Profit or Loss

How does a business measure profit or loss?

 An accountant prepares an income statement for a business to show if the

business is making a profit or a loss
 The profit or loss is the difference between the total income and the total
expenses
o A profit is made if the income is higher than the expenses
o A loss is made if the income is lower than the expenses

Why is it important to measure profit or loss?

 The information provided by financial statements shows the owner what has
happened to the business during a certain period of time
o This is usually a year
 It can be used to monitor the progress of the business
o If a profit is made, the owner is making money on their investment
o If a loss is made, the owner might have to make changes to the business

Assets, Liabilities & Capital

How does a business measure its financial position?

 An accountant prepares a statement of financial position to show:

o Assets
o Liabilities
o Capital

What are assets?

 Assets are things owned by the business

o Premises, inventory, motor vehicles, money in the bank, etc
 Assets also include amounts that are owed to the business by other people or
businesses
o Money owed to the business by credit customers
 These are called trade receivables
 Current assets are short-term assets that the business intends
to liquidate within a year
o Trade receivables, inventory, money in the bank, etc
 Non-current assets are long-term assets that the business intends to own for
more than a year and they are not easily liquated
o Premises, motor vehicles, etc
What are liabilities?

 Liabilities are the amounts that the business owes to other people or
businesses
o Bank loans, bank overdraft, etc
o Money owed to credit suppliers by the business
 These are called trade payables
 Current liabilities are short-term liabilities which the business intends to
pay within a year
o Trade payables, bank overdraft, etc
 Non-current liabilities are long-term liabilities which the business intends
to take longer than a year to repay
o Bank loans, etc

What is capital or owner’s equity?

 Capital is any resource provided by the owner to start up the

business or keep it going
o This is sometimes referred to as owner’s equity
 Capital is often in the form of money
o However, it may also consist of other assets
 Such as buildings, furniture, equipment, motor vehicles, goods, etc
 The owner invests capital into their business
o Technically the business owes these assets to the owner
 If a business makes a profit then its capital increases
 If a business makes a loss then its capital decreases

What are drawings?

 Drawings refer to when an owner takes assets from the business for personal
use
o This could be money, goods, motor vehicles, etc
 If the owner takes drawings from the business then the capital decreases