Profit Formula  Profit Formula in Accounting

Profit formula in accounting 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 the key component of operating margin, , , 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 ensures transparency and allows better comparability in the company’s results.

The formula for profit in accounting is:

Profit Attributable to Shareholders = Revenue – Cost of Revenue – Selling and Maintenance Expense – General and Administrative Expense – Depreciation and Amortization – Research and Development Expense + Other Income – Tax Provision +/- not About Ordinary Business

For eg:
Source: Profit Formula (wallstreetmojo.com)

Steps to Calculate Accounting Profit

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

1. Determine the company’s total revenue from the core business activity.

2. Then, from revenue, deduct the total cost of revenue incurred for earning the company’s gross revenue. This will help arrive at gross profit and gross margin. Cost of revenue includes salary cost, finance expense, cost of inventory, and such expenses directly related to the business.

3. From deduct the below expense:

a. Selling and maintenance expense
b. Depreciation and amortization
c. Research and development expense.
d. It will give the operating income of the company.

4. For operating income, add Other income like interest, profit on the sale of the investment, etc., to arrive at .

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

6. Every business will have a few unwanted gains or losses incurred during the financial year, which are not ordinary, like the debtor’s bankruptcy, 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.

You can download this Profit Formula Excel Template here – Profit Formula Excel Template

#1 – Microsoft Inc.

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

Solution:

As per the given profit equation, operating income can be derived as follows:

Operating Income = 12,789 – 1,144 – 1,200 – 452 – 306

Operating Income = 9,687

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

Income Attributable to Shareholders = 9,687 + 122 + 219

Income Attributable to Shareholders = 10,028

Thus, Microsoft Inc has earned profit from operating income of \$9,687 million for the given period and \$10,028 million of profit attributable to shareholders.

Example #2 – Alphabet Inc

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

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 = 15,619 – 1,434 – 1,918 – 403 – 1,691 – 1,504 – 566 – 4,012 – 4,162 – 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 = – 28

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. If it is directly related to operations, it will form part of . Otherwise, It will form part of either selling and maintenance, general and administrative expense, etc., which are considered below-the-line expenses.

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.

Example #3 – Apple Inc

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

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 = 17,832 – 1,738 – 2,324 – 2,049 – 1,823 – 686 – 22 – 5,044 – 488

Operating Income = 3,658

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

Income Attributable to Shareholders = 3,631 + 111 – 1,863

Income Attributable to Shareholders = 1,879

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, it will form part of the cost of revenue. Otherwise, It will form part of either selling and maintenance, general and administrative expense, etc., which are considered the line expense.

Thus, Apple Inc has earned profit from operations of \$3,658 million for the given period and \$1,879 million for the given financial year.

Example #4 – Amazon.in

Below are the particulars of Amazon for the financial year:

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 = 9,179 – 869 – 911 – 2,522 – 1,162 – 1,024 – 2,372

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 = 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, it will form part of the cost of revenue. Otherwise, It will form part of either selling and maintenance, general and administrative expense, etc., considered below-the-line expenses.

Thus, Amazon has earned profit from operations of \$319 million for the given period and \$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 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 strategic decisions like continuing the business line or diversifying or divesting the business segment.

Conclusion

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

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