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The principle of profit and loss is a very important one in the financial sector. Today every company has to maintain its profit and loss account which needs a high amount of knowledge and expertise in the field of finance. The format to maintain such profit and loss account is discussed under this topic along with an example for a better understanding. The profit and loss or its statement is a maintained record of revenue and expenses incurred in a business firm over a financial year. The basic concepts of profit and loss are applied in daily lives by common people too as in the case when a shopkeeper buys products from a wholesale retailer and sells them to the buyers at a higher price to realize profit and sustain a growing business. This makes one excited to know exactly what is profit or loss?
What is profit?
The term profit could be explained as, when we buy a product at a certain price and sell it at a higher price than that we bought it, the difference between the price at which we sold the product and the price at which we bought it is the profit gained.
The concept of profit could be more explanatory if we solve a problem such as
- A wholesale seller buys 1000 quantities of a product at 20 rupees each, after sometime he sells all 1000 quantities at 23 rupees each. Calculate the total profit realised by the wholesale seller also calculate the profit gained per product.
Ans. A total number of products bought= 1000
Buying price =₹20/product
Total money required to buy 1000 quantities at ₹20 =1000*20 =₹ 20000
Similarly, the selling price =₹23/product
By selling 1000 quantities at ₹23/product, the total money gained =1000*23
=₹23000
therefore, the total profit =total selling price-total buying price
Total Profit=₹23000-₹20000
Total profit =₹3000
now ,the profit per product could easily obtained by subtracting the buying price per product from the selling price per product.
Profit per product= selling price per product-buying price per product
Profit per product=23-20=₹ 3
Hence, total profit is ₹3000 and profit per product is ₹ 3.
- If a shopkeeper buys 2 products at 50 rupees each and sells one at 60 rupees and another at 45 rupees. Calculate the net profit or loss realised by the shopkeeper.
Ans. Total buying price= 50*2= 100 rupees
Total selling price =60*1 +45*1
=105 rupees
Therefore, selling price -buying price= 105-100=5 rupees
Hence, 5 rupees is the net profit realised by the shopkeeper.
What is loss?
The term loss is defined as when we buy a certain commodity at a certain price and sell it at a lower price than the price at which we bought it, the difference between the price at which the commodity sold and bought. Loss is always in negative.
Let us take one example.
- If a shopkeeper buys 20 packets of premium pens at ₹500 each and sells all packets at ₹ 290 each. What is the realised loss faced by the shopkeeper ?
Ans. Total number of packets=20
Buying price for each packet=₹500
Total buying cost for 20 packets=20*500= ₹10000
Now, 20 packets sold at ₹290,the total selling price=20*290=₹ 5800
Therefore, loss =selling price-buying price
Total loss=5800-10000
= -4200
Hence, the loss is of ₹4200.
Formulas to calculate profit and loss
Profit/loss = Selling price – buying price
Note- if the answer is in positive then it is profit and if it is in negative then we have loss. Also, the net profit and loss are calculated by deducting all the expenses (GST and other expenditures).
Profit and loss account format
Particulars | Amount | Particulars | Amount |
To gross loss b/d | To gross profit b/d | ||
Management expenses: | Income: | ||
Selling distribution expenses: | Non-trading income: | ||
Financial expenses: | Abnormal gains: | ||
Abnormal losses: | By Net loss | ||
Transferred to a/c(capital a/c) | |||
To Net profit | |||
Transferred to a/c(capital a/c) | |||
total | total |
An example of XYZ company’s profit and loss account by the end of 31st march 2020
Particulars | Amount | Particulars | Amount |
To carriage outward | 6000 | By gross profit | 1,58,000 |
To rent | 40000 | From Rent received | 7000 |
To discount allowed | 3000 | ||
To salaries | 49000 | ||
To depreciation: | 18500 | ||
Plant and machinery | |||
Furniture | |||
To bad debts | 6000 | ||
To net profit-transferred to capital a/c | 42500 | ||
1,65,000 | 1,65,000 |
Conclusion
The topic of the profit and loss has looked into what is profit and loss. Moreover, it has also looked into the terms related to profit and loss, in brief. The various profit and loss formats have been discussed under the topic along with an example of a company’s profit and loss account. The FAQs section attempts to address the most probable queries that might arise. The FAQs section provides additional information which will aid a better understanding of the topic.
