You would know that in a business, you will either be earning profit or suffering losses. There can not be any business activity without profit or loss. Today, we will be teaching you “what is profit” through this article.
What is profit?
Profit is nothing but the gains earned by a businessman from its business.
These gains are termed as profit in the language of math. In a business, if you are selling something, it means you would have spent some amount on buying or manufacturing the product that you are selling.
When you will be selling an item above its cost, the amount in excess of the cost will be representing profit. But if the item is being sold at a price that is lower than its cost that means you will be suffering loss.
To find whether you are earning profit or suffering loss, it is very obvious that you will be required to do some sort of calculations. These calculations can, sometimes, be quite confusing.
This is why we are with you with a profit the formula that will help you in finding the amount of profit that you have earned or the loss that you have suffered. In theoretical meaning, profit is nothing but the difference between the selling price and the cost price.
Profit = selling price – cost price. If you know these two figures then you will be able to find profit earned very easily.
However, if you want to find the same in percentage, you can do the same by following the formula has been given below:
Profit% = profit/cost price X 100.
However, this formula will reflect the profit as the percentage of the cost. But there might be instances, where, you will be looking to find profit as the percentage of the selling price. In that case, you can use the formula given below:
Profit% = profit/selling price X 100.
Furthermore, there is not only one type of profit but there are three different types of profit: the first one is gross profit, the second one is net profit, and the third one is operating profit.
What is gross profit?
As explained above, when you remove the component of cost from the selling price, the figure that you will get is profit. However, the cost is not of one type. There are two types of cost mainly, one is a direct cost and the second one is an indirect cost. When you will reduce the indirect cost from the revenue generated then the figure that you will get will be representing gross profit.
Gross profit = sales – the cost of goods sold.
What is net profit?
The calculation of the net profit is similar to the calculation of gross profit. There is only one small difference in calculation. In gross profit, you only reduce the direct cost. But in the calculation of net profit, you will be required to reduce the total cost from the sales. However, you can also find net profit by reducing indirect costs from the gross profit.
Net profit = sales – total cost or,
Net profit = gross profit – indirect costs.
In both cases, the answer will be the same.
What is operating profit?
Operating profit also represents the amount of the profit that is earned by the company but it only represents the profit earned from operations only. While calculating operating profit, you only will have to take into account the revenues that have been earned from the operations of the company and the expenses that have been incurred on the operations of the company.
Operating profit = revenue from operations – operating expenses.
These are three different types of profits and the formulas for their calculation. These points will help you in understanding the concept of profit in an easy manner. However, if you want a more detailed understanding of this concept, you can join math online classes at cuemath.