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Economics for Kids: Learn About Profit and Loss

Updated on February 5, 2021

Imagine a boy named Tom. He wants to buy a new toy. He decides to set up a lemonade stand to make some money. To make money, he has to make a profit on the sale of the lemonade he sells. To understand what it means to make a profit, you need to learn about costs or expenses first.

What does Tom need to make lemonade? Obviously he needs lemons and sugar. He takes money out of his piggy bank to buy the lemons and sugar he needs to make lemonade. He spends $5 to get the ingredients at the grocery store. This is a cost or expense.

He also wants a big sign to put in front of his lemonade stand. He pays $1 for the poster paper. That is another cost. So, his total costs add up to $6.

A lemonade stand could make either a profit or a loss
A lemonade stand could make either a profit or a loss

Tom sets up his lemonade stand and sells a lot of lemonade. He earns $14 altogether. But he really only makes $8. This is his profit. You may be wondering why. Remember that Tom spent $6 on lemons, sugar, and poster paper? The profit is the amount of money Tom makes after his costs are deducted (subtracted).

So, he made $14 but he had to actually spend $6 first. Tom started out with $6 in his piggy bank. After his lemonade sale he now has $14 in his piggy bank. So, he has $8 more after the lemonade sale.

What is a Loss?

Imagine now that Tom spends $6 to buy the things he needs for his lemonade stand but he only sells $5 worth of lemonade. He lost $1. His expenses or costs are higher than his lemonade sales. He took $6 out of his piggy bank but is only able to put $5 back. This is known as a loss.

Sometimes businesses make extra money, known as a profit. But sometimes they lose money, known as a loss.

Important Terms

Cost of Goods Sold - this is the amount paid for the things someone wants to sell. This is the money Tom spent on lemons, sugar, and poster paper. His Cost of Goods Sold was $6.

Total Sales - this is the amount Tom made selling his lemonade to customers. He made $14 in Total Sales.

Gross Profit - this is Total Sales minus Cost of Goods Sold. $14 - $6 = $8. So, Tom's Gross Profit was $8.

Operating Expenses - many business have to pay for rent, electricity, salaries, office supplies, and many other things. Let's say in our example that Tom paid a friend $1 to help with the lemonade stand. So his operating expenses were $1.

Net Profit/Net Loss - Gross Profit minus Operating Expenses. Tom's Gross Profit was $8 and the cost of paying his friend to help, his Operating Expense, was $1. $8 - $1 = $7. His Net Profit was $7.

Unit Cost - the amount paid for each item sold. Think of each cup of lemonade as a unit.

Each glass of lemonade is a unit
Each glass of lemonade is a unit

Let's summarize this again:

Cost of Goods Sold - Tom spent $6 buying lemons, sugar, and poster paper

Total Sales - Tom sold $14 worth of lemonade

Gross Profit - this is total sales ($14) minus cost of goods sold ($6). Tom's gross profit is $8

Operating Expenses - Tom paid a friend $1 to help run the lemonade stand. So $1 is his operating expense

Net Profit/Net Loss - Gross profit ($8) minus operating costs ($1). Tom's gross profit is $7

Unit Cost - if Tom sold 50 cups of lemonade and his total cost was $6, then his unit cost would be $6 divided by 50, which is equal to 12 cents. So his unit cost is 12 cents

This content reflects the personal opinions of the author. It is accurate and true to the best of the author’s knowledge and should not be substituted for impartial fact or advice in legal, political, or personal matters.

© 2013 JoanCA

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    2 years ago

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