In the preparation of accounts some approach towards expression in money of the " interest " and "remuneration for services " elements in profits is made by charging against gross profits allowances for " interest on capital " and " partners' salaries," but it must be remembered that such charges are not trade expenses, but appropriations of profit made. Every penny of these (pas; expenses has to be prouuced, like all other profits, by the exercise of skill in direct trading operations, and the mere employment of money does not of itself necessarily produce interest.
Profit is thus to be taken as the difference between cost and selling price, and the cases of the manufacturer who sells his products at a fraction above cost, and the trader who buys them from him in large quantities and adds a similar fraction in selling them piecemeal, are typical simple examples. Some undertakings, however, e.g. railways, supply a public demand for services rather than goods, and charge a small sum over the total cost for rendering them ; railways are instances of monopolist under takings whose maximum charges are prescribed by law. Banks again, while rendering services, derive a great part of their profits by incurring a risk ; they receive large sums on deposit subject to the obligation to repay on demand or at short notice, and for these loans they pay little or no interest ; the improbability of more than a certain proportion of their creditors requiring simultaneous payment allows them to employ a certain part of their customers' deposits in loans, discounts, and investments, and the interest received thereon covers their expenses and provides a profit. Insurance companies again incur risks for the sake of gain ; experience teaches them what proportion of the risks they accept may be expected, in dealing with large numbers, to result in "claims" and at what time ; upon these data are based the net premiums they should charge, and the addition of a small fraction to the latter suffices for payment of office expenses and shareholders' dividends.
Two methods are in the main employed commercially in order to dis cover what profit, if any, has accrued over a period of trading, one being the process arising out of what is known as "single entry bookkeeping," and the other that which forms an integral part of the "double entry" system. It is customary to prepare such statements at periodical intervals, usually 'yearly or half-yearly, although the time may be longer or shorter as is convenient. Life insurance companies generally ascertain their profits
once in every five or seven years, by means of a lengthy and expensive actuarial valuation.
In the single entry method the trader must prepare statements showing his property and liabilities both at the commencement and conclusion of any period of trading; each of these statements will show his net monetary worth at its date—in other words, taken together, they will show both his initial and final capital. If the concluding capital be greater than that at the beginning, the period of trading has resulted in a profit to the amount of the difference between them ; but if the final capital be less than the initial amount, the difference represents a loss. The objections to this method are briefly :—(1) It shows only the net result and not how it is produced; (2) it includes the effect of extraneous fluctuations in the value of assets; (3) the whole result is liable to be falsified if either statement accidentally omits an asset or a liability.
The alternative method, that of " double entry," includes a de' ailed profit and loss account as an integral part of its system, and forms the most reliable method by which profits can be ascertained. In this system the profit statement assumes, in the case of a trader, a form similar to that appended.
In the case of a joint-stock company the profit or loss shown at the end of a year is not transferred to capital account, but remains as a balance on the profit and loss account. In the case of " simple manufacturing undertakings" the accounts are substantially the same as above, except that the name of the " trading" account is changed to " manufacturing" account, and the cost of articles sold, which in a trading business appears as the single item " purchases," is replaced by a number of debits, e.g. for raw material, wages, factory rent, power, &c., which combine to make up the direct cost of production. Indirect expenses are in all cases charged to the profit and loss account. In a few businesses, e.g. collieries, the trading account and profit and loss account are sometimes shown as one combined "profit and loss account," instead of in two divisions. Gross profit, if shown, represents the difference between direct cost, or cost of production, of articles sold and their selling price ; while net profit represents the final trading result.