PROFIT OR LOSS

 Profit is what remains of the selling price (sales) after all costs and expenses had been deducted.
 Cost means the cost of the product sold or service rendered.
 Expenses refer to operating expenses (administrative and selling expenses)and financial expenses
(interest and other finance charges).
 Loss occurs when the cost and expenses exceed the selling price or sales. LessonObjectives

1. You bought a bag for P800.00. You spent P50.00 for transportation in going to the store to buy it.
For the following independent cases, determine whether you earn a profit or incurred a loss.
Determine how much your profit or loss was.
a. You sold the bag to your friend for P1 000.00
b. You sold the bag to your friend for P700.00.
2. Abigail purchased a suitcase for P1 200.00. She paid P120.00 for delivery of the suitcase from the
seller to her place. She promised to give Bernadette P150.00 if Bernadette could sell the suit case
fot P2000.00. Bernabette was able to sell the suitcase for P1900.00 to which Abigail agreed. How
much profit did Abigail get?

Income Statement for a Trading Firm

A trading or merchandising firm buys goods that it sells. Whatever it buys, it sells; if it buys shoes, it
sells shoes; and if it buys dresses, it sells dresses. The account used to report the selling price of the
merchandise is sales. Gross sales refer to the total sales. Sales discounts and sales returns and
allowances are deducted from the gross sales to arrive at the net sales. How much the seller buys the item
is the cost of the item. It is termed cost of goods sold or cost of sales.
An income statement is the financial statement that shows the results of operation, that is, if it
earns a profit or incurs a loss for a given period of time. Generally,a firm prepares financial statement on a
monthly basis. For tax purposes, it is prepared quarterly and annually. It details the sales, the cost of sales,
the operating expenses,and other expense and/or other income, if any. Below is a sample income
statement of a trading firm.

Matatag Merchandising
Income Statement
For the Year Ended June 30,201B

Sales P117 000

Less:Cost of Sales P59 000
Gross Profit P 58 000
Less:Operating Expenses
Communication Expense P1 000
Delivery Expense 5 000
Rent Expense 5 500
Salary Expense 8 300
Bad Debts Expense 600
Office Supplies Expense 700
Store Supplies Expense 1 500
Depreciation Expense,
Furniture and Equipment 1 000 23 600
Operating Profit 34 400
Add:Other Income
Interest Income P 800
Commission Income 1500 2300
Less: Other Expense
Interest Expense 1200 1100
NET PROFIT P35 500

BREAK-EVEN POINT
Break-even point is the point where a business neither makes a profit nor a loss. At the break-even
point, a business' revenue is equal its total costs.In as much as there is no profit or no loss at the break-
even point, the revenue will equal total costs. To determine the number of units to be sold to break-even,
we can assume that:
 Sales =Variable Costs+Fixed Costs
If we let x represent the number of units to break-even, we can use the following formula adopted
from the above formula :

 whereP is the unit price;

 x is the number of units;
 v is the variable cost per unit;and
 FC is total fixed cost.
To solve for x:

Therefore,the break-even point in number of units would be:

The break-even point in pesos would be:

Example:
Calculate the break-even point in sales units and sales dollars from the following information:
 Unit price P20
 Variable cost P8
 Fixed costs P12 000

Substituting the given values into the formula for breakeven point in sales units,we get:

Practice:
1. A trading firm purchased a lot for merchandise that costs P100 000.00 for which it paid P10 000.00
for transportation. The firm sold the entire lot for P180 000.00.The firm incurred the following
operating expenses:
 Rent P3000
 Advertising P15 000
 Store Supplies P 7000
 Office Supplies P4000
 Heat,Light,and Water P9 000
 Miscellaneous Expenses P5 000
The firm borrowed money from the bank for which it paid P6 000.00 in interest. Prepare the income
statement for the firm.

2. A small bakery sells cupcakes for 5 pesos each. The fixed monthly costs total P1,200. The variable
cost per cupcake is P1.50. How many cupcakes does the bakery need to sell each month to break
even?

3. A company manufactures and sells custom t-shirts. The selling price per t-shirt is $25, and the
variable cost to produce each shirt is $10. The company has fixed expenses of $3,000. Calculate
the number of t-shirts the company must sell in a month to break even.
TRADE DISCOUNTS
To entice buyers to buy, sellers usually offer trade discount. It could be a single trade discount of,
say, 20% or a series of discounts like 10%, 5%,and 5%. It is generally wholesalers who offer trade
discounts, but there are also some retailers who offer them.

A single trade discount is easy to calculate because we simply multiply the list price with the given
trade discount. For a series of discounts, the base decreases as we apply the series of discounts given.

 If the list price is P1 000.00 and the series of trade discounts given is 10%, 5%, and 5%, we first
multiply the P1 000 x 10% to get the P100 first discount.
 Therefore, our base of P1 000.00 is reduced by P100.00 discount.
 For the second discount in the series, the base is now P900.00 (P1 000 -P100) which we multiply by
the second discount in the series, which is 5% giving us P45.00. Next,we deduct the P45.00 from
P900.00 to get P855.00, which we now multiply to the last discount in the series, which is 5% giving
us P42.75.
 If we deduct the P42.75 from the P855.00, the net invoice price would be P812.25.

In accounting, trade discounts are not recorded because accounting records reflect only the net invoice
prices, that is, sales and/or purchases are the recorded net of trade discounts. For example, if the
merchandise listed at P1 000.00 is sold subject to a 10% discount, the seller records the sale as a sale of
P900.00 only, the net invoice price. Similarly, the buyer will record the same as a purchase of P900.00.

Single Discount
Computing for discounts makes use of our basic percentage formula

where the base is the list price, the rate is the discount rate, and the percentage is the discount. As such,

Example:
Compute the discount for an item with a list price of P1 250.00subject to a 15% discount. What is its
net invoice price?
Given:
 List Price = P1 250.00
 Discount Rate = 15%
Find:
a. Discount
b. Net Invoice Price
Solution:

a.

b.

Another way of computing for the net invoice price is to multiply the list price by the net invoice price
rate. The net invoice price rate is equal to 100% less the discount rate.Thus,
SERIES OF DISCOUNTS
In certain instances, a seller grants additional discounts other than the discount ordinarily given by
him/her. For instance, aside from the regualar 10% discount, a seller may grant a special additional
discount of 5%. The series of discounts is, therefore,10% and 5%. This is not, however, equivalent to 15%
as we shall see later.

Example:
Compute for the discount and the net invoice price if an item listed at P1 250.00 is given a 10% and
5% discount.
Given:
 List price =P1 250.00
 Discount rates =10% and 5%
Find:
a) . Discount
b) Net invoice price

Solution:
Method 1
We first multiply the list price by the first discount rate. To get the discount, and the second discount rate.
We then deduct the second discount from the said dlifference to get the net invoice price.
List price P1 250.00
Less 10% (P1 250 x 10%) 125.00
Difference P1 125.00
Less 5% (₱1 125 x5%) 56.25
Net Invoice Price P1 068.75

Our total discount is equal to the first discount plus the second discount:

Method 2
a) Deduct the first discount rate from 100% and multiply the list price by the rate obtained.
100%-10%=90%
b) .Multiply the list price by the first balance rate obtained in step (a).
List price P1 250.00
x 90%
First balance P1 125.00
c) Deduct the second discount rate from 100% and multiply the first balance obtained in (1)by the
second balance rate obtained.
100%-5%=95%
First balance P1 125.00
Second balance rate 95%
Net invoice price P1 068.75

This method involves a process similar to the use of the net invoice price rate (NIP rate) applied to
the list price to get the net invoice price. Our discount is still equal to the list price less the net invoice price.
Discount = List price- Net invoice price
=P1250.00-P1068.75
=P181.25
We obtained the same result as we got in Method 1.
Method 3
Using this method, we will convert the series of discounts to a single equivalent rate.
Step 1:Deduct the series of discounts individually from 100%.
(a) 100%-10%=90%
(b) 100%-5%=95%
Step 2: Multiply the resulting products by themselves togive us the net invoice price rate.
(a)×(b)=90%×95%=85.5%(NIPrate)
Step 3: Deduct this NIP rate from 100% to get the single equivalent discount rate.
 100%-85.5%=14.5%(Single equivalent rate)
Take note that if we add the NIP rate and the single equivalent discount rate,we will get 100%.
To get the discount, we multiply the single equivalent discount rate by the list price:
Discount=List price x Single equivalent discount rate
=P1250×14.5%
=P181.25

To get the net invoice price, we multiply the list price by the net invoice price rate (NIP rate) obtained in
step (3) above.
Net invoice price=List price×NIP rate
=P1250.00×85.5%
=P1 068.75

Compare the results we obtained under this method with the results we got under Method 1 and Method 2.

Practice

1. A living room set worth P5 300.00 was granted a discount of P636.00.Find:

a) discount rate
b) net invoice price
c) net invoice price rate

2. A camera is listed at P1 315.00 less 15% and 3%. Find:

a. net invoice price
b. discount.
3. Avesco Marketing sells a lighting fixture for P8185.00 less 15% and 5%. Home Appliances sells the
same lighting fixture for P7 895.00 less 15%. Which has the better offer? Why?
4. Pleasant Care Corporation sells hospital equipment. A particular equipment listed at P5 150.00 is given
a 15%, 8%, and 3% series discount. Compute:
a. net invoice price
b. single equivalent discount rate