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What Is Annual Profit?

Annual profit is used to determine if a company is making or losing money.
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  • Written By: Alexis W.
  • Edited By: Heather Bailey
  • Last Modified Date: 26 July 2014
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Annual profit is the amount of money a given individual, company or entity makes in a year's time. Annual profit is useful to determine whether a company is making or losing money. Tracking the annual profit of a company or individual over the years can also provide an indication of whether the business is expanding or contracting.

There are several different ways to calculate annual profit. The main distinction is usually between net profit and gross profit. Net profit refers to the amount of money made after the cost of goods and other deductions is subtracted. For example, a company's net profit is equal to the amount of money the company made in total minus the cost of materials purchased, payments to staff, taxes paid and all other costs such as rent and equipment. A person's net profit is equal to the amount of money he brought home from his job after all deductions for required income taxes were paid.

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Gross profit, on the other hand, is the total amount of money made before subtracting these deductions. Gross profit is a useful metric only in that it allows a company or person to know the total amount of money that came in over the course of a year. Because it does not factor in deductions, however, it is not an accurate measure of whether the person or company lost or made money. For example, if a company brought in $150,000 US Dollars (USD) per year in gross profit, this seems like a good indicator that the company is doing well; however, if the company spent $175,000 USD, then the company actually had a negative annual net profit and the company is in poor financial shape.

The annual profit of a given company or individually is generally calculated at a set time by the company in order to be compared. For example, many companies will use the standard January-January calendar and calculate their yearly profit each January to compare how it has done in comparison to the previous year. The profit made over the course of the year is most often calculated by using accounting records throughout the course of the year, adding up the total amount made and the total amount spent. Sometimes companies will also calculate quarterly profits, especially public companies who must report to shareholders in a quarterly basis, and as such these quarterly figures can be added together to arrive at the total amount of yearly profit.

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Frances2
Post 2

@parklinkz – I’ve often wondered about that, too. It seems perfectly logical that a person’s annual profit would only be what he or she has left over at the end of the year. But, we don’t look at things that way because a company’s finances are different from a person’s finances.

A company has shareholders, employees, and partners it must be financially accountable to. It has to pay its employees, create a return for its shareholders, and so forth. It also has to prove that it is a thriving organization so it can get loans, investors, and so on.

The only true way to tell that a company is healthy is to look at its net profits over time, hence the annual financial reports.

On the other hand, a person is only accountable to herself and her family (if she has one). In most cases, a person doesn’t have to prove that they’re making more money each year. He or she just has to keep the bills paid and provide the necessities of life.

parklinkz
Post 1

Does anyone else think it’s weird that a company’s annual profit is only calculated after every single expense is accounted for, but a person’s profit is calculated before they pay their living expenses?

Since a company’s profits equal what’s left over after it has paid for everything it needs in order to survive, shouldn’t a person’s annual profit only be calculated after they’ve paid their mortgage, grocery bill, and so on?

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