Revenue against income, profit against cash: business vocabulary split into pairs

Q: Do I need to learn accounting to read a set of accounts?

No, but you do need to [read the notes](/business-acumen). The statements give figures; the notes

Most business words are not hard. They are close together. Revenue and income, profit and cash, margin and markup each sit a few inches apart, and the gap is exactly wide enough to lose an argument in.

So this page is built out of pairs. Each entry names the class a word belongs to, then the one difference that separates it from its nearest neighbor. That is the whole method, and it is worth more than a glossary of two hundred entries you will never read twice.

What to take away

A definition is only useful when it names the neighbor it is being distinguished from. "Revenue is money from sales" is not a definition until you can say how it differs from income.
The most expensive confusions are between words that are both correct. Profit and cash are both real; they are just not the same measurement.
Several of these words carry different meanings in different places and in different documents. Where the meaning changes, the document decides, not the conversation.

Money coming in

Revenue is the amount earned from selling goods or services in a period. Its nearest neighbor is cash received, and the difference is timing: revenue is recorded when the sale is earned, which may be before or after anyone pays.

Turnover in British usage means revenue. It also names two unrelated things: staff turnover, the rate at which people leave, and inventory turnover, how many times stock is sold and replaced in a period. Three meanings, one word, and the only reliable fix is to ask which is meant.

Income is the word that moves the most. In everyday speech it means money coming in. In a set of accounts net income is a profit figure, which is money left over rather than money arriving. If a document says "income", find out which end of the statement it is describing before quoting it.

Bookings, billings and collections are three separate events for the same sale: what a customer has committed to, what has been invoiced, and what has actually been paid. Anyone reporting one while calling it another is not necessarily being dishonest, but the three move at different speeds.

Money kept

Profit is not one number. It is a sequence, and each layer subtracts a different

Profit layers subtract costs

Gross profit: direct cost of what was sold
Operating profit: plus running the business
Pre-tax profit: plus financing and other items
Net profit: plus tax, left for owners

Layer	What has been taken off	The question it answers
Gross profit	The direct cost of what was sold	Does the product itself make money?
Operating profit	Plus the cost of running the business	Do the operations make money?
Pre-tax profit	Plus financing costs and other items	Does the business make money before the state takes a share?
Net profit	Plus tax	What is left for the owners?

Two rules follow. A profit figure means nothing without its layer, because the same business produces four different answers. And a comparison between two profit figures is only a comparison if both are the same layer.

Profitable and solvent are also not the same claim. Profitable is about a period's result. Solvent is about being able to meet obligations. A business can be both, neither, or either one on its own.

Money moving

Cash flow is the movement of cash in and out over a period. Its neighbor is profit, and the difference is what causes each to be recorded.

Profit is recorded when a sale is earned and a cost is incurred. Cash is recorded when money actually moves. Under an accrual basis those two events can be months apart; under a cash basis they are the same event by definition, which is simpler and tells you less.

That gap has a name on each side: Accounts receivable is revenue you have recorded and not been paid. Accounts payable is a cost you have recorded and not paid.

A fast-growing business can be profitable on paper and short of cash because its receivables grow faster than collections, and nothing improper happened; the two measurements answer different questions.

Liquidity is whether you can pay what falls due soon. Solvency is whether what you own exceeds what you owe. Running out of the first is what actually stops a business, and it can happen while the second looks fine.

Cost words, which describe two different things at once

Costs get sorted on two separate axes, and the axes are constantly mixed up.

Cost words

The question it asks

Behavior: Does the total change when volume changes?
Traceability: Can it be traced to one unit or job?

The two answers

Behavior: Fixed, or variable
Traceability: Direct, or indirect

A cost can be fixed and direct, or variable and indirect, or any other pair. Calling something "a fixed cost" says nothing about whether it can be traced to a product, and treating the two axes as one is how a per-unit cost ends up wrong.

Cost and expense are also distinct. A cost is what something takes. An expense is a cost recognized against a particular period's result. When a cost buys something with a life longer than the period, it is capitalized instead: it becomes an asset, and it reaches the profit statement gradually.

That gradual route has two names, split by what is being written down. Depreciation applies to tangible assets, the things you could bump into. Amortization applies to intangible ones. Same mechanism, different subject. Neither is a movement of cash; the cash left when the asset was bought.

Capital expenditure and operating expenditure name the same split from the spending side. The distinction matters because it changes which period the cost lands in, and the rules for which is which are set by the applicable accounting framework rather than by preference.

Margin and markup

This is the pair that costs the most money, because both are percentages and

Margin vs markup on same sale

Markup

Base: Cost
Cost: 100
Price: 150
Amount: 50
Percentage: 50%

Margin

Base: Price
Cost: 100
Price: 150
Amount: 50
Percentage: 33%

Markup is the amount added to cost, expressed as a share of the cost. Margin is the amount kept, expressed as a share of the price.

Take a cost of 100 and a price of 150, purely as arithmetic. The markup is 50 percent, because 50 was added to 100. The margin is a third, because 50 is a third of 150. Same transaction, two very different numbers, and a pricing rule that says "we work on 30 percent" is ambiguous until someone says which one.

Both terms have settled technical senses. The entry on gross margin explains how the share of the price is calculated.

The error is systematic, not random: applying a margin percentage as a markup always underprices. A business can hit its stated percentage on every sale and still miss the profit that percentage was meant to produce.

Words that change meaning with the room

Words that change meaning

Valuationis an estimate produced by a method with assumptions in it. Price is what was actually paid in a transaction. A valuation is an argument; a price is an event.
Equitymeans an ownership stake. It also names the residual: what is left of the assets after the liabilities. Both are standard, and they are not interchangeable in a sentence about how much someone owns.
Grossand net are relative terms with no fixed content. They only mean something once you say what has been taken off in between.
Reservein ordinary speech means money set aside. In accounting it names a component of equity, which is not a pot of cash, and the two readings lead to opposite conclusions about whether anything can be spent.

Common questions

Which definition wins when a word means two things?

Inside a document, the document's own defined term wins, and reading it the ordinary way is simply an error. Where a term has a settled technical meaning in accounting or law, that meaning governs in a filing or a contract regardless of how it was used in the meeting.

Do I need to learn accounting to read a set of accounts?

No, but you do need to read the notes. The statements give figures; the notes say what was included, what basis was used, and what has been estimated. Most of the meaning is in the second half.

Is there a single correct definition of these terms everywhere?

For the technical ones, the applicable accounting framework or law defines them, and frameworks differ between jurisdictions. For the loose ones, no, and that is precisely why a document that relies on one should define it.

What is the fastest way to check I have understood a term?

State the neighbor. If you can say what it is not, and name the one difference that separates them, you have the definition. If you can only give a synonym, you have a label.