At a glance, net income and net profit may look the same, but they don’t necessarily mean the same thing.
In fact, they can even be rather different in meaning. Here’s an overview on what net income and profit are, how they differ, and what you need to know about each term.
What is Net Income?
Net income is a company’s total earnings or profit. Net income is calculated by taking revenues and adjusting for the cost of doing business, depreciation, interest, taxes, and other expenses.
Net income can be distributed among holders of common stock as a dividend or held by the firm as retained earnings. If a firm distributes dividends to common stockholders, then they must be subtracted from retained earnings to arrive at net income.
The formula for net income is:
Net Income = Revenues – Costs – Expenses
In other words, net income is how much money your business has left over after all expenses have been paid. If you’re a sole proprietor, it’s your personal income after expenses. If you’re an incorporated business, it’s your company’s profits.
What is Net Profit?
Net profit is what’s left of your revenue after you’ve paid all your expenses, taxes and interest. You can also think of it as the total amount of money you’re left with from your sales, once you’ve made all required payments.
Net profit is a widely-used metric because it’s easy to understand and shows a company’s profitability at a glance.
Companies that have high net profits — that is, the remaining money left over after paying all expenses — have more money to reinvest in their business (for example buying new equipment) or use for expansion (for example opening new stores).
The following formula is used to calculate net profit:
Revenue – Expenses = Net Profit
How do net income and net profit differ?
Net income is the profit that a company has earned after all expenses have been deducted from all revenue. In other words, net income is the amount of money that a company has made or lost during a specific period of time, such as a year or quarter.
Net profit, on the other hand, is the total earnings of a company minus any and all expenses, including taxes and interest payments on debt. In short, net income is the same as net profit except that it doesn’t take into account taxes and interest payments on debt.
The bottom line when comparing net income to net profit is that the former is simply an expense subtracted from revenue, while the latter takes into account additional figures such as taxes and interest payments.
In most cases, you’ll find that net income and net profit are used interchangeably by businesses when they’re referring to their earnings. However, these terms can be used in different contexts to refer to different things. For example, net income can also refer to an individual’s personal earnings after taxes and deductions have been removed from gross pay.
Conclusion
Net income and net profit are two terms that are used in the same way but they are not the same term; they are very different.
Net income is figured by deducting all of your operating expenses and non-operating items such as your interest costs, depreciation, and taxes from your revenue for a given period of time.
In order to arrive at the net profit, which can be calculated by subtracting the total cost of sales from the revenue you have to add some additional costs.