From the information extracted from the Statement of Profit and Loss of K Ltd. for the years ended 31st March, 2017 and 31st March, 2018, prepare a Common Size Statement of Profit and Loss. | Particulars | Note No. | 2017 – 18 | 2016 – 17 | | --- | --- | --- | --- | | Revenue from operations | | ₹ 4,00,000 | ₹ 5,00,000 | | Cost of materials consumed | | ₹ 2,40,000 | ₹ 3,50,000 | | Other expenses | | ₹ 1,10,000 | ₹ 1,30,000 | | Tax rate | | 50% | 50% |

> [!TLDR] > A Common Size Statement of Profit and Loss expresses every line item as a percentage of Revenue from Operations for each year; K Ltd.'s profit margin improves from 4% (2016-17) to 12.5% (2017-18) of revenue. **Working Notes** 1. 2016-17: Total Expenses = Cost of materials consumed (₹3,50,000) + Other expenses (₹1,30,000) = ₹4,80,000; Profit before tax = ₹5,00,000 − ₹4,80,000 = ₹20,000; Tax @ 50% = ₹10,000; Profit after tax = ₹10,000. 2. 2017-18: Total Expenses = Cost of materials consumed (₹2,40,000) + Other expenses (₹1,10,000) = ₹3,50,000; Profit before tax = ₹4,00,000 − ₹3,50,000 = ₹50,000; Tax @ 50% = ₹25,000; Profit after tax = ₹25,000. 3. Every % column = (item ÷ Revenue from Operations of that year) × 100. **Common Size Statement of Profit and Loss of K Ltd. for the years ended 31st March, 2017 and 2018** | Particulars | 2016-17 (₹) | 2017-18 (₹) | % of Revenue 2016-17 | % of Revenue 2017-18 | | --- | --- | --- | --- | --- | | Revenue from Operations | 5,00,000 | 4,00,000 | 100.00 | 100.00 | …

From the information extracted from the Statement of Profit and Loss of K Ltd. for the years ended 31st March,

Question

From the information extracted from the Statement of Profit and Loss of K Ltd. for the years ended 31st March, 2017 and 31st March, 2018, prepare a Common Size Statement of Profit and Loss.

Particulars	2017 – 18	2016 – 17
Revenue from operations	₹ 4,00,000	₹ 5,00,000
Cost of materials consumed	₹ 2,40,000	₹ 3,50,000
Other expenses	₹ 1,10,000	₹ 1,30,000
Tax rate	50%	50%

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Concept understanding — Profit Before Tax

Profit Before Tax (PBT) – A First Look

Think of a business like a small shop you run. At the end of the year, you add up all the money you earned from selling goods (revenue) and subtract all the money you spent on buying stock, paying rent, electricity, and salaries. What remains is your profit — the reward for your effort.

But here's the catch: before you can take that profit home, the government wants its share — income tax. So the profit you calculate before paying tax is called Profit Before Tax (PBT). After you pay tax, what's left is Profit After Tax (PAT) — the amount you can actually keep or reinvest.

Precise Meaning (as per NCERT Class 12 Accountancy)

In the context of a company's financial statements, Profit Before Tax is the net profit earned by the company from its operations and other activities before deducting the provision for income tax.

It appears in the Statement of Profit and Loss (the new name for the Profit & Loss Account under Companies Act, 2013). The format is:

Profit Before Tax = Revenue from Operations + Other Income - Total Expenses (excluding tax)

Where total expenses include:

Cost of materials consumed / purchases
Changes in inventories
Employee benefit expenses
Depreciation and amortisation
Finance costs (interest)
Other expenses (rent, repairs, etc.)

Why Does PBT Matter?

It shows operating efficiency – PBT tells you how well the business is doing before the taxman's cut. A company with high PBT but low PAT might be paying heavy taxes (or has deferred tax issues).
It's used for comparisons – Different companies may face different tax rates (e.g., new manufacturing units get tax holidays). Comparing PBT (instead of PAT) gives a fairer picture of their core performance.
It's the base for tax calculation – The company estimates its tax liability on PBT and creates a provision.

Accounting Treatment – Which Account is Debited/Credited?

In the Statement of Profit and Loss, the treatment is straightforward:

Debit side (expenses): All expenses are debited.
Credit side (incomes): All revenues and gains are credited.
The balancing figure after all items (except tax) is Profit Before Tax – shown on the credit side.
Then, Less: Provision for Tax is shown as a deduction from PBT to arrive at Profit After Tax.

Journal entry for creating tax provision:

Particulars	Debit (₹)	Credit (₹)
Profit & Loss A/c (or Statement of P&L) Dr.	XXX
To Provision for Tax A/c		XXX
(Being provision for income tax created)

Debit: Profit & Loss (Statement of P&L) – reduces the profit.
Credit: Provision for Tax – a current liability shown in the Balance Sheet.

When tax is actually paid later:

Particulars	Debit (₹)	Credit (₹)
Provision for Tax A/c Dr.	XXX
To Bank A/c		XXX
(Being tax paid)

Format of Statement of Profit and Loss (as per NCERT – Part I of Schedule III)

Below is the relevant portion showing how PBT appears. Note: This is a simplified extract.

Particulars	Note No.	Amount (₹)
I. Revenue from Operations		10,00,000
II. Other Income		50,000
III. Total Revenue (I + II)		10,50,000
IV. Expenses:

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A Common Size Statement of Profit and Loss expresses every line item as a percentage of Revenue from Operations for each year; K Ltd.'s profit margin improves from 4% (2016-17) to 12.5% (2017-18) of revenue.

Working Notes

2016-17: Total Expenses = Cost of materials consumed (₹3,50,000) + Other expenses (₹1,30,000) = ₹4,80,000; Profit before tax = ₹5,00,000 − ₹4,80,000 = ₹20,000; Tax @ 50% = ₹10,000; Profit after tax = ₹10,000.
2017-18: Total Expenses = Cost of materials consumed (₹2,40,000) + Other expenses (₹1,10,000) = ₹3,50,000; Profit before tax = ₹4,00,000 − ₹3,50,000 = ₹50,000; Tax @ 50% = ₹25,000; Profit after tax = ₹25,000.
Every % column = (item ÷ Revenue from Operations of that year) × 100.

Common Size Statement of Profit and Loss of K Ltd. for the years ended 31st March, 2017 and 2018

Particulars	2016-17 (₹)	2017-18 (₹)	% of Revenue 2016-17	% of Revenue 2017-18
Revenue from Operations	5,00,000	4,00,000	100.00	100.00

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