Is net profit the same as net income? Net profit and net profit are terms that are commonly used while making reference to the income statement. However, there have been misconceptions as to whether net profit is the same as net income or not, as they both represent a line item on the income statement. In this article, we discuss what is net profit and net income. From there, we see whether the two terms refer to the same thing, and we see their similarities and whether there is any difference.
See also: Profitability Factors of a Company: What affects profit?
What is net profit
Net profit is defined as the total amount of money earned by a business after deducting all expenses such as operating, interests, tax expenses, etc, over a given period of time. To arrive at this value, a company has to know its gross profit. The gross profit is obtained after subtracting the cost of goods sold from the net sales. If the value of net profit is negative, it is then called a net loss.
The net profit is an important parameter that determines a business’s financial health. It indicates whether a business is able to earn more than what it spends. Using this figure, a firm can decide when and how to work towards expanding its business and when to reduce its expenses.
It is important to note the significant difference between profit and profitability. While profit is an absolute figure which is equal to revenue minus expenses, profitability is a relative number (a percentage) which is usually the ratio between profit and revenue. With this, the profitability ratios are used to measure a business’s efficiency as well as determine its success or failure. So, net profit tells about the profitability of a business. This means that there are several advantages to knowing this figure.
Most government and tax forms require a business to declare its net profit. Also, based on this figure, financial institutions like banks, decide whether to issue a loan or not. This is factual because this figure is a common field found on business tax forms. Lenders and investors, furthermore, look at a company’s net profit to check its capability of paying future debts. Net profit is the bottom line of the profit and loss account or income statement (used interchangeably).
What is net income?
The net income of a company is the result of a number of calculations starting with the revenue (also known as net sales). In other words, it is the sum of income minus all expenses. This includes the expenses incurred in the manufacture of products, operating expenses, interest on loans, depreciation/amortization, taxes, and even one-time payment for unusual events.
Net income is also referred to as net profit or net earnings, and it is a concrete concept. This figure is a comprehensive reflection of a business’s profitability and it is used in publicly-traded companies to calculate financial ratios such as earnings per share (EPS). The net income represents the renowned bottom line of an income statement.
As is with other accounting measures, net income is prone to manipulation through techniques such as aggressive recognition of revenue or hiding expenses. So, when making an investment decision or making an evaluation of net income, investors and analysts review the quality of the numbers that were used to arrive at the taxable income of a business as well as its net income.
See also: Net Income vs Net Profit Margin: Differences and Similarities
Is net profit the same as net income
Having looked at what both terms imply above, it is evident that net profit is the same as net income. Therefore, they are used interchangeably to mean the same thing.
First, in the definition, we see that they come about after deducting all expenses from the total amount of money earned by a business, meaning that through this, one can determine whether the business is able to earn more than it spends. Secondly, we saw in both explanations that they reflect the profitability of a business, and we said that the figure there is used to calculate financial ratios/profitability ratios. We also saw that financial institutions, investors, government/tax authorities, and analysts are interested in this figure as it depicts the financial health of a business.
Net profit and net income differences
Some scholars claim that although net profit and net income are similar as they both represent the amount of money earned by a business after accounting for costs and expenses, they differ in things like calculations.
The reasons given as to why they differ include the fact that not every business is public with shareholders who earn dividends. Here, companies without equity shareholders do not calculate net income because the figure is directly related to the amount of money provided to shareholders, such businesses instead calculate only net profit.
It is also said that businesses with equity shareholders may calculate both net income and net profit. They do so by first calculating earnings before taxes, determining net income from there, then finally arriving at the net profit figure. These scholars stated that net income and net profit relate to each other and make use of the same information for calculation but net income requires an additional step to be arrived at. The summary then states that the net income is the income that is available for equity shareholders while net profit is the actual profit earned by the company.
Having looked at this analysis, it is important to refer back to the calculation that is carried out on the income statement. In this, we would see that both terms are the bottom line of this financial statement. Also note that an income statement cannot have two bottom lines, by implication, net income is also known as the net profit on the income statement. In this case, we can conclude that the only difference here lies in the names they are called (net profit and net income).
Net profit and net income similarities
As stated above, net profit is the same as net profit, looking at the income statement of any company. The fact that profit and earnings are used as synonyms for income depending on the United Kingdom and United States usage, it is evident that net earnings and net profit are oftentimes used interchangeably for net income.
Hence, net profit is also referred to as net income, total comprehensive income, net earnings, bottom line, or sales profit. These terms all refer to the same subject matter. We saw above that it is considered the bottom line figure on the income statement because it is the result of net revenue or net sales and gains minus all expenses and losses for the accounting period. In other words, it is usually found in the last line of the income statement while revenue or sales is usually the first line item on the income statement.
It is important to also note that another name for the income statement is the profit and loss account or statement of profit and loss and the term “cost of goods sold” or “cost of sales” is a key component there. Having looked at this fact, it is evident that net profit is the same as net income.
See also: Net Income vs Net Revenue: Differences and Similarities
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