The Balance Sheet Method sets forth all the capital, turned and unturned, both at the beginning and the end of the period, and the profit is the increase of the total capital, due regard being had for fresh capital investments and withdrawals made during the period.
Thus in case B above I may compute my profits for each of the two months by the Income Sheet Method as follows: These two methods give the same result. On Jan uary 31st, the goods on hand are valued at cost, $45, 000, to identify that amount of initial capital that has not completed a turn-over. Also $3,000 of the cash was on hand at the beginning. If we deduct this $3,000 and the $45,000 from the total of $108, 000 we obtain $60,000, which was the income, and if we deduct them from the $90,000 we obtain $42,000 which was the "cost of income" for January or the amount of initial capital that completed a turn during that month. Thus the inclusion at cost of items which identify unturned capital virtually rules such capital out of the profit computation. Hence the reason for identical results by the two methods.
Again in case D, I may compute any profit for 1913 by the Income Sheet Method as follows: The valuations put upon "unsold goods," "ma terials" and "machinery" on December 31, 1915, sim ply identifies those quantities of unturned capital. All of this completes turnover during 1916 and gets into "cost of income" of that year.
In the above illustrations capital is always treated as identical with assets. This is partly because debts payable were omitted from the illustrations. The more complicated cases will be considered in a later chapter.
Now we have seen that— a. A business profit is the excess of income over its cost, or is that increase in cash capital that occurs or tends to occur in the process of buying at one set of prices and selling at a higher.
b. The making of a profit involves at least two transactions, namely, a purchase and a sale—for oth erwise there is no turnover.
c. Profits are made possible by human caution with respect to the assumption or the carrying of risks; by interest on advances made by the enterpriser out of his cash capital; by the enterpriser's own manual or mental labor ;by monopoly, economic friction, chance, and other miscellaneous causes.
d. Profits may be computed either by concentrat ing attention on the capital that has completed a turn and observing its increase—which is the Income Sheet Method; or by observing the increase in the whole capital.
We have also touched on such subjects as assets, valuation of assets, depreciation, the distinction be tween capital and income (capital and "cost of in come" or unturned and turned capital). These and other subjects will be elaborated in later chapters.