STANDARD FORMAT OF PROFIT & LOSS ACCOUNT

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Financial Accounting (Mgt-101)

Lesson-29

STANDARD FORMAT OF PROFIT & LOSS ACCOUNT

Standard format of profit & loss account is shown as follows:

Particulars

Amount

Rs.

Sales

Less: Cost of Goods Sold

(X)

Gross Profit

Less: Administrative Expenses

Selling Expenses

(X)

Operating Profit

Less: Financial Expenses

(x )

Add : Other income

Profit Before Tax

Less: Tax

(X)

Net Profit After Tax for the Year

Other income

SALES

Sales as we know are the revenue against the sale of the product in which the organization deals.

In case of a service organization, there will be Income against Services Rendered instead of Sales

and there will be no Cost of Sales or Gross Profit.

COST OF GOODS SOLD/GROSS PROFIT

Cost of goods sold is the cost incurred in purchasing or manufacturing the product, which an

organization is selling plus any other expense incurred in bringing the product in salable condition.

Cost of goods sold contain the following heads of accounts:

o Purchase of raw material/goods

o Wages paid to employees for manufacturing of goods

o Any tax/freight is paid on purchases

o Any expense incurred on carriage/transportation of purchased items.

Gross Profit = Sales Cost of goods sold

OTHER INCOME

· Other income includes revenue from indirect source of income, such as return on investment, profit

on PLS account etc.

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Financial Accounting (Mgt-101)

ADMINISTRATIVE EXPENSES

Administrative expenses are the expenses incurred in running a business effectively. Main

components of this group are:

o Payment of utility bills

o Payment of rent

o Salaries of employees

o General office expenses

o Repair & maintenance of office equipment & vehicles.

It is important to distribute expenses properly among the three classifications i.e. Cost of Goods

Sold, Administrative Expenses and Selling Expenses to present the financial statements fairly. Take

the example of following costs:

o Salaries and Wages

Although both these terms mean remuneration paid to labour and employee

against services.

Wages usually denotes remuneration paid to daily wages labour. Whereas salary

denotes payments to permanent employees.

Salaries can be classified in any of the classifications mentioned below.

· Salaries / wages paid to labour and supervisors/officers working for the

manufacturing of goods become a part of Cost of Goods Sold.

· Salaries and benefits of general administrative staff becomes part of

Administrative Expenses

· Salaries and benefits of sales and marketing staff become part of selling

expenses.

Other expenses like Depreciation, Utilities and Maintenance can also be classified in all three,

depending upon the exact nature of the expenditure.

SELLING EXPENSES

Selling expenses are the expenses incurred directly in connection with the sale of goods. This head

contains:

o Transportation/carriage of goods sold

o Tax/freight paid on sale

If the expense head `salaries' includes salaries of sales staff. It will be excluded from salaries &

appear under the heading of `selling expenses'.

FINANCIAL EXPENSES

Financial expenses are the interest paid on bank loan & charges deducted by bank on entity's bank

accounts. These are shown separately in the Profit and Loss Account. These includes:

o Interest on loan

o Bank charges

There is, however, one exception and that is the interest paid on loan taken to build an asset is

capitalized as cost of the asset up to the time that asset is completed.

INCOME TAX

Different types of entities have to pay income tax at different rates.

At the time of preparing annual financial statements, an estimate of expected tax liability is made.

A provision is then, created equal to that estimate.

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Financial Accounting (Mgt-101)

You should remember the treatment of Provision for Doubtful debts. Same is the case with income

tax i.e. provision is made at the time of preparing accounts which is then adjusted accordingly at the

time when actual tax expense is known.

BALANCE SHEET (ASSET SIDE)

Standard format of the balance sheet is given as follows:

Particulars

Amount Rs.

Assets

Non Current Assets

Fixed Assets

Capital Work In Progress

Deferred Costs

Long Term Investments

Current Assets

Stocks

Trade debtors and Other Receivables

Prepayments

Short Term Investments

Cash and Bank

Total

FIXED ASSETS

Fixed assets are the assets of permanent nature that a business acquires, such as plant, machinery,

building, furniture, vehicles etc.

Fixed assets are presented at cost less accumulated depreciation OR revalued amount.

CAPITAL WORK IN PROGRESS

If an asset is not completed at that time when balance sheet is prepared, all costs incurred on that

asset up to the balance sheet date are transferred to an account called Capital Work in Progress

Account. This account is shown separately in the balance sheet below the fixed assets. Capital work

in progress account contains all expenses incurred on the asset until it is converted into working

condition. All these expenses will become part of the cost of that asset. When an asset is completed

and it is ready to work, all costs will transfer to the relevant asset account.

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Financial Accounting (Mgt-101)

DEFERRED COSTS

An expense that has a future benefit in excess of one year and recorded in a capital asset account

LONG TERM AND SHORT TERM INVESTMENTS

Where a business has surplus funds, it is better to invest those funds where these can generate a

return greater than PLS accounts.

These investments can be of different types e.g. shares of other companies, fixed deposits with

banks, government securities, national savings etc.

For presentation purposes, these investments are classified in two categories, long term and short

term investments.

Investments made with the intention that they will be held for a period longer than twelve months

are classified as long term and those made for a period equal to or shorter than 12 months are

classified as short term.

Following things are important to note here:

Classification is to be made every time a balance sheet is prepared and the period is to be calculated

from the date of balance sheet.

This means that an investment made for 2 years on May 2000 will be classified as long term

investment in accounts prepared on Jun 30, 2000 and the same investment will be classified as

current investment in the accounts prepared on June 30, 2001.

An investment may initially be made as current investment. Subsequently, if it is decided to hold it

for a longer period, then its classification will have to be changed accordingly and vice versa.

Therefore, investments are checked for classification every time a balance sheet is prepared and

presented accordingly.

CURRENT ASSETS

Current Assets are the receivables that are expected to be received within one year of the balance sheet

date. Debtors, closing stock & all accrued incomes are the examples of Current Assets because these are

expected to be received within one accounting period from the balance sheet date.

It is important to note that assets and liabilities are presented in the balance sheet in the order of

their maturity i.e. assets / liabilities having longer life are presented first and assets / liabilities

having shorter life are presented later.

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