Business owners and managers generally use the term profit loss to refer to a figure on the income statement. Economic loss often encompasses a broader range of variables. For example, economic loss can result from a profit loss or from damaged or lost property. In general, a profit loss comes as an undesired consequence of a pursuit and an expectation of profit.
Simplistically, profit loss and economic loss could be used synonymously, but profit loss generally refers to a business enterprise specifically organized for profit. Economic loss is the more applicable term in reference to losses suffered by private citizens, communities, and governments or societies. For example, a devastating storm may wreak havoc on a town and the media will post a headline about economic loss. Within that town there may be literally dozens to hundreds of businesses that also suffer an economic loss and will continue to suffer profit loss as an ongoing result of economic loss. The difference in the two terms boils down to context and causation.
Personal Economic Loss
In a business sense, to suffer a profit loss you must first be seeking a profit. Profit equals income minus expenditures. Contrastingly, a family household budget may show a profit at the end of the month, but in a situation like this the more common term is surplus, although the term profit is true in the actual sense of the word. As given in the example, a family budget is not a business enterprise and therefore the term profit loss is generally not applied. A family can suffer economic loss brought on by varying circumstances. For example, if a main wage-earner in the family loses a job or source of income that supports the group, an economic loss is sure to follow.
Business Profit Loss
Figuring gross profit as a business accounting procedure often amounts to subtracting cost of goods sold from sales. If gross profit does not cover remaining operating costs, a profit loss results. In business, the term profit loss does not always refer to net income. A business may suffer a profit loss as a percentage of previous profits, or may have a profit loss on a portion of inventory, while making a substantial profit on different inventory.
Profit Gain and Economic Loss
Within the context of a single business enterprise, an economic loss may be suffered while showing a gain in profit on the income statement. Consider for instance a company that manufactures and sells a dozen different products. The company may suffer an economic loss consisting solely of property loss or damage, while simultaneously posting a profit gain in specific areas of the enterprise.
- Marquette University Law School: The Economic Loss Doctrine, Distinguishing
- Northwestern University Law Review: A Production Theory of Pure Economic Loss
- Ohio State University Extension: The Profit and Loss Statement What Does It Mean
- University of North Florida: Introduction to Managerial Accounting Chapter 8 Multiple Product Cost-Volume-Profit Analysis
- U.S. Securities and Exchange Commission: Beginners' Guide to Financial Statements
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