What is Profit?
Profit is an important factor in business transactions. It is a financial benefit or gain which a firm realizes from its transactions and business dealings. It could be also defined as the excess of income realized from selling goods and services over expenditure incurred in the running of day-to-day activities of the business. No individual organization will venture into business without having the desire to make a profit.
Types of Profit
- Gross Profit
- Net Profit
This is the excess of sale (less return) over the cost of goods sold. It can also be referred to as the profit realized after the sale and before the deduction of all the expenses. Gross profit is ascertained from the trading account of the business. The following formula is used to calculate Gross Profit
Gross Profit = Sales – Cost of Goods Sold
This type of profit is arrived at after the deduction of all expenses which was incurred over the period of trading.
Net Profit = Gross Profit – Sundry expenses
Some of those expenses include wages, salaries, rent and rate, stationery, etc. It is the actual profit of the business.
Importance of Profit
(i) Profit encourages continued existence of a business
(ii) It is used to buy seasonal goods and expand the business
(iii) It is a source of revenue for the government as taxes are paid from profit
(iv) It is a reward for management for taking risks and for performing management functions
(v) Profit provides an incentive for efficiency
(vi) It is used as an index for computing a firms viability and performance
Factors affecting Profit
(i) The selling price of goods
(ii) The cost of goods sold i.e. cost price
(iii) The number of competing firms
(iv) Relationship between demand and supply
(v) The knowledge of the seller concerning the market