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To be successful, every business must make a profit. On a company’s income statement, a positive bottom line indicates that the business is doing well. The bottom line, or net profit, is critical to the company’s long-term success and growth. In this article, we’ll study about the profit and how it compares to growth, as well as the different forms of profit.
Profit
After all expenses have been deducted, profit is the remaining revenue, also known as income. Profits from small enterprises normally go to the company’s owner or owners. Dividends are paid to the stockholders by the publicly owned and traded enterprises. A business owner has the option of keeping the money or reinvesting it in the company to promote growth and profit.
In general, profit is the amount generated from the sale of a product, which should be greater than the product’s cost price. It is the amount of profit made from any type of company activity. In other words, if a product’s selling price (SP) is more than its cost price (CP), it is considered as gain or profit. It refers to the financial gain obtained when the revenue from a company activity exceeds the costs of running the firm, such as taxes and expenses.
Profit and Loss Formula
Profit is better expressed in terms of cost and sale price. The cost price of a product or commodity is the price at which it is purchased, whereas the selling price is the price at which it is sold. As a result, when the selling price of the commodity is higher than the cost price, then the company has made a profit.
Profit formula is given as,
Profit = selling price (SP) – cost price (CP)
Loss formula is given as,
Loss = cost price (CP) -selling price (SP)
Profit Percent Formula
Profit percent formula is given as,
P%=P/CP×100
Here,
P = profit
CP = cost price
Types of Profit
Gross Profit
The first form of profit stated on the income statement is usually gross profit, and it is often the largest figure. The revenue of a corporation is subtracted from the cost of goods sold, or COGS. The gross profit enables businesses to determine how much money they’ve gained after deducting the direct costs of producing their product or service. Subtract COGS from total sales to determine the gross profit.
Gross Profit = Revenue – Cost of goods sold
Operating Profit
On the income statement, operating profit is lower than gross profit. It takes into consideration both the cost of goods sold and the cost of operating costs. The operating profit assists firms in determining how direct expenditures, such as personnel and machinery, and indirect costs, such as building rent and utilities, affect profit. Subtract operating costs from the gross profit to determine the operating profit.
Operating Profit = Gross profit – Operating costs
Net Profit
The final profit computation on the income statement, often known as the bottom line, is called net profit. After accounting for all business expenses, including taxes and interest, net profit is the residual revenue. The bottom line genuinely reflects a company’s health by displaying how much revenue is left after all expenses and costs have been deducted. Subtract tax and interest charges from operating profit to arrive at net profit.
Net profit = Operating profit – Taxes and Interest
Profitability
A positive bottom line indicates that the company is earning higher than it is spending, which indicating that it will continue to be profitable. This is essential information for investors seeking for good investments and executives looking to boost total income. Young businesses may not make a lot of money when they first start out. A company’s profitability can increase when it adopts a more concentrated operational plan.
Growth
Growth in a company might also suggest that it is doing well. A company’s expansion is defined as adding more personnel, increasing the quantity of products produced and sold, and expanding into new markets. Company expansion indicates that the company has sufficient capital or revenue to extend its operations. For both new and existing businesses, growth is an important sign for the company.
Conclusion
Profit is the amount generated from the sale of a product, which should be greater than the product’s cost price. Profit is the amount of profit made from any type of company activity.
Profit formula is given as,
Profit = selling price (SP) – cost price (CP)
Loss formula is given as,
Loss = cost price (CP) -selling price (SP)
Profit percent formula is given as,
P%=P/CP×100
There are following types of profit which are as follows.
- Gross profit
- Net profit
- Operating profit
Gross Profit = Revenue – Cost of goods sold
Operating Profit = Gross profit – Operating costs
Net Profit = Operating profit – Taxes and interest
