Profits and Losses vs. Income and Expenses: What’s the Difference?

Profits and Losses vs. Income and Expenses: An Overview

Most companies report items such as revenue, gains, expenses and losses on their income statement. Although some of the terms sound similar, there are different practical uses for profits and losses and for income and expenses.

Below we take a look at each combination of terms and how they can differ. Ultimately, companies strive to maximize profits and revenue while minimizing expenses and losses. They all impact overall profitability.

Profits and losses

Profits and losses are the contrasting financial results generated by a company’s non-primary operating and production processes. Any time a company makes a profit or adds value through secondary sources, for example through lawsuits, investments in financial instruments or through the disposal of assets, this is considered a (capital) gain.

Conversely, a loss always occurs when a company loses money through secondary activities. When a company sells an asset, the determination of gain versus loss depends on the book value of the asset according to the company’s financial documents. A loss is also recognized if a company is ordered by a judge to pay to settle a lawsuit or if it loses money on the financial investment.

Gains and losses are treated differently for tax purposes depending on whether they are short-term in nature (typically within 12 months or less) or long-term in nature (occurring over a period of more than one year). The profits are usually offset by corresponding tax losses.

Financial analysts and investors typically care less about losses and gains because many of them are likely one-time events and unrelated to a company’s core business activities.

Income and expenses

Unlike profits and losses, income and expenses are not opposite financial results of the same activities. Rather, the term “revenue” is the term used to describe revenue generated by the provision of a company’s primary goods or services, while “expense” is the term for costs incurred in the process of producing or providing them of a primary business operation. Investors and analysts will typically give these metrics far more weight than losses or gains.

Revenue is the gross proceeds a company receives when it sells its goods or services and is sometimes simply referred to as “sales.” Since there are always a number of costs (both fixed and variable) associated with production, these must be deducted from sales as expenses to calculate a company’s net profit.

Of the four terms considered, the expenses are the most diverse. Expenses can be related to a variety of different types of costs, such as: B. Labor costs (salaries, wages and employee benefits), marketing and advertising, rent, utility bills, insurance, taxes, interest, depreciation and amortization. Expenses can also be recorded in any number of different line items on an income statement to reflect the specific type of expense.

Several financial ratios and metrics take into account income and expenses, such as the commonly used metric EBITDA, which is earnings before interest, taxes, depreciation, and amortization. In other words, it is income minus expenses related to the production of the goods sold.