What is Profit?

Profit is the positive amount remaining after subtracting expenses incurred from the revenues generated over a designated period of time. This is one of the core measurements of the viability of a business, and so is closely watched by investors and lenders. Profitability can be quite hard to achieve for a startup business, since it is struggling to create a customer base and is not yet certain of the most efficient way in which to operate.

The Difference Between Profit and Cash Flows

The profit reported by a business may not match the amount of cash flows generated during the same reporting period; this is because some of the accounting transactions required under the accrual basis of accounting do not match cash flows, such as the recordation of depreciation and amortization. When an organization’s management is engaged in earnings management, it may use a variety of tricks to make profits look higher than is really the case; this will result in a wider gap between reported profits and cash flows.

Accounting for Profits

Profit is only accumulated in the accounting records for the current year. After that, the amount of profit reported is shifted into retained earnings, which appears in a company's balance sheet. These retained earnings may be kept within the business to support further growth, or may be distributed to owners in the form of dividends. Retained earnings may also be used to buy back shares.