Meaning : Profit is the reward for the services of the organizer. It is the residual income which is equal to the difference between the total revenue and cost of production.
Profits = Total revenue — Total costs.
Profits are divided into two categories (1 ) gross profits and (2) net profits.
A. Gross profits : Gross profit refers to the surplus income over and above cost of production. In other words, gross profit means the surplus income that remains in the hands of the entrepreneurs after paying rent, wages and interest to the factors. Gross profit include the following elements
1. Rent of land owned by the entrepreneurs : If an entrepreneur uses his own land for production, rent must be deducted at present rate from total income.
2. Interest on the entrepreneur’s own capital : Interest must be calculated on the own capital of entrepreneur.
3. Wages of management : Salary should he paid to the Manager. Hence some amount of salary must be deducted from the gross profit for the services of his management. All the above elements are included in the gross profit.
B. Net profit : Net profit is the reward received by the entrepreneur for his services and efficiency only.
Net profit = gross profit — rent of land owned by the entrepreneur, interest on the entrepreneur’s own capital and wages of management.
Net profits: include the following elements :
1. Reward for risk taking.
2. Reward for uncertainty bearing.
3. Reward for innovations.
4. Reward for efficiency.
5. Monopoly gains.
6. Windfall gains.
7. Gains of superior.
