Income vs Revenue vs Earnings

Revenue is a business's top line, whereas income and earnings are referred to as a business's bottom line. However, income and revenue are synonymous, as revenue is income generated by a company by selling its product or service. 

Income and revenue are two vital components used in determining a company's financial strength but are unrelated. Income and earnings are synonymous sometimes, whereas revenue is the amount generated through sales and business operations.

These three can be found in a company's financial statements. A company's profit is also known as its earnings, whereas revenue is not just a company's profits, as it includes more factors. 

To understand the differences between the above three items, we first have to understand what each of these accounts for and the role of these in the company, and various other things. 

By completing various analyses of these factors, it can be determined if a business is profitable or not. These three are calculated by the formula discussed below in the article. 

These are three of the most popular terms in the business, accounting, and finance sectors, but they can often be confused. 

What is Income?

For businesses, it describes the amount of money they receive through their sales and labor. For individuals, it is the gross financial compensation received by an individual in the form of wages or salary in return for their service.

Sources include jobs, dividends, rents, etc. To calculate net income (NI), take the total revenue (total amount of money received/ TR) and take out all expenses and taxes from it. The formula is as follows:

NI = TR – Total Expenses

Shareholders and managers use income recorded in a company's financial statement to identify various problems and make decisions such as inefficiency in a project, choosing investments, and many others with the help of ratios such as gross margin ratio, quick ratio, and various other ratios. 

It plays a vital role in a business; a positive indicator on a company's financial statements defines a business as profitable and attractive for investors. A positive indicator on an income statement is also essential for a company's growth and development.

In economics, greater income inequality increases the economic growth of developing countries, whereas it decreases the development of high-income and middle-income countries.

It is also a factor in influencing consumer behavior; higher income provides consumers with more purchasing power. Income and demand are directly proportional, describing that an increase in income will cause an increase in demand and vice versa. 

Where can you find a company's income?

The income statement, also known as the Profit & Loss Statement, and the operation statement contain the main elements of a business, such as sales, revenue, income, profit and loss accounts, expenses, costs, and expenditures. The principal formula for the income statement is:

NI = Revenue - Expenses

This financial statement helps stakeholders determine the company's health and projected financial trajectory, which impacts investment decisions. It also can provide information for business owners, such as to cut costs or increase sales within a department. 

This statement can be generated quarterly or monthly and highlight expenses that various user groups use in making their decisions.

While the income statement helps determine whether or not a firm is thriving at a glance, a closer examination may show much more. Such as how different business units and products are performing or whether a seasonal business should be a full-year operation.

It can be defined as a financial statement that shows a company's income and expenditures. The typical period to record and publish these values is one full financial year.

What is Revenue?

It is the total amount of money generated through goods or services.

In simple terms, it is the amount a firm receives from the sale of output without subtracting any taxes and expenses. 

It can also be termed the lifeline of a business. But, apart from being a lifeline, it can provide valuable insights into a business. For example, increasing revenue would increase the company's overall profits. 

It is combined from various sources, including sales, rent, dividends, interest revenue, etc. This system plays a vital role in the business and is described as the process by which a company generates revenue and how it is recorded in the accounting system.

It is calculated by multiplying the number of sales by the average price of service or goods. The formula is written as follows:

Revenue = number of units sold X Average price of service or goods

There are different sources in different sectors created for various purposes. 

For example, the government gains revenue from citizens and businesses in return for their services and goods and monitors aggregate demand. 

A vital ratio consisting of revenue is the cost of revenue ratio, which is calculated as the cost of revenue to total revenue (TR). The formula is as listed below:

Cost of Revenue Ratio = Cost of Revenue / TR

According to the general rules of economics -

• If demand for a product is elastic, a price rise will reduce total revenue. 
• Price and revenue have a constructive relation when demand is inelastic, meaning a price increase would also result in increased total revenue and vice versa. 
• Changes in the total revenue depend upon the price elasticity of demand, 

Where can you find revenue?

It can also be found under the income statement. It plays a significant role when the company needs investment, as investors use this financial value to base their analyses and projections for its future profitability.

Companies have two accounting options that affect their financial statement values: accrual-based and cash-based. For this example, the company prefers to have an accrual-based income statement. 

The income statement does not show any assets or liabilities for the company. Instead, these values are found on the company's balance sheet, shareholders' equity, and various liabilities. 

The income statement lies on a principal formula: net income equals expenses taken away from total revenue. An income statement's three main components are revenue, cost of goods sold, purchases, and expenses.

The values recorded in the income statement helps determine ratios that support the business in identifying its weak points and comparing itself with other companies in the same industry. 

The formula is listed as follows:

NI = Total Revenues - Total Expenses

From the above equation, we can observe that any payments or transactions would affect total revenue and net income. This is because when a company generates revenue, there is an increase in the current assets and shareholder's equity on the balance sheet.

What are Earnings?

It is the amount of money left after a company's expenses and taxes for a quarter or a financial year. This value plays a significant role in determining a company's stock price and is very helpful in assessing a company's profitability. 

A good or increasing value for a firm can increase its stock price and vice versa. Rising stock prices sometimes do not mean solid earnings for the company but indicate the company will be profitable in the future. The formula is:

Earnings = Total Revenue - Total Expenses

The ratio includes earnings per share (EPS) and price-to-earnings (PE). These are some of the most vital ratios to determine a company's attraction for investment. 

EPS is calculated by taking away preferred dividends from net income and dividing it by an average number of common shares. The formula for this is listed below: 

EPS = Net Income-Preferred dividends/ Average number of common shares

EPS is a measurement to determine the amount of a company's income available to pay its stakeholders through common stock. A high EPS indicates profitability, as investors will receive a significant amount through dividends. 

Another ratio is the PE ratio, which is the relationship between stock price and annual earnings per share. It can be determined by dividing the stock price by EPS. The formula for this is listed below:

PE Ratio = Stock Price/ EPS

Companies trading at higher PE ratios are expected to have higher growth when compared to their peers with lower PE multiples. Hence, the former attracts growth investors while the latter attracts value investors.

A P/E ratio below 15 is cheap, whereas a ratio above 18 is expensive. Therefore, an optimum P/E ratio ranges between 15 and 18, but a lower P/E ratio attracts more investors. 

Where can you find a company's earnings?

These can also be found under the income statement, but a similar term known as retained earnings can be found under the statement of financial position or the balance sheet.

It is essential to understand that these are always the profit of a company, never revenue. Therefore, they can also be referred to as profits.

Financial statements such as balance sheets and income statements are the most important statements for a business. They are used by various groups, which include analysts, investors, shareholders, customers, and consumers. 

A careful analysis of these statements helps investors determine if the company is profitable or attractive as it provides general information about the company but also helps in understanding business insights and comparisons to other businesses with the help of ratios and analysis.

Income vs Revenue vs Earnings

Researched and authored by Abhinav Bhardwaj | LinkedIn

Edited by Colt DiGiovanni | LinkedIn

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