Profit ... derivative of money cost and money price

The simple definition of profit is based on money cost and money price. In financial accounting and reporting to corporate stakeholders, profit is the key measure that drives everything.

But profit is more complex in modern financial accounting. Money profit is no longer just the delta between price and profit but might be something else. The accounts may not simply record assets at their cost but on some other basis ... including “mark to market”! This is a wonderful device for taking into account unrealized profit ... simply by recording their value in the balance sheet at a price that the assets could be sold for based on the present market. Fifty years ago, a practice like this would have been banned absolutely based on the prevailing accounting principles ... but lobbying and legislation has overturned old principles and replaced them with laws and rules that are convenient ... in a rising market ... and very dangerous at any other time! Convenience is not a good principle of accounting.

Profit is at the center of the capitalist economic construct ... and is a useful metric as it relates money revenue with money costs, and serves as a useful and practical proxy for performance and productivity. But profit is is not a good proxy for socio-economic performance and the way quality of life in a community changes ... nor the sustainability of the community. In fact, thoughtless optimizing or maximizing of profit is a fairly certain way of creating an unsustainable future.

Modern society is largely driven by material economic activity, but there is a surprising lack of understanding of the behavior of economic activity and the impact on society. Money profit ... that is the derivative of money cost and money price ... is the biggest single metric for the performance of the economy. Social impact is totally ignored ... value is not in the dialog. Profit ... financial profit

Financial reporting is calculated using prices ... that is revenues ... and costs to calculate and report profit. There are rules about how this is done in practice ... but the key principle that should determine the detail of the rule is that the revenue of the period should be matched with the costs associated with this revenue.

Caveat

One of the (many) ways in which modern American accounting has gone off track has been to have rules that allowed revenues to be taken into the accounts without the long term costs of these revenues. An example is the pension and health benefits of auto-workers who built vehicles that were sold years ago, but without these benefits being treated as a cost and provided for. The law and the rules of FASB and GAAP allowed this practice ... but the principles of good accountancy do not.