Surplus vs Profit
Any organization that earns income or incurs expenditure will expect to make a return from their operations in excess of the expenses incurred. Such a return, sometimes known as a profit or a surplus, is essential to any business or organization that wishes to run its operations smoothly. However, the excess incomes earned by organizations are termed differently depending on the type of organization, types of activities carried out and the purpose for which the organization operates. The following article offers an explanation of the similarities between the terms profit and surplus and outlines how they are different to each other based on to the type of organization being referred.
Profit
A profit is made when a firm is able to make sufficient income to surpass its expenses. The term ‘profit’ is used as opposed to surplus because the firm in reference is operating with the sole concern of making a profit. The profit made by a firm is calculated by reducing all the expenses (utility bills, rent, salaries, raw material costs, new equipment costs, taxes, etc.) from the total income that a firm produces. Profits are important for a firm because it is the return that business owners obtain for bearing the costs and risks of running the business. Profits are also important because it provides some idea of how successful the business is, and can help attract external funding. Profits can also be reinvested in the business, to grow the business further which will then be called retained profit.
Surplus
In general, a surplus refers to something that is left or in excess, once it has served its requirement. In finance, surplus refers to the excess income that is earned by a not-for-profit organization that does not seek to make a profit, and may have other aims such as operating for a greater good of the public. A surplus isn’t that different to a profit and is calculated in very much the same way by adding up all the expenses incurred during the year and reducing that from the total revenue earned. The government of a country may also make a surplus, which will usually be referred to as a budget surplus where the government’s total revenues exceed total outlays. Just as in a not-for-profit organization, governments also reinvest their budget surpluses back into developing the country and strengthening the economy.
Profit vs Surplus
Surpluses and profits are very similar to each other as they both represent income made in excess of expenditure. Both profits and surpluses are necessary as they are a good indicator of an organization’s financial strength and success of its operations. Just like profits, surpluses can also be reinvested back onto the organization with the aim of achieving higher levels of growth and revenue. The major difference between the two is that profit is usually the term used for the excess incomes made by a for-profit corporation, whereas surplus is the term given to the excess income made by a not-for-profit organization.
Summary:
• Any organization that earns income or incurs expenditure will expect to make a return from their operations in excess of the expenses incurred. Such a return, sometimes known as a profit or a surplus, is essential to any business or organization that wishes to run its operations smoothly.
• Surpluses and profits are very similar to each other as they both represent income made in excess of expenditure.
• The major difference between the two is that profit is usually the term used for the excess incomes made by a for-profit corporation, whereas surplus is the term given to the excess income made by a not-for-profit organization.