Analysis of Profit and Loss account (P&L A/c) :

It is a statement of income and expenditure of an entity for the accounting period. Every P&L account must indicate the accounting period for which it is prepared. The items of a P&L account are:

• Gross and Net sales

• Cost of goods sold

• Gross profit

• Operating expenses (including depreciation)

• Operating profit

• Non-operating surplus/deficit (other income-other than operation or loss)

• Profit before interest and tax

• Interest

• Profit before tax

• Tax

• Profit after tax (Net Profit)

Gross and Net Sales:

The total price of goods sold and services rendered by an enterprise, including excise duty paid on the goods sold, is called Gross sales. Net sales are gross sales minus excise duties. In other words it is net of what company gets after paying government duties.

Cost of Goods Sold:

This is the sum of costs incurred for manufacturing the goods sold during the accounting period. It consists of direct material cost, direct labour cost, and factory overheads. It is different from the cost of production, which represents the cost of goods produced in the accounting year, not the cost of goods sold during the same period.

Gross Profit:

This is the difference between net sales and cost of goods sold. Most companies show this amount as a separate item. Some companies, however, show all expenses at one place without showing gross profit a separate item.

Operating Expenses:

These consist of general administrative expenses, selling and distribution expenses, and depreciation. Some companies include depreciation under cost of goods sold as a manufacturing overhead rather than under operating expenses.

Operating Profit:

This is the difference between gross profit and operating expenses. As a measure of profit, it reflects operating performance and is not affected by non-operating gains/losses, financial leverage and the tax factor.

Non-operating Surplus: This represents gains arising from sources other than normal operations of the business. Its major components are income from investments and gains from disposal of assets. Likewise, non-operating deficit represents losses from activities unrelated to the normal operations of the firm. For example losses in share investment and loss in taking some task of consultancy work etc.

Profit before Interest and Taxes:

This is the sum of operating profit and non-operating surplus/deficit. Referred to also as earnings before interest and taxes (EBIT), this represents a measure of profit which is not influenced by financial leverage and the tax factor.

These are represented as under:

PBITD = Profit before interest tax and depreciation

PBIT = Profit before interest and tax – it indicates the ability of the firm to serve interest and taxes.

PBT = Profit before tax

PAT = Profit after tax (also termed as net profit)

Interest:

This is the expenses incurred on account of application of interest for borrowed funds, such as term loans, debentures, public deposits, and working capital advances etc.

Profit before tax (PBT):

This is obtained by deducting interest from profits before interest and taxes. It is also termed as PBIT. It provides an indicator of ability of the firm to pay interest to banks, other financial institutions and depositors.

Tax:

This represents the income tax payable on the taxable profit of the year. On this basis of PBT, the tax burden is calculated.

Profit after tax (PAT):

This is the difference between the profit before tax and tax for the year. It is also termed as net profit of the firm and an indicator of its earning power.