Profit equations

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There are at least two ways to calculate profit (winst) at the annual accounts (jaarrekening) and they need to match. I actually found this out, when entering an annual account at the site of Belastingdienst, with the site pointing out that these two methods didn't match. This is concerning a single-owned company (eenmanszaak).

The formula - Left side and ride side should match: 

{Equity increase} + {nett withdrawals}  = {Profit according to income statement} <=>
{Toename EV}      + {Saldo onttrekking} = {Winst volgens resultatenrekening}

The name of the game

Nothing as frustrating as working with an entity and not knowing how it is being called:

Example - Start easy

Let's run a simple example to see this in action:

  • Company A is started in 2022
  • It provides services, has no direct or indirect costs.

Booking facts

All booking facts (if that's the correct name) during this year:

  • An invoice of € 1.000 (ex. 21% VAT) has been send to customer B
  • Payment has been received on A's business account
  • Half the amount has been retained and half withdrawn
  • VAT has been disbursed to Belastingdienst.

Balance beginning of the year

Balance at the beginning of this year: 0 - 0 at both sides

Balance at the end of the year

  • Balance business account: € 500
  • No debt/foreign capital (vreemd vermogen)
  • Equity formula: Equity = Assets - Liabilities [1] <=> Eigen vermogen = Bezittingen - Schulden
  • In this case: Equity = € 500 - € 0 = € 500.

Resulting balance: 

Debit                               Credit
------------------------------------------
Business account: € 500 | Equity: € 500
                        |
Total             € 500 | Total   € 500

Income statement

Easy: 

Revenue (omzet):                           € 1.000
Direct costs (directe kosten):             €     0
--------------------------------------------------
Gross profit (brutowinst):                 € 1.000
Indirect costs (indirecte kosten):         €     0
--------------------------------------------------
Operational profit (operationale winst):   € 1.000
Interest (rente)                           €     0
--------------------------------------------------
Profit (winst)                             € 1.000

I believe that withdrawals (onttrekking) shouldn't be incorporated in the income statement. Otherwise you could always depress profit by simply siphoning it off.

Profit calculations

Finally, we can apply the formula from the start of this article: 

{Equity increase} + {nett withdrawals}  = {Profit according to income statement} <=>
{Toename EV}      + {Saldo onttrekking} = {Winst volgens resultatenrekening}

with

  • Equity increase = € 500
  • Nett withdrawals = € 500
  • Profot according to income statement = € 1.000
{Equity increase} + {nett withdrawals}  = {Profit according to income statement} <=>
€ 500 + € 500 = € 1.000

Notes:

  • The calculation above confirms that the income statement should not include withdrawals
  • Strange to see that withdrawals are not included in either balance or income statement
  • Maybe this is why you need three documents to get a complete picture of a business' finance: Balance, Income statement and Cashflow statement: In the latter, withdrawals will be visible
  • A balance is a snapshot of certain aspects of a business at a specific time, whereas a income statement is a statement over a time period. There's a analogy with electricity: current is at any one point where voltage is the difference over an interval. In physics, there are actually many such analogies and this isn't too remarkable
  • Note that in this equation, all entities are of the interval-kind: The equity- and withdrawal-related entities are converted to interval-like. The income profit number is already interval-like
  • Could all three entities be converted to point-like entities? I'm not sure: What would profit be as a point-like entity? - It doens't seem to make sense.

Example - Non-disbursed VAT

Now let's extend the example above with VAT not being disbursed to the Belastingdienst during this year

Booking facts

  • An invoice of € 1.000 (ex. 21% VAT) has been send to customer B
  • Payment has been received on A's business account
  • Half the amount has been retained and half withdrawn
  • VAT (€ 210) has been retained this year, and only disbursed in January of the next year

Balance beginning of the year

Balance at the beginning of this year is the same as before: 0 - 0 at both sides

Balance at the end of the year

  • Balance business account: € 710
  • There is debt to the Belastingdienst of € 210
  • Equity formula: Equity = Assets - Liabilities [2] <=> Eigen vermogen = Bezittingen - Schulden
  • In this case: Equity = € 710 - € 210 = € 500.

Resulting balance: 

Debit                               Credit
------------------------------------------
Business account: € 710 | Debt:   € 210
                        | Equity: € 500
------------------------| ----------------
Total             € 710 | Total   € 710

Income statement

The income statement is the same as before: VAT doesn't have anything to do with income statements.

Profit calculations

{Equity increase} + {nett withdrawals}  = {Profit according to income statement} <=>
{Toename EV}      + {Saldo onttrekking} = {Winst volgens resultatenrekening}

with

  • Equity increase = € 500
  • Nett withdrawals = € 500
  • Profit according to income statement = € 1.000
{Equity increase} + {nett withdrawals}  = {Profit according to income statement} <=>
€ 500 + € 500 = € 1.000

Notes:

  • The profit calculation doesn't change
  • Maybe because all entities are converted to interval-like entities, which is like the domain of the income statement, and VAT doesn't play here a role.

Sources

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