Loading the player...
A:

A number of terms in business finance have differing or even fluid meanings in day-to-day use. Some terms used interchangeably by the average person actually have very specific definitions in a finance or accounting context. Though both terms deal with the positive flow of cash, profit and net income are two concepts with definitions and contextual usage that differ in important ways.

What Is Net Income?

Net income, also called net profit, is a concrete concept. This is the renowned bottom line of an income statement and the figure that most comprehensively reflects a business' profitability.

The net income of a company is the result of a number of calculations, beginning with revenue and encompassing all expenses and income streams for a given period. All the money that flows in and out of a company is accounted for in this amount. This includes expenses for the manufacture of products; operating expenses; payment on debts; 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, like other accounting measures, is susceptible to manipulation through such things as aggressive revenue recognition or by hiding expenses. When basing an investment decision on net income numbers, review the quality of the numbers that were used to arrive at the business's taxable income as well as its net income.

How Is Profit Different Than Net Income?

Profit, conversely, can refer to a number of figures. Profit simply means revenue that remains after expenses.

While net profit is synonymous with net income, corporate accountants calculate profit at a number of levels. For example, gross profit is revenue less the cost of goods sold, or COGS. Operating profit refers to revenue less COGS and operating expenses.

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.

RELATED FAQS
  1. What is being adjusted in 'adjusted net income'?

    Understand the difference between net income and adjusted net income, including which items factor into the adjustment and ... Read Answer >>
  2. What is the difference between operating income and revenue?

    Understand the definitions of revenue and operating income, how they are calculated and interpreted, and how operating income ... Read Answer >>
  3. What is the difference between gross margin and net margin?

    Learn the basics of gross profit margin and net profit margin, including how each is calculated and interpreted as a metric ... Read Answer >>
  4. What are the differences between gross profit and net income?

    Find out how companies determine gross profits and net income, and how these figures provide quick snapshots of their financial ... Read Answer >>
  5. What is the difference between operating income and operating profit?

    Find out why operating margin and operating income can be treated synonymously with EBIT, but how they all differ from operating ... Read Answer >>
  6. Does gross profit include tax?

    Find out what gross profits are, how they are calculated, how they are interpreted by investors and whether taxes are taken ... Read Answer >>
Related Articles
  1. Investing

    Is Net Income The Same As Profit?

    Net income and profit both deal with positive cash flow, but there are important differences between the two concepts.
  2. Investing

    The Difference Between Gross and Net Profit Margin

    To calculate gross profit margin, subtract the cost of goods sold from a company’s revenue; then divide by revenue.
  3. Investing

    Profitability Indicator Ratios

    Learn about profit margin analysis, effective tax rate, return on assets, return on equity and return on capital employed.
  4. Investing

    Calculating Net Income

    Otherwise known as the "bottom line", net income is the most commonly used indicator of a company's profitability. Learn more about how it an investor's decision to own or sell a stock.
  5. Investing

    A Look At Corporate Profit Margins

    Take a deeper look at a company's profitability with the help of profit margin ratios.
  6. Investing

    Calculating Economic Profit

    Economic profit is the difference between the revenue a firm earns from sales and the firm’s total opportunity costs.
  7. Investing

    Operating Profit

    Operating profit is the profit generated from the core business of a company before accounting for interest and taxes.
  8. Investing

    Interpreting a Strategy Performance Report

    A strategy performance report can provide key metrics to decide if your strategy is a winner.
  9. Small Business

    Run Your Finances Like A Business

    Think of yourself as your own little company. To make it run smoothly, you need to take a look at your books.
RELATED TERMS
  1. Net Income - NI

    A company's total earnings (or profit). Net income is calculated ...
  2. Operating Profit

    Operating profit is the profit from a firm's core business operations, ...
  3. Corporate Profit

    Corporate profit is the money left over after a corporation pays ...
  4. Net Loss

    The result that occurs when expenses exceed the income or total ...
  5. After-Tax Profit Margin

    After-tax profit margin is a financial performance ratio calculated ...
  6. Operating Income

    Operating income is the amount of money a company generates from ...
Hot Definitions
  1. Capital Asset Pricing Model - CAPM

    Capital Asset Pricing Model (CAPM) is a model that describes the relationship between risk and expected return and that is ...
  2. Return On Equity - ROE

    The profitability returned in direct relation to shareholders' investments is called the return on equity.
  3. Working Capital

    Working capital, also known as net working capital is a measure of a company's liquidity and operational efficiency.
  4. Bond

    A bond is a fixed income investment in which an investor loans money to an entity (corporate or governmental) that borrows ...
  5. Compound Annual Growth Rate - CAGR

    The Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer ...
  6. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
Trading Center