Where is my profit then? - an overview

Kumar Gaurav (Going...to be C.A soon...) (1624 Points)

11 June 2015

Dear All

I would like to recall a very basic but important thing that even my P&L account is refelcting

Profit, whereas i have nothing in my hands. Why? Where is my Profit then?

We 'll go through of following example to understand-

Mr. Kalu started a small business 1 year ago with a capital of Rs. 5,000/- and started business activities and earned a profit of Rs. 2,000/- at the end of the year.

Mr. Goru, his accountant shows P&L account to Mr. Kalu stated Profit earned during the year.

Mr. Kalu after going through the P&L account asked a query to Mr. Goru, then where is my profit of Rs. 2,000/-?

Then, Mr. Goru replied with smile Sir, Please sit i will explain to you-

When you brought in capital into business at that time you will have 5000/- in capital and cash/bank account each side of your B/s. Right!

Now, suppose you have invested 1500/- in Fixed assets, 1000/- in Purchases and 500/- for operational expenses.

So now you have 2000/- Cash in hand left.

If you sold goods for Rs. 2000/- and having closing stock for Rs. 500, then surely you will get

Gross Profit in the tune of Rs. 1500/- (ie: OS+Pur-CS)-(Sales)=GP

Now, you may reduced you GP by Operational expenses for Rs. 500/- and received Interest income for Rs. 1000/- to arrive at N. Profit figure Rs. 2,000/- Right!

Now your query is that where is N.Profit of Rs. 2,000/-???

See your Net Profit of Rs. 2,000/- is invested/lying with some other items like Fixed Assets, TDS recievables, Cash In hand/Bank etc. How? (Question by Mr. Kalu)

Mr. Goru (Look)-
You have Rs. 4,800/- in your Bank account appearing on B/s Assets side after adjusting all the cash activities and closing stock of Rs. 500/-, F.Assets worth Rs. 1500/- and TDS receivable for Rs. 200/-

On the other hand, you have Rs. 5000/- capital and Net Profit Rs. 2,000/- on Liabilities side of your B/s.

If you go deeply you will find that the Profit earned by you (Rs, 2,000/-) is invested in the form of Fixed Assets Rs. 1.300/- , Closing stock Rs. 500/- and TDS receivable for Rs. 200/-

Ohhhhhhh thank god reply by Mr. Kalu so this means it is safe and lying in the business only in some another form.