Calculation of Profit and Loss

The core purpose of any business is to generate profit. Owners do not run a business just to see transactions pile up; they need to know, at regular intervals, whether their operations have added to their wealth or eroded it. This is the second major objective of accounting: to ascertain the net result of business activities for a specific period, usually a year.

Profit or loss is not a guess. It is a calculated figure derived from the complete record of all incomes and expenses. The accounting process captures every revenue earned and every cost incurred during the period. Once these are totalled, the comparison is straightforward.

If the total revenue (income) for a period is greater than the total expenses, the business has made a profit. The amount of profit is simply the excess of revenue over expenses.

Conversely, if total expenses exceed total revenue, the business has suffered a loss. The amount of loss is the excess of expenses over revenue.

The textbook provides a concrete example to make this clear. Suppose a business has total revenue of ₹6,00,000 and total expenses of ₹5,40,000 for the accounting period. The profit is calculated as:

₹6,00,000 – ₹5,40,000 = ₹60,000

This ₹60,000 is the net profit for the period. It represents the increase in the owner's equity resulting from business operations. …