What is the formula used to calculate profit?

The formula to calculate profit is derived from the fundamental accounting equation that assesses a company's financial performance. Profit is determined by taking total revenue, which is the income generated from sales, and subtracting total expenses, which includes all costs incurred in the operation of the business, such as wages, rent, utilities, and materials.

This basic relationship highlights the core concept of profit: it reflects the financial gain that the business realizes when its revenue exceeds its costs. A positive result indicates that the business is operating effectively, generating more income than it spends. This formula is crucial for businesses to assess profitability, make strategic decisions, and evaluate overall performance.

The other choices presented do not represent the calculation of profit. The second option relates to a measure of solvency, focusing on the financial position rather than operational performance. The third option mixes income with liabilities, which is not applicable to expressing profit. The fourth option incorrectly combines gross income and retained earnings, which are different financial metrics and do not directly relate to calculating profit.