Profit and Loss

We all buy products from various companies. In return, we pay the companies money in exchange for the commodity. A company sells their goods to us. The money they charge from their customers’ needs to provide them some benefit because the company worked hard to produce the goods they sold to the customers. The money which the companies charge covers the price of delivering the goods and leaves some more money for the company to enjoy. The concept of profit and loss revolves around this extra money.

What are profit and loss?

Profit and loss are essential concepts when it comes to business. Profit refers to the excess money a company is left with after the revenue generated from the sales of goods covers all the expenses incurred by the company while producing the goods. Loss is a situation when a company fails to acquire the excess sum of money, and the revenue that is generated is lesser than the cost incurred by the company to produce the goods. Therefore, the concept of profit and loss is essential for a company, and thus, a company maintains profit and loss accounts to supervise their profit or loss.

The formula for calculating profit and loss

The following is the profit and loss formula that will assist in calculating the exact amount of money that the company has earned or lost.

• Profit = Selling Price – Cost Price
• Loss = Cost Price – Selling Price

In the above formula, selling price refers to the price of the goods the company agreed to sell the commodities. Cost price involves the expenses of producing the goods. Therefore, the payment of having an item must be deducted from the price at which the goods were sold to determine profit. To assess the loss, the cost of producing a good must be removed from the price at which the goods were sold.

Why is the concept of profit and loss important?

The concept of profit and loss is very important in the field of business. A company needs to maintain a profit and loss account. Maintaining a profit and loss account helps a company to keep a check over the income and expenses of a business that further results in the calculation of the net profit or net loss. It also helps people in the industry in estimating the performance of a company in the business world and provides an essential platform to determine what can be the possible future of the company. Apart from that, before granting a loan to a company, the bank needs to analyze the profit and loss account of the company to decide whether to sanction the loan or not. A profit and loss account is also essential because it helps in estimating the tax obligations. The advantage of maintaining a profit and loss account is it helps a company in setting and achieving business-related targets. To select a realistic and achievable target, a company needs to analyze its expenses and revenues. A company can predict they’re possible future revenue by thoroughly examining the sales it has done in the past and exploring the income they have earned. With the help of a profit and loss account, a company can easily do it. With the gradual growth of the company, the level of revenue earned will increase extensively. To avoid unproductive expenses, an accurate estimation of income is required. The profit and loss account also helps a company to analyze the areas of improvement so that more profits can be earned.

Conclusion

If an individual aspires to become a successful businessman, he must have a proper understanding of analyzing the profit and loss accounts of a company. If an individual wants to own a company, he must prepare a profit and loss account for the company. The concept of profit and loss is simple, but the application of the image can prove to be complicated. In case of any doubt, the profit and loss questions can be searched over the internet to find convincing answers.