What Is Business Profit?

What is business profit? The easiest way to explain profit is the income a company earned in a certain period of time. There are two types of profit namely gross profit and net profit. Gross profit is not the actual profit of a business and it is found by deducting the cost of goods sold from net sales. Thus, net profit is considered as the actual profit retained by a business and it is actually the difference between the revenue earned by the company and the expenses incurred. For example, on Oct 1 a company provided legal services for a customer and received $2000 cash and on Oct 31 the company paid $500 for the rent of the premises, if we are asked to calculate the net profit for the month you should find the difference between the cash received and the rent paid, i.e., $2000 - $500, which gives us the value of the net profit of $1500. We have to find the profit in order to see whether a business

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The $300 cash obtained from the sales of drawing table can be treated as sales revenue but the $8000 from the sales of the motor vehicle cannot be considered as revenue because drawing table is the goods of the company (the thing which the business sell) whereas the motor vehicle is an asset of the company (the thing which the business own). According to Cunningham, Nikolai and Bazley (2000: 132) “Revenues are the prices a company charged to its customers for goods or services it provided during a specific time period”. It is recorded in the financial statement which summarizes the overall performance of a business during a particular financial period. According to Horngreen (2004 4th Ed. We did not add the amount paid for supplies because we have not use the supplies yet and it is still considered as the asset of the company.

Now, we shall analyse what is actually considered as revenue to a company.

In conclusion, the major aim of a business organization is obviously to earn profit. For example, on 31 Nov we pay $400 for electricity, $30000 for wages and purchases $500 worth of supplies.

We shall move on to discuss what is meant by ‘Matching Principle’. : 17) expenses are the cost incurred in the running of a business and will result in a decrease in the owner’s equity.

Similarly we shall now analyse the definition of expenses to a business. For example, a lawyer firm provided legal services to its customer on 1 June and received $5000 cash. The main purpose for using this technique is to determine an accurate profit or loss for the period so that we will not overstate or understate our profit. However accrual accounting is actually the method we applied and matching principle is the rule. In the example above we will have to record the rent expense, insurance expense and the revenue earned but not the revenue which have not been performed.

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Approximate Word count = 815
Approximate Pages = 3 (250 words per page double spaced)

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