Profit and Loss vs. Revenue and Expense: Overview
Most companies report items such as income, profits, expenses, and losses on their income statements. Some terms sound similar, but not only in income and expense, but also in the actual usage of profit and loss.
Below we will look at each combination of terms and how they differ. Ultimately, companies aim to maximize profits and profits while minimizing costs and losses. They all affect overall profitability.
- Profit and loss are the opposite financial consequences of a company’s non-major operations and production processes.
- Revenue is the income earned through the provision of a company’s major products or services.
- Expenses are the costs incurred in the process of conducting or providing a major business operation.
Profit and loss
Profit and loss are the opposite financial consequences of a company’s non-major operations and production processes. Whenever a company makes a profit or realizes an increase in value through secondary sources such as proceedings, investing in financial instruments, or disposing of assets, it is considered a (capital) gain.
Conversely, when a company loses money through secondary activities, it incurs a loss. When a company sells an asset, the determination of profit and loss depends on the book value of the asset in the company’s financial statements. Losses are also recorded if the company is ordered by a judge to pay to settle the proceedings, or if the company loses money on a financial investment.
Profit and loss are treated differently for tax purposes, depending on whether they are short-term (usually within 12 months) or long-term (over a year or more). Profit can also usually be offset by the corresponding tax loss.
Financial analysts and investors usually don’t care much about losses and profits. This is because many of them are likely to be one-off events and have nothing to do with the company’s core business activities.
Income and expenses
Unlike profits and losses, income and expenses are not the opposite financial consequences of the same activity. Rather, revenue is a term used to describe the income earned through the provision of a company’s major goods or services, and expense is a term for the costs incurred in the process of producing or providing a major business operation. Investors and analysts usually place much more emphasis on these indicators than losses and profits.
Revenue is the total revenue a company receives when it sells a product or service, and is sometimes referred to simply as “sales.” Production always involves a set of costs (both fixed and variable) that you need to deduct from your revenue as expenses to calculate your company’s net income.
Of the four terms being considered, costs are the most diverse. Expenses can be related to various types of expenses such as labor (salaries, wages, employee benefits), marketing and advertising, rent, utilities, insurance, taxes, interest, depreciation, amortization, etc. Expenses can also be recorded on any number of different items on the income statement to reflect a particular type of expense.
Some financial ratios and metrics, such as the frequently used EBITDA metric, which is interest, taxes, depreciation, and income before depreciation, take income and expenses into account. In other words, it is income minus the costs associated with the production of the goods sold.