The three profits included in accounting textbooks: gross profit, operating profit and net profit are a good start for accountancy students. Limiting them to just three types of profit is intended to avoid overburdening young accountants at the beginning of their studies. If they told them up front that more than 15 different types of profit exist, our poor accounting students would all abandon their studies and probably open trendy wine bars instead. Accountants have so many different types of profit that they have to qualify the word to convey which one they are actually talking about.
They introduce the other profits gradually. The first notion comes with the concept of before and after profit, for instance profit before taxes or profit after taxes. Often when a profit type has been introduced, accountants give it the coveted status of an acronym. PBT is profit before taxation. But, as a warning to anyone who thinks they might be getting the hang of this the acronym PAT is not 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, as in the well-known EBIT and EBITDA. But they can play with anything they want – anything goes. But you will have noticed that ‘earnings’ have suddenly been substituted for the word profit, as though it is the most logical and natural evolution, which it is not. No explanation is ever given.
So logically ‘earning before taxation’ (EBT) exists, but is rarely 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 and trips more readily off the tongue.
To confuse us even more, the word income can be used instead of profit. Many companies no longer have net profit, but net income. But beware! Income can also be used instead of revenues. So sometimes, income means revenues, sometimes it means profits. It depends though it is rarely clear on what. 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.
But I am diverging. After explaining the concept of profits before and after various things, other types of profit are gradually introduced. The list of different profit types is long. I name here but a few: future profits, long-term profits, short-term profits, distributable profits, trading profits, taxable profits, consolidated profits, accumulated profits, and not forgetting the mysterious book profits and paper profits.
But beware again! Sometimes the word ‘profit’ is used NOT to convey profit, but something completely different. For instance, profit margin is a ratio, profit motive is an ambition, profit centre is a place where profits are made, and profit sharing for once does what it says on the tin. 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, called with disarming clarity, not-for-profit organisations. Despite the name, they do have profits, they just call them ‘surpluses’ instead.
So accountants use the word profit in multiple ways. On its own it’s a generic word. When attached to another it can sometimes be a profit, and sometimes not. It is sometimes synonymous with income. But profit is never revenue. Only income can be called revenue. Most important of all, only accountants can tell.
About Grant Tait
After boarding school in Scotland and an accounting apprenticeship in England where Grant qualified with the ICAEW, he was an auditor in London and Paris. By this time he had saved enough money to pay for an MBA at INSEAD in France.
His career continued in the European HQ of a US company in Paris, then three years in Switzerland as Finance Director. Thereafter, he worked in Europe with multinational companies for 35 years. This involved intensive travel which included projects abroad: distribution agreements in Tokyo and Amsterdam, new offices in Barcelona, fraud in Geneva, and meetings all over the world. He managed teams in the USA and around Europe.
He worked for several bosses who never made decisions. This resulted in his first book after he retired: How to become a no-decision manager which won a silver medal from the Non-Fiction Authors Association in USA.
His second book Fun with Accountants will be published on 8th November 2024.
