Pretax Profit Definition Formula Example & Importance

pretax profit definition

Pretax Profit Definition and Example

Pretax Profit Definition – “Net income before income taxes”

Pretax Profit is also known as Profit before tax or earnings before tax. In simple word, it is a measure of company’s profit before providing for the taxes. This profit is a result of subtracting all the expenses including operating as well as interest expenses from the revenues earned during a year.

This profit excludes the taxes as tax policies changes every year. So in order to get the amount of profit actually earned by the company, the pretax profit is calculated. This profit appears on the Income Statement. In addition to this, the calculation of pretax profit results in assessing how organisation can increase its profit.

This can be done either by increasing the sales of the firm or cut the cost in producing goods or services. So the companies that are successful in increasing their sales or cutting their cost are often those companies which are successful in increasing their pretax profit.

Formula

Pretax Profit = Revenues – Expenses (Exclude Tax)

Pretax Profit Example

Let’s understand Pretax profit definition with an example. ABC Company Net sales of FY 2017 is Rs. 2,00,000. Cost of goods sold Rs. 1,25,000. The interest expenses costs Rs 15,000. Selling expenses and administrative expenses are 10,000 and 5,000 respectively. Calculate Pretax Profit.

Pretax Profit = 2,00,000 – 1,25,000 – 15,000 – 10,000 – 5,000

= 45,000

Related Financial Terms of Pretax Profit

Importance of Pretax Profit

Pretax Profit is important as it measures the operational efficiency of an organisation both for internal management as well as outsiders. Excluding tax results in minimizing the variable which might differ from company to company. This becomes very useful while comparing companies within the same industry.

 

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