Statement of Profit and Loss of ABC Ltd. for the year ended March 31, 2024
| Particulars | Note No. | Year Ended March 31, 2024 (₹) | Year Ended March 31, 2023 (₹) |
| I. Revenue from Operations | 1 | 1,50,00,000 | 1,20,00,000 |
| II. Other Income | 2 | 5,00,000 | 3,00,000 |
| III. Total Revenue (I + II) | 1,55,00,000 | 1,23,00,000 | |
| IV. Expenses | |||
| (a) Cost of Materials Consumed | 3 | 50,00,000 | 45,00,000 |
| (b) Purchases of Stock-in-Trade | 4 | 25,00,000 | 18,00,000 |
| (c) Changes in Inventories of Finished Goods, Work-in-Progress and Stock-in-Trade | 5 | (3,00,000) | (1,00,000) |
| (d) Employee Benefits Expense | 6 | 20,00,000 | 18,00,000 |
| (e) Finance Costs | 7 | 10,00,000 | 8,00,000 |
| (f) Depreciation and Amortization Expense | 8 | 8,00,000 | 7,00,000 |
| (g) Other Expenses | 9 | 25,00,000 | 20,00,000 |
| Total Expenses (IV) | 1,35,00,000 | 1,15,00,000 | |
| V. Profit before Exceptional and Extraordinary Items and Tax (III – IV) | 20,00,000 | 8,00,000 | |
| VI. Exceptional Items | 10 | 3,00,000 | – |
| VII. Profit before Extraordinary Items and Tax (V – VI) | 17,00,000 | 8,00,000 | |
| VIII. Extraordinary Items | 11 | – | – |
| IX. Profit before Tax (VII – VIII) | 17,00,000 | 8,00,000 | |
| X. Tax Expense | |||
| (a) Current Tax | 12 | 4,00,000 | 2,00,000 |
| (b) Deferred Tax | 13 | 50,000 | 30,000 |
| Total Tax Expense (X) | 4,50,000 | 2,30,000 | |
| XI. Profit for the Period (IX – X) | 12,50,000 | 5,70,000 | |
| XII. Other Comprehensive Income | |||
| (a) Items that will not be reclassified to profit or loss | 14 | (50,000) | 1,00,000 |
| XIII. Total Comprehensive Income for the period (XI + XII) | 12,00,000 | 6,70,000 | |
| XIV. Earnings per Equity Share | |||
| (a) Basic (₹) | 12.00 | 6.70 | |
| (b) Diluted (₹) | 11.50 | 6.50 |
The Statement of Profit and Loss (P&L) is a key component of a company’s financial statements, offering insights into the company’s financial performance over a specific period, typically a financial year. It is also called the Income Statement and is mandated under Section 129 of the Indian Companies Act, 2013. Here’s a detailed breakdown of its components and relevance as per the Indian Companies Act, 2013:
1. Purpose of the Statement of Profit and Loss
The Statement of Profit and Loss provides a summary of:
- Revenue earned during the financial year.
- Expenses incurred to generate that revenue.
- Profit or loss calculated as the difference between revenue and expenses.
2. Format and Structure (As per Schedule III)
The format for the Statement of Profit and Loss is prescribed under Schedule III of the Indian Companies Act, 2013. It includes two sections:
- Revenue Section: Where the company lists its income.
- Expense Section: Where the company lists its costs and expenses.
A. Revenue Section
The revenue section includes the following items:
- Revenue from Operations: This refers to the income generated from the company’s core business activities, such as the sale of goods, services rendered, or any other primary operations.
- Other Income: This includes income that is not directly related to the company’s core operations, such as interest income, dividend income, gains on investments, or sale of assets.
B. Expense Section
- Cost of Materials Consumed: Applicable for manufacturing companies, this includes the cost of raw materials used to produce goods.
- Purchases of Stock-in-Trade: For trading companies, this represents the cost of goods purchased for resale.
- Changes in Inventories: This reflects the difference between the opening and closing stock levels, which affects the cost of sales.
- Employee Benefit Expenses: This includes salaries, wages, bonuses, and other employee-related expenses.
- Finance Costs: These are interest costs or any other finance-related expenses incurred on borrowings.
- Depreciation and Amortization: The allocation of the cost of fixed and intangible assets over their useful lives.
- Other Expenses: This category includes miscellaneous expenses such as rent, legal fees, advertising, administrative costs, etc.
C. Profit Before Tax (PBT)
Once all operating expenses, finance costs, and other expenses are subtracted from the total revenue, the result is the Profit Before Tax (PBT). This represents the company’s profitability before the effect of taxation.
D. Tax Expense
- Current Tax: This represents the tax liability calculated as per the applicable tax laws for the year.
- Deferred Tax: This includes the future tax liability or asset based on timing differences between the book and tax profits.
E. Profit After Tax (PAT)
After deducting tax expenses from the Profit Before Tax, the company arrives at Profit After Tax (PAT) or Net Profit. This figure reflects the company’s profitability after accounting for all expenses and taxes for the financial year.
3. Other Key Disclosures in the Profit and Loss Statement
The Indian Companies Act, 2013, requires several additional disclosures in the P&L Statement:
- Earnings Per Share (EPS): Companies must disclose both basic and diluted earnings per share, calculated based on the company’s net profit.
- Details of Exceptional and Extraordinary Items: Any unusual items that are non-recurring and significant (like asset disposals, legal settlements, etc.) should be separately disclosed.
- Prior Period Items: Any adjustments related to income or expenses of previous financial years should be disclosed in the P&L statement.
4. Requirements for Preparation and Presentation
- Accrual Basis of Accounting: The Companies Act requires companies to follow the accrual basis of accounting, where revenues and expenses are recognized when they are earned or incurred, irrespective of actual cash flows.
- Compliance with Indian Accounting Standards (Ind AS): Companies listed or of a certain size must follow Indian Accounting Standards (Ind AS), which govern how items are recognized and measured in the P&L.
- Disclosure of Related Party Transactions: Any transaction with related parties (e.g., subsidiaries, directors) that impacts the profit and loss must be disclosed.
5. Purpose for Stakeholders
- Investors use the P&L statement to assess a company’s profitability and ability to generate returns.
- Lenders and Creditors analyze the P&L to determine the company’s ability to repay debts and manage costs.
- Management uses it to make decisions about operational efficiency, cost control, and revenue enhancement.
- Government and Regulators use it to assess tax liabilities and ensure compliance with regulations.
6. Penalties for Non-compliance
Failure to prepare and present a true and fair Statement of Profit and Loss, as required under the Indian Companies Act, 2013, can lead to penalties for the company, its directors, and the responsible officers. Misstatements or omissions can also attract scrutiny from regulatory bodies like the Ministry of Corporate Affairs (MCA) and Securities and Exchange Board of India (SEBI).
Current Tax and Deferred Tax: Overview and Example
Current Tax and Deferred Tax are essential components of a company’s tax expense in the Statement of Profit and Loss. They help in determining the total tax liability and are defined under Indian Accounting Standards (Ind AS 12), which deals with “Income Taxes.”
1. Current Tax
- Definition: Current tax is the amount of income tax payable by a company on its taxable income for the current financial year. It is computed according to the applicable tax laws of the jurisdiction (in India, as per the Income Tax Act, 1961).
- Calculation: The taxable income is calculated by adjusting the accounting income for tax purposes, including deductions, exemptions, disallowances, and other tax provisions.
Example of Current Tax Calculation:
- Assume that a company has a profit before tax (PBT) of ₹10,00,000 as per the Statement of Profit and Loss.
- Under tax laws, certain income may be exempt, and certain expenses may not be allowable. Let’s assume these tax adjustments reduce the taxable income to ₹9,50,000.
- The corporate tax rate in India is 25%.
- Current Tax = ₹9,50,000 * 25% = ₹2,37,500.
This ₹2,37,500 is the company’s current tax liability for the year, which it must pay to the tax authorities.
2. Deferred Tax
- Definition: Deferred tax arises due to temporary differences between the accounting profit and the taxable profit. These differences lead to future tax consequences, either as an asset or a liability.
- Deferred Tax Liability (DTL) occurs when taxable income is greater than accounting income due to timing differences, meaning the company will pay more tax in the future.
- Deferred Tax Asset (DTA) occurs when taxable income is less than accounting income due to timing differences, meaning the company will save tax in the future.
Temporary Differences: These are differences between the carrying amount of assets or liabilities in the balance sheet and their tax base (the amount attributed to them for tax purposes). These differences can reverse in future periods.
Example of Deferred Tax Calculation:
- Assume the company has purchased machinery worth ₹10,00,000.
- The company depreciates this machinery over 5 years using the straight-line method (₹2,00,000 per year) for accounting purposes.
- However, under tax laws, the depreciation method allows for accelerated depreciation, where the company can claim ₹3,00,000 in the first year as a deduction for tax purposes.
For the first year:
- Accounting Depreciation: ₹2,00,000.
- Tax Depreciation: ₹3,00,000.
- Temporary Difference: ₹3,00,000 (tax base) – ₹2,00,000 (book value) = ₹1,00,000.
Since the company is claiming higher depreciation for tax purposes, its taxable income is lower by ₹1,00,000, which will lead to less tax payable this year. However, in the future, the depreciation allowed for tax purposes will be lower than the book depreciation, leading to higher taxable income in subsequent years. Thus, a Deferred Tax Liability (DTL) is created for this year.
- Assume the corporate tax rate is 25%.
- Deferred Tax Liability = ₹1,00,000 * 25% = ₹25,000.
This means that ₹25,000 is the future tax liability that the company will need to pay due to the temporary difference arising from depreciation.
3. How Current Tax and Deferred Tax Appear in the Financial Statements
- In the Statement of Profit and Loss, both Current Tax and Deferred Tax are shown under the head “Tax Expense.”
- The total tax expense is the sum of current tax and the net impact of deferred tax (which could be a deferred tax asset or liability).
Example of Tax Expense in Profit and Loss Statement:
- Profit Before Tax (PBT): ₹10,00,000
- Current Tax: ₹2,37,500
- Deferred Tax Liability (Net): ₹25,000
Total Tax Expense = Current Tax + Deferred Tax = ₹2,37,500 + ₹25,000 = ₹2,62,500
The total tax expense of ₹2,62,500 is deducted from the Profit Before Tax to arrive at the Profit After Tax (PAT).
4. Key Differences Between Current Tax and Deferred Tax
- Current Tax is the actual tax payable in the current year, whereas Deferred Tax arises from timing differences that will affect future tax liabilities or savings.
- Current Tax is based on the taxable income calculated per tax laws, while Deferred Tax is calculated on temporary differences between accounting income and taxable income.
- Current Tax is paid to the tax authorities in the present, whereas Deferred Tax represents future tax implications.
5. Practical Example
Let’s consider a practical scenario:
- A company reports an accounting profit of ₹15,00,000.
- Due to tax exemptions and deductions, its taxable profit is ₹12,00,000.
- The applicable tax rate is 30%.
- Current Tax: ₹12,00,000 * 30% = ₹3,60,000.
- Now, assume there is a temporary difference due to depreciation of ₹2,00,000 (higher depreciation claimed for tax purposes in the current year).
- Deferred Tax Liability: ₹2,00,000 * 30% = ₹60,000.
So, the total tax expense recorded in the Statement of Profit and Loss will be:
- Current Tax: ₹3,60,000
- Deferred Tax: ₹60,000 (liability)
Total Tax Expense = ₹3,60,000 + ₹60,000 = ₹4,20,000.
This combined tax expense is deducted from the accounting profit to calculate the company’s Net Profit or Profit After Tax.
6. Implications of Deferred Tax
- Deferred Tax Liabilities represent future tax payments. Companies need to manage these to avoid cash flow issues in future periods.
- Deferred Tax Assets can result from provisions, bad debts, or unclaimed tax losses that can reduce future tax liabilities, enhancing cash flow in future periods.
Conclusion: In summary, Current Tax is the tax payable on the taxable income for the current period, whereas Deferred Tax arises due to temporary differences between accounting and taxable profits. Deferred tax ensures that companies account for tax effects that will affect them in future periods. Understanding these concepts helps in evaluating the full tax burden and future tax implications for a company.
Basic and Diluted EPS
Basic and Diluted Earnings Per Share (EPS)
Earnings Per Share (EPS) is a key financial metric used to measure the profitability of a company on a per-share basis. It is essential for investors and analysts because it provides insights into how much profit a company is generating for each share of its stock. The Indian Companies Act, 2013, along with Indian Accounting Standard (Ind AS 33), mandates the disclosure of both Basic EPS and Diluted EPS in the financial statements.
Let’s discuss each in detail, along with examples.
1. Basic Earnings Per Share (Basic EPS)
Definition: Basic EPS is calculated by dividing the net profit (or loss) attributable to equity shareholders by the weighted average number of outstanding equity shares during the reporting period. It does not consider any potential dilution from convertible securities, stock options, or other convertible instruments.
Formula:
Basic EPS =
Key Components:
- Net Profit Attributable to Equity Shareholders: This is the profit after tax, adjusted for dividends on preference shares (if any).
- Weighted Average Number of Shares: This accounts for changes in the number of shares during the year, such as issuance or buyback of shares.
Example of Basic EPS Calculation:
Let’s assume the following:
- Net profit attributable to equity shareholders: ₹50,00,000
- Number of shares at the beginning of the year: 1,00,000
- 20,000 additional shares were issued on July 1, which is halfway through the year.
Weighted Average Number of Shares:
- Shares for the first 6 months (January to June): 1,00,000 shares.
- Shares for the last 6 months (July to December): 1,20,000 shares (1,00,000 + 20,000 issued in July).
The weighted average is calculated as follows:
Weighted Average Number of Shares=
Basic EPS:
Basic EPS = Per share
This means that for every share outstanding, the company earned ₹45.45 in profit during the year.
2. Diluted Earnings Per Share (Diluted EPS)
Definition: Diluted EPS takes into account the impact of potential dilution from convertible securities, stock options, warrants, or any other instruments that could convert into equity shares. The purpose of diluted EPS is to show the “worst-case scenario” in terms of dilution, assuming all convertible instruments are exercised.
Formula:
Diluted EPS=
Key Components:
- Net Profit Attributable to Equity Shareholders: Same as basic EPS, but adjusted for interest (net of taxes) on any convertible debt.
- Weighted Average Number of Shares (Adjusted for Dilution): This number is adjusted to reflect the potential issuance of additional shares from convertible securities, stock options, warrants, etc.
Example of Diluted EPS Calculation:
Building on the basic EPS example, let’s assume the following additional information:
- The company has convertible bonds that, if converted, will result in the issuance of 20,000 additional equity shares.
- The company also has employee stock options (ESOs) that would allow employees to purchase 10,000 shares.
- The interest expense on convertible bonds is ₹1,00,000, and the applicable tax rate is 30%. Hence, the after-tax interest is ₹70,000 (₹1,00,000 – 30%).
Now let’s calculate the adjusted net profit and the adjusted number of shares for diluted EPS.
Step 1: Adjust the Net Profit
- The net profit needs to be adjusted to account for the interest on the convertible bonds, which will no longer be an expense if the bonds are converted into equity.
- Adjusted Net Profit = ₹50,00,000 + ₹70,000 = ₹50,70,000.
Step 2: Adjust the Number of Shares
- Original Weighted Average Shares: 1,10,000 (calculated earlier).
- Additional Shares from Convertible Bonds: 20,000.
- Additional Shares from Employee Stock Options: 10,000.
Total Adjusted Number of Shares = 1,10,000 + 20,000 + 10,000 = 1,40,000 shares.
Step 3: Calculate Diluted EPS
Diluted EPS=
3. Comparison Between Basic EPS and Diluted EPS
| Basis | Basic EPS | Diluted EPS |
| Meaning | EPS calculated without considering potential dilution. | EPS calculated considering potential dilution from convertible securities, stock options, etc. |
| Calculation | Based on the actual number of outstanding shares. | Based on the actual shares plus potential additional shares from convertible instruments. |
| Potential Impact | No impact of future conversions or exercises of stock options. | Considers the effect of dilution, showing the possible worst-case EPS. |
| EPS Value | Higher than diluted EPS (in most cases). | Generally lower than basic EPS due to the impact of dilution. |
4. When Are Basic and Diluted EPS Reported?
- Basic EPS is always reported as it reflects the actual earnings attributable to each share.
- Diluted EPS is reported when a company has any potentially dilutive securities, such as:
- Convertible bonds or debentures.
- Convertible preference shares.
- Stock options granted to employees.
- Warrants or similar instruments.
In cases where there is no potential dilution (i.e., no convertible securities or options), basic EPS and diluted EPS will be the same.
5. Key Points to Remember
- EPS measures profitability on a per-share basis, helping investors understand the earnings available to each shareholder.
- Diluted EPS gives a more conservative view of a company’s profitability by assuming that all convertible securities and stock options will be converted into equity shares, thus diluting the earnings for each share.
- When the company has no dilutive instruments, basic EPS = diluted EPS.
6. Practical Implications for Investors
- Basic EPS is more straightforward but can be optimistic if the company has many convertible securities that could dilute earnings.
- Diluted EPS provides a more conservative and realistic estimate of potential earnings dilution, helping investors gauge the worst-case scenario for per-share profitability.
- Investors often compare basic EPS and diluted EPS to understand the potential impact of dilution. A large difference between the two could indicate significant potential dilution, which could reduce future per-share earnings.
Conclusion: In summary, basic EPS reflects the earnings per share based on the current number of shares outstanding, while diluted EPS accounts for potential dilution from convertible instruments, giving a more conservative view of the company’s profitability. Both are critical metrics for investors when evaluating the financial health and profitability of a company.