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.

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