Net Income vs. Profit: An Overview
Net income, also called “net profit” or “net earnings,” is usually the last line item on a company’s income statement. It represents the amount of money earned after taking into consideration all costs and expenses, such as operating costs, interest expenses, and taxes. A cost is generally a one-time payment, while an expense is usually recurring.
Profit on its own is the amount of revenue left after costs and expenses. It can be reported at different levels, such as gross profit and operating profit, depending on which items are deducted from the gross revenue.
Key Takeaways
- Profit means the revenue that remains after costs and expenses have been deducted; it exists on several levels, depending on which items have been deducted.
- Net income 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 costs, expenses, and income streams for a given period. The sum of income less all costs and expenses is the net income. When spending exceeds the budgeted revenue, it causes a revenue deficit.
Net income takes into account the price tags for manufacturing products, operating expenses, interest paid on loans or accrued from investments, depreciation and amortization of assets, taxes, and even one-time payments for unusual events. It also includes additional income streams from subsidiary holdings or the sale of assets. Net income is the figure that most comprehensively reflects a business’ profitability and is used by publicly traded companies to calculate their earnings per share (EPS).
As with other accounting measures, net income is susceptible to manipulation through such techniques as aggressive revenue recognition or hiding expenses. When basing an investment decision or evaluation on it, investors and analysts review the quality of the numbers that were used to arrive at it, as well as at the business’ taxable income.
There are also different types of profit margins, including gross, operating, and net.
Profit
While net income is synonymous with a specific figure, profit can refer to many figures depending on which costs and expenses have been deducted. Corporate accountants calculate it at different stages, because doing so allows companies to see where the biggest bites out of the bottom line are being taken.
For example, gross profit, also called “gross margin” or “gross income,” is revenue less a specific expenditure: the cost of goods sold (COGS), while operating profit refers to revenue minus the COGS and operating expenses. All the expenditures, both fixed and variable, necessary to keep the business running must be included.
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 certain specific expenditures, such as taxes and interest. Others are only concerned with profitability after all costs and 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 just over $169 billion. Its net income—which includes operating expenses and income tax payments—is listed as just under $97 billion. Net profit is almost 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 a company is doing based solely on its business activities. Net profit, which takes into consideration taxes and other expenses, shows how a company is managing its business.
Is Profit Before Tax the Same as Net Income?
No, it's not. Net income is the last line item on an income statement and accounts for all costs and expenses, including taxes. Profit before tax will always be higher than net income, as it doesn’t deduct taxes.
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. EBITDA is different from net income, which accounts for all costs and expenses, not just the four used to calculate EBITDA.
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 gross profit and 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. it represents how much revenue is left after all costs and expenses have been deducted, including COGS, administrative expenses, research and development, and taxes.
