The concept of net income and its distinction from profit
In English the concept of net income and profit are identical, whereas in Russian between them there are some differences. The concept of net income is broader than net income.
Net revenue is calculated as gross sales revenue minus the cost of the returned goods and discounts.
With respect to the individual net income is income after taxes, deductions and credits.
Profit is the goal of the company, which stimulates its further work, this portion of the annual income or revenues that remains after the costs of production and marketing of products. Distinguish between gross, net and profit margin.
Net profit (RAS) is formed by three sources, among them:
- profit from sales, which is calculated as the difference between the revenue from sales (without VAT and excises) and its cost;
- profit from sales of material assets - the difference between the sale price and the acquisition cost;
- non-operating profit (income from securities, equity, the delivery of property in rent).
Net profit is the profit of the company for payment of dividends. It is calculated as the difference between total revenue and costs (e.g. cost of goods) that it incurred in the course of their activities, then this figure is subtracted the depreciation, taxes, penalties, and payments on loans. Net profit (RAS) can be found in the statement of profit and loss. It is a key indicator of the effectiveness of the company, and is also used to determine earnings per share.
Profit margin is defined as the positive difference between net sales revenue and cost of sales or services.
It is also worth to distinguish between accounting and economic profit. If accounting only takes into account valid legislation costs, in other informal economic costs of the entrepreneur (e.g., corruption, additional employee premiums).
Thus, the net profit is always less than net income.
The concept of annual income
Annual income - a broader concept than net income. At its core, it is close to the concept of annual revenue. It represents the amount of money received by the company through the sale of goods and services to its customers for the year. The revenue is always more than net profit because it includes all costs incurred by the company in the process of production and sales.
The sources of annual income may be from sales of goods or provision of services from investment or financial activities. The decisive importance belongs to the income derived from operating activities, because it determines the meaning of existence of the enterprise.
The amount of annual income depends on the performance by the company of the assortment, sales, pricing and marketing policies.
Income, minus taxes, can be used for consumption and investment. The consumption Fund is directed to wages and other payments. The investment Fund is a source of development of the company and diversification of its activities.