Post By: Mark Thompson March 21 2024

What are the differences between net income and net revenue?

Businesses thriving in the competitive landscape must realise the importance of understanding the differences between the net revenue and the net incomes shown in the statement of profit and loss, also known as the income statement. Having a clear knowledge of the key differences will assist the entities in making strategic decisions. Knowing the difference between these two items of the statement will give you a clear picture of the operations of the business. Not only the business entities, but related stakeholders and investors must also be aware of the differences so they can assess the performance of the business.

Key Differences Between net income and net revenue

Net income and net revenue are both interrelated, as they are part of the same statement of profit and loss. Revenue is the first amount that you would see in a statement, whereas net income is shown at the end after the adjustment of all the expenses. Below are some of the differences between net income and net revenue.

Net revenue

Revenue in general means the total sales made by the business in a particular period. It is the total turnover or total amount received from selling the product or service to the customer. It can be again classified as gross revenue and net revenue. Gross revenue is the same as explained in the beginning, whereas net revenue is the revenue that is ascertained after adjustments relating to sales returns, discounts, refunds, sales commissions, etc.

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The calculation of net revenue involves deducting sales discounts, sales returns, and sales commissions from the gross revenue of the business.

Net revenue figures are very vital for the internal parties, as they are used for analysing internal operations and the performance of the business. The gross and net revenue figures depict the success of the products or services sold to customers. These figures might not be a high priority for the external parties.

Example

Suppose your business has a monthly sales revenue of 200000 AED earned by selling goods worth 100 AED per unit, then total sales in units will be 2000. Out of the total sales, if 10% of the customers return the product, then the return would amount to 20000 AED (2000* 10% * 100 AED), which must be deducted from the total gross revenue. Hence, the net revenue will amount to 180000 AED. Along with this, if you provide a discount to the customer of 10 AED per unit, then the net revenue will again come down to 162000 AED (200000-20000-18000), as the discount provided must also be deducted to get the net sales of the business.

Net income

Net income is the balance profit that is left with the business after making the adjustments related to all the cash outflows incurred during the operations. Generally, it is the last item left in the statement of the profit and loss of the business. Net income is totally dependent on the net revenue, as without an accurate computation of the net revenue, the net income cannot be calculated. The net income amount will be less than the amount of net revenue.

The calculation of the net income involves the deduction of all operating expenses, the cost of goods sold, taxes, interests, deductions, etc. In the absence of net revenue, the calculation of net income is impossible.

The net income figures are always monitored by external parties, like investors and stakeholders, in order to assess the performance of the business. The net income is the actual amount left with the business after deducting all the expenses incurred and adding all the income from the business.

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Example

As a continuation of the above-mentioned example, where we have 162000 AED as the net revenue, we can ascertain the net income by deducting the adjustments relating to the cost of goods sold, operating expenses, interests, taxes, depreciation, etc., which might amount to 52000 AED. The net income will then be calculated as 110000 AED (162000–52000).

Understanding the difference between net income and net revenue is important for making vital business decisions. By analysing the net revenues and the net income, the business can strategically make decisions regarding the sales prices to be charged, the discount to be maintained, the quality to be maintained, the amount of cost to be controlled, etc.

How Can CDA Help?

CDA, being one of the leading accounting and auditing firms in UAE, provides its clientele with premium accounting, auditing, bookkeeping, and other various services with its team of professionals. CDA can help your business make the strategic decisions required to take your business to the next level by providing you with the best insights from the accounting statements and records of your business. To learn more about the varied services provided by our team, consult us now!