Profit Formula

Formula to Calculate Profit

Profit Formula calculates the net gains or losses incurred by the company for any given period by subtracting total expenses from total sales. Profit is the key indicator of the performance of any company. Profit is considered as the key component of Operating margin, Earning per share, profitability ratios, etc. There are various statutory guidelines and local GAAPs, which all the corporations have to follow while calculating the profits for any given period. It not only ensures the transparency but also allows the better comparability in the results of the company.

Profit is the walkthrough through which any non-professionals can understand how the company has arrived at a profit after tax (PAT), profit before tax (PBT), Earnings before interest tax depreciation, and amortization (EBITDA).

The formula for profit is:

Steps to Calculate Profit

Below is the detailed explanation of the steps of the Profit equation:

Step 1: Determine the total revenue of the company from the core business activity.

Step 2: Then, from revenue, deduct the total cost of revenue incurred for earning the gross revenue of the company; this will help in arriving at gross profit and gross margin. Cost of revenue includes Salary cost, finance expense, cost of inventory, and such expense directly related to the business.

Step 3: From gross profit, deduct below expense:

• Selling and maintenance expense
• General and Administration expense
• Depreciation and Amortization
• Research and Development Expense.

It will give the Operating income of the company.

Step 4: To Operating income, Add Other income like interest, profit on the sale of the investment, etc., to arrive at Profit before taxes.

Step 5: From Profit before tax, deduct tax provision for the given period. It will give profit after tax.

Step 6: Every business will have few unwanted gains or losses incurred during the financial year, which are not ordinary in nature like the bankruptcy of the debtor, winning/losing of any legal suit, etc. Adjust such extraordinary items to Profit after tax, which will provide income attributable to shareholders.

Calculation Examples of Profit

Let’s see some simple to advanced examples of the profit equation to understand it better.

Profit Example #1 – Microsoft Incorporation

Below are the various incomes and expense of Microsoft Inc., calculate profit attributable to the shareholders:

Particulars	Amount ( in $)
Salary and Wages	322
Interest Expense	669
Interest Income	219
Cost of Inventory	43,410
Sales Promotion Expense	1,144
Professional Fees	1,200
Fees	452
Dividend Income	122
Depreciation	306
Revenue from Sale of IT Products	57,190

Solution:

As per the given profit equation, Operating Income can be derived as follows:

Operating Income = 12789 – 1144 – 1200 – 452 -306

Operating Income = 9687

Calculation of profit income attributable to shareholders can be done as follows:

Income Attributable to Shareholders = 9687 + 122 + 219

Income Attributable to Shareholders will be –

Income Attributable to Shareholders = 10028

Thus, Microsoft Inc has earned profit from operating income of $9687million for the given period and $ 10,028 Million of profit attributable to shareholders.

Profit Example #2 – Alphabet Inc

Below are the particulars of Alphabet Inc., for the financial year:

Particulars	Amount ( in $)
Salary and Wages	403
Interest Expense	838
Interest Income	274
Cost of Inventory	54,436
Sales Promotion Expense	1,434
Professional Fees	1,504
Legal Fees	566
Dividend Income	152
Depreciation	383
Revenue from Sale of IT Products	71,716
Provision for Doubtful Debt	4,012
Rent Expense	4,162
Insurance Expense	1,918
Subscription Expense	403
Travel Expense	1,691
Staff Welfare Expense	420

Bifurcate the expense under different heads and calculate the profit attributable to shareholders.

Solution:

As per the given profit formula, Operating Income can be derived as follows:

Operating Income = 15619 – 1434 – 1918 – 403 – 1691 – 1504 – 566 – 4012 – 4162 – 383

Operating Income = -454 

Calculation of profit loss attributable to shareholders can be done as follows:

Loss Attributable to Shareholders = -454 + 274 + 152

Loss Attributable to Shareholders will be –

Loss Attributable to Shareholders = -28

Explanation:

All the expenses are bifurcated into various heads if expenses based on their nature. While bifurcating the expense, one has to keep in mind whether the expense is directly related to operations or not. If it is directly related to operations, then it will form part of the cost of revenue. Otherwise, It will form part of either Selling and maintenance, General & Administration expense, etc., which are considered as below the line expense.

Thus, Alphabet Inc has incurred a loss from operations of $454 million for the given period and a loss of $28 Million for the given financial year.

Profit Example #3 – Apple Inc

Below are the particulars of Apple Inc., for the financial year:

Particulars	Amount ($)
Wages	488
Interest Expense	1,015
Insurance Claim Lodged and Accepted	111
Communication	387
Interest Income Expense	332
Cost of Inventory	65,983
Employee Stock Obligation Expense	100
Bank OD Interest Expense	87
Sales Incentive Expense	1,738
Audit Fees	1,823
Court Fees	686
Bank Guarantee Expense	63
Brokerage Expense	22
Dividend Income	184
Depreciation and Amortization	464
Revenue from Operations	86,928
Provision for Insolvency of Debtor	1,863
Office Rent Expense	5,044
Insurance Expense	2,324
Subscription Expense	488
Commutation Expense	2,049
Staff Welfare Expense	509

Bifurcate the expense under different heads and calculate the profit attributable to shareholders.

Solution

As per the given formula, Operating Income can be derived as follows:

Operating Income = 17832 – 1738 – 2324 – 2049 – 1823 – 686 – 22 – 5044 – 488

Operating Income = 3658

Calculation of profit income attributable to shareholders can be done as follows:

Income Attributable to Shareholders = 3631 + 111 – 1863

Income Attributable to Shareholders will be –

Income Attributable to Shareholders = 1879

Explanation:

All the expenses are bifurcated into various heads if expenses based on their nature. While bifurcating the expense, one has to keep in mind whether the expense is directly related to operations or not. If it is directly related to operations, then it will form part of the cost of revenue. Otherwise, It will form part of either Selling and maintenance, General & Administration expense, etc., which are considered as below the line expense.

Thus, Apple Inc has earned profit from operations of $3658 million for the given period and profit of $1879 Million for the given financial year.

Profit Example #4 – Amazon.in

Below are the particulars of Amazon.in., for the financial year:

Particulars	Amount ($)
Insurance Claim Lodged & Accepted	55
Communication	193
Inventory Consumed	32,991
Product Development Cost	2,372
Impairment	481
Profit from Sale of Plant A	953
Forex Conversions	60
Interest Expense	43
Sales Commission	869
Audit Fees	911
Letter of Intent Fees	31
Dividend Income	92
Depreciation and Amortization	232
Revenue from Operations	43,464
Loss due to Fire	931
Rental	2,522
Insurance Expense	1,162
Periodical	244
Transportation Expense	1,024
Salary Expense	254
Tax Provision	271

Bifurcate the expense under different heads and calculate the profit attributable to shareholders.

Solution

As per the given formula, Operating Income can be derived as follows:

Operating Income = 9179 – 869 – 911 – 2522 – 1162 – 1024 -2372

Operating Income = 319

Calculation of profit income attributable to shareholders can be done as follows:

Income Attributable to Shareholders = 140 + 55 – 931 + 953

Income Attributable to Shareholders will be –

Income Attributable to Shareholders = 217

Explanation:

All the expenses are bifurcated into various heads, based on their nature. While bifurcating the expense, one has to keep in mind whether the expense is directly related to operations or not. If it is directly related to operations, then it will form part of the cost of revenue. Otherwise, It will form part of either Selling and maintenance, General & Administration expense, etc., which are considered as below the line expense.

Thus, Amazon.in has earned profit from operations of $319 million for the given period and profit of $217 Million for the given financial year.

Relevance and Uses

To determine the correct profit formula is of utmost importance as:

• Profit is considered a key indicator of Operating margin.
• Profit is considered as one of the key measuring areas in competitor analysis.
• Borrowings are sanctioned based on the operating profitability of the company.
• The profit helps in determining the foreseeable future of the company.
• Profit is important to take the strategic decision like to continue the line of business or to diversify or divest the business segment.

Conclusion

The profit formula plays a major role in any income statement, as this will form the base to determine the operational matrix of the company.

Recommended Articles

This article has been a guide to Profit Formula. Here we discuss how to calculate profit along with practical examples and a downloadable excel template. You can learn more about financing from the following articles –

• Formula of Economic Profit
• Calculate Operating Expense (OPEX)
• Calculate Book Profit