The words Profit and Income can confuse some people as they may think these two words mean the same thing, but they don't.
Profit refers to the difference between how much money is spent and earned in a given time period.
Income represents the actual amount of money earned in a given time period.
Let's take a closer look at the difference.
When you have a business and you sell your products and/or services, that brings in money. That money is classified as income for your business. You can have one income stream or several in a business.
When you have a business, you also have bills (expenses). Expenses come in all shapes and sizes like vendor bills (if you have products), payroll (if you have employees), utilities, rent, software fees, state or federal taxes.... you get the picture. After you pay all your necessary bills, if you have money left over from your income, that is your profit for that period of time.
To put it in a simple and way to easy equation: Income - Expenses = Profit. Of course, if your expenses exceed your income for that period, then you do not have a profit. We call that a loss in accounting.
I want to clarify something here, I am not saying that when you show a profit (which will show on your Profit & Loss Statement, hence the name of the financial statement) that all the money showing as a profit will be money you can take out of the business and spend willy-nilly. (Shoot, I just aged myself!). That profit may have to be used to cover payables, the next payroll, or other business expenses.
I also want to bring up that a business can show a profit in one time period, and a loss in the previous or next time period. It just depends on the income and expenses that business has for that time period.
You might be wondering exactly what a “time period” in accounting is. We (accounting professional like bookkeepers, CPA, etc) will choose a period of time and run reports all dated within that same time frame. Often is it a month, a quarter or a year during which that business was operating. That is how us accounting nerds analyze what is going on with our client's business. If a client asks for advisory services, we can use that data to help them decide how to make their business more profitable.
I hope this post helped you understand a little more about the difference between profit and income. If you would like to learn more about your Financial Statements or Cash Flow, click on the links.
If you have any further questions about this or other bookkeeping subjects, please contact me at Rebecca@RHBizSolutions.com. I look forward to talking to you about your bookkeeping needs.
Here's To Your Success!
Rebecca Hurt
RH Business Solutions
Disclaimer:
Any accounting, business or tax advice contained in these articles, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties. Please seek consultation from the appropriate accounting/tax professional.