{{unreferenced, date=September 2009
Notional profit is an estimate of
earnings Earnings are the net benefits of a corporation's operation. Earnings is also the amount on which corporate tax is due. For an analysis of specific aspects of corporate operations several more specific terms are used as EBIT (earnings before interes ...
primarily used in the building and
construction industry
Construction is a general term meaning the art and science to form objects, systems, or organizations,"Construction" def. 1.a. 1.b. and 1.c. ''Oxford English Dictionary'' Second Edition on CD-ROM (v. 4.0) Oxford University Press 2009 and come ...
. It is used to smooth out fluctuations in reported
revenue
In accounting, revenue is the total amount of income generated by the sale of goods and services related to the primary operations of the business.
Commercial revenue may also be referred to as sales or as turnover. Some companies receive reven ...
due to contracts that take a long time to complete. It is calculated by the equation:
Details
A
contract
A contract is a legally enforceable agreement between two or more parties that creates, defines, and governs mutual rights and obligations between them. A contract typically involves the transfer of goods, services, money, or a promise to tran ...
usually takes several years to complete. If the profit on such contracts is recorded only after their completion, then wide fluctuations may be noted in the profit figures of contractors from year to year. To avoid these fluctuations in the reported profits and to reflect the revenue in the
accounting period
An accounting period, in bookkeeping, is the period with reference to which management accounts and financial statements are prepared.
In management accounting the accounting period varies widely and is determined by management. Monthly account ...
during which the activity is undertaken, the profit in respect of each contract in progress is transferred to the
profit and loss account
An income statement or profit and loss accountProfessional English in Use - Finance, Cambridge University Press, p. 10 (also referred to as a ''profit and loss statement'' (P&L), ''statement of profit or loss'', ''revenue statement'', ''stateme ...
of the year by calculating the notional profit. The portion of notional profit to be transferred to the profit and loss account depends on the stage of completion of a contract.
See also
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Accountancy
Accounting, also known as accountancy, is the measurement, processing, and communication of financial and non financial information about economic entities such as businesses and corporations. Accounting, which has been called the "language ...
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Cost accounting
Cost accounting is defined as "a systematic set of procedures for recording and reporting measurements of the cost of manufacturing goods and performing services in the aggregate and in detail. It includes methods for recognizing, classifying, al ...
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Financial accounting
Financial accounting is the field of accounting concerned with the summary, analysis and reporting of financial transactions related to a business. This involves the preparation of financial statements available for public use. Stockholders, s ...