Profit, in
accounting 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 "languag ...
, is an income distributed to the owner in a profitable market production process (
business Business is the practice of making one's living or making money by producing or buying and selling products (such as goods and services). It is also "any activity or enterprise entered into for profit." Having a business name does not separ ...
). Profit is a measure of profitability which is the owner's major interest in the income-formation process of market production. There are several profit measures in common use. Income formation in market production is always a balance between income generation and income distribution. The income generated is always distributed to the stakeholders of production as economic value within the review period. The profit is the share of income formation the owner is able to keep to themselves in the income distribution process. Profit is one of the major sources of economic well-being because it means incomes and opportunities to develop production. The words "income", "profit" and "earnings" are synonyms in this context.

Measurement of profit

There are several important profit measures in common use. Note that the words ''earnings'', ''profit'' and ''income'' are used as substitutes in some of these terms. * Gross profit equals sales
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 rev ...
minus cost of goods sold (COGS), thus removing only the part of expenses that can be traced directly to the production or purchase of the goods. Gross profit still includes general (overhead) expenses like R&D, S&M, G&A, also interest expense, taxes and extraordinary items. *
Earnings before interest, taxes, depreciation, and amortization A company's earnings before interest, taxes, depreciation, and amortization (commonly abbreviated EBITDA, pronounced , , or ) is a measure of a company's profitability of the operating business only, thus before any effects of indebtedness, stat ...
(EBITDA) equals sales revenue minus cost of goods sold and all expenses except for interest, amortization, depreciation and taxes. It measures the cash earnings that can be used to pay interest and repay the principal. Since the interest is paid before income tax is calculated, the debt holder can ignore taxes. * Earnings before interest and taxes (EBIT) or operating profit equals sales revenue minus cost of goods sold and all expenses except for interest and taxes. This is the surplus generated by operations. It is also known as Operating Profit Before Interest and Taxes (OPBIT) or simply Profit Before Interest and Taxes (PBIT). * Earnings before taxes (EBT) or net profit before tax equals sales revenue minus cost of goods sold and all expenses except for taxes. It is also known as pre-tax book income (PTBI), net operating income before taxes or simply pre-tax income. * Net income or earnings after tax or net profit after tax equals sales revenue after deducting all expenses, including taxes (unless some distinction about the treatment of extraordinary expenses is made). In the US, the term net income is commonly used. Income before extraordinary expenses represents the same but before adjusting for extraordinary items. * Retained earnings equals earnings after tax minus payable
dividend A dividend is a distribution of profits by a corporation to its shareholders. When a corporation earns a profit or surplus, it is able to pay a portion of the profit as a dividend to shareholders. Any amount not distributed is taken to be re-i ...
s. To accountants, economic profit, or EP, is a single-period metric to determine the value created by a company in one period—usually a year. It is earnings after tax less the ''equity charge'', a risk-weighted cost of capital. This is almost identical to the economists' definition of economic profit. There are analysts who see the benefit in making adjustments to economic profit such as eliminating the effect of amortized goodwill or capitalizing expenditure on brand advertising to show its value over multiple accounting periods. The underlying concept was first introduced by
Eugen Schmalenbach Eugen Schmalenbach (20 August 1873 – 20 February 1955) was a German academic and economist. He was born in Halver, and attended the Leipzig College of Commerce starting in 1898. That college later became part of Leipzig University, only t ...
, but the commercial application of the concept of adjusted economic profit was by Stern Stewart & Co. which has trade-marked their adjusted economic profit as Economic Value Added (EVA). Optimum profit is a theoretical measure and denotes the "right" level of profit a business can achieve. In the business, this figure takes account of
marketing Marketing is the process of exploring, creating, and delivering value to meet the needs of a target market in terms of goods and services; potentially including selection of a target audience; selection of certain attributes or themes to emph ...
strategy, market position, and other methods of increasing returns above the competitive rate. Accounting profits should include economic profits, which are also called
economic rent In economics, economic rent is any payment (in the context of a market transaction) to the owner of a factor of production in excess of the cost needed to bring that factor into production. In classical economics, economic rent is any payment ...
s. For instance, a
monopoly A monopoly (from Greek language, Greek el, μόνος, mónos, single, alone, label=none and el, πωλεῖν, pōleîn, to sell, label=none), as described by Irving Fisher, is a market with the "absence of competition", creating a situati ...
can have very high economic profits, and those profits might include a rent on some natural resource that a firm owns, whereby that resource cannot be easily duplicated by other firms.

Other terms

See also

* Gross income * Net profit * Profitability index * Rate of return * Return on assets * Return on equity *
Rate of profit In economics and finance, the profit rate is the relative profitability of an investment project, a capitalist enterprise or a whole capitalist economy. It is similar to the concept of rate of return on investment. Historical cost ''vs.'' mark ...
* Profit model * Profit motive



* * * * * * * * * * * * * *

Further reading and external links

* * *Moroney, J. R. (1967) Cobb-Douglass production functions and returns to scale in US manufacturing industry, ''Western Economic Journal'', vol 6, no 1, December 1967, pp 39–51. *Pearl, D. and Enos, J. (1975) Engineering production functions and technological progress, ''The Journal of Industrial Economics'', vol 24, September 1975, pp 55–72. *Robinson, J. (1953) The production function and the theory of capital, ''Review of Economic Studies'', vol XXI, 1953, pp. 81–106 * Anwar Shaikh, "Laws of Production and Laws of Algebra: The Humbug Production Function", in The Review of Economics and Statistics, Volume 56(1), February 1974, p. 115-120. https://web.archive.org/web/20050518113632/http://homepage.newschool.edu/~AShaikh/humbug.pdf * Anwar Shaikh, "Laws of Production and Laws of Algebra—Humbug II", in Growth, Profits and Property ed. by Edward J. Nell. Cambridge, Cambridge University Press, 1980. https://web.archive.org/web/20050518112119/http://homepage.newschool.edu/~AShaikh/humbug2.pdf * Anwar Shaikh, "Nonlinear Dynamics and Pseudo-Production Functions", published?, 2008. http://college.holycross.edu/eej/Volume31/V31N3P447_466.pdf *Shephard, R (1970) ''Theory of cost and production functions'', Princeton University Press, Princeton NJ. *Thompson, A. (1981) ''Economics of the firm, Theory and practice'', 3rd edition, Prentice Hall, Englewood Cliffs. *Elmer G. Wiens
Production Functions
- Models of the Cobb-Douglas, C.E.S., Trans-Log, and Diewert Production Functions.
Profit and Loss
Ludwig von Mises Ludwig Heinrich Edler von Mises (; 29 September 1881 – 10 October 1973) was an Austrian School economist, historian, logician, and sociologist. Mises wrote and lectured extensively on the societal contributions of classical liberalism. He is ...
Measuring the Long-Run Profitability of the Firm
Salmi and Virtanen (1997) {{Library resources box, by=no, onlinebooks=no, others=no, about=yes, label=Profit (accounting)