Profit, in financial accounting, is an income earned by the owner from a profit-making industry process. Profit is also a measure of profits that is the owners main interest in the financial-production process of industry production. There are several profit indicators in common use in financial accounting. These profit indicators are:
Gross Profit: This is a value of the total revenue earned by the company in one year. It includes all the revenue received by the company in a single year minus all the costs incurred in the same year. This measure is mainly used for the purpose of calculating taxes and as a basis to determine the earnings of the company. This profit indicator is used primarily for the calculation of the capital employed to earn the revenue.
Profit Margin: Profit margin is the difference between gross profit and total cost of sales. This profit indicator measures the earnings by a company on the sale of products and the amount of the sales price of the products.
Net Profit: Net profit is the difference between gross profit and total cost of sales. Net profit includes the difference between gross profit and net cash flow. This profit indicator mainly measures the net sales by dividing net sales cost by net sales cost.
Percentage Profit: This profit measure is used to estimate the percentage of total profit earned by the firm for a given period. This profit indicator is also known as the profit margin and it is used for the purpose of determining the gross profit of the firm. It is divided by the gross profit in order to calculate the percentage of profit earned by the firm during the given period.
Percentage of Earned Revenue: This is another profit indicator in common usage in financial accounting. This profit indicator measures the percentage of total gross revenue earned by the firm over a period of time.
Percentage of Sales Cost: This is a value of gross profit less total cost of sales. This is a profit indicator used in a firm to calculate the ratio between profit earned by the firm and its total cost. This profit indicator is divided by total gross profit in order to calculate the percentage of profit earned by the firm during the given period of time.
These are the profit indicators in use in financial accounting. The measurement of profit is essential in determining the profitability of the firm and the ability of the firm to continue its business and make profits.
To get a clear idea of what profit indicators are and how they can be applied in the analysis of the firm’s financial health, one needs to understand the concept of profit. If the firm has lost its previous profitability, this means that it has not been able to earn profits over a period of time.
A firm that has made profits will also have an increased profitability over a period of time. The more it earns profits, the more it will be able to earn profits. More profits would mean better profits for the firm.
In the same way, a firm that has failed to make profits will also have decreased profitability. over a period of time because it has not been able to earn profits.
The profitability of a firm can be measured in two ways: direct and indirect. The direct profit of a firm is the profit the firm makes out of the sale of products or services. The indirect profit of a firm is the profit the firm earns from the sale of products or services that are not purchased by customers.
There are many profit indicators available in accounting. Some of them are discussed below. The measurement of profit can be made by using the information provided to the market analyst by the firm’s financial accountants.