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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