The concept income refers to funds that flow into the business ― cash or credit ― once products or services have been rendered and the business has been reimbursed in monetary terms.
This represents all the money received by a business, which is paid into its bank account or cash funds.
The money, which leaves the business for goods or services purchased, is expenditure by the enterprise.
This represents all the money that is drawn from the businesses bank account or cash funds.
If income exceeds expenditure for a certain period it is referred to as a surplus. In certain cases it is referred to a “Surplus income above expenditure”.
The opposite could also occur where expenditure exceeds income for a period of time. This is known as a “deficit”.
The concepts profit and loss refer to whether a business that is selling goods or services has made a profit or loss on those goods or services rendered for a particular time or on a single transaction.
The difference between the total sales and purchases for a given period of time is referred to as profit or loss, providing there is no stock involved, in other words everything that was purchased has been sold.
The use of these two words causes the most profound misunderstanding and mistakes in financial calculations. It is important to illustrate them in terms of various examples.
Gross, in its simplest form, indicates something must still be deducted, while the term net indicates that it is the final amount.
To understand the difference between Gross Profit and Net Profit, the following:
In the example we see that a gross profit of R155.00 was generated before the expenses were taken into account. A net profit was generated after the expenditure was calculated. The final profit, the net profit, amounts to R31.00.
Gross profit is the difference between the selling price and cost price of an item.
From the example above, two new concepts come to the fore which must be explained further, viz. selling price and cost price.
As has already been seen, the net profit of a business is the final profit made and on which tax must be paid. It also demonstrates that all the expenditure has already been taken into account.