Before we go through the remaining examples of basic accounting transactions, let’s first define profit and see how it is arrived at.
Profit is the positive amount you are left with when your total income exceeds your total expenses.
A person starts a business, and invests his assets in the business, so that the business will produce a profit for him.
This reason or motivation of starting and running an organization with the objective of making a profit is called the profit motive. Other organizations, such as welfare and educational organizations, are non-profit organizations – i.e. they do not exist so the owner makes a profit, but for other reasons such as benefiting the community or a group of people. Thus, when we are looking at income, expenses and profit, we are really looking at your for-profit business.
In order to calculate if the business has made an overall profit (or loss), we take our income and deduct our expenses.
The amount of profit that a business makes indicates how well a business is performing. This is called the financial performance of a business.
If the business makes a profit, this will belong to the owner.
Thus more profit means more owner’s equity (the owner’s share).
But now, what are these things called income and expenses? In our next lesson we're going to define income and go over a simple example to see how it works.