Constituents of Gross Profit

Gross profit includes the following elements

Implicit Cost

The Imputed cost of entrepreneur’s own capital, own land which he might have contributed to his business is known as implicit cost. Again if he manages his own business, then imputed reward of his management is also included in implicit costs. These costs do not enter into accountant’s register. But economists consider these costs as genuine costs.

Depreciation Cost

Normal wear and tear or machines is called depreciation. The entrepreneur makes provision for depreciation to maintain the plant and equipment intact. These depreciations charges are included in gross profit.

Tax

Govt. imposes tax on the profit of the business concerns. The amount of tax paid must be deducted from the gross profit to arrive at the net profit.

From the Gross Profit, When the Above Three Elements are Deducted, What We Get is Net Profit.

Thus net profit is a part of gloss profit. When we deduct all costs (both implicit and explicit costs), from the total revenue, what we get is net profit or economic profit.

Net profit = Gross Profit-Implicit costs

Net Profit= Total revenue – (Explicit costs + Implicit costs)