What is the difference between profit and profit?
Some of those people who want to open their business, do not understand the basics of economic theory. Profit, revenue, income … Sounds like. However, this is not the same thing. If you are a start-up entrepreneur, you just need to know the difference between income from profits and revenues. And sometimes even experienced entrepreneurs confuse these terms.
What is revenue?
Revenue is all material values obtained by an individual or a legal entity as a result of doing business for a certain period: from the sale of goods, the provision of services, the performance of work. Most people think that revenue is all that went to the cashier. This is not quite true. Indeed, in retail sales, this is usually the case: the goods are paid immediately after they are received by the buyer. But it is quite another thing if we are talking about mutual settlements between enterprises-counterparties. In this case, the difference between the receipt of goods by the buyer and payment for the goods can be significant. Therefore, it is important to know that usually the revenue in such cases is determined at the time of shipment of the goods (provision of services, etc.), regardless of whether the goods are paid for.
What is the essence of income?
Revenue is the difference between the cost of goods and revenue from their sale. However, this applies only to goods. It is usually considered that since when rendering services, the cost of materials is not made, then the income is equal to revenue.
Profit is a value that reflects the difference between income and the cost of its receipt. It is profit that is the final and desired result of the activity of any entrepreneur.
Note! Income and revenue are always positive values. And the profit can be not only positive, but also negative. After all, it may happen that all costs (costs) of entrepreneurial activity are higher than the income received.
Profit is of two types: gross and net. Gross – this is the profit that remains as a result of the summation of all revenues and the deduction of expenses that are associated with the income received (for example, if the income is derived from the sale of goods, the cost will be the cost of this product).
Net profit remains after deducting from the income of absolutely all expenses of the enterprise. These may be:
The cost of renting an office and similar expenses.
Of course, all indicators are taken for a certain period.
Methods for determining revenue, income and expenses
Methods for determining revenue, income and expenses There are two ways to determine the indicators under consideration.
The first method – “by shipment” (or the accrual method), means that revenue (income, expense) is determined at the time of transfer of goods, execution of works, provision of services (and this does not depend on their actual payment). This method is usually used.
The second method – “on payment” (or the cash method), means that the revenue, income or expense of the organization is determined at the time of actual payment for work, services, and goods.
As a rule, this method is used in small organizations with cash. For example, in retail stores, where the transfer of goods almost coincides with its payment.
The second method has several disadvantages. Among them are, for example, the lack of complete control over receivables and payables, because they keep records of cash receipts, but they do not keep records of goods sold, services rendered, work performed.