Issues discussed in the material:
- What is the net profit indicator and why is it needed?
- How to calculate the net profit of an organization
- How is net profit reflected in financial statements?
- What is the difference between net and retained earnings
Net profit and running a business are inextricably linked. New companies are opened precisely to generate income, entrepreneurs actively use material and labor resources, and develop ways to increase the profitability of the business. Therefore, it is important for any businessman to understand such a concept as net profit. The formula for its calculation with examples is the topic of our material.
Used interpretations of the concept
The concept of net income is sometimes interpreted differently.
Take our proprietary course on choosing stocks on the stock market → training course
First definition: net income is the totality of income received as a result of the primary and secondary activities of the enterprise, from which the amount of tax and excise duties has been deducted.
Second definition: net income is the totality of income from the volume of which production costs and the amount of tax have been subtracted. In fact, in this definition, the concept of net income is used as a synonym for the concept of net profit.
When filling out reporting documents, it is permissible to use the formulation of net income to calculate net profit. However, it is important to distinguish them from each other. To avoid problems with the tax service, it is recommended to separate the two concepts and not use the wording “net income” when talking about profit.
Net income is all revenue received, from the amount of which only taxes and excise taxes are subtracted without production costs and other expenses.
| Business valuation | Financial analysis according to IFRS | Financial analysis according to RAS |
| Calculation of NPV, IRR in Excel | Valuation of stocks and bonds |
Who uses the net income indicator and for what purposes?
Net income is the main parameter reflecting the success of an enterprise. The following categories of persons use this indicator in the course of their work:
- Owners and shareholders. For them, the parameter reflects the success of the organization. It assesses the relevance of the management system used, calculates dividends, determines the size of shareholders’ shares, etc.
- Members of the management team. The parameter allows them to calculate and evaluate the financial stability of the organization.
- Supplier companies. Based on the parameter, an assessment is made of the solvency of the organization purchasing raw materials.
- Investors. The indicator allows them to assess the profitability of investing savings in the organization. Companies with large net profits are extremely attractive for investment.
- Credit organizations. Similar to the situation with suppliers, net income allows lenders to assess the borrower's solvency.
Distribution
The procedure for distribution of profits is regulated by the company's charter and is divided according to the distributed shares of the participants. To distribute net profit, you first need to organize a meeting of company participants, and only after making a general decision to pay money to each participant. If there is only one participant, for example, an individual entrepreneur, then he independently decides where the net profit received will be directed.
Net profit can be used to:
- Creation of a social and investment fund;
- Increase the authorized capital;
- Formation of reserve capital;
- Payment of dividends to security holders.
Video on the topic:
Why do you need to calculate net income?
In some cases, an estimate of net income is sufficient. For example, lenders only care about the solvency of a potential borrower. To evaluate it, you don’t need to know the value of the indicator down to the kopecks.
However, in many other cases, an accurate result is important. You need to calculate the amount of net income in order to:
- distribution of profit volume by shares;
- payment of taxes;
- filling out financial statements;
- calculating the amount of compensation for incurred costs and losses;
- evaluating performance results;
- determining the organization’s pricing policy, etc.
All these tasks cannot be completed in the absence of an accurately calculated net income indicator.
Reflection of net income in financial statements
To reflect the net income of the enterprise, a separate column is highlighted in the content of reporting documents. When doing accounting, it is important to correctly represent this indicator.
According to the content of paragraph 23 of the accounting regulation 4/99, the revenue received is reflected in the document in the form of a net estimate. A similar rule applies to income received in the course of non-core activities of the organization.
For example, if the management of an enterprise has chosen a general tax regime, VAT is charged on the cost of goods sold. Under such conditions, the tax amount is already included in the base price. In shipping documentation, in certificates of work done or services provided, in financial statements, etc. The amount of revenue is indicated taking into account the value added tax included in the price.
This is stated in the docs as:
Debit 62 Credit 90-1 “Revenue”
If the income was not received as a result of the main activity, the statements are filled out as follows:
Debit 62 Credit 91-1 “Other income”
However, along with this information, the content reflects the fact that part of these incomes belongs to the state in the form of taxes collected for the sale of goods or for the provision of services. To reflect the actual net income, one of the following formulations is used:
- Debit 90-3 “VAT” Credit 68, subaccount “Calculations for VAT”
- reflects the existing accounts payable to the state for VAT and excise duties.
- Debit 91-2 “Other expenses” Credit 68, subaccount “Calculations for VAT”
- indicates the amount of VAT withheld from income received as a result of the sale of fixed assets, intangible assets, materials, etc.
In the final financial statements, in lines 2110 and 2340 for basic revenue and additional income, respectively, the actual net income is entered, from which the amount of value added tax was previously deducted. The information is indicated as the difference between the primary and secondary group of records.
If the list of sold products contains groups of goods for which the state has established excise taxes, reporting is filled out in a similar way, indicating subaccount 90-4 “Excise taxes”.
Calculation of net income
A special formula is used to calculate the net income indicator. It looks like this:
(B - NA) + (VD - NA),
Where:
- B – income received as a result of the sale of products or provision of services;
- VC – income received from additional sources not related to the main activities of the enterprise;
- NA – the amount of tax and excise duties.
Attention:
Net income is calculated for a certain period. It can be a year, a quarter, or any other arbitrary number of days and months. During the calculation, you must use the values for the desired period. Also, when making calculations, you must in any case subtract the amount of taxes and excise taxes, even if they have not yet been paid at the time of analysis.
When filling out financial statements using the unified OFR form, the data is entered into the formula with the amounts of tax and excise duties already deducted. If you modify the formula using document line numbers, it will look like this:
2100 + 2310 + 2320 + 2340,
Where:
- 2100 – basic income code;
- 2310 – code of income received as a result of cooperation with other enterprises;
- 2320 – code of income received in the form of interest;
- 2340 – code for other sources of income not related to the main activities of the enterprise.
Main types of profit in the economy
Having understood that profit is the difference between the total income and expenses of an enterprise in monetary terms, let us consider the structure of profit from the point of view of economics. Main types of profit:
- from implementation;
- gross;
- clean;
- balance sheet;
- marginal.
There are more than 15 indicators of enterprise profit that allow you to study the situation in more detail. We will focus on those that are used in the preparation of financial statements and characterize the activities of any enterprise.
The ratio of net income to cash flow
Net income and cash flow can be correlated with each other. However, in most cases their values are not equal. As a result, situations often arise, for example, when there were sales, but the flow remained at the same level, or there were cash injections, but no income.
Impact of accounts receivable and payable
A sale does not always mean the transfer of goods and the simultaneous receipt of money or payment for a service upon its provision. It is not uncommon for there to be a time gap between these actions. This is the reason why net income and cash flow are not equal.
If an organization operates on a prepayment system, it first receives money, and only then transfers the goods or provides the service. As a result, accounts payable arises. In this situation, the net income parameter is less than the flow, since the money has already been received, but has not yet been taken into account in the reporting, since the service has not yet been provided, or the goods have not yet been transferred.
If an organization operates on a postpaid system, it first transfers a product or provides a service, and after a while receives money. As a result, accounts receivable arise. In such a situation, the net income parameter exceeds the flow. The company's reporting reflects the income received, but, in fact, there is no money yet.
On a note:
Similar situations arise when working with suppliers and customers.
Impact of non-current excise taxes
The discrepancy between the net income indicator and the volume of cash flows may arise due to the capitalization of costs. For example, a similar situation arises when purchasing real estate.
Even if the concluded transaction implies a deferred payment, the funds will in any case be spent much earlier than the cost of the property will be written off as depreciation expenses.
This situation often occurs among small and medium-sized businesses. They can be extremely profitable, but have virtually no net income due to investments in real estate and other intangible assets.
Impact of credit costs
A large difference in indicators may arise due to borrowed money. When an organization takes out a loan, it receives a large infusion of existing cash flow, as well as new liabilities. However, this entire amount does not in any way affect the net income indicator. The negative impact will be noticeable only some time after interest has been accrued.
Formula and methods of analysis
Net profit (or, as it is also called, “total”, as well as Net income/NI and “bottom line”, from the last line in the report mentioned above) is the balance of funds after all payments.
Fig. 1 Emergency in the 1C:ERP report
The emergency situation can be calculated in different ways, but they will all be similar to each other. For example, in the statement of financial results (OFR), net profit is equal (its line number is 2400):
- Revenue (line 2110)
- Cost of sales (line 2120)
- Commercial expenses (line 2210)
- Administrative expenses (line 2220)
- Income from participation in other organizations (line 2310)
- % to be received (line 2320)
- % payable (line 2330)
- Etc. income (line 2340)
- Etc. expenses (line 2350)
- Income tax (line 2410)
Fig. 2 OFR in 1C:ERP
For a comprehensive study of fluctuations in the state of emergency, the strength of the impact on it of various factors, both external economic and internal corporate ones, is analyzed. To do this, factor analysis . Let's consider the example of Zimniy Sad LLC, which sells drills.
Sales revenue
The influence on this factor is analyzed during a step-by-step calculation:
- Price influence;
- The influence of the number of drills sold.
Revenue from the sale of drills for 2022: RUB 364,000. – B2020 .
Price increase compared to 2022 – 15%.
Price index (PI)= (100+15)/100=1.15.
Those. revenue from the sale of drills of Zimniy Sad LLC:
Vsop.ts. = 364000 / 1.15 = 316522 rub.
Thus, the 2022 revenue of Winter Garden LLC is 47,478 rubles more. (364,000 rubles – 316,522 rubles) The revenue of Winter Garden LLC in 2022 amounted to 295,800 rubles. (B2019). This means that the increase in sales led to an increase in revenue for the reporting period by 20,722 rubles. (RUB 316,522 – RUB 295,800)
Vkol=Vsop.ts.– V2019
The increase in profit due to an increase in price is stronger than due to an increase in sales volume (quantity). This shows continued demand and is generally good for business.
Price
As we found out above, in 2022, due to the increase in the price of drills, Winter Garden LLC received more than last year, by 47,478 rubles.
Return on sales for the reporting year 0.19 or 19% (P2020) = (69,000 rubles / 364,000 rubles)
Р2020 = Profit from sales (Ppr.2020)/Revenue (В2020)
Return on sales for 2022 was 0.21 or 21% (RUB 62,000 / RUB 295,800)
P2019 = Profit from sales (Ppr.2019) / Revenue (Q2019)
Due to the price increase, the profit of Winter Garden LLC increased by 9,020 rubles. (RUB 47,478 * 19% / 100%)
FPrice = growth of Vsop.ts. * Р2019 / 100%
Quantity of products sold
As we found out above, in 2022, due to the increase in sales of drills, Winter Garden received 20,722 rubles more than last year. Knowing the profitability of the previous period (19%), we determine that, under the influence of increased sales volumes, profit increased - 3947 rubles. (RUB 20,722 * 19% / 100%).
Cost of sales
In 2022, this figure is 243,000 rubles. ( С2020 ), and in 2022 – 279,000 ( С2019 ). Let's determine the level of cost in relation to revenue:
US2020 = 67% (RUB 243,000 /RUB 364,000);
US2019 = 71% (RUB 279,000 / RUB 295,800)
The impact of reducing the cost of sales led to an increase in profit by RUB 14,560. due to resource savings - 14,560 rubles.
364000 * (67%-71%) / 100% = 364000*(-4%)=100%
Administrative and commercial costs
Reducing them will allow you to save money and increase the emergency situation in the short term, but in the long term such savings may have a negative impact on the business.
