The terms profit and income are often used interchangeably in day-to-day life. In corporate finance , however, these terms can have very different and specific meanings depending on the context in which they are used. While income does mean positive flow of cash into a business, net income is something much more complex. Profit is generally understood to refer to the cash that is left over after accounting for expenses. Though both gross profit and operating profit fit this definition in the simplest sense, the kinds of income and expenses that are accounted for differ in important ways.
Perhaps the simplest way to understand these three concepts — gross profit, operating profit and net income — and how they relate to each other is to look at them in the order they appear on a company's income statement. The top line of the income statement reflects a company's gross revenue, or the total amount of income generated by the sale of goods or services.
From there, various expenses and alternate income streams are added and subtracted to arrive at different levels of profit. Gross profit is the total revenue less only those expenses directly related to the production of goods for sale, called the cost of goods sold COGS. These include expenses for raw materials and the labor to build or assemble a product but exclude other wages and overhead expenses, such as rent.
The result is a profit metric that reflects the amount of money left over to fund the business after accounting for the cost of simply producing a product. While gross profit is technically a net measurement of profit, it is referred to as gross because it does not take debts, taxes, interest or operating expenses into account.
Next on the income statement is operating profit. Derived from gross profit, operating profit reflects the residual income that remains after accounting for all the costs of doing business. In addition to COGS , this includes fixed-cost expenses such as rent and insurance, variable-cost expenses such as shipping and freight, payroll and utilities, as well as amortization and depreciation of assets. All the expenses that are necessary to keep the business running must be included.
However, like gross profit, operating profit does not account for the cost of interest payments on debts, additional income from investments or taxes. Gross profit reflects the profitability of a company's operations. Finally, net income , also called net profit , is the infamous bottom line. This reflects the total residual income that remains after accounting for all cash flows , both positive and negative. From the operating profit figure is subtracted all debt expenses such as loan interest, taxes and one-time entries for unusual expenses such as lawsuits or equipment purchases.
All additional income from secondary operations or investments and one-time payments for things such as the sale of assets are added. The result is arguably the most important financial metric of them all, reflecting a company's ability to generate profit for owners and shareholders alike. Dictionary Term Of The Day. A conflict of interest inherent in any relationship where one party is expected to Broker Reviews Find the best broker for your trading or investing needs See Reviews.
Sophisticated content for financial advisors around investment strategies, industry trends, and advisor education. A celebration of the most influential advisors and their contributions to critical conversations on finance. Become a day trader. What is the difference between gross profit, operating profit and net income?
Learn about gross, operating and net profit margins, how each is calculated and how they are used by businesses and investors Learn the basics of gross profit margin and net profit margin, including how each is calculated and interpreted as a metric Understand the difference between profit and net income, including why corporate accountants calculate profit at different Learn more about the difference between operating income and gross profit, two accounting figures that appear on a company's Explore how operating expenses and the cost of goods sold can either increase or decrease a company's profits on an income Find out how companies determine gross profits and net income, and how these figures provide quick snapshots of their financial Rather than relying solely on net profit figures to evaluate a company's performance, seasoned investors will often look at gross profit and operating profit as well.
The best way to analyze a company - and figure out if it's worth investing in - is to know how to dissect its income statement. Here's how to do it. Learn about profit margin analysis, effective tax rate, return on assets, return on equity and return on capital employed. Find out how to put this important component of equity analysis to work for you. Take a deeper look at a company's profitability with the help of profit margin ratios.
For individuals, the total income earned in a year, as calculated A company's total earnings or profit. Net income is calculated A company's total sales revenue minus its cost of goods sold, The profit earned from a firm's normal core business operations.
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