SS2 Commerce Lesson Note on Profit

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TOPIC: PROFIT

CONTENT:

1. Meaning of Profit
2. Types of Profit
3. Calculation of gross profit and net profit
4. Percentage of gross profit or net profit to turnover

Sub-topic 1: Meaning of Profit

Profit is the financial benefits or gains which accrue to a businessman. The purpose of a business organization is to make profit. It represents the gain, resulting from investing one’s capital in a business enterprise.

An accountant defines profit as the excess of income over expenditure. The accountants view profit from two perspectives; gross and net profits.

To an economist, profit represents the reward of an entrepreneur. It is measured as business performance and means of rewarding business managers or owners for making risk.

Evaluation:

Define the term Profit

Sub-topic 2: The Term Profit

There are two types of profit namely; gross profit and net profit.

1. Gross Profit

Gross profit is the excess of turnover over the cost of goods sold. It is the difference between the selling Price and cost price of a particular product. This is the total profit  before any expenses can be deducted. The gross profit can be determined through the preparation of trading account. Gross profit is calculated as opening stock plus purchases, less closing stock and this is deducted from the sales revenue i.e

Gross profit = opening stock + purchases – closing stock

(b) Net profit: The net profit is the excess of gross profit over expenses. It is arrived at after all expenses incurred in that period have been deducted from the gross profit. This is ascertained in the profit and loss account.

EVALUATION

1. Distinguish between gross and net profit
2. How is gross profit calculated?

Sub-Topic 3: Calculation of gross profit and net profit

Before the calculation of gross profit and net profit is done, a trading, profit and loss account will be drawn. The content of the trading, profit and loss account consist of:

1. Opening stock: this is the stock of goods at the beginning of the year.
2. Closing Stock: this is the stock of goods available at the end of the year.
3. Purchases: Purchases is the total volume of goods bought for resale by an organization. It also includes cash and credit purchases.

USES OF TRADING, PROFIT AND LOSS ACCOUNT

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