26. Revenue vs. Profit: What’s the Difference?¶
26.1. Revenue vs. Profit: An Overview¶
Revenue is the total amount of income generated by the sale of goods or services related to the company’s primary operations. Profit, typically called net profit or the bottom line, is the amount of income that remains after accounting for all expenses, debts, additional income streams and operating costs.
Revenue is often referred to as the top line because it sits at the top of the income statement. The revenue number is the income a company generates before any expenses are taken out.
For example, with a shoe retailer, the money it makes from selling shoes before accounting for any expenses is its revenue. If the company also has income from investments or a subsidiary company, that income is not considered revenue; it does not come from the sale of shoes. Additional income streams and various types of expenses are accounted for separately.
Also referred to as the bottom line, profit is referred to as net income on the income statement. There are variations of profit on the income statement that are used to analyze the performance of a company.
However, there are other profit margins in between the top line (revenue) and bottom line (net profit); the term “profit” may emerge in the context of gross profit and operating profit. These are steps on the way to net profit.
Gross profit is revenue minus the cost of goods sold (COGS), which are the direct costs attributable to the production of the goods sold in a company. This amount includes the cost of the materials used in creating the good along with the direct labor costs used to produce the good.
Operating profit is gross profit minus all other fixed and variable expenses associated with operating the business, such as rent, utilities, and payroll.
26.4. Example: Revenue vs. Profit¶
Below are the figures and the income statement portion for J.C. Penney for 2017. The numbers were reported on their 10K annual statement, page 46, closing on February 03, 2018.
Revenue or Total Net Sales = $12.50 billion Gross Profit = $4.33 billion (total revenue of $12.50B - COGS of $8.17B) Operating Profit = $116 million (minus all other fixed and variable expenses associated with operating the business, such as rent, utilities, and payroll) Profit or Net income = -$116 million (a loss)
26.5. Key Differences¶
When most people refer to a company’s profit, they are not referring to gross profit or operating profit, but rather net income, which is the remainder after expenses, or the net profit. It’s possible for a company to generate revenue but have a net loss. We can see that J.C. Penney suffered a loss on the bottom line of $116 million, despite earning $12.5 billion in revenue. The loss occurs typically when debts or expenses outstrip earnings, as in the case of J.C. Penney.
26.6. Special Considerations¶
Accrued revenue is the same as unrealized revenue. Accrued revenue is the revenue earned by a company for the delivery of goods or services that have yet to be paid by the customer.
For example, a company sells widgets for $5 each on net-30 terms to all of its customers and sells 10 widgets in August. Since it invoices its customers on net-30 terms, the company’s customers won’t have to pay until 30 days later, or on September 30. As a result, the revenue for August will be considered accrued revenue until the company receives customer payment.
From an accounting standpoint, the company would recognize $50 in revenue on its income statement and $50 in accrued revenue as an asset on its balance sheet. When the company collects the $50, the cash account on the income statement increases, the accrued revenue account decreases, and the $50 on the income statement will remain unchanged.
It’s important not to confuse accrued revenue with unearned revenue; unearned revenue can be thought of as the opposite of accrued revenue.
Unearned revenue accounts for money prepaid by a customer for goods or services that have not been delivered. If a company requires prepayment for its goods, it would recognize the revenue as unearned, and would not recognize the revenue on its income statement until the period for which the goods or services were delivered.
Revenue is the total amount of income generated by the sale of goods or services related to the company’s primary operations. Profit is the amount of income that remains after accounting for all expenses, debts, additional income streams, and operating costs. While revenue and profit both refer to money a company earns, it’s possible for a company to generate revenue but have a net loss.