Profit Formula

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.

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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.

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?

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.

Example#1

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

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 = 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 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: –

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 = 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 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 ($)
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 = 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 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)

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: –

• Formula of Economic Profit Formula Of Economic ProfitEconomic profit refers to the income acquired after deducting the opportunity and explicit costs from the business revenue (i.e., total income minus overall expenses). It is an internal analysis metric used by the organizations along with the accounting profits.read more
• Calculate Operating Expense (OPEX)
• Calculate Book ProfitCalculate Book ProfitBook Profit is the profit amount that a business earns from its operations & activities but has not been realized yet. It is not tracked by analysts or stakeholders & its calculation is relevant only to evaluate a Company’s tax liability. read more