Profit on its own does not exist in accounting. Accountants have so many different types of profit that they have to qualify the word to convey which one they are talking about.
Accounting text books usually announce three: gross profit, operating profit and net profit. But this is a myth. Accountants adore the concept of ‘before and after’ profit, for instance profit before taxes, as usual with an acronym PBT. But beware not all have acronyms. Profit after taxes, for instance PAT, is never used for profit after tax.
Profit can be calculated before or after anything. Most accountants like to play with depreciation, amortisation, interest and taxation and calculate profits either before or after one or several of these four. But they can play with before and after with anything they want – anything goes.
But profits are not limited to before and after, the list of different profit types is long. I name but a few: future profits, long-term, short-term profits, distributable profits, trading profits, taxable profits, consolidated profits, accumulated profits. Not to forget the mysterious book profit and paper profit.
Income and earnings
Profit is not always called profit. To confuse us accountants sometimes substitute the word ‘earnings’ for the word profit. Logically EBT could be used as well as PBT, profit before tax. But as you now know accountants are not always logical, EBT exists but is never used. Instead accountants prefer the now popular and indeed universally known EBIT.
Most non-accountants believe that EBIT means earnings before income tax, but this is not how accountants use it. EBIT means earnings before interest and taxation. However, they NEVER use PBIT, ‘profit before interest and taxation’. PBIT does not exist in accounting jargon and no accountant would ever understand these initials. PBIT is not elegant enough. EBIT sounds more refined.
Further, to confuse us even more, the word income can be used instead of profit. It can also be used instead of revenues. Many companies no longer have net profit, but net income. But sometimes, income means revenues, sometimes it means profits. It depends. Earnings can also mean profits, but never net earnings, only earnings before or earnings after something. As you can see it is never simple with accountants.
Profit is not always profit
Sometimes accountants use the word ‘profit’ NOT to convey profit, but something completely different, so beware, for instance profit margin is a ratio, profit motive is an ambition, profit centre is a place where profits are made, profit sharing is just that. A profit warning arises when management have messed up their forecast and decide to announce lower profits, sometimes losses.
And there are organisations which are not interested in making profits: not-for profit organisations. They do have profits, they call them surpluses. But they are really profits, only these organisations are not-for profit so they have to call them something else.
Gross profit
Gross Profit does not mean fat profit or vulgar profit (the same goes with gross earnings). Gross to an accountant never means excessively fat, vulgar or disgusting. Accountants give gross two separate meanings depending on the context.
Many times gross for an accountant means total. Gross earnings and total earnings are, for instance, synonymous and here means earnings without any deductions. But gross never means without deductions when accountants use gross profit. With gross profit some deductions have already been made. These deductions are call COGS.
Now as you would expect with accountants these COGS are not the one you would find driving the chain of a bicycle. Note the capitals. COGS for an accountant is ‘cost of goods sold’, which is deducted from, not gross, but net earnings to give gross profit. This earnings is of course sales or revenues not profit.
Net profit.
Non-accountants should know that (most of the time) the opposite of gross for an accountant is net. And not net as in fishing and not even net as in netting. Net to an accountant means ‘after ALL deductions’. Therefore, you would expect that ‘net profit’ would be the ultimate profit after ALL deductions possible. And surprise, net profit is exactly that. For once accountants are logical and do not confuse us. Except of course they sometimes call profits income or earnings, as in net income.
But accountants have invented a nickname for net profit. It is so rare that it has to be mentioned, the only time accountants try to be funny. Their nickname is ‘the bottom line’, (the last line of the earnings statement at the bottom of the page) Accountants find ‘bottom’ more explicit!
Operating profit.
The third and last, more or less official profit is operating profit. For once accountants have chosen a wording which represents reality. Operating profit is made up of income and expenses arising from the operations of the company regardless of their activity.
But accountants need to confuse us by introducing ‘net’ yet again. Sometimes they use net operating profit and sometimes operating profit, without telling us what the difference is. Probably none but you never know. But this time accountants do not use the acronyms OP or NOP. Instead they have another more complicated one: NOPAT which stands for net operating profit after tax, but which is often called ‘post tax operating profit’ just to confuse us. (Note accountants never call it PTOP). Post here of course has nothing to do with the postman. Some accountants like to show us how clever they are by substituting ‘after’ with ‘post’.
