Determining Profit

Profit is the amount of money that is left after expenses are subtracted from income. To understand this formula, let's look what each component means. Income is money that comes into a business. This income is from the sale of goods or services and called income from sales. Expenses are monies that must be paid out in order to continue in business. There are two main types of expenses: cost of merchandise and operating expenses. Cost of merchandise is the money that business must pay for the goods that they sell or for the raw materials from which they make goods to sell. Operating expenses are those expenses necessary to keep the business operating on a daily basis. Payroll, utilities, rent, insurance, supplies, equipment, taxes, bad debts, and donations are all examples of operating expenses. As you can see, there are many expenses involved in running a business.

Income and expenses are two elements that what, if any, profit a business will make. However, there are two types of profit, and it is very important to understand the difference. One of them is gross profit. It is the amount of money that is left after the cost of merchandise is subtracted from the income from sales. For example, if a business buys T-shirts for 15 rubles each T-shirt and sells them for 50 rubles, the gross profit would be 35 rubles. If the business sells 100 T-shirts, the gross profit is 3,500 rubles. Another type of profit is net profit. It is the amount of money that is left after operating expenses are subtracted from gross profit. This is the money that is actually left for the business owner to keep or to reinvest in the business.