Which of the following best defines profit in the context of the fundamental accounting equation?

• A. Profit is the difference between assets and liabilities.
• B. Profit is the total amount of assets owned by a business.
• C. Profit is the excess of revenues over expenses during a specific period.
• D. Profit is the sum of liabilities and equity.

Answer: (C)

Verified step by step guidance

1. Step 1: Begin by recalling the fundamental accounting equation: Assets = Liabilities + Equity. This equation is the foundation of financial accounting and helps in understanding the relationship between a company's financial components.
2. Step 2: Understand that profit is not directly defined by the fundamental accounting equation itself but is derived from the income statement, which measures the performance of a business over a specific period.
3. Step 3: Recognize that profit is calculated as the excess of revenues over expenses during a specific period. This is a key concept in financial accounting and is used to assess the financial success of a business.
4. Step 4: Eliminate incorrect options by analyzing their definitions: (a) Profit is not the difference between assets and liabilities, as this would represent equity, not profit. (b) Profit is not the total amount of assets owned by a business, as assets are a balance sheet component. (d) Profit is not the sum of liabilities and equity, as this represents total assets.
5. Step 5: Conclude that the correct definition of profit in this context is: Profit is the excess of revenues over expenses during a specific period. This aligns with the principles of financial accounting and the income statement.