Imagine that you have opened your own business. Every day you sell something, receive money, count expenses - well, everything, like in a business. And then someone asks: "What is your income? What is your profit? What is your revenue?" And you don't know how to answer, because for you it seems like everything is the same. In fact, it is not. These words sound similar, but they mean completely different things. They are used not only by accountants and financial analysts, but also by ordinary entrepreneurs. So understanding them is useful for anyone who wants to understand how money works in business.
Explanation of financial terminology
Revenue (R) is the money a company receives from selling (S) its goods (G) or services (SVC). It can simply be called sales revenue. It includes not only the money that is already in the account, but also what is received from customers, that is, accounts receivable. It is like a promise: "I will pay you later."
Income (I) is a broad term that includes revenue and arises from the sale of goods or services. It reflects the net value of goods and services sold, excluding the costs of their production or other expenses. But let's start with profit.
What is profit?
Profit (P) is the total difference between a company's revenue and its expenses. It is the excess amount remaining after deducting all operating expenses from total revenue. This indicator provides information about the company's performance by assessing its profitability and efficiency of business activities. There are several types: gross, operating, and net, which take into account different types of expenses.
Accounting
In accounting, it is realized when revenues exceed costs (TC).
It is calculated by the formula:
P = R — TC
Includes all operating expenses: payroll, raw material bills, and office supplies. Internal accounting does not take into account non-operating income (stock trading) when calculating P.
Tax law
There is a special calculation method in tax legislation. According to the Income Tax Law, it is calculated using the income and expense method.
The formula for this is as follows:
P = I — expenses
Revenue includes all incoming payments for revenue, while expenses include all outgoing payments for expenses. In the income statement, a surplus is calculated, which is subtracted from revenue. This surplus corresponds to profit.
Commercial law
The Commercial Code defines profit for accounting purposes. It is determined using the profit and loss account (P&L). It only arises when I exceeds TC. Unlike accounting, commercial law also takes into account non-operating income and non-operating expenses when calculating P. These include, for example, donations, income from trading in shares. In commercial law, this is also called the company's profit.
The formula is the result of the difference between income and expenses:
P = I – TC
Difference between turnover and profit
The difference between the two is quite simple. Revenue includes all the income you earn from selling services. To calculate this, you simply multiply all the prices of the products and services you sell by their respective sales volumes, and then add them together. Profit, on the other hand, is just a portion of turnover, the remainder after deducting expenses.
What is revenue (R)?
Revenue is the value of goods and services sold during a certain period. In business management, it is understood as the cost of S, rental and leasing of goods, SVC. Revenue is distinguished in value and quantitative terms.
Value and quantitative turnover
Volume turnover is the sum of all services sold (sales volume). Value turnover is calculated from the number of SVCs sold and the selling price.
Calculated:
R = S
According to the new definition of March 27, 1991, in accordance with the Law "On Enterprises in Ukraine", turnover includes:
- Sale, rental and leasing of goods
- Services provided
R is calculated from these items, minus various deductions from S (e.g. discounts, rebates), VAT and other taxes directly related to it.
The old regulation provided a narrower definition, and included only revenue from “ordinary business activities” and “typical products.”
The following items are not considered income from S co/s.:
- Sale of fixed assets
- Leasing unused parts of buildings
- Insurance premiums and commissions
- Interest income
Gross (GR) and net revenue (NR)
In accounting, a distinction is made between GR (excluding VAT) and NR (price of the product + VAT). NR is crucial for companies, as the collected sales tax is transferred to the tax office.
Calculation example:
A company operating in the tourism industry sold trips worth 15,499 $ in January. It corresponds to the company's GR. Of this amount, 19% VAT, i.e. 2,474 $, is paid to the tax office. Thus, the decisive NR of the travel agency in January is 13,025 $.
R from sales/sales profitability
Return on sales comes from business administration, and describes the percentage ratio between the profit received, i.e. the company's annual net P and R. The resulting figure reflects the company's efficiency.
What is income?
Income (I) is the inflow of cash and non-cash payments, such as wages before taxes, investments, such as interest on loans, and operating income (S of goods and services). It represents the balance, i.e. the difference between I and TC. Thus, it can be positive (P) and negative (loss).
Consists of seven types of income after compensation for any losses between different types of income, minus special, extraordinary expenses and an allowance for holders of official IDs and victim cards.
There are the following seven types of income:
- Entrepreneurial activity (from profit).
- Agriculture and forestry (e.g. farmers, gardeners, foresters, beekeepers, etc.).
- Self-employment (including freelancers, architects, lawyers, notaries, chartered accountants, members of the supervisory board, as well as managers of a limited liability company if they own a significant share in the company (more than 25 percent).
- Business activity: non-agricultural activity (surplus I)
- Employment: Active employees, salaried employees, workers, and retirees. Income tax is levied on this income in the form of payroll tax.
- Capital assets: private interest income from savings and securities, dividends, payments from shares of corporations, investment funds, as well as capital gains from the sale of private investments (e.g., stocks) and derivatives.
- Leasing of such real estate objects - land, buildings, apartments (including sublease), and leasing.
Conclusion
So, these are the basic financial terms that form the basis of the economic analysis of any business. Each of these concepts has its own unique meaning and role: revenue reflects the total volume of sales, income outlines financial receipts, and profit demonstrates the final result of the activity. Understanding their differences allows you to more effectively manage the business, assess its profitability and plan for further development.
