What Is the Difference Between Net Income, Earnings, and Profit?

Every business is established with the sole purpose of generating money for the owner. The business must continue to make money to stay afloat.

The money the business makes for its owner is usually determined by how much it takes in vs. how much it generates.

The three business terms used to describe how much money a business makes are net income, earnings, and profit.

While some people think that all three mean the same thing, there are actually distinct differences between them.

This article will explain each term and the key differences between them. Read on to find out everything you need to know.

Gross income, also known as "gross earnings," is the total amount of money a business has taken in from its sales. This includes the money generated from products sold, services rendered, or investments made by the business.

Gross income does not take into account any expenses incurred by the business, such as payroll costs, taxes, rent, and other operating costs.

It simply indicates how much money the business has made before any expenses were deducted.

Gross income is usually reported on companies' financial statements at the end of the accounting period.

It is important to understand gross income when looking at a company's profitability, as it tells you how much revenue the company was able to generate during a certain period.

Net income is the amount of money a business has made after taking out all expenses and taxes. It reflects the actual profit that the company has earned for its owner.

Net income can be found on companies' financial statements, usually at the end of each accounting period.

It is the most important metric for measuring a company's profitability, providing an accurate picture of what the business has earned for its owners.

For example, if a business generates $10 million in gross income, but then has to pay out $2 million in expenses and taxes, its net income would be $8 million.

The term "earnings" is unique because it can refer to different things depending on the context. For individuals, earnings generally refer to their income or salary.

For investors, earnings refer to dividends or capital gains earned from their investments. And for businesses, earnings usually refer to a company's profits.

It is important to note that "earnings" and "profits" are not the same thing. While profits are the total amount of money a business has made after taking out all expenses and taxes, earnings can refer to either net income or gross income.

For example, when a company reports its earnings for the period, it could be referring to either its gross earnings (the total sales generated) or its net earnings (the total profits generated).

Profit is the most straightforward term of the three. It is simply the amount of money a business has earned after taking out all expenses and taxes. Put another way, it is the net income a company generates for its owners.

Profit can be found on a company's financial statements, usually at the end of each accounting period. 

It is important to understand profits when looking at a company's performance, as it tells you how much the business has earned for its owners.

To calculate the net profit of a business, subtract all expenses and taxes from the gross income. For example, if a business takes in $15 million in sales while incurring $3 million in expenses and taxes, its profit would be $12 million.

Net income, earnings, and profits are three important business terms that often get confused with each other. While they all measure how much money a business has made, there are key differences between them. 

Gross income is the total amount of money that a business has taken in from sales, earnings can refer to either net income or gross income, and profit is the net income earned by a business after taking out all expenses and taxes. 

It is important to understand these concepts when looking at a company's financials to get an accurate picture of its performance.