What are the differences among accounting revenue, gain, and net income?
December 10, 2011
Learn about differences among revenue, gross profit, profit, income gain, and net income.
Sometimes there is confusion when words revenue,income, gross profit, gain, profit, and net income are used. These are all accounting terms that have different meanings in light of an income statement. Unfortunately, it is not always understood that the word revenue can be used interchangeably with the word profit, for example. To clear up things with these accounting terms, let’s review them in detail and then look at an example of an income statement with all these elements.
We will start at the top of income statement and progress downwards by explaining each element.
Revenue is usually understood to be total income of a company resulting from its main operating activities. Main operating activities may be manufacturing and selling goods for a manufacturing company, providing legal services for a law firm, or providing leased assets for a leasing company. Revenue represents the total amount of income before any expenses are subtracted. In pure accounting terms, revenue is an increase in assets or decrease in liabilities on the company’s books. Revenues are also called sales, especially in context of companies producing or selling tangible products.
Income may have several meanings. First, income can be used interchangeably with revenue. Second, income may refer to revenue from sources other than main operating activities (we will call them secondary revenue types); for example, interest income, rent income, or commission income. Third, income may refer to the excess of revenue over expenses: this excess represents net income. In our example in the following section we will use the second meaning of income (i.e., secondary types of revenues).
Gross profit is the difference between revenue and cost of goods sold (cost of sales). Revenue was defined above. Cost of goods sold is the cost of goods which a company sold to generate that revenue. In pure accounting terms, cost of goods sold is the difference between cost of goods available for sale and cost of goods on hand at the end of an accounting period. As we will see in the example presented further, gross profit is an intermediate step in arriving at net income.
Gain is similar to income as a secondary type of revenue, except that gain refers to incidental and nonrecurring transactions. For example, rent income may be received by a company regularly, which is why it will be an income. On the other hand, gain on disposal of fixed assets is called a gain because sale of fixed assets does not take place regularly.
Profit is the difference between revenue and expenses. Profit can also be called net income, net profit, or “bottom line” because it’s usually the last line on an income statement.