Key Terms You Should Know About Profit and Loss

What is the definition of a business? Simply put, a business is defined by the United States Department of the Treasury as an enterprising or business entity organized for the purpose of conducting commerce. A business can be either for-profit or non-for-profit entities that function to meet a social objective or further a personal social cause. For example, a sole proprietor is the sole manager of a for-profit business.

The for-profit businesses are those which provide a service or product that can be directly traded between the owners and users. These services or products may include such services as repair, food preparation, education, research and technology development. Non-for-profit businesses are those in which profits are made for a socially useful purpose, such as political lobbying, scientific investigation, direct sales, advertising and profits from intellectual property.

Both for-profit and non-profit businesses maximize their profits through investment, management, and strategic planning. The structure of a for-profit firm is typically similar to that of a for-sale firm, with a board of directors, shareholders, managers, and marketing staff responsible for making decisions regarding strategic and operating plans. A non-profit organization has different ownership structures but often retains the same management structure and does not have the same level of oversight from members of the board.

There are four primary elements of profit maximization in any business: cost of capital, sales volume, present value of the assets and liabilities owned by the firm, and net worth. A firm’s cost of capital includes the total cost of capital resources used to conduct operations. It also includes the cost of the purchases of tangible assets, depreciated capital assets, and any other costs necessary to establish and maintain the firm’s business.

A firm’s sales volume is determined by the overall number of customers served by the firm. A firm’s market price is derived from the prices received by customers for products or services relative to the prices offered to them by other firms in the same industry. The economic value of a firm’s assets is determined by the value of the firm’s equity as calculated in terms of the total current accounts assets of the firm. A company’s stock-based compensation is primarily based on the fair market value of the total stock issued by the firm.

One important point to remember when discussing profit and loss is that they are not identical; although they are often used synonymously. A firm can generate surplus (or excess) profits that exceed the amount spent in expenses. Conversely, it can incur losses that would bring it into debt. The key terms used in this article are profit, losses, and surplus.