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Net income and net profit – what is the difference and difference

Net income and net profit – what is the difference and difference

As we know, net profit is determined by the difference between Revenue and Cost with some taxes.

We sold the product at a price higher than the cost with taxes – the difference is in the pocket, this is the net profit.

But you won 't believe it ! - There may be more in your pocket money than the calculated value net profit !

Why and what does it depend on ?

I don't understand net income

It's all about the amount of net income.

Many approach this indicator (net income) purely formally, without catching the practical difference between it and net profit.

To understand what net income is and how it differs from net profit, let's consider one pattern of monetary turnover in the production and sale of a certain product.

  • We sell the product
  • The product has a price
  • The price should cover the costs that create this product
  • All that is more – is net profit

Let's draw parallels to all of the above with an example.

difference between net income and net profit

What we see.

After we have received money from the sale (revenue) of the manufactured goods, we must pay (cover) the costs that allowed us to produce this product:

  • raw materials and supplies to suppliers of raw materials
  • energy – suppliers of energy resources
  • wages – workers
  • deductions from wages to extra-budgetary social protection funds
  • services, repairs to construction organizations and other suppliers
  • taxes to the budget

We cover all these positions with our revenue. That is, we pay off with all the contractors who provided, each in his own part, the formation of the cost of our product.

Thus, we have covered all costs, except Depreciation.

And where to transfer money to cover this expense item? It turns out that the money for depreciation remained in the revenue, since there is no one to transfer, and they, in fact, remained with us on the settlement account.

As a result, what we have.

With the proceeds, we covered all expenses with depreciation (which is the cost price) and all that was left over was NET PROFIT. Everything is logical and understandable.

However, in the form of cash, in addition to net profit, we still have depreciation, which, in fact, are the source of our own cash, i.e. net income.

Calculation formula:

Net income = Net profit + Depreciation

That's why the income is called pure, since it is at the full disposal of its owner.

attention - what does it depend on net income

It's all about the amount of net income.

Net income determines the availability of net money for an enterprise or organization in the implementation of production and economic activities and is one of the most important economic indicators in assessing it free cache.

This value determines the financial and economic capabilities of the organization to self-finance its activities and settlements with creditors.

P.S.: If, when planning the price (by the cost method), depreciation is not included in the cost price (i.e. depreciation will be 0), then the entire amount of net income will correspond to the amount of net profit!

Net income and net profit what is the difference and the difference Somehow!

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