Business – 10.1 Financial statements – Statement of profit or loss | e-Consult
10.1 Financial statements – Statement of profit or loss (1 questions)
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The profit for the year (also called net profit) is the final figure on the statement of profit or loss after all expenses and taxes have been deducted. This profit is the total amount available to the owners of the business.
From this profit the company may decide to:
- Pay dividends: a distribution of cash (or other assets) to shareholders. The amount paid reduces the profit that can be retained.
- Retain earnings: the remainder of profit after dividends, which is transferred to the retained earnings account in the statement of changes in equity.
The relationship can be expressed as:
Retained Earnings = Profit for the Year – Dividends Paid
Reasons for retaining earnings include:
- Financing future growth projects without needing external borrowing.
- Building a buffer for unexpected downturns or cash‑flow problems.
- Improving the company’s equity base, which can enhance creditworthiness.
- Funding research and development, acquisitions, or capital expenditure.
Thus, the profit for the year is the source of funds, dividends represent the portion distributed to shareholders, and retained earnings show the portion reinvested in the business, all of which are reflected across the profit and loss statement and the equity statement.