It might seem like a simple task to define just exactly what profits and losses are. However it is important to understand that they are referred to in many different instances by accountancy services.
Profit can be referred to by many different terms, including being called net income or net earnings.
Profit can also be referred to as Return on Investment, or ROI. This relates to the fact that the income generated by a business must be greater that the investment made by the shareholders or in relation to the particular income stream so that a positive ROI or profit is made. Some accountancy services will only relate ROI to profit on investments, stocks, bonds or loans. Others use this term to refer to short and long term 'results'.
Gross profit can also be defined as taxable income.
Net profit is defined as the profit generated once all expenses (including tax) have been deducted.
Gross profit is the profit generated on the trade element of the business once all 'Cost of Sale' items have been deducted from sales. This is the profit, or loss, before any deductions for admin, or office, expenses.
It's the job of accountancy services to assess the profits and losses of a business. This allows them, in conjunction with net assets, to determine the net worth of a business, i.e. the business assets minus the businesses liabilities. In this instance net worth is not the value of the business. The business may be worth more or less if sold as a going concern. For private and public companies, the resulting net worth is referred to as 'shareholders funds', as it is, once the bills have been paid, whatever is left is the shareholders. These shareholders funds can then be distributed by way of dividends or bonus depending on various other factors.
So, in a nut shell, for any money a company makes, first the liabilities have to be paid, and anything left over is profit. Net worth is calculated once all the liabilities are deducted from all the assets. These assets include cash, machinery, property, stock and debtors (among others).
The overall aim of any business is to make a profit and increase the net worth for its shareholders.
Should you wish Accountancy Services Direct to explain your profit and loss performance indicators to you in more details then please do not hesitate to contact us.
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