WHAT IS PROFIT? LESS COSTS??

If we put it simply, profit is income less costs.However, whereas the definition of income is distinctly consistent, the definition of costs can differ from person to person and nation to nation.Consequently,  there are different and often conflicting measures of profit.Even, profit has different names .Sometimes people use the terms earnings or income   interchangeably for profit.When discussing profit with other people, it is smart to confirm which definition is being used.Some of the most common definitions are outlined here:

*Gross Profit- The first measure of profit shown on an income statement .It is calculated by deducting “cost of sales”  from “revenue”.”Cost of sales” are the direct costs of sales i.e. the wholesale cost of purchase for a retailer.Therefore,  the gross profit is the direct profit of a business.

*Operating Profit- It is the second measure of profit shown on an income statement.It is calculated by deducting      indirect operating costs (such as distribution and administration) from gross profit.Operating profit is also known  as results from operating activities or EBIT (earnings before interests and tax).

*Net Profit- Often referred to as “the bottom line”, as traditionally it was the bottom figure on an income  statement.There are, however, differences in how net profit is calculated.The most common definitions are: profit  before tax and after interest costs; and profit after tax and interest costs.

*Contribution- The above measures of profit are derived from financial reporting, where distinctions are made  between direct and indirect costs.For internal management purposes, using fixed and variable costs to calculate  profit can provide a more useful measure.A key measure of profit for management accountants is “contribution”,  which is calculated as revenue less variable costs.Fixed costs are deducted from contribution to arrive at net profit.

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