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Profits)
Profit is defined as the residual value gained from business operations. However, the exact method of calculation differs between accountants and economists.
Profitability refers to the amount of profit received relative to the amount invested, often measured by a rate of profit or rate of return on investment.
Economists and accountants measure profit in slightly different ways, profit will only be the same when all the factors of production have been credited their full opportunity cost.
Economic profit
Economists usually define profits as revenues less the opportunity costs of labor, capital, and materials. Furthermore, profits are divided into two types:
- Normal profits are the salaries paid to executives in exchange for their entrepreneurial skills.
- Economic profits are what remain after normal profits are subtracted. It is the economic profit that economists see as the incentive for firms to enter or leave a market.
Some economists define further types of profit:
Economic profit is calculated by π = (p x q) - (mc x q) - f
where;
Accounting profit
In the accounting sense of the term, net profit (before tax) is the residual after deduction of all money costs such as; wages, rent, fuel, raw materials, interest on loans and depreciation. Gross profit is profit before depreciation and interest, Net profit after tax is after the deduction of either corporate tax (for a company) or income tax (for an individual).
See also