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Balance sheet

In my college my teachers says if we get net profit add to capital and if we get net loss subtract from capital.till date no one has clarified me why should we add to capital if we get net profit.or why should we subtract capital if we get net loss.please you must only clarify this point sir.

Answers (4)

Best Answer

Think like a businessman na... You start a business and invest Rs. 1000 in it. (i.e. Cash Dr. and Capital Cr.) Say, in the first year of your business, after all the sale, purchase and expenses, you don't earn anything and instead incur a loss of Rs. 200. It means your lost 200 out of your 1000 invested in the business. (i.e. Capital Dr. and P&L Cr.) Now, in the next year you get a knack of things and make a profit of Rs. 500. (i.e. P&L Dr. and Capital Cr.) End result is: 1st year you invested 1000 and lost 200, so left with 800 to run the business in the 2nd year. In the 2nd year, you make a profit of 500 and you have 1300 in your hand as capital.