Movie Case Study
Shekhar comes to spend some time in his village when his barber gives him a proposal. He wants to go to the city along with Shekhar and open a salon. He guarantees with this idea they will make a lot of profit in this start-up.
This blog, Learning Perspectives will explore the meaning of profit in accounts.
What is Profit in Accounting?
Profit or net profit or revenue or income are some terms used synonymously in accounts. However, that’s not correct. We will deconstruct each term to understand its relevance in accounting.
When a business is undertaken, the company’s first objective is to determine its sales/revenue and expenses that it is incurring. If we take the example of the salon similar to the scene that we saw.
Salon makes revenue through the customers who avail the services of the salon such as a haircut, hair wash, etc. While its expenses could be on the daily expenses of the products that they need to purchase to serve the customers.
Understand Profit with a Video
Salon’s rent and electricity also are part of the monthly expenses that the salon has to incur. Profit for the salon will be where revenue or sales are higher than the expenses.
Formula
Profit/Net Income = Revenue – Expenses
Profit or net income is reported in the income statement of the company. It is also called the profit & loss account. The top line of the income statement indicates the revenue or sales of the company, below this all expenses that the company incurs are recorded. When expenses are higher than the revenue, then the company incurs a net loss.
Real-Life Example:
Below is the income statement of Meta (previously Facebook). Let’s take a deeper look into it to understand it further.
The above shows Meta’s quarter-wise income statement. The top line is the revenue line, it gives you an understanding of where Meta derives its revenue from. Revenue at Meta is generated through ads, different apps (such as Instagram, Messenger, and Whatsapp), and reality Labs including augmented and virtual reality-related consumer hardware, software, and content.
For December 2021, the total revenue is US 33,671 million dollars. Cost of revenue includes R&D, marketing & sales, and general expenses.
References:
https://s21.q4cdn.com/399680738/files/doc_financials/2021/q4/FB-12.31.2021-Exhibit-99.1-Final.pdf
