How To Understand "Income Cost = Profit"

The relationship between revenue, cost and profit is generally defined as "profit is the ultimate financial achievement of production and business activities in a certain period of time. It is the ratio of income to cost and the balance after balance. It is the ultimate factor reflecting the results of operations."

How to understand "income cost = profit"? If it is simply understood that business income minus business expenses equals operating profit, it is obviously not comprehensive.

To understand this equation, we should consider income.

Start with the concept of cost and profit.

According to the enterprise accounting standards, "income is the business revenue that an enterprise implements in the business of selling goods or providing services. It includes basic business income and other business income."

The author believes that the concept of "income" here is relatively broad, and it should include all income from operation and non business activities.

But in the real economic life, people tend to narrow the concept of "income".

Both broad sense of income and narrow sense of income have the following two characteristics: first, income is the increase of net assets of enterprises.

Because the realization of income often appears as an increase in assets or a decrease in liabilities, which will eventually lead to an increase in net assets of enterprises.

However, the increase of corporate net assets does not necessarily generate income, such as owners' increasing investment and accepting donations. This kind of matter is also reflected as an increase in net assets of enterprises, but enterprises do not earn income.

Second, the main source of income comes from the main business activities in the production and operation process, such as selling goods and providing services, but not the only source, such as leasing fixed assets and so on.

The definition of cost in China's accounting standards for enterprises is two. The cost is defined as the expenses in the course of production and operation.

The direct material, direct labor, commodity purchase price and other direct expenses incurred by enterprises directly for production of goods and services shall be directly included in the cost of production and operation. The indirect expenses incurred by enterprises for the production of goods and services shall be allocated to the production and operation costs according to certain standards.

The administrative expenses and financial expenses incurred by an enterprise's administrative department for organizing and managing production and business activities, and the purchase cost and sales expenses incurred for selling and providing labor services shall be included in the profits and losses of the current period as a period cost.

From this we can see that the cost refers to the consumption associated with the provision of goods or services, which is a narrow concept.

In the broad sense, the cost includes various costs and losses, such as outgoing expenses.

No matter whether the cost includes loss, it should have the following characteristics: first, the cost will eventually lead to the reduction of enterprise resources, which is manifested in the capital expenditure of enterprises.

In this sense, the essence of cost is a resource outflow enterprise, which is opposite to the income generated by the flow of resources into the enterprise. It can also be understood as the consumption of assets, and its purpose is to obtain income and obtain more assets.

Second, fees will ultimately reduce owners' equity.

Generally speaking, the owner's equity will increase with the increase of income. On the contrary, the increase of expenses will reduce owner's equity.

However, the reduction of owners' equity is not necessarily included in the cost. For example, corporate debt paying expenses and profits distribution to investors obviously reduce owners' equity, but they can not be included in the cost.

It is stipulated in the "enterprise accounting standards" that profit is the operating result of an enterprise for a certain period of time, which includes operating profit, net investment income and net operating income and expenditure. Three

The operating profit is the balance after business income minus business cost, period cost and all kinds of turnover tax and surcharge; net investment income is the balance after the investment income of the enterprise minus the investment loss; the net amount of business income and expenditure refers to all kinds of non business income which is not directly related to the production and operation of the enterprise, minus the balance after operating expenses.

From the concept of profit, we can see that the income in profit includes all kinds of income, such as operating income, investment income, supplementary income and extra business income, and all costs and expenses include operating costs, period expenses and extra operating expenses.

Four, income, cost = profit, profit and loss is the difference between income and expenses. The income here is generalized income, including business income, subsidy income, investment income and extra business income. The cost here is generalized consumption, which includes all costs and losses.

The ratio of income to cost should include three ways: 1. direct proportion.

It is a direct match between the expenses that are directly related to a specific income and the income corresponding to them, so as to determine the way of matching profits.

If the direct material and the direct labor are included in the cost of the finished product directly, the selling cost will be pferred directly to the cost of the sales revenue realized.

2. indirect ratio.

It is to allocate the expenses which are jointly consumed by several objects to each specific object according to a certain proportion or coefficient, so that it can be related to the corresponding financial results, for example, the manufacturing cost is allocated by indirect matching method.

The ratio of the 3. periods is.

The cost of causation which is not related to any specific product or service is only related to a certain period of time, so these costs are considered to be related to all the revenues achieved during the period.

It is necessary to match the income of the period. These costs include management fees, sales expenses, financial expenses and extra business expenses.

Some sales expenses may have a causal relationship with specific sales revenue, but in most cases, sales expenses are difficult to relate to specific sales revenue, and the sales expenses incurred in the current period are generally related to the sales revenue of the current period, and there is little inter temporal treatment.

According to the above three matching methods, the ratio of income to cost is the profit, that is, income (generalized) cost (generalized) = profit.