What are the different types of profit?

Author: Arslan Ali

What are the several kinds of profit?

There are four main categories of profit in business accounts:

  • Gross Profit

  • Net Profit

  • Profit Before Tax

  • Profit After Tax

In this article, I'll explain each type of profit and how to calculate them for your own business.

How to calculate the various sorts of profit

When it comes to each of the four primary profit categories, I find that remembering them all in the form of a 'timeline' is the best way to remember them all because they all follow one another as seen in the infographic below, making it a simple 9-step process:

As you can see, all profit categories flow seamlessly into one another, making it simple to remember how to calculate each one. Please feel free to save and save our profit kinds infographic so you may refer to it whenever you need a reminder!

Now that you've seen the diagram, let's go over how this profit timeline works:

1. Profits

As a result, the entire process begins with your sales. Simply put, this is the total amount you've sold/invoiced over the time period you're looking at. If you are VAT registered, this does not include VAT.

2. Cost of Goods Sold (Minus)

Then you deduct all costs associated with producing your items, including as materials and direct labour charges, among other things.

3. Gross Profit (Equals)

Simply said, gross profit is the difference between the total amount of money you made (sales) and the costs of producing your items.

4. Overheads (minus)

You just subtract all of the expenses related with keeping your business afloat, such as power bills, office charges, professional subscriptions, and so on, to arrive at your gross profit.

5. (Negative) Interest

You now subtract any business-related interests, such as banking and loan interests, from your net profit figure.

6. Profit Before Tax (Equals)

As a result, your Profit Before Tax is simply your net profit minus any interest paid by your company. If your company does not pay interest, your profit before taxes and net profit will be the same.

7. Tax (Minus)

Finally, you subtract any taxes paid by your business from your Profit Before Tax. If you're VAT registered, this is where you'll deduct VAT, which is why you must include all sales in step 1 without VAT.

8. Profit After Tax (Equals)

The fourth form of profit is Profit After Tax (often known as your 'bottom line,' which is the amount of profit you made after all expenses have been removed from your initial sales amount.

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