Debt Dictionary


Investment Dictionary -> Profit

Earning profit is the reason why every business operates. In other words, the generation of profits is the aim of the businesses. While a company may have other objectives, without the generation of profit, the business activity will have to end.

In an easy to grasp way, the meaning of profit can be explained as the companys income, earned over a defined time period. The two types of profit are net profit and gross profit. By deducting the cost of goods from the sale, the gross profit is found. Net profit, on the other hand, is the retained actual profit of a business and represents the difference between the companys revenue and expenses.

The type of profit, considered to be most familiar, is the accounting profit. It shows the money amount one has left over in the course of the business, after the explicit costs have been paid out.

In economics, the focus is on foregone or lost opportunities, so these should be taken into account when profit is calculated. The account values that do not show in the checkbook, such as cost of time, resale value, rate of returns, and depreciation must also be considered. To account for these, a calculation of the economic profit should be used. Economic profit is considered to be the profit made by the business after all opportunity and explicit costs have been taken into account. It is often the case that a profitable business in view of accounting is not a profitable business with regards to economics. A good idea here is that business to closes activities.

The elements of the economic profit are such elements that contribute to the profit of the entrepreneurs. Good examples are the land and the capital supplied by the investors.

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