Understanding And Analysis of Profit and Loss Account And Balance Sheet

The Balance Sheet of a company has to be prepared as per the format given in Part I of Schedule VI to the Companies Act. Schedule VI, Part I prescribes two alternative forms in which balance sheet should be prepared I) Horizontal Form and II) Vertical Form.

BALANCE SHEET ANALYSIS

Sources of Funds
1. Shareholders Funds a) Capital b) Reserves & Surplus 2. Loan Funds a) Secured Loans b) Unsecured Loans

BALANCE SHEET ANALYSIS

Application of Funds 1. Fixed Asset 2. Investments 3. Current Assets, Loans and Advances Less Current Liabilities and Provisions 4. Miscellaneous Expenditure

BALANCE SHEET ANALYSIS: SOURCES OF FUNDS

Share Capital: Share Capital shall be of 2 kinds I) Equity Share Capital and II) Preference Share Capital 1) Authorised Capital 2) Issued Capital 3) Subscribed Capital 4) Paid-up Capital

BALANCE SHEET ANALYSIS: SOURCES OF FUNDS

Reserves & Surplus: It shall comprise of: 1. Capital Reserves 2. Capital Redemption Reserves 3. Securities Premium Account 4. Sinking Funds 5. General Reserve 6. The credit balance in profit and loss account

BALANCE SHEET ANALYSIS: SOURCES OF FUNDS

Secured Loans: It refers to loan secured against tangible assets by a fixed or floating charge and comprises of: 1. Debentures 2. Loans and Advances from banks 3. Loans and Advances from subsidiaries

BALANCE SHEET ANALYSIS: SOURCES OF FUNDS

Unsecured Loans: It refers to loans not supported by any security and are taken on the basis of mere promise to pay and comprises of: 1. Fixed Deposits 2. Loans and Advances from banks 3. Loans and Advances from subsidiaries

BALANCE SHEET ANALYSIS: APPLICATION OF FUNDS

Fixed Assets: A fixed asset is an asset held for the purpose of producing or providing goods or services and is not held for sale in the normal course of business. It includes: Goodwill/Patents/Copyrights Land and Building/Plant and Machinery Vehicles

BALANCE SHEET ANALYSIS: APPLICATION OF FUNDS

Investments: Investments are held by an enterprise for earning income by way of dividends, interest, rentals and for capital appreciation or other benefits. These include: Govt. Securities Shares, Debentures or Bonds Immovable Property

BALANCE SHEET ANALYSIS: APPLICATION OF FUNDS

Current Assets Loans and Advances: These are classified separately as: A) Current Assets: These include: 1. Accrued Interest on Investments 2. Raw Material/Finished Stock 3. Loose Tools 4. Sundry Debtors

5. Cash in Hand and Bank Balance B) Loans and Advances: These include: 1. Advances to subsidiaries 2. Bills of Exchange 3. Prepaid Expenses 4. Advance Tax and TDS

BALANCE SHEET ANALYSIS: APPLICATION OF FUNDS

BALANCE SHEET ANALYSIS: APPLICATION OF FUNDS

Miscellaneous Expenditure: Items included under this are: 1. Preliminary Expenses 2. Underwriting Commission 3 Advertising Suspense Account 4. Discount on Issue of Shares or Debentures

BALANCE SHEET ANALYSIS: APPLICATION OF FUNDS

Current Liabilities and Provisions: These are classified into: A: Current Liabilities: These include: 1. Acceptances 2.Sundry Creditors 3.Unclaimed Dividends 4.Tax Payable

BALANCE SHEET ANALYSIS: APPLICATION OF FUNDS

B. Provisions: These include the following: 1. Provision for Income Tax 2. Proposed Dividend 3. Provision For Corporate Dividend Tax

BALANCE SHEET ANALYSIS: FOOT NOTE

Contingent Liabilities: It is shown by way of foot note. It is a possible obligation that arises from past events and the existence of which will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the enterprise. These include: 1. Claims against the company not acknowledged as debts 2. Uncalled liability on shares partly paid

BALANCE SHEET ANALYSIS: FOOT NOTE

Arrears of fixed cumulative dividend on preference shares Bills discounted with bank

BALANCE SHEET ANALYSIS

Notes The valuation of the stock is done as per the opinion of the management Depreciation method may be changed to boost profit It may be silent on key personnel and staff turnover Marginal changes in the classification of certain items would lead to different results.

Profit & Loss Account

It is a summary of revenue earned and expenses incurred which ultimately results in profit or loss to the company No defined format in law Operating revenue = Sales revenue Non-operating revenue = Other income ( out of sale of investments, interest, commission and discount etc) Hence operating profit is a yard stick for operating profit of the company Operating profit = Sales Revenue- Operating Cost

Profit & Loss Account

Gross Sales Gross sales includes excise duty to be charged to the customer, central sales tax applicable, state sales tax/VAT applicable, the discount to be allowed to distributors/dealers/customers. The gross sales appears in the P&L account comprises of all the above part from the basic unit price. Net Sales The sales figure excluding all the factors explained above are the net sales.

Profit & Loss Account

Cost of production
This is the cost incurred right from the procurement of raw material to the finished good. For ex in a garment firm following cost is incurred while production 1) cost of raw material cloth, buttons, canvas, hooks, zips etc 2) Maintenance of sewing machines 3) payment of wages to workers 4) power 5) washing, ironing,packing etc. Cost of Prod excludes selling & admn expenses

Profit & Loss Account

Selling And General Administrative Expenses Maintaining office staff for administration & accounting. marketing effort payment of salaries/Travelling Allowance to marketing personnel. All the expenses which are not directly connected to manufacturing are classified as selling and/or general expenses.

Profit & Loss Account

Cost of goods sold Cost of goods sold includes all manufacturing expenses and the adjustments for opening and closing stock Cost of Goods sold = Opening stock + Purchases + Manufacturing expenses - Closing stock Gross Profit is arrived deducting figure of cost of goods sold from the sales figure ie Gross profit = Sales - Cost of goods sold.

 Operating Profit is arrived deducting selling, administrative and general expenses , provision for bad debts, interest and miscellaneous expenses from the gross profit. ie Op Profit = Gr Prof - (Sel & adm exp + Prov bad debt + mis exp ) Profit Before Tax When other income is added and other expenses are deducted from the operating profit we get profit before Tax ie PBT = Op Profit + oth Inc - oth exp Net Profit When provision for taxes is deducted from the Profit Before Tax we get Net profit ie Net Profit = PBT - taxes

Profit & Loss Account

Profit & Loss Account

Non Operating Income/Expenses The income earned by the unit from other than manufacturing and selling operations is classified under this head . i.e a) Interest earned on fixed deposits b) Dividends and profit earned by sale of assets and share. All those expenses which are not directly connected with operations of the unit are classified under this head. i.e a) Preliminary expenses written off b) Loss suffered due to sale of assets & share

GENERAL FORMAT OF PROFIT AND LOSS ACCOUNT WITH IMAGNARY FIGURES

Sales Less: Cost of Goods Sold Gross Profit Less: Operating Expenses Operating Profit Less: Non Oprtng Exp Add: Non-Oprtng Incomes

600 400 200 50 150 20 70

GENERAL FORMAT OF PROFIT AND LOSS ACCOUNT WITH IMAGNARY FIGURES

Profit before Interest and Tax 200 Less: Interest 25 Profit before Tax 175 Less: Tax 50 Profit after Tax 125 Less: Preference Dividend 15 Profits Available to Equity Sholders110