PROFITS AND TURNOVER
Profit is the financial benefits which accrues to a businessman. It is the excess of income over expenses. Profit represents the gain,resulting from one’s capital in a business enterprise.
To the accountant, profit is the excess of income over expenditure. He sees it from two perspectives which are gross profit and net profit.
To an economist,profits represent the reward of an entrepreneur. It is a measure of business performance and means of rewarding business managers for taking the risk
Types of profit
Gross profit: This is the excess of turnover over the cost of goods sold. It is the difference between the selling price and cost price if a particular product. This is the total profit before any expenses is deducted. It can be determined by through preparation of trading account.
Gross profit is calculated as opening stock plus purchases,less closing stock, and this is deducted from sales revenue.
Net profit: The net profit is the excess of gross profit over the expenses. It is arrived at after all expenses incurred in the period have been deducted from gross profit.
Trading Profit and Loss
This is the account drawn up to show the gross profit and net profit of a business organisation. It’s contents are……
Opening stock : This is the stock of goods at the beginning of the year.
Closing stock: This is the stock of goods available at the end of the year.
Purchases: Purchase is the total value of goods(credit and cash purchases )bought for resale by an organisation.
Sales: This is the total value of goods sold by a business firm. It includes credit and cash sales.
Returns inwards: These are goods returned by the customers. It must be deducted from the sales for the period.
Returns outward: These are goods returned to the suppliers. It must be deducted from the purchases for the period.
Carriage inward : This is the cost of transporting goods to the firm. It is normally added to purchase.
Carriage outward: This is the cost of transporting goods to the customer. It is called carriage on sales and must be treated as expenses.
Expenses: These are the expenditure incurred in the running of a business. It is normally deducted from the gross profit in order to show the net profit.
Uses of Trading Profit and Loss
To show the profit
For planning purposes
For income or corporation tax purpose
For comparison with other years
Factors Affecting Profit
The selling price of goods
The cost of goods sold,that is,cost price
The number of competing firms
Relationship between demand and supply
The knowledge of the seller concerning the market
This is the net sales during a particular period e.g a year. This is the value of all sales of an organisation during an accounting period,that is,sales less return inward.
Rate of Turnover
This is the number of times the value of average stock of a business is sold during a period. This is used to investigate the market success of the output of a firm.
The rate varies from one product to another . Expensive goods have slow turnover rate while perishable goods have rapid rate.
Rate of turnover = Cost of goods sold
Average stock= Opening stock + Closing stock
Factors that can Affect Turnover
1. Reduction in prices of goods (goods with high prices will have low sales while product with low prices will have high saled).
2. Goodwill and reputation of the seller.
3. The types of goods (foodstuffs will have high turnover as compared with electronics.
4. Advertising, publicity and sales promotion .
5. Nearness of the business to consumers .
6. Constant availability of goods.
7. Credit facilities.
8. Increase in the quantity of goods sold.
9. The variety of goods sold by the seller.
Other Important Ratio
Margin : This is the relationship between the profit and selling price. It is the profit expressed as a percentage of selling price. This could be derived thus:
Gross profit × 100
Mark up: This is the relationship that exist between the profit and the cost of goods sold. The gross profit is expressed as percentage of costs price using the formula.
Gross profit x 100
Net profit as a percentage of turnover
Turnover × 100
Gross profit as a percentage of turnover
Gross profit × 100
Expenses as a percentage of turnover
Expenses × 100