Net profit can be understood as the profit arrived after working on all expenses (both cash and non-cash), interest, taxes, and losses. It is the actual profit received from business activities by the company during the accounting period. It is not exactly same as net income. Technically, net income is used to mean the actual amount remained with the firm after deducting dividend to the preference shareholders.
In business parlance, both the two terms heard quite often. Many use the terms net profit and net income interchangeably, but these are not synonyms, as there is the slight and subtle difference between these two, which one should know while working on accounts. So, take a look at the given article in which we’ve elaborated the differences.
|BASIS FOR COMPARISON||NET INCOME||NET PROFIT|
|Meaning||The income that is available for equity shareholders is known as Net Income.||The actual profit earned by the company is known as Net Profit.|
|Uses||Helpful in calculating earnings per share.||Shows the profitability of the company.|
Definition of Net Income
Net income is the residual income of the company which is left with the entity. The term net earnings are often used many times in place of net income. When we arise at the net profit, preferred stock dividend is reduced from it. The remaining part is either transferred to the reserves and surplus or distributed to the equity holders in the form of a dividend or both. It is the net increase in the equity shareholder’s fund.
Definition of Net Profit
When the total revenue exceeds the total expenses, Net Profit arises. It is shown in the last line of the income statement (or profit or loss account). From the gross profit (sales – cost of goods sold) all operating and non-operating expenses (including interest and taxes) are deducted while the non-operating income is added which results in the Net Profit of the entity.
Key Differences Between Net Income and Net Profit
The difference between net income and net profit can be drawn clearly on the following grounds:
- The income arose after deducting preference dividend from net profit is the Net Income. The pure profit earned by a company in a particular accounting year is known as Net Profit.
- Net Income is used to calculate earnings per share for equity shareholders while the Net Profit is used to show the profitability position of the company.
Typically, both the terms are used synchronously, but there is only a slight difference between Net Profit and Net Income. The only point of difference in them is the preferred stock dividend. When the preference dividend is deducted from the net profit, net income of the company arises.