A:

In some cases residual income can be considered profit. Residual income is the amount of income a person has after all personal debts have been paid off. It is usually calculated on a monthly basis after all monthly bills and costs are paid. In cases where there are additional funds left over after monthly bills are paid, the residual income could be considered profit. Residual income is often considered in the context of personal finances whereas profit is discussed in a business context.

Profit is realized when the amount of funds gained exceeds the expenses, costs and taxes needed to sustain a household or company. A simpler formula is profit = total revenue - total expenses. For example, if a general store has revenue of $1,000 in a month and must pay expenses of $700 that same month, the store would generate a profit of $300. Often it may take new businesses months or years to realize a profit particularly when dealing with start-up costs. Businesses often also have profit and loss (P&L) statements usually calculated quarterly.

Similarly if a person has $1,000 a month to pay bills and must pay expenses of $700 that same month, the person has a residual income of $300. The $300 may also be referred to as disposable income. In cases where a person has a substantial amount of residual income lenders may be more willing to extend credit because having an adequate amount of residual income will ensure that the borrower can afford to make monthly payments and is less likely to default.

While residual income is often referred to in the scope of personal finance it can also be used to determine equity value for a business or firm. This is often referred to as the "Residual Income Method."

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