Tuesday, January 29, 2008

Profit – Its Definition and Use

Profit is the term used to describe the revenue produced by a corporation that is in excess of its expenses. Profits are necessary for a firm to grow and expand. Without profits a firm would be unable to purchase the additional resources necessary to expand the firm's productive capacity and increase output.

The accounting formula for the calculation of profit is:

Profit = Total Revenue – Total Cost

If total revenue exceeds total costs the resulting surplus is called profit. However, if total revenue is less than total cost, we have a loss and the firm is forced to borrow, dip into reserves or sell assets in order to make up the difference.

Legally, profits belong to the owners of the business and in the case of a singular undertaking such as the construction and sale of a single home or group of homes, the owners dissolve the business once the objective has been met, the profit is divided among them and each goes their own way. In the case of an on going business such as an oil company or TV network, the firm calculates its profit and divides it up periodically. In this case the owners usually take part of the profit in cash for use elsewhere and reinvest the remainder in the business in order to expand the business and increase future profits.