Profit and loss formula – what you need to know

A profit and loss formula is typically used in the corporate world to help organizations calculate the profit and loss incurred by selling a product or service. Hence, this tool is one of the most important mathematical instruments used in everyday corporate functioning. 

Learning everything there is to know about this formula can help you develop the relevant skills needed to apply the same when required. This is also a concept that is tested in corporate interviews for managerial-level positions in the industry. 

Keep reading to learn everything you need to know about the profit and loss formula! 

What are profit and loss? 

Profit and loss are terms that are commonly used to identify whether a financial transaction makes or loses money. These terms are also often used in daily life to identify whether a deal is profitable or not. 

If the selling price of the product or service is greater than the cost price, the difference between the selling price and the cost price is referred to as profit. 

Similarly, if the selling price is lesser than the cost price, the difference between the cost price and the selling price is referred to as a loss. 

Understanding this basic concept thoroughly is crucial before moving on to the next step of learning the profit and loss formula. These are studying the different terms that are present in the equation. 

What are the different profit and loss-related terms? 

When an individual purchases an article for a certain price, he can make a profit or loss by selling the same at a different price. 

Different terms are associated with every step of the transaction process. 

Here are the terms you need to be familiar with – 

Cost Price (C.P.) 

The amount that is paid for a product or commodity is referred to as the cost price. Cost prices are further divided into two different categories – 

• Fixed Cost – The fixed cost is the price that is constant and does not vary under any changing circumstances. 
• Variable Cost – The variable cost depends on factors such as the number of units of the product or service. 

Selling Price (S.P.) 

The amount for which a product or service is sold is referred to as the selling price. Sometimes, the selling price is also known as the ‘sale price’. 

Marked Price (M.P.) 

The marked price is the price that is set by a seller on the label of a product or service. It is also a price upon which a seller offers a discount. After the discount has been applied to the marked price, it is sold at a reduced rate,  referred to as the selling price. 

For example – 

Mark goes shopping at a clothing franchise where all items are at a 50% discount. The price tag on a shirt is USD 120. This means that the M.P. of the shirt before the discount is USD 120. 

Discount 

One of the best ways to cope with the competition in the business sector and boost the sale of goods and services is by offering discounts. The offer or rebate given by shopkeepers on products and services is a discount. 

A discount is always calculated on the market price of a product. 

Here is the discount profit and loss formula – 

Discount = Marked Price – Selling Price 

Discount (%) = (Discount/Marked Price) x 100 

What is the profit and loss formula? 

The following profit and loss formulas can be applied to a wide range of business transactions. 

• The profit gained is equal to the selling price minus the cost price. 
• The loss incurred is equal to the cost price minus the selling price. 

Profit = S.P. – C.P. 

Loss = C.P. – S.P. 

• The profit and loss formula in percentage is as follows – 

Profit (%) = (Profit/C.P.) x 100 

Loss (%) = (Loss/C.P.) x 100 

• Here are some additional profit and loss formula types for different kinds of business transaction scenarios – 

S.P. = {(100+P(%)/100} x C.P. (if the selling price is greater than the cost price) 

S.P. = {(100 – L%)/100} x C.P. (if the selling price is lesser than the cost price) 

C.P. = {100/(100+P%)} x S.P. (if the selling price is greater than the cost price) 

C.P. = {100/(100-L%)} x S.P. (if the selling price is lesser than the cost price) 

Examples of profit and loss formula applications 

To cement your understanding of the profit and loss formula, here are 3 examples of its applications – 

• If a retailer buys material for USD 100 and sells it for USD 120, he has made a profit of USD 20. 
• If a shopkeeper has bought stock worth USD 300 and has to sell it for USD 250, he will incur a loss of USD 50. 
• If Sam buys a device for USD 500 and sells it to his friend Sean for USD 600, he will make a profit of USD 100, with a profit percentage of 20%. 

Key takeaways 

• Profit and loss are an essential part of business operations today. Understanding how much money is gained or lost in transactions can be useful in helping organizations streamline their operations. 
• The profit and loss formula is another essential topic that is tested in interviews for managerial-level positions in the corporate world. 
• This blog is designed to provide you with all the relevant information you need to understand and apply the profit and loss formula. 

Was this blog informative? If yes, please share your thoughts in the comments below. Click here to reach out to us for more information on the profit and loss formula. We would be happy to assist you with your queries! 

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FAQs 

Q1. Will I need to know the profit and loss formula for a career in Business Analytics? 

Answer – Absolutely! The profit and loss formula is an essential part of business analytics and interpreting the data generated by an organization. 

Q2. Is the term ‘loss’ the same as ‘expenditure’? 

Answer – In most cases, ‘loss’ is used to describe additional expenditure in a business transaction. 

Q3. Is the cost price the same as an investment? 

Answer – In cases where the item or service has been purchased to be sold at a different price, the cost price can be considered the same as an investment. However, if an object is purchased with no intention of selling the same, the cost price is not considered an investment as there are no financial gains involved.