Profit Formula

Updated on April 12, 2024
Article byWallstreetmojo Team
Reviewed byDheeraj Vaidya, CFA, FRM

What Is Profit Formula?

The 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.

What Is Profit Formula

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Profit is considered the key component of operating margin, earnings per share, profitability ratios, etc. There are various statutory guidelines and local GAAPs that all corporations must follow while calculating the profits for any given period. It ensures transparency and allows better comparability in the company’s results.

Key Takeaways

  • The profit formula in accounting calculates the net gains or losses of a company for a specific period by subtracting total expenses from total sales.
  • Profit is a crucial performance indicator for a company.
  • Profit is a key component of various financial metrics such as operating margin, earnings per share, and profitability ratios.
  • The profit formula is integral to the income statement as it serves as the foundation for assessing the company’s operational performance.

Profit Formula Explained

The profit formula in economics plays a major role in any income statementIncome StatementThe income statement is one of the company's financial reports that summarizes all of the company's revenues and expenses over time in order to determine the company's profit or loss and measure its business activity over time based on user requirements.read more, as this will form the base to determine the operational matrix of the company.

Profit is the walkthrough through which any non-professionals can understand how the company has arrived at a Profit After Tax (PATPATProfit After Tax is the revenue left after deducting the business expenses and tax liabilities. This profit is reflected in the Profit & Loss statement of the business.read more), Profit Before TaxProfit Before TaxPretax income is a company's net earnings calculated after deducting all the expenses, including cash expenses like salary expense, interest expense, and non-cash expenses like depreciation and other charges from the total revenue generated before deducting the income tax expense.read more (PBT), Earnings Before Interest Tax Depreciation, and Amortization (EBITDAEBITDAEBITDA refers to earnings of the business before deducting interest expense, tax expense, depreciation and amortization expenses, and is used to see the actual business earnings and performance-based only from the core operations of the business, as well as to compare the business's performance with that of its competitors.read more).

Formula

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 +/- Extraordinary ItemExtraordinary ItemExtraordinary Items refer to those events which are considered to be unusual by the company as they are infrequent in nature. The gains or losses arising out of these items are disclosed separately in the financial statement of the company.read more not About Ordinary Business.

Thus, the profit formula in economics mentioned above is used to calculate the profit of a business.

How To Calculate?

Below is a detailed explanation of the steps of accounting profit formula: –

  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. That will help arrive at gross profit and gross margin. The cost of revenue includes salary cost, finance expense, cost of inventory, and such expenses directly related to the business.

  3. From GrossGrossgross profit[/wsm-tooltip], deduct the below expense: –
     a. Selling and maintenance expense
     b. Depreciation and amortization
     c. Research and development expenses. 
    d. It will give the operating income of the company

  4. For operating income, add other incomes like interest, profit on the sale of the investment, etc., to arrive at a ProfitProfitprofit before taxes[/wsm-tooltip].

  5. From profit before tax, deduct tax provision for the given period. It will provide 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 any legal suit, etc. Adjust such extraordinary items to profit after tax, which will provide income attributable to shareholders.

Thus, the above are the steps followed while calculating profit using the accounting profit formula.

Examples

Let us 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

Example#1

Below are the various incomes and expenses of Microsoft Inc,calculated profit attributable to the shareholders using the total profit formula: –

ParticularsAmount ( in $)
Salary and Wages322
Interest Expense669
Interest Income219
Cost of Inventory43,410
Sales Promotion Expense1,144
Professional Fees1,200
Fees452
Dividend Income122
Depreciation306
Revenue from Sale of IT Products57,190

Solution:

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

Example1.1

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: –

Profit Formula Example1.2

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

Income Attributable to Shareholders = 10,028

Example1.3

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

Example #2

Let us look at another example to where the using the total profit formula has been used.

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

ParticularsAmount ( in $)
Salary and Wages403
Interest Expense838
Interest Income274
Cost of Inventory54,436
Sales Promotion Expense1,434
Professional Fees1,504
Legal Fees566
Dividend Income152
Depreciation383
Revenue from Sale of IT Products71,716
Provision for Doubtful Debt4,012
Rent Expense4,162
Insurance Expense1,918
Subscription Expense403
Travel Expense1,691
Staff Welfare Expense420

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: –

Example2.1

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: –

Profit Formula Example2.2

Loss Attributable to Shareholders = – 454 + 274 + 152

Loss Attributable to Shareholders = – 28

Example2.3
Explanation

All the expenses are bifurcated into various heads based on their nature. While bifurcating the expense, one must consider whether the expense is directly related to operations. If it is directly related to operations, it will form part of the cost of revenueThe Cost Of RevenueThe cost of revenue is the total expense incurred from manufacturing to delivering a product or service to the customer. It reflects all direct costs associated with the product or service delivered and is reflected in a company's income statements.read more. Otherwise, it will form part of selling and maintenance, general and administrative expenses, 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

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

Particulars Amount ($)
Wages488
Interest Expense1,015
Insurance Claim Lodged and Accepted111
Communication387
Interest Income Expense332
Cost of Inventory65,983
Employee Stock Obligation Expense100
Bank OD Interest Expense87
Sales Incentive Expense1,738
Audit Fees1,823
Court Fees686
Bank Guarantee Expense63
Brokerage Expense22
Dividend Income184
Depreciation and Amortization464
Revenue from Operations86,928
Provision for Insolvency of Debtor1,863
Office Rent Expense5,044
Insurance Expense2,324
Subscription Expense488
Commutation Expense2,049
Staff Welfare Expense509

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: –

Example3.1

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: –

Profit Formula Example3.2

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

Income Attributable to Shareholders = 1,879

Example3.3
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 selling and maintenance, general and administrative expenses, etc., 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.

Relevance And Uses

Determining the correct business profit formula is of utmost importance as:

  • Profit is considered a key indicator of operating margin.
  • Profit is regarded 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 make strategic decisions like continuing the business line or diversifying or divesting the business segment.

Profit Formula Vs Revenue

  • The business profit formula is revenue minus cost, whereas the revenue formula is total sales multiplied by the price per unit.
  • Revenue is the total income the business generates and profit is the revenue remaining after all expenses have been paid.
  • It is possible for a business to earn good revenue but still may not be profitable due to high amount of expenses.
  • We view the revenue on the top of income statement whereas the profit is found at the end of the income statement.

Frequently Asked Questions (FAQs)

1. What is the profit and cost formula?

The profit and cost formula calculates the profit generated by deducting the total cost from the total revenue. After considering all costs associated with production, operations, and expenses, it provides an understanding of the financial gain or loss resulting from business activities.

2. What is the profit formula vs. net profit formula?

The profit formula calculates the overall profit by subtracting the total cost from the total revenue. On the other hand, the net profit formula determines the profit after deducting all expenses, including operating costs, taxes, interest, and other factors, from the total revenue. Net profit provides a more accurate reflection of the profitability of a business.

3. What is profit divided by cost?

Profit divided by cost refers to the profit margin ratio. It is calculated by dividing the profit by the cost and multiplying the result by 100 to express it as a percentage. This ratio helps assess the profitability of a business relative to its costs and is commonly used to evaluate financial performance and efficiency.

Recommended Articles

This article is a guide to what is Profit Formula. We explain the differences with revenue, along with example, how to calculate, formula and uses. You can learn more about financing from the following articles: –

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