FINANCIAL STATEMENTS: UNDERSTANDING PROFIT AND LOSS ACCOUNT (INCOME STATEMENT)

 Profit and loss account is also known as income statement. It is a document which is prepared by the company to report its income, expense, and profit happened in last 12 months. 

P&L account talks about few important things about the business. First of all it talks about how much income the company has generated in last FY (12 months). In India the financial year of a business generally starts from first of April and ends on 31st of March. So when P&L account is prepared it is prepared for a period between 1st of April and 31st of March.  

The next important thing that profit and loss accounts states is various expenses that the company has incurred in the last FY. 

Once the income and expense line items are listed by the company, the next important deduction that is made is called the gross profit. By adjusting depreciation, interest expense, and tax expense, net profit (PAT) of the company is deduced in the P&L account. 

Statement of Profit and Loss Account

This is the snapshot of how a typical profit and loss account looks like. As a beginner one must first try to grasp the structure of this report. How it is structured? It starts with stating the income of the company. Next it lists down all expenses of the company. Then what will come is profit before tax (PBT), tax liability, and net profit (PAT).

In this article we will see in detail these components of profit and loss account. Let’s start with the income…

Income (Revenue)

In the profit and loss account of Tata Steel, “Total Income” component of the company is represented as (a) Revenue from operations, and (b) Other income. In FY ending 31-Mar’20, the company’s total income was Rs.60,840.09 Crore, out of which Rs.60,435.97 Crore is from operations and Rs.404.12 Crore is from other sources. 

The details of these income heads is provided in the Notes SL 27 and 28. Hence if one wants to know a further break-up of revenue from operations or other income, they must look into these Notes. “Notes” form an integral part of financial statements.

Let’s look at the notes SL No 27 and 28. 

Note No 27 provides a break-up of ‘Revenue from operations’. Here we will get to know what the company means by operation income. For Tata Steel it is sale of products, sale of power and water etc.

Sale of products (Steel) has fetched Rs.57,167 Crores. Sale of power and water has fetched Rs.1,647 core. The company has also classified Rs.1,620 Crore worth of income as “other operating revenues”. 

Note No 28 provides a break-up of “Other Income” sources. For Tata Steel other income is dividends, interest, change in value of investments (mutual funds), sale proceeds of capital assets, etc.

Other income accounts for Rs.404 Crore. Out of this Rs.89 Crore is dividend income. Rupees 73 crore is interest income. Rupees 98 crore is from sale of investments like mutual funds Rs.147 crore is also accounted as “other miscellaneous income”. 

Expenses (Revenue)

Now we will look at the company’s expense statements. First we will look at the absolute numbers then at their respective notes. Company generally classify their various expenses into few expense heads. So first thing we can look here is, what are the expense heads of the company.

Generally speaking, depending upon the type of business, similar company will have similar expense heads. Like expense heads of manufacturing company’s (like steel cement, auto, oil and gas etc) will be alike.