Prepare a Common size statement of profit and loss of Shefali Ltd. with the help of following information: | Particulars | 2015-16 (₹) | 2016-17 (₹) | |---|---:|---:| | Revenue from operations | 6,00,000 | 8,00,000 | | Indirect expense | 25% of gross profit | 25% of gross profit | | Cost of revenue from operations | 4,28,000 | 7,28,000 | | Other incomes | 10,000 | 12,000 | | Income tax | 30% | 30% |

Prepare a Common size statement of profit and loss – Class 12 Accountancy

Numerical Questions · Q5

Prepare a Common size statement of profit and loss of Shefali Ltd. with the help of following information:

Particulars	2015-16 (₹)	2016-17 (₹)
Revenue from operations	6,00,000	8,00,000
Indirect expense	25% of gross profit	25% of gross profit
Cost of revenue from operations	4,28,000	7,28,000
Other incomes	10,000	12,000
Income tax	30%	30%

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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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We first compute the missing Gross Profit for each year.

Gross Profit = Revenue from Operations − Cost of Revenue from Operations.

2015‑16: ₹6,00,000 − ₹4,28,000 = ₹1,72,000
2016‑17: ₹8,00,000 − ₹7,28,000 = ₹72,000

Indirect Expense = 25% of Gross Profit.

2015‑16: 25% of ₹1,72,000 = ₹43,000
2016‑17: 25% of ₹72,000 = ₹18,000

Profit Before Tax = Gross Profit + Other Incomes − Indirect Expense.

2015‑16: ₹1,72,000 + ₹10,000 − ₹43,000 = ₹1,39,000
2016‑17: ₹72,000 + ₹12,000 − ₹18,000 = ₹66,000

Income Tax = 30% of Profit Before Tax.

2015‑16: 30% of ₹1,39,000 = ₹41,700
2016‑17: 30% of ₹66,000 = ₹19,800

Profit After Tax = Profit Before Tax − Income Tax.

2015‑16: ₹1,39,000 − ₹41,700 = ₹97,300
2016‑17: ₹66,000 − ₹19,800 = ₹46,200

Now we express each item as a percentage of Revenue from Operations (the base for a Common Size Statement of Profit & Loss).

Particulars	2015‑16 (₹)	% of Revenue	2016‑17 (₹)	% of Revenue
I. Revenue from Operations	6,00,000	100.00%	8,00,000	100.00%
II. Other Incomes	10,000	1.67%	12,000	1.50%
III. Total Revenue (I + II)	6,10,000	101.67%	8,12,000	101.50%
IV. Expenses

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The Common Size Statement of Profit and Loss expresses each line item as a percentage of Revenue from Operations (₹6,00,000 for 2015-16 and ₹8,00,000 for 2016-17). Gross Profit, Indirect Expenses, Other Incomes, and Net Profit after Tax are all shown as percentages, enabling year-on-year comparison of cost structure and profitability.

Concept First: Why a Common Size Statement?

A Common Size Statement of Profit and Loss is a vertical analysis tool. Every item in the statement is expressed as a percentage of a common base — here, Revenue from Operations is taken as 100%. This lets you compare financial performance across years (or between companies of different sizes) by focusing on the relative weight of each expense and income item, not just absolute rupees.

The key accounting treatment: Profit Before Tax is the bridge between operating profit and net profit. We compute Gross Profit first (Revenue minus Cost of Revenue), then deduct Indirect Expenses to get Operating Profit, add Other Incomes, and finally deduct Income Tax at the given rate.

Watch out

A classic mistake is to compute Indirect Expense as 25% of Revenue instead of 25% of Gross Profit. The question explicitly says "25% of gross profit" — always read the basis carefully. Also, Income Tax is applied on Profit Before Tax, not on Operating Profit.

Step-by-Step Calculations

Let's compute the missing figures for both years.

2015-16:

Revenue from Operations = ₹6,00,000
Cost of Revenue from Operations = ₹4,28,000
Gross Profit = Revenue - Cost = ₹6,00,000 - ₹4,28,000 = ₹1,72,000
Indirect Expense = 25% of Gross Profit = 25% of ₹1,72,000 = ₹43,000
Other Incomes = ₹10,000
Profit Before Tax = Gross Profit - Indirect Expense + Other Incomes = ₹1,72,000 - ₹43,000 + ₹10,000 = ₹1,39,000
Income Tax = 30% of Profit Before Tax = 30% of ₹1,39,000 = ₹41,700
Profit After Tax = Profit Before Tax - Income Tax = ₹1,39,000 - ₹41,700 = ₹97,300

2016-17:

Revenue from Operations = ₹8,00,000
Cost of Revenue from Operations = ₹7,28,000
Gross Profit = ₹8,00,000 - ₹7,28,000 = ₹72,000
Indirect Expense = 25% of ₹72,000 = ₹18,000
Other Incomes = ₹12,000
Profit Before Tax = ₹72,000 - ₹18,000 + ₹12,000 = ₹66,000
Income Tax = 30% of ₹66,000 = ₹19,800
Profit After Tax = ₹66,000 - ₹19,800 = ₹46,200

Tip

To speed up, compute Gross Profit first, then Indirect Expense as 0.25 × Gross Profit. The rest follows in a straight line.

The Common Size Statement

Now, express each absolute figure as a percentage of Revenue from Operations (the base = 100%).

Particulars	2015-16 (₹)	% of Revenue	2016-17 (₹)	% of Revenue
I. Revenue from Operations	6,00,000	100.00%	8,00,000	100.00%
II. Other Incomes	10,000	1.67%	12,000	1.50%
III. Total Revenue (I + II)	6,10,000	101.67%	8,12,000	101.50%
IV. Expenses
Cost of Revenue from Operations	4,28,000	71.33%	7,28,000	91.00%
Indirect Expenses	43,000	7.17%	18,000	2.25%

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Concept First: Why a Common Size Statement?

Step-by-Step Calculations

The Common Size Statement

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