Net Income vs. Profit: An Overview
Many terms in business and finance have differing or even fluid meanings in day-to-day use. Some terms the average person may use interchangeably have very specific definitions in a finance or accounting context. Case in point: profit and net income. Though both terms deal with the an excess of income over expenses, their definitions and contextual usage differ in important ways.
- Profit simply means the revenue that remains after expenses; it exists on several levels, depending on what types of costs are deducted from revenue.
- Net income, also known as net profit, is a single number, representing a specific type of profit.
- Net income is the renowned bottom line on a financial statement.
Net Income vs. Profit: What's the Difference?
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. The sum of income less all expenses is the net income. This includes expenses for the manufacture of products, operating expenses, 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, also called net profit or net earnings, is a concrete concept. The figure that most comprehensively reflects a business's profitability—and used in publicly traded companies to calculate their earnings per share (EPS)—represents the renowned bottom line of an income statement.
Net income, like other accounting measures, is susceptible to manipulation through such techniques as aggressive revenue recognition or by hiding expenses. When basing an investment decision or evaluation on net-income numbers, investors and analysts review the quality of the numbers that were used to arrive at the business's taxable income as well as its net income.
Net income, strictly speaking, is a form of profit.
While net income is synonymous with a specific figure, profit conversely can refer to a number of figures. Profit simply means revenue that remains after expenses, and corporate accountants calculate profit at a number of levels.
For example, gross profit is revenue less a specific type of expense: the cost of goods sold (COGS). Gross profit is also called gross margin or gross income. Operating profit refers to revenue minus the COGS and operating expenses—all the costs, both fixed and variable, that are necessary to keep the business running must be included.
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.
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 2020. Its gross profit (listed as gross margin)—revenues minus COGS—is reported as $105 billion. Its net income—which includes operating expenses and income tax payments—is listed as $57.4 billion. For the most part, net profit is always going to be lower than gross profit.