Accounting: the expanded

FIGURE 5.1 A Graphic Illustration of Profit

Value added, on the other hand, is a much broader definition of wealth. As can be seen in Figure 5.2, value added looks beyond the wealth (profit) created for shareholders and includes the wealth for a wider group of stakeholders such as employees, creditors, government and the organization itself. Thus, value added can be thought of as revenues less purchases of external goods and services. Materials and supplies are purchased from suppliers and turned into different goods and services using labour and capital.

19. 
    Depreciation or amortization is the process of matching the cost of an asset against revenues based on its estimated useful life. Thus, instead of expensing the entire cost of an asset when it is purchased, it is expensed according to how long it is estimated to be useful in producing value. In a simple example, if the asset were estimated to last five years, one fifth of its cost would be expensed every year for five years.
    

To use a simple example, the value added created by a furniture-making company is calculated by taking the difference between the price the furniture was sold for and the cost of the materials that went into making the furniture (wood, screws, glue, etc.). So if you were making a table that sold for $300, and the wood and materials cost $100, the value added would be $300 minus $100, or $200. Another way of looking at value added is that labour and capital transformed the raw materials into another form, i.e., the table, and as a result, the value of the materials increased by $200. That value added, $200, is then distributed to the stakeholders of the company – its employees, creditors, government (taxes), and shareholders.

FIGURE 5.2. A Graphic Illustration of Value Added

^Revenues(market value of primary outputs)