We explain what profit is and its differences with profit and performance. Also, what is and what does the loss consist of?
What is profit?
It is understood by profit, benefit or profits to the positive balances obtained from a process or an economic or financial 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, the gain is an indicator of economic growth or generation of value in an economic circuit, which is not always true in the case of individuals. Its calculation follows a simple formula:
Total revenue – Production and distribution costs = Profit
Percentage profit margins can be indicative of the profitability of an activity, although they are often used as a symptom of consumption, since capitalists can’t make big 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 the 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 Value added, Gross Value added and Gross Domestic Product.
- Microeconomics. It is conceptualized from the cost-benefit relationship, being a much more individual and minority perspective. This is the case in which the formula detailed above applies best: Total income – costs = profit.
Differences between profit, yield and profit
These concepts can often be used more or less synonymously, but they are not so in the technical field of accounting. Let’s tackle each one separately to make a difference:
- Utility. It consists of the increase of the total equity of an individual or a company, so it is the remainder after reinvesting the costs of production and distribution. It is what we commonly call “profit” in non-specialized language.
- Performance. The performance is measured based on the capital invested, since it consists of a percentage or margin of return from the use of a certain asset, such as financial products (stocks). It is equivalent to the interest earned in common speech.
- Gain. Finally, the profit consists, for accounting, in an additional, extra profit, which is obtained under specific and special conditions, such as discounts, surcharges or promotions. Thus, what is normally accrued by an economic activity is not, in this specific area of language, gain otherwise utility.
What is loss?
Loss is the opposite of gain: losses occur when the total wealth of an individual or a company decreases instead of growing. For example, if after selling a series of products that we make and distribute, we realize that the final amount does not allow us to cover the reinvestment and perpetuate economic activity over time, we will be facing 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).