Are Revenue and Profit the Same?
Some of the business owners may choose to outsource their accounting tasks as they find it hard to prepare the financial statements on their own, yet they can’t afford to hire in-house full-time accountants. However, when looking at the financial statements that the accountants from an accounting firm in Johor Bahru have prepared for them, they may not be able to understand those statements fully as they cannot differentiate some terms like revenue, profits, income and so on. If the business owners wish to understand the financial position of their company clearly, they need to know what those terms mean and the slight differences between them. Here, two terms that we will focus on are revenue and profit.
Revenue refers to the earnings that a company has received from the business activities carried out in a particular accounting period (Also see The Concept of Revenue Recognition). This means that revenue is the income that the company has generated by selling the products or providing the services or using the company’s assets or capital for its core business activities. It is the amount earned by the company before any deduction of costs (Also see Categorisation of Costs) or expenses incurred has been made.
The revenue that appears on the top line of the profit and loss statement of a company will be the company’s sales revenue or service revenue for that period, depending on its principal business activity. If a business owner wants to calculate the net profit (Also see Can You Differentiate Net Income and Net Sales?) that his company has generated, he needs to deduct the cost of inputs, the interest charged on the debts, taxes as well as expenses from the revenue.
On the other hand, profit is the return that the company has received from the risks it has taken and the money it has spent on the operation and commencement of the business. To calculate a profit, a business owner should take the revenue less the costs it spent on labour, rent, material, machinery, taxes, as well as the interests charged on the borrowed capital (Also see What is Capital Budgeting). This means that profit is the extra sum of money when the income generated from the company’s business activities has exceeded the respective expenses for that period.
Have you found out the differences between revenue and profit? Revenue is the earning that the company has earned by selling goods, providing services or through other activities. As against, profit is the extra amount remaining after the deduction of various costs, expenses, taxes have been made on the revenue. Thus, the amount of profit depends on the amount of revenue generated.
Apart from that, one can regard revenue as the earnings obtained from the business activities carried out, while profit is the reward that the business owners get for the uncertainties and risks they take. One more difference to note is that these two items appear in different places in a profit and loss statement (Also see Accounting – How Does the Balance Sheet Relate to the Profit and Loss?). Revenue will appear as the top line item, while profit is shown as the bottom line item in this statement.
The primary objective of running a business is to make money, regardless of the size, location and the legal structure of that business (Also see Types of Business Structures in Malaysia). This is because all of them need money for the business’s survival and operation. Thus, all kinds of businesses need to generate revenue that not only helps in covering the costs incurred but also bring considerable profit. In the end, this will help the business to build goodwill, reputation, market share and networks.