Profit and Loss

The terms ‘profit and loss’ are used quite often in our daily lives, as they help us make most of our financial decisions. Calculating profit and loss are important when it comes to buying and selling commodities and services. 

When an item’s selling price exceeds its cost price, the remainder is called profit. The difference is loss when the cost price is more than the selling price. The profit and loss of a business can be calculated by subtracting the expenses from the income. If the expenses exceed the income, the company has incurred a loss. If the income is more than the company initially spent, then it is a profit.

To elaborate

1. Profit: Financially, it makes sense to have the selling price of a commodity/service more than the cost price, as this results in profit. Profit can be represented mathematically as:

Profit = Selling Price > Cost Price.

2. Loss: On the other side of profit, it doesn’t make sense financially to continue selling a commodity/service at a price that is lesser than its cost price. This is called incurring a loss. Loss can be represented mathematically as:

Loss = Cost Price > Selling Price

Profit and Loss related terms 

1. Cost Price: This is the price paid to buy an item or a service. It can also be the price at which an article is made. CP is the abbreviation. 

Example: A pen was bought for Rs 10. Here, Rs 10 is the cost price (CP) for the pen.

Cost price can be divided into two categories.

• Fixed rate: This cost price cannot be further discounted or at its maximum discounted price. Items of great value and everyday basic commodities are sold at a fixed rate. 

• Flexible rate: This price, unlike the fixed rate, is negotiable and can be further reduced by effective bargaining. Most commodities are sold at a flexible price. For example, the purchaser can use discount coupons on certain products, which reduce their initial rate. Many companies and vendors offer flexible rates through discounts to attract prospective customers and boost sales. 

2. Selling Price: This is the price at which the item or service is sold. The abbreviation is SP.

Example: A book is sold for Rs 100. Here, Rs 100 is the selling price of the book, the price at which the shopkeeper will sell the book.

3. Market Price: Market Price or MP is the price printed on an item or service for sale. MP is also called tag or list price. The MP and SP can be equal when there is no discount on the commodity or service. If there is any discount, the market price will be more than the selling price.

Example: The SP of a pencil is Rs 12, and the seller gives a discount of Rs 2. Calculate the market price.

Selling Price = Rs 12

Discount = Rs 2

Market Price = Selling Price + Discount

Market Price = 12 + 2 = Rs 14

Hence, the market price for the pencil is Rs 14.

4. Markup: The MP of an item or service can be the sum of its CP and markup. In mathematical terms, it can be expressed as:

Market Price = Cost Price + Markup

5. Discount: The discount is a special price reduction a seller gives for their product or service. Discount can be expressed mathematically as:

Discount = Marked Price – Selling Price

6. Profit percentage: The net profit divided by the cost price and then multiplied by 100. Mathematically, the profit percentage is represented as:

Profit Percentage = Profit/Cost Price x 100 

7. Loss Percentage: The net loss divided by the cost price and multiplied by 100. Mathematically, the loss percentage is represented as:

Loss Percentage = Loss/Cost Price x 100  

Uses of Profit and Loss

So far, we have discussed the definitions of profit and loss and related terms. In this section, let’s look at some uses and applications of profit and loss, especially concerning running a business. 

A profit and loss statement of a company helps determine its financial position. Business owners can use the financial statement to decide whether to continue running the business or shut it down. The statement can also help investors and other stakeholders understand the health of the company and determine whether to invest further or seek external credit.

Profit and loss are important to sellers and buyers while trading commodities or services.  For the customers, the concept helps evaluating and making buying choices. For suppliers, it helps assessing the demand for an item and its cost. It also helps diversify and introduce new products. Various factors such as providing discounts help increase the profit margin for a particular product. 

Examples

1. The cost of a particular book on Amazon is Rs 200. During the festival season (Diwali Dhamaka), the website introduces a 2% discount on the book. Calculate the discount and the selling price for the book. 

Book’s cost (CP) = Rs 200 

Discount = 2% 

Discount = CP * 2%

                = 200 * 2%

                = Rs 4

Selling price = Cost Price – Discount

Selling price = 200 – 4

Selling price = Rs 196

The book is sold for Rs 196 during the festival season with a discount of Rs 4. 

2. If the cost price of 6 pens is equal to the selling price of 4 pens, calculate the profit margin for the shopkeeper?

Let us assume the cost price for a pen is Rs 4 and the selling price is Rs 6. 

Profit Percentage = (Selling Price – Cost Price (Profit)/Cost Price) * 100

                            = (6-4/4) * 100

                            = (2/4) * 100

Profit percentage = 50% 

Conclusion 

It is important to understand how to calculate profit and loss as the concept has many applications in our daily lives. The concept is crucial for investors, buyers, business owners and consumers. Since every business aims to maximise profit, profit and loss come into play while buying and selling commodities, investing and for the survival of the business.