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Net Income vs. Profit: An Overview
Net income, or net profit, is usually the last line item on a company’s income statement, detailing the amount of money earned after taking into consideration all costs and expenses, such as operating costs, interest expenses, and taxes. Profit is the amount of revenue left after certain expenses have been deducted and can be reported at different levels, such as gross profit and operating profit.
Key Takeaways
- Profit simply means the revenue that remains after expenses; it exists on several levels, depending on what types of costs are deducted from revenue.
- Net income, also known as net profit, 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 expenses and income streams for a given period. The sum of income less all expenses is the net income. When spending exceeds the budgeted revenue it causes a revenue deficit.
Net income includes expenses for manufacturing products, operating expenses, interest paid on loans or accrued from investments, additional income streams from subsidiary holdings or the sale of assets, depreciation and amortization of assets, taxes, and even one-time payments for unusual events.
Net income, also called net profit or net earnings, is a concrete concept; the figure that most comprehensively reflects a business’s profitability and is used in publicly traded companies to calculate their earnings per share (EPS).
Net income, like other accounting measures, is susceptible to manipulation through such techniques as aggressive revenue recognition or hiding expenses. When basing an investment decision or evaluation on net-income numbers, investors and analysts review the quality of the numbers that were used to arrive at the business’s taxable income as well as its net income.
There are also different types of profit margins, such as gross, operating, and net profit margins.
Profit
While net income is synonymous with a specific figure, profit can refer to many figures depending on what costs and expenses have been deducted. Profit simply means revenue that remains after expenses, and corporate accountants calculate profit at many levels.
For example, gross profit is revenue less a specific type of expense: the cost of goods sold (COGS). Gross profit is also called gross margin or gross income. Operating profit refers to revenue minus the COGS and operating expenses—all the costs, both fixed and variable, that are necessary to keep the business running must be included.
Calculating profit at different stages allows companies to see which expenses take the biggest bite out of the bottom line.
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 expenses, such as taxes and interest, and still others are only concerned with profitability after all 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 $169 billion. Its net income—which includes operating expenses and income tax payments—is listed as $97 billion. For the most part, net profit is 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 well a company is doing based solely on its business activities while net profit, which takes into consideration taxes and other expenses, highlights overall how well a company is managing its business.
Is Profit Before Tax the Same as Net Income?
No, profit before tax is not the same as net income. Net income is the last line item on an income statement and includes all costs and expenses, including taxes. So profit before taxes will always be higher than net income.
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. Profit, however, can be viewed in many different ways, depending on what costs and expenses have been deducted from revenues. EBITDA is different from net income, however; the latter of which includes all costs and expenses.
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 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, detailing how much revenue is left after all costs and expenses have been taken into consideration, including costs of goods sold, administrative expenses, research and development, and taxes.