How to Calculate Profit

Every company or business operates in order to earn profit for its owners and at the end of year after happening of so many things profit figure is arrived at, so the question is how to calculate profit. Calculation of profit for a business is complex procedure as it involves so many variables; however let’s try to simplify it by dividing it into 4 steps

  1. First and foremost step before considering any variable is to look at sales of the company because for any company the primary source of income is sales and hence first thing is to calculate sales which is nothing but total amount received by company on selling the goods or service produced by the company less any goods return by the customers to company.
  2. After calculating sales second step is to deduct all manufacturing cost like raw material purchased, wages paid to workers, electricity and so on from net sales figure which will give the gross profit figure.
  3. After calculation of gross profit in third step company will deduct all other operating expenses like administration cost (it includes expenses like salaries, office expenses, rent of office premises and so on), selling and distribution costs (it includes expenses like sales commission, discounts, incentives paid to salesman and so on) financing cost (it includes all interest expenses paid on loan or debt taken by the company for running of business) from gross profit figure arrived at step 2 which will give the net profit before tax figure.
  4. After arriving at net profit before tax last step is to deduct tax from profit, and this will give net profit after tax figure which if entity is sole proprietorship will belong to owner and if its partnership concern then profit will be divided between partners and if entity is limited company then profit will be distributed among shareholders.

Above steps are simple and basic ones because apart from normal items shown above there are many other adjustments which have to be made in profit and loss account in order to calculate profit like various adjustment entries related to outstanding expense, unearned revenue, opening and closing stock alteration, tax adjustment and so on and hence one should keep those adjustments in mind also before calculation of profit.

0 comments… add one

Leave a Comment


Related pages


clean bill discountinglearn bank reconciliation statementbill discounting definitiondirect and indirect currency quotesadvantages and disadvantages of loansadvantages and disadvantages mixed economyexample of unearned revenuewhat does consignee meanwhat is full form of cfaexample of market skimmingadvantages and disadvantages of a loanwhat are characteristics of a traditional economywhy is trial balance preparedadvantages and disadvantages of lifo and fifodisadvantages of international trade for developing countriesexamples of perfect competition market structureeffect of advertisement on monopolistic competitionadvantages of decentralisationwhat are inelastic goodsunearned revenuehorizontal mergers exampleslong term sources of finance advantages and disadvantagescash flow statement easy explanationwhat is the meaning of trial balancemsf full formrbi crr and slrwhat is an unearned revenuebarter trade systemweaknesses of socialismcash reserve ratio formularent prepaid journal entryadvantages and disadvantages of industrializationfreight outwardcurrency convertibilityprivatisation in india pptcomparative balance sheet examplebill of exchange disadvantagesconsignee consignoradvantages and disadvantages of process costingdemand loansglobalization drawbacksexample of capital reservewhat is the full form of ipoadvantages of barter systemforex reserve meaningdefinition of penetration pricingdistinguish between micro and macro economicjournal entry to record deferred revenueexamples of substitutes goodsunclaimed dividendadvantages of specialization in economicsexample of vertical mergerdistinguish between trade discount and cash discountexamples of normal goodsmeaning of unclaimednet worth calculation for companyadvantages and disadvantages of borrowing money from a bankwhat is the difference between direct and indirect labordisadvantage of break even analysismonopoly price makerprepaid expenses meaningveblem goodsmerits of privatizationwhat does proprietors meanhow to calculate cross currency ratesadvantages and disadvantages of debit and credit cardspure monopoly economicspurpose of preparing trial balanceadvantages and disadvantages of buyback of sharesdifference between fdi and fiiunsystematic risk examplescapitalist economy advantages and disadvantagesexamples of cost push inflationcross rate formulafmcg fullformadvantages of a dictatorshipadvantages and disadvantages of hire purchasedistinguish between micro and macro economicautocratic leadership stylesexamples of income effectdisadvantage of decentralisation