deductions.
What Is The Difference Between Profit And Revenue?
Revenue is the total income from the sale of goods and services. This figure appears on the top line of the income statement. Also, it is the basis for calculating gross profit, net profit, and other profitability ratios in the business.
Profit, on the other hand, is the amount that remains after expenses, taxes, costs, rent or mortgage, utilities, wages, and any other running expenses have been deducted from revenue.
In other words, revenue shows how much money a business has taken in. While profit tells us how much money is left over after all expenses have been paid. Thus, while they may sound similar, profit and revenue mean different things.
So What’s The Bottom Line?
Both profit and revenue are essential as they each measure how well the business is doing. This information helps to make informed decisions about a company’s future, such as whether to expand or reduce operations. In addition, investors and creditors use these numbers to assess the risk associated with lending money to or investing in a business.
