Profit vs Income | Top Differences You Must Know!
What is income?
Income, or net income, measures the overall profitability of the business and includes all monetary inflows and outflows over a predetermined time period. Calculations of income include the amount of revenue a business generates, potential additional sources of income, and all outlays made over a specific time period. Income is the actual money that a business makes and has on hand at any given time.
Income is a measure of how much money can be distributed to an organization’s shareholders and depends on both a company’s revenue and profit. Additionally, income can be reinvested in the business to encourage further development and production.
In the business world, there are primarily two types of income. These types include:
What is profit?
Profit is a term used in finance to describe any revenue that remains after expenses are taken into account. In other words, at the end of a specific time period, profit is the sum of money earned minus money spent on operating or producing something. An organization’s profit depends on its revenue because lower revenue equates to lower profit after expenses are deducted. A company can determine its earnings relative to the costs of producing the sales that generated the revenue by computing its profit.
Organizations must take into account two main types of profit. These types include:
What are the differences between profit and income?
When operating or managing a business, it’s crucial to comprehend the key distinctions between profit and income. These differences include:
Understanding the distinction between income and profit is crucial for making financial decisions and managing cash flow. An accurate picture of the cash flow available is not provided, for instance, if your assessment of your company’s current income shows that you have $500 in the bank but have expenses that are due at the end of the month. Making financial decisions based on income alone, without taking into account a company’s actual profit, can lead to spending money the company doesn’t have and accumulating unnecessary debt.
Examples of profit and income
The following are examples of profit and income:
FEL Corporation purchased several products for $1,000. The company spent a total of $1,300 on cost of goods sold, which included $200 in labor costs and $100 in additional materials. The products were then sold by FEL Corporation for a total of $1,500.
Total sales = $1,500
Cost of goods sold = $1,300
Sales less cost of goods sold (1,500 minus 1,300) equals $200.
FEL Corporations total profit is $200.
During a fiscal year, FEL Corporation spent $1,000 on the cost of goods sold. Additionally, they spent $300 on marketing and advertising, $15 on loan interest fees, and $1,000 on salaries and administrative costs. Sales for the same time period brought in a total of $4,000 for FEL Corporation.
Total sales = $4,000
Cost of goods sold = $1,000
Other business expenses (300 + 15 + 1,000) = $1,315
Total sales minus total expenses (4,000 – 1,315) = $2,685
FEL Corporations total profit for that fiscal period was $2,685.