THE POLYTECHNIC, IBADAN

FACULTY OF BUSINESS AND COMMUNICATION STUDIES

LOCAL GOVERNMNET AND DEVELOPMENTAL STUDIES

COURSE TITLE

FINANCIAL ACCOUNTING

COURSE CODE

LGS 309

FULL NAME

ATIKO OLASHUBOMI ROFIAT

MATRIC NO

20190701020083

ASSIGNMENT

CONCEPTUALLY CONCENTRATE ON THE FOLLOWING TERMS

“GROSS PROFIT, BALANCE SHEET, NET PROFIT, DISCOUNT

LECTURER IN CHARGE

BARR. KAZEEM OLADEPO

Every business works for profit. Profit is the excess of revenue over expenditure. It

is a perimeter by which the success and the sustainability of a business are

measured. A business or an organization that does not earn profits or incurs losses

cannot survive. Thus, profit is of utmost importance in a business. We can classify

profit as Gross profit and Net profit. But, here let us discuss the Gross Profit

formula with solved examples in detail. Let’s get started!

Gross profit is the amount of total revenue minus cost of goods sold. It is the

amount of profit before all interest and tax payments. It is also known as gross

margin. Gross profit does not include indirect incomes and expenses. In other

words, it is the profit purely from the trading activities of a firm.

The gross profit depicts to the management as well as investors how well a

business can manufacture and sell the products. Thus, we can say that it shows the

profitability of the product.

The gross profit ratio is vital as it gives investors an understanding of how healthy

financially a company is. This is so because a company showing a good net profit

may actually be dying. A deep study may reveal that it is not earning profits from

its core activities i.e. from buying and selling goods rather than the other sources of

income.
Gross profit on a product is the selling price of your product minus the cost of

producing it. For a service business, it's the selling price of your service minus the

cost of the time spent doing the job. Gross profit also refers to total sales (also

known as revenue or turnover) minus the total cost of sales.

Gross profit does not include indirect revenue i.e. income from interest, rent,

commission, etc. Similarly, we do not deduct any indirect expenses also such as

electricity charges, insurance, travel expenses, etc.

The gross profit concept also helps the cost accountants and the management in

creating budgets and future forecasts. It also helps the investors in comparing the

margins or profits of two or more companies irrespective of their size and sales

volume. The investors can thus wisely choose which company or firm to invest.

Gross profit is the financial gain of a company after deduction of the costs

necessary to manufacture and distribute its goods or services. These costs are

referred to collectively as the cost of goods sold. The revenue of a company after it

accounts for what had to be paid out to return that revenue is called the company’s

gross profit, meaning it is the amount of money actually earned.

Gross profit is a company's profit after deducting the costs associated with

producing and selling its products or services. It's also known as sales profit or

gross income.
Gross profit is calculated on a company's income statement by subtracting the cost

of goods sold (COGS) from total revenue. It's important to note that gross profit

differs from operating profit, which is calculated by subtracting operating expenses

from gross profit.

GROSS PROFIT FORMULA

The formula to calculate gross profit is the total revenue minus the COGS.

Total Revenue − Total COGS = Gross Profit

Cost of goods sold

COGS includes only variable costs—such as hourly wages or materials—

associated with the production of a good or service. Variable costs are those that

change as the production output changes. They may include:

 Materials and parts

 Labor costs for staff directly involved in production

 Packaging and shipping costs

 Equipment operation costs (which may include utilities)

 Processing fees for consumer purchases

 Depreciation of equipment

 Sales commissions
COGS doesn’t usually include fixed costs, such as marketing budgets, labor

unrelated to manufacturing (like executive pay), insurance, software and other

subscriptions, equipment leases, and property taxes.

Revenue

Total revenue refers to the net sales or the total amount of money earned from the

sale of your business’s products or services. Usually, this income amount isn’t

adjusted to account for expenses like business overhead, taxes or interest. It only

reflects the money earned from sales. It may include deductions from discounts

and returns.

Gross profit calculation example

As an example of calculating gross profit, consider a doughnut shop that had

$209,060 in total revenue and $129,835 in COGS. In this example, the total gross

profit for the first quarter of 2022 is $79,225.

$209,060 − $129,835 = $79,225

Imagine that you own this doughnut shop. Your variable expenses include raw

materials to make the dough, icing and coffee drinks; paper goods, cups and lids;

toppings and add-ons; wages for your team; and processing fees for customer

purchases. If you want to calculate the gross profit for your entire business (not just
the coffee drinks) for the first quarter of the year, you would first need to total your

revenue and variable costs.

BALANCE SHEET

The balance sheet is one of the three fundamental financial statements and is key to

both financial modeling and accounting. The balance sheet displays the company’s

total assets and how the assets are financed, either through either debt or equity. It

can also be referred to as a statement of net worth or a statement of financial

position. The balance sheet is based on the fundamental equation: Assets =

Liabilities + Equity.

A statement of the assets, liabilities, and capital of a business or other organization

at a particular point in time, detailing the balance of income and expenditure over

the preceding period.

The balance sheet - also called the Statement of Financial Position - serves as a

snapshot, providing the most comprehensive picture of an organization's financial

situation. It reports on an organization's assets (what is owned) and liabilities (what

is owed). The net assets (also called equity, capital, retained earnings, or fund

balance) represent the sum of all annual surpluses or deficits.

much cash an organization has at present and what assets will soon be available in

the form of cash.

As such, the balance sheet is divided into two sides (or sections). The left side of

the balance sheet outlines all of a company’s assets. On the right side, the balance

sheet outlines the company’s liabilities and shareholders’ equity.

The assets and liabilities are separated into two categories: current asset/liabilities

and non-current (long-term) assets/liabilities. More liquid accounts, such as

Inventory, Cash, and Trades Payables, are placed in the current section before

illiquid accounts (or non-current) such as Plant, Property, and Equipment (PP&E)

and Long-Term Debt.

Balance Sheet Example

Below is an example of Amazon’s 2017 balance sheet taken from CFI’s Amazon

Case Study Course. As you will see, it starts with current assets, then non-current

assets, and total assets. Below that are liabilities and stockholders’ equity, which

includes current liabilities, non-current liabilities, and finally shareholders’ equity.

How the Balance Sheet is Structured

organizations and industries. However, there are several “buckets” and line items

that are almost always included in common balance sheets. We briefly go through

commonly found line items under Current Assets, Long-Term Assets, Current

Liabilities, Long-term Liabilities, and Equity.

Learn the basics in CFI’s Free Accounting Fundamentals Course.

Current Assets: Cash and Equivalents

The most liquid of all assets, cash, appears on the first line of the balance sheet.

Cash Equivalents are also lumped under this line item and include assets that have

short-term maturities under three months or assets that the company can liquidate

on short notice, such as marketable securities. Companies will generally disclose

what equivalents it includes in the footnotes to the balance sheet.

Accounts Receivable

This account includes the balance of all sales revenue still on credit, net of any

allowances for doubtful accounts (which generates a bad debt expense). As

companies recover accounts receivables, this account decreases, and cash increases

by the same amount.account.

Inventory includes amounts for raw materials, work-in-progress goods, and

finished goods. The company uses this account when it reports sales of goods,

generally under cost of goods sold in the income statement.

Non-Current Assets

Plant, Property, and Equipment (PP&E)

Property, Plant, and Equipment (also known as PP&E) capture the company’s

tangible fixed assets. The line item is noted net of accumulated depreciation. Some

companies will class out their PP&E by the different types of assets, such as Land,

Building, and various types of Equipment. All PP&E is depreciable except for

Land.

Intangible Assets

This line item includes all of the company’s intangible fixed assets, which may or

may not be identifiable. Identifiable intangible assets include patents, licenses, and

secret formulas. Unidentifiable intangible assets include brand and goodwill.

Accounts Payables, or AP, is the amount a company owes suppliers for items or

services purchased on credit. As the company pays off its AP, it decreases along

with an equal amount decrease to the cash account.

Current Debt/Notes Payable

Includes non-AP obligations that are due within one year’s time or within one

operating cycle for the company (whichever is longest). Notes payable may also

have a long-term version, which includes notes with a maturity of more than one

year.

Current Portion of Long-Term Debt

This account may or may not be lumped together with the above account, Current

Debt. While they may seem similar, the current portion of long-term debt is

specifically the portion due within this year of a piece of debt that has a maturity of

more than one year. For example, if a company takes on a bank loan to be paid off

in 5-years, this account will include the portion of that loan due in the next year.

Non-Current Liabilities Bonds Payable

This account includes the amortized amount of any bonds the company has issued.
Long-Term Debt

This account includes the total amount of long-term debt (excluding the current

portion, if that account is present under current liabilities). This account is derived

from the debt schedule, which outlines all of the company’s outstanding debt, the

interest expense, and the principal repayment for every period.

Shareholders’ Equity Share Capital

This is the value of funds that shareholders have invested in the company. When a

company is first formed, shareholders will typically put in cash. For example, an

investor starts a company and seeds it with $10M. Cash (an asset) rises by $10M,

and Share Capital (an equity account) rises by $10M, balancing out the balance

sheet.

Retained Earnings

This is the total amount of net income the company decides to keep. Every period,

a company may pay out dividends from its net income. Any amount remaining (or

exceeding) is added to (deducted from) retained earnings.

In business and accounting, net income is an entity's income minus cost of goods

sold, expenses, depreciation and amortization, interest, and taxes for an accounting

period.

It is computed as the residual of all revenues and gains less all expenses and losses

for the period, and has also been defined as the net increase in shareholders' equity

that results from a company's operations. It is different from gross income, which

only deducts the cost of goods sold from revenue.

Net income can be distributed among holders of common stock as a dividend or

held by the firm as an addition to retained earnings. As profit and earnings are used

synonymously for income (also depending on UK and US usage), net earnings and

net profit are commonly found as synonyms for net income. Often, the term

income is substituted for net income, yet this is not preferred due to the possible

ambiguity. Net income is informally called the bottom line because it is typically

found on the last line of a company's income statement (a related term is top line,

meaning revenue, which forms the first line of the account statement).

In simplistic terms, net profit is the money left over after paying all the expenses of

an endeavor. In practice this can get very complex in large organizations. The
bookkeeper or accountant must itemise and allocate revenues and expenses

properly to the specific working scope and context in which the term is applied.

Net income is usually calculated per annum, for each fiscal year. The items

deducted will typically include tax expense, financing expense (interest expense),

and minority interest. Likewise, preferred stock dividends will be subtracted too,

though they are not an expense. For a merchandising company, subtracted costs

may be the cost of goods sold, sales discounts, and sales returns and allowances.

For a product company, advertising, manufacturing, & design and development

costs are included. Net income can also be calculated by adding a company's

operating income to non-operating income and then subtracting off taxes.

The net profit margin percentage is a related ratio. This figure is calculated by

dividing net profit by revenue or turnover, and it represents profitability, as a

percentage.

AN EQUATION FOR NET INCOME

Net profit: To calculate net profit for a venture (such as a company, division, or

project), subtract all costs, including a fair share of total corporate overheads, from

the gross revenues or turnover.

calculation:

Net Income = Gross Profit − Operating Expenses − Other Business Expenses −

Taxes − Interest on Debt + Other Income Net profit is a measure of the

fundamental profitability of the venture. "It is the revenues of the activity less the

costs of the activity. The main complication is . . . when needs to be allocated"

across ventures. "Almost by definition, overheads are costs that cannot be directly

tied to any specific" project, product, or division. "The classic example would be

the cost of headquarters staff." "Although it is theoretically possible to calculate

profits for any sub-(venture), such as a product or region, often the calculations are

rendered suspect by the need to allocate overhead costs." Because overhead costs

generally do not come in neat packages, their allocation across ventures is not an

exact science.

Net profit is the selling price of your good minus ALL the costs of running your

business. This is the figure that we usually mean when we refer to profit (but it's

always worth checking).

Businesses use discounts and allowances to encourage customers to buy from them

or to pay an outstanding bill sooner. Incentives used to motivate sales are called

discounts while those used to motivate payments are called allowances (which

apply only to purchases made on credit).

Discounts are most often used by retail and wholesale companies (e.g., when a

store holds a 10% off sale).

An example of an allowance would be to offer a 2% discount on a bill paid in 10

days but no discount for paying in 30 days.

When a company provides a discount or an allowance to a customer it appears on a

company’s income statement as a reduction to revenue. This means the net revenue

figure is the “true” revenue for the specified period.

Discounts are reductions applied to the basic sale price of goods or services.

Allowances against price may have a similar effect

Discounting practices operate within both business-to-business and business-to-

consumer contexts. Discounts can occur anywhere in the distribution channel,

modifying either the manufacturer's list price (determined by the manufacturer and

often printed on the package), the retail price (set by the retailer and often attached
to the product with a sticker), or a quoted price specific to a potential buyer, often

given in written form.

There are many purposes for discounting, including to increase short-term sales, to

move out-of-date stock, to reward valuable customers, to encourage distribution

channel members to perform a function, or to otherwise reward behaviors that

benefit the discount issuer. Some discounts and allowances are forms of sales

promotion. Many are price discrimination methods that allow the seller to capture

some of the consumer surplus.

Trade Discount

Trade discounts are deductions against the list price or catalogue price which are

charged by a wholesaler or manufacturer to a retailer or supplier who then deals

with the end customer. The discount then enables the retailer to charge the end

customer the list price and cover its own costs/profit.

Prompt Payment Discount

Cash discounts are reductions in price given to the debtor to motivate the debtor to

make payment within specified time. These discounts are intended to speed

payment and thereby provide cash flow to the firm. They are sometimes used as a

promotional device.
Taxation Treatment

Before 2014, suppliers in the United Kingdom were permitted to add VAT to the

discounted price, even if payment was not made within the discount period and

therefore due in full. This provision generated a shortfall in taxation revenue and

also meant that UK practices were not in line with the EU's VAT Directive of

2006, which specified that value added tax was to be levied on the actual price

paid, so proposals were put forward in the budget of 2014 to amend the law in this

respect. In the telecommunications and broadcasting sectors, the law was amended

from 1 May 2015, while in other sectors of the economy, the change was effective

from 1 April 2015.

Preferred Payment Method Discount

Some retailers (particularly small retailers with low margins) offer discounts to

customers paying with cash, to avoid paying fees on credit card transactions.

Partial Payment Discount

Similar to the trade discount, this is used when the seller wishes to improve cash

flow or liquidity, but finds that the buyer typically is unable to meet the desired

discount deadline. A partial discount for whatever payment the buyer makes helps

the seller's cash flow partially.

A discount offered based on one's ability to pay. More common with non-profit

organizations than with for-profit retail.

Forward Dating

This is where the purchaser doesn’t pay for the goods until well after they arrive.

The date on the invoice is moved forward - example: purchase goods in November

for sale during the December holiday season, but the payment date on the invoice

is January 27.

Seasonal Discount

These are price reductions given when an order is placed in a slack period

(example: purchasing skis in April in the northern hemisphere, or in September in

the southern hemisphere). On a shorter time scale, a happy hour may fall in this

category. Retailers organize big discounts on almost every season in order to make

space for new inventory for the upcoming season.

Generally, this discount is referred to as "X-Dating" or "Ex-Dating". An example

of X-Dating would be: 3/7 net 30 extra 10 - this means the buyer must pay within

30 days of the invoice date, but will receive a 3% discount if they pay within 7

days after the end of the month indicated on the invoice date plus an extra 10 days.
This term refers to a reduction in price given by a seller to the buyer, which could

be for reasons such as a sales promotion, volume purchase, early payment

incentive, or to rectify minor defects in goods or services sold. From the seller’s

perspective, discounts allowed are considered an expense and are usually recorded

in the company’s financial statements under operating expenses.For example, if a

business sells a product for $500 but allows a 10% discount for early payment, the

discount allowed would be $50. The seller records this $50 as an expense.

Example for Discount Allowed:

Office Supplies Ltd. sells office furniture to XYZ Corporation for $10,000. To

encourage prompt payment, Office Supplies Ltd. offers a 5% discount if the

invoice is paid within 15 days.

This discount is a “discount allowed” from the perspective of Office Supplies Ltd.

They’re allowing a discount to the buyer for early payment.

If XYZ Corporation pays the invoice within 15 days, Office Supplies Ltd. would

receive $9,500 ($10,000 – $500) and the $500 would be recorded as a “discount

allowed” expense in their accounting records.

Discount received is the reduction in cost a buyer gets from a supplier. For the

buyer, this acts as a saving on the cost side of business transactions. This could be

due to bulk buying, early payment, or other situations the buyer benefits from. It is

considered as an income for the buyer.

This is the flip side of the coin. It refers to the reduction in cost that a buyer

receives from a seller. The buyer views this discount as a reduction in the cost of

purchases and records it as such in their books. So, discounts received are

considered as an income and are generally recorded in the company’s income

statement as other income.Using the same example, the buyer who gets a 10%

discount on a $500 purchase views this $50 as a discount received, and records it

as income or a reduction in their cost.

Example for Discount Received:

On the flip side, XYZ Corporation views the same 5% discount as a “discount

received”. They’re receiving a discount from the seller for early payment.

If XYZ Corporation pays the invoice within 15 days, they would pay only $9,500,

receiving a discount of $500. XYZ Corporation would record this $500 as a

“discount received”, which could be considered as other income or a reduction in

their cost.