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Operating Profit (EBIT): Meaning, Formula and Example

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  • Last Updated : 23 Jun, 2022

Operating profit is the profit that the company earns over a period of time from the operating activities of the business. It is also defined as the profit left after deducting operating expenses from the gross profit before taking into account the interest and the taxes. It is also known as Earning before interest and taxes (EBIT).

Operating Activities are defined as those activities that a company performs to carry out the day-to-day work of business. It is basically the core activities of the business, like manufacturing, distributing, packaging, etc., which the company performs to provide goods and services to the market on regular basis to earn revenue. 

Net profit is calculated from the Operating profit. It shows how the company is performing in relation to its competitors and whether the company managing its expenses efficiently to maximize profitability or not.  

Formula for calculating Operating Profit:

Operating Profit = Net Sales – (COGS + Administrative & Office Exps. + Selling and Distribution Exps. ) – Operating Expenses.

or

Net Profit + Non-Operating Expenses and Losses – Non-Operating Incomes

where, 

Net Sales: Net Sales is the net amount of sales of the company in an accounting period. 

Net Sales = Cash Sales + Credit Sales – Sales Return. 

C.O.G.S.: It stands for Cost of Good Sold. It refers to the cost of producing the goods that are sold by the company. It includes the cost of material used in the manufacturing of the goods plus the cost of labour of producing the goods, and also includes the expenses, which are related to the manufacturing of goods. It can be calculated as,

 C.O.G.S = Opening Inventory + Net Purchases + Direct Expenses- Closing Inventory

Operating Expenses: These are those expenses that are incurred while carrying out the day-to-day activities of the business. For example, Selling and Administration Expenses, Rent, Insurance, Repairs, Maintenance, etc.

Non-Operating Expenses: Non- Operating Expenses are incurred while carrying out activities other than day-to-day activities of the business. For Example, Interest on Loan, Charity, Donation, Loss on Sale of Assets, etc.

Non-Operating Incomes: Non-Operating Incomes are any income earned from the non-operating activities of a business. For Example, Interest Received, Dividend Received, Profit on Sale of Asset, etc.

Illustration:

Prepare Trading and Profit and loss A/c of M/s Akanksha Ltd. showing Gross Profit, Operating Profit, and Net Profit for the year ending 31st March, 2022 from the following information:

 

 

We can also calculate Operating Profit as:

Operating Profit = Net Sales – (COGS + Administrative & Office Exps. + Selling and Distribution Exps. ) – Operating Expenses.

Operating Profit = 12,00,000 – 8,80,000 – 1,40,000

Operating Profit = ₹1,80,000

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