The Concept of Profit and Loss


The Concept of Profit and Loss

Profit, in accounting, is a residual income distributed equally to the owner in some successful market production procedure. Profit is the measure of success that is the sole consideration of the owner during the income-production process of economic market. There are many profit measures prevalent in commercial use. It can be in the form of earnings per share (EPS), net profit margin (NPV), cost of goods sold (COG) and operating profit margin.

The first profit measure is the gross profit margin. This is one of the easiest profit margins to calculate. It uses the total revenue product in terms of total cost of goods sold times the gross profit. This is then multiplied with the operating profit and other special items of expenses to come up with the net profit margin. Most brokers will provide this number upon request.

Net profit on the other hand, takes into account the total revenue product minus the costs of good sold times the gross profit to determine the net profit. In this profit measurement, the costs of good sold are excluded. Net profit therefore, is a measurement of profit that focuses on the after-tax income of the business owners. The more the revenue, the more profit there will be. And the higher the net profit, the more money that is left for investments.

Profitability pertains to profitability in business. In determining this through the net profit and gross profit, the profit margin is calculated as follows: Expenses less revenue by 100. To arrive at the profit margin, the following factors are used: Revenue product, expenses, level of sales and market competition. There are two other important profit measurements used in Forex trading: cost of goods sold or cost of capital. These are also known as enterprise cost and variable cost of good sold.

Profit and loss pertains to a company’s profit and loss statement. This is usually presented separately from the gross profit and the operating profit because in this latter profit and loss are usually included. The profit and loss measurement are arrived at by totaling the gross profit and the net profit and dividing the latter by the former.

The profit percentage is the result of adding the value of all revenues minus the value of all expenses. The percentage of profit is then multiplied by the total revenue. The goal of most business owners is to attain the best percentage of profit at all times. They strive to maximize the profits they earn by minimizing their expenses and boosting their revenue. On the other hand, they minimize their expenses so as to maximize their revenue, which in turn is dependent on the value of the goods or services they offer.

The value of the goods or services offered is determined by the gross profit margin. The value of the merchandise or the services that the business offers is called its gross profit margin. This is calculated by taking the cost of production and adding the selling and administrative expenses. The calculation is actually done once the cost of goods sold have been established and the total revenue realized. In order for a business owner to determine whether their business is profitable or not, he has to make sure that the gross profit margin is at the appropriate levels.

Basically, profit margins are figured by first figuring out the difference between the total revenue and the total expenses. This will give the owner an idea of how much profit their business is able to generate. After the proprietor has figured out the profit margin, he has to subtract the expenses from his gross revenue so as to arrive at the net income. When the net income is minus the expenses, it gives an idea of the profitability of the business venture. This concept of net profit margin or gross margin is used in almost all businesses, especially those that have retail outlets.