How to calculate Profit

WHAT IS PROFIT? Profit may be defined as the excess of selling price over cost price. In this case, the total revenue realized from goods bought exceeds the total expenditure on goods if reverse is the case , it is known as loss which indicates that the business concerned did not make profit .

Profit may also be termed as the reward a person gets for the risk he took in providing his capital in a business

NOTE: The main reason for establishing a business is to make profit because it increases the business capital and provides income to the owner of the business

ECONOMIST DEFINITION OF PROFIT: This is the payment to the entrepreneur for undertaking the risks of production. It is the total reward available to an entrepreneur i.e. returns on entrepreneurship.

ACCUONTANT, S DEFINITION OF PROFIT: This is the difference between the revenue and the cost incurred in the course of a business .It takes into cognizance the relationship between revenue and cost

To an accountant, profit =Revenue –Expenses

TYPES OF PROFIT:

1. Gross profit This is the excess of sales revenue over the cost of goods sold .It shows the total profit before deducting all the expenses .Gross profit is determined in the trading account.
2. Net profit: This is the excess of gross profit over the total expenses of the business at a given period .This is the real profit of a business. It is determined by preparing the profit and loss account.

USES OF TRADING PROFIT AND LOSS ACCOUNT

1. To show the profit of an organization.

.b.     For income tax assessment

1. for planning by management
2. it is used for comparison of results actually achieved against those expected.
3. it can be used to obtain loan by an organization .
4. it is used for comparison between companies.

EVALUATION:1. Define profit according to an economist

2. Mention 5 items each;
3. credited to trading profit and loss account.
4. debited to trading profit and loss account

ASSIGNMENT; XYZ limited is a trading company .the following transactions took place in the month of February

Purchase of goods

32 suitcases at #3500 each

42 shirts at #800 each

ADDITIONAL INFORMATION:

1. The cost of transporting goods to firm’s premises was #2500
2. Two workers of the firm were paid wages and salaries of

#4500 each

3. total sales revenue was #180000

You are required to calculate:

1. Gross profit

B.net profit