In this article we will discuss about:- 1. Introduction to Profit and Loss Account 2. Form of Profit and Loss Account 3. Statutory Requirements as to Profit and Loss Account.
Introduction to Profit and Loss Account:
The Indian Companies Act is silent as to the form of Profit and Loss Account. But Part II of Schedule VI contains a list of items of income and expenditure which should be included in the Profit and Loss Account. The Profit and Loss Account of a Company should give a true and fair view of the profit or loss of the Company for the financial year.
The first account covers the period since the incorporation of the Company, and subsequent accounts cover the period since the date of the preceding account. An Income and Expenditure Account takes the place of Profit and Loss Account in the case of a Company not trading for profit.
Form of Profit and Loss Account:
Sub-Section (2) of Section 211 of the Companies Act 1956 requires: “Every Profit and Loss Account of a company shall give true and fair view of the Profit or Loss of the company for the financial year and comply with the requirements of Part II of Schedule VI so far as they are applicable thereto.
Provided that nothing contained in this sub-section shall apply to any insurance or banking company, or any company engaged in the generation or supply of electricity or to any other class of company for which a form of profit and loss account has been specified in or under the Act governing such class of company.”
It is also given in Sub-Section (3) of Section 211 that the Central Government may, by notification in the Official Gazette, exempt any class of companies from compliance with any of the requirements in Schedule VI if, in its opinion, it is necessary to grant exemption in the public interest. Any such exemption may be granted either unconditionally or subject to such conditions as may be specified in the notification.
No form for Profit and Loss Account has been prescribed in the Companies Act as it has been prescribed for Balance Sheet, but “Requirements” as to Profit and Loss Account are given in Part II of Schedule VI.
Statutory Requirements as to Profit and Loss Account (Part II of Schedule VI):
Profit and Loss Account shall be so made out as to clearly disclose the result of the working of the Company during the period covered by the account and shall disclose every material feature including credits or receipts and debits or expenses in respect of non-recurring expenditure or expenditure of an exceptional nature.
It shall set out the various items relating to the income and expenditure of the Company under the most convenient heads and in particular shall disclose the following information in respect of the accounting period. The Profit and Loss Account must be prepared with the directions given in Part II of Schedule VI of the Act.
The important provisions are given below:
(i) (a) The turnover, that is, the aggregate amount for which sales are effected by the Company, giving the amount of sales in respect of each class of goods dealt with by the Company, and indicating the quantities of such sales for each class separately.
(b) Commission paid to sole selling agent within the meaning of Section 294 of the Act.
(c) Commission paid to other selling agents.
(d) Brokerage and discount on sales other than usual trade discount.
(ii) (a) In the case of manufacturing concerns, the purchase of raw material including consumption and the opening and closing stocks of the goods produced indicating the quantity produced.
(b) In the case of trading concerns the purchases made and the opening and the closing stocks.
(c) In the case of Companies rendering or supplying services, the gross income derived from services rendered or supplied.
(d) In the case of Company which falls under more than one of the categories mentioned in (a), (b) and (c) above, it shall be sufficient compliance with the requirements herein if the total amounts are shown in respect of the opening and closing stocks, purchases, sales and consumption of raw material with value and quantitative breakup and the gross income from services rendered is shown.
(e) In the case of other Companies, the gross income derived under different heads.
(iii) In the case of all concerns having work-in-progress, the amounts for which (such works have been completed) at the commencement and at the end of the accounting period.
(iv) The amount provided for depreciation, renewals or diminution in value of fixed assets. If such provision is not made by means of a depreciation charge, the method adopted for making such provision.
If no provision is made for depreciation, the fact that no provision has been made shall be stated and the quantum of arrears of depreciation computed in accordance with Section 205 (2) of the Act shall be disclosed by way of a note,
(v) The amount of interest on the Company’s debentures and other fixed loans, that is to say, loans for fixed periods stating separately the amount of interest, if any, paid or payable to the Managing Director, and the Manager, if any.
(vi) The amount of charge for Indian Income-tax and other Indian taxation on profits and distinguishing them,
(vii) The amount reserved for:
(a) Repayment of share capital and
(b) Repayment of loans.
(viii) (a) The aggregate, if material, of any amounts set aside or proposed to be set aside to reserves but not including provisions made to meet any specific liability, contingency or commitment known to exist at the date of the Balance Sheet.
(b) The aggregate, if material, of any amount withdrawn from such reserves.
(ix) (a) The aggregate, if material, of the amounts set aside to provisions made for meeting specific liabilities, contingencies or commitments.
(b) The aggregate, if material, of the amounts withdrawn from such provisions, as no longer required.
(x) Expenditure incurred on each of the following items separately for each item:
(a) Consumption of stores and spare parts.
(b) Power and fuel.
(d) Repairs to Buildings.
(e) Repairs to Machinery.
(f) (i) Salaries, Wages and Bonus.
(ii) Contribution to Provident and other funds.
(iii) Workmen and staff welfare expenses to the extent not adjusted from any previous provision or reserve.
(h) Rates and taxes including taxes on income.
(i) Miscellaneous expenses:
Provided that any item under which the expenses exceed 1% of the total revenue of the Company or Rs 5,000, whichever is higher, shall be shown as a separate and distinct item against an appropriate account head in the Profit and Loss Account and shall not be combined with any other items to be shown under Miscellaneous Expenses.
(xi) (a) The amount of income from investments, distinguishing between trade investments and other investment.
(b) Other income by way of interest, specifying the nature of the income.
(c) The amount of income tax deducted if the gross income is stated under subparagraphs (a) and (b) above.
(xii) (a) Profits and losses on investments (showing distinctly the extent of the profits or losses earned or incurred on account of membership of a partnership firm) to the extent not adjusted from any previous provision or reserve.
(b) Profits and losses in respect of transactions of a kind not usually undertaken by the Company or undertaken in circumstances of an exceptional or non-recurring nature, if material in amount.
(c) Miscellaneous income.
(xiii) (a) Dividends from Subsidiary Companies.
(b) Provisions for losses of Subsidiary Companies.
(xiv) The aggregate amount of dividends paid and proposed, and stating whether such amounts are subject to deduction of income tax or not.
(xv) Amount, if material, by which any items shown in the Profit and Loss Account are affected by any change in the basis of accounting.
The Profit and Loss Account shall contain by way of a note detailed information showing separately the following payments provided or made during the financial year to the Directors (including Managing Directors), the Managing Agents, Secretaries and Treasurers or Manager, if any, by the Company, the subsidiaries of the Company or any other person:
(i) Managerial remuneration under Section 198 of the Act paid or payable during the financial year.
(ii) Expenses reimbursed to the Managing Agent under Section 354.
(iii) Commission or other remuneration payable separately to a Managing Agent or his associate under Sections 356, 357 and 358.
(iv) Commission received or receivable under Section 359 by the Managing Agent or his associate as selling agent of other concerns in respect of contracts entered into by such concerns with the Company.
(v) The money value of the contracts for the sale or purchase of goods and materials or supply of services, entered into by the Company with the Managing Agent or his associate under Section 360 during the financial year.
(vi) Other allowances and commission including guarantee commission.
(vii) Any other perquisites or benefits in cash or in kind stating the money value where practicable.
(viii) Pensions, gratuities, payments from provident funds in excess of own subscription and interest thereon, compensation for loss of office, consideration in connection with retirement from office.
The Profit and Loss Account shall contain or give by way of a note a statement showing the computation of net profits in accordance with Section 349 of the Act with the relevant details of the calculation of the commissions payable by way of percentage of such profits to the directors, including Managing Directors or Managers, if any.
The Profit and Loss Account also contains by way of note detailed information in regard to amounts paid to the auditor whether as fees, expenses or otherwise for services rendered as auditor and in any other capacity.
The Companies Act does not require the Revenue Account to be split into three sections, viz. Trading Account, Profit and Loss Account and Profit and Loss Appropriation Account.
The usual practice regarding the presentation of Profit and Loss Account is to split it into two sections:
(i) Profit and Loss Account and
(ii) Profit and Loss Appropriation Account.
If it is desired to show the gross profit, it can be done by splitting the Profit and Loss Account into (i) Trading Account and Profit and Loss Account. The Profit and Loss Appropriation Account may be prepared either separately or as a separate section in the Profit and Loss Account itself. Items which are shown in the Profit and Loss Account are popularly termed as items appearing “above the line”. The items which are shown in the Profit and Loss Appropriation Account are popularly termed as items appearing “below the line”.
The items usually appearing in the Profit and Loss Appropriation Account are as shown below:
The principles for preparing the final account of sole trader or a partnership or a Company are the same except the following differences:
In case of a partnership, the heading is usually trading and Profit and Loss Account while in case of a Company the heading is only “Profit and Loss Account”.
In case of a firm, the Profit or Loss disclosed by Profit and Loss Account is transferred to Capital Accounts but in case of a Company the profit or loss is shown separately in Balance Sheet.
In case of final accounts of a Company, the figures relating to the previous year should be given while it is not so in case of firms i.e., sole trading or partnership firm.
There are new items of expenditure in case of a Company, for instance, interest on debentures, director’s fee etc., while such type of expenditures are not there in case of a sole trader or partnership.