Movie Case Study
The owner of Golden Fisheries, Babloo (played by Sharat Saxena) is shown in the above scene. He is enraged because the company is losing money, and he is blaming his employees for it. In this blog, Learning Perspectives will explore the meaning of net losses in a business.
What is Net Loss?
Losses in a business occur when expenses or costs are higher than the revenue of the business. Net loss is the opposite of net profit. Profit in the business occurs when revenue or sales are higher than the costs incurred.
These terms are seen in the profit and loss account or the income statement of the company. An income statement is one of the four main financial statements that businesses prepare.
The four main financial statements of a business are:
Statement of Stockholders’ equity
What is an Income Statement?
The three main aspects of the income statements are:
- Revenue or Sales
- Expenses or Cost
- Profit or Loss
Understand Net Loss with a Video
Example:
Let’s assume you started a new restaurant. For the restaurant to do well, you would have to serve great dishes. This requires raw materials in the form of veggies, proteins, fruits, etc. To make these vegetables into dishes one requires chefs. Also, cooking appliances, a working kitchen, and a clean working space.
Above are all the costs that the restaurant incurs, cost of vegetables, the rent of the kitchen, the chef’s salary, gas bill, water, electricity bill, etc.
Revenue or Sales are the customers who eat at the restaurant and pay for the food.
Profit and loss are calculated as follows:
Revenue – Expenses = Profit (When Revenue> Expenses)
Revenue – Expenses = Loss (When Revenue< Expenses)
Below is a sample income statement of this restaurant to make it simpler to understand:
| Particulars | Amount (Rs.) | Amount (Rs.) |
| Revenue | 50,000 | |
| Expenses: | ||
| Rent | 7,000 | |
| Salary | 6,500 | |
| Cost of vegetables/fruits | 7,500 | |
| Electricity | 1,000 | |
| Gas Bill | 5,00 | |
| Total Expenses | 22,500 | |
| Net Profit | 27,500 |
The above income statement shows a profitable condition as the restaurant earns a revenue of Rs. 50,000. The costs are Rs. 22,500. In this condition, since revenues are higher than the costs, we will get a profit of Rs. 27,500.
| Particulars | Amount (Rs.) | Amount (Rs.) |
| Revenue | 20,000 | |
| Expenses: | ||
| Rent | 7,000 | |
| Salary | 6,500 | |
| Cost of vegetables/fruits | 7,500 | |
| Electricity | 1,000 | |
| Gas Bill | 5,00 | |
| Total Expenses | 22,500 | |
| Net Loss | 2,500 |
This income statement depicts the loss situation. In this scenario, the company earns a revenue of Rs. 20,000. This is less than the expenses that the company incurred. Hence this is a loss situation and the company faces a net loss of Rs. 2,500.
