Introduction to Calculating Profit
Economic and Management Sciences
(EMS)
Definition: Profit is the financial gain a
business makes when its income
exceeds its expenses.
• Formula: Profit = Income – Expenses
• Importance: Profit indicates the success of a
business and its ability to sustain operations.
• Types of Profit:
• Gross Profit
• Operating Profit:Income from sales – Cost of
Goods Sold (COGS)
• Gross Profit – Operating Expenses
• Net Profit: Operating Profit – Taxes and
Interest
• Key Terms
• Income: Money earned from selling goods or
services.
• Expenses: Costs incurred in the process of
earning income (e.g., rent, salaries).
• Cost of Goods Sold (COGS): Direct costs of
producing goods sold by the business.
• Operating Expenses: Indirect costs such as
utilities, marketing, and administrative
expenses.
• Example Calculation
Scenario:
• Income: R12,000
• COGS: R5,000
• Operating Expenses: R3,000
• Taxes and Interest: R1,000
• Calculations:
• Gross Profit = R12,000 – R5,000 = R7,000
• Operating Profit = R7,000 – R3,000 = R4,000
• Net Profit = R4,000 – R1,000 = R3,000
• Why Profit Matters
• Financial Health: Indicates if the business is
earning more than it spends.
• Decision Making: Helps in making informed
business decisions.
• Sustainability: Ensures the business can
continue operations and grow.
• Attracts Investment: Profitable businesses are
more likely to attract investors.