Profit (利益) is the amount left when the expenses incurred to earn it are subtracted from the revenue gained from goods or services.
Case
Revenue (10,000 yen)
Expenses (10,000 yen)
Profit (10,000 yen)
Example in the black
500
420
80
Example in the red
500
530
−30 (loss)
The basic formula is "revenue − expenses = profit": a positive result means the company is in the black, and a negative one means a loss (損失). The financial statement that totals revenue and expenses for one accounting period and shows the profit as that period's operating results is the income statement (損益計算書). Because it adds and subtracts revenue and expenses by type in order, profits with different names appear stage by stage depending on how far the calculation has gone.
AnalogyThink of a festival food stall: the cash left in hand after paying for ingredients and the pitch fee out of the day's takings is the profit.
Exam points
ExamThe income statement (損益計算書) shows profit from the revenue and expenses of an accounting period, presenting a company's operating results. It is a different document from the balance sheet (貸借対照表), which shows the financial position at a single point in time.
Mix-upSales (売上高) is simply the value of goods and services sold, not profit (利益). Even when sales rise, profit falls if expenses rise by more.
Cost (原価) is the expense of preparing and selling goods. In the income calculation, the purchase or production cost of the goods sold in the period is first deducted from sales as the cost of sales (売上原価).
Item
Amount (10,000 yen)
Opening inventory (goods on hand at the start)
50
Purchases for the period (add)
400
Closing inventory (goods unsold at the end, subtract)
70
Cost of sales
380
The value of goods on hand at the start and end of the period is the inventory amount (棚卸高), and what is still unsold at the end is left out of the period's cost of sales. The name of a cost changes with which expenses it includes: the manufacturing cost (製造原価) of making a product plus the operating expenses (営業費) of selling and administration is called the total cost (総原価).
AnalogyAt a bakery, the cost is what was spent on flour and other materials to make and sell the bread, not the price on the shelf tag.
Exam points
ExamThe cost of sales (売上原価) is opening inventory (期首棚卸高) plus purchases for the period (仕入高), minus closing inventory (期末棚卸高).
ExamIf opening inventory and purchases stay the same and only closing inventory is valued higher, the cost of sales shrinks by that amount.
ExamA product's total cost (総原価) is its manufacturing cost (製造原価) plus operating expenses (営業費), covering the whole cost (原価) incurred up to the point of sale.
Gross profit (粗利益) is sales (売上高) minus the cost of sales (売上原価); its formal name is gross profit on sales (売上総利益).
Item
Amount (10,000 yen)
Sales
800
Cost of sales (subtract)
500
Gross profit (gross profit on sales)
300
It is the first level of profit worked out on the income statement, showing how much was earned from buying and selling or making the goods themselves. Gross profit as a share of sales is the gross profit margin (売上総利益率), used to compare earning power across products or periods.
AnalogyBuy a used book for 200 yen and sell it for 500 yen, and the 300-yen difference is the gross profit.
How to rememberThe 粗 in 粗利益 means "rough" or "approximate", so think of it as the rough first profit before the finer deductions are made.
Exam points
ExamGross profit (粗利益, or gross profit on sales, 売上総利益) is sales (売上高) minus the cost of sales (売上原価), and it is the first profit (利益) to appear on the income statement (損益計算書).
ExamAn increase in sales does not turn directly into the same increase in gross profit. The change in gross profit equals the increase in sales minus the increase in the cost of sales.
ExamGiven the gross profit margin (売上総利益率), the cost of sales can be found as sales × (1 − gross profit margin).
Operating profit (営業利益) is the profit earned from the core business: gross profit minus selling, general and administrative expenses (販売費及び一般管理費, or SG&A, 販管費).
Sales
Gross profit (gross profit on sales)
Operating profit
Subtracting SG&A expenses from gross profit gives operating profit.
3 / 3
SG&A covers the costs of selling goods and running the company, such as advertising, sales staff salaries and head office rent. Interest received or paid and similar items arising outside the core business are non-operating income (営業外収益) and non-operating expenses (営業外費用), and they are left out of operating profit. After operating profit come ordinary profit (経常利益), which adds and subtracts the non-operating items, and finally net income for the period (当期純利益), after one-off extraordinary gains (特別利益), extraordinary losses (特別損失) and corporate taxes.
AnalogyFor an online shop, what is left after paying for ads and office rent out of the margin on goods sold is the profit from running the shop, its core business.
How to remember営業 means the core business. Interest that arises outside it goes under "non-operating" (営業外), so the names themselves tell them apart.
Exam points
ExamOperating profit (営業利益) is gross profit on sales (売上総利益) minus selling, general and administrative expenses (販売費及び一般管理費).
ExamAdvertising expenses (広告宣伝費) are part of SG&A (販管費), so an increase lowers operating profit (営業利益). Interest paid (支払利息) is a non-operating expense (営業外費用), and it moves ordinary profit (経常利益) rather than operating profit.
ExamOrdinary profit is operating profit plus non-operating income (営業外収益) minus non-operating expenses. Even if operating profit is unchanged, ordinary profit rises when the non-operating balance improves.
Earnings from buying, selling or making the goods themselves
Earnings from the core business, selling and administration included
When advertising expenses rise
No change
Falls
Key points
Profit (利益) is what remains after expenses are subtracted from revenue: positive means in the black, negative means a loss.
The cost of sales (売上原価) is found as opening inventory + purchases − closing inventory.
Starting from sales, the income statement adds and subtracts revenue and expenses stage by stage, showing profit in the order gross profit → operating profit → ordinary profit → net income for the period.