Profit is the money left after deducting total costs from total revenue. It is the starting point for calculating taxes and if the business issues stock, the base upon which stock dividends are calculated and paid. Profit is reflected in the business income statement. Any transaction that affects its bottom line will in turn affect business profits.

Income Statement Calculations

An income statement calculates profit by subtracting expenses and losses from revenues and gains. Expenses are the total of operating expenses such as sales commissions and the cost of goods sold and non-operating expenses such as interest expense. If the proceeds from the sale of a long-term asset are less than its book value, the amount the business loses on the sale gets recorded on the income statement as a loss. Revenues are the total income the business receives from primary activities such as sales revenue, secondary activities such as rent or interest income and gains, such as profits from the sale of a long-term asset.

Asset Transactions

Revenues from sales or service and income from interest, dividends or rent increase business assets and affect business profits. Journal entries that increase revenue or income show the increase as a credit and the corresponding asset account as a debt. For example, a journal entry for sales revenue of $5,000 that includes $2,000 in cash and $3,000 in credit sales will show a $5,000 credit to sales revenue, a $2,000 debit to cash and a $3,000 debit to accounts receivable. A journal entry for $100 of interest income will show a $100 credit to interest income and a $100 debit to cash.

Liabilities Transactions

Transactions that increase liabilities decrease business profits. Liability transactions include the cost of goods sold and any expense account. Journal entries that increase expense liabilities show the increase as a debit. For example, a journal entry to record $10,000 cost of goods sold that includes $4,500 in beginning inventory and $5,500 in purchases will show as a $10,000 debit to cost of goods sold, a $4,500 credit to inventory on hand and a $5,500 credit to inventory purchases. A journal entry to record the payment of a $5,000 advertising bill will show as a $5,000 debit to advertising expense and a $5,000 credit to cash.

Owner’s Equity

The owner’s equity section of the balance sheet – or stockholder’s equity if the business is a corporation – can also reflect transactions that affect business profits. Owner’s equity is the sum of the owner’s total investment in the business plus the net income or net loss figure – profit or loss – reported on the income statement. Owner's equity is also called the book value of the business. Because money the owners puts into or withdraws from the business increases or decreases cash – a business asset – owner’s equity transactions ultimately affect business profits.