Financial Accounting: 2.2 Profit Determination Equation

Improved Essays
2.2 Profit Determination Equation Profit is the amount whereby it is calculated with the formula, revenue minus expenses in a business (Appendix 3). The owner will obtain profit when the total revenue exceeded the total of expenses. What is a revenue? Revenue is an amount that the owner earned during the business period. For example, when the owner rents out one of his or her shoplot to others for business purposes, the owner will receive rental fee from them as a revenue which means profit. This means that the owner will obtain and earn income from them who pays the rental fee .
In contrast, expenses are costs that the owner have spent for his or her business. For example, staff’s salaries are expenses in a business. Why are staff’s salaries being categorized as expenses? This is
…show more content…
This cycle involves several stages or steps over a particular period of time.An accounting cycle shows the steps to collect and record business information systematically. Therefore, financial reports or statements can be presented to the …show more content…
For examples, lenders such as banks and finance companies will look into the accounting information that is provided and would decide whether to lend and how much to lend and whether an organization is able to repay its loan with interest. Stockholders are also known as an investor is an external user. The investors have the rights to know how a company is managing their investment through accounting information. Example, as aforementioned that external users are not directly involved in running an organization.They have limited access to an organization’s information. Thus, external users need reliable, relevant and comparable information in order to make their business

Related Documents

  • Decent Essays

    External Users are those who are outside the company: 1. Investors: Investors use financial information to check wether they invested in company which is maximizing their profits or not, wether its worth to invest in such companies or not. 2. Customer: They use for selecting suppliers. Which suppliers they should go for major contact , they check how long suppliers going to last enough for service.…

    • 737 Words
    • 3 Pages
    Decent Essays
  • Improved Essays

    The elements affected includes Asset and Expense. In the balance sheet, the cash increase due to Prepaid Rent would be recorded as an asset, however with each rent paid in advance by the business, it will be recorded as a reduction in cash. Rent being paid in advance will be recorded as operating activities for the business in the statement of cash flows. Once rent has expired, a reduction will be incurred which is then determined as Rent Expense for the business in the income statement. 4.…

    • 759 Words
    • 4 Pages
    Improved Essays
  • Superior Essays

    If revenue exceeds expense, it is net profit and if expense exceeds revenue, it is net loss. At the end of the period, all revenues and expenses with sales of goods and service are added and expenses are subtracted to know the overall profit or suffered an overall loss. Balance sheet is a snapshot of a firm’s asset, liability and equity as of specific date. It shows what the business is worth at one point in time. It has three parts: Assets, Liability and ownership equity or capital.…

    • 840 Words
    • 4 Pages
    Superior Essays
  • Brilliant Essays

    The gross profit is the profit made before taking away any non-product expenses where as the net profit is the final profit after taking off the non-product expenses. If a businesses gross profit is high, it does not necessarily mean that they are making a profit. If the business is not receiving as much as their non-product expenses, then their net profit would be negative. The Statement of Financial Position The statement of financial position which is also known as the balance sheet shows a business 's assets and liabilities for a specific day and gives a summary of the business 's overall financial position. Assets are things that a business owns such as equipment or vehicles or could also be money that is owed to them at that time.…

    • 1478 Words
    • 6 Pages
    Brilliant Essays
  • Improved Essays

    Financial and managerial accounting are both important accounting aspects to effectively manage a company. Financial accounting are reports that are mainly used by external stakeholders of a company. Managerial accounting is mainly used by management of a business to help them make informed decisions. While both forms of accounting provide different information for different uses, they both provide important financial information that describes the financial wellness of an organization. Both Financial and managerial accounting provide accounting data that allow individuals to make informed decisions about a company.…

    • 802 Words
    • 4 Pages
    Improved Essays
  • Improved Essays

    and then posts the data in the corresponding ledger. The functions of an accountant Accounting implies a more complex process that uses financial information formed by a bookkeeper and on the basis of these data it generates a report on the financial condition of a company and other financial statements. The functions of accounting include: - Preparation of adjusting records (recording of expenses occurred that had not been yet recorded within a bookkeeping process); - Preparation of financial statements of a company; - Analysis of operating…

    • 940 Words
    • 4 Pages
    Improved Essays
  • Improved Essays

    When the owners finances the business or increases the assets of the business it is called equity. The essence of the owners is that they provide the initial capital of the business and further are liable to the debts of the business incase its operations or assets does not pay off the debts (Palepu & Healy, 2007). Evidently, the sole aim of a business financial statement is to enable the firm managers, investors and owners to keep track of the company’s…

    • 711 Words
    • 3 Pages
    Improved Essays
  • Improved Essays

    An income statement also shows the volume of sales and type of expenses a business is incurring. After reviewing businesses income statement over a period of time a reviewer can find and analyze trends within an organization. Another document that serves a great outlook on a business’s assets and liabilities is the balance sheet. The information from the balance sheet is used to estimate the liquidity, funding, and debt position of an entity, and is the basis for a number of liquidity ratios. Lastly, the main function of statement of cash flows informs the reader the type of cash receipts and disbursements of cash.…

    • 764 Words
    • 4 Pages
    Improved Essays
  • Great Essays

    Financial Accounting

    • 1493 Words
    • 6 Pages

    If these standards did not exist, then companies could publish any information they like to entice investors and creditors to contribute to the organization. These standards allow investors and creditors to compare companies within an industry to each other. The standards ensure reports published by competing business contain the same types of information. “Companies are expected to follow general accepted accounting principles when they report their financial information” (Arline, 2015). GAAP has an impact on how a company measures economic activity, information disclosed, how economic information is prepared and summarized, and the interval economic measurements are published.…

    • 1493 Words
    • 6 Pages
    Great Essays
  • Great Essays

    Financial Accounting may be defined as the science and art of recording and classifying business transactions and preparing summaries of the same transactions and preparing summaries of the same for determining profit or loss and the financial position of the concern. The object of is to find out the profitability and to provide information about the financial position of the concern. Its purpose is to provide information for others to the value of a company. It is concerned with record – keeping directed towards the preparation of Profit and Loss Account and Balance Sheet. Managerial Accounting is concerned with the supply of information which is useful to management in decision making for the efficient running of the business and in minimizing…

    • 1121 Words
    • 5 Pages
    Great Essays