The Statement of Profit and Loss, also known as the Income Statement, is a financial statement that shows the revenues, expenses, and net income of a company over a specific period of time. It provides investors, creditors, and other stakeholders with an overview of the company’s profitability and financial performance.
The preparation of the Statement of Profit and Loss involves the following steps:
- Revenue Recognition: The first step in preparing the Statement of Profit and Loss is to recognize the revenue earned by the company during the period. Revenue recognition depends on the nature of the business and the terms of the contracts with customers.
- Cost of Goods Sold: The cost of goods sold is the cost of the products or services that were sold during the period. It includes the cost of raw materials, direct labor, and overhead expenses that are directly related to the production of the goods or services.
- Gross Profit: Gross profit is the difference between the revenue and the cost of goods sold. It represents the profit that the company earned from its core operations before deducting other expenses.
- Operating Expenses: Operating expenses are the expenses that are incurred to run the business, such as salaries, rent, utilities, and marketing expenses.
- Operating Profit: Operating profit is the difference between the gross profit and the operating expenses. It represents the profit that the company earned from its core operations after deducting the operating expenses.
- Other Income and Expenses: Other income and expenses include any income or expenses that are not related to the core operations of the business, such as interest income, dividend income, or gains or losses from the sale of assets.
- Net Profit: Net profit is the final amount of profit that the company earned after deducting all the expenses, including operating expenses and other income and expenses.
- Appropriations: Appropriations include any allocations of profits or losses to different accounts, such as reserves, dividends, or taxes.
- Earnings per Share: Earnings per share is a measure of the profitability of the company that is calculated by dividing the net profit by the number of outstanding shares.
Example:
| Particulars | Amount (Rs.) |
| Revenue from operations | 5,00,000 |
| Other income | 50,000 |
| Total revenue | 5,50,000 |
| Cost of materials consumed | 2,00,000 |
| Purchases of stock-in-trade | 1,00,000 |
| Employee benefits expense | 1,50,000 |
| Finance costs | 50,000 |
| Depreciation and amortisation expense | 75,000 |
| Other expenses | 50,000 |
| Total expenses | 6,25,000 |
| Profit before exceptional and extraordinary items and tax | (75,000) |
| Exceptional items | – |
| Profit before extraordinary items and tax | (75,000) |
| Extraordinary items | – |
| Profit before tax | (75,000) |
| Tax expense | 15,000 |
| Net profit for the period | (60,000) |