Preparation of Profit and Loss Statement According to The Companies Act, 2013

Introduction
The Profit and Loss Statement (also known as the Income Statement) is a financial report that
shows a company's revenues, expenses, and profits or losses over a specific period. Under the
Companies Act, 2013, the preparation of this statement follows a standardized format to
ensure uniformity and transparency across all companies.
1. Format of Profit and Loss Statement
The Companies Act, 2013 mandates companies to prepare the Profit and Loss Statement in a
prescribed format under Schedule III. The format is divided into two sections: Revenue from
Operations and Expenses.
2. Key Components of the Profit and Loss Statement
A. Revenue from Operations
 Sale of Goods: Revenue from the sale of goods or products.
 Rendering of Services: Revenue generated from services rendered.
 Other Operating Revenues: Includes income from sources directly related to the
company’s primary operations but not included in sales.
B. Other Income
 Interest Income: Interest earned on investments or deposits.
 Dividend Income: Dividends received from investments in other companies.
 Rental Income: Income earned from renting out properties.
 Other Non-operating Income: Includes income from sources not directly related to
the company’s core operations.
C. Expenses
 Cost of Goods Sold (COGS): Direct costs attributable to the production of goods
sold by the company.
 Employee Benefits Expense: Salaries, wages, and other benefits provided to
employees.
 Depreciation and Amortization Expense: Reduction in the value of tangible and
intangible assets over time.
 Finance Costs: Interest and other costs related to borrowing funds.
 Other Expenses: All other operating expenses such as rent, utilities, marketing, etc.
D. Exceptional and Extraordinary Items
 Items that are not usual and occur infrequently, but significantly affect the company's
financial position.
E. Tax Expense
 Current Tax: Taxes payable for the current period.
 Deferred Tax: Taxes that are payable or recoverable in the future due to timing
differences.
F. Profit or Loss for the Period
 Net Profit or Loss Before Tax: Revenue minus expenses, not including taxes.
 Net Profit or Loss After Tax: The final profit or loss after all taxes have been
deducted.
3. Steps to Prepare the Profit and Loss Statement
Step 1: Gather Financial Data
Collect all the necessary financial data for the period, including revenue, expenses, taxes, and
any other financial information.
Step 2: Classify Revenue and Expenses
Classify the revenue and expenses according to the categories outlined above.
Step 3: Calculate Gross Profit
Gross Profit = Revenue from Operations - Cost of Goods Sold
Step 4: Deduct Operating Expenses
Subtract all operating expenses, including employee benefits, depreciation, and other
operational costs from the Gross Profit.
Step 5: Include Other Income
Add any other income that the company has earned during the period.
Step 6: Subtract Finance Costs
Subtract finance costs such as interest on loans or borrowings.
Step 7: Adjust for Exceptional Items
Make adjustments for any exceptional or extraordinary items that need to be reported
separately.
Step 8: Calculate Tax Expenses
Determine the current and deferred tax expenses and subtract them from the total profit
before tax.
Step 9: Determine Net Profit or Loss
Subtract the tax expenses from the profit before tax to arrive at the Net Profit or Loss for the
period.
4. Disclosure Requirements
The Companies Act, 2013 also requires the following disclosures in the Profit and Loss
Statement:
 Details of Revenue Recognition Policies: Companies must disclose their policies for
recognizing revenue in the financial statements.
 Breakdown of Expenses: A detailed breakdown of major expense categories must be
provided.
 Earnings Per Share (EPS): Disclosure of the basic and diluted EPS is required.
5. Practical Example
Here is a simplified example of a Profit and Loss Statement according to the Companies Act,
2013:
Amount
Particulars
(₹)

Revenue from Operations 50,00,000

Other Income 2,00,000

Total Revenue 52,00,000

Expenses

Cost of Goods Sold (COGS) 25,00,000

Employee Benefits Expense 10,00,000

Depreciation and Amortization 2,00,000

Finance Costs 1,00,000

Other Expenses 5,00,000

Total Expenses 43,00,000

Profit Before Tax 9,00,000

Tax Expense 2,70,000

Net Profit After Tax 6,30,000

6. Conclusion
The preparation of a Profit and Loss Statement under the Companies Act, 2013 is a structured
process designed to ensure accurate reporting of a company's financial performance. By
following the prescribed format and making the necessary disclosures, companies can
provide stakeholders with a clear and comprehensive view of their profitability.
7. Practical Exercises
1. Exercise 1: Prepare a Profit and Loss Statement for a hypothetical company using the
format and steps outlined above.
 2. Exercise 2: Analyze a real company's Profit and Loss Statement (e.g., from annual
reports) and identify key components such as revenue, expenses, and net profit.
8. References
 Companies Act, 2013: Schedule III, Format of Financial Statements
 Institute of Chartered Accountants of India (ICAI) Guidelines on Financial Statements
This material should provide your students with a solid understanding of how to prepare and
analyze a Profit and Loss Statement in accordance with the Companies Act, 2013.

Practical Example 1: Basic Preparation

Scenario: ABC Ltd. is preparing its Profit and Loss Statement for the year ending 31st March
2024. The following financial information is available:
 Revenue from Operations: ₹80,00,000
 Cost of Goods Sold (COGS): ₹50,00,000
 Employee Benefits Expense: ₹12,00,000
 Depreciation: ₹3,00,000
 Finance Costs: ₹2,00,000
 Other Expenses: ₹5,00,000
 Other Income (Interest): ₹1,50,000
 Tax Rate: 30%
Task: Prepare the Profit and Loss Statement for ABC Ltd.
Solution:
Amount
Particulars
(₹)

Revenue from Operations 80,00,000

Other Income 1,50,000

Total Revenue 81,50,000

Expenses

Cost of Goods Sold (COGS) 50,00,000

Employee Benefits Expense 12,00,000

Depreciation 3,00,000
 Amount
Particulars
(₹)

Finance Costs 2,00,000

Other Expenses 5,00,000

Total Expenses 72,00,000

Profit Before Tax 9,50,000

Tax Expense (30%) 2,85,000

Net Profit After Tax 6,65,000

Practical Example 2: Adjustment for Provision of Bad Debts

Scenario: Continuing with the previous example, assume ABC Ltd. discovers that out of the
revenue from operations, ₹2,00,000 is doubtful, and the company decides to create a
provision for bad debts.
Effect:
 The P&L Statement will reflect the creation of a provision for bad debts as an
expense of ₹2,00,000, reducing the Revenue from Operations.
 The Balance Sheet will reflect:
o Debtors will be reduced by ₹2,00,000 for Provision for Bad Debts and will
be reflected under the head current assets.
Task: Adjust the Profit and Loss Statement to reflect the provision for bad debts.
Solution:
Amount
Particulars
(₹)

Revenue from Operations 80,00,000

Less: Provision for Bad Debts 2,00,000

Adjusted Revenue from Operations 78,00,000

Other Income 1,50,000

Total Revenue 79,50,000

Expenses

Cost of Goods Sold (COGS) 50,00,000

Employee Benefits Expense 12,00,000

 Amount
Particulars
(₹)

Depreciation 3,00,000

Finance Costs 2,00,000

Other Expenses 5,00,000

Total Expenses 72,00,000

Profit Before Tax 7,50,000

Tax Expense (30%) 2,25,000

Net Profit After Tax 5,25,000

Practical Example 3: Adjustment for Accrued Expenses

Scenario: In the same financial year, ABC Ltd. realizes that ₹1,00,000 worth of employee
benefits expense is accrued but not yet paid.
Task: Adjust the Profit and Loss Statement to reflect the accrued expenses.
1. Effect on the Profit & Loss Statement (P&L)
Since the ₹1,00,000 is an accrued expense, it means the expense has been incurred in the
current financial year but is unpaid. Therefore, this amount must be recognized as an expense
in the P&L for the year ending 31st March 2023.
Impact:
 Employee Benefits Expense will be debited (increased) by ₹1,00,000 in the P&L.
This will reduce the net profit for the year by ₹1,00,000.
Journal Entry (for recording accrued expense):
Debit Credit
Date Account
(₹) (₹)

Current Date Employee Benefits Expense 1,00,000

Accrued Expenses (Liability) 1,00,000

2. Effect on the Balance Sheet
Since the expense has been incurred but not yet paid, it will be recorded as a liability under
Current Liabilities in the balance sheet.
Impact:
 Accrued Expenses (Liability) will be credited (increased) by ₹1,00,000, which
represents the obligation to pay this amount in the future.
  Retained Earnings (Net Profit) will decrease as a result of the expense recorded in
the P&L statement.
Updated Balance Sheet:
Liabilities
 Accrued Expenses: ₹1,00,000 (added under Current Liabilities)
Final Effect:
 The P&L Statement will reflect a higher expense of ₹1,00,000, which decreases the
net profit.
 The Balance Sheet will reflect a new liability of ₹1,00,000 under Current
Liabilities as Accrued Expenses, while the retained earnings or net profit figure
will decrease due to the recognition of this expense.
Solution:
Amount
Particulars
(₹)

Revenue from Operations 78,00,000

Other Income 1,50,000

Total Revenue 79,50,000

Expenses

Cost of Goods Sold (COGS) 50,00,000

Employee Benefits Expense 13,00,000

Depreciation 3,00,000

Finance Costs 2,00,000

Other Expenses 5,00,000

Total Expenses 73,00,000

Profit Before Tax 6,50,000

Tax Expense (30%) 1,95,000

Net Profit After Tax 4,55,000

Practical Example 4: Adjustment for Depreciation Change

Scenario: ABC Ltd. decides to revise the useful life of its assets, resulting in an increase in
the depreciation expense by ₹50,000.
1. Effect on the Profit & Loss Statement (P&L)
Depreciation is an expense that must be recognized in the P&L to allocate the cost of assets
over their useful lives. An increase in depreciation by ₹50,000 will reduce the company's net
profit.
Impact:
 Depreciation Expense will be debited (increased) by ₹50,000 in the P&L statement,
directly reducing net profit.
Journal Entry (for recording additional depreciation):
Debit
Date Account Credit (₹)
(₹)

Current Date Depreciation Expense 50,000

Accumulated Depreciation 50,000

2. Effect on the Balance Sheet
The balance sheet will be affected in two key areas:
 Accumulated Depreciation: The increase in depreciation will reduce the book value of
the assets, as accumulated depreciation increases.
 Retained Earnings: Since the depreciation expense reduces the net profit, it will also
reduce retained earnings in the balance sheet.
Impact:
 Accumulated Depreciation will increase by ₹50,000, reducing the net book value of
fixed assets (such as property, plant, and equipment).
 Retained Earnings (under equity) will decrease by ₹50,000 due to the reduction in net
profit.
Updated Balance Sheet:
Assets
 Property, Plant & Equipment (PPE): The net book value of the assets decreases
because of the increased depreciation (accumulated depreciation is increased by
₹50,000).
Equity
 Retained Earnings: Reduced by ₹50,000, reflecting the lower net profit.
Final Effect:
 The P&L Statement will reflect an additional depreciation expense of ₹50,000, which
reduces the net profit.
 The Balance Sheet will reflect:
 o A decrease in the net book value of assets due to increased accumulated
depreciation.
o A decrease in retained earnings due to the reduced net profit from the
increased depreciation.
Task: Reflect the change in the Profit and Loss Statement.
Solution:
Amount
Particulars
(₹)

Revenue from Operations 78,00,000

Other Income 1,50,000

Total Revenue 79,50,000

Expenses

Cost of Goods Sold (COGS) 50,00,000

Employee Benefits Expense 13,00,000

Depreciation 3,50,000

Finance Costs 2,00,000

Other Expenses 5,00,000

Total Expenses 73,50,000

Profit Before Tax 6,00,000

Tax Expense (30%) 1,80,000

Net Profit After Tax 4,20,000

Practical Example 5: Adjustment for Finance Costs

Scenario: ABC Ltd. secures a new loan during the financial year, resulting in additional
finance costs of ₹1,00,000.
1. Effect on the Profit & Loss Statement (P&L)
Finance costs (such as interest on loans) are recorded as expenses in the P&L statement.
These costs must be recognized in the current financial year, even if the loan was obtained
partway through the year.
Impact:
 Finance Costs/Interest Expense will be debited (increased) by ₹1,00,000 in the
P&L statement, reducing the company's net profit.
Journal Entry (for recording finance costs):
Debit Credit
Date Account
(₹) (₹)

Current Date Finance Costs (Interest Expense) 1,00,000

Loan/Bank (Creditor) 1,00,000

2. Effect on the Balance Sheet
The additional loan secured will appear on the balance sheet as a liability under Long-Term
Liabilities (if it is a long-term loan) or Current Liabilities (if it is a short-term loan). The
finance cost is recognized as an expense in the P&L, which will reduce the Retained
Earnings or Net Profit on the balance sheet.
Impact:
 The Loan will be shown under Liabilities.
 The Retained Earnings will decrease due to the reduction in net profit caused by the
additional finance costs.
Updated Balance Sheet:
Liabilities
 Loan: ₹X (new loan amount) added under Long-Term or Current Liabilities,
depending on the loan tenure.
Final Effect:
 The P&L Statement will reflect an additional finance cost of ₹1,00,000, reducing
the net profit.
 The Balance Sheet will reflect the new loan liability (amount borrowed) under
Liabilities, and the Retained Earnings will decrease due to the reduction in net profit
from the finance costs.
Summary:
 P&L Impact: Net profit decreases by ₹1,00,000 due to the increased finance
costs/interest expense.
 Balance Sheet Impact:
o A loan liability is recorded under Liabilities.
o Retained Earnings decrease by ₹1,00,000 due to the recognition of finance
costs in the P&L.
This ensures the company's financials accurately reflect the cost of borrowing and its impact
on profitability.
Task: Update the Profit and Loss Statement with the additional finance costs.
Solution:
Amount
Particulars
(₹)

Revenue from Operations 78,00,000

Other Income 1,50,000

Total Revenue 79,50,000

Expenses

Cost of Goods Sold (COGS) 50,00,000

Employee Benefits Expense 13,00,000

Depreciation 3,50,000

Finance Costs 3,00,000

Other Expenses 5,00,000

Total Expenses 74,50,000

Profit Before Tax 5,00,000

Tax Expense (30%) 1,50,000

Net Profit After Tax 3,50,000

Exercise for Students

1. Exercise 1: Prepare a Profit and Loss Statement for XYZ Ltd. based on the following
data:
o Revenue from Operations: ₹1,20,00,000
o Cost of Goods Sold: ₹70,00,000
o Employee Benefits Expense: ₹20,00,000
o Depreciation: ₹5,00,000
o Finance Costs: ₹3,00,000
o Other Expenses: ₹10,00,000
o Other Income: ₹2,50,000
o Tax Rate: 25%
Adjustment: Assume that during the year, the company had to create a provision for doubtful
debts amounting to ₹3,00,000.
Adjust the Profit and Loss Statement for an additional accrued expense of ₹2,00,000 in the
employee benefits expense.
Further adjust the Profit and Loss Statement by considering an increase in the depreciation
expense by ₹1,00,000 due to changes in the useful life of assets.
These exercises will help students understand how adjustments can affect the final profit or
loss reported by a company and reinforce their knowledge of preparing and analyzing
financial statements according to the Companies Act, 2013.