In business language, the two terms are heard quite frequently. Many use the terms net profit and net income interchangeably, but these are not synonymous, since there is a slight and subtle difference between these two, which one should know while working on the accounts. Therefore, take a look at the article in which we have drawn up the differences.
|Sense||The income that is available to capital shareholders is known as Net Income.||The real profit obtained by the company is known as net profit.|
|Applications||useful in the calculation of earnings per share.||It shows the profitability of the company.|
Definition of Net Income
Net income is the residual income of the company that remains with the entity. The term net earnings is often used many times instead of net earnings. When they arise at net income, the dividend of preferred shares is reduced from it. The remaining part is transferred to reserves and surplus or distributed to holders of shares in the form of dividends or both. It is the net increase in the shareholder fund.
Definition of net profit
When total income exceeds total expenses, Net Profit arises. It is shown on the last line of the income statement (or profit and loss account). From the gross profit (sales – cost of goods sold), all operating and non-operating expenses (including interest and taxes) are deducted while 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 clearly established for the following reasons:
- The income that arises after deducting the preferential dividend from the net benefit is the Net Income. The pure profit obtained by a company in a particular accounting year is known as net profit.
- Net Profit is used to calculate earnings per share for shareholders, while Net Profit is used to show the company's profitability position.
In general, both terms are used as synonyms, 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 preferential dividend is deducted from the net profit, the company's net income arises.