Profit is defined simply as revenue less expenses. It is the financial benefit a business generates from its revenue after subtracting all expenses, costs and taxes it needs to pay to sustain operations.
There are three types of profit: gross, operating and net profit. Gross profit (GP) is calculated by subtracting the Cost Of Goods Sold (COGS) from Total Sales (TS); (GP = TS – COGS).
Operating Profit (OP) is calculated by subtracting Operating Expenses (OE) from Gross Profit (GP); OP = GP – OE. Gross profit examines a firm’s profitability after direct expenses, while operating profit examines a firm’s profitability after satisfying its operating expenses that may include selling, general and administrative costs.
Net Profit (NP) is calculated by subtracting taxes and interest (T&I) from operating profit (OP); NP = OP – T&I, Net profit thus seeks to measure a firm’s profitability after subtracting all expenses of a business that include cost of goods sold, various operating expenses and finally taxes and interest payable.