What is profit?
We explain what profit is and its differences with profit and performance. In addition, what it is and what the loss consists of.
What is profit?
Profit, profit or profits are understood as the positive balances obtained from an economic or financial process or activity . The three terms are not exactly synonymous, since in the economic or business technical language they are distinguished, but in broad strokes they represent the material or nominal thickening of the assets of a company , individual or organization . Profit is the opposite of loss.
Commonly, profit is an indicator of economic growth or value generation in an economic circuit , which is not always true in the case of individuals. Its calculation obeys a simple formula:
Total revenue – Production and distribution costs = Profit
The percentage profit margins may be indicative of the lucrative nature of an activity, although they are often used as a symptom of consumption , since capitalists cannot obtain large profit margins (that is, adding value to the product of which they are intermediaries) if There is no public willing to buy at the offered price. Thus, the profits of an economic activity will grow with demand , and will also decrease with it.
The study of profit margins can be based on two perspectives:
- Macroeconomic . It is conceptualized as the level of wealth or progress in the economic activities of a country, measured by the Value Added, the Gross Value Added and the Gross Domestic Product.
- Microeconomic . It is conceptualized from the cost-benefit ratio, being a much more individual and minority perspective. This is the case in which the formula detailed above best applies: Total income – costs = benefit.
Differences between profit, performance and profit
These concepts can often be used as more or less synonyms, but they are not used in the technical field of accounting. Let’s address each one separately to make a difference:
- Utility . It consists of increasing the total assets of an individual or a company, so it is the remainder after reinvesting production and distribution costs . It is what we commonly call “gain” in non-specialized language.
- Performance . The return is measured based on the capital invested, since it consists of a percentage or margin of return from the use of a particular asset, such as financial products ( shares ). It is equivalent to the interest accrued in common speech.
- Gain . Finally, the profit consists, for the accounting, in an additional, extra utility, which is obtained under specific and special conditions, such as discounts, overprices or promotions. Thus, what is normally accrued by an economic activity is not, in this specific area of language, profit but utility .
What is the loss?
Loss is the opposite of profit: losses occur when the total assets of an individual or a company decreases instead of growing . For example, if after selling a series of products that we produce and distribute, we realize that the final amount does not cover the reinvestment and perpetuate economic activity over time , we will face a loss, since we must add from our pocket the missing if we want to continue in the business, or we must then withdraw from it (bankruptcy).