Lesson 7: Profit - The third source of funds to the business
We have already discovered the first two sources of funds for a business: debt (liabilities) and equity (contributed by the owners). But the most important source of funds is the third type: generated equity (profit).
Profit is the owner's reward for investing in the business. It is the owner's additional, generated, claim on the assets of the business. Another way of saying this, is that profit is part of Equity because it represents the additional obligation of the business to the owner. Profit is a source of funds to the business.
In this video, Mark Robilliard explains profit (or generated equity) is the third source of funds to a business. He then use the BaSIS Framework to show how the profit number in the balance sheet is explained by the income statement.
[Duration 12:02]
Profit is the owner's reward for investing in the business. It is the owner's additional, generated, claim on the assets of the business. Another way of saying this, is that profit is part of Equity because it represents the additional obligation of the business to the owner. Profit is a source of funds to the business.
In this video, Mark Robilliard explains profit (or generated equity) is the third source of funds to a business. He then use the BaSIS Framework to show how the profit number in the balance sheet is explained by the income statement.
[Duration 12:02]
Extenders
- It is common for people to think that Profit should be shown in the Assets box, rather than the Equity box of the BaSIS Framework. Why do you think this is so?
- Rakgadi received a 7% return on investment (ROI) from her investment in the Wors Rolls vendor stall. What would you consider when deciding whether the return on an investment you were receiving was adequate?
- Should Rakgadi withdraw her investment and move it to Mandla’s business? Explain. Considerations?
Resources
- Student Workbook - Lesson 7 [2.3MB] - download