Revenue and Profit: Meaning and Differences

On an income statement, “revenue” and “profit” are different. Revenue is money your firm earns. Profit is equal to revenue minus expenses. Strong revenue doesn’t guarantee a profit if cash outflows exceed cash inflows. The income statement shows revenue and expenses. By watching how expenses affect income, you may minimise costs and boost profit.

Revenue and Profit

Meaning of Revenue

In essence, revenue is all of the earnings or returns that a company generates before deducting certain expenses. In the end, it refers to the money that a company receives in exchange for the sale of goods and services.

Sales are included in revenue. Nevertheless, it can also include items like rental revenue and interest income. However, these sources of revenue are typically listed separately.

Meaning of Profit

Both your business and non-business activity generate revenue. Although revenue, sales, and income are sometimes used interchangeably, you should be aware of the distinctions between the three terms. According to Corporate Finance Institute, you generate operating income from your regular business operations such as product sales or service revenue. In a technical sense, this would be your sales revenue.

Non-operating revenue, on the other hand, is money you receive from sources such as interest income and the sale of outdated equipment. When you sell something, even if payment is delayed, you record revenue if you utilise an accrual accounting system. In a cash-basis accounting system, revenue is only recognised upon receipt of payment. Your company’s overall revenue is comprised of both sales and non-operating revenues. Profit is divided into three categories:

  • Gross Profit
  • Operating Profit
  • Net profits

Gross Profit

You deduct the cost of any goods returned by consumers and any sales discounts that they utilised from your revenue to arrive at your gross profit. To calculate your gross profit, deduct the cost of your sold goods from your revenue. The expenses incurred in producing and selling your items are known as the cost of goods sold. The cost of products sold for a manufacturing company is comprised of direct materials, direct labour, and manufacturing overhead. The price of the things you buy to resell is your cost of goods sold for a retail business.

Operating Profit

According to Indeed, operating profit is what is left over after deducting operational costs from gross profit. These costs are divided into three categories: sales, general, and administrative. Your marketing expenses as well as the salaries and commissions paid to your sales team are considered sales expenses. Supplies, salaries for administrative staff, and costs associated with research and development are all considered general and administrative expenses. The costs associated with depreciation and amortisation are also subtracted from your gross profit.

Net Profit

What’s left over after deducting non-operating expenses from non-operating revenue is your net profit, also known as net income. Non-operating revenue is the interest received from a corporate money market or investment account. Non-operating revenue is defined as transactions that are out of the ordinary, like the sale of used factory equipment. The interest cost associated with borrowing money to purchase company assets is a non-operating expense. The operating profit is also reduced by the amount of income tax your company owes. The money your company made after all fees and expenses have been paid is known as net profit.

Differences between revenue and profit

Differences between revenue and profit are highlighted below.

  • Revenue is the total money a company earns through trade and non-trading operations during a given time period. Profit is the money left from a company’s revenue after removing costs, expenses, loan interest, and taxes.
  • Revenue is the company’s revenues from various activities. Profit is the entrepreneur’s reward for taking risks and working hard.
  • Revenue is not dependent on profit; it’s the overall money brought in by the company’s activity. Profit is strongly dependent on income, therefore unless the firm earns enough, it won’t make profits. So, profit equals revenue.
  • Without revenue, a firm can’t make a profit and grow. It’s crucial for running a firm efficiently. Profit is the company’s essential requirement, determining its destiny and helping it survive and grow while fulfilling contingencies.
  • Sales or Service Revenue tops the income statement. Net Profit is the income statement’s bottom line.