Revenue vs Profit: Definition, Function & Example (2023)

Imagine that you own a small shop that sells chocolate bars. The price of each chocolate is $2, and in one day, you manage to sell 1000 chocolates. That means you make $2000 dollars in a day. In a month, you would make $60,000, and in one year, $720,000. But does all of that money belong to you? What about the cost? What is the difference between revenue vs. profit?

The difference between revenue and profit is that revenue counts all the money you make, whereas profit takes into account the cost of running your business. If you buy a bar of chocolate for $1 and sell it for $2, then your revenue would be $2000 a day, but your profit would only be $1000.

Read on and find out how revenue and profit are calculated and how you can use them to run your future business!

Revenue vs Profit Definition

The revenue vs. profit definition refers to the difference that exists between revenue and profit. These two terms are often confused with one another.

Revenue is the amount of income an enterprise generates through sales, fees, memberships, rent or lease payments.

It includes all income from business operations and is almost always the top line of a firm's income statement. This means that all other measurements of income are refined from this broad figure, which is often called gross revenue.

For the largest corporations, gross revenue can be in the tens of billions of dollars per year.

Basically, revenue includes any income flow that a company receives as a result of selling its products.

Profit is a more complex term and involves subtracting the costs of operating the business from the gross revenue.

Profit is the difference between a firm's total revenue and a firm's total cost.

There can be many levels of profit because of the many costs that can be deducted. Profit is typically found at the bottom of a firm's income statement after all costs are deducted.

For some simple firms, such as small sole proprietorships with a single owner, profit is the 'take-home' pay enjoyed by the owner. More complex forms include salaries for the owners as part of their costs, meaning the 'take-home' pay analogy is only partially accurate.

Difference Between Revenue and Profit

The difference between revenue and profit is that revenue includes all the income that a firm makes during a certain period of time. On the other hand, profit includes only the income a firm makes after all the cost has been covered.

Let's take a look at the revenue vs profit by looking at a perfectly competitive firm.

Revenue vs Profit: Definition, Function & Example (1)Fig. 1 - Revenue of a perfectly competitive firm

(Video) Cost, Revenue & Profit function | Business Maths | B.Com (P)

Figure 1 shows the revenue for a perfectly competitive firm - the shaded blue area. A perfectly competitive firm faces a horizontal demand curve that is equal to the firm's marginal revenue.

Marginal revenue is the firm's revenue from selling an additional product.

The supply curve of a perfectly competitive firm is equal to the marginal cost.

Marginal cost is the cost of producing an additional unit of product.

Perfectly competitive firms are firms that face a horizontal demand curve as there are many sellers in the market competing with them. If you need to refresh your knowledge of the perfectly competitive firm, click here:

- Perfectly Competitive Firm.

A perfectly competitive firm is part of a perfectly competitive market. Click here to find out all there is about a perfectly competitive market:

- Perfect Market.

The point where MR (demand) intersects supply is known as the point where you can find the equilibrium price and quantity. Basically, the amount of quantity the firm sells and the price it sells it for.

We can find the total revenue of the firm by multiplying the entire quantity the firm sells by its price.

\(TR=P_m \times Q_m\)

Revenue vs Profit: Definition, Function & Example (2)Fig. 2 - Profit of a perfectly competitive firm

Figure 2 shows the profit that a perfectly competitive firm incurs. Notice that when considering profit, we also consider the average total cost the firm faces when producing that particular level of output, in this case, \(Q_m\).

Cost Profit and Revenue Functions

Let's consider cost, revenue, and profit function in detail.

(Video) Profit function | cost function | revenue in terms of x | #maths #mathsproblems #profitfunction

The cost function is used to measure the cost of producing a certain level of output, given that there are some factors of production that the firm should pay for to produce.

A firm has two main types of cost that it faces. These are fixed cost and variable cost. Those two costs make up the total cost of a firm.

Fixed cost includes expenses a firm should pay regardless of its production level.

Examples of fixed costs include rent, interest payments, salaries, utility bills, insurance, etc.

That is to say that regardless of whether the firm only produces 10 units of output or 1000 units of output, the firm still will have to pay the fixed cost.

If you need to refresh your knowledge of the Fixed Costs, click here:

- Fixed costs.

Variable costs are expenses that a firm faces, and they change as the total output produced by the firm changes.

Some examples of variable costs include the price of raw materials, delivery costs, packaging supplies, etc.

We have an entire explanation about variable costs that will help you learn everything there is about them. Click here:

- Variable costs.

The cost function of a firm may then be expressed as:

\(TC = VC + FC\)

Where TC is the total cost, VC is the variable cost, and FC is the Fixed Cost.

(Video) Profit, Revenue and Cost Functions

Revenue refers to all the money that the firm makes. So, to make revenue, a firm should sell a certain amount of goods at a certain price. Therefore, the revenue is a function of quantity and price.

The revenue function can be expressed as follows.

\(\hbox{Total Revenue}=\hbox{Price (P)}\times\hbox{Quantity(Q)}\)

For example, a firm that makes chocolate bars sells 2,000,000 chocolate bars in one year. What is its total revenue if the price it sells them for is $2?

The total revenue of the chocolate company is as follows:

\(\hbox{Total Revenue}=\hbox{Price (P)}\times\hbox{Quantity(Q)}\)

\(\hbox{Total Revenue}=\$2\times2,000,000=\$4,000,000\)

A firm's profit is a function of its revenue and cost. Therefore, we can express the profit function as follows.

\(\hbox{Profit}=\hbox{Price (P)}\times\hbox{Quantity(Q)} -(\hbox{Variable Cost} + \hbox{Fixed Cost})\)

Net Revenue vs Gross Profit

Sometimes, people think net revenue is the same as gross profit; however, there is a difference between net revenue vs. gross profit.

Net revenue is gross revenue that has been adjusted for refunds, returns, and discounts.

In the real world, some sales are not final, and customers can return items for full or partial refunds.

For example, someone didn't like their Amazon order and might decide to return it, for which the company has to pay money back.

Customers may also be able to submit coupons or receive rebates (cash back).

These reduce revenue but are not considered costs of production. Thus, net revenue is a more refined and accurate look at a firm's income.

On the other hand, gross profit is part of the net revenue that also includes the cost of goods sold (often abbreviated as COGS).

Gross profit is a firm's net revenue minus the cost of goods sold (COGS).

The cost of goods sold includes the cost of inventory, hourly labor, utilities, and supplies.

It covers most physical production costs but not advertising, consulting fees, or subscriptions to business publications, trade groups, or software. Therefore, gross profit often needs to be adjusted further to find what many would consider being true profit.

Net profit is the term for profit after all expenses have been deducted, including taxes and the interest paid on any outstanding debt.

Revenue vs Profit vs Turnover

Although they are often used interchangeably, there are some differences between revenue vs. profit vs. turnover.

Revenue is the firm’s total income from business practices.

Profit is the amount of revenue left for the firm’s owners after all costs have been deducted.

Turnover refers to the sales a firm makes within a certain time period, meaning how much inventory is sold.

Turnover and revenue are often compared as a percent of the firm’s total inventory. A high dollar amount of revenue may be unimpressive if it is only a tiny percent of the entire stock.

Ideally, firms want to have substantial inventory turnover to show that their products are in high demand.

A small firm with a high turnover may be seen as a better business investment than a more prominent firm with a lower turnover.

Turnover is related to whether a business sells durable or more perishable goods.

Supermarkets, for example, must maintain a high turnover to prevent food from going bad.

Car dealerships may need more time to sell number-year models before they lose value.

(Video) Cost, Revenue, Profit functions, Break even point

Industrial supplies and equipment, however, may maintain their value while sitting for more than a year, meaning a lower turnover is okay for business.

Revenue Vs Profit - Key takeaways

  • Revenue is the amount of income an enterprise generates through sales, fees, memberships, rent or lease payments.
  • Profit is the difference between a firm's total revenue and a firm's total cost.
  • Marginal revenue is the firm's revenue from selling an additional product.
  • Marginal cost is the cost of producing an additional unit of product.
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What is revenue vs profit with example? ›

Revenue describes income generated through business operations, while profit describes net income after deducting expenses from earnings. Revenue can take various forms, such as sales, income from fees, and income generated by property.

What are 2 examples of revenue? ›

The three examples of revenue are:
  • Rent received.
  • Amount received from one time sale of an asset.
  • Interest received from bank accounts.

What is the function of revenue? ›

1) Revenue is equal to the number of units sold times the price per unit. To obtain the revenue function, multiply the output level by the price function.

What are 4 examples of revenue? ›

Types of revenue include:
  • The sale of goods, products, or merchandise.
  • The sale of services, such as consulting.
  • Rental income from a commercial property (notice the use of “income”)
  • The sale of tickets to a concert.
  • Interest income from lending.
Dec 19, 2022

What is a profit example? ›

Profit is a term that often describes the financial gain a business receives when revenue surpasses costs and expenses. For example, a child at a lemonade stand spends one quarter to create one cup of lemonade. She then sells the drink for $2. Her profit on the cup of lemonade amounts to $1.75.

What is revenue in simple words? ›

Revenue definition says that it is the total amount of money received from carrying out the business operations such as sales. On the income statement, it is also known as sales. It is the top line figure as it is shown first on the income statement of any company.

How do you find revenue example? ›

Revenue (sometimes referred to as sales revenue) is the amount of gross income produced through sales of products or services. A simple way to solve for revenue is by multiplying the number of sales and the sales price or average service price (Revenue = Sales x Average Price of Service or Sales Price).

How do you recognize revenue example? ›

If you get paid to provide a service for a month or a year, but you receive the money immediately, that payment should be gradually recognized as revenue. Each month that you provide the service for the prescribed time means recognizing an equal portion of that income until the service delivery period is complete.

How do you express revenue as a function? ›

Express the revenue R as a function of x. Recall that revenue = price · quantity. Because we want the revenue as a function of x, we need to write both the price and the quantity in terms of x. The quantity is simple; it is x.

What is the formula for profit? ›

Profit is revenue minus expenses.

Is cash an example of revenue? ›

No. Revenue is the money a company earns from the sale of its products and services. Cash flow is the net amount of cash being transferred into and out of a company. Revenue provides a measure of the effectiveness of a company's sales and marketing, whereas cash flow is more of a liquidity indicator.

Does revenue mean income? ›

Revenue is the total amount of income generated by the sale of goods or services related to the company's primary operations. Income or net income is a company's total earnings or profit. Both revenue and net income are useful in determining the financial strength of a company, but they are not interchangeable.

What is an example of profit in accounting? ›

For example, if a person invested $100,000 to start a business and earned $120,000 in profit, their accounting profit would be $20,000. Economic profit, however, would add implicit costs, such as the opportunity cost of $50,000, which represents the salary they would have earned if they kept their day job.

What is profit in simple sentence? ›

Noun The company made a profit this year. Profits are up from last year. There was a rise in profits this year. The profits from CD sales were donated to charity.

What are the 3 types of profit? ›

There are three main measures of profit. These are gross profit, operating profit and net profit.

What is revenue answer in one sentence? ›

Revenue is money that a company, organization, or government receives from people. [business]

Why do we calculate revenue? ›

It tells a company clearly how much money it is bringing in from the sale of its product. Changes in revenue can be analyzed to determine if marketing strategies are working, how price changes affect the demand for the product, and a multitude of other insights.

How do you recognize recognized revenue? ›

IFRS Reporting Standards Criteria

According to IFRS criteria, the following conditions must be satisfied for revenue to be recognized: Risk and rewards have been transferred from seller to the buyer. Seller has no control over goods sold. The collection of payment from goods or services is reasonably assured.

What is an example of sales revenue? ›

Sales is the income a company generates by selling its goods and services. Meanwhile, revenue is a business's income from all sources, including sales. For example, a company can have $10 million in sales but $12 million in revenue if nonoperating income totals $2 million.

Can profit be higher than revenue? ›

Can profit be higher than revenue? Theoretically, net profit can be higher than revenue when a company's income through non-core business operations, such as the sale of investments, temporarily exceeds operating costs.

How do you calculate profit vs revenue? ›

Revenue vs Profit formula
  1. Total revenue is the money that you receive from all sources—everything from sales to investments.
  2. Total expenses, on the other hand, include everything from the cost of goods sold to overhead costs like rent and utilities.
  3. Subtracting total expenses from total revenue gives you net profit.

Is revenue gross or net? ›

Revenue, also known as gross sales, is often referred to as the "top line" because it sits at the top of the income statement. Income, or net income, is a company's total earnings or profit. When investors and analysts speak of a company's income, they're actually referring to net income or the profit for the company.

Which is more important revenue or profit? ›

Profit, for any company, is the primary goal, and with a company that does not initially have investors or financing, profit may be the corporation's only capital. Without sufficient capital or the financial resources used to sustain and run a company, business failure is imminent.

What is the formula for revenue? ›

Revenue (sometimes referred to as sales revenue) is the amount of gross income produced through sales of products or services. A simple way to solve for revenue is by multiplying the number of sales and the sales price or average service price (Revenue = Sales x Average Price of Service or Sales Price).

Why is profit low but revenue high? ›

Profit margins, which are computed as net income divided by revenue, do not always improve when sales are increased or costs are reduced. Increasing revenue can result in higher costs and lower profit margins. Cutting costs can result in diminished sales and also lower profit margins if market share is lost over time.

Is profit equal to revenue minus? ›

Calculating Profit

Simply put, profit is equal to total revenue minus total cost. Since total revenue and total cost are written as functions of quantity, profit is also typically written as a function of quantity.

What is revenue vs profit vs income? ›

The actual amount received by the company through its business activities without any deduction is known as revenue. The surplus remained after reducing all expenses from the revenue is known as profit. The actual earnings of the company during a particular accounting year is known as income.

How much of revenue is profit? ›

Profit is the amount of income left after deducting expenses from your revenue. To calculate profit, subtract your expenses from revenue. If you generate $10,000 in revenue, but you had $5,000 in expenses, your profit would be $5,000. Typically, when you hear people talk about profit, they're referring to net profit.

Does revenue mean sales? ›

Revenue is the entire income a company generates from its core operations before any expenses are subtracted from the calculation. Sales are the proceeds a company generates from selling goods or services to its customers.

Does revenue include tax? ›

Government revenue includes all amounts of money (i.e., taxes and fees) received from sources outside the government entity. Large governments usually have an agency or department responsible for collecting government revenue from companies and individuals.

Is revenue before or after expenses? ›

Revenue is often referred to as the top line because it sits at the top of the income statement. The revenue number is the income a company generates before any expenses are subtracted. For example, the money a shoe retailer makes from selling its shoes before accounting for any expenses is its revenue.

What percentage of revenue should be profit? ›

Your profit margin can tell you how well your business performs compared to other market players in your industry. Although there's no magic number, a good profit margin will typically fall between 5% and 10%.


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