Types of Profit, Meaning, Uses & Factors

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Hello welcome to this blog on meaning, types of profit.

Table Of Contents

  1. Explain the meaning of profit
  2. State the types of profit
  3. Trading profit and loss
  4. Uses of trading profit and loss
  5. Factors affecting profit

MEANING OF PROFIT

Definition: Profit is the financial benefits which accrue to a businessman. The main purpose of a business organization is to make profit. Profit represent the gain, resulting from investing one’s capital in a business Enterprise.

To an accountant, profit is the excess of income over expenditure. He views profit from two perspectives: gross profit and net profit. But to an economist, profit represents the reward of an entrepreneur. It is a measure of business performance and a means of rewarding business managers for taking the risk.

TYPES OF PROFIT

1. Gross profit: Gross profit is the excess of turnover over the cost of goods sold. It is the difference between the selling price and cost price of a particular product. This is the total profit before any expense is deducted. The gross profit can be determined through the preparation of trading account. Gross profit is calculated as opening stock plus purchases, less closing stock, and this is deducted from the sales revenue.

2. Net profit: The net profit is the excess of gross profit over the expenses. It is arrived at after all expenses incurred in that period that has been deducted from gross profit. This is ascertained in the profit and loss accounts.

TRADING PROFIT AND LOSS

This is the account drawn up to show the gross profit and net profit of a business organization. The content of trading profit and loss consists of

  1. Opening stock: This is the stock of goods at the beginning of the year.
  2. Closing stock: This is the stock of goods available at the end of the year.
  3. Purchases: Purchases is the total value of goods (credit and cash purchases) bought for a resale by an organization.
  4. Sales: This is the total value of goods sold by a business firm. It includes credit and cash sales.
  5. Returning inward: These are goods returned by the customers. It must be deducted from the sales for the period.
  6. Return outward: These are good returned to the suppliers. It must be deducted from the purchases for the period.
  7. Carriage inward: This is the cost of transporting goods to the firm. It is normally added to purchases.
  8. Carriage outward: This is the cost of transporting goods to the customers. It is called carriage on sales and must be treated as expenses.
  9. Expenses: These are the expenditure incurred in the returning of a business. It is normally deducted from the gross profit in order to show the net profit.

Uses of Trading Profit and Loss

  1. To show the profit
  2. For planning purposes
  3. For income or corporation tax purpose
  4. For comparison with other years

Factors affecting Profits

  1. The selling price of goods
  2. The cost of goods sold, i.e, cost price
  3. The number of competing firms.
  4. Relationship between demand and supply
  5. The knowledge of the seller concerning the market.

Revision Questions

  1. Define profit
  2. Discuss the types of profit
  3. Distinguish between the following, (a) fixed capital and liquid capital (b) gross profit and net profit.

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