Definition: Profit, also called net income, is the amount of earnings that exceed expenses for the period. In other words, it’s the amount of income left over after all the necessary and matched expenses are subtracted for the period. Notice I didn’t say all the expenses that were paid during the period.
What Does Profit Mean?
What is the definition of profits? According to the matching principle all of the expenses that were incurred to produce the income must be recognized in the period in which the revenue is earned. Thus, some expenses that aren’t actually paid during the period are still subtracted from income to arrive at the net income for the period.
Accrued expenses are the most common example the matching principle. Take payroll for instance. The last payroll of the year is often paid in the first week of the following year. Since the business incurred the costs of its employees’ labor, it must recognize this cost in the current period even though the payroll checks won’t be made out until the next accounting period. These payroll expenses must be subtracted from the revenues of the company to calculate the net profit.
The basic profit formula is calculated by subtracting all expenses incurred during a period from the total revenues earned in that same accounting period. Profits are reported on the bottom of the income statement and are traditionally viewed as the amount of money left over after all expenses have been paid. This is why many people call net income the “bottom line” of the company.
If total revenues don’t exceed total expenses for a period, the company does not report negative profits. There is no such thing as negative profits. Instead, the company would show a net loss on the bottom line of its income statement indicating that revenues were insufficient to cover expenses for the period.
Summary Definition
Define Profits: Profit means a business’ excess revenues left over after all expenses have been paid for the period.
