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Definition
Reporting the value of assets, liabilities and owners equity
at a particular point in time and the net change in owners
equity brought about by the operations between the two
consecutive reporting periods is the intended purpose of
Balance Sheet. It does not tell anything about the details of
operations of business such as-
Was it a good year or a bad year?
What was the volume of operations?
What was the margin available on sales?
How was the sales rupee distributed among different
expenses and profit?
All these questions could be answered with the help of
another financial statement addressed exclusively to
summarize the revenue and expenses of a particular period.
This statement is known as Profit & Loss Account.
Profit & Loss Account
(Rs. in millions)
.Sales (Schedule 1) 275
Other Income (Schedule 2) 5
280
Cost of Goods Sold (Schedule 3) 150
Gross Profit 130
Operating Expenses
Personnel (Schedule 4) 49
Depreciation (Schedule 5) 11
Other Expenses (Schedule 6) 28 88
Operating Profit 42
Less: Interest (Schedule 7) 12
Net Profit before Income Tax 30
Less: Provision for Tax 12
Net Profit 18
Earning Before Interest & Taxes (EBIT) is calculated on the basis of Operating
Profit. Earning per share is calculated on the basis of Net Profit
Schedule 1 : Sales
(Rs. In millions)
Gross Sales 260
Less: Sales Returns & Allowances 1.75
Sales Discount 3.25 5
255
Net Sales (Inland)
Machine Tools Group 83
Watch Group 87
Tractor Group 60
Lamp Group 13
Dairy Machinery Group 2 245
Exports:
Machine Tools Group 6
Watch Group 2
Others 2 10
Total Net Sales 255
Schedule 2 : Other Incomes
(Rs. in millions)
(Rs. in millions)
Debentures 0.58
Fixed Deposits 1.50
Loans from Government 5.00
Term Loans from Banks/Financial 0.42
Institutions
Others 4.50
Total 12.00
Linkage Between Balance Sheet and
Profit & Loss Account
From the balance sheet equation
Assets = Liabilities + Owners Equity.(1)
Owners Equity at any point in time is represented by-
Owners Equity = Assets Liabilities(2)
This implies that except in case of first balance sheet, the
owners equity need not to be equal to the contributed capital
because the amount of sales revenue increases the owners
equity and the amount of goods parted with decreases the
owners equity. The resultant increase in owners equity is
equal to the net increase in the assets and that is equal to the
profit. As per the balance sheet equation,
Owners Equity = Contributed Capital + Retained Earning
Assuming no withdrawals the retained earning the difference
revenues and expenses. This relationship could be written as under-
Substituting the right hand side of this equality in the balance sheet
equation (1)
It is the last two terms of the equality (4) above which called the
profit & Loss Account or income summery. The Profit & Loss
Account is therefore, an integral part of the balance sheet