Q.Which statement provides information about the profitability of the company?
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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:
| Date | Particulars | L.F. | 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:
| Date | Particulars | L.F. | 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: |
The income statement (Statement of Profit and Loss) shows revenues, expenses and the net profit, so it provides information about profitability. The correct option is (a). …
The income statement shows profitability - option (a).
The income statement (Statement of Profit and Loss) matches the revenues of the period against its expenses and arrives at the net profit or loss; it therefore conveys how profitable the company is. The statement of financial position (Balance Sheet) shows the posi …
- CBSE 2025Set ANNUAL1 markMCQQ.Sales less cost of goods sold is called (A) Operating profit (B) Gross profit (C) Net profit (D) Total profit
›Reveal solutionSolution
Gross profit is the difference between net sales and the cost of goods sold; operating and net profit come only after further expenses. Hence the answer is (B) Gross profit.
For the BSEB Inter / Bihar Class-12 Accountancy syllabus, the profit measures build up in stages:
- Gross Profit = Net Sales - Cost of Goods Sold.
- Operating Profit = Gross Profit - Operating (office, selling, distribution) Expenses + Operating Income. …
- CBSE 2025Set ANNUAL1 markQ.Name the sub-heading under which "Interest on Bank loan" appears in the Profit and Loss statement of the Company as per revise schedule III of the Companies Act, 2013.
›Reveal solutionSolution
Any interest the company pays on its borrowings is classified under "Finance Costs" in the Statement of Profit and Loss.
Explanation
Schedule III (Part II) requires the Statement of Profit and Loss to show expenses under specific sub-headings, one of which is Finance Costs — covering interest expense on borrowings (term loans, bank loans, debentures, etc.), other borrowing costs, and applicable exchange differences treated as an adjustment to interest cost.
…
- CBSE 2025Set ANNUAL1 markQ.From the following information, what is the total amount to be shown under the sub-heading "Other Incomes" in the Profit & Loss statement of a Company? Credit Sales — Rs. 1,50,000 Cash Sales — Rs. 2,50,000 Gain on sale of fixed asset — Rs. 1,10,000
›Reveal solutionSolution
"Other Income" captures only non-operating gains that are incidental to the main business — regular sales, whether on credit or in cash, are always Revenue from Operations, never Other Income.
Step-by-step classification
Item Classification Amount shown under "Other Incomes" Credit Sales Revenue from Operations — Cash Sales Revenue from Operations — Gain on sale of fixed asset Other Income (non-operating gain) Rs. 1,10,000 … - CBSE 2024Set MARCH1 markMCQQ.Which of the following is included in financial expense?(a) Factory expenses(b) Administrative expenses(c) Sales expenses(d) Interest expenses
›Reveal solutionSolution
Interest expense is a financial expense, so option (d) is correct.
In this GSEB Class-12 Commerce financial-statements topic, financial (finance) costs are the costs of raising and using borrowed funds - mainly interest on loans/debentures. Factory expenses, administrative e …
- CBSE 2024Set MARCH1 markQ.When the changes in stock is negative, whether it will be added to cost of goods sold or deducted?
›Reveal solutionSolution
A negative change in stock is deducted from cost of goods sold.
In this GSEB Class-12 Commerce financial-statements topic, 'Changes in inventories' = Opening stock - Closing stock. When this figure is negative, it means the closing stock is greater than the opening stock (stock has increased during the year). Since more goods remain unsold, the cost of goods actually sold is lower, so the negative change is *deducted …
- CBSE 2024Set ANNUAL1 markMCQQ.Which statement provides information about the profitability of the company?(a) Income statement(b) Statement of Retained earnings(c) Financial position statement(d) Statement of cost
›Reveal solutionSolution
The income statement shows profitability - option (a).
The income statement (Statement of Profit and Loss) matches the revenues of the period against its expenses and arrives at the net profit or loss; it therefore conveys how profitable the company is. The statement of financial position (Balance Sheet) shows the posi …
- CBSE 2024Set ANNUAL1 markQ.Fill in the blank: An increase in accrued income during the particular year is ________ the net profit.
›Reveal solutionSolution
Answer: It increases the net profit.
Accrued (outstanding) income is income that has been earned during the year though not yet received in cash. Being an income earned, it is added while computing profit, so an increase in accrue …
- CBSE 2022Set ANNUAL1 markMCQQ.Dividend paid in the mid of the year is called(a) uncalled dividend(b) preference dividend(c) interim dividend(d) final dividend
›Reveal solutionSolution
A dividend paid in the middle of the year is an interim dividend - option (c).
An interim dividend is declared and paid by the Board of Directors during the financial year, out of estimated profits, before the annual accounts are finalised and the final dividend is declared at the AGM. A preference di …
- CBSE 2020Set ANNUAL1 markMCQQ.Dividend declared in the middle of the year is called(a) Unclaimed dividend(b) Preference dividend(c) Final dividend(d) Interim dividend
›Reveal solutionSolution
A dividend declared in the middle of the year is an interim dividend — option (d).
A final dividend is declared by shareholders at the annual general meeting after the year's accounts are finalised. When the Board of Directors declares and pays a dividend during the year, out of estimated profits, it is called an interim dividend. An unclaimed …
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