In accounting, every thing/event is known or represented through some word and one of those words is profit which represents the surplus revenue over expenditure/expenses, and it is a common word that we often hear especially when it comes to business-related matters.
Profit is the main objective of most businesses because most businesses are formed to earn profit and the activities carried out in the business are also done keeping this in mind. To find out the profit in the business, various reports are prepared from time to time which are based on the transactions that take place in the business. Note: The more correctly the transactions that take place in the business are managed, the more accurate the reports that are prepared will be.
Table of Contents
What is Profit?
Profit is an accounting term that represents the excess revenue over expenditure/expenses. In simple words, when income is more than expenditure it is called profit. Generally, it is calculated through the profit and loss account and if the business is involved in trading, then trading account is also used.
| Profit = Revenue > Expenses |
| Formula |
| Profit/Loss = Revenue – Expenditure/Expenses or Profit/Loss = Selling Price – Cost Price |
As per accounting principles, profit is mainly classified into three parts such as gross profit, operating profit, and net profit. In detail, gross profit means profit after deducting direct expenses from Direct revenue and it is generally calculated through trading account and operating profit means profit after deducting operating expenses like indirect expenses excluding taxes from revenue/gross profit, and net profit means profit after deducting all expenses including taxes from operating profit/revenue.
| Gross Profit | Direct Revenue > Direct Expenses |
| Operating Profit | Revenue/Gross Profit > Indirect Expenses/Operating Expenses (Excluding Taxes) |
| Net Profit | Revenue/Operating Profit/Gross Profit > All Expense (Including Taxes) |
Profit is shown in the liability side of the balance sheet under equity and share (capital), and it increases the owner’s share as it is added to the owner’s share and similarly, loss is vice versa. Note: Only net profit is shown in the balance sheet.
Features of Profit
Following are the features of the profit:
1. Accounting Term:
The term profit is an accounting term used to denote the surplus amount of revenue over expenses/expenditure. For example, a pen is sold for Rs.100 which was bought for Rs.50, and the tax payable is Rs.10, in this case, the revenue is Rs.100 and the expense is Rs.60 (including tax) and the excess/surplus amount of revenue is Rs.40 and this Rs.40 is called profit.
2. Recorded on the Books:
Profit is recorded in the business books like balance sheet, etc. and it is calculated through trading account, profit and loss account, etc. Gross profit or loss is calculated with the help of trading account and net profit or loss is calculated with the help of profit and loss account. In the balance sheet, profit is recorded under the owner’s share (capital) on the liability side.
3. Classified:
Profit is classified into various parts but mainly it is classified into three parts: 1. Gross profit, 2. Operating profit, and 3. Net profit and all types of profit have their own meaning. For example, gross profit means profit after deducting direct expenses from revenue, operating profit means profit after deducting operating expenses from revenue/gross profit, and net profit means profit after deducting all expenses including taxes from operating profit/revenue.
4. Increase Liability:
Profit increases the liability of the business as the profit is recorded on the liability side of the balance sheet under the heading of equity and share commonly known as capital. The reason behind recording the profit on the liability side of the balance sheet is the separate legal entity principle/concept. Separate legal entity means that the owner and the organization are two different persons.
5. Uncertainty:
Profit is uncertain in nature as it depends upon the activities of the organization and it is determined by various factors like price, margin, market condition, competition, product availability, demand, supply, etc. But to some extent, the profit ratio can be maintained by using various strategies.
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QNA/FAQ
Q1. What is Profit?
Ans: Profit is an accounting term that represents the excess/surplus revenue over expenditure/expenses.
Q2. Profit is certain in nature, is it correct?
Ans: No, this is wrong because profit is uncertain in nature.
Q3. Write the formula to find the profit.
Ans: Profit = Revenue – Expenditure/Expenses
Q4. Does profit increase the liability of a business?
Ans: Yes, profit increases the liability of a business as it is added to the owner’s share
Q5. Write the features of profit.
Ans: Following are the features of the profit:
1. It is an accounting term.
2. It represents surplus revenue over expenditure.
3. It is recorded in the books.
4. It increases the liability of the business.
5. It is uncertain in nature.
6. It is classified into various parts.
7. It is the main objective of most businesses.
8. It increases the owners’ share.
9. It is calculated through accounting reports.
10. It is the opposite of loss.
