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Profit statement

Profit statement

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Published by mshah_kunal
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Published by: mshah_kunal on Feb 03, 2012
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01/10/2014

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PROFITWhat is profit?Profit refers to a reward enjoyed by an entrepreneur for hisentrepreneurship or for his contribution to the process of production.P =TR (Total receipts – TC (Total cost).This is called gross profit i.e. residual income left afterdeducting the money payments made to all hired factors.Some economists define profit as a compensation received byan entrepreneur for his managerial functions or for organizingproduction.According to some economists it is a reward for bearing risk and uncertainty by an entrepreneur and for introducinginnovations by him.Characteristics of profit:Profit differs from other factor rewards like rent, wages andinterest.
1.
Profit is derived from various sources likeorganizational ability, monopoly position, innovationssuch as new products, new techniques, risk anduncertainty bearing, windfall gains. Profit is affectedby new modes of advertisement and sales.
2.
Profit is a fluctuating income. It goes on fluctuatingwidely from time to time; high during prosperousperiods and low during recession. Other factor incomesare elastic over a period of time.
3.
Profit is not a fixed or contractual income. Otherfactor incomes are predetermined.
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4.
Profit is uncertain-changes with conditions of demand and supply.
5.
Profit is a residual surplus or income. It is what isleft after deducting rent, wages, interest and all otherexpenses.
6.
Profit is received after the completion of productionand sales. Payment to other factors is made. Totalsales- Total cost of production
7.
Profit can be positive, zero or negative. Rent, wagesand interest are always positive.
8.
Profit is not determined in an entrepreneurialmarket. Rent, wages and interest are determined in therespective market.
9.
Non-insurable risks are responsible for a profitwhich is not the case for determination of rent, wagesand interest.Distinction between gross profit and net profit:Gross profit refers to the total revenue minus the total explicitcost. Gross profit includes implicit cost.Gross profit includes the following items:1.Implicit returns, implicit rent, implicit wages andimplicit interest pertaining to land, labour, and capitalrespectively owned and supplied by the entrepreneurhimself.
2.
Normal profit is included in implicit cost. It is aminimum return for his organizational functions.
3.
Imputed costs such as depreciation of capital assetsand maintenance charges are imputed which areincluded in the implicit cost.Gross profit also includes the reward to an entrepreneur forhis functions like uncertainty bearing, innovations, etc. It also
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includes profits due to monopoly position, windfall gains onaccount of a sudden increase in demand for a commodity, etcNet profit is also called real or economic or pure profit earnedby an entrepreneur.Net profit = Gross profit minus implicit costs including normalprofit, depreciation and maintenance charges.Thus, net profit is a reward to an entrepreneur due to thefollowing causes:1.Risk and uncertainty-bearing by him2.Introduction of innovations by him3.Profits due to a monopoly position enjoyed by him4.Profits due to exploitation of workers andconsumers5.Windfall gains or abnormal profits due tounexpected increase in demand6.Product differentiation introduced by himNormal profits and super-normal profits:1.Normal profit is a reward paid to the entrepreneurfor organizing business. Super-normal or excess profitis the reward paid to the entrepreneur for bearing risk.
2.
Normal profits can be guaranteed in advance.Super-normal profits cannot be anticipated /forecastedin advance.3.Normal profits are sufficient to induce theentrepreneur to remain in the market. New firms/entrepreneurs will enter the industry or market if there are super- normal profits.
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