Negative loss is a profit & negative profit is a loss
By MUNGAI KIHANYA
The Sunday Nation
Nairobi,
01 May 2016
2015 was a tough for
business: Unlike the past, this year has seen a large number of
companies reporting losses for the period ending December 31, 2015. My
concern for now, however, is not how much money companies have lost, but
how they are reporting the losses.
In principle,
calculating profit is a simple matter: you simply subtract costs from
sales. That is, if the total sales are S and the total costs are C, then
the profit is P = S – C.
Obviously, if the
sales amount is bigger than the cost, then the busines is making a
profit. In that case, the answer coming out the equation P = S – C will
be a positive quantity. For example, if the sales for the year were
Sh2,000,000 and the costs were Sh1,500,000; then the profit will be
Sh2,000,000 – Sh1,500,000 = Sh500,000.
If, however, the
costs are greater than the sales, then the result will be a negative
quantity; that is, a negative profit. For example, if the sales were
Sh2,000,000 and the costs were Sh2,300,000, then the profit would be
–Sh300,000.
The important thing
to note thus far, is that we are calculating profit. If it turns out as
a negative quantity, then it means that the business made a loss. Now,
even though it contains the same quantities, the formula for calculating
losses is different from that working out profits: It is L = C – S.
So, in the second
example, the loss made is Sh2,300,000 – Sh2,000,000 = Sh300,000. Notice
that it comes out as a positive quatinty. This is because costs are
greater than sales.
If we want to
calculate the loss for the first example (when the business actually
made a profit), we work out L = C – S; that is, Sh1,500,000
– Sh2,000,00 = –Sh500,000. This
comes out as a negative quantity!
Clearly, then, loss
is a positive quantity and profit is also a positive quantity. However,
a negative profit is a loss and a negative loss is a profit. Confused?
Here is an illustration from real reports.
Resolution Insurance
Co. Ltd. published its financial statement for 2015 in the
Daily Nation of 27th
April 2016. The bottom line reads: “Loss for the year: –246 million”.
Old Mutual Life Assurance Co. Ltd. also published its results in the
same newspaper. In this case, the bottom line says: “Profit for the
year: –24 million”.
So we have one
company declaring a negative loss amount and another one reporting a
negative profit. Do the two statements mean the same thing? If not,
which is correct?
In both cases, the sales amount is less than the costs; therefore, the “profit for the year’ should be a negative quantity and “loss for the year” should be positive. So, it is Old Mutual that has reported correctly. Resolution Insurance is wrong.
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