Profit and Loss Account

Author:
Helna
Updated date:
Nov 9, 2020

Helna is a postgraduate in Commerce who is working as a Manager. She loves sharing informative information with her readers.

Profit and Loss Account

Legal requirements of Profit and Loss Account (Schedule VI Part II)

As per the Companies Act, 1956 there is no prescribed proforma for the preparation of Profit and Loss Account. But the information and particulars are to be present in the Profit and Loss Account are laid down in Schedule VI Part II of the Act. Various items relating to income and expenditure of the company must be presented in the Profit and Loss Account as follows:

Income

Income: Profit and Loss Account required to be included in the following items under the head of Income:

a) Turnover: Turnover refers to the total sale value of goods or services rendered during the year. The amount of income from the sale is arrived at after deducting trade discount allowed and sales return from the total sale. If the company deals with more than one type of goods, income from a different class of goods are to be shown separately.

Turnover=Total Sale value - Sales return - Trade discount allowed.

b) Dividend received from Subsidiary companies if any.

c) Income From Investments: That may be:

i. Interest on trade investments such as loans and advances and

ii. Dividends and interest on investments in debentures and shares of other companies.

The two types of income from the investment must be shown separately.

d) Profit or Loss on Sale of investment in shares or debentures has to be shown as a separate item.

e) Miscellaneous income: Recovery of an insurance claim, rent on land and buildings, etc may come under this head.

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f) Extraordinary profits: Profits earned during the year from non-recurring transactions, for example, due to change in the method of valuation of the stock, are shown under this head.

Expenses and Provisions

Items to be shown under different heads of Expenditures are as follows:

a) Cost of Goods Sold: Generally, we get the amount from adding opening stock and purchase and deduction closing stock.

Cost of Goods Sold

Opening Stock xxxx
Add Purchase xxxx
xxxx
Less Closing Stock xxxx

Details of stock i.e. finished goods, semi-finished goods, raw materials are shown separately under the respective items of stock and purchase

B) Manufacturing and Selling Expenses: The following items will come under this head:

1. Raw materials consumed (opening stock plus purchase less closing stock)
2. Stores Consumed
3. Power and Fuel
4. Rent
5. Repairs to buildings
6. Repairs to Machinery
7. Insurance
8. Rates and Taxes
9. Miscellaneous expenses
10. Salaries, Wages, and bonus
- Contribution to provident fund and pension fund
- Employee welfare expenses
11. Commission to selling agents, discounts, and allowances
12. Depreciation on fixed assets (As per rates specified in the Companies Act)
13. Interest on debentures and long-term loans paid or payable
14. Remuneration payable to Directors or managers, if any
15. The amount reserved for:
-Repayment of preference share capital
-Repayment of loans and debentures
16. Provision for Taxation
17. Provision for bad and doubtful debts
18. Audit Fee

Appropriation of Profits

The final step in the preparation of the Profit and Loss account is the appropriation or distribution of the profit of the current year and the profit of the previous year. The balance of the profit of the previous year brought forward and added to the current year's profit will have to appropriate by transfer to reserves and provisions for the dividend proposed to be paid to shareholders, Debenture Redemption Reserve, and arrears of depreciation of the previous year, if any.

The final balance of the profit after the appropriation is carried forward and taken to the next year's account. This part of the Profit and Loss Account may be regarded as a Profit & Loss Appropriation Account, or also known as "below the line" account.

Vertical form of presentation of Profit and Loss Account

Current Year Previous Year

I Income

Sales

Interest on Loans and Advances

Total

II Expenditure

Cost of goods sold

Raw materials consumed

power and fuel

Repairs to Machinery

Salaries, Wages & Bonus

Provision for Bad & Doubtful Debts

Audit Fee

Depreciation

Interest on Debentures

Total

III Profit before Tax (I-II)

IV Provision for Taxation

V Profit after Tax (III-IV)

VI Profit Available for Appropriation (V+VI)

Proposed Dividend on Equity Shares

Transfer to General Reserve

VII Balance transferred to Balance Sheet

Note: The Companies Act requires that figures of the previous year must be shown in a separate column alongside the respective figures of the current period.

This content is accurate and true to the best of the author’s knowledge and is not meant to substitute for formal and individualized advice from a qualified professional.