Net Income vs. Profit: An Overview
Net income, also called “net profit” or “net earnings,” is usually the last line item on a company’s income statement. It represents the amount of money earned after taking into consideration all costs and expenses, such as operating costs, interest expenses, and taxes. A cost is generally a one-time payment, while an expense is usually recurring.
Profit on its own is the amount of revenue left after costs and expenses. It can be reported at different levels, such as gross profit and operating profit, depending on which items are deducted from the gross revenue.
Key Takeaways
- Profit means the revenue that remains after costs and expenses have been deducted; it exists on several levels, depending on which items have been deducted.
- Net income is a single number representing a specific type of profit after all costs and expenses have been deducted from revenue.
- Net income is the renowned bottom line on a financial statement.
Net Income
A company’s net income is the result of many calculations, beginning with revenue and encompassing all costs, expenses, and income streams for a given period. The sum of income less all costs and expenses is the net income. When spending exceeds the budgeted revenue, it causes a revenue deficit.
Net income takes into account the price tags for manufacturing products, operating expenses, interest paid on loans or accrued from investments, depreciation and amortization of assets, taxes, and even one-time payments for unusual events. It also includes additional income streams from subsidiary holdings or the sale of assets. Net income is the figure that most comprehensively reflects a business’ profitability and is used by publicly traded companies to calculate their earnings per share (EPS).
As with other accounting measures, net income is susceptible to manipulation through such techniques as aggressive revenue recognition or hiding expenses. When basing an investment decision or evaluation on it, investors and analysts review the quality of the numbers that were used to arrive at it, as well as at the business’ taxable income.
There are also different types of profit margins, including gross, operating, and net.
Profit
While net income is synonymous with a specific figure, profit can refer to many figures depending on which costs and expenses have been deducted. Corporate accountants calculate it at different stages, because doing so allows companies to see where the biggest bites out of the bottom line are being taken.
For example, gross profit, also called “gross margin” or “gross income,” is revenue less a specific expenditure: the cost of goods sold (COGS), while operating profit refers to revenue minus the COGS and operating expenses. All the expenditures, both fixed and variable, necessary to keep the business running must be included.
Much of business performance is based on profitability in its various forms. Some analysts are interested in top-line profitability, whereas others are interested in profitability before certain specific expenditures, such as taxes and interest. Others are only concerned with profitability after all costs and expenses have been paid.
Net Income vs. Profit Example
To illustrate the difference between net income and profit, let’s take a look at Apple’s annual income statement for fiscal year 2023. Its gross profit (listed as gross margin)—revenues minus COGS—is reported as just over $169 billion. Its net income—which includes operating expenses and income tax payments—is listed as just under $97 billion. Net profit is almost always going to be lower than gross profit.
What Is Operating Profit?
Operating profit is the earnings a company generates from its core business. It is profit after deducting operating costs but before deducting interest and taxes. Operating profit provides insight into how a company is doing based solely on its business activities. Net profit, which takes into consideration taxes and other expenses, shows how a company is managing its business.
Is Profit Before Tax the Same as Net Income?
No, it's not. Net income is the last line item on an income statement and accounts for all costs and expenses, including taxes. Profit before tax will always be higher than net income, as it doesn’t deduct taxes.
Is EBITDA the Same As Profit?
Earnings before interest, taxes, depreciation, and amortization (EBITDA) is a metric used to gauge a company’s profitability before those items have been taken into consideration. It can be seen as a type of profit. EBITDA is different from net income, which accounts for all costs and expenses, not just the four used to calculate EBITDA.
The Bottom Line
While net income and profit are similar terms, there are distinct differences between the two. Profit can come in different shapes and sizes, such as gross profit and operating profit, and may not take into consideration all the costs and expenses a business has incurred.
Net income, on the other hand, is generally the last item on a company’s income statement. it represents how much revenue is left after all costs and expenses have been deducted, including COGS, administrative expenses, research and development, and taxes.
FAQs
Net Income: an Overview. Gross profit represents the income or profit remaining after production costs have been subtracted from revenue. Net income is the profit that remains after all expenses and costs, such as taxes, have been subtracted from revenue.
What is the difference between profit and net income? ›
Profit means the revenue that remains after costs and expenses have been deducted; it exists on several levels, depending on which items have been deducted. Net income is a single number representing a specific type of profit after all costs and expenses have been deducted from revenue.
What is more important gross profit or net income? ›
In short, gross profit is your revenue without subtracting your manufacturing or production expenses, while net profit is your gross profit minus the cost of all business operations and non-operations. Your net profit is going to be a much more realistic representation of your company's profits.
What is the difference between income and profit? ›
Profit is calculated by deducting expenditures from revenue, whereas income is calculated by deducting all expenses spent by a firm. Profit is the difference between how much money is spent and earned in a specific time period, whereas income is the actual amount of money earned in that time period.
Is net income different from profit True False? ›
Answer and Explanation:
"Net income" is a term used interchangeably with "earnings" and "profit" in financial reporting and by financial analysts. Managers, investors, and creditors can all benefit from using these definitions when discussing the company's financial performance over a given time frame.
What is a good profit margin? ›
As a rule of thumb, 5% is a low margin, 10% is a healthy margin, and 20% is a high margin.
What is a good net income? ›
You may be asking yourself, “what is a good profit margin?” A good margin will vary considerably by industry, but as a general rule of thumb, a 10% net profit margin is considered average, a 20% margin is considered high (or “good”), and a 5% margin is low.
Can a business earn a gross profit but incur a net loss? ›
operating expenses exceed gross profit. Therefore, a business can earn a gross profit but incur operating expenses in excess of this gross profit and end up with a net loss.
Is it better to have a higher or lower net profit? ›
A higher net profit margin typically indicates the company is managing its costs well and generating good levels of revenue. A lower net profit margin means the business needs to consider how its costs and revenue structure could be better managed.
Does net profit include taxes? ›
What is net profit? Net profit is the amount of money your business earns after deducting all operating, interest, and tax expenses over a given period of time. To arrive at this value, you need to know a company's gross profit.
Net income is lower than revenue because revenue is the top line item from which expenses are deducted. However, in rare instances, net income can be higher than revenue if extraordinary, or one-time, items are included in a period.
Does net income include taxes? ›
Is Net Income Before Taxes or After? Net income is what a business or individual makes after taxes, deductions, and other expenses are taken out. In business, net income is what a company has left after all expenses are subtracted, including taxes, wages, and the cost of goods.
Is net income the same as profit after tax? ›
Net profit after tax (NPAT), also known as net income or the bottom line, is the final measure of a company's profitability after all expenses have been deducted from revenue—including taxes.
What is the relationship between net income and profit? ›
Net income refers to the amount remaining for a business's equity shareholders. It appears as the very bottom line item on the statement. Net profit doesn't factor in the equity for shareholders. For companies without shareholders, net profit replaces net income as the bottom line on an income statement.
Is net income and net profit both are same? ›
Net income is also called net profit since it represents the net profit remaining after all expenses and costs are subtracted from revenue.
Is revenue or profit more important? ›
Both revenue and profit are essential to understand and track, but profit provides a more complete picture of a company's financial health. Increased revenue is generally achieved through expansion and scaling, while higher profits are reached through optimization.
Is net income and profit margin the same thing? ›
Profit margin is calculated by dividing the company's net income by its revenues. The result is shown as a percentage. A higher percentage means the company produces more net income for every dollar of revenue that comes in the door.
What is meant by net income? ›
Net income refers to the amount an individual or business makes after deducting costs, allowances and taxes. In commerce, net income is what the business has left over after all expenses, including salary and wages, cost of goods or raw material and taxes.
Is net income the same as operating profit? ›
Operating profit is a company's profit after all expenses are taken out except for the cost of debt, taxes, and certain one-off items. Net income is the profit remaining after all costs incurred in the period have been subtracted from revenue generated from sales.
Is net profit good or bad? ›
A net profit of 10% is generally regarded as a good margin for most businesses, while 20% and above is regarded as very healthy. A net profit margin of less than 5% is relatively low in most industries and can indicate financial risk and unsustainability.
