What is Profit and Loss?

The amount earned or lost on the sale of one or more items is referred to as the profit or loss on that item.

What is Profit?

A profit can be defined as the extra amount we earn after selling our product at a price that is more than its cost price.

Hence, Profit = Selling Price (S.P) - Cost Price (C.P).

Example: A man buys an apartment for $100,000. After two years, he sold his apartment for $125,000. Hence, he gets a gain of $25,000.

Profit Percentage

It means when a profit is represented or expressed in the form of a percentage.

It can be expressed as -

Profit Percentage (Profit %) = {(S.P - C.P)/C. P} ×100

OR

Profit % = {(Profit/C. P) ×100}

Example: A man buys a plot for $100,000. After 3 years he sold the plot for $125,000. So, the profit he gets is $ 25,000. Now, the profit percent is -

Profit Percent = (Profit/Cost Price) ×100

                      = (25,000/1,00,000) ×100 = 25%.

What is Loss?

It means a deficit amount which we get after selling our product at a lesser amount than its cost price and the statement of loss is known as a loss statement.

Therefore, the formula to find loss is given below:

Loss = Cost Price - Selling Price

When the loss occurs, then the cost price will be more than the selling price.

Example: A man bought a phone with having a price of $20,000. After 1 year, he sold his phone for $15,000. It means he sold his phone at a loss of $5000, which can be seen in his loss statement.

Loss Percent

It means a percentage that represents the loss amount.

The formula for loss percentage is:

Loss % = {(Cost Price - Selling Price)/Cost Price} ×100

OR

Loss Percentage = [(Loss/Cost Price) ×100].

Example: A man bought a phone at the price of $10,000. After a year, he sold the phone for $8,000. Now, he has a loss of $2000. Find the loss percent.

Solution: 

Given data,

Cost Price = 10,000

Selling Price = 8,000

Loss = 2000

Loss Percent = (loss/cost price) ×100

                      = (2000/10000) ×100

                       = 20% 

What is a Financial Statement?

The financial statements are the statements that show the activities of a business and its financial position. It is mostly prepared by management executives. It is prepared to present the financial affairs of a company in a given period of time. The time may be quarterly, half-yearly, or yearly. It contains a balance sheet, income statement, cash flow statement, and shareholders' equity statement. 

What do you mean by Balance Sheet?

It is the company's financial statement that serves as an important source of information for users of financial statements. The users of this statement include owners and outsiders. The balance sheet displays a summary in the form of an image either a profit statement or a loss statement. It shows the financial position of the company at a particular date in detail.

Components of the Balance Sheet:

Assets

Assets = Liabilities + Shareholder's Equity

Assets are the tools that help to make money through the production process. Generally, assets are divided into:

Fixed Assets

Some of the fixed assets are:

• Land
• Furniture
• Plant and machinery
• Vehicles 

Current Assets

Some of the current assets are:

• Inventory
• Bill’s receivables
• Cash
• Prepaid expenses

Liabilities

Liability for a company means something owed by it for business activities, which is to be paid in the future. Generally, liabilities are divided into:

Non-current liabilities

Some of the non-current liabilities are:

• Loans and advances
• Bonds payable
• Deferred revenue
• Lease obligations

Current Liabilities

Some of the current liabilities are:

• Bills payable
• Creditors
• Accrued expenses
• Income tax payable

What is an Income Statement?

The income statement is an important financial statement of a company. It is also known as the profit and loss statement. The income statement is used to report the company's financial performance over a period of time and shows the net income. It is used with other important statements which are balance sheet and cash flow statements.

How is a Profit and Loss Statement Structured?

The company's profit and loss statement is recorded for a period of time, usually a month, a quarter, or a financial year. The main categories that can be found in the profit and loss statement include:

• Revenue
• Cost of goods sold (COGS)
• Marketing and Advertising
• Technology/Research & Development
• Interest Expense
• Taxes
• Net Income

Shareholders' Equity Statement

It is the part of the balance sheet which shows the changes in the value of shareholders' equity or any other ownership interest of the company. Generally, shareholders' equity statement includes the following:

• Equity capital
• Preferred capital
• Treasury stock
• Additional paid-in capital
• Retained earnings

What are the Different Profit and Loss Terms? 

Gross Profit

It is known as the measure of a company’s gain. It comes directly from the sale value of the company which is made above the cost of the goods sold.

Formula to find gross profit is given below: 

Gross Profit = Total sales – Cost of Goods Sold (COGS).

The difference (subtract) of the cost of goods sold from the total sales value is called gross profit.

Net Profit

It represents the total amount of revenue earned by the company after paying all the expenses. It is also known as net income or net earnings.

Formula to find net profit is given below:
Net Profit = Total Revenue - Total Expenses

Example: The total revenue of a company is $100,000 and the total expense (it includes the cost of goods, salaries, rent, etc.) is $70,000.  Find the net profit.

Solution: -

Net profit = Total revenue - Total expenses

                = $100,000 - $70,000

                = $30,000.

So, the Net Profit is $30,000.

Operating Expenses

Operating Expenses are those expenses that a business obtains to keep itself running. Operating expenses do not contain the cost of goods sold (such as building materials, over-production) nor does it include financial costs (large costs such as buildings). When the operating expenses increase, the gain of a business decreases. 

Some of the operating expenses are as below:

• Rent
• License fees
• Research
• Vehicle expenses
• Travel expense
• Electricity and telephone expenses

Selling Price (S.P)

The price at which a product is sold in the market is called the selling price of the product. 

The formula to find the selling price is as below:

Selling Price (S.P) = Cost Price (C.P) + Gain.

OR

S.P = C.P - Loss.

Hence, when we subtract the loss from the cost price then we get the selling price.

S.P = Market Price (M.P) - Discount.

Cost Price (C.P)

The price at which a product is purchased or bought by a seller is called the cost price.

The formula to find cost price is as below:

Cost Price (C.P) = Selling Price (S.P) - Gain.

OR

Cost Price (C.P) = Selling Price (S.P) + Loss.

When we add loss and S.P then we get the cost price of the product.

Marked Price 

The price set by the shopkeeper (seller) on a product is known as its marked price. It is represented as M.P. Sellers mostly mark this price on the products using a label, so it is also known as the list price.

Common Mistakes 

• There is no loss or gain if the C.P and the S.P of a product are equal.
• The seller gets the gain on the product when the S.P is more than C.P.
• The statement of income, balance sheet, and cash flow statement are important financial statements. 
• Earnings per share are calculated by using net income.

Formula

• Profit = Selling Price(S.P) − Cost Price(C.P)
• Profit % = {(S.P - C.P)/C.P} ×100
• S.P = Marked Price(M.P) − Discount
• C.P= S.P − Gain
• S.P = Cost Price − Loss
• Net profit = Total revenue − Total expenses

Context and Application

• Helpful in accounting to determine actual gain or loss.
• Used by the business management.
• Used for taxation purposes.