Gross profit is the surplus that accrues to a firm when it subtracts its total expenditure (explicit expenditure) from its total receipts. In ordinary language, the term ‘profit’ is used in the sense of gross profit. If, however, we analyze the term ‘gross profit’ we will find that it includes several items which are not profits in the strict sense of the term. The following four items are included in gross profits.<\/p>\n\n\n\n
(1) Remuneration for the Factors of Production contributed by the Entrepreneur himself-<\/em><\/strong> Sometimes the entrepreneur contributes his own capital to the business, or he may himself act as the manager of the business. In that case, the interest accruing on his capital and his salary in lieu of his work as manager will be included in his gross profits. While calculating net profits, the entrepreneur should subtract these items (also called implicit costs) from his gross profits.<\/p>\n\n\n\n (2) Depreciation and Maintenance Charges-<\/em><\/strong> This can be discussed under two sub-heads- <\/p>\n\n\n\n (3) Extra-personal Profit-<\/em><\/strong> This is of two types-<\/p>\n\n\n\n (4) Net Profit-<\/em><\/strong> The balance which remains after deducting the above three items from gross profit is called net profit. The net profit is the reward for the following three functions performed by the entrepreneur.<\/p>\n\n\n\n We, thus, find that net profit is only one of the constituents of gross profit. It is arrived at by deducting all contractual and non-contractual payments from gross profits. In short, gross profits minus explicit costs minus implicit costs minus certain other elements = net profits. It is possible for the net profits to be either positive or negative. If the total expenditure (explicit as well as implicit) exceeds the total receipts, the net profits will be negative. Profit is the only reward (of a factor of production) that can be negative. Rent, interest, and wages are always positive.<\/p>\n\n\n\n\n
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