Mada za sehemu hiiBusiness ArithmeticMada 2
- Sources of profit and loss
- Profits and costs of depositing and borrowing money
There are many sources of profit or loss on sales and purchase. One way of recognising the sources of profit or loss is to observe businesses that make profit or loss. The following are some of the reasons that can cause profit or loss on sales and purchases:
Infrastructure
If the infrastructure is bad, the cost of transportation will be high, the price of commodities will rise, and this in turn will reduce the number of customers. If it is good, transportation cost of commodities will be low. Thus, the price of commodities will be low and attract more sales.
Demands
When starting a business, it is important to find out the highly demanded commodities by the intended customers. This will increase the amount of sales and generate more profit. On the other hand, commodities with low demand will reduce the amount of sales and can be a source of loss.
Quality of commodities
A commodity of good quality attracts more customers and saves advertisement cost. Also, a quality commodity increases the amount of sales and generates more profit. On the contrary, low quality commodity does not attract customers. Thus, it will be a source of loss in the business.
Workers involved in business
Sometimes profit or loss in business depends on the qualification of workers involved in the business. Skilled, disciplined and trustful workers make business grow and generate profit. On the contrary, workers without these qualifications cause loss in the business.
Record keeping
Profit in a business can increase by keeping the records of income and expenditure properly. A businessperson who fails to keep records of income and expenditure may cause loss in the business. Improper record keeping slows down business and may lead into a total business collapse.
Income is the total amount of money obtained in a business in a specified duration of time. Sources of income in a business include:
- Producing and selling commodities;
- Purchasing and selling commodities;
- Providing services (example, taxi services);
- Receiving gifts from friends or families;
- Securing a loan; and
- Inheritance of properties.
Likewise, expenditure refers to payments made by the business in a specified period of time.
When a person or group of people decide to run a business, it is important for them to control the flow of money and commodities in the business. This is done by using books designed for keeping records of the business.
Many businesspersons do not keep records of their business due to several reasons. One of the reasons is inability to understand proper ways of keeping records of the flow of money in the business. The human brain has a limit in storing records, thus, a person can easily loose important information. Consequently, a businessperson can forget the debtors, creditors, amount debited or credited. Therefore, keeping records is very important and it improves business.
The following are advantages of keeping records in business:
- It helps to know the amount of money received, and plan proper expenditure;
- It enables one to compute profit or loss and to know the capital in one's business;
- It enables people to keep information on expenses and debts. This will help to identify the debtors and the amount of money they owe. It also helps to know the debts one owes in the business;
- It prevents misuse of funds and mistrust among business owners; and
- It helps in monitoring and controlling commodity stores, so as to easily identify any new commodities to be ordered.
Good keeping of income and expenditure records is done professionally using ledgers or properly tabulated exercise books.
The following are advantages of good record keeping of income and expenditure in a business:
- Helps to know the profit or loss made in the business during a specific period of time;
- Helps to know the available business resources and dividends;
- Helps to know the creditors and debtors in the business;
- Helps businesspersons in making decisions on whether to increase or decrease the capital in the business;
- Helps to know the amount of tax to be paid;
- Helps financial institutions to make decisions on loan applications; and
- Helps to know the rate at which the business is growing or depreciating.
Human beings are engaged in different activities for the purpose of generating income. The income can be in form of cash or asset. Thus, it is important to have proper records of income and expenditure of the available resources.
Proper record keeping of income and expenditure helps to know whether profit or loss is being generated. Since the human brain has a limit in storing information, keeping records is very important in business. Governments, institutions, farmers, businesspersons, and families keep records of their income and expenditure. The process of keeping records in a cash book involves recording all business transactions in terms of cash and assets.
Cash books
The books which are used to record transactions are called ledgers. An exercise book can be used to record transactions if it is tabulated in a ledger form. The parts of a ledger are shown in Table
Business arithmetic has two main sides, namely, DEBIT (Dr) and CREDIT (Cr). DEBIT (Dr) is the side that represents income in the business. CREDIT (Cr) is the side that represents expenditure in the business. Both sides have columns for Date, Particulars, Folio, and Amount (shillings and cents). The Particulars column represents types of transactions, the Folio column represents the number of the entry, and the Amount column represents the money involved. The capital and all income transactions are recorded on the debit side. The expenditures and other expenses are recorded on the credit side.
FOLIO represents numbers assigned to similar particulars (items). For example, all sales are assigned the same number. In order to show the balance carried down (balance c/d) and balance brought down (balance b/d), the difference in the total amounts in the DEBIT and CREDIT sides is computed. If the amount in the DEBIT side is larger, then the difference is recorded and added on the CREDIT side. The total amount on the two sides of the ledger must be equal. The difference shows the balance at the end of a specific period of doing business, for example, a month or year. This balance is considered as the balance available for business in the next period of business. If the amount in the CREDIT side is larger, then the difference is recorded and added on the DEBIT side. If the amounts in the DEBIT and CREDIT sides are equal, then the business will have neither balance carried down nor balance brought down.
Example 1
Angelina's business transactions for September 2018 were as follows:
- September 1, 2018 had a capital of 3,450,000 shillings cash;
- September 2, purchased goods for 280,500 shillings;
- September 3, paid transport of goods for 21,500 shillings;
- September 5, sold goods for 85,000 shillings;
- September 8, sold goods for 122,000 shillings;
- September 12, hired a car for 51,000 shillings;
- September 14, purchased goods for 185,000 shillings;
- September 16, sold goods for 295,000 shillings;
- September 18, received 114,300 shillings from sales of goods;
- September 20, sold goods for 116,000 shillings;
- September 23, paid salary of 140,000 shillings to a shopkeeper;
- September 24, paid rent of 250,000 shillings;
- September 26, paid 15,000 shillings for electricity bill;
- September 28, purchased goods for 625,000 shillings;
- September 29, purchased goods for 600,000 shillings.
(a) Record the transactions in a ledger using the double entry principle.
(b) Indicate the balance carried down and the balance brought down.
Solution
Example 2
Prepare a cash book for Mustapha's income and expenditure for July, 2019. Indicate balance brought down as of 1st August, 2019:
- July 1, start up capital of 350,000 shillings cash;
- July 2, purchased goods for 210,000 shillings;
- July 4, sold goods for 112,400 shillings;
- July 7, sold goods for 172,550 shillings;
- July 10, purchased goods for 120,100 shillings;
- July 10, paid 12,000 shillings for transport of goods;
- July 14, purchased goods for 92,600 shillings;
- July 16, sold assets for 275,700 shillings;
- July 19, repaired shop building worthy 52,000 shillings;
- July 21, bought goods for 183,150 shillings;
- July 24, paid 130,000 shillings for salary;
- July 25, paid 70,000 shillings for shop license;
- July 26, sold goods for 196,900 shillings;
- July 28, paid 10,000 shillings for electricity bill;
- July 29, hired a car for 42,000 shillings;
- July 29, received 223,850 shillings from sales of goods.
Solution
Swali
Which of the following is NOT mentioned in the source material as a source of income in a business?
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