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Business profit is the amount left after expenses are subtracted from income in a specified period. Profit types include gross profit, net profit, and retained earnings. Gross profit is revenue minus direct costs, while net profit is gross profit minus operating expenses. Retained earnings are excess profit after dividends have been paid. Profit is tracked through a profit and loss account.
Business profit is the amount remaining after expenses have been subtracted from the company’s income within a specified period of time. The time period could be stated in monthly, quarterly or yearly terms. Profit types include gross profit, net profit, and retained earnings.
The first type of trading profit is called gross profit, which is the excess revenue from sales minus the amount of direct costs – the costs of creating the products or preparing them for sale. This is referred to as cost of goods sold. These costs could include materials purchased to manufacture products, transportation of the materials to the manufacturing facility, direct labor to produce them, and distribution costs. The simplest way to determine the cost of goods sold is to start with the starting inventory value, add the amount of purchases during the relevant period, and then subtract the ending inventory value.
Net profit is the difference between gross profit and operating expenses. Operating expenses differ from direct expenses because they are general business expenses that cannot be directly attributed to the products sold. This is sometimes called overhead.
Operating expenses are expenses that companies incur in the ordinary course of business. They are divided into two categories: selling expenses and administrative expenses. These include things like sales commissions, depreciation charges, rent, management or office staff salaries, repairs, office supplies, business licenses, and taxes. Corporate profit is usually discussed in terms of net income since it is from this type of profit that owners receive their earnings or shareholders receive dividends.
Retained earnings are the excess profit after the amount has been withdrawn from the owner or dividends have been paid to the shareholders. This amount is added to the owner’s net worth or equity. Corporate profit is important because without it, the company could cease to exist. The retained profit is important to business growth and can be used for activities such as adding a production line, increasing the size or number of facilities, or researching and developing new products.
Company owners or managers track corporate profits by compiling a profit and loss account. This cash flow statement begins with total or gross sales, net of any discounts or returns. Then the cost of goods sold is subtracted to determine the gross profit.
Operating expenses are subtracted from gross profit to show revenue from operations. From this figure, other revenues, such as dividends, interest or rental income are added, and other expenses, such as interest and taxes, are subtracted to arrive at the net profit. After deduction of any owner disbursements or shareholder dividends, the remaining amount of trading profit will be retained.
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