Profit is the difference between the costs and revenues required for the production of a product and for all processes associated with its implementation that were received after the product was sold. In other words, it is the difference between costs and revenues.
Instructions
Step 1
Profit is the most important indicator of the effectiveness of any commercial activity. We can say that any entrepreneurial activity is started for the sake of profit, and if there is none, then there is no need to talk about positive results.
Step 2
There are two kinds of profit. The first is accounting profit. It is quite simple to define it. The amount of income from the sale of goods is calculated, the amount of funds that can be attributed to costs is subtracted from it.
Step 3
Another type of profit is economic. It is characterized by the funds remaining after all sorts of expenses that are not directly related to the enterprise have been deducted from the accounting profit. For example, such as uncompensated expenses that do not affect the cost of goods, the costs of interacting with a corrupt bureaucratic apparatus in those types of economy where this factor is significant, bonuses paid to employees and other types of similar expenses.
Step 4
Economic profit is considered the cleanest type of profit. This is exactly the kind of it, which should be considered as characterizing the benefit from the enterprise. It often happens that accounting profit is positive, while economic profit is negative. This means that the enterprise under the current conditions functions as a loss-making one, usually in this case either the issue of increasing its efficiency or leaving the market is considered.
Step 5
The main difference between accounting profit and economic profit is that when calculating economic profit, the cost of all kinds of long-term liabilities of various kinds must be taken into account, while the accounting calculation includes only the payment of interest on borrowed funds. If the economic profit is positive, then the enterprise acquires additional value in the eyes of the founders or investors, that is, the cost of spending the attracted resources was covered by income. If the economic profit is negative, then this means that the company is simply losing money.
Step 6
Usually, when assessing the profitability of the company, it is the economic profit that is used, since it allows you to get a more complete and accurate result. This is a more capacious and accurate indicator than accounting profit.
