Profit vs Income

There is a slight difference between Profit vs. Income. However, they are two critical terms that are useful in determining a company's financial strength.

The terms Profit and Income are often synonymous, especially net profit and net income, which are quite similar but are different from the point of view of accounting.

• Profit in simple terms is the surplus amount left after deducting all the expenses from the revenue.
• Income, in simple terms, is the actual amount of money a company earns.

Even if both income vs. profit deal with the positive cash flow, income vs. profit are two concepts that differ in a few scenarios.

In general, profit is the reward for the company's risk in the business. Profit is the net amount left after deducting all costs, expenses, and taxes from the revenue. Profit works as a tool in the calculation of tax of the enterprise. We can describe profit as the difference between the selling price and the cost price of a product/service.

• Profit in company accounting can be divided into gross profit and net profit. Gross profit is the revenue minus cost of goods sold.
• Also, please note that Income is also divided into two – earned income and unearned income. Earned income is the income from the sales of goods or services. Unearned income is the passive income made through investments made in other places.

Here are the top 4 differences between Profit vs. Income that you must know.

Let’s take an example to illustrate this.

For example, suppose Mr. B purchased some goods for $1000 and paid $40 on account of a carriage and $20 as octroi duty. He sold the goods for $1400.

• Gross profit = Total sales - Cost of goods sold
• Total Sales = 1400
• Cost of goods sold = 1060
• (Total Sales - Cost of goods sold) = 1400 - 1060
• Gross profit  = 340

Net profit is the gross profit minus indirect expenses.

Suppose in the above example, Mr. B paid $100 as salaries and $50 as rent. His net profit will be $190.

• Net profit = Gross profit - All indirect expenses
• Gross Profit = $340
• All indirect expenses = $150
• (Gross profit - All indirect expenses) = $340 - $150
• Net profit   = $190

The income of the company can also be termed as net earnings. We get net earnings when we deduct the preferred dividend from the net profit. It is the residual amount left with the company, which can either be held as retained earnings or distributed among the equity shareholders as a dividend. It can also be said that it is the net increase in the equity shareholder’s fund.

If the dividends distributed were $10, the Net Income would have been $190 – $10 = $180.

Here are the critical differences between profit vs. income –

1. Both incomes vs. profit are calculated from revenue.
2. Profit is realized after reducing the expenses from the revenue, and the net income is further realized after reducing other expenses like preference shares and dividends.
3. Profits are being calculated at various points in time by companies to know their financial strength and the areas they are lacking. But it is the income through which the company can decide whether the income should be put back into the business or not.
4. Profit is an indicator of how much cash flow exceeds the total costs. Income indicates how much money a firm can utilize.

Here are the main differences between profit vs. income –

There’s a very slight difference between the profit vs. income. However, the actual difference is in the direction. The profit indicates how much money exceeds the company's total cost during a particular time frame. The income, on the other hand, means how much money the company can keep for reinvestment and how much dividend they would pay to the equity shareholders.

For an individual who has started in business, profit and income are the same. But it always helps if one understands the technical difference between the profit and income and what income vs. profit indicates.

This article has been a guide to the top differences between Profit vs. Income. Here we also discuss the Profit and Income differences with examples, infographics, and comparison tables. You may also have a look at the following articles for gaining further knowledge in Accounting –

• Operating Profit vs. Net Profit
• Operating Income vs. Net Income
• Corporate Profit Example
• Ordinary Income Example