By Fraser Sherman Updated February 04, 2019
When your company turns a profit, you might refer to it simply as "money." To accountants, profits can have various names: income, revenue, profit, net income, net profit and more. "Net income" and "net profit after tax" mean the same thing: the amount left after you subtract expenses and taxes from your earnings.
Your Income Statement
Your income statement measures how profitable you are by adding up all your income for a given period, then subtracting all your expenses. The exact format varies depending on the kind of income and expenses you have. A statement can include separate lines for the money you made from business operations, the money you earned from investments and the money from rare events, such as winning a lawsuit.
Separating income types is important. If you didn't enter revenue and investment income separately, a year of profitable investments could hide that you made almost nothing from sales. Likewise, you need to separate extraordinary losses – a fire burned down a factory, for instance – from recurring expenses such as salaries.
Revenue, Income and Profit
Different terms come into play as you work your way down the income statement. A given statement might not include all of them:
- Revenue: all the money you made from your line of business, whether that's baking bread, mowing lawns or building computer firewalls.
- Gross profit: revenue less the cost of goods sold.
- Operating income: gross profit less operating expenses such as advertising and marketing:
- Non-operating income: money earned on investments.
- Gains: one-time income, for example, from the sale of an asset.
- Net profit or net income before tax: total income less total non-tax expenses.
- Net profit or net income after tax: the statement may simply say, "net income" at this point.
All this information is valuable for judging your company's performance. How much sales revenue did you earn? If your operating income is a lot smaller than your revenue, are your expenses too high? Is your net income or net profit after tax as high as it needs to be?
Future Tax Liabilities
Suppose you make out the income statement for the second quarter of the year. You report any taxes you paid as an expense, but not taxes you owe. If your taxable income for the quarter was $1.2 million, that may add up to a sizable tax bill. As you haven't paid it, it doesn't affect your income.
Instead, you report taxes you'll pay in the near future as a liability on the balance sheet. You report any deferred taxes as a liability, too. If you're due a tax refund but you haven't received the check, list the pending refund as an asset on the balance sheet rather than as income on the income statement.
