The Business Equation

2 Responses to “The Business Equation”

1. 

   Flustered says:

   20/08/2008 at 8:16 am

   can one explain it wth reference to the accounting equation?????????

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2. 

   Happy Accountant says:

   20/08/2008 at 10:03 am

   Profit = increase in capital + drawings – extra capital introduced

   Profit = Assets – liabilities + drawings – extra capital.

   Basically, it means that you can view profit (in any given year) as being the same as the increase in capital (less any new capital introduced into the business) because the business equation and accounting equation are mathematically linked. (If you really wanted, you could do a mathematical “proof” of this, or you could substitute numbers in and see for yourself).
   Going the “other way”, profit is the business assets less its liabilities plus drawings and less capital introduced.

   (You have to include drawings and capital introduced in the equation to allow for capital coming in or going out of the business which didn’t come about through profit generation)

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