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Long Answer Questions · Q4

Q.Prepare the format of statement of profit and loss and explain its items up to the ascertainment of profit before tax.

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The Statement of Profit and Loss is prepared under the Companies Act, 2013, in a vertical format, showing Revenue from Operations, Other Income, Total Revenue, Expenses (classified by nature), and Profit Before Tax — which is the final figure before deducting income tax.

The Concept: Why We Prepare the Statement of Profit and Loss This Way

The Statement of Profit and Loss is not just a list of incomes and expenses — it is a performance report for a company. Under the Companies Act, 2013, it must be prepared in Part II of Schedule III, which prescribes a vertical format. The key idea is to show how a company moves from its core business revenue to the profit that is available to shareholders and the government.

The most critical figure in this statement is Profit Before Tax (PBT). This is the profit earned by the company from all its activities before the government takes its share through income tax. PBT is the bridge between operating performance and final net profit. It is calculated by taking Total Revenue (Revenue from Operations + Other Income) and subtracting all expenses (except income tax).

The accounting treatment is straightforward: every item is either an income (credited to P&L) or an expense (debited to P&L). The statement itself is a summarised version of the ledger accounts — it does not replace the journal entries but presents the net effect.

The Format of the Statement of Profit and Loss

Here is the standard format as per Schedule III of the Companies Act, 2013. Note that the amounts are illustrative — you will fill them from your trial balance.

ParticularsNote No.Amount (₹)
I. Revenue from Operations1xxx
II. Other Income2xxx
III. Total Revenue (I + II)xxx
IV. Expenses:
Cost of Materials Consumed3xxx
Purchases of Stock-in-Trade4xxx
Changes in Inventories of Finished Goods, Work-in-Progress and Stock-in-Trade5xxx
Employee Benefits Expense6xxx
Finance Costs7xxx
Depreciation and Amortisation Expense8xxx
Other Expenses9xxx
Total Expensesxxx
V. Profit Before Exceptional and Extraordinary Items (III – IV)xxx
VI. Exceptional Itemsxxx
VII. Profit Before Extraordinary Items (V – VI)xxx
VIII. Extraordinary Itemsxxx
IX. Profit Before Tax (VII – VIII)xxx
X. Tax Expense:
(1) Current Taxxxx
(2) Deferred Taxxxx
XI. Profit/(Loss) for the Period (IX – X)xxx
Watch out

A common mistake is to include Dividend or Transfer to Reserves as an expense. These are appropriations of profit, not expenses. They appear after Profit Before Tax, in the Profit and Loss Appropriation Account (for partnerships) or in the Notes to Accounts (for companies). Do not deduct them before arriving at PBT.

Explanation of Each Item Up to Profit Before Tax

I. Revenue from Operations

This is the income from the company's main business activities. For a manufacturing company, it is Revenue from Sale of Products (net of returns, discounts, and GST). For a service company, it is Revenue from Services. It is always shown gross of any indirect taxes but net of trade discounts and returns.

Tip

If the company has Excise Duty included in sales, it must be deducted to arrive at Revenue from Operations. Under GST, this is simpler — GST is not part of revenue.

II. Other Income

This includes all incomes that are not from the core business operations. Examples:

  • Interest income on bank deposits or investments
  • Dividend income
  • Rental income from property not used in business
  • Profit on sale of fixed assets or investments
  • Commission income

III. Total Revenue

Simply the sum of I and II. This is the total inflow of economic benefits during the period.

IV. Expenses

Expenses are classified by nature (not function) under Schedule III. The major heads are:

Cost of Materials Consumed — Raw materials used in production. Calculated as: Opening Stock + Purchases – Closing Stock.

Purchases of Stock-in-Trade — For trading companies, the cost of goods bought for resale.

Changes in Inventories — The difference between opening and closing stock of finished goods, WIP, and stock-in-trade. If closing stock > opening stock, this is a negative figure (reduces expenses).

Employee Benefits Expense — Salaries, wages, bonus, PF, gratuity, etc.

Finance Costs — Interest on loans, bank charges, discount on bills, etc. Not dividend.

Depreciation and Amortisation — Systematic allocation of cost of fixed assets and intangible assets over their useful lives.

Other Expenses — A catch-all for everything else: rent, repairs, insurance, audit fees, selling expenses, etc.

V. Profit Before Exceptional and Extraordinary Items

This is the profit from ordinary activities — the company's regular business operations. It excludes one-off items.

VI. Exceptional Items

Items that are part of ordinary activities but are abnormal in size or incidence. Example: a major lawsuit settlement, a large write-off of inventory due to a natural disaster. These are shown separately because they distort the normal profit.

VII. Profit Before Extraordinary Items …

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