Revenue vs. Profit: An Overview
Revenue is the total amount of income generated by the sale of goods or services related to the company's primary operations. Profit, which is typically called net profit or the bottom line, is the amount of income that remains after accounting for all expenses, debts, additional income streams, and operating costs.
What Is The Difference Between Revenue And Profit?
- Revenue is the total amount of income generated by the sale of goods or services related to the company's primary operations.
- Revenue, also known simply as "sales", does not deduct any costs or expenses associated with operating the business.
- Profit is the amount of income that remains after accounting for all expenses, debts, additional income streams, and operating costs.
- While revenue and profit both refer to money a company earns, it's possible for a company to generate revenue but have a net loss.
For example, the money a shoe retailer makes from selling its shoes before accounting for any expenses is its revenue. Income isn't considered revenue if the company also has income from investments or a subsidiary company. That's because it doesn't come from the sale of shoes. Additional income streams and various types of expenses are accounted for separately.
Profit is referred to as net income on the income statement. But most people commonly know it as the bottom line. There are variations of profit on the income statement that are used to analyze the performance of a company.
But there are other profit margins in between the top line (revenue) and bottom line (net profit). For instance, the term profit may emerge in the context of gross profit and operating profit. These are steps on the way to net profit.
Gross profit is revenue minus the cost of goods sold (COGS), which are the direct costs attributable to the production of the goods sold in a company. This amount includes the cost of the materials used in creating a company's products along with the direct labor costs used to produce them.
When most people refer to a company's profit, they are not referring to gross or operating profit, but rather net income. This is what's left over after expenses or the net profit. Keep in mind that it is possible for a company to generate revenue but have a net loss at the same time.
Let's take a look at J.C. Penney's numbers for 2017, reported on the company's 10-K annual statement, closing on Feb. 03, 2018. The company suffered a loss on the bottom line of $116 million, despite earning $12.5 billion in revenue. Losses typically occur when debts or expenses outstrip earnings, as in the case of J.C. Penney.
Example of Revenue vs. Profit
Here are the figures and income statement portion for J.C. Penney that we mentioned above.
- Revenue or Total Net Sales: $12.50 billion
- Gross Profit: $4.33 billion (total revenue of $12.50B – COGS of $8.17B)
- Operating Profit: $116 million (minus all other fixed and variable expenses associated with operating the business, such as rent, utilities, and payroll)
- Profit or Net income: –$116 million (a loss)
Accrued revenue is the same as unrealized revenue. Accrued revenue is the revenue earned by a company for the delivery of goods or services that have yet to be paid for by the customer.
Here's a hypothetical example to demonstrate accrued revenue. Let's say a company sells widgets for $5 each on net-30 terms to all of its customers and sells 10 widgets in August. Since it invoices its customers on net-30 terms, the company's customers won't have to pay until 30 days later, or on September 30. As a result, August's revenue will be considered accrued revenue until the company receives payment from its customers.
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 company collects the $50, the cash account on the income statement increases, the accrued revenue account decreases, and the $50 on the income statement remains unchanged.
Accrued revenue is not the same as unearned revenue. In fact, they're actually the opposite of one another.
Unearned revenue accounts for money prepaid by a customer for goods or services that have not been delivered. If a company requires prepayment for its goods, it would recognize the revenue as unearned, and would not recognize the revenue on its income statement until the period for which the goods or services were delivered.
Revenue vs. Profit FAQs
Can Profit Be Higher than Revenue?
Revenue sits at the top of a company's income statement, making it the top line. Profit, on the other hand, is referred to as the bottom line. Profit is lower than revenue because expenses and liabilities are deducted.
Is Revenue the Same as Sales?
Revenue is commonly referred to as sales. But revenue is any income a company generates before expenses are subtracted while sales are what the firm earns from selling goods and services to its customers.
What Is More Important, Profit or Revenue?
While both are important, profit gives a more accurate picture of a company's financial position. That's because a company's liabilities and other expenses such as payroll are already accounted for when its profit is calculated.
How Much of Revenue Is Profit?
Profit is whatever remains from the revenue after a company accounts for expenses, debts, additional income, and operating costs.
The Bottom Line
Revenue and profit are two very important figures that show up on a company's income statement. While revenue is called the top line, a company's profit is referred to as the bottom line. Investors should remember that while these two figures are very important to look at when making their investment decisions, revenue is the income a firm makes without taking expenses into account. But when determining its profit, you account for all the expenses a company has including wages, debts, taxes, and other expenses.