The different profit concepts employed for profit planning with budgeting are as follows:
Gross profit – this is the amount of profit earned on purchases, manufacture and sales of goods and services only. Gross profit is arrived at by deducting cost of sales from the amount of net sales. Adequate amount od gross profit is necessary for meeting other expenses of business.
Operating profit – the amount of gross profit left after meeting all other indirect expenses is termed as operating profit. This amount is arrived at by deducting various administrative, selling and distribution and finance expenses. This amount is also known as earnings before interest, depreciation and tax (EBIDT)
Earnings before interest and tax (EBIT) – this is the amount of profit less depreciation.
Earnings before tax (EBT) – this is the amount of profit after interest is deducted.
Earnings after tax (EAT) – this is the final profit amount left after payment of taxes.
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