Is revenue the same as profit?

This article is devoted to the description of such economic terms as revenue, income and profit, which are related but not identical. Every financially literate person, even if he is not a professional accountant, should clearly distinguish between these concepts in order to easily navigate in the realities of the modern market economy

Revenue is

What is revenue? Revenue refers to the amount of money earned by an enterprise or organization during the reporting period of time through the sale of goods, works and services. This term is widely used in entrepreneurial circles. It is the best criterion for assessing the efficiency of an enterprise or organization. Accounting does not reflect income, but only revenue.  

There are two ways of accounting for it in enterprises:

• Under the cash method, revenue is determined in the form of real money that entrepreneurs receive for the sale of goodsand for the performance of work or services. If installment payments are granted, they will be received after the actual payment for the goods by the buyer.
• The second method of revenue recognition is accrual accounting. This method provides for its recognition when contracts are signed or goods are received by customers, even if payment is actually made at a later date. Payments in advance are not relevant.

All revenues of enterprises and organizations are classified into two types - net and gross. Gross means all payment in the aggregate, which is received for the sale of goods, works or services. Net is made up of the first component less indirect taxes, duties and excise taxes, which is applied in accounting.

The total revenue of enterprises and organizations is understood to be the sum of the following components:

• Revenue that is derived from the firm's principal activity;
• investment proceeds, which are received from the sale of securities;
• financial revenue. 

Revenue and profit

Many entrepreneurs mistakenly believe that the definition of "income" and "revenue" are identical. Under income is understood the sum of all the money that the enterprise or organization has earned for the reporting period of time. This indicator shows that increase in financial income of the company with the help of capital growth through asset additions.

Order of the Ministry of Finance of the Russian Federation No. 32n dated 06.05.1999 "On Approval of Accounting Regulations "Income of the Organization" PBU 9/99" (ed. dated 06.04.2015) contains a detailed interpretation of the methods of income generation. This document also contains their classification.  

Revenue includes only the money received by an enterprise or organization in the course of its core activities. Income, on the other hand, takes into account, in addition, other sources of cash receipts (for example, from the sale of shares, from the receipt of interest on deposits, etc.).

In today's economic realities, enterprises and organizations often have to conduct very diverse activities, and, consequently, they have a variety of channels for income. They are understood as the total profit of enterprises and organizations, and this indicator characterizes the effectiveness of their work in the reporting period. This amount increases the capital of the company.

In some cases, a firm's income and revenue are equal, but much more often there are several components of income, while revenue is only one. This concept is not limited to commercial activities, revenues can have a private individuals in their daily life activities. They include salaries, pensions, allowances or scholarships. Income is the receipt of any money outside of business activities.

The difference obtained by subtracting total expenses from total income including taxation is called profit. In everyday terms, it is the amount that can be safely put in the piggy bank. To calculate profit, sum up all the money received and subtract from it the sum of all the available costs.

Unfavorable situation is possible even at high entrepreneurial income, when the profit is equal to zero or becomes negative at all. The main profit of enterprises and organizations is formed from losses and profits, which are obtained in all areas of entrepreneurial activity.

With the help of economic science it is possible to distinguish several main sources of profit generation by economic entities:

• Innovative developments of enterprises or organization;
• entrepreneurial skills to navigate well in complex economic situations;
• utilization of investment sources and capital in production activities;
• benefiting from the monopoly position of an enterprise or organization in the market for the sale of products.

In economic science there are 5 types of profit: accounting, economic (excess profit), arithmetic, normal and economic.

The first type of profit is used in accounting. It is used to form the relevant statements and to calculate the taxable base. In order to calculate the accounting profit it is necessary to deduct all reasonable apparent costs from the total revenue.

The second type of profit when calculating takes into account all types of financial costs that were made in the production process, according to which it is a more objective indicator.

The third type of profit is calculated as gross income minus all types of costs.

The fourth type of profit is in direct relation to lost profits in the production process.

Finally, the fifth type of profit is calculated as the sum of economic and normal profit. Based on its value, all strategic decisions on the further mode of functioning of enterprises or organizations are made.

There is also the following classification of profits - gross and net. In the first case, only those costs that are directly related to production processes are to be taken into account in its calculation, while in the second case - any costs that are possible in the course of economic and business activities.

For example, gross profit in trading processes is calculated as the difference between the selling price of goods and their cost price. If an enterprise or organization operates in several areas, gross profit is calculated for each area separately. This indicator is used to analyze the profitability of each line of business (it is determined in which segment there is maximum profit). It is also calculated by banks to determine the creditworthiness of enterprises or organizations.

Net profit is determined by subtracting all types of costs (all types of taxes and interest on loans) from gross profit. This indicator is used in the calculation of dividends for owners and shareholders of enterprises and organizations. Net profit is reflected in balance sheets and is considered to be the main characteristic of business efficiency.

Sometimes in news reports and economic literature, instead of the familiar term "profit", entrepreneurs have to face such "mysterious" abbreviations as EBIT and EBITDA. These indicators are used to assess the efficiency of enterprises and organizations that are located in different countries with different tax systems. These indicators are called cleared profit.

EBIT is defined as profit as it was before taxes and bank interest. This indicator was decided to be categorized separately, as it occupies an intermediate place between net and gross profit.

EBITDA is earnings excluding taxes, depreciation, amortization and depletion and bank interest. It is used for general assessment of business performance and is not applied in the Russian accounting system.   

What is the difference between income and revenue

The main differences between the terms "revenue" and "income" are summarized in the following table:

Profit and revenue difference

The main differences between the terms "revenue" and "profit" are summarized in the following table:

What is the difference between income and profit

The main differences between the terms "income" and "profit" can be examined using the example of a retailer. For example, during the month you received 100,000 rubles from the sale of products in your store. It is the most common mistake to consider this amount to be profit. aspiring entrepreneurs.

To calculate the amount of profit, the main expenditure items should be subtracted from the income. These are, as a rule, the cost of purchasing goods, rent of retail premises, tax deductions, salaries of employees, transportation and communication services, office expenses, bank interest on loans taken for business.   

Consequently, income can be considered to be the money that entrepreneurs receive from doing business and which they have the right to spend according to their own discretion. Profit is the balance of cash after deducting all types of expenses. A reliable forecast of income and profits can be obtained by taking into account revenue, fixed and variable costs for previous accounting periods.  

In conclusion, it should be noted that nuances in the definition of such terms as "income", "revenue" and "profit" may be indifferent for ordinary employees of enterprises and organizations, but for professional accountants and management specialists they are of fundamental importance.