Revenue vs. Income vs. Profit: Similarities and Differences
By Indeed Editorial Team
Updated August 15, 2022 | Published July 7, 2021
Updated August 15, 2022
Published July 7, 2021
The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.
The primary goal of most businesses is to increase sales. Revenue, income and profit are a few of the most common ways to describe the funds businesses collect through product sales. With a variety of methods available to describe the funds a business receives, it’s important to know which one to use when discussing a company's financial gains.
In this article, we provide an overview of revenue versus income versus profit, discuss the definition of each and share key similarities and differences to improve your understanding.
Revenue is the amount of money a company earns from typical business operations, like sales. Unlike income and profit, revenue doesn’t incorporate business spending.
To calculate income, subtract business operation expenses from company revenue. Include both the cost of the goods and other operational costs like rent, salaries and taxes.
Profit is the money a company earns minus the amount it spends to procure the goods. To calculate it, you may leave out operational costs like rent, salaries and taxes.
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Overview of revenue, income and profit
Revenue, income and profit are important tools of financial measurement. They can help a business understand the amount of money it generates, the amount it may have left after business expenses, and how well a product offsets its purchase or production costs respectively. This can help companies when making business decisions. Whether a company plans to expand or invest more into the development of the company, they may use information from revenue, income and profit to understand the best way to proceed. A business may also budget or forecast differently depending on the accounting method.
What is revenue?
Revenue is the total amount of funds that a business receives from its sales and services. Businesses also use the term sales to describe revenue because the money a company makes from a transaction does not account for costs or overhead expenses. Revenue comes from a variety of sources including the following:
Sale of products or services
Product or brand licensing
For example, when a company makes a product sale, the money the customer exchanges for the product is revenue. When a business hosts ads on its website, it earns revenue from the company posting the advertisements. You can calculate company revenue using the following formula:
Revenue = Product / Service Quantity x Sale Price
What is income?
Income is the amount of money a company makes minus the cost of running a business. For example, to calculate income, you might subtract the cost of salaries from the revenue to learn more about how much money the company made. Here are some other factors to consider subtracting from the revenue total to calculate the company income:
Depreciation of goods and property
Cost of industry-specific business operations
Rent for company office, brick-and-mortar retail or warehouse space
Analyzing a business's total income can help you evaluate how efficient a company is in using funds, as well as if its operating costs are too high. Income also often refers to earnings as it is the amount of funds that a business makes. You can use the following formula to calculate income for a business:
Income = Revenue - Cost of Goods - Variable Expenses and Operating Costs - Taxes
What is profit?
Profit is the amount of money a business receives after it accounts for the cost of goods. Unlike income, this business metric doesn’t account for other operational costs like salaries or taxes. To determine their profit, businesses subtract their expenses from their total income using the following formula:
Profit = Revenue - Cost of Goods
If the value is a positive amount, businesses gain a profit instead of taking a loss. Businesses strive to increase sales, reduce operating costs and maximize their profits. Many investors or decision-makers use the total profit to determine a company's success.
Revenue vs. income vs. profit
Revenue, income and profit can all be used to describe a business's profitability. However, each term helps businesses identify specific information about their financial success. Here are a few other similarities and differences between revenue, income and profit:
Each financial term has its category of subtypes. Revenue includes operating and non-operating revenue. This refers to the activities in which the business earns money. Operating revenue comes from the traditional sales of goods and services, whereas non-operating revenue comes from activities that do not directly relate to goods and services like rent or commission.
Income includes earned and unearned which refers to how the company earns funds. Earned income includes things like wages, salaries or other types of direct pay. Unearned income refers to income that a business may expect but not have access to yet, like dividends or interest. Profit includes gross and net which refers to profit calculations that include, or don't include expenses. Net profit includes gross profit minus all expenses and taxes.
Accounting is the process of tracking items like revenue, income and profit. Two main accounting methods affect how you track these items. Cash is an accounting method that tracks funds as you receive or earn them. Accrual is an accounting method that accounts for funds following a transaction, rather than if a business receives the funds.
Revenue and expenses use different methods depending on whether a business uses cash or accrual accounting. With accrual accounting, you recognize revenue as you earn it and expenses as you receive them. With cash accounting, you recognize revenue and expenses only when you exchange money.
Financial statements are important in tracking and predicting revenue, income and profit. Each uses the same types of financial statements, including a general ledger or a profit and loss ledger (PNL). When creating financial reports, accurate numbers in each category are crucial for business planning. Focusing solely on one area like revenue will not give a full outlook on the future financials of the company.
Financial statements contain list items and describe if a cost is at the top or bottom of the financial document. Revenue is a top-line item because it is the amount of money a business receives before accounting for other costs. Businesses show a profit on the bottom line because it is the amount of money a business retains after accounting for the cost of goods. Income is also the bottom line since it accounts for a business's earnings after calculating all business-related expenses.
Tax documents are a necessary process when documenting revenue, income or profit. This is why choosing the right calculation is so important because a business's tax documents should reflect the revenue and profits accurately. Accurate calculation of taxes will also help a business account for tax liabilities, ensuring all income and profit projections are accurate.
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