Profit/Loss Accounts

Every business wants to know the incomes earned and expenses incurred during a particular period, usually at the end of the year. Profit & Loss Account reflects the income and expenses of the business. It is a financial statement reflecting the outcome of business activities of an organization during an accounting period. The Profit & Loss Account reports the incomes and expenses directly related to an organization to measure the performance in terms of profit or loss. Profit & Loss Account is also known as P&L A/c, Profit & Loss Statement, Income Statement or Income and Expense Statement.

What is Profit & Loss Statement?

The Profit & Loss Statement is a crucial financial statement summarizing the costs, revenues and expenses incurred by a business during a specific period, usually a quarter or year.

All the indirect expenses and incomes, including the gross profit/loss, are reported in the Profit & Loss Statement to arrive at the net profit or loss.

It shows the company’s net profit or loss during a specific time for which it is prepared.

This statement helps companies make informed decisions about their operations and track their financial performance.

Purpose of Profit & Loss Statement/Account

Profit & Loss Statement/Account shows the profits/losses earned or incurred by a business for a month or a year.

Companies use Profit & Loss Statement and “T Account” for the following reasons:

To know the profits/losses earned or incurred by a business.

Statutory requirements under Companies Act, Partnership Act or other laws.

Traditional Method to Know Profit/Loss

Traditionally, there were two steps to know the profit or loss:

Preparation of Trading Account.

Preparation of Profit & Loss Account.

The Trading Account reflects the gross profit or gross loss of the business.

The Profit & Loss Account shows the net profit or net loss earned by the company.

Calculation in Profit & Loss Account

Add all revenue earned during the accounting period.

Add all expenditures made throughout the accounting period.

Subtract total expenses from total revenue.

If the value is positive, it represents profit.

If the value is negative, it represents loss.

How to Prepare Profit & Loss Statement?

Below is the process to prepare the Profit & Loss Statement:

1. Prepare Ledger Accounts

An account statement must be prepared for each ledger from the journal book to determine the closing balance.

2. Create Trial Balance

Trial balance summarizes all the ledger accounts.

It lists every ledger account with the closing balance posted from individual ledger accounts.

3. Prepare Trading and Profit & Loss Statement

All ledger accounts related to sales, purchases, direct expenses, indirect expenses and income are posted to the Profit & Loss Statement.

Components of Profit & Loss Statements

The Profit & Loss Account consists of various components that record the expenses and income of the business.

Revenue / Income

The business income is classified into two categories:

Revenue from primary business operations.

Other or miscellaneous income such as interest or dividend income.

Cost of Goods Sold (COGS)

The Cost of Goods Sold includes direct costs involved in manufacturing or purchasing goods.

These costs include:

Labour cost.

Raw material cost.

Direct overheads.

These expenses are deducted from revenue to determine the gross margin.

Operating Expenses

Operating expenses are indirect costs involved in running the business.

These include:

Administrative expenses.

Depreciation costs.

Employee costs.

Marketing and distribution costs.

Selling costs.

Research and development costs.

Operating Profit

Operating profit is the balance remaining after deducting operating expenses from gross margin.

It is also called EBIT (Earnings Before Interest and Taxes).

A positive operating margin assures stakeholders and investors about business profitability and solvency.

Net Income

Net income is the final profit generated after deducting all operating and non-operating expenses, taxes and interest.

It is the amount available for distribution to shareholders.

Earnings per share are also calculated based on net income.

Different Formats of Profit & Loss Account

Different formats of Profit & Loss Account are:

Format for Sole Traders & Partnership Firms.

Format of P&L Account for Companies.

Format for Sole Traders & Partnership Firms

No specific format of Profit & Loss Account is prescribed for sole traders and partnership firms.

They can prepare the P&L Account in any form.

However, it should separately reflect gross profit and net profit.

Usually, these entities prefer the “T-shaped form” for preparing the Profit & Loss Account.

T-Shaped Form of Profit & Loss Account

T-shape form of Profit & Loss Account has two sides:

Debit Side

Credit Side

Trading Account is prepared first followed by the Profit & Loss Statement.

Free Consultation

Trading and Profit & Loss Account

Particulars	Amount	Particulars	Amount
To Opening Stock	XXX	By Sales	XXX
To Purchases	XXX	By Closing Stock	XXX
To Direct Expenses	XXX
To Gross Profit	XXX
	XXX		XXX
To Operating Expenses	XXX	By Gross Profit	XXX
To Operating Profit	XXX
	XXX		XXX
To Non-operating expenses	XXX	By Operating Profit	XXX
To Exceptional Items	XXX	By Other Income	XXX
To Finance Cost	XXX
To Depreciation	XXX
To Net Profit Before Tax	XXX
	XXX		XXX

Format of P&L Account for Companies

Companies have to prepare the Profit & Loss Account as per Schedule III of Companies Act, 2013.

Following is the format mentioned in Schedule III – STATEMENT OF PROFIT & LOSS

Name of the Company..........................................

Statement of Profit and Loss for the period ended.................................

	Note No.	Figures for the current reporting period	Figures for the previous reporting period
INCOME
(a) Revenue From operations
(b) Other Income
Total Income
(a) Cost of materials consumed
(b) Purchases of Stock-in-Trade
(c) Changes in inventories of finished goods, Stock-in -Trade and work-in-progress
(d) Employee benefits expense
(e) Finance costs
(f) Depreciation and amortization expenses
(g) Other expenses
Total Expenses
Profit/(loss) before exceptional items and tax
Exceptional Items
Profit/ (loss) before tax
Tax Expense:
Current tax
Deferred tax
Profit (Loss) for the period from continuing operations
Profit/(loss) from discontinued operations
Tax expenses of discontinued operations
Profit/(loss) from Discontinued operations (after tax)
Profit/(loss) for the period
Other Comprehensive Income
A. (i) Items that will not be reclassified to profit or loss
(ii) Income tax relating to items that will not be reclassified to profit or loss
B. (i) Items that will be reclassified to profit or loss
(ii) income tax relating to items that will be reclassified to profit or loss
Total Comprehensive Income for the period Comprising Profit (Loss) and other comprehensive income for the period
Earnings per equity share (for continuing operation):
(1) Basic
(2) Diluted
Earnings per equity share (for discontinued operation):
(1) Basic
(2) Diluted
Earning per equity share (for discontinued & continuing operation)
(1)Basic
(2) Diluted

Details to be disclosed in the notes

a. Amount of “Revenue from operations” will be divided in –

Sale of products (including excise duty)
Sale of services
Other operating revenues

b. Finance cost will be distributed in –

Interest
Dividend on redeemable preference shares
Exchange Differences regarded as an adjustment to borrowing costs, and
Other borrowing costs (if any)

c. Other Income will be distributed in –

Interest Income,
Dividend Income, and
Other non-operating income

d. Other Comprehensive Income shall be classified into –

Items that will not be reclassified to profit or loss
1. Changes in revaluation surplus
2. Remeasurements of the defined benefit plans
3. Equity Instruments through Other Comprehensive Income
4. Fair value changes relating to own credit risk of financial liabilities designated at fair value through profit or loss

Share of other comprehensive income in associates and joint ventures, to the extent not to be classified into profit or loss, and

Others

ii. Items that will be reclassified to profit or loss

Exchange differences in translating the financial statements of a foreign operation;
Debt instruments through Other Comprehensive Income;
The effective portion of gains and loss on hedging instruments in a cash flow hedge;
Share of other comprehensive income in Associates and Joint Ventures, to the extent to be classified into profit or loss; and

Others

e. Employees benefit expense

Salaries and wages,
Contribution to provident and other funds,
Share-based payments to employees
Staff welfare expenses

f. Depreciation and amortization expense,

g. Interest Income,

h. Interest Expense,

i. Dividend Income,

j. Net gain or loss on sale of investments,

k. Net gain or loss on foreign currency transaction and translation (other than considered as finance cost),

l. Payment to the auditor as :

Auditor
For taxation matters
For company law matters
For other services
For reimbursement of expenses

m. Amount of expenses incurred on corporate social responsibility activities

o. Any other expense or income which exceeds higher of Rs. 10,00,000 or 1% of revenue from operations

Form 23ACA – E-Form for submitting Profit & Loss Account with Registrar

For submitting Profit & Loss Account with the Registrar, a company has to file e-Form 23ACA.

With the form, it has to attach an audited copy of Profit & Loss Account. The e-form has to be digitally signed by a CA or CMA or CS, who is in whole time practice, certifying that the information entered in 23ACA is correct and audited Profit & Loss Account is attached with the form.

Period of Delay	Rate of Damages in % p.a.
Less than 2 months	5%
2 to 4 months	10%
4 to 6 months	15%
6 months and above	25%

ESI payment due date and procedure

The last date to pay your ESI contribution is the 15th of every month. Employers registered under the scheme should deposit the due amount in a bank authorized by the statutory body before the deadline.

Employers should submit half-yearly returns using the Return of Contributions form (RC). For the contribution period of April to September, the due date to file returns is 12th of November and for the October to March period, the last date is 12th of May.

Penalty for non-compliance with the ESI Act

The amount deducted by the employer under the ESI Act is considered entrusted to them by the employee for the purpose of contributing towards the ESI fund. Any delay in payment or non-payment of contribution amounts is considered "Breach of Trust" which is a crime punishable under IPC 406 and 409. It is also an offense under section 85 of the ESI Act.

An employer who fails to pay their contribution has to pay a simple interest at the rate of 12% per annum for each day late.

The ESI department can also levy penal provisions on the employer for delays in payment or non-payment.

ESI compliance forms for the employer

Form	Description
Form 01(A)	Form of Annual Information
Form 1	Declaration Form
Form 2	Addition/Deletion in Family Declaration
Form 3	Return of Declaration Form
Form 6	Register of Employees
Form 9	Claim for Sickness/Temporary Disablement Benefit/Maternity Benefit
Form 11	Accident Book
Form 12	Accident Report
Form 12A	Claim for Maternity Benefit for Sickness
Form 13	Claim for Sickness or Temporary Disablement or Maternity Benefit
Form 14	Claim for Permanent Disablement Benefit
Form 15	Claim for Dependent Benefit
Form 16	Claim for Periodical Payment of Dependent Benefits
Form 19	Claim for Maternity Benefit and Notice of Work
Form 20	Claim for Maternity Benefit by a Nominee
Form 21	Maternity Benefit - Certificate of Expected Confinement
Form 22	Funeral Expense Claim
Form 23	Life Certificate for Permanent Disablement Benefit
Form 24	Declaration and Certificate of Dependent's Benefits

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Profit/Loss Accounts