Hello! In this article we will talk about related, but not identical concepts: revenue, income and profit.
Today you will learn:
- What is included in the company's revenue?
- What is the company's income and profit derived from?
- What are the main differences between these concepts?
What is revenue
Revenue – earnings from the direct activities of the company (from the sale of products or services). The concept of revenue is found exclusively in business and entrepreneurship.
Revenue characterizes the overall efficiency of the enterprise. It is revenue, not income, that is reflected in accounting.
There are several ways to account for revenue in an enterprise.
- The cash method defines revenue as the actual money received by the seller for providing services or selling goods. That is, when providing an installment plan, the entrepreneur will receive proceeds only after actual payment.
- Another accounting method is accrual. Revenue is recognized when the contract is signed or the buyer receives the goods, even if actual payment occurs later. However, advance payments do not count towards such revenue.
Types of revenue
Revenue in an organization is:
- Gross– the total payment received for a job (or product).
- Clean– used in . Indirect taxes (), duties, and so on are subtracted from gross revenue.
The total revenue of the enterprise consists of:
- Revenue from core activities;
- Investment proceeds (sales of securities);
- Financial revenue.
What is income
The definition of the word “income” is not at all identical to the term “revenue,” as some entrepreneurs mistakenly believe.
Income - the sum of all the money earned by the enterprise through its activities. This is an increase in the economic benefit of an enterprise due to an increase in the company's capital by the receipt of assets.
A detailed interpretation of the ways of generating income and their classification are contained in the Regulations on Accounting “Income of Organizations”.
If cash revenue is funds received by the company’s budget in the course of its core activities, then income also includes other sources of funds (sale of shares, receipt of interest on a deposit, and so on).
In practice, enterprises often conduct diverse activities and, accordingly, have different channels for generating income.
Income – the overall benefit of the company, the result of its work. This is an amount that increases the organization's capital.
Sometimes income is equal in value to the organization’s net revenue, but most often companies have several types of income, and there can be only one revenue.
Income occurs not only in entrepreneurship, but also in the everyday life of a private person who is not engaged in business. For example: scholarship, pension, salary.
Receipt of funds outside the scope of business activities will be called income.
The main differences between revenue and income are given in the table:
| Revenue | Income |
| Summary of main activities | The result of both main and auxiliary activities (sale of shares, interest on bank deposits) |
| Arises only as a result of conducting commercial activities | Allowed even for unemployed citizens (benefits, scholarships) |
| Calculated from funds received as a result of the company’s work | Equal to revenue minus expenses |
| Cannot be less than zero | Let's say it goes negative |
What is profit
Profit is the difference between total income and total expenses (including taxes). That is, this is the same amount that in everyday life could easily be put into a piggy bank.
In an unfavorable situation, and even with a large income, the profit can be zero, or even go negative.
The main profit of the company is formed from the profit and loss received from all areas of work.
The science of economics identifies several main sources of profit:
- The company's innovative work;
- An entrepreneur’s skills to navigate the economic situation;
- Application and capital in production;
- Company monopoly in the market.
Types of profit
Profit is divided into categories:
- Accounting. Used in accounting. On its basis, accounting reports are generated and taxes are calculated. To determine accounting profit, explicit, justified costs are subtracted from total revenue.
- Economic (excess profit). A more objective indicator of profit, since its calculation takes into account all economic costs incurred in the work process.
- Arithmetic. Gross income minus miscellaneous expenses.
- Normal. Necessary income for the company. Its value depends on lost profits.
- Economic. Equal to the sum of normal and economic profit. Based on it, decisions are made on the use of the profit received by the enterprise. Similar to accounting, but calculated differently.
Gross and net profit
There is also a division of profit into gross and net. In the first case, only costs associated with the work process are taken into account, in the second - all possible costs.
For example, the formula by which gross profit in trade is calculated is the selling price of a product minus its cost.
Gross profit is most often determined separately for each type of activity if the company operates in several directions.
Gross profit is used when analyzing areas of work (the share of profit from which activity is greater), when the bank determines the creditworthiness of the company.
Gross profit, from which all costs (loan interest, etc.) have been subtracted, forms net profit. It is accrued to shareholders and owners of the enterprise. And it is net profit that is reflected in and is the main indicator of business performance.
EBIT and EBITDA
Sometimes, instead of the understandable word “profit,” entrepreneurs encounter such mysterious abbreviations as EBIT or EBITDA. They are used to evaluate the performance of a business when the entities being compared operate in different countries or are subject to different taxes. Otherwise, these indicators are also called cleared profit.
EBIT represents earnings as they were before taxes and various interest. It was decided to separate this indicator into a separate category, since it is located somewhere between gross and net profit.
EBITDA- This is nothing more than profit without taking into account taxes, interest and depreciation. Used exclusively to evaluate the business and its characteristics. Not used in domestic accounting. for commercial equipment.
Thus, income is funds received by an entrepreneur, which he can subsequently spend at his own discretion. Profit is the balance of funds minus all expenses.
Both income and profit can be predicted by taking into account past earnings, fixed and variable costs.
The differences between profit and revenue are as follows:
The line between the concepts may be unclear for an ordinary worker; it does not matter to him how revenue differs from profit, but for an accountant there is still a difference.
Few ordinary people will be able to answer the question of how income differs from profit. Both concepts mean the arrival of funds and the possibility of investing them in the future. How these indicators relate to revenue is also a mystery for the reader who is not savvy in economic matters. However, this oversight is easy to eliminate; just understand the terminology.
What is meant by the term "revenue"
The first is the difference between revenue and accounting (that is, explicit, calculated) costs.
Taking into account economic costs, including implicit costs associated with an alternative in conditions of limited resources, we will now talk about economic profit: revenue minus economic costs.
Let's look at an example. Since the head of a passenger transportation company at one time chose the path of an entrepreneur, rather than the path of an employee with savings in a bank, he faced alternative economic costs, for example, the following:
- savings in a bank account that were invested in business development - 60 tr.
- lost interest on money remaining in the bank - 6 tr.
- lost wages from hired work per year - 180 tr.
It turns out that the annual profit of 240 tr, which we calculated earlier, should be reduced by the amount of economic costs:
240 t.r. - (180 t.r.+60t.r.+6t.r.) = -6 t.r.
This business for an entrepreneur will not pay for itself in a year. If the company’s accountant congratulates the manager on his annual profit, the entrepreneur himself will assess the business’s performance as satisfactory.
Summary
Let’s summarize and answer the question of how income differs from profit, what is the difference between them and revenue, highlighting the main points briefly:
- Revenue and income are always positive economic indicators. Profit can be positive (the company is profitable), negative (the company is unprofitable) and equal to zero (the company is at the break-even point).
- Income includes profit, as well as costs for remuneration of employees of the enterprise and the social component of internal policy.
- Profit is a calculated indicator. It can take into account implicit economic costs. Income can always be calculated and entered into the balance sheet.
- Another difference between income and profit is the legislative connection: commercial enterprises work to achieve profit, non-profit enterprises should not receive profit at all, and municipal enterprises can be profitable, but subsidies only imply breaking even. All businesses can receive income.
Thus, revealing small terminological nuances of the profitable part of enterprises’ activities will allow readers to become more savvy in economic issues.
One of the key indicators characterizing the financial result of an economic entity is gross profit. The accuracy of the economic analysis carried out to determine promising directions for the development of the enterprise largely depends on the correctness of determining this indicator. In the article we will look at what gross profit is, how it differs from other types of profit, and we will study the calculation algorithm and how it differs from other results.
Gross profit concept
Gross profit refers to the difference between the proceeds from the sale of an organization's products, goods, works or services and the costs of their production or purchase. The main purpose of the gross profit indicator is to determine the rationality of spending labor, material and other resources of a legal entity.
As a rule, the reporting period for determining the amount of gross profit is month, quarter, half year and year. But for internal economic analysis and management accounting, depending on the company’s goals, gross profit can be calculated over a shorter period - a week, 10 days, a decade.
The difference between gross profit and other financial performance indicators
The gross profit indicator differs significantly from gross income, net, marginal and balance sheet profit.
Difference from gross income
Gross revenue (income) represents all the funds that a company received from its activities. This figure includes tax and other similar payments included in the price of assets sold. The amount of gross revenue depends not only on the price and number of sales, but also on the product range, labor productivity, demand and other indicators.
Gross profit refers to the difference between the amount of revenue from all activities and the expenses associated with them.
Gross and net profit
There is a main difference between these indicators. When determining gross profit, in contrast to net profit, the amount of taxes, fees and other similar payments is not taken into account. First, gross profit is calculated. After this, by subtracting the amount of taxes and fees accrued by the enterprise, the amount of net profit is determined.
Difference from contribution margin
The concept of marginal profit is closely related to the concept of variable costs, which are directly proportional to production output. These are materials, wages of workers engaged in production and sales. Marginal profit is calculated as the difference between the organization's income and variable expenses.
Its main difference from gross is that with the help of this indicator it is possible to determine the optimal production output in terms of volume and range, the most cost-effective option for production development. Gross profit characterizes the success of the company as a whole.
Balance sheet and gross profit: the same thing?
How to Determine Gross Profit
Gross profit can be calculated in different ways. The easiest way to define it is as the difference between sales revenue and sales expenses. You can calculate gross profit based on the amount of turnover. This does three things:
- turnover is multiplied by the estimated gross profit premium;
- the resulting value is divided by 100;
- The cost of sales is subtracted from the calculation result.
The estimated allowance is determined as follows:
- the trade markup as a percentage is divided by 100;
- the value of the trade markup as a percentage for the reporting period is added to the result obtained.
Indicators involved in determining gross profit
The indicators taken into account when determining gross profit will differ slightly depending on the type of activity of the economic entity.
| Index | Manufacturing enterprise | Trading enterprise |
| Revenues from sales | Products | Goods and paid services |
| Fixed assets and intangible assets | ||
| Products, goods, services of structural divisions | Valuable papers | |
| Valuable papers | ||
| Expenses for | Raw materials, materials, tools | Purchase of goods |
| Transportation of goods | ||
| Administrative expenses | Salary and contributions to funds | |
| Depreciation | Renting retail premises | |
| Overheads | For advertising and storage of goods | |
| Transportation of products | Other articles |
Gross profit as a financial reporting indicator
Gross profit is shown in the income statement on line 2100. The value of this line is calculated by subtracting their cost on line 2120 from sales revenue on line 2110. The gross profit indicator can have either a positive or negative value. If, as a result of the organization’s activities, a negative gross profit is obtained, we are talking about a loss, which is written without the minus sign in parentheses.
For example, Raduga LLC is engaged in sewing workwear. The organization's reporting for the previous period contains the following data:
Gross profit is calculated by subtracting its cost from sales revenue: 50,000 – 40,000 = 10,000 rubles.
Gross profit accounting: postings
Account 90 “Sales” is used to reflect gross profit in accounting. To calculate the gross profit for the reporting period, you need to compare the loan turnover with the debit turnover of this account broken down by subaccounts.
Account 90/9 is closed monthly by writing off the balance to account 99 “Profits and losses”. A debit balance on account 90/9 means that the financial result for the normal activities of the enterprise was a gross loss, while a credit balance indicates gross profit for the month. At the end of the year, subaccounts are closed on account 90.
| Account correspondence | Contents of operation | |
| Debit | Credit | |
| 90/9 | 99 | Write-off of gross profit |
| 90/1 | 90/9 | Sales revenue |
| 90/9 | 90/2 | Cost of sales |
| 90/9 | 90/3 | VAT |
| 90/9 | 90/4 | Excise taxes |
| 90/9 | 90/5 | Sales tax |
| 90/9 | 90/6 | Export duties |
Let's look at the example of reflecting product sales and the formation of gross profit in accounting accounts. The main activity of the enterprise is the production of light metal structures (medals, orders, badges, metal fittings). In 2016, products were sold for 1,180,000 rubles (including VAT of 180,000 rubles). The cost of production was 700,000 rubles. In accounting, the accountant reflected the sale as follows:
- Dt62 Kt90/1 = 1180000 – shipment of products;
- Dt90/2 Kt43 = 700000 – write-off of production costs;
- Dt90/3 Kt68 = 180000 – VAT on shipped products;
- Dt90/9 Kt90/2 = 700000 – account closure;
- Dt90/9 Kt90/3 = 180000 – account closure;
- Dt90/9 Kt99 = 300,000 – sales result.
Gross profit, EBIT and EBITDA - what do they have in common?
When analyzing the financial condition and economic activities of an organization, EBIT and EBITDA indicators are used in world practice. In the Russian Federation they are used mainly by the largest resource extraction companies (Lukoil, Gazprom, etc.). Among domestic small and medium-sized businesses, these indicators have not received much widespread and practical application.
Their difference from gross profit lies in the special “cleaning” of this indicator and the calculation algorithm.
EBIT and EBITDA are determined in Russia somewhat differently than under IFRS. In domestic practice, EBIT and gross profit are identical. EBIT is the difference between sales revenue and direct expenses. In the Russian Federation, when calculating it, you need to take into account the amount of net interest, income tax reimbursement and the balance of emergency expenses and income.
- EBITDA = EBIT + depreciation.
Gross profit in economic analysis
Gross profit analysis is necessary for making important management decisions and developing an organization's strategy for the future. On the basis of this value, profitability of sales, capital turnover and a number of other important indicators characterizing the activities of an economic entity are determined. When conducting financial analysis, you can compare indicators obtained based on gross profit values for the period:
- planned and actual;
- previous and present (actual).
It is relevant to compare the indicator for the enterprise with the average value for the industry, as well as actual values with standard values.
Answers to pressing questions
Question No. 1. What is the difference between concepts such as gross income and gross profit?
Question No. 2. What factors affect gross profit?
The amount of gross profit depends on factors of two internal levels:
- first level – sales income, interest receivable and payable, operating and non-operating profit;
- the second level is the cost of production, the structure of goods sold, sales volume and the purchase price of goods.
Gross profit is affected by product quality, correct pricing of goods, fines and economic sanctions. Gross profit is also influenced by external factors - geographical, political, natural. The management of an organization can easily influence internal factors. In relation to the influence of external factors, the choice of a flexible enterprise strategy that can quickly change is required.
Question No. 3. What transactions reflect the formation of gross profit in a retail trade organization?
When selling goods at retail, the accountant makes the following entries:
- Dt50 Kt90 – cash received for the Goods sold;
- Dt90/2 Kt41/2 – write-off of the cost of goods (sales price);
- Dt90/2 Kt42 – trade margin of goods sold (the posting is reversed);
- Dt90/3 Kt68 – VAT payable;
- Dt90/3 Kt44 – write-off of distribution costs;
- Dt90/9 Kt99 – financial result from sales.
Question No. 4. The trade organization has established the same percentage of trade margins for all product groups (20%). Revenue for the reporting period amounted to 1,500,000 rubles. How to correctly calculate the implemented enterprise overlay?
When a trade organization has established a single percentage of trade markup for all groups of goods, then to calculate gross income (realized overlay) you can use the method of determining by turnover (T), that is, by the total amount of sales revenue.
- First of all, I determine the estimated trade margin:
20%:(100%+20%) = 0,167.
- Implemented overlay:
1500000*0.167 = 250500 rubles.
Profit reflects the increase in the initially advanced cost of the production and economic activities of the organization to ensure its activities. It is determined by measuring the organization’s income and expenses.
Depending on the conditions of its formation, the following types of profit are distinguished.
1) Based on the volume of distribution costs, economic and accounting profit are distinguished.
§ Accounting profit is the simple difference between sales income (sales income) and expenses (operating costs).
§ Economic (net) profit is the amount that is obtained by deducting additional expenses from accounting profit. Such expenses may include uncompensated own expenses that were not taken into account in the cost of the product, additional bonuses for employees, costs for officials, etc.
That is, net profit is income minus absolutely all costs.
2) According to the value of the final result, profit can be:
§ normative or prescribed,
§ maximum possible or minimum acceptable,
§ not received (lost profit), with a negative result (loss).
3) By the nature of taxation we can distinguish:
§ taxable profit,
§ and not taxable.
4) Depending on the types of activities performed, profit can be:
§ From financial activities. This is the effect that is obtained from attracting capital from other sources on favorable terms.
§ From production activities. This is the result of production and marketing.
§ From investment activities. This is income from placing deposits and holding securities, income received from participation in joint activities with other companies or the sale of property upon completion of the investment project.
5) According to the regularity of formation, profit can be:
§ seasonal,
§ normalized
§ excessive.
§ Marginal profit is the additional profit received from the sale of an additional unit of production.
Gross profit is a parameter that reflects the difference between the income received by the enterprise and the cost of goods (services) sold, but without deducting income tax.
Gross profit- this is the total income of the company, which is received over a fixed period of time. It takes into account the profit from all types of company activities (both production and non-production areas are taken into account) minus production costs. The calculated figure is recorded in the balance sheet.
Gross Profit is the difference between revenue and the cost of products or services sold (Cost of sales or Cost of goods sold - COGS). It should be kept in mind that gross profit differs from operating profit (profit before taxes, penalties and interest, interest on loans).
Net sales income is calculated as follows:
· Net sales income = Total sales income − Cost of returned goods and discounts provided.
Gross profit is calculated:
· Gross profit = Net sales income − Cost of products and services sold including depreciation.
Based on gross profit data, you can calculate net profit:
· Net profit = Gross profit – Sum of taxes, penalties and fines, interest on loans.
Cost of goods sold is calculated differently for manufacturing and trading.
In general, this indicator reflects the profit of the transaction, excluding indirect costs.
For retail, gross profit is revenue minus the cost of goods sold. For a manufacturer, direct costs are the costs of materials and other supplies to create the product. For example, the cost of electricity to run a machine is often considered a direct cost, while the cost of lighting a machine room is often considered an overhead cost. Wages can also be direct wages if workers are paid a price per unit of goods produced. For this reason, service industries that sell their services on an hourly basis often treat wages as a direct expense.
Gross profit is an important indicator of profitability, but indirect costs must be taken into account when calculating net income.
Net profit- This is part of the enterprise’s balance sheet profit, which remains at its disposal after the formation of the wage fund and payment of taxes, fees, deductions and other obligatory payments to the budget, to higher organizations and banks. Unlike economic profit, net profit is used to expand production and increase working capital; it is the main source of the formation of funds, reserves, reinvestment in production and cash savings of the enterprise.
Net profit is an indicator of how profitable it really is to work in one direction or another, whether it is worth developing the business further or is it better to suspend it. This is the most important factor affecting the profitability of any enterprise.
Net profit is included in cost estimates or forms accumulation funds (production development fund or production and scientific-technical development fund, social development fund) and consumption funds (material incentive fund), as well as a charitable fund.
The volume of net profit depends on the volume of gross profit and the amount of taxes. Dividends to the shareholders of the enterprise are calculated based on the volume of net profit.
Net profit
+ Income tax expenses
- Refunded tax at a profit
(+ Extraordinary expenses)
(- Extraordinary income)
+ Interest paid
- Interest received
+ Depreciation charges for tangible and intangible assets
- Revaluation of assets
