Difference Between Profit vs Income
Profit vs Income, are generally used as synonyms but it is important to understand the difference between these two terms for accounting purposes. In short, we can say, Profit is Income minus Expenses. There are two important terms in accountancy to understand the financial strength of any firm. In this article, we will understand the meaning and major difference between these two terms,
Profit is the amount left (Positive) post deduction of all kinds of costs, expenses, taxes, etc. from the income or revenue. Profit the actual reward for the risk taken by the businessman in the business. In short, we can say, profit is the revenue that is left after deducting the expenses.
Income is basically the total amount earned post-sale of products or any services. It’s the actual earning of any company at the first stage. It also differs from the term Revenue. Income is the total earnings of the business whether earnings from direct or indirect business activities. Income is also referred to as Gross Revenue.
Head to Head Comparison between Profit vs Income (Infographics)
Below is the Top 5 Comparison between Profit vs Income:
Key Differences between Profit vs Income
To understand the differences between profit vs income, let’s take one example,
- Suppose there is one company called Modern Fashion Pvt. Ltd. which manufacture gents’ shirts and each shirt costs $10. In the financial year 2018-19, they sold a total of 5,000 shirts and they received $50,000 as income.
- As per the accounts, they spent $35,000 as expenses on raw material, salaries, and other overheads. In this case, the total profit would be $15,000 which would be useful in calculating the tax for the firm and would be transferred to the reserve account in the balance sheet after deducting dividends to the shareholders.
So, by this example, we can understand the difference between profit vs income. Below are the main differences between Profit vs Income,
- Profit is the amount that is left over after paying for expenses such as raw materials, salaries, tax, interest or other overheads from the income in the firm but income is the amount received from business activities whether from direct or indirect sources.
- There are two types of Profit which are Gross Profit and Net Profit. In the same way, income could be two types, Earned or Unearned income.
- Both are dependent on Revenue. Income is dependent on both Profit and revenue.
- Profit shows the actual strength of the company in terms of profitability, it is also helpful in calculating the total tax payable by the firm. On the other side, income shows that how much money the firm can distribute among shareholders and keep reserve or reinvest in the firm.
Profit vs Income Comparison table
Below is the topmost comparison between Profit vs Income
|Basis of Comparison||Income||Profit|
|Meaning||The money earned in any business post sells of products or services for a particular time period.||The amount left post deduction of expenses, overheads, taxes or any interest from the total income of the business.|
|Nature||Total cash inflow of revenue during a period of time.||It shows the profitability of the company during a period of time.|
|Types||Earned or Unearned Income||Gross Profit or Net Profit.|
|Dependency||Income is dependent on Revenue and profit both.||Profit is dependent on Revenue only.|
|Uses||Income is important to know in calculating the value of shares in a firm.||Profit is useful in calculating tax and profitability of the company.|
So, from the above discussion, we have understood the meaning and differences between Profit vs income. It is quite clear now that these two terms have a difference in meaning and uses in accounting. The conclusion of the above discussion is as follows,
- Income and profit are two important terms to understand the financial strength of any company during any particular period of time.
- Income shows the amount earned in any financial year but profit is the positive amount that is left from the income post deduction of all kinds of expenses, overheads, taxes or interest if any. In accounting, the terms profit and income can be used interchangeably. Income is termed as net earning also.
- Both income and profit deal with positive cash flow.
- There are two types of profit which is called gross profit and net profit. Gross Profit means the amount of revenue post deduction of trading expenses such as raw material, direct costs, etc. Trading expenses refer to the expenses related to the main activities of the business. On the other hand, net profit considers income from main and other activities as well.
- In the same way, there are two kinds of income, earned income and unearned income. Earned income refers to the amount received from main business activities such as the sale of products or services, but unearned income means the amount received from other sources such as investment or sale of any assets in the business.
- The amount of income is not controllable as it depends on various kinds of internal or external factors, but we can control profit as the expenses are internal kind of nature and manageable by effective management.
- The profit during any particular period is directly proportionate to income if the management is able to control expenses. More income means more profit for the business.
- Profit and income are the two main parts of financial statements to know the profitability and strength of any firm.
- In the initial stage of any business, profit vs income is considered the same terms due to the fewer type of transactions. But the management should understand the difference between these two terms to make proper decisions in the business. These help in cash flow and financial decisions.
This is a guide to the top difference between Profit vs Income. Here we also discuss the Profit vs Income and key differences with infographics. You may also have a look at the following articles to learn more-