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Don't Let the Language Confuse You
Definition
Finance and accounting has its own language, as does any field. But finance and accounting have seemed to add a twist by using several words or phrases that mean the same thing. The end result is that non financial folks tend to get confused or overwhelmed, and may even give up trying to understand what is being said by their CFO or shared in a meeting.
In this Weekly Fix, we’ll share the key terms that can be the most confusing.
First, let’s look at sales. Another term for sales is revenue. Both of those terms mean the same thing. Some companies do have specific definitions for each (for example, sales might be the “gross” amount, and then “revenue” might take into account any discounts given), but they represent customers’ promise to pay for products and services provided.
The most confusing term when it comes to revenue, however, is when it is called income. Using the term income to mean revenue is wrong. Income is the bottom line, that is, how much is left over from revenue after expenses have been subtracted.
Now, let’s look at the term profit. The terms profit, income and earnings all mean the same thing. There are various forms of profit (or you could say, various forms of income or earnings) – gross profit, operating profit and net profit. Each simply has more expenses subtracted from revenue to get to that profit number. Confusion can arise when you look at your income statement, because the terms used for the various profit categories might be gross profit, operating income and net earnings (when they could just as easily have said gross profit, operating profit and net profit). You just need to remember that profit, income and earnings all mean the same thing, and the important term is either gross, operating or net.
Finally, the name of the report where you’ll find revenue, expenses, and profit is the income statement. Here we have lots of names – profit and loss statement, P&L statement, statement of operations, operating statement, statement of earnings or earnings statement. Sometimes the word “consolidated” is in front of these phrases. Just remember, these are all the same report – the report that gives you the revenue, expenses and profit of a company. We’ve seen some companies that mix and match the terms, depending on the part of the organization. In one company, we saw one of the major divisions use the phrase income statement, while another uses profit and loss statement.
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