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All goods are sold to customers at a price which is known as the selling price. Costing is also required to manufacture the goods and then that product is given to the distributor to sell. This price is known as the cost price of the product. If the selling price is greater than the cost price, the person selling the product makes a profit and if the situation is reversed, he incurs a loss. Now, the entire range of profit or loss and the distribution and shares of the profits is a different topic but the prime focus here is profit and loss. Profit and loss are basic concepts that are necessary to understand to buy or sell things efficiently, do business properly, maintain accounts, and maintain money as well. It is essential to understand and compare products to save money and this is possible only if one understands the basic concepts of profit and loss.
Components and Terminology
The key terms which are necessary to understand the fundamental concept of profit and loss:
Cost Price (CP)- This refers to the price at which a commodity is purchased. The amount includes multiple costs such as transportation costs, setup costs, overhead expenses, etc.
Selling Price (SP)- This price refers to the amount at which the commodity is sold to another person/organization. This price can be equal to, more or even less than the cost price of the commodity.
Profit- A person or organization makes a profit if they sell a product at a higher price than the product’s cost price. For example, say a man sells a piece of furniture for 6000 rupees which he earlier bought for 5000 rupees. Then he makes a profit of 1000 rupees.
Loss- A person or organization makes a loss if they sell a product at a lower price than the product’s cost price. For example, say a man sells a piece of furniture for 4000 rupees which he earlier bought for 4500 rupees. Then he incurs a loss of 500 rupees.
Percentage of Profit- This is calculated by taking the percentage of profit on the cost price.
Loss Percentage- This is calculated by taking the percentage of loss on the cost price.
Profit and Loss Formula
In the case of a profit:
Therefore, CP < SP
Profit = Selling price of the product – Cost price of the product
Selling price = Cost price + profit
Cost Price = Selling price – profit
Profit Percent = Profit/Cost price multiplied by 100
Cost price = Profit/profit percent multiplied by 100
Profit = Profit/100 multiplied by the cost price
In the case of a loss:
Loss = Cost price – selling price
Cost price = Selling price + loss
Selling price = Cost price – Loss
Loss percent = Loss/cost price multiplied by 100
Loss = Loss/loss percent multiplied by Cost price
Cost price = Loss/loss percent multiplied by 100
Profit and Loss Account
A profit and loss account shows the performance of a business by reflecting on different activities like revenue, costs, and expenses over a certain period. as a result, a proper outcome of a business can be understood with the help of this account and the overall performance of the organization can be measured on the bases of the profits and losses made by the organization.
Profit and Loss Statement
The profit and loss statement (P&L) is an organization’s financial statement of different operations. It provides evidence and analysis of all the revenues, profits/losses, and expenses of the business over a given period.
Conclusion
Profit and loss are basic concepts of mathematics and their application can be witnessed in day-to-day life. Every business, organization, person relies on profit and loss to make proper financial decisions both in the short-run and the long run. The concept of profit and loss is very necessary to understand how to buy or sell things efficiently, do business properly, maintain accounts, and maintain money as well. In simple terms, profit and loss are the differences between the cost price and selling prices of a commodity and when that profit or loss is divided by the cost price and then multiplied by 100, it shows the profit percent or loss percent of that commodity.
