Profit and Loss Account Profit/Loss: The difference between the revenues and the expenditures determines profits

(when the revenues are in excess of expenditures) and losses (when expenditures are in excess over revenues) Profit and Loss account also termed as income statement. It is a financial statement that will determine the pattern of revenues and expenses over a period of time. Income Statement Format: There is no prescribed format for income statement. However, the rules for preparation of P&L accounts are given in Part 2 Schedule 6 of the Companies Act. The time period in which P&L is prepared is usually one year but it can be prepared for a month or a quarter. The format that can be useful for P&L account Sales Net Sales Less : Cost of Goods sold Raw material consumed Factory wages Electricity & power Less : Operating expenses Operating Profit Less : Non-operating expenses Add : Non-Operating Gains Profit before tax Dividends or capital Profit retained Components 1) Revenue: Total revenues earned over a period of time. The revenues are earned from operating revenues or from non-operating revenues 2) Expenses: Total expenses incurred over a period of time. Expenses incurred include cost of goods sold, selling expenses and administrative expenses. 3) Gross profit: Difference between revenue and cost is called gross profit. It is also termed as profit before interest and taxes and when interest and taxes are deducted from it then it as termed as profit after interest and taxes. Funds Flow statement: Funds flow statement is the statement of sources and uses of funds. It is very important for an entrepreneur to make the estimates about the sources and uses of funds for the following reasons:

1) 2) 3) 4)

Estimation of total cash requirements Properly plan for next year in terms of amount of funds required It identifies the direction and volume of flow of funds It helps in judging whether the organization is making progress or problems are arising.

Funds flow statement can be prepared on the following basis: 1) Working capital 2) Cash 3) Total revenues Funds flow statement on the basis of working capital The objective of preparing this is to estimate the working capital requirements of the business. The sources of working capital includes: 1) Operations: Net income + Depreciation: Depreciation is added to net income because depreciation amount remains with the business. 2) Issue of share capital: Total cash received from issue of share capital 3) Long term borrowing: Total cash inflow from long term borrowings 4) Sale of goods other than current assets and investments The uses of capital include: 1) 2) 3) 4) Payment of dividend and taxes Purchase of other current assets Redemption of debenture and redeemable preference shares Repayment of long-term liability

Format: Sources of funds Operation Net Income Depreciation Issue of share Long term borrowings Sale of non-current assets

Uses of funds Payment of dividends Purchase of other current assets Redemption of debentures and redeemable preference shares Repayment of long term liability

Changes in Working Capital (Uses Sources) Balance Sheet: Projected Balance Sheet is the statement of forecast of assets and liabilities of a business firm over a period of time, usually a year. In fact, it is cumulative in nature as it reports the results of all kinds of financial activities between its current or fixed, short or long term of a business. For a start-up business it is prepared on a quarterly basis but a yearly balance is prepared for all kind of business in the later stages. Balance Sheet is an expansion of following fundamental equation: Assets = Liabilities + Owners Equity Assets: They are the economic resources that a business owes. It includes everything that is expected to assist in the earning of revenues in future. Assets are divided into: Current assets: they are those assets that are expected to be converted into cash during the next year or normal operating cycle of the business whichever is longer. Current assets include: Prepaid expenses / payment in advance: These are not current assets in the sense that they will be converted into cash, but if they are not paid in advance they would require the use of current assets during the operating cycle. These include rent, insurance, taxes and operating supplies. Inventories: A manufacturing unit has three kinds of inventories: raw materials, work-in-process and finished goods. Sundry debtors and bills receivables Temporary Investments / Marketable Investments include investments of cash that will be converted into cash within a year and they are available for current operations Cash in hand and cash at bank

Current Liabilities: They are those liabilities that are to be paid within a year or normal operating cycle of the business, whichever is longer. They include:

Trade liabilities and bills payable that incur during acquisition of materials and supplies to be used in the production of goods or in providing services to be offered for sale Debts related to operating cycle such as wages, commissions, rentals, royalties and taxes. Other current liabilities like provision for tax, dividends payable, overdraft, short term loans, deferred revenues and advances from consumers.

Non- Current Assets: These are assets that an entrepreneur intends to hold for more than one year. They include: Tangible assets: They include tangible assets that are used in the production of revenue, have a useful life of more than one year and are not intended for resale in the course of regular business operations. Eg: land, building, leaseholds, plant and machinery, etc. Intangible assets: Non-physical but variable assets like goodwill, copyright and trademarks, patents. Fictitious assets: They include underwriting commission, brokerage, discount on issue of shares and debentures, interest paid out of capital, development expenditure not adjusted, heavy advertisement expenses preliminary expenses, wasting assets. Investments include stocks and bonds acquired, cash surrender value of life insurance, land haled for future use. As on Proforma of Balance Sheet Balance Sheet of XYZ as on 31.3.200 Capital and Liabilities Amt. Assets Capital Fixed Assets: Tangible -Equity Share Capital Land & Building -Preference Share Capital Leasehold -General Reserves Plant & Machinery -Funds Furniture & Fittings Motor, van, lorry Liabilities Fixed Assets: Intangible Long term liability Goodwill -Secured Loans(Public deposits, Copyrights & trademarks, patents long term loans) -Unsecured Loans(Debentures, Fictitious Assets Bonds) Current Liabilities Underwriting Commission -Trade Liabilities Brokerage -Bills Payable Discount on issue of shares and debentures -Creditors Interest paid out of capital -Provision for taxes Development expenditure not adjusted -Dividend payable Heavy advertisement expenses

Amt.

-Overdraft -Short-term loans from bank -Deferred revenue -Advances from customer Contingent Liabilities -Claims against the firm not acknowledged as debt -Uncalled liabilities or investment in other companies -Arrears of fixed cumulative dividends -Liability on account of bill discounted with bankers -Estimated amount of contracts remaining to be executed on capital account and not provided for

Preliminary expenses Wasting Assets Current Assets Payment in advance/Prepaid expenses Closing stock/Stock in trade (RM+WIP+Finished Goods) Sundry Debtors (including adjustments for bad debts and its reserves) Bills receivable Temporary Investments/ Marketable Investments Cash in bank Cash in hand

Total

Contingent Assets (e.g. winning of law suit) Total