Profit and Loss

Have you ever wondered how stores/businesses compute their sales? How do they know their profits and losses? Well this post will tell you what computations businessman do in order to know these things. 

But first, here are the important terms you need to know in relation to this topic: 

Profit is the amount by which the sales are greater than the cost of goods sold and the operating expenses. 


Gross Sales is the actual amount received for selling the goods.

Refunds are amounts returned usually if goods are defective.

Net sales are obtained when refunds are being deducted from the gross sales.

Costs of goods sold or buying price is the amount paid for articles bought including the buying   expenses.

Inventory is an itemized lists of goods on hand.

Gross Profit is the difference between the net sales and the cost of goods sold.

Operating expenses or overhead are selling expenses such as salaries or wages, traveling expenses, rentals, water, electric bills, commissions, taxes.

Net Profit is the amount obtained when all the selling expenses or other cost of doing business are deducted from the gross profit.

How to compute the Profit? 

The formulas in computing profit are as follows;

               

                Net Sales = Gross Sales – Refunds and Allowances

                

          Net Profit = Gross Profit – Operating Expenses

The net sales and profit may also be given in scheme diagram as follows:

                                    

         Gross Sales

                                -   Sales Returns and Allowances

                                ---------------------------------------------

      Net Sales

                  -   Costs of Goods Sold

                                 ----------------------------------------------

                                                  Gross Profit

                                                                         -  Operating Expenses

 -----------------------------------------

                                                                             Net Profit

To compute for the cost of goods sold for a period of time, we have the formula as follows:

               

Available Goods = Beginning Inventory + Purchases

                Costs of Goods Sold = Available Goods – Ending Inventory

The above may be diagrammed as follows:

                               

   Beginning Inventory

        +  Purchases

                                ------------------------------- 

Goods For Sale

                       - Ending Inventory

                                ------------------------------- 

     Costs of Goods Sold

In case the sales are less than the cost of goods sold, there is a loss. The formulas in computing losses are as follows:

                               

Gross Loss = Costs of Goods Sold – Net Sales

                            Net Loss = Gross Loss + Operating Expenses

The relationship of the terms of loss may be diagrammed schematically as follows:

                                 

   Cost of Goods Sold

         - Net Sales

                                   ------------------------------

 Gross Loss

                            + Operating Expenses

                                  ------------------------------

   Net Loss

So there you go! It's pretty easy. No complicated equations/formulas needed in solving the profit and loss. 




Checked by: CRISENCIO M. PANER