COMPUTING THE

PROFIT
GR OUP 12
 1
WHAT
IS
PROFIT
 PROFIT
PROF IT IS T H E DI F F EREN C E B E T WE E N T H E
PRI CE AND C OST WHEN T A L K IN G A B OUT
ONE I T EM. WHEN DEAL I NG WIT H H IG H E R
VOL UMES OF I T EMS, T OT A L P R OF IT IS T H E
DI F F ERENCE BET WEEN REVE N UE A N D T OT A L
COS T . GENE RAL L Y SP EAK IN G , P R OF IT IS
T HE I NCENT I V E BEHI ND T H E MA JOR IT Y OF
BUS INESS T RANSACT I ONS . ON E S IDE
WAN T S T O B UY A P RODU C T OR A S E R VIC E ,
AND T HE OT HER WANT S T O S E L L IT F OR A
PROF IT .
 TO RECAP AND UNDERSTAND
WHAT PROFIT IS
1 F I R ST REMEMB ER T H AT CO ST IS
MONEY SPEN T

2 THEN REVENU E I S MO NE Y E A RN E D

3 AND F I NALL Y , PR O F I T I S MO N E Y
GAI NED.
COMPUTE FOR PROFIT
HOW MUCH PROFIT YOU MAKE AS A SMALL
BUSINESS OWNER CAN GIVE AN IMPORTANT CLUE
AS TO WHETHER OR NOT A BUSINESS IS
SUCCESSFUL. WITH SO MUCH MONEY GOING IN
AND OUT OF A BUSINESS, IT IS NOT ALWAYS EASY
TO SEE IF WHAT YOU ARE DOING IS MAKING
MONEY.

I F BUSSI NES S I S MAKI N G P RO FI T I T CA N:

Ex p and and g row

Att ract more i n v es tmen t
Emp l oy more s ta f f
 HOW TO CALCULATE PROFIT
WHEN CAL C UL ATI NG P RO F I T F O R O N E I T E M, T H E PROFI T FORMU L A I S

3
SI MPL E ENO UG H:

PROFI T = PRI CE - CO ST.

WHEN DETER MI N I N G T H E P RO F IT F O R A
HI GHER QUAN T I T Y O F ITE MS, TH E F O RMU L A L OOK S L IK E T HIS :

TOTAL PROFI T -REV EN UE - TOTAL C OST

OR EXPRESSED D I F F ER EN TL Y

TOTAL PROFI T = UN I T P RI C E * QUAN TI TY - UN I T COST

* QUANTI TY
 DEPENDING ON THE QUANTITY OF UNITS SOLD,
THE FOLLOWING ARE THE VARIABLES USED TO
DETERMINE PROFIT:

COS T - T HE AMOUNT F OR WH IC H IT E MS A R E A CQUI RE D OR

PRODUCED, AL SO K NOWN A S T H E C OS T OF G OODS S OLD,

UNI T COST - t he a mo u nt for w hi ch a s i ng l e i t e m i s

ac q ui r e d or pr o du c e d

PR I CE - pr i c e f o r w hi c h t he i t e ms ar e s ol d ,

UNI T PRI CE - t he a mo u nt for w hi ch a s i ng l e i t e m i s

s ol d,
 DEPENDING ON THE QUANTITY OF UNITS SOLD, THE
FOLLOWING ARE THE VARIABLES USED TO
DETERMINE PROFIT:

QUANTI TY - T H E N U MB E R O F ITE MS F O R WH ICH

THE PROFI T I S CAL CU LA TE D ,

TOTAL COS T - c o s t mu l t i p l i e d b y t he numb e r of

i t e ms,

DI S COUNT - t he pe r c e n t ag e p r i ce r e d uct i on

TOTAL PRO F I T - t o t a l amount of mone y g ai ne d .

 DO PERSONAL EXPENSES AFFECT PROFIT?

2
UNFORTUNATELY, PERSONAL EXPENSES WILL NOT
REDUCE PROFIT NOR WILL CASH TAKEN OUT OF THE
BUSINESS FOR PERSONAL USE. SO, REDUCING YOUR
PROFITS TO ZERO AND PAYING NO TAX BY DRAWING
OUT ALL OF YOUR PROFITS AS CASH WON’T AVOID A
TAX. FOR A SOLE TRADER, PERSONAL EXPENSES WILL BE
CALLED DRAWINGS AND INCLUDE CASH TAKEN OUT THE
BUSINESS FOR PERSONAL EXPENDITURE, SUCH AS
HOUSEHOLD BILLS AND HOLIDAYS.
 SHOULD I PAY FOR TAX FROM MY PROFIT?

THE STARTING POINT FOR TAX PURPOSES IS THE PROFIT

THAT HAS BEEN CALCULATED FROM THE PROFIT AND LOSS
ACCOUNT. HOWEVER, THERE ARE DIFFERENT RULES WITH
REGARDS TO WHAT IS ALLOWABLE AS AN EXPENSE FOR
ACCOUNTS PURPOSES AND WHAT IS ALLOWED FOR TAX.
CERTAIN EXPENSES ARE NOT ALLOWED AS EXPENSES FOR
TAX PURPOSES, SUCH AS FINES AND CLIENT ENTERTAINING.
BECAUSE YOU’ RE EARNING FROM YOUR BUSINESS IT IS
MANDATED AND IT IS OUR OBLIGATION TO PAY TAXES TO
THE GOVERNMENT
 WHAT INFORMATION AND RECORDS I NEED TO KEEP?

IT IS VITAL THAT BOOKS AND RECORDS ARE KEPT

SAFELY AS THERE ARE RULES SURROUNDING HOW LONG
BUSINESS RECORDS MUST BE STORED FOR.
INFORMATION THAT YOU WILL NEED TO KEEP
PREPARING YOUR ACCOUNTS IS NECESSARY FOR
ACCOUNTING PURPOSES. THE FOLLOWING ARE
EXAMPLE DOCUMENTS NEEDED FOR SAFE KEEPING:
SALES AND PURCHASE INVOICE, FUEL RECEIPTS,
BUSINESS EXPENSES, BANK STATEMENTS, TAX,
SALARIES, DETAILS OF LOAN (IF THERE’S ANY) ETC
 GROSS PROFIT
GR OSS PRO F I T I S T H E PRO F IT A CO MP A N Y MA K ES
AF TER DEDU CT I N G T H E CO STS A SSO CIA TE D WIT H
MAKI NG AN D S EL L I N G ITS P RO D U CT, O R TH E COS T
ASS OCI ATED WI T H PR OV ID IN G ITS SE RV ICE S.

GR OSS PRO F I T WI L L APP E A R O N CO MP A N Y ’ S

I NCOME STA T EMEN T AN D CA N BE CA L CU L A TE D B Y
SUB TRACTI N G T H E CO ST O F GO O D S SO L D ( CO GS )
F R OM REVEN U E ( S AL ES) . TH E F IGU RE S CA N BE
F OUND ON A CO MPAN Y ’ S IN CO ME STA TE ME N T . IT
MAY ALSO BE R EF ER R E D TO A S SA L E S P RO F IT OR
GR OSS I NCOME
 GROSS PROFIT ASSESSES A COMPANY'S EFFICIENCY AT
USING ITS LABOR AND SUPPLIES IN PRODUCING GOODS
OR SERVICES. THE METRIC MOSTLY CONSIDERS VARIABLE
COSTS—THAT IS, COSTS THAT FLUCTUATE WITH THE LEVEL
OF OUTPUT, SUCH AS:

MAT ERI ALS

UT I LI T I ES FOR T HE P R ODUCT I O N
DI RECT LAB OR , ASSUMI N G I T I S
SI T E
HOURLY OR O T HER WI SE
DEPENDENT ON O UT P U T L EVEL S
SHI PPI NG

COMMI SSI ONS F OR SAL ES S T AF F

EQUI PMENT , P ER HA P S I NCL UDI NG
USAGE- BASED DEP R ECI A T I ON
CREDI T CARD F EES ON
CUS TOMER P UR CHASE S
 FORMULA OF GROSS PROFIT
REVENUE - CO S T O F GOODS SOL D = G ROSS PR OF I T

As g ener a lly d e f i n e d , g r o s s p ro f i t do e s n o t i n cl ude f i x e d c o s t s (t h a t i s, c o st s t h a t mu st

b e p a i d r eg a r d l e ss o f t he l e v e l o f o utp ut) . F i xe d co s t s i nc l u d e r e nt , a d v e r t i si ng,
i n s ur a nce, sa l a r i e s f o r e m p l o ye e s n o t di re ctl y i n v ol v e d i n t h e p r o d u c t i o n a nd o f f i c e
s up pl i es .
Howev er , i t sho uld b e n o t e d tha t a p o rti o n o f the f i x e d c o s t i s a ssi gne d t o e a c h u ni t
of p r oduct i on un d e r a b s o rp ti o n co s ti n g, whi ch i s requ i r e d f o r e x t e r na l r e p o r t i ng u nd e r
t he g ener a l l y a cce p t e d a c co un ti n g p ri n ci p l e s ( GAAP) . Fo r e x a mp l e , i f a f a c t o r y
p r o duces 10, 0 0 0 wi d g e t s i n e a ch p e ri o d, a n d the c o mp a ny p a y s P30,000 i n r e nt f o r
t he b ui ldi ng , a co s t o f P 3 wo ul d b e a ttri b ute d to e a c h w i d ge t u nd e r a b so r p t i o n
cos t i n g .
 EXAMPLE

TO CAL CUL ATE TH E GRO S S PRO F I T , WE F I RS T ADD U P THE C O S T O F GO O DS S O L D,

WHI CH SUMS UP TO P3 50 , 4 6 2 . 0 0 . WE DO N O T I NC L U DE S E L L I NG, A DMI NI S TRA TI V E
AND OTHE R E XPE N S E S S I N C E T H E S E ARE M O S T L Y F I XE D C O S TS

WE THE N SUB TRAC T TH E C O S T O F GO O DS S O L D F RO M RE V E NU E S TO O B TA I N A GRO S S

P ROFI T OF P 1 , 0 8 8 , 4 0 3 . 0 0 – P3 5 0 , 4 6 2 . 0 0 = P7 3 7 ,941.00
 GROSS PROFIT VS GROSS MARGIN
GR OSS PRO F I T
Gross profit is expressed as a currency value,
gross profit margin as a percentage.
Simply comparing gross profits from year to
year or quarter to quarter can be misleading,
since gross profits can rise while gross
margins fall, a worrying trend that could land
a company in hot water.
GROSS MAR GI N
gross margin and gross profit margin are also
used interchangross margin and gross profit
margin are also used interchangeably, Gross
profit margin takes the gross profit (revenue
less cost of goods sold) and divides it by
revenuegeably, Gross profit margin takes the
gross profit (revenue less cost of goods sold)
and divides it by revenue.
THE FORMULA OF GROSS PROFIT MARGIN
AS IN FOLLOWS:
 LIMITATIONS OF USING
GROSS PROFIT
STANDARDIZED INCOME STATEMENTS
PREPARED BY FINANCIAL DATA SERVICES MAY
GIVE SLIGHTLY DIFFERENT GROSS PROFITS.
THESE STATEMENTS CONVENIENTLY DISPLAY
GROSS PROFITS AS A SEPARATE LINE ITEM, BUT
THEY ARE ONLY AVAILABLE FOR PUBLIC
COMPANIES. INVESTORS REVIEWING PRIVATE
COMPANIES' INCOME SHOULD FAMILIARIZE
THEMSELVES WITH THE COST AND EXPENSE
ITEMS ON A NON-STANDARDIZED BALANCE
SHEET THAT DO AND DON'T FACTOR INTO
GROSS PROFIT CALCULATIONS.
GROUP MEMBER
ROSALYN ANES
RENELYN ROCREO
CARLO SIMBULAN