Profit, in accounting, is an income distributed to the owner in a profitablemarket production process (business). 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 economicwell-being because it means incomes and opportunities to develop production. The words "income", "profit" and "earnings" are synonyms in this context.
There are several important profit measures in common use. 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 (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.
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.
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. doi:10.1016/0305-0483(92)90002-O.
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 Sciences.
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 Conference.
Kurosawa, K (1975). "An aggregate index for the analysis of productivity". Omega. 3 (2): 157–168. doi:10.1016/0305-0483(75)90115-2.
Loggerenberg van, B.; Cucchiaro, S. (1982). "Productivity Measurement and the Bottom Line". National Productivity Review. 1 (1): 87–99. doi:10.1002/npr.4040010111.
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 University.
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 linksEdit
Fuleky, P. (September 2006). "Anatomy of a Cobb-Douglas Type Production/Utility Function in Three Dimensions". University of Washington.
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.
profit, accounting, this, article, about, profit, accounting, business, profit, economics, political, economy, profit, economics, pbit, redirects, here, measurement, computer, storage, petabit, this, article, includes, list, references, related, reading, exter. This article is about profit in accounting and business For profit in economics and political economy see Profit economics PBIT redirects here For the measurement of computer storage see Petabit This article includes a list of references related reading or external links but its sources remain unclear because it lacks inline citations Please help to improve this article by introducing more precise citations May 2020 Learn how and when to remove this template message 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 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 Contents 1 Measurement of profit 2 Other terms 3 See also 4 Footnotes 5 References 6 Further reading and external linksMeasurement of profit EditThere are several important profit measures in common use 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 amp D S amp M G amp 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 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 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 amp 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 Other terms EditNet sales gross sales customer discounts returns and allowances 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 interestSee also EditGross income Net profit Profitability index Rate of return Return on assets Return on equity Rate of profit Profit model Profit motiveFootnotes EditReferences EditCourbois 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 doi 10 1016 0305 0483 92 90002 O 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 Sciences 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 Conference Kurosawa K 1975 An aggregate index for the analysis of productivity Omega 3 2 157 168 doi 10 1016 0305 0483 75 90115 2 Loggerenberg van B Cucchiaro S 1982 Productivity Measurement and the Bottom Line National Productivity Review 1 1 87 99 doi 10 1002 npr 4040010111 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 University Riistama K Jyrkkio E 1971 Operatiivinen laskentatoimi Operative accounting Weilin Goos 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 EditFuleky P September 2006 Anatomy of a Cobb Douglas Type Production Utility Function in Three Dimensions University of Washington 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 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 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 1951 Measuring the Long Run Profitability of the Firm Salmi and Virtanen 1997 Retrieved from https en wikipedia org w index php title Profit accounting amp oldid 1168188440, wikipedia, wiki, book, books, library,
