Operating Profit

It is described as the excess of gross profit (sale of goods minus cost of goods sold) over operating expenses. Operating expenses are incurred for maintaining and carrying on business activities. Examples of operating expenses are: rent of the building, repairs to the machinery, electricity bill, salaries to the office staff, salesmen’s commission and the like. Operating expenses are generally classified under such main categories as: Administrative or establishment expenses, selling and distribution expenses, maintenance and depreciation expenses. The main criterion in the calculation of operating profit is that the revenues are earned from and expenses are incurred on the normal business activities involving sale and purchase of goods in which the business enterprise engages itself. Obviously the operating profit will not include the profit resulting from the sale of fixed assets, interest on investments etc., since these are not a part of normal business activities. Operating loss occurs when operating expenses exceed the gross profit.

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