Understanding the Difference Between Revenue and Profit

The total income acquired by the sale of goods or services related to the firm’s primary operation is called revenue. Profit, usually called net profit of the bottom line, is the amount of income that stays after accounting for all debts, expenses, additional income streams, and operating costs.

Revenue

Revenue is typically referred to as the top line since it sits at the top of the income statement. The revenue number is the income a firm produces before any expenses are taken out.

For example, with a shoe seller, the money it earns from selling shoes before computing for any expenses is its revenue. If the firm also has income from investments or a subsidiary firm, that income is not the revenue; it does not come from the cost of shoes. Various types of expenses and additional income streams are accounted for individually.

Profit

Profit, also called the bottom line, is referred to as net income on the income statement. There are variations of gain on the income statement that is used to assess the achievement of a company.

However, there are some profit margins in the middle of the top line (revenue) and bottom line (net profit); the word “profit” may appear in the context of operating profit and gross profit. These are ways to net profit.

Gross profit is revenue less than the cost of products sold (COGS), which are the direct prices attribute to the production of the products sold in a company. This amount includes the value of the materials used in making the goods along with the direct labor costs used to generate the goods.

Operating profit is gross profit less than all other fixed and variable expenses related to running the business, such as utilities, rents, and payroll.

Key Differences

When most people refer to a firm’s profit, they are not referring to gross profit or operating profit, but slightly net income, which is the rest after expenses, or also called as net profit. It’s possible for a firm to produce revenue but have a net loss. The loss usually occurs when debts or expenses outstrip earnings.

Special Points

Accrued revenue is also the same as unrealized revenue. Accrued revenue is the revenue acquired by a firm for the delivery of products or services that are needed to be paid by the consumer.

For example, a firm sells widgets for $5 each on a net-30 term to all its consumers and sells ten widgets in August. Since it itemizes its customers on net-30 terms, the firm’s customers do not have to compensate until 30 days after, or on September 30. Therefore, the revenue for August will be treated as accrued income until the firm receives customer payment.

From an accounting standpoint, the company would recognize $50 in revenue on its income statement and $50 in accrued revenue as an asset on its balance sheet. When the firm collects the $50, the cash account on the income statement increases, the accrued revenue account decrease, and the $50 on the income statement will stay unchanged.

Unearned revenue accounts for money prepaid by a consumer for goods or services that have not been delivered. If a firm requires prepayment for its products, it would recognize the revenue as unearned. It would not recognize the revenue on its income statement until the period for which the goods or services were delivered.

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