Definition of Profit
Profit is the result of revenues minus expenses.
How Profits Change the Balance Sheet
Since all business transactions affect at least two accounts, there will likely be an enormous number of changes to the balance sheet. Here are some of the changes:
- Owner’s equity or stockholders’ equity will increase by the positive amount of net income
- Accounts receivable will change by the amount of sales/services provided with credit terms
- Inventory will decrease when goods are sold
- Cash will increase when goods are sold for cash and when accounts receivable are collected
- Cash will decrease when cash is paid for expenses, inventory, equipment, liabilities, etc.
- Accounts payable will increase for expenses that were not paid with cash
- Accumulated depreciation will change when an asset is depreciated
Again, the list is just a few of the balance sheet changes that may occur when a company has profitable operations.
