The two most fundamental concepts that pave the way for understanding business finances are revenue and profit. Unfortunately, more often than not, people confuse revenue with profit and use these terms synonymously.
But though the concepts of revenue and profit are related, they are distinct in the sense that both denote different things. To have a strong grasp on finances, identifying the differences between revenue and profit is the stepping stone.
Comparison Between Revenue And Profit
|It is the total amount the firm earns by selling its goods or services.
|Profit is calculated by calculating the total revenue and total costs.
|Revenue = Selling Price (P) x Number of Units Sold (Q)
|Economic Profit = Total Revenue – (Explicit Costs + Implicit Costs)
|Revenue is of two types; operating revenue and non-operating revenue.
|Profit is classified as; gross profit, operating profit, and net profit.
|Revenue helps to determine the profitability of a firm.
|Profit plays a crucial role in the growth of a firm.
|It is the top line of an income statement.
|In an income statement, profit is the bottom line.
Definitions Of Revenue And Profit
What Is Meant by Revenue?
Revenue is the total amount that a firm yields by selling its goods and services. It takes into account only the sale of goods and not the expenses.
The formula for calculating revenue is: –
R = p x q
Here, ‘p’ is the price of one unit of the good or service that is being sold, and ‘q’ is the number of units of the good or service that is sold.
What Is Meant by Profit?
Profit or economic profit refers to the difference between the revenue generated and the cost of generating that revenue, including opportunity cost.
Opportunity cost is another crucial concept that signifies the amount a company loses or lets go of by choosing one alternative over another.
The formula for economic profit is
Economic Profit = Total Revenue – Explicit Costs – Opportunity costs
Key Difference Between Revenue And Profit
- Revenue– the total amount a firm obtains after selling its goods and services.
- Profit– Profit is the amount that remains after all the costs are subtracted from the revenue obtained. The expenses include input costs, opportunity costs, and other associated costs.
- Revenue- The total revenue generated by a firm is calculated by multiplying the price of one unit of the good or service produced by the firm and the number of units sold.
Revenue = Price x Quantity
- Profit- Profit made by a firm is calculated by obtaining the difference between total revenue generated and total expenses.
Profit = Total Revenue – Expenses
- Revenue- Generally, revenue is classified into two broad categories; operating and non-operating.
- Operating revenue is the revenue that a firm from its primary activities generates.
- Non-operating revenue, on the other hand, refers to the revenue obtained from sources unrelated to the firm’s business activities. Income received by investments or the sale of assets is some common examples.
Net Profit = Earnings before interests and taxes – Interest Expense – Taxes
- Revenue- Revenue is present in the income statement. It is the top line of an income statement. It is because an income statement is initiated by total revenue.
- Profit- Profit is the bottom line of an income statement.
- Revenue- Revenue is a significant measure of a firm’s profitability. Therefore, finding ways to increase revenue is crucial for a firm to enhance its profitability.
- Profit- A firm can only stay in business and grow by making a profit. This is the reason why it is of incredible importance for any firm to make efforts in the direction of earning profit.
Frequently Asked Questions (FAQs)
1. How is it determined whether a firm is making a profit or loss?
A firm is making a profit when the difference between the total revenue it has obtained and the total costs is positive. On the other hand, if this difference is negative, when costs exceed the revenue, the firm is at a loss.
2. How does Accounting Profit differ from Economic Profit?
Accounting profit is the amount left with a firm after deducting all the explicit costs from the revenue generated. Economic profit also takes into account the opportunity costs.
3. How is revenue calculated?
Revenue is obtained by the product of the number of units of goods or services sold and the price at which one unit is sold.
4. What are the examples of operating revenue?
The two most common examples of operating revenue include the amount earned by selling goods and the amount made by selling services.
5. Are revenue and profit the same?
Revenue only indicates the amount of money earned by selling goods or services, while profit is obtained when the total costs are deducted from the total revenue received.
- 20+ Differences Between Gross Profit And Net Profit (Explained)
- 20+ Difference Between Accounting And Economic Profit
- 20+ Difference between Cash Flow and Net Income
- 20+ Difference Between Income Statement And Balance Sheet
- Revenue Per Employee Explained: Maximizing Your Workforce
Business, marketing, and blogging – these three words describe me the best. I am the founder of Burban Branding and Media, and a self-taught marketer with 10 years of experience. My passion lies in helping startups enhance their business through marketing, HR, leadership, and finance. I am on a mission to assist businesses in achieving their goals.