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 as the key component of Operating margin, Earning per shareEarning Per ShareEarnings Per Share (EPS) is a key financial metric that investors use to assess a company's performance and profitability before investing. It is calculated by dividing total earnings or total net income by the total number of outstanding shares. The higher the earnings per share (EPS), the more profitable the company is.read more, profitability ratiosProfitability RatiosProfitability ratios help in evaluating the ability of a company to generate income against the expenses. These ratios represent the financial viability of the company in various terms.read more, 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 (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 (EBITDA).

The formula for profit in accounting is:

Profit Attributable to Shareholders = Revenue – Cost of Revenue – Selling and Maintenance Expense – General and Administration 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 Pertaining to Ordinary Business.
Profit-Formula

You are free to use this image on your website, templates etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: Profit Formula (wallstreetmojo.com)

Steps to Calculate Accounting 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 profitGross ProfitGross Profit shows the earnings of the business entity from its core business activity i.e. the profit of the company that is arrived after deducting all the direct expenses like raw material cost, labor cost, etc. from the direct income generated from the sale of its goods and services.read more, 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 taxesProfit Before TaxesProfit before tax (PBT) is a line item in a company's income statement that measures profits earned after accounting for operating expenses like COGS, SG&A, depreciation & amortization, and non-operating expenses. It gives the overall profitability and performance of the company before making payments in corporate taxes.read more.

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.

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

#1 – Microsoft Incorporation

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

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 = 12789 – 1144 – 1200 – 452 -306

Operating Income = 9687

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

Profit Formula Example1.2

Income Attributable to Shareholders = 9687 + 122 + 219

Income Attributable to Shareholders will be –

Example1.3

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.

Example #2 – Alphabet Inc

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

Particulars Amount ( 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 = 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:

Profit Formula Example2.2

Loss Attributable to Shareholders = -454 + 274 + 152

Loss Attributable to Shareholders will be –

Example2.3

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 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 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.

Example #3 – Apple Inc

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

Operating Income = 3658

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

Profit Formula Example3.2

Income Attributable to Shareholders = 3631 + 111 – 1863

Income Attributable to Shareholders will be –

Example3.3

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.

Example #4 – Amazon.in

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

Particulars Amount ($) 
Insurance Claim Lodged & Accepted55
Communication193
Inventory Consumed32,991
Product Development Cost2,372
Impairment481
Profit from Sale of Plant A953
Forex Conversions60
Interest Expense43
Sales Commission869
Audit Fees911
Letter of Intent Fees31
Dividend Income92
Depreciation and Amortization232
Revenue from Operations43,464
Loss due to Fire931
Rental2,522
Insurance Expense1,162
Periodical244
Transportation Expense1,024
Salary Expense254
Tax Provision271

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:

Example4.1

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

Operating Income = 319

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

Profit Formula Example4.2

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

Income Attributable to Shareholders will be –

Example4.3

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 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.

Recommended Articles

This article has been a guide to Profit Formula. Here we discuss the calculation of the accounting profit along with practical examples and its interpretations. You can learn more about financing from the following articles –

Reader Interactions

Leave a Reply

Your email address will not be published. Required fields are marked *