Unless you work in the field of finance, you probably have only a vague idea of the meaning of some accounting terms and concepts. Two common accounting terms we hear are “net income” and “net profit.” But what do they mean? What is the difference between them?
Net income is the residual amount of money after expenses and losses are deducted from the total amount of revenue in a certain accounting period. It is usually called the “bottom line” because it is the last item on an income statement.
The following equation or formula is used to calculate the net income:
Revenue (or Sales) – Cost of goods sold – Expenses – Taxes = Net income
(The “expenses” may include debts, loans, interests, depreciation, amortization, one-time charges for unusual or infrequent events, etc.)
Let’s say you own an online store that sells homemade beauty products. Your total sales for October was $25,000 and the cost of all goods sold was $10,000. You also shelled out $2,000 that month to pay off the loan you got for your business and $1,500 for the taxes. The calculation would be: $25,000 – $10,000 – $2,000 – $1,500 = $11,500.
Depending on the company’s management, the net income of a company can be divided among the stockholders of a company as a dividend or can be used for the company’s additional investments.
Net income is also useful information in determining a company’s profitability. Financial experts often compare a company’s net income from different fiscals periods to check the business’s financial health.
Net profit is another term for net income. It is also informally referred to as the “bottom line,” “total comprehensive income,” or “net earnings.”
Net Income vs Net Profit
What, then, is the difference between net income and net profit?
There really is no difference between the two terms. Net income and net profit both refer to the amount remaining after expenses, losses, and taxes are subtracted from the revenue.