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For the television series, see Profit (TV series). Profit is a short-lived American Television series that aired on the Fox Broadcasting Company.
For the use in real property, see Profit (real estate). Profit, but an entirely different meaning of the term analogous to an Easement.

Profit generally is the making of gain in business activity for the benefit of the owners of the business. The word comes from Latin meaning "to make progress," is defined in two different ways, one for economics and one for accounting. Economics is the social science that studies the production distribution, and consumption of goods and services. Accountancy or accounting is the measurement statement or provision of assurance about financial information primarily used by Lenders managers,

Pure economic profit is the increase in wealth that an investor has from making an investment, taking into consideration all costs associated with that investment including the opportunity cost of capital. Wealth derives from the old English word "weal" which means "well-being See Investor AB for the Swedish investment company An investor is any party that makes an Investment. Opportunity cost or economic opportunity loss is the value of a product forgone to produce or obtain Accounting profit is the difference between price and the costs of bringing to market whatever it is that is accounted as an enterprise (whether by harvest, extraction, manufacture, or purchase) in terms of the component costs of delivered goods and/or services and any operating or other expenses. Price in Economics and Business is the result of an exchange and from that trade we assign a numerical Monetary value to a good, A key difficulty in measuring either definition of profit is in defining costs. Pure economic monetary profits can be zero or negative even in competitive equilibrium when accounted monetized costs exceed monetized price. Competitive market equilibrium is the traditional concept of Economic equilibrium, appropriate for the analysis of commodity markets with flexible prices and many traders and

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Economic definitions of profit

Note: these definitions are different from those used by accountants

In economics, a firm is said to be making a normal profit when total revenues equal total costs. Economics is the social science that studies the production distribution, and consumption of goods and services. In business revenue or revenues is Income that a company receives from its normal business activities usually from the sale of goods and services These normal profits then match the rate of return that is the minimum rate required by equity investors to maintain their present level of investment. Economically, the "normal profit" is thus treated as a cost, and recognized as one of the two components of the cost of capital. The weighted average cost of capital (WACC is the rate that a company is expected to pay to finance its assets

An economic profit arises when its revenue exceeds the total (opportunity) cost of its inputs, noting that these costs include the cost of equity capital that is met by "normal profits. In business revenue or revenues is Income that a company receives from its normal business activities usually from the sale of goods and services " A business is said to be making an accounting profit if its revenues exceed the accounting cost the firm. [1] Economics treats the normal profit as a cost, so when deducted from total accounting profit what is left is economic profit (or economic loss).

All enterprises can be stated in financial capital of the owners of the enterprise. Financial capital is money used by Entrepreneurs and Businesses to buy what they need to make their products or provide their services The economic profit may include an element in recognition of the risks that an investor takes. It is often uncertain, because of incomplete information, whether an enterprise will succeed or not. Complete information is a term used in Economics and Game theory to describe an economic situation or game in which knowledge about other market participants or players This extra risk is included in the minimum rate of return that providers of financial capital require, and so is treated as still a cost within economics. The size of that return is commensurate with the riskiness associated with each type of investment, as per the risk-return spectrum. The risk-return spectrum is the relationship between the amount of return gained on an Investment and the amount of Risk undertaken in that investment

"Normal profits" arise in circumstances of perfect competition when economic equilibrium is reached. In Neoclassical economics and Microeconomics, perfect competition describes a market in which no buyer or seller has Market power. In Economics, economic equilibrium is simply a state of the world where economic forces are balanced and in the absence of external influences the (equilibrium values of economic At equilibrium, average cost equals marginal cost at the profit-maximizing position. Since normal profit is economically a cost, there is no economic profit at equilibrium. In a single-goods case, a positive economic profit happens when the firm's average cost is less than the price of the product or service at the profit-maximizing output. In Economics, profit maximization is the process by which a firm determines the Price and output level that returns the greatest Profit. The economic profit is equal to the quantity of output multiplied by the difference between the average cost and the price.

Economic profit does not occur in perfect competition in long run equilibrium. In Neoclassical economics and Microeconomics, perfect competition describes a market in which no buyer or seller has Market power. Once risk is accounted for, long-lasting economic profit is thus viewed as the result of constant cost-cutting and performance improvement ahead of industry competitors, or an inefficiency caused by monopolies or some form of market failure. The term inefficiency has several meanings depending on the context in which its used Allocative inefficiency - Allocative efficiency theory In Economics, a monopoly (from Greek monos, alone or single + polein, to sell exists when a specific individual or enterprise has sufficient Market failure is a concept within economic theory wherein the allocation of goods and services by a Free market is not efficient.

Positive economic profit is sometimes referred to as supernormal profit or as economic rent. Economic rent is the difference between what a Factor of production is paid and how much it would need to be paid to remain in its current use

The social profit from a firm's activities is the normal profit plus or minus any externalities that occur in its activity. In Economics, an externality is an impact on any party not directly involved in an economic decision A firm may report relatively large monetary profits, but by creating negative externalities their social profit could be relatively small.

Profitability is a term of economical efficiency. Mathematically it is a relative index – a fraction with profit as numerator and generating profit flows or assets as denominator.

Accounting definitions of profit

Note: these definitions are different from those used by economists

In the accounting sense of the term, net profit (before tax) is the sales of the firm less costs such as wages, rent, fuel, raw materials, interest on loans and depreciation. Depreciation is a term used in Accounting, Economics and Finance to spread the cost of an Asset over the span of several years Costs such as depreciation, amortization, and overhead are ambiguous. Revenue may also be ambiguous when different products are sold as a package, or "bundled. " Within US business, the preferred term for profit tends to be the more ambiguous income. Income, refers to consumption opportunity gained by an entity within a specified time frame which is generally expressed in monetary terms [2]

Gross profit is profit before Selling, General and Administrative costs (SG&A), like depreciation and interest; it is the Sales less direct Cost of Goods (or services) Sold (COGS),

Net profit after tax is after the deduction of either corporate tax (for a company) or income tax (for an individual).

Operating profit is a measure of a company's earning power from ongoing operations, equal to earnings before the deduction of interest payments and income taxes.

To accountants, economic profit, or EP, is a single-period metric to determine the value created by a company in one period - usually a year. It is the net profit after tax less the equity charge, a risk-weighted cost of capital. This is almost identical to the economist's definition of economic profit.

There are commentators who see benefit in making adjustments to economic profit such as eliminating the effect of amortized goodwill or capitalizing expenditure on brand advertising to show its value over multiple accounting periods. The underlying concept was first introduced by Schmalenbach, but the commercial application of the concept of adjusted economic profit was by Stern Stewart & Co. which has trade-marked their adjusted economic profit as EVA or Economic Value Added. In Corporate finance, Economic Value Added or EVA® is an estimate of true economic profit after making corrective adjustments to GAAP accounting including

Some economists define further types of profit:

Optimum Profit - This is the "right amount" of profit a business can achieve. In Economics supernormal profit, also called Economic rent, abnormal profit or pure profit or excess profits, is a Subnormal profit, an Economic term of Profit, occurs when profit fails to meet the level of Normal profit. In Economics, a monopoly (from Greek monos, alone or single + polein, to sell exists when a specific individual or enterprise has sufficient In business, this figure takes account of marketing strategy, market position, and other methods of increasing returns above the competitive rate. In popular usage "marketing" is the promotion of products especially Advertising and Branding However in professional usage the term has a wider meaning of In Marketing, positioning has come to mean the process by which marketers try to create an image or identity in the minds of their target market for its product,

Accounting profits should include economic profits, which are also called economic rents. Economic rent is the difference between what a Factor of production is paid and how much it would need to be paid to remain in its current use For instance, a monopoly can have very high economic profits, and those profits might include a rent on some natural resource that firm owns, where that resource cannot be easily duplicated by other firms. In Economics, a monopoly (from Greek monos, alone or single + polein, to sell exists when a specific individual or enterprise has sufficient

References

Notes

  1. ^ Albrecht, p. 409
  2. ^ Pyle & Larson, pp. 157-158

See also

External links

Dictionary

profit

-noun

  1. Total income or cash flow minus expenditures. The money or other benefit a non-governmental organization or individual receives in exchange for products and services sold at an advertised price.

-verb

  1. (transitive) To benefit (sb), be of use to (sb).
  2. (intransitive, construed with from) To benefit, gain.
  3. (intransitive, construed with from) To take advantage of, exploit, use.
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