Profit

Profit is a financial benefit that is realized when the amount of revenue gained from a business activity exceeds the expenses, costs, and taxes needed to sustain the activity. Any profit that is gained goes to the business's owners, who may or may not decide to spend it on the business. Profit is often seen as a key indicator of a company's success and growth potential.

Definition

Profit is the surplus remaining after total costs are deducted from total revenue, and the basis on which tax is computed and dividend is paid. It is the best known measure of success in an enterprise.

Profit is reflected in reduction in liabilities, increase in assets, and/or increase in owners' equity. It furnishes resources for investing in future operations, and its absence may result in the extinction of a company. As an objective of business, profit is achieved through efficient and effective management of operations and resources.

Types of Profit

There are several types of profit, including:

• Gross Profit: This is the profit a company makes after deducting the costs associated with making and selling its products, or the costs associated with providing its services.

• Net Profit: Also known as net income or net earnings, this is a measure of the profitability of a venture after accounting for all costs. In a financial context, it is periodically measured via the income statement as Revenue minus Cost of Goods Sold and Operating Expenses (the latter inclusive of taxes and interest).

• Operating Profit: This is the profit from a firm's core business operations, excluding deductions of interest and tax.

Profit in Economics

In economics, profit in the theoretical sense has a number of possible meanings:

• Normal Profit: This is a component of (implicit) costs and not a component of business profit at all. It represents the opportunity cost, as the time that the owner spends running the firm could be spent on running a different firm. The normal profit is a part of the cost of production.

• Economic Profit: This is, at least in theory, normal profit plus economic rent. It is also known as excess profit.

Profit in Accounting

In accounting, the profit can be distributed among several sections of the company, including:

• Retained Earnings: Profit remaining after all costs, tax and dividends have been paid. Profit retained in the business has a direct impact on the amount of dividends.

• Dividends: Any distribution of a company's earnings to its shareholders, usually in the form of cash or additional shares.

See Also

• Revenue
• Costs
• Expenses
• Taxes
• Gross Profit
• Net Profit
• Operating Profit
• Normal Profit
• Economic Profit
• Retained Earnings
• Dividends