Net Income vs. Profit_ What is the Difference
For the uninitiated, global business finance vocabulary can be difficult to understand. It’s so easy to mix up certain terms for other terms, and vice versa. While some terms, such as “cryptocurrency,” are mentioned more frequently as of late and certain jargon is taking on more fluid meanings, modern times have made it easier to become confused.
Lately, certain age-old business terms have also been subject to being used interchangeably depending on whether or not the conversation is in a finance or accounting context. Out of all the different terms that continue to be interchanged in recent years, however, the most frequently mixed-up are net income and profit.
Both net income and profit pertain to a positive flow of cash, but the ways to appropriately use them in context versus their actual definitions differ. To better understand the difference between profit and net income, let’s first look at the technical definition of each term:
No matter which way you look at it or how you use it, profit will always pertain to a certain amount that remains after expenses. Profit, in general, exists on several distinct levels, all depending on what type of costs are deducted from the revenue of a certain period.
When looking at it from a technical point of view, profit can refer to a variety of different values that a company has in its accounting cycle, occurring at different levels. The term “profit” can also pertain to several types of numbers that a company tracks in its accounting, such as operating profit, gross profit, and net profit after taxes.
Also known as “net profit” or “net earnings,” net income is a concrete concept that is best defined as the number that represents a specific type of profit. Net income is often found on the bottom line of a financial statement and signifies the profitability of a business. Every net income value is used to calculate the earnings per share in a publicly-traded company, making it vital to ensure accuracy down to the cent.
The net income of a company is derived from a certain number of calculations that begin with the firm’s revenue and is inclusive of all income streams and expenses for a certain period. Every transaction that flows in and out of a company’s cash flow is accounted for in this particular concept, inclusive of certain expenses such as:
● Manufacturing expenses
● Liability payments (or payment on debts)
● Interest paid on loans
● Operating expenses
● Asset depreciation
On the other hand, a company’s income is also a vital part of the calculation for its net income. Qualified forms of income that can be accounted for include:
● Interest accrued from a company’s various investments
● Income streams from a company’s subsidiary holdings
● Income or proceeds from the sale of assets
In a similar fashion to that of various accounting measures, net income can also be manipulated through the employment of several techniques, such as highly aggressive revenue recognition. Investors and analysts often review the quality of the net income numbers of a company to come up with a final evaluation or investment decision to ensure the security of its shares.
Although it may seem like profit and net income are two terms that are loosely interchangeable, the truth is that they differ in significant ways that are unique to each term. Profit and net income are different from each other in that profit is a general or umbrella term, while net income pertains to a certain type of profit at the end of a financial statement. Knowing the main difference between the two can go a long way in terms of issuing accurate reports and avoiding misinformation.
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