Profit, in
accounting
Accounting, also known as accountancy, is the process of recording and processing information about economic entity, economic entities, such as businesses and corporations. Accounting measures the results of an organization's economic activit ...
, is an
income
Income is the consumption and saving opportunity gained by an entity within a specified timeframe, which is generally expressed in monetary terms. Income is difficult to define conceptually and the definition may be different across fields. F ...
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 Trade, buying and selling Product (business), products (such as goods and Service (economics), services). It is also "any activity or enterprise entered into for ...
). Profit is a measure of
profitability
In economics, profit is the difference between revenue that an economic entity has received from its outputs and total costs of its inputs, also known as surplus value. It is equal to total revenue minus total cost, including both Explicit co ...
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
In economics, income distribution covers how a country's total GDP is distributed amongst its population. Economic theory and economic policy have long seen income and its distribution as a central concern. Unequal distribution of income causes e ...
. The income generated is always distributed to the
stakeholders of production as
economic value
In economics, economic value is a measure of the benefit provided by a goods, good or service (economics), service to an Agent (economics), economic agent, and value for money represents an assessment of whether financial or other resources are ...
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
Well-being is what is Intrinsic value (ethics), ultimately good for a person. Also called "welfare" and "quality of life", it is a measure of how well life is going for someone. It is a central goal of many individual and societal endeavors.
...
because it means incomes and opportunities to develop production. The words "income", "profit" and "earnings" are synonyms in this context.
Other terms
See also
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Gross income
For households and individuals, gross income is the sum of all wages, salaries, profits, interest payments, rents, and other forms of earnings, before any deductions or taxes. It is opposed to net income, defined as the gross income minus taxes ...
*
Net profit
In business and Accountancy, accounting, net income (also total comprehensive income, net earnings, net profit, bottom line, sales profit, or credit sales) is an entity's income minus cost of goods sold, expenses, depreciation and Amortization (a ...
*
Profitability index
Profitability index (PI), also known as profit investment ratio (PIR) and value investment ratio (VIR), is the ratio of payoff to investment of a proposed project. It is a useful tool for ranking projects because it allows you to quantify the amo ...
*
Rate of return
In finance, return is a profit on an investment. It comprises any change in value of the investment, and/or cash flows (or securities, or other investments) which the investor receives from that investment over a specified time period, such as i ...
*
Return on assets
The return on assets (ROA) shows the percentage of how profitable a company's assets are in generating revenue.
ROA can be computed as below:
:\mathrm = \frac
The phrase return on average assets (ROAA) is also used, to emphasize that average as ...
*
Return on equity
The return on equity (ROE) is a measure of the profitability of a business in relation to its equity;
where:
: Jason Fernando (2023)"Return on Equity (ROE) Calculation and What It Means" Investopedia
Thus, ROE is equal to a fiscal year's net in ...
*
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
The profit model is the linear, deterministic algebraic model used implicitly by most cost accountants. Starting with, profit equals sales minus costs, it provides a structure for modeling cost elements such as materials, losses, multi-products, ...
*
Income statement
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'', ''statement o ...
Footnotes
References
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Further reading
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*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
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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.
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*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 (; ; September 29, 1881 – October 10, 1973) was an Austrian-American political economist and philosopher of the Austrian school. Mises wrote and lectured extensively on the social contributions of classical l ...
(1951)
Measuring the Long-Run Profitability of the Firm Salmi and Virtanen (1997)
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