Profit and income are the key indicators of the efficiency of the financial and economic activities of the company; their profitability and solvency depend on them. There are a number of important differences between these concepts.
The concept of net income and its difference from profit
In English, the concepts of net income and profit are identical, while in Russian, there are a number of differences between them. The concept of net income is broader than net income.
Net sales revenue is calculated as gross sales revenue minus the value of items returned and discounts.
For an individual, net income is income after taxes, withholdings, and loans.
Profit is the target of the company's work, which stimulates its further activities, it is a part of the annual income or revenue that remains after reimbursement of the costs of production and sales of products. Distinguish between gross, net and marginal profit.
Gross profit is generated from three sources, among them:
- profit from the sale of products, which is calculated as the difference between the proceeds from the sale of products (excluding VAT and excise taxes) and its cost;
- profit from the sale of tangible assets - the difference between the sale price and the cost of their acquisition;
- non-operating profit (income from securities, equity participation, property lease).
Net income is the company's profit before dividend payments. It is calculated as the difference between the company's total income and expenses (for example, the cost of goods) that it incurred in the course of its activities, then depreciation, taxes, penalties, loan payments are deducted from this indicator. Net income can be found in the income statement. It is a key indicator of a company's performance and is also used to determine earnings per share.
Profit margin is defined as the positive difference between net sales income and cost of goods or services sold.
It is also worth distinguishing between accounting and economic profit. If the accounting takes into account only the expenses allowed by the legislation, then in the economic one also other informal expenses of the entrepreneur (for example, corruption, additional bonuses to employees).
Thus, net income is always less than net income.
Annual income concept
Annual income is broader than net income. In essence, it is close to the concept of annual revenue. It represents the amount of money a company receives from the sale of goods and services to its customers in a year. Revenue is always higher than net profit, because includes all costs incurred by the company in the production and sale process.
The sources of annual income can be proceeds from the sale of goods or the provision of services, from investment or financial activities. The determining value belongs to the income received from the main activity, since it is he who determines the meaning of the existence of the enterprise.
The amount of annual income depends on the effectiveness of the assortment, sales, pricing and marketing policy pursued by the company.
Income, net of taxes, can be used for consumption and investment purposes. The consumption fund is directed to wages and other payments. The investment fund serves as a source of development for the company and diversification of its activities.
