16 Form of Company‟s Profit & Loss Account and Profit & Loss Appropriation Account

Deepika Gautam

LEARNING OBJECTIVES:

After studying the module the students may be able to understand the meaning of financial statements under Companies Act 2013, statement of profit and loss along with its brief interpretation, cash flow statement and how it is affected by the schedule III. Consolidated financial statement and the statement of changes in equity have also been discussed.

INTRODUCTION:

Companies Act 2013 was framed on September 2013 by obtaining the consent of the President of India, therefore replacing the Companies Act 1956. The Companies Act, 2013 comprises of 470 sections, 7 Schedules and 29 Chapters. It is the act of parliament which includes the provisions regarding the incorporation, merger, acquisition, final accounts preparation, dissolution etc. Final accounts of the company need to be prepared under the provisions of the Company Act 2013.

HIGHLIGHTS OF FINANCIAL REPORTING AS PER CA 2013:

●The term „financial statement‟ has been used instead of the term „Balance Sheet and Profit and Loss Account‟ as used in old Act.

●Companies must follow the accounting period starting from 1st April to 31st March of next year. ●Financial Statements should include cash flow statement as well as statement of changes in equity (if applicable).

●National Advisory Committee on Accounting Standards (NACAS) is to be replaced by National Financial Reporting Authority (NFRA) with additional powers of setting up audit standards and investigating some serious professional misconduct.

●The Act also allows for re-opening of books of accounts and recasting the financial statements.

FINANCIAL STATEMENTS AS PER CA 2013:

According to Section 129(1) the financial statements shall depict a true and a fair picture of the affairs of the company and comply with the accounting standards stated under section 133 and shall be presented in the form as may be provided under per schedule III for different classes. Section 2(40) of the Companies Act 2013, defines financial statement as:

Financial Statement in relation to a company, includes-

(i)Balance sheet as at the end of the financial year;

(ii)Profit and loss account, or in case of company carrying out activity not for profit, an income and expenditure account for the financial year;

(iii)Cash flow statement for the financial year; (iv)Statement of changes in equity, if applicable; and

(v)Explanatory note annexed to, or forming part of, any document referred to sub-clause stated above. All companies whether public or private and irrespective of their area of operations is required to prepare the financial statements as prescribed under Schedule III of the Companies Act 2013. The prepared financial statements should be presented in front of the board of directors in the annual general meeting (AGM).

QUICK REVISION

▪Companies Act 2013 was framed on September 2013 by obtaining the consent of the President of India, therefore replacing the Companies Act 1956.

▪The Companies Act, 2013 comprises of 470 sections, 7 Schedules and 29 Chapters.

▪The term „financial statement‟ has been used instead of the term „Balance Sheet and Profit and Loss Account‟ as used in old Act.

▪The Act also allows for re-opening of books of accounts and recasting the financial statements.

▪According to Section 129(1) the financial statements shall depict a true and a fair picture of the affairs of the company and comply with the accounting standards

All companies whether public or private and irrespective of the area of operations is required to prepare the financial statements as prescribed under Schedule III of the act.

STATEMENT OF PROFIT AND LOSS:

Part II of Schedule III provides the format and general instructions for preparation of the statement of profit and loss. They are similar to those given in Revised Schedule VI, but under the old Schedule VI there was no format provided for the Statement of Profit and Loss, only the requirements were provided.

STATEMENT OF PROFIT AND LOSS (As per Schedule III to the Companies Act, 2013 applicable for the financial year commencing on or after 1.4.2011)

PARTICULARS

FIGURES FOR

FIGURES FOR CURRENT

REPORTING PERIOD

(I)Revenue from operations

Domestic turnover

(i)Sale of goods manufactured

(ii)Sale of goods traded

(iii)Sale or supply of services

Export turnover

(i)Sale of goods manufactured

(ii)Sale of goods traded

(iii)Sale or supply of services

(II) Other Income

(III) Total Revenue

(I+II)

(IV) Expenses

Cost of materials consumed Purchases of stock in trade

Changes in inventories of finished goods, work-in-progress and stock in trade Employee benefit expenses Managerial remuneration

Payment to Auditors Insurance expenses Power and fuel

Finance cost

Depreciation and amortization expenses

Other expenses

Total expenses

(V) Profit before exceptional and extraordinary items and tax (III-IV)

(VI) Exceptional items

(VII) Profit before extraordinary items and tax (V-VI)

(VIII) Extraordinary items

(IX) Profit before tax (VII-VIII)

(X) Tax Expense

(XI) Profit/(Loss) for the period from continuing operations (IX-X)

(XII) Profit /

loss from discontinuing operations

(XIII) Tax expense of discontinuing operations (XIV) Profit/loss from discontinuing operations

(after tax) (XII-XIII) (XV) Profit/loss (XI + XIV) (XVI) Earnings per equity share

1) Basic

2) Diluted

BRIEF INTERPRETATION OF STATEMENT OF PROFIT AND LOSS:

1) Revenue from Operations:

Here only the revenue on account of company‟s main operating activity is disclosed. As given under the paragraph 2 of “the general instructions to prepare the statement of profit and loss account”, a separate disclosure regarding the breakup of revenue must be shown. Further, the amount of VAT should also not be included in Revenue. Other indirect taxes like service tax, purchase tax etc shall not be made a part of revenue where the entity is acting as an agent.

2) Other Income:

Here the revenues not arising from the main operating activities of the company is disclosed. It can be classified as interest income and dividend income, as per paragraph 4. Interest income of finance company is covered under revenue from operations, and therefore only interest income of companies other than finance companies is included. Eg: interest on fixed deposits, interest on overdue amounts of trade receivables etc. Whereas, the dividend income should be recognized once the right to receive it has been established.

3) Cost of Materials Consumed:

Only the Manufacturing companies need to disclose it and would include consumption of raw material, packing material/ raw material, purchased intermediaries and components consumed in manufacturing activities. Disclosure of raw materials and goods purchased are also required in notes to accounts as per paragraph 5(ii)(a).

4) Purchases of Stock in Trade:

It is applicable only to the manufacturing companies and consists of only goods purchased with an intention to resell them. Also as per paragraph 5(ii)(b) of the general instructions for preparation of statement of profit and loss, disclosure of purchases in respect of goods traded in by the company under broad heads in also required to be disclosed in the notes to accounts.

5) Changes in Inventories of finished goods, work in progress and stock in trade:

This represents the difference between opening and closing inventories of finished goods, work –in progress and stock in-trade. Such differences need to be shown separately for finished goods, work in- progress and stock-in-trade. No further disclosure is required in the notes to accounts for the same.

6) Employee benefit expense:

The aggregate amount is shown in the statement of profit and loss. The breakup should be disclosed in the notes to accounts as per paragraph 5(1)(a).

7) Finance Costs:

Aggregate amount is disclosed in the P&L A/C. expense, other borrowing costs, net gross gain (regarded as adjustments towards interests).

Finance cost shall be classified as interest or loss on foreign currency transactions

8) Depreciation and amortisation expense:

The term amortization has been newly added to the term depreciation. Amortization refers to systematic allocation of the depreciable amount of an intangible asset over its entire useful life. Under Schedule II, mode of amortization of intangible assets provided and useful life of various assets have been provided with (unlike % depreciation given earlier).

9) Other Expense:

Expenses not treated earlier are to be shown here like consumption of stores and spare parts, power and fuel rent, repairs, insurance etc.

10) Exceptional Items:

The total impact of the exceptional items like gain / loss on disposals of long-term investments, legislative changes having retrospective application, litigation settlements disposals of items of fixed assets and other reversals of provisions etc are to be disclosed.

11) Extraordinary Items:

The total impact of the extraordinary items like expenses related to previous periods, expenses arising out of long term settlement with the employees, and loss due to fire etc are to be shown.

QUICK REVISION

▪Part II of Schedule III provides the format and general instructions for preparation of the statement of profit and loss.

▪As per paragraph 2 of the general instructions to prepare the statement of profit and loss account, a separate disclosure regarding the breakup of revenue must be shown.

▪Only the manufacturing companies need to disclose the cost of materials consumed.

▪The only goods purchased with an intention to resell them should be included in the P&L A/C of manufacturing company under the head purchases of stock in trade.

▪Changes in Inventories of finished goods, work in progress and stock in trade represents the difference between opening and closing inventories of finished goods, work –in progress and stock in-trade.

▪The aggregate of the finance cost (comprising of interest expense, other borrowing costs, net grossgain or loss on foreign currency transactions) is disclosed in the statement of profit and loss.

▪ The term amortization has been newly added to the term depreciation.

PROFIT AND LOSS APPROPRIATION ACCOUNT:

Particulars	Amount
By Last Year’s Balance b/d
Add: Net Profit for the year b/d
Amount Withdrawn from General Reserve or any other Reserve
Provision such as Income Tax
Provision no longer Required
Deduct: Transfer to Reserves
Income Tax for Previous year not provided for:
Interim dividend
Proposed dividend
Corporate dividend tax @10% on dividend
Surplus (Balancing figure) carried to Balance sheet

The Profit and Loss Appropriation Section of the Profit and Loss account shows the appropriation of

Profit and is popularly known as “below the line”. It is prepared as follows:

Negate

CASH FLOW STATEMENT:

As per section 2(40) of the Companies Act 2013, the financial statements should include cash flow statement for the respective financial year. Cash flow statement was not mandatory to be disclosed earlier, but with the introduction of new act, it has been made compulsory for the companies to disclose in the accounts.

The listing agreement requires the use of indirect method of cash flow statement preparation by the listed companies, whereas the non listed companies have a choice of either following the direct method, or the indirect method.

Direct Method: under this method the gross receipts and gross payments of cash is disclosed, and subtracted in order to find the net increase or decrease in cash.

Indirect Method: under this method, the profit and loss account is adjusted for the effects of transaction of non cash nature.

HEADS OF CASH FLOW STATEMENT:

Cash flow statement reveals the moment of cash (inflow and outflow) in an organisation and is classified under three heads of operating, investing and financing activities.

Operating Activities: it is the main revenue generating activity. For Example: Cash receipt from sale of goods, fees, royalties, commission, cash payments to suppliers for goods and services etc.

Investing Activities: it comprises of the activities resulting from purchase/sale of long term investments and property. Eg: Cash receipt from disposal of fixed assets (including intangibles), Cash payments to acquire shares, warrants or debt instruments of other enterprises etc.

Financing Activities: reports issuance and repurchase of companies own bonds and stocks and the payment of dividends. Eg: receipt from issuing shares, debentures, bonds, borrowing and repayment of borrowed amount, loan etc.

IMPACT ON CASH FLOW OF SCHEDULE III

●In schedule III the terms like Trade Receivables and Trade Payables are used whereas under AS3 the cash flow statement used the words sundry debtors and sundry creditors. So in order to maintain consistency, same terms should be used in the cash flow as used in rest of the financial statements i.e. trade receivables and trade payables.

●Neither AS 3 nor schedule 3 of companies act 2013 mandate presentation of current and non-current components of assets and liabilities. Hence the companies need not show the inflow outflow of from the current and non-current items separately.

QUICK REVISION

▪As per section 2(40) of the Companies Act 2013, the financial statements should include cash flow statement for the respective financial year.

▪Listed companies have to follow the indirect method for preparation.

▪Non Listed companies have a choice of either following the direct method or the indirect method.

▪Cash flow statement divides the cash flows under three main heads: operating, investing and financing.

▪The companies need not show the inflow outflow of from the current and non-current items separately.

CONSOLIDATED FINANCIAL STATEMENTS:

As per section 129(3) of the Companies Act, 2013 if a company has one or more subsidiaries, itprepares consolidated financial statement. It is also made mandatory that the disclosure requirements of the accounting standards should be followed. Presently the following AS (accounting standards) are applicable for the purpose of disclosure:

AS 21: Meaning of subsidiary

AS 23: Accounting for Investment in associates in Consolidated Financial Statements

AS 27: Financial reporting of interests in joint ventures

While calculating the Minority Interest, share of minority in net profit of consolidated subsidiaries should be calculated for the reporting period and charged against the consolidated profit, Minority Interests means that portion of the net assets of the subsidiary (on the date of consolidation) not controlled by the parent company. Schedule III also requires that Minority interests in the balance sheet within equity shall be presented separately from the equity of the owners of the parent company.

In Consolidated Financial Statements, the following shall be disclosed by way of additional information and this provision has been introduced for the very first time, under Companies Act 2013

It has been made essential that all subsidiaries, associates and joint ventures (whether Indian or foreign) will be covered under the consolidated financial statements. The requirements of AS 21, 23 and 27 is to be followed for the same. In case any subsidiaries, joint ventures and associates are not consolidated in the final accounts, the parent company must disclose the reasons for not including them in the statements.

STATEMENT OF CHANGES IN EQUITY:

Financial statements as per section 2(40), includes the statement of changes in equity as well. It has been introduced for the very first time in the accounting history, taken from IFRS. As per international accounting standard 1, the preparation of statement of changes in equity is required.

However, neither any format for the statement nor any definition or explanation regarding the same is available under Schedule III of the act.

The statement of changes in equity explains the movement in various equity accounts like equity share capital account, securities premium account, general reserve account, profit and loss account, various accounts reflecting capital reserve, debenture redemption reserve, capital redemption reserve, deposit redemption reserve, tax reserve, revaluation reserve etc. It is comprehensive statement that highlights share capital and reserve and minority interest in case of consolidated financial statements, which gives a detailed view of shareholders equity and its movement throughout the year.

Section 2(40) of the Companies Act 2013 states that “the statement of changes in equity (if applicable)“ be a part of the financial statements. It means that it is not required by every company to prepare the statement, and that it should be prepared and presented only if it is applicable to them.

QUICK REVISION

▪Unlike Schedule IV of the Companies Act 1956, the Companies Act 2013 has inserted the general instructions for the preparation of consolidated financial statements in Schedule III.

▪A company if holding two or more subsidies, need to prepare a consolidate statement of accounts in the same format as it is preparing its own.

▪Presently the AS (accounting standards) 21, 23 and 27 are applicable for the purpose of disclosure.

▪It has been made essential that all subsidiaries, associates and joint ventures (whether Indian or foreign) will be covered under the consolidated financial statements.

▪As per international accounting standard 1, the preparation of statement of changes in equity is required.

▪The statement of changes in equity explains the movement in various equity accounts like equity share capital account, securities premium account, general reserve account, profit and loss account, various accounts reflecting capital reserve, debenture redemption reserve etc.

SUMMARY

Companies Act 2013 is a replacement of the old Companies Act 1956. With the introduction of this new act various new provisions have been included which need to be followed by the companies.

The term „financial statement‟ has been used in the new act, instead of the term „Balance Sheet and Profit and Loss Account‟ as used in old Act. The Companies must follow the accounting period starting from 1st April to 31st March of next year and the financial statements should include cash flow statement as well as statement of changes in equity (if applicable).

According to Section 129(1) the financial statements shall depict a true and a fair picture of the affairs of the company and comply with the accounting standards stated under section 133. All companies whether public or private and irrespective of their area of operations is required to prepare the financial statements as prescribed under Schedule III of the Companies Act 2013.

The format and general instructions are laid down under part II of schedule III regarding the preparation of statement of profit and loss. Schedule III have also made it compulsory for the companies to present Cash Flow Statement along with their final accounts, under the Companies Act 2013. However, the companies may follow the format as prescribed by the AS 3(revised). The listed companies are required to present the cash flow statement using indirect method only, whereas the non listed companies have an option of either following the direct method or the indirect method.

Unlike Schedule IV of the Companies Act 1956, the Companies Act 2013 has inserted the general instructions for the preparation of consolidated financial statements in Schedule III. It requires that if a company is holding two or more subsidies, it need to prepare a consolidated statement of accounts in the same format as it is preparing for its own. Presently the following AS (accounting standards) are applicable for the purpose of disclosure: AS 21: Meaning of subsidiary, AS 23: Accounting for Investment in associates in Consolidated Financial Statements and AS 27: Financial reporting of interests in joint ventures.

As per international accounting standard 1, the preparation of statement of changes in equity is required. However, neither any format for the statement nor any definition or explanation regarding the same is available under Schedule III of the act. The Companies Act 2013 has brought about few changes in the ways of final accounts preparation and presentation, hence opening up the doors for better and transparent disclosure of the transactions during a course of year.

you can view video on Form of Company‟s Profit & Loss Account and Profit & Loss Appropriation Account

SUGGESTED READINGS:

Gupta R.L & Gupta K.V (2005) “Principles and Practice of Accountancy” Sultan Chand & Sons 23, Daryaganj, New Delhi- 110002.
Jain P.K (2006) “Corporate Accounting” Kalyani Publishers, Old Maujpur, Shahdara, Delhi-53.
Juneja Mohan .C & Singh Baljindar (2008) “Accountancy- I” Kalyani Publishers, B-15, Sector 8 Noida
Mukherjee A & Hanif M (2003) “Financial Accounting”. Tata Mc Graw Hill Education Private Limited NewDelhi.

Points to Ponder

1) Companies Act 2013 is a replacement of the old Companies Act 1956.

2) With the introduction of this new act various new provisions have been included which need to be followed by the companies.

3) The term „financial statement‟ has been used in the new act, instead of the term „Balance Sheet and Profit and Loss Account‟ as used in old Act.

4) The Companies must follow the accounting period starting from 1st April to 31st March of next year.

5) The financial statements should include cash flow statement as well as statement of changes in equity (if applicable).

6)According to Section 129(1) the financial statements shall depict a true and a fair picture of the affairs of the company and comply with the accounting standards stated under section 133.

7) All companies whether public or private and irrespective of their area of operations is required to prepare the financial statements as prescribed under Schedule III of the Companies Act 2013.

8) The format and general instructions are laid down under part II of schedule III regarding the preparation of statement of profit and loss.

9) Schedule III have also made it compulsory for the companies to present Cash Flow Statement along with their final accounts, under the Companies Act 2013.

10) The listed companies are required to present the cash flow statement using indirect method only, whereas the non listed companies have an option of either following the direct method or the indirect method.

11) Unlike Schedule IV of the Companies Act 1956, the Companies Act 2013 has inserted the general instructions for the preparation of consolidated financial statements in Schedule III.

12) Presently the following AS (accounting standards) are applicable for the purpose of disclosure: AS 21: Meaning of subsidiary, AS 23: Accounting for Investment in associates in Consolidated Financial Statements and AS 27: Financial reporting of interests in joint ventures.

13) As per international accounting standard 1, the preparation of statement of changes in equity is required.

14) The Companies Act 2013 has brought about few changes in the ways of final accounts preparation and presentation, hence opening up the doors for better and transparent disclosure of the transactions during a course of year.