Net Income Vs Net Profit What S The Difference

The differences between net income and net profit are subtle, but they are important to understand as you develop your knowledge of a business’s financial statements.

What Is Net Income?

Net income is calculated on the income statement and shows what a business has earned after subtracting expenses such as operating expenses, cost of goods sold (COGS), depreciation, interest, and taxes along with allowable deductions during a specific accounting period. This period could be a month, a quarter, six months, or one year. Net income is considered the “bottom line” figure on the income statement.

How To Calculate Net Income

Net income is calculated by the equation: Revenue - Expenses = Net Income Net income is the total income from revenue (sales and other income) after all business expenses are deducted. Both the revenue and expense figures can be obtained from the business’s income statement.

Types of Business Expenses

The first, and arguably the most important business expense is COGS, which can be defined as the firm’s direct production costs like raw materials, labor, and overhead. If a business sells services instead of products, it does not have cost of goods sold. After you report your total revenue from your business and COGS, you can then follow the traditional income statement format to report your business expenses. Following the income statement format, here are some examples of business expenses you might incur:

Selling and operating expenses: Examples are commissions paid to salespeople, advertising, contract labor, rent, insurance, repairs and maintenance, and travel and meals.General and administrative expenses: Examples are car and truck expenses, depreciation, interest on mortgages, lease expenses, legal and professional expenses, office expenses and supplies, taxes and licenses, and utilities.Other: Examples are any income the business receives that is not counted as a sale. Selling an asset for a profit would be an example.Interest expense: This is the interest the business has to pay if it has any outstanding debt.Income tax expense: This is the business’s tax liability based on profit.

The “foreign currency” line item on the income statement is usually not applicable for small businesses. You can look at IRS Form Schedule C to see these and other categories of business expenses.

What Is Net Profit?

The most obvious difference between net income and net profit is that net income is the “bottom line” of the firm’s income statement from which all expenses have been deducted. Net profit, however, indicates the profitability of the business for a specific time period. Another difference is that net profit can be calculated in stages. For example, if you look at an income statement you will see that profitability, in dollars, is calculated after each section of expenses. The three components of profit on an income statement are gross profit, operating profit, and finally, net profit. The calculations for each are as follows:

Gross profit: Revenue - COGSOperating profit: Gross profit - operating expenses - depreciation - amortizationNet profit: Total revenue - total expenses