Profit equals revenue minus cost.
All businesses have money coming in — called revenue — and money going out — called costs. If the money coming in is greater than the money going out, the business makes a profit. If the money coming in is less than the money going out, the firm makes a loss.
N.B when calculating revenues, costs and profits you must make sure all values refer to the same basis - per month, per year, per DVD etc.
Accountants and financial statements refer to several types of profit:
"Gross profit" is revenue minus costs directly involved in producing the product. For example, an auto maker's gross profit is its income from selling cars minus the direct cost of making the cars (materials and manufacturing labor).
"Operating income" is gross profit minus the indirect (or "overhead") costs, such as research and development, head office overhead, sales and marketing and depreciation.
Operating margin is operating income divided by revenue. It is an important measure of the profitabilityof a business.
An income statement is like a stairway. It starts with the revenue at the top, then keeps subtracting the different costs the business incurs until it gets to the bottom line. This spreadsheet shows you how to interpret a real income statement and how to calculate operating margin, with is the key measure of profitability we use in this class.
"Net income" is "the bottom line": operating income minus all additional costs, such as taxes, interest payments and interest income and everything else.
For an example, see a simplified Google income statement.