The commercial director is obliged to navigate the accounting and finances of the company, and for this he should understand the essence of the concepts of gross income and revenue, which we will consider in detail in this material.
You will learn:
- What is gross income, how is it formed and calculated.
- What is revenue, what is it formed from and how is it calculated.
- What is the difference between gross income and revenue with examples.
- What connecting and distinguishing factors exist between revenue and gross income.
Gross income
Gross income is the sum of all cash receipts the company as a result of its business activities and operations. Gross income is calculated without deduction tax payments which are included in the price of goods. This is not only value added tax, but also various excise taxes, duties and customs duties. The main part of this type of income for trading and manufacturing companies is income from sales.
The gross income of an enterprise is determined by quantitative indicators of goods sold, services provided and work performed. The second indicator that affects the total gross income of an enterprise is the price per unit of goods (service, volume of work). The formula for determining gross income is as follows:
Gross Revenue = Price x Quantity
An indicator such as the level of profitability, expressed by the profitability ratio, depends on gross income. It can be defined as the ratio of gross income to the volume of products sold during this period of time.
Gross income is a kind of financial reference point for an enterprise. Since this type of income includes cost price and current costs for the purchase (production) of products, then it constitutes the bulk of these economic costs. The self-sufficiency of the organization’s activities or profitability ratio depends on this.
Profitability ratio = Gross income / Quantity of products sold x 100%
Also from a certain share of gross income is formed profit. And from it funds are formed, from which the development of the enterprise is financed, salaries and bonuses are calculated for staff, the income of the founders of the enterprise and much more. If an enterprise has a large gross income in proportion to the operating costs of organizing its activities, then it has a high level of self-financing. This has a positive effect on its development and financial performance.
Gross income consists of intangible aspects. These components include income from the organization’s investment activities and reinvestment operations. This also includes operations related to the accumulation and disposal of funds in pension accounts or bank deposits.
Revenue
Revenue is material assets expressed in monetary terms that an enterprise receives from sales of goods, provision of services or performance of work. The paths of these receipts are strictly determined by accounting standards. Not all cash receipts are considered revenue, only those that come from the main activities of the business. Receipts coming from other channels are income. Therefore, the difference between revenue and profit is colossal.
The company’s revenue can also be generated from other sources that were declared as the main ones according to OKVED. There are two types of revenue: total and net.
Total – the amount of all cash receipts for goods sold or services provided (excluding VAT, excise taxes, customs duties and duties).
Net – the sum of total revenue minus all additions to the price per unit of goods (services).
According to the accounting regulations, revenue is a component of income. Amounts of proceeds from sales are reflected in a separate report “Settlements with customers. Debit".
The amount of revenue consists of various factors (quality, price competitiveness or variety of product range). Revenue depends on how many products were planned to be released for sale. Revenue volumes are influenced by the consumer qualities and properties of the product, the timing of sales (especially important for perishable goods), and the market level of supply and demand. There are factors that do not depend on the company (mass events that provide an influx or outflow of people, economic and political reasons).
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Difference between income and revenue
For large organizations whose revenue structure is complex and has many sources of revenue, the concept of revenue will be very different from gross income.
For example, a company's revenue is always greater than zero. It may be equal to zero, but only in the case when the enterprise did not carry out trade and production activities. All cash deposits and receipts add up to a strictly defined value. Income may be negative. This happens when a company cannot cover all the necessary costs for production, procurement and preparation for sales of goods, as well as other operating expenses.
The calculation of revenue includes only receipts to the cash desk and to the current accounts of the enterprise only from the main activities of the enterprise. This could be the sale or production of goods, the provision of services and the performance of certain types of work.
Gross income, in contrast to revenue, is formed from the totality of all activities of the enterprise. This could be income from leased assets and non-residential areas, bank interest, investment and borrowed funds, sales of goods, provision of services or performance of work.
Cash flow channels are what primarily distinguishes gross income from revenue.
Example: An agro-industrial company sold meat and vegetables to retail and wholesale buyers in the amount of 700,000 rubles. The company received another 150,000 rubles for renting out one of its harvesting machines to a farm during the harvest. The company also receives money from interest on investments in this farm (50,000 rubles) and rents out part of the offices in its administrative building (50,000 rubles). Thus, the gross income of the agricultural holding was: 700,000 + 150,000 + 50,000 + 50,000 = 950,000 rubles.
And the enterprise’s revenue amounted to 700,000 rubles, since it only includes income from the main activity.
In rare cases, a company's revenue may be quantitatively equal to gross income. This happens when providing certain types of services in which there is no expense component for the implementation of the service.
Factors that differentiate the concepts of income and revenue
Experts in economics and accounting of an enterprise identify several distinctive factors by which the concepts of revenue and income can be divided. Next, we specify each factor.
- Formation. Revenue is a component of gross income and implies income only from the main activities of the company. Rent and other variable cash flows are income.
- Origin. The proceeds may be received by legal entities that conduct economic activities. Income can come from companies that do not conduct any active activities: this can be interest on investments or government subsidies.
- Meaning. Revenue is always greater than or equal to zero. If the company did not conduct economic activities in its main type, then there cannot be any revenue. A company's earnings can be either positive or negative. This happens when the cost of purchasing or producing a product exceeds its selling price.
- Ratio. Revenue always correlates positively with income, since it is part of it. The indicator is almost always greater than one, except in cases of provision of certain types of services.
- Calculus. To calculate revenue, we simply need to add up all receipts from customers. When calculating income, the terms can be negative numbers.
Thus, the concepts of revenue and gross income differ not only at the level of financial statements. Understanding these differentiating factors, each manager can more clearly understand the essence of management decisions related to the concepts of revenue, income, and profit.
Conclusion
Gross income and revenue are concepts that managers businesses are confused and do not pay due attention to the differences between them.
When you know what the concepts of gross income and revenue are, you will be able to give more accurate orders and more objectively perceive the information in financial statements. To do this, you need to know not only the definitions of these concepts, but also the distinctive features and methods of calculation.
Economists distinguish two types of enterprise profit - gross and net. What are the specifics of each of them?
What is gross profit?
Under gross profit It is customary to understand the magnitude of the difference between a company’s income and expenses, which arises from the fact that the company sells all types of goods and services, as well as receiving income through non-sales operations. It should be noted that the cost structure in this case does not include operating costs - those associated with payment for rent of premises, fuel and lubricants, and transfer of license fees. All of these can be significant, so gross profit alone does not always reflect the actual profitability of the business. Only those costs that reflect the cost of producing goods or providing services are significant.
At the same time, based on the size of the indicator under consideration, the effectiveness of the enterprise’s business model is determined. That is, if a company manages to reduce costs without deteriorating the quality of goods produced and services provided, as well as without reducing the level of social support for employees, and at the same time maintain turnover, gross profit will increase, and this will indicate the effectiveness of business management.
Note that the cost of production can be calculated according to different principles in individual industries. Some criteria will be applied in trade, and others in production.
What determines the size of gross profit? Economists distinguish 2 groups of factors influencing the value of the indicator under consideration:
- managed;
- uncontrollable.
The first include those that the owners and managers of the company are able to directly influence. The effectiveness of their work determines the intensity of the impact of the noted factors on business processes, as well as the size of the company’s gross profit.
The factors in question include:
- the rate at which the company receives revenue - which is determined by the dynamics of brand promotion in the market, the effectiveness of the sales strategy;
- quality and range of goods;
- efficiency of production modernization - in order to increase the volume of goods produced;
- reducing costs on factory lines;
- efficiency of personnel management at the enterprise.
Factors of the second type (which the owners of the company and its managers, as a rule, cannot influence) include:
- market volume;
- the geographical location of the company (affecting, in particular, the accessibility of transport communications, energy costs - if the territory where the company is located has a warm or, conversely, cold climate);
- foreign economic and political factors.
What is net profit?
Under net profit It is customary to understand part of the gross profit minus taxes and other obligations of the company to the budget. The owner of the company can use the amount that corresponds to the indicator in question at his own discretion - for example, use it to modernize production. But from it he will most likely pay salaries to employees - and this is supposed to be done first. Sometimes, due to net profit, the company's working capital is increased.
The value of the indicator under consideration depends, first of all, on gross profit. In addition, the amount of net profit is affected by:
- the tax regime in which the company operates;
- staffing structure, as well as the policy of attracting personnel through outsourcing, under contract agreements;
- the efficiency of accounting and tax accounting in the company - if it is at a high level, the company will be able to avoid overpayments to the budget, as well as timely use deductions guaranteed by law;
- state policy regarding the regulation of taxes and fees.
Thus, the amount of net profit is influenced by both those factors that are controllable and those that cannot be influenced by the owners and managers of the company.
Comparison
The main difference between gross profit and net profit is that the structure of the first does not take into account taxes and fees. Otherwise, the considered indicators are the same. Based on gross profit - by subtracting taxes and fees from it - net profit is calculated. Those factors that influence the size of the first indicator indirectly determine the size of the second. Which, in turn, depends on the influence of a number of specific factors.
Having considered the difference between gross and net profit, we will record the conclusions in the table.
Table
| Gross profit | Net profit |
| What do they have in common? | |
| Net profit is calculated on the basis of gross profit and indirectly depends on the factors influencing it | |
| Calculated without taking into account operating expenses | |
| What is the difference between them? | |
| Corresponds to the difference between the firm's revenue and expenses, which reflect the cost of goods | Corresponds to the difference between gross profit and cash transfers to the budget - in the form of taxes, fees and other payments established by law |
| Reflects the effectiveness of the business model | Reflects the efficiency of accounting and tax accounting |
A clear understanding of economic categories and income makes it possible to correctly plan and implement your steps, decisions and actions in real economic activity.
The most common misconception is that revenue refers to all cash receipts to sellers at markets and retail outlets, to cash registers and to current accounts. After all, other income may come to the current account, for example:
Discussion: 9 comments
From a legal point of view, there is a difference between the concepts. Yes, income is a broader concept; revenue represents profit taking into account expenses. In everyday life there is absolutely no difference, one might say, although income would be more correct.
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As practice has shown, many people confuse these two words, that is, they mean the same thing when they say these two different words. This is incorrect because they have different meanings. Everything was explained clearly.
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Since school age, we have been learning in law lessons what income and revenue are. But since I didn’t listen well to the teachers at school, I didn’t remember these definitions well. Now I understand perfectly well the difference between income and revenue.
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I once studied to become an accountant and even managed to work as an accountant for a little while, but I’ve been on maternity leave for two years now, and I’m planning to get out soon and brush up on my knowledge. I had forgotten the difference between income and revenue.
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Such simple concepts, but there are quite a lot of nuances in each of them. I think these concepts need to be understood at the training stage, the most important thing is to understand the essence, then everything will be much simpler.
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Understanding the difference between profit, income and revenue is one of the basics taught to future accountants or economists. I have an economics education, and, as far as I remember, teachers in any course could ask a question about the difference between these concepts.
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How subtly you need to understand this matter in order to understand what’s what, I never understood the difference, now at least I’ll know that income is the total amount, and revenue is what’s left after minor expenses.
AnswerProfit reflects the increase in the initially advanced cost of the production and economic activities of the organization to ensure its activities. It is determined by measuring the organization’s income and expenses.
Depending on the conditions of its formation, the following types of profit are distinguished.
1) Based on the volume of distribution costs, economic and accounting profit are distinguished.
§ Accounting profit is the simple difference between sales income (sales income) and expenses (operating costs).
§ Economic (net) profit is the amount that is obtained by deducting additional expenses from accounting profit. Such expenses may include uncompensated own expenses that were not taken into account in the cost of the product, additional bonuses for employees, costs for officials, etc.
That is, net profit is income minus absolutely all costs.
2) According to the value of the final result, profit can be:
§ normative or prescribed,
§ maximum possible or minimum acceptable,
§ not received (lost profit), with a negative result (loss).
3) By the nature of taxation we can distinguish:
§ taxable profit,
§ and not taxable.
4) Depending on the types of activities performed, profit can be:
§ From financial activities. This is the effect that is obtained from attracting capital from other sources on favorable terms.
§ From production activities. This is the result of production and marketing.
§ From investment activities. This is income from placing deposits and holding securities, income received from participation in joint activities with other companies or the sale of property upon completion of the investment project.
5) According to the regularity of formation, profit can be:
§ seasonal,
§ normalized
§ excessive.
§ Marginal profit is the additional profit received from the sale of an additional unit of production.
Gross profit is a parameter that reflects the difference between the income received by the enterprise and the cost of goods (services) sold, but without deducting income tax.
Gross profit- this is the total income of the company, which is received over a fixed period of time. It takes into account the profit from all types of company activities (both production and non-production areas are taken into account) minus production costs. The calculated figure is recorded in the balance sheet.
Gross Profit is the difference between revenue and the cost of products or services sold (Cost of sales or Cost of goods sold - COGS). It should be kept in mind that gross profit differs from operating profit (profit before taxes, penalties and interest, interest on loans).
Net sales income is calculated as follows:
· Net sales income = Total sales income − Cost of returned goods and discounts provided.
Gross profit is calculated:
· Gross profit = Net sales income − Cost of products and services sold including depreciation.
Based on gross profit data, you can calculate net profit:
· Net profit = Gross profit – Sum of taxes, penalties and fines, interest on loans.
Cost of goods sold is calculated differently for manufacturing and trading.
In general, this indicator reflects the profit of the transaction, excluding indirect costs.
For retail, gross profit is revenue minus the cost of goods sold. For a manufacturer, direct costs are the costs of materials and other supplies to create the product. For example, the cost of electricity to run a machine is often considered a direct cost, while the cost of lighting a machine room is often considered an overhead cost. Wages can also be direct wages if workers are paid a price per unit of goods produced. For this reason, service industries that sell their services on an hourly basis often treat wages as a direct expense.
Gross profit is an important indicator of profitability, but indirect costs must be taken into account when calculating net income.
Net profit- This is part of the enterprise’s balance sheet profit, which remains at its disposal after the formation of the wage fund and payment of taxes, fees, deductions and other obligatory payments to the budget, to higher organizations and banks. Unlike economic profit, net profit is used to expand production and increase working capital; it is the main source of the formation of funds, reserves, reinvestment in production and cash savings of the enterprise.
Net profit is an indicator of how profitable it really is to work in one direction or another, whether it is worth developing the business further or is it better to suspend it. This is the most important factor affecting the profitability of any enterprise.
Net profit is included in cost estimates or forms accumulation funds (production development fund or production and scientific-technical development fund, social development fund) and consumption funds (material incentive fund), as well as a charitable fund.
The volume of net profit depends on the volume of gross profit and the amount of taxes. Dividends to the shareholders of the enterprise are calculated based on the volume of net profit.
Net profit
+ Income tax expenses
- Refunded tax at a profit
(+ Extraordinary expenses)
(- Extraordinary income)
+ Interest paid
- Interest received
+ Depreciation charges for tangible and intangible assets
- Revaluation of assets
Hello! In this article we will talk about related, but not identical concepts: revenue, income and profit.
Today you will learn:
- What is included in the company's revenue?
- What is the company's income and profit derived from?
- What are the main differences between these concepts?
What is revenue
Revenue – earnings from the direct activities of the company (from the sale of products or services). The concept of revenue is found exclusively in business and entrepreneurship.
Revenue characterizes the overall efficiency of the enterprise. It is revenue, not income, that is reflected in accounting.
There are several ways to account for revenue in an enterprise.
- The cash method defines revenue as the actual money received by the seller for providing services or selling goods. That is, when providing an installment plan, the entrepreneur will receive proceeds only after actual payment.
- Another accounting method is accrual. Revenue is recognized when the contract is signed or the buyer receives the goods, even if actual payment occurs later. However, advance payments do not count towards such revenue.
Types of revenue
Revenue in an organization is:
- Gross– the total payment received for a job (or product).
- Clean– used in . Indirect taxes (), duties, and so on are subtracted from gross revenue.
The total revenue of the enterprise consists of:
- Revenue from core activities;
- Investment proceeds (sales of securities);
- Financial revenue.
What is income
The definition of the word “income” is not at all identical to the term “revenue,” as some entrepreneurs mistakenly believe.
Income - the sum of all the money earned by the enterprise through its activities. This is an increase in the economic benefit of an enterprise due to an increase in the company's capital by the receipt of assets.
A detailed interpretation of the ways of generating income and their classification are contained in the Regulations on Accounting “Income of Organizations”.
If cash revenue is funds received by the company’s budget in the course of its core activities, then income also includes other sources of funds (sale of shares, receipt of interest on a deposit, and so on).
In practice, enterprises often conduct diverse activities and, accordingly, have different channels for generating income.
Income – the overall benefit of the company, the result of its work. This is an amount that increases the organization's capital.
Sometimes income is equal in value to the organization’s net revenue, but most often companies have several types of income, and there can be only one revenue.
Income occurs not only in entrepreneurship, but also in the everyday life of a private person who is not engaged in business. For example: scholarship, pension, salary.
Receipt of funds outside the scope of business activities will be called income.
The main differences between revenue and income are given in the table:
| Revenue | Income |
| Summary of main activities | The result of both main and auxiliary activities (sale of shares, interest on bank deposits) |
| Arises only as a result of conducting commercial activities | Allowed even for unemployed citizens (benefits, scholarships) |
| Calculated from funds received as a result of the company’s work | Equal to revenue minus expenses |
| Cannot be less than zero | Let's say it goes negative |
What is profit
Profit is the difference between total income and total expenses (including taxes). That is, this is the same amount that in everyday life could easily be put into a piggy bank.
In an unfavorable situation, and even with a large income, the profit can be zero, or even go negative.
The main profit of the company is formed from the profit and loss received from all areas of work.
The science of economics identifies several main sources of profit:
- The company's innovative work;
- An entrepreneur’s skills to navigate the economic situation;
- Application and capital in production;
- Company monopoly in the market.
Types of profit
Profit is divided into categories:
- Accounting. Used in accounting. On its basis, accounting reports are generated and taxes are calculated. To determine accounting profit, explicit, justified costs are subtracted from total revenue.
- Economic (excess profit). A more objective indicator of profit, since its calculation takes into account all economic costs incurred in the work process.
- Arithmetic. Gross income minus miscellaneous expenses.
- Normal. Necessary income for the company. Its value depends on lost profits.
- Economic. Equal to the sum of normal and economic profit. Based on it, decisions are made on the use of the profit received by the enterprise. Similar to accounting, but calculated differently.
Gross and net profit
There is also a division of profit into gross and net. In the first case, only costs associated with the work process are taken into account, in the second - all possible costs.
For example, the formula by which gross profit in trade is calculated is the selling price of a product minus its cost.
Gross profit is most often determined separately for each type of activity if the company operates in several directions.
Gross profit is used when analyzing areas of work (the share of profit from which activity is greater), when the bank determines the creditworthiness of the company.
Gross profit, from which all costs (loan interest, etc.) have been subtracted, forms net profit. It is accrued to the shareholders and owners of the enterprise. And it is net profit that is reflected in and is the main indicator of business performance.
EBIT and EBITDA
Sometimes, instead of the understandable word “profit,” entrepreneurs encounter such mysterious abbreviations as EBIT or EBITDA. They are used to evaluate the performance of a business when the entities being compared operate in different countries or are subject to different taxes. Otherwise, these indicators are also called cleared profit.
EBIT represents earnings as they were before taxes and various interest. It was decided to separate this indicator into a separate category, since it is located somewhere between gross and net profit.
EBITDA- This is nothing more than profit without taking into account taxes, interest and depreciation. It is used exclusively to evaluate the business and its characteristics. Not used in domestic accounting. for commercial equipment.
Thus, income is funds received by an entrepreneur, which he can subsequently spend at his own discretion. Profit is the balance of funds minus all expenses.
Both income and profit can be predicted by taking into account past earnings, fixed and variable costs.
The differences between profit and revenue are as follows:
The line between the concepts may be unclear for an ordinary worker; it does not matter to him how revenue differs from profit, but for an accountant there is still a difference.
