The Financial Performance (Result)
Study Unit 2 gave you the snapshot — what the entity owns and owes at a point in time. Study Unit 3 gives you the story behind the snapshot: how did the entity perform over the period? Did it make money or lose it? And crucially — what does that do to the owner’s equity?
1. Financial performance defined
The financial performance (also called the financial result) of an entity measures how well the entity did over a specific period of time — normally one year, called the financial period.
Unlike the financial position (which is a snapshot at a moment), financial performance is measured over time. It answers the question: did the entity earn more than it spent during this period?
Financial performance is measured by comparing two things: income earned and expenditure incurred. The difference is the profit or loss for the period.
2. Income
Income refers to increases in economic benefits during the financial period in the form of inflows or enhancements of assets, or decreases of liabilities, that result in an increase in equity (other than contributions by the owner).
In plain terms: income is money earned by the entity through its normal business activities.
Increases equity. The entity earned resources it did not have before.
- ✓ Fees earned (service businesses)
- ✓ Sales revenue (trading businesses)
- ✓ Rent received (from tenants)
- ✓ Interest received (on investments)
- ✓ Commission received
- ✓ Dividends received
Decreases equity. The entity used up resources to generate income.
- ✗ Salaries and wages
- ✗ Rent expense (paid to landlord)
- ✗ Insurance expense
- ✗ Telephone and internet
- ✗ Stationery and supplies
- ✗ Depreciation
3. Expenditure
Expenditure (expenses) refers to decreases in economic benefits during the financial period in the form of outflows or depletions of assets, or incurrences of liabilities, that result in a decrease in equity (other than distributions to the owner).
In plain terms: expenditure is what the entity spent in order to generate its income. It is incurred in order to earn income — this is an important principle. If you cannot link an expense to income generation, it may not qualify as a business expense.
4. Profit and loss
The difference between income and expenditure over the financial period is the entity’s profit or loss:
Profit = Income − Expenditure
If the result is positive → Profit (equity increases)
If the result is negative → Loss (equity decreases)
Profit is the owner’s reward for investing capital and taking on the risk of running the business. It is not something taken from the entity — it belongs to the entity until the owner withdraws it (draws it out).
5. Effect of profit or loss on equity
This is the crucial link between financial performance and financial position. Because profit increases the owner’s wealth and a loss erodes it, every profit or loss directly changes the equity figure in the BAE.
This relationship is captured in the expanded equity equation:
Closing Equity = Opening Equity + Capital Contributions − Drawings + Profit (or − Loss)
Drawings are amounts the owner withdraws from the business for personal use — they reduce equity.
Worked example: T Payn, Attorney
On 28 February 20.0, T Payn’s financial position showed: Assets = R50 000 | Equity = R30 000 | Liabilities = R20 000.
During the year ended 28 February 20.1, the following occurred:
Step 1 — Calculate profit:
Profit = Income − Expenditure = R180 000 − R130 000 = R50 000
Step 2 — Update equity:
Closing Equity = Opening Equity + Profit = R30 000 + R50 000 = R80 000
6. The financial statements of performance
6.1 Statement of Profit or Loss and Other Comprehensive Income
Previously called the income statement, this report shows all income earned and all expenditure incurred during the financial period, arriving at a net profit or net loss. It covers a period of time (e.g. “for the year ended 28 February 20.1”).
6.2 Statement of Changes in Equity
This statement reconciles the opening equity to the closing equity. It shows capital contributions, profit or loss for the period, and any drawings (withdrawals) the owner made. It is the bridge between the income statement and the statement of financial position.
1. Statement of Financial Position — snapshot of assets, liabilities and equity at year-end
2. Statement of Profit or Loss — income and expenses over the period → profit or loss
3. Statement of Changes in Equity — links the two: shows how profit (or loss) changed equity from opening to closing balance
6.3 Accounting policies and explanatory notes
All financial statements must be accompanied by notes. These disclose the accounting policies used (e.g. depreciation method) and provide additional detail on line items in the statements. Notes are an integral part of the financial statements — not optional extras.
7. Worked example: Alpha Services
On 28 February 20.2, Alpha Services showed the following for the financial year:
Workings:
Total Income = R850 000 + R1 000 = R851 000
Total Expenditure = R520 000 + R50 000 + R4 000 + R2 000 + R12 000 = R588 000
Net Profit = R851 000 − R588 000 = R263 000
8. Profit & loss calculator
Enter your income and expense figures. Add as many line items as you need. The calculator will produce a formatted income statement and update equity.
9. Worked exercises
Scenario-based questions in the FAC1502 exam style. Work through each one before revealing the answer.
10. Quick quiz
Ten questions on financial performance. No notes — find the gaps first.