Profit, in accounting, is an income distributed to the owner in a
profitable market production process (business). Profit is a measure
of profitability which is the owner’s major interest in 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 himself/herself 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 substitutes in
2 Other terms
3 See also
6 Further reading and external links
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 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
(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
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
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.
extraordinary expenses represents the same but before adjusting for
Retained earnings equals earnings after tax minus payable dividends.
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, 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 strategy, market position, and other methods of
increasing returns above the competitive rate.
Accounting profits should include economic profits, which are also
called economic rents. For instance, a monopoly 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.
Net sales = gross sales – (customer discounts, returns, and
Gross profit = net sales – cost of goods sold
Operating profit = gross profit – total operating expenses
Net profit = operating profit – taxes – interest
Net profit = net sales – cost of goods sold – operating expense
– taxes – interest
Rate of return
Return on assets
Return on equity
Rate of profit
Courbois, R.; Temple, P. (1975). La methode des "Comptes de surplus"
et ses applications macroeconomiques. 160 des Collect,INSEE,Serie C
(35). p. 100.
Craig, C.; Harris, R. (1973). "Total Productivity Measurement at the
Firm Level". Sloan Management Review (Spring 1973): 13–28.
Genesca, G.E.; Grifell, T. E. (1992). "Profits and Total Factor
Productivity: A Comparative Analysis". Omega. the International
Journal of Management Science. 20 (5/6): 553–568.
Gollop, F.M. (1979). "
Accounting for Intermediate Input: The Link
Between Sectoral and Aggregate Measures of Productivity Growth".
Measurement and Interpretation of Productivity. National Academy of
Hulten, C. R. (January 2000). "Total Factor Productivity: A Short
Biography". NBER Working Paper No. 7471. doi:10.3386/w7471.
Hulten, C. R. (September 2009). "Growth Accounting". NBER Working
Paper No. 15341. doi:10.3386/w15341.
Jorgenson, D.W.; Ho, M.S.; Samuels, J.D. (2014). Long-term Estimates
of U.S. Productivity and Growth (PDF). Tokyo: Third World KLEMS
Kurosawa, K (1975). "An aggregate index for the analysis of
productivity". Omega. 3 (2): 157–168.
Loggerenberg van, B.; Cucchiaro, S. (1982). "Productivity Measurement
and the Bottom Line". National Productivity Review. 1 (1): 87–99.
Pineda, A. (1990). A Multiple Case Study Research to Determine and
respond to Management Information Need Using Total-Factor Productivity
Measurement (TFPM). Virginia Polytechnic Institute and State
Riistama, K.; Jyrkkiö E. (1971). Operatiivinen laskentatoimi
(Operative accounting). Weilin + Göös. p. 335.
Saari, S. (2006a). Productivity. Theory and Measurement in Business.
Productivity Handbook (In Finnish). MIDO OY. p. 272.
Saari, S. (2011). Production and Productivity as Sources of
Well-being. MIDO OY. p. 25.
Saari, S. (2006). Productivity. Theory and Measurement in Business
(PDF). Espoo, Finland: European Productivity Conference.
Further reading and external links
Stable Profit is a trust fund that offers its clients an opportunity
to increase their capital.
Fuleky, P. (September 2006). "Anatomy of a Cobb-Douglas Type
Production/Utility Function in Three Dimensions". University of
Fuleky, P. (October 2006). "Anatomy of a Constant Elasticity of
Substitution Type Production/Utility Function in Three Dimensions".
University of Washington.
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.
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.
Anwar Shaikh, "Nonlinear Dynamics and Pseudo-Production Functions",
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. ISBN 0-13-231423-1
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 von Mises (1951)
Measuring the Long-Run Profitability of the Firm, Salmi and Virtanen
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