Question: How do you Determine Profit or Net Income?
Answer:
Profit or net income is determined by subtracting all the company's expenses from its sales revenues. Expenses and sales revenues are recorded as they happen, not as you receive or expend the money for them. This is called accrual accounting.
An example is accounts receivable. Suppose you have a customer to whom you extend credit. That customer buys your product. On your income statement, that sale shows up immediately even though you have not received the money for it. On your cash budget, that sale does not show up until you do receive the money for it.
