Profit and loss is a concept that indicates the gain or loss in terms of money for a particular deal. Simply put, it refers to calculating the invested amount and received amount.
The general formulas for calculating profit and loss are;
- Profit = Selling price – Cost price
- Loss = Cost price – Selling Price
Various versions of the formula are used to get the selling price and cost price.
For the selling price,
Selling Price = Profit + Cost Price
For cost price,
Cost Price = Loss + Selling Price
Selling Price
The amount at which a particular commodity or a product is sold is its selling price. This amount is the net total of the manufacturing amount, material amount, and other expenses inferred to produce the particular commodity or a product. If the cost price is greater than the selling price, then there will be no profit as the investment is greater than the receiving amount.
Cost Price
The amount at which a particular commodity or a product is bought is its cost price. The cost price is divisible into two categories:
- Fixed-rate: This amount cannot be any further discounted or is at its maximum discounted price. Items of great value and everyday essential commodities are sold at a fixed rate.
- Flexible rate: Unlike the fixed-rate, this amount is negotiable and can be further reduced by effective bargaining. Most commodities are sold at a flexible amount; various discount coupons are applicable on these products, which reduce their initial rate. This is a trick used by many companies and shop vendors to attract customers
Percentage
Percentage in general terms is defined as a ratio expressed as a fraction of a hundred. In terms of profit and loss a Percentage is the final value obtained when an amount is divided by the principal amount and later multiplied by 100. It is presented as %.
- Profit percentage: This is the net total of profit amount divided by cost price and then multiplied by a hundred.
Mathematically profit percentage is represented as:
Profit Percentage = (Profit amount/ Cost price) x 100
- Loss Percentage: This is the net total of loss amount divided by cost price and then multiplied by a hundred.
Mathematically loss percentage is represented as:
Loss percentage = (Loss amount/ Cost price) x 100
Marked Price
Marked price is the price that the producer sets on the label of any product. It is a price at which the producer gives the customer a discount. After this discount is subtracted from the known Marked price, it is sold at this price, known as the selling price.
Calculation
A company’s profit statement and loss statement is generated at the end of a year by adding all the revenue and subtracting from the total expenses. The profit and loss statement, also known as the income statement, helps provide details of the company’s financial performance for that financial year.
Uses of Profit and Loss in real life
Buying goods
Understanding profit and loss are important when we go to the market to buy or sell goods. Before any trade, we first need to calculate the profit and loss associated with the product. Shopkeepers consider profit and loss in selling their products at a high price.
Accounts
An accountant of a firm uses profit and loss to calculate the profit percentage of the company in particular. This gives an overall summary of all the calculations made in that year.
Share Market
Investors and brokers use profit and loss in the share market to understand the health of a company before investing in it.
Business
While running a business the profit and loss concept plays a very important role. Because a business thrives only when it makes a certain amount of profit for its growth.
Trading
People who are involved in trading in stocks use the concept of profit and loss to a great extent. Suppose if they purchase a stock at x rate today and if the price of the stock increases by 10% the very next day, then the trader receives a profit of 10%. Whereas if the price of the stock decreases by 10% then the trader has to pay the extra 10% from his pocket which is known as a loss. Every trader uses this concept to calculate their daily income.
Tricks to Calculate Profit and Loss
There are several tricks or formulas to calculate profit and loss. These formulas help us to solve mathematical problems easily.
Profit = Selling price – Cost price
Loss = Cost price- Selling price
Profit Percentage = Profit/Cost price ✕ 100
Loss Percentage = Loss/ Cost price ✕ 100
Selling price = {(100 + Profit Percent)/100} ✕ Cost Price
Selling price = {(100 – Loss Percent)/100} ✕ Cost Price
Cost price = { 100/ (100 + Profit percent)} ✕ Selling price
Cost price = { 100/ (100 – Loss percent)} ✕ Selling price
Discount= Market Price – Selling Price
Profit percentage for false weight = [( True weight – false weight)/ False weight] ✕ 100
Conclusion
Profit and loss are important terms used by people generally. Profit is described as the additional amount earned after selling a product at a price more than its cost price. The exact opposite of profit is loss; where the product is sold at a price less than its cost price. These concepts form the basis of finance management, business, grocery shopping, or any kind of transaction that is done. The profit and loss depend highly on the selling price and the cost price of a substance. If the difference between the selling price and cost price is positive(+) it indicates that a profit has been made but if the result is negative(-) it indicates that a loss has occurred. Overall the concept of profit and loss teaches a lot and has numerous applications in our daily life.
