Accounting Terms: Profit VS Profitability
Are they the same?
What is the difference between Profitability and Profit? Two accounting terms that every business owner encounters. Although they may look similar, they are not entirely the same. Both are accounting metrics used in analyzing the financial success of a business.
Accounting Terms Definition
Don’t confuse the two accounting terms. Profit is the difference between income and expenses. Profitability is the degree to which a business yields profits.
Definition of Profit
Profit is an absolute number determined by the amount of income or revenue above and beyond the costs or expenses a company incurs. It is calculated as total revenue minus total expenses and appears on a company’s income statement. No matter the size or scope of the business or the industry in which it operates, a company’s objective is always to make a profit.
Definition of ProfitabilityProfitability is closely related to profit – but with one key difference. While profit is an absolute amount, profitability is a relative one. It is the metric used to determine the scope of a company’s profit in relation to the size of the business. Profitability is a measurement of efficiency – and ultimately its success or failure. A further definition of profitability is a business’s ability to produce a return on an investment based on its resources in comparison with an alternative investment. Although a company can realize a profit, this does not necessarily mean that the company is profitable.
Horton, Melissa “The Difference Between Profitability and Profit” 31 March 2019
They go hand-in-hand
Businesses cannot rely on simple ‘plus and minus’ calculation when it comes to the growth of the company. Profit shows you how much money you’re getting and profitability shows you how efficient your company is. The analysis of your profitability is necessary to understand if your company utilizes all it’s resources efficiently.
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