Understanding the distinction between sales revenue and profit is critical to comprehending economics, business analytics, and accounting principles. Both are looked at while analyzing a company’s overall health.
The Basics of Sales Revenue and Profit
To show the entire amount of income a firm generates from the sale of its goods or services, the terms “sales revenue” and “revenue” are frequently interchanged. The collections and billings from the sale of products or services (the gross sales revenue) can be broken down further, as can the deduction of returns and allowances from the gross sales income (the net sales revenue). Although the terms “sales revenue” and “revenue” are often interchanged, not all income is generated by sales. When computing total revenues, other sources of income, such as interest collected on credit sales, may be added to sales revenue as a distinct line item.
Profit is the difference between a company’s total revenues and total costs, and it’s also known as the bottom line. Profit, in this context, refers to the amount of money left over after all expenses, charges, and taxes have been deducted. Profit is measured by taking into account both income and expenditure, whereas sales revenue solely analyses the amount of money a company makes through the sale of its goods or services. Gross profit (sales minus cost of goods sold), operational profit (gross profit minus operating expenses), and net profit (gross profit minus operating expenses) are the three types of profit (remaining income after all expenses have been paid).
Calculating Sales Revenue and Profit
Multiply the selling price of each good or service by the total number of items or services sold to compute sales revenue. For instance, if an orchard sells 200 apples for $2 each, the total sales revenue is $400. If it additionally sells 100 lemons for $3 each, the total sales proceeds will be $700.
Subtract entire costs from total revenue to arrive at the profit figure. Returning to the orchard example, if each apple costs $1 to cultivate and harvest, and each lemon costs $2, and the orchard sells 200 apples and 100 lemons, the total cost is $400. To arrive at the profit, subtract that sum from the total sales revenue of $700. From the sale of apples, the orchard made $200 and from the sale of lemons, the orchard made $100.
Why Sales Revenue and Profit Matter?
Sales revenue and profit are important to businesses and their investors because they provide information about the health of the organization. Profit reflects how much value a company obtains through its product’s price and cost, whereas sales revenue displays the quantity demanded at a specific price. When determining a company’s profitability, both profit and sales revenue are evaluated.
Revenue vs. Profit: What’s the Difference?
Revenue vs. Profit: An Overview
The total amount of revenue generated through the sale of goods or services connected to the company’s principal business is referred to as revenue. Profit, also known as net profit or the bottom line, is the amount of money left over after all expenses, debts, additional revenue streams, and operating costs have been deducted.
What Is The Difference Between Revenue And Profit?
- The total amount of revenue generated through the sale of goods or services connected to the company’s principal business is referred to as revenue.
- Revenue, commonly known as “sales,” does not include any charges or expenses incurred in the operation of the company.
- After all expenses, debts, other income streams, and operating costs have been deducted, profit is the amount of money left over.
- While both revenue and profit relate to money earned by a firm, a corporation can generate revenue while still losing money.
Because it appears at the top of the income statement, revenue is commonly referred to as the top line. The revenue figure is the amount of money a company makes before any expenses are deducted.
For example, before deducting any expenses, a shoe retailer’s revenue is the money it makes from selling its shoes. If a corporation has income through investments or a subsidiary company, it is not considered revenue. This is because it is not derived from the selling of shoes. Additional sources of revenue and other types of costs are tracked individually.
On the income statement, profit is referred to as net income. However, most people refer to it as the bottom line. Profit is a variable on the income statement that is used to analyze a company’s success.
Between the top line (revenue) and the bottom line, however, there are different profit margins (net profit). The term profit, for example, may appear in the context of gross profit and operating profit. These are the steps that lead to a net profit.
Revenue minus cost of goods sold (COGS), which are the direct costs attributable to the manufacturing of the commodities sold in a business, equals gross profit. This figure comprises the cost of materials used in the production of a company’s products as well as direct labor costs.
Operating profit is gross profit minus all additional fixed and variable costs such as rent, utilities, and payroll that come with running a business.
When most individuals talk about a company’s profit, they’re talking about net income rather than gross or operating profit. After expenses or net profit, this is what’s leftover. It’s important to keep in mind that a corporation might earn income while still losing money.
Let’s take a look at J.C. Penney’s 2017 financial results, as disclosed in the company’s 10-K annual report, which ended on February 3, 2018. Despite generating $12.5 billion in revenue, the corporation lost $116 million on the bottom line. As in the case of J.C. Penney, losses occur when debts or expenditure exceed earnings.
Example of Revenue vs. Profit
- Here is the J.C. Penney stats and income statement section that we referenced earlier.
- $12.50 billion in revenue or total net sales
- Gross Profit: $4.33 billion (total sales of $12.50 billion minus cost of goods sold of $8.17 billion)
- $116 million in operational profit (minus all other fixed and variable expenses associated with operating the business, such as rent, utilities, and payroll)
Unrealized revenue is the same as accrued revenue. The money collected by a corporation for the delivery of products or services that have yet to be paid for by the customer is referred to as accrued revenue.
To demonstrate accumulated revenue, consider the following hypothetical case. Let’s imagine a corporation sells $5 widgets to all of its clients on a net-30 basis and sells 10 widgets in August. Customers will not have to pay until 30 days later, on September 30, because the company invoices on net-30 terms. As a result, until the company receives payment from its consumers, August’s revenue will be deemed accrued revenue.
The corporation would record $50 in revenue on its income statement and $50 in accrued revenue as an asset on its balance sheet, according to accounting principles. When the company receives $50, the cash account on the income statement rises, the accrued revenue account falls, and the $50 on the income statement stays the same.
Unearned revenue is not the same as revenue that has been earned. In reality, they are opposed to one another.
Unearned income refers to money a client has paid for goods or services that have yet to be delivered. If a corporation requires prepayment for its goods, the revenue is considered unearned, and the revenue is not recorded on the income statement until the period in which the goods or services are provided.