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.
Is Net Income The Same As Profit?
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.