Differences Between Profit and 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.

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  • 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 soldCost Of Goods SoldThe Cost of Goods Sold (COGS) is the cumulative total of direct costs incurred for the goods or services sold, including direct expenses like raw material, direct labour cost and other direct costs. However, it excludes all the indirect expenses incurred by the company.
  • read more.Also, please note that Income is also divided into two – earned income and unearned income. Earned incomeEarned IncomeEarned income is any amount earned by an individual, such as a salary, wages, or employee compensation. It can also be an individual’s income through their own business.read more is the income from the sales of goods or services. Unearned income is the passive income made through investmentsPassive Income Made Through InvestmentsPassive investing is a strategy used by investors to maximize their returns by avoiding frequent portfolio churning by buying and selling securities and instead buying and holding a diverse range of securities.read more made in other places.

Profit vs. Income Infographics

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

Profit vs. Income Example

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 soldTotal Sales = 1400Cost of goods sold = 1060(Total Sales – Cost of goods sold) = 1400 – 1060Gross 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 expensesGross Profit = $340All indirect expenses = $150(Gross profit – All indirect expenses) = $340 – $150Net profit   = $190

The income of the company can also be termed as net earnings. We get net earnings when we deduct the preferred dividendThe Preferred DividendPreferred dividends refer to the amount of dividends payable on preferred stock from profits earned by the company, and preferred stockholders have priority in receiving such dividends over common stockholders.read more from the net profit. It is the residual amount left with the company, which can either be held as retained earningsRetained EarningsRetained Earnings are defined as the cumulative earnings earned by the company till the date after adjusting for the distribution of the dividend or the other distributions to the investors of the company. It is shown as the part of owner’s equity in the liability side of the balance sheet of the company.read more 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 IncomeNet IncomeNet income for individuals and businesses refers to the amount of money left after subtracting direct and indirect expenses, taxes, and other deductions from their gross income. The income statement typically mentions it as the last line item, reflecting the profits made by an entity.read more would have been $190 – $10 = $180.

Critical Differences Between Profit vs. Income

Here are the critical differences between profit vs. income –

  • Both incomes vs. profit are calculated from revenue.Profit is realized after reducing the expenses from the revenue, and the net income is further realized after reducing other expenses like preference sharesPreference SharesA preferred share is a share that enjoys priority in receiving dividends compared to common stock. The dividend rate can be fixed or floating depending upon the terms of the issue. Also, preferred stockholders generally do not enjoy voting rights. However, their claims are discharged before the shares of common stockholders at the time of liquidation.read more and dividends.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.Profit is an indicator of how much cash flowCash FlowCash Flow is the amount of cash or cash equivalent generated & consumed by a Company over a given period. It proves to be a prerequisite for analyzing the business’s strength, profitability, & scope for betterment. read more exceeds the total costs. Income indicates how much money a firm can utilize.

Head to Head Differences Between Profit vs. Income

Here are the main differences between profit vs. income –

Profit vs. Income – Final thoughts

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 reinvestmentReinvestmentReinvestment is the process of investing the returns received from investment in dividends, interests, or cash rewards to purchase additional shares and reinvesting the gains. Investors do not opt for cash benefits as they are reinvesting their profits in their portfolio.read more 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.

Profit vs. Income Video

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 ProfitOperating Income vs. Net IncomeCorporate Profit ExampleOrdinary Income Example