The Business Equation

This gives a definition of profits earned: 

Profit = Increase in net assets (excl drawings) + drawings – extra capital introduced.

It shows the link between the amount of profit earned and the increase in net assets and drawings.

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One response to “The Business Equation

  1. 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)