Profit

Profit, from Latin meaning "to make progress", is defined in two different ways. Pure economic profit is the increase in wealth that an investor has from making an investment, taking into consideration all costs associated with that investment including the opportunity cost of capital. Accounting profit is the difference between retail sales price and the costs of manufacture. A key difficulty in measuring either definition of profit is in defining costs. Accounting profit may be positive even in competitive equilibrium when pure economic profits are zero.
Accounting profits should include economic profits, which are also called economic rents. For instance, a monopoly can have very high economics profits, and those profits might include a rent on some natural resource that firm owns, where that resource cannot be easily duplicated by other firms.

Economic definitions of profit

Note: these definitions are different from those used by accountants
In economics, a firm is said to be making an economic profit when its revenue exceeds the total (opportunity) cost of its inputs. It is said to be making an accounting profit if its revenues exceed the accounting cost the firm "pays" for those inputs.
In a single-goods case, a positive economic profit happens when the firm's average cost is less than the price of the product or service at the profit-maximizing output. The economic profit is equal to the quantity output multiplied by the difference between the average cost and the price.
(In circumstances of perfect competition, average cost = marginal cost at the profit-maximizing position)
All enterprises can be stated in financial capital of the owners of the enterprise. The economic profit may include an element in recognition of the risks that an investor takes. It is often uncertain, because of incomplete information, whether an enterprise will succeed or not. In these cases, economists treat returns to risk as part of the profit, as it is also an element of the cost of capital.
Economic profit does not occur in perfect competition in long run equilibrium. Once risk is accounted for, long-lasting economic profit is thus viewed as an inefficiency caused by monopolies or some form of market failure.
Positive economic profit is sometimes referred to as supernormal profit or as economic rents.
The social profit from a firm's activities is the normal profit plus or minus any externalities that occur in its activity. A polluting oil monopoly may report huge profits, but by doing relatively little for the economy and damaging the environment. It would exhibit high economic profit but low social profit.


Accounting definitions of profit

Note: these definitions are different from those used by economists
In the accounting sense of the term, net profit (before tax) is the sales of the firm less costs like as wages, rent, fuel, raw materials, interest on loans and depreciation. Costs such as depreciation and amortization tend to be ambiguous. Within US business, the preferred term for profit tends to be the more ambiguous income.
Gross profit is profit before Selling, General and Administrative costs (SG&A), like depreciation and interest; it is the Sales less direct Cost of Goods (or services) Sold (COGS),
Net profit after tax is after the deduction of either corporate tax (for a company) or income tax (for an individual).
Operating profit is a measure of a company's earning power from ongoing operations, equal to earnings before the deduction of interest payments and income taxes.
To accountants, economic profit, or EP, is a single-period metric to determine the value created by a company in one period - usually a year. It is the net profit after tax less the equity charge, a risk-weighted cost of capital. This is almost identical to the economist's definition of economic profit.
There are commentators who see benefit in making adjustments to economic profit such as eliminating the effect of amortized goodwill or capitalizing expenditure on brand advertising to show its value over multiple accounting periods. The underlying concept was first introduced by Schmalenbach, but the commercial application of the concept of adjusted economic profit was by Stern Stewart & Co. which has trade-marked their adjusted economic profit as EVA or Economic Value Added.
Some economists define further types of profit:
Abnormal profit (or supernormal profit)
Subnormal profit
monopoly profit (super profit)
Optimum Profit - This is the "right amount" of profit a business can achieve. In business, this figure takes account of marketing strategy, market position, and other methods of increasing returns above the competitive rate.


Gross profit

Gross profit or sales profit or gross operating profit is the difference between revenue and the cost of making a product or providing a service, before deducting overheads, payroll, taxation, and interest payments.
In general, it is the profit shown on a transaction if one disregards the indirect costs. It is the revenue that remains once one deducts the costs that arise only from the generation of that revenue.
For a retailer, gross profit is the shop takings less the cost of the goods sold. For a manufacturer, the direct costs are the costs of the materials and other consumables used to make the product. For example, the cost of electricity to operate a machine is often a direct cost while the cost of lighting the machine room is an overhead. Payroll costs may also be direct if the workforce is paid a unit cost per manufactured item. For this reason, service industries that sell their services by time units often treat the fee-earners' time cost as a direct cost.
Gross profit is an important guide to profitability but many small businesses fail because they overlook the regular demand to meet the fixed costs of the business. The indirect costs are considered when calculating net income, another important guide to profitability.