What is interest & Profit?
Interest: Interest can be defined as the payment paid to its owner for the use of capital. It is reward received by the capitalist (capital owner) for the use of capital. Interest may be
1) Gross interest 2) Net interest.
1) Gross interest: It is the amount paid to creditor (capital owner) called gross interest.
2) Net interest: It can be obtained by deducting following from Gross interest. They are (i) Insurance against risk (ii) Reward for management and (iii) payment for inconvenience.
Profit: It is defined as reward received by entrepreneur for assuming a risk.
Risk is an integral part of any business. Therefore whatever profit an organizer is obtaining it is reward for the risk he is bearing. Hence wherever risk is more the profit taken generally is also high. It is after all net income received by and organizer from the business.
Therefore, Profit = Net income = Gross income – costs
(i.e. rent, wages and interest)
Profit Total Revenue (income) – Total cost of production
Peculiarities are as follow:
1) Residual income: Profit is received after meeting all the expenses and then it is residual income.
2) End result of business: an entrepreneur receives profit on1y after the sale is completed arid all obligations are discharged. Production or business process ends when product is sold.
3) Not always positive: All other factor rewards are positive. But profit may he positive, zero or negative. When negative profit is there it is termed as loss of business.
4) Fluctuating income: Business is influenced by number of factors and the profit is changing time to time. It may be high low or negative (loss) also,
5) Not contractual: Profit is organizer’s reward and depends upon business conditions. Hence it is not contractual.