In this blog post, we will discuss the difference between Net Income and Net Profit and how to calculate each one. We will also look at some examples to help illustrate the concepts.
Defining Net Income
Net income is a company's total earnings or profit. This figure includes revenue from sales and other sources of income, such as interest or investments, minus any expenses incurred during the same period.
How to calculate net income?
To calculate net income, you simply take a company's total revenue and subtract all of its expenses. This number can be positive or negative, depending on whether the company made more money than it spent or vice versa.
For example, let's say that a company has total revenue of $100,000 in a year. It incurs $40,000 in expenses during the same period, including the cost of goods sold, overhead, taxes, and interest payments. This company's net income would be $60,000 ($100,000 - $40,000).
Defining Net Profit
Net profit is similar to the net income in that it represents a company's overall earnings. However, net profit is calculated differently. While net income includes all sources of revenue and subtracts all expenses incurred during the same period, net profit only subtracts the cost of goods sold from total revenue.
How to calculate net profit?
Net profit is calculated in much the same way, excluding certain items like taxes, interest payments, and depreciation. This number is also referred to as "net earnings" or " bottom line."
To continue with our example from above, let’s say that the company’s cost of goods sold was $30,000. This company’s net profit would be $70,000 ($100,000 - $30,000).
As you can see, the main difference between net income and net profit is that net profit does not take into account overhead costs, taxes, and other expenses when calculating a company's overall earnings. For this reason, net profit is often considered a more accurate measure of a company's true profitability.
Another way to think of the difference between net income and net profit is to imagine a pie. The total size of the pie is the company's net income, while the slice left after all the expenses have been paid is the net profit.
Here’s an example:
Let's say that a company has a net income of $100,000 for the year. They have to pay $20,000 in taxes, $30,000 in rent, and $10,000 in salaries. That leaves them with a net profit of $40,000.
As you can see, the net income is the total amount of money that the company has brought in. In contrast, the net profit is the amount of leftover money after all expenses have been paid.
After you understand the difference between these two terms, you can use them to track and assess your company's financial performance. However, keep in mind that neither net income nor net profit is an exact measure of a company's financial health. To get a complete picture of your company's finances, you'll need to look at other cash-flow and balance sheet data.
Which one is more important?
That depends on who you ask. Some people believe that net income is a more accurate measure of a company’s success because it shows how much money they’ve actually brought in. Others believe that net profit is a better measure because it shows how much money the company has left over to reinvest or give to shareholders.
If you're an investor, you're probably more interested in a company's net profit because it gives you a better idea of how much cash the business generates. On the other hand, if you're a manager trying to run a company, you might be more concerned with net income since it includes all of the money coming in and out of business.
In the end, it's up to you to decide which metric is more important for your needs. Remember that they are two different things, and don't get them confused!
Takeaway
Now that you know the difference between net income and net profit, it is time to put this knowledge to use! Try using this information to analyze a company's financial statement and see if you can find any trends. Additionally, try comparing the net profits of different companies to see which one is more profitable. Good luck!
