Net Income, Earnings, and Profit - What's the Difference?

Net Income, Profit, and Earnings Explained

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Net Income or Profit Loss Sheet. Diane Macdonald/Moment Open/Getty Images

Net Income vs. Earnings vs. Profit 

Businesses are set up to make money for their owners. The business must continue to make money to stay in business. This "money" that the business makes is determined by how much money the business takes in, minus how much the business spends to make this money. 

There are three terms that describe this process of "making money." They are: 

  • Earnings
  • Profit, and
  • Net Income.

    All three terms mean the same thing - the difference between the gross income of the business and all of the expenses of a business, including taxes, depreciation, and interest.

    Net income is the same as the "profit" of a business, or its "earnings." For all of these terms - profit, net income, or earnings - we are talking about a net amount, including both the income (revenue) of the business and deductions to that income. 

    For the purpose of this article, we'll use the term "net income." 

    What if the Business Doesn't Make Enough Money?

    Of course, a business may not bring in enough income to cover its expenses. In that case, the business has:

    • Negative earnings
    • A loss (as opposed to a profit), or
    • Net Loss, as opposed to net income

    The opposite of net income is a net loss. In this case, the expenses and other reductions are greater than the income of the business.

    Earnings of a Business

    The term "earnings" is a special case, and earnings as a measure of making money is used primarily for corporations.

    Earnings are shown for individual shareholders and for the corporation as a whole. The term "earnings per share" relates to how the earnings of a corporation are divided between the individual shareholders.

    How a Business Shows Net Income

    A business shows the calculation for net income on a financial report titled a "Net Income" or "Profit and Loss" sheet.

    Again, since the terms mean the same thing, either title can be used. 

    The Net Income statement has a specific form: 

    • The title shows the name of the company, the name of the report (Net Income or P&L), and the date of the report (For example: "As of December 31, 2016")
    • The gross income of the business, less any returns or adjustments to gross income
    • The expenses of the business are shown, in alphabetical order. These are all the legitimate business expenses. 
    • Any depreciation expenses and taxes are shown as separate deductions. 

    After all the calculations, the resulting figure is the net income or profit or earnings of the business. 

    How is Net Income - Profit - Earnings Used?

    The net income of a business is used as a way for the business owner to measure success, but also as a way to determine the tax for the business. 

    Net income is used: 

    • To determine the tax paid by a sole proprietor business filing business taxes on Schedule C (as part of the owner's personal tax return)
    • To determine self-employment tax (Social Security and Medicare tax) for self-employed business owners
    • To determine tax for individual partners and LLC members and for S corporation owners
    • To determine tax for corporations.