Tuesday, 24 May 2016

Profitability in Business

Income and gains and expenses and losses are the two parts which an entrepreneur or business owner if knows would help him/her in his/her business. When income and gains are increasing then there is profit and when expenses and losses are increasing then there is loss in a business. #profitandlossanalysis

Assets and liabilities are two parts of a balance sheet. For example, if there is bank and business owners, then assets and liabilities are different for business owners and banks. The cash deposits and other forms of deposits in banks are a liability for a bank. Banks are financing by taking loan from Reserve Bank of India and it is also a liability for banks but the loan that is given to individuals/business owners/entrepreneurs is an asset for banks. Other examples of assets for banks are furniture, land and buildings etc. The interest on loan which the bank gets is an income for the bank. There is provision for bad and doubtful debts in banks because banks assume that a certain percentage of loss may be there.

For entrepreneurs/business owners  who wants to start a business, then his/her own money that he/she may put in his/her business is a liability for their firm or the loan that he/she takes from his/her friends, relatives or banks is also a liability for their firm.

On the expenses side- if the entrepreneur/business owner is paying rent for his/her office space or gives his/her own building for office space that could have been used for rent which could have brought him/her money but now that is his/her establishment cost, the number of staff that he/she keeps and their salaries based on their employment status or he/she gives goods on credit, his/her own salary that he/she may use for the month that he/she calculates according to if they were employed somewhere, and keeping provision for some percentage of loss in business or credits and etc could be added on the expenses side.

And for  example, if there is no loss for which the provision was made for then that percentage or amount of money could be carried on to the next year as profits and again the entrepreneur/business owners keeping provision for some percentage of loss in the next year, then this may be the way one can analyse the profit and loss in his/her business.

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