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Profit, in
accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about economic entity, economic entities such as businesses and corporations. Accounting, which has been called the "language ...
, 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.Smith's financial dictionary. Smith, Howard Irving. 1908. Income is defined as, "Revenue; the amount o ...
distributed to the owner in a profitable market production process (
business Business is the activity of making one's living or making money by producing or buying and selling products (such as goods and services). Simply put, it is "any activity or enterprise entered into for profit." Having a business name A trade ...
). Profit is a measure of
profitability An economic profit is the difference between the revenue a commerce , commercial entity has received from its outputs and the opportunity costs of its inputs. Unlike an accounting profit, an economic profit takes into account both a firm's Impli ...

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 In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goo ...
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, also known as ''wellness'', ''prudential value'' or ''quality of life'', refers to what is intrinsically valuable relative ''to'' someone. So the well-being of a person is what is ultimately good ''for'' this person, what is in the s ...
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 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 ...
equals sales
revenue In accounting, revenue is the income or increase in net assets that an entity has from its normal activities (in the case of a business, usually from the sale of product (business) , goods and services to customers). Commercial revenue may also be ...
minus
cost of goods sold Cost of goods sold (COGS) is the carrying value of goods sold during a particular period. Costs are associated with particular goods using one of the several formulas, including specific identification, first-in first-out (FIFO), or average cost. ...
(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 A company, abbreviated as co., is a Legal personality, legal entity representing an association of people, whether Natural person, natural, Legal personality, legal or a mixture of both, with a specific objective. Company members sha ...
(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 In accountancy, accounting and finance, earnings before interest and taxes (EBIT) is a measure of a firm's profit (accounting), profit that includes all incomes and expenses (operating and Non-operating income, non-operating) except interest expens ...
(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 In accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about economic entity, economic entities such as businesses and corporations. Accounting, which has been call ...
(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 In business Business is the activity of making one's living or making money by producing or buying and selling Product (business), products (such as goods and services). Simply put, it is "any activity or enterprise entered into for profit. ...
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 In business Business is the activity of making one's living or making money by producing or buying and selling Product (business), products (such as goods and services). Simply put, it is "any activity or enterprise entered into for profit. ...
is commonly used. Income before extraordinary expenses represents the same but before adjusting for extraordinary items. *
Retained earnings The retained earnings (also known as plowback) of a corporation A corporation is an organization—usually a group of people or a company—authorized by the state to act as a single entity (a legal entity recognized by private and public la ...
equals earnings after tax minus payable
dividend A dividend is a distribution of profits by a corporation A corporation is an organization—usually a group of people or a company—authorized by the state to act as a single entity (a legal entity recognized by private and public law 'b ...
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 An economist is a practitioner in the social sciences, social science discipline of economics. The individual may also study, develop, and apply th ...
, 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 In corporate finance, as part of fundamental analysis, economic value added is an estimate of a firm's economic profit, or the value created in excess of the Required rate of return, required return of the types of companies, company's shareholders. ...
(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 intentionally stimulating demand for and purchases of goods and services; potentially including selection of a target audience; selection of certain attributes or themes to emphasize in advertising; operation of adve ...

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 A monopoly (from Greek el, μόνος, mónos, single, alone, label=none and el, πωλεῖν, pōleîn, to sell, label=none) is as described by Irving Fisher, a market with the "absence of competition", creating a situation where a specific ...

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.


Other terms


See also

*
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 ( ...
*
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 amou ...
*
Rate of return In finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money and investments. Savers and investors have money available ...
*
Return on assetsThe 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 This number tells you what the company can do with what it has, ''i.e.'' how many dolla ...
*
Return on equityThe return on equity (ROE) is a measure of the profitability of a business in relation to the equity. Because shareholder's equity can be calculated by taking all assets and subtracting all liabilities, ROE can also be thought of as a return on ''as ...
*
Rate of profit In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods an ...
* Profit model *
Profit motive In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods a ...


Footnotes


References

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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 The Austrian School is a Heterodox economics, heterodox Schools of economic thought, school of economic thought that is based on methodological ...

Ludwig von Mises
(1951)
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)