It is already observed that section 211 requires that profit and loss account of a company should give a true and fair view of the profit or loss of the company for the financial year and should comply with the requirements of Part II of Schedule VI, so far as they are applicable thereto. The said requirements do not apply to insurance or banking company or any company engaged in the generation or supply of electricity or to any other class of company for which a form of profit and loss account has been specified in or under the Act governing such class of company. The power of the Central Government to exempt any company from the above provisions has been already discussed. The Act does not prescribe any form of profit and loss account but it merely gives the requirements in regard to the matters to be stated in the profit and loss account. The requirements of the said Part II, apply in like manner to the income and expenditure account as they apply to a profit and loss account.
The general requirements in regard to the profit and loss account are as under :
1. The profit and loss account should be so made out as clearly so as to disclose the result of the working of the company during the period covered by the account.
2. It should disclose every material feature relating to the working results of the company’s business.
3. It should also disclose clearly credits or receipts and debits or expenses in respect of nonrecurring transactions or transactions of an exceptional nature.
4. It should set out the various items relating to the income and expenditure of the company arranged under the most convenient heads.
5. The comparative figures relating to the corresponding previous period, whether a year, half year or a quarter, should be given in the profit and loss account. The comparative figures should be regrouped wherever necessary and in that case a note should be placed at the foot of the profit and loss account to that effect.
6. It should disclose in particular the information required by clause 3 of Part II and it should contain or give by way of a note information required by clauses 4, 4A, 4B, 4C and 4D. Under clause 3, profit and loss account should disclose, in particular the following information in respect
of the period covered by the account.
The aggregate amount for which sales are effected by the company, must be shown as the gross figure, giving the amount of sales in respect of each class of goods dealt with by the company, and indicating the quantities of such sales for each class separately. The turnover may be shown after making
adjustments in respect of return of goods, trade discounts and allowances etc. The following amounts should not be deducted from sales but should be shown separately :
- Commission paid to sole selling agents within the meaning of Section 294 of the Act.
- Commission paid to other selling agents.
- Brokerage and discount on sales, other than the usual trade discount. The usual trade discount according to standard accounting practice should be deducted from the sales but the particulars of any unusual trade discount should be separately disclosed. (II) Stocks, Purchases, etc.
1. In the case of manufacturing companies the following information must be disclosed :
- The value of raw materials consumed, giving item-wise break-up and indicating the quantities thereof. In this break-up all important basic raw materials should be shown as separate items as far as possible. The intermediates or components procured from other, manufacturers may be grouped under suitable headings without mentioning the quantities, if their list is too large to be included in the break-up. All those raw material items which in value, individually, account for 10% or more of the total value of the raw material consumed shall be shown as separate and distinct items with value and quantities thereof in the break- up. The usual practice is to show the opening stock plus purchase of raw materials, minus
the closing stock so as to show the amount of raw materials consumed.
- The opening and closing stock of goods produced giving break-up in respect of each class of goods and indicating the quantities thereof.
2. In case of trading companies, the purchases made and the opening and closing stocks, giving break-up in respect of each class of goods traded in by the company and indicating the quantities thereof should be stated.
3. In the case of companies rendering or supplying services, the gross income derived from services rendered or supplied should be stated.
4. In case of a company which falls under more than one of the categories mentioned in items 1, 2 and 3 above, it shall be sufficient compliance with the requirements, if the total amounts, in respect of the opening and closing stocks, purchases, sales and consumption of raw material with value and quantitative break up and the gross income from services rendered are shown. For the disclosure of above information the following points should be noted :
- The quantities should be expressed in quantitative denominations for which raw materials, purchases, stocks, and the turnover are normally purchased or sold in the market as the case may be (Note 1).
- For the purposes of disclosure in respect of items 1, 2 and 4 above, the items for which the company is holding separate industrial licences should be treated as separate class of goods. In case where a company has more than one industrial licence for production of the same item at different places or for expansion, the item covered by all such licences shall be treated as one class. In case of trading companies, import items should be classified according to the classification adopted by the Controller of Imports and Exports in granting the import licences (Note 2).
- All those items which in value individually account for 10% or more of the total value of the purchases, stocks, or turnover, as the case may be, are to be shown as separate and distinct items with quantities thereof in the break-up. In respect of items other than the above items, in giving the break-up of purchases, stocks and turnover, items like spare parts and accessories, the list of which is too large to be included in the break-up, may be
grouped under suitable headings without quantities (Note 3).
5. In the case of concerns other than the above, the gross income derived under the different heads should be shown.
In the case of all concerns having work-in-progress there should be shown :
1. The amounts for which such works have been completed at the commencement of the accounting period, and
2. the amounts for which such works have been completed at the end of the accounting period. In the case of manufacturing concerns it is recommended that the opening and the closing stocks of semi-finished goods or the opening and the closing amount of work-in-progress, as the case may be, should be stated.
Provision for depreciation
The amount provided for depreciation, renewals or diminution in the value of fixed assets should be separately stated. It is suggested that the particulars of any obsolescence loss written off should be separately given. Where such provision is not made by means of a depreciation charge, the method adopted for making such provision and the amount should be stated. In case no provision is made for depreciation, the fact that no provision has been made should be
stated. The quantum of arrears of depreciation computed in accordance with section 205(2) of the Act should be disclosed by way of a note. The provision for depreciation, in excess of the amount, which, in the opinion of the directors is reasonably necessary for the purpose, should be treated as a reserve and not as a provision. If there has been any change in the method of depreciation the effect of the change should be clearly stated by way of a note.
The amount of interest on the company’s debentures and loans for fixed periods should be separately stated. There should be stated separately the amount of interest, if any, paid or payable to the managing director and the manager.
Provision for taxation
The amount of charge for Indian income-tax and other Indian taxation on profits should be shown separately. Where practicable, with Indian income-tax there should be also stated any taxation imposed elsewhere to the extent of the relief, if any, from the Indian Income-tax. Where practicable, a distinction should be made between income-tax and other taxation. Different types of taxes should be shown separately. Any adjustment to the provision for taxation on determination of the actual liability should be adjusted through the profit and loss appropriation account and the difference, if material, should be clearly shown. In cases where a company has made a profit during the year but no tax is payable on account of carry forward of loss, depreciation, etc. it is recommended that an appropriate note may be given explaining the reasons why provision for taxation has not been made.
Reserves for repayment of share capital or loans
The amounts reserved for :
1. Repayment of share capital; and
2. Repayment of loans are to be shown separately.
It is unusual for a company to make provision for repayment of share capital. However, in the case of redeemable preference shares it is possible that the terms of issue may require the company to reserve a part of the profit for ultimate redemption of such preference shares. The reserve created for redemption of debentures should be separately shown.
The aggregate, if material, of any amounts set aside or proposed to be set aside to reserves must be separately shown. Such amounts should not include provisions made to meet any specific liability, contingency or commitment known to exist at the date as at which the balance sheet is made out. For this purpose the distinction between “provision” and “reserve” should be borne in mind. The aggregate, if material, of any amounts withdrawn from such reserves also must be separately shown.
The aggregate, if material, of the amounts set aside to make provision for specific liabilities, contingencies or commitments should be separately shown.
The aggregate, if material, of the amounts withdrawn from such provisions, as no longer required, should be separately stated. Where additions to or withdrawals from reserves and provisions have been made during the year and such transfers affect the profit and loss account, the amounts involved, if material, must be shown separately in that account or by way of a note. Where, however, the additions or withdrawals are capital transactions, e.g., a transfer to capital reserve of a capital profit, such transactions should either appear on the face of the balance sheet or in a statement or report annexed thereto. The source from which the increase has been derived or the manner in which the decrease has been applied must be shown clearly. The amount of provision, in excess of the amount which in the opinion of the directors is reasonably necessary for the purpose, should be treated as a reserve and not as a provision. A proper distinction must be made between provisions and liabilities. Only the amount retained by way of providing for any known liability of which the amount cannot be determined with substantial accuracy should be termed as a provision. The term “liability” includes all liabilities in respect of expenditure contracted for and all disputed or contingent liabilities.
The expenditure incurred on each of the following items should be shown separately:
1. Consumption of stores and spare parts: It is not necessary to disclose separately the opening stock, purchases and closing stock of stores and spare parts. It is suggested that where the sale of items are material, such amounts should be separately disclosed.
2. Power and fuel.
3. Rent – including rent for factory, office, godowns, etc.
4. Repairs to buildings.
5. Repairs to machinery: Where repairs to buildings or machinery have been carried out departmentally, it is recommended that the expenditure under various heads such as salaries and wages, stores, etc. should be allocated to repairs account and the expenses so allocated should also be indicated by way of a note under their respective heads.
- Salaries, wages and bonus including gratuity, compensation, etc.
- Contribution to provident and other funds.
- Workmen and staff welfare expenses to the extent not adjusted from any previous provision or reserve. If such expenditure is adjusted against any previous provision or reserve, such information should also be given in the balance sheet under the relevant provision or reserve account.
7. Insurance .
8. Rates and taxes, excluding taxes on income: This item will cover local taxes, property tax, water tax, vehicle tax, State sales-tax, Central sales-tax, etc. It is suggested that the amount of sales-tax should be separately shown.
9. Miscellaneous expenses: Any item under which the expenses exceed 1% of the total revenue of the company or rupees five thousand whichever is higher, should be shown as a separate and distinct item under an appropriate head in the profit and loss account. It should not be combined with any other item to be shown under “Miscellaneous Expenses”.
Income from investments
The amount of income from : Trade investments and other investments should be separately shown. Other income by way of interest must be separately stated, specifying the nature of the income. If the gross income is stated in respect of the above items, the amount of income-tax deducted must be
Profits or losses etc.
1. The profits or losses on investments to the extent not adjusted from any previous provision or reserve should be shown separately. If the profits or losses on investments are adjusted against any previous provision or reserve such information should also be given in the balance sheet under the relevant provision or reserve such information should also be given in the balance sheet under the relevant provision or reserve account. The profits or losses earned or incurred on account of membership of a partnership firm should be shown separately.
2. Profits or losses, if material in amount, in respect of transactions of a kind, not usually undertaken by the company or undertaken in circumstances of an exceptional or non-recurring nature should be shown separately.
3. Miscellaneous income. It is recommended that where the amount of miscellaneous income is material in amount the nature of the income should be stated.
The amount of dividend from subsidiary companies and provisions for losses of subsidiary companies, should be separately stated. Note (f) under the form of balance sheet requires that dividends declared by subsidiary companies after the date of the balance sheet should not be included unless they are in
respect of period which closed on or before the date of the balance sheet.
The aggregate amount of dividends paid and proposed should be stated separately. It should also be stated whether such amounts are subject to deduction of income-tax or not.
Basis of accounting
The amount by which any items shown in the profit and loss account are affected by any change in the basis of accounting, if material, should be disclosed. If there has been any change in the method of valuation of stock-in-trade or work-in-progress or in the basis of providing for depreciation or any change from the cash to the mercantile system of accounting, the effect should be clearly disclosed. Clause 4, Part II, Schedule VI, requires that the profit and loss account should contain or give by way of a note detailed information in respect of payments provided or made during the financial year to :
2. Managing directors; or
The disclosure should be not only in respect of payments provided or made by the company but also by the subsidiaries of the company and any other person. Such information should be detailed as under :
1. Managerial remuneration under section 198 of the Act paid or payable during the financial year to the directors (including managing directors), or manager, if any.
2. Other allowances and commission including guarantee commission (details to be given).
3. Any other perquisites or benefits in cash or in kind (stating approximate money value where practicable).
4. Pensions, etc. :
- Payments from provident funds, in excess of own subscriptions and interest thereon.
- Compensation for loss of office.
- Consideration in connection with retirement from office.
It should be noted that section 221 casts a duty on the officer of the company and other persons to give particulars and information required to be given in the balance sheet or profit and loss account of a company. Such particulars and information should be furnished by them in as full a manner as possible
whenever so required by the company’s auditor. Clause 4A requires that the profit and loss account should contain or give by way of a note a statement showing the computation of net profits in accordance with section 349 of the Act together with relevant details of the calculation of the commissions payable by way of percentage of such profits to :
2. Managing directors; or
Clause 4B requires that the profit and loss account should contain, or give by way of a note, detailed information in regard to amounts paid to the auditor, whether as fees, expenses, or otherwise for services rendered :
1. as auditor;
2. as adviser, or in any other capacity, in respect of
- taxation matters;
- company law matters;
- management services; and
3. in any other manner.
The Institute of Chartered Accounts of India has recommended that the disclosure be made under the following heads :
(1) Audit fee;
(2) Fee for tax representation;
(3) Fee for company law matters;
(4) Fee for management services;
(5) Fee for internal auditing;
(6) Expenses reimbursed to auditors;
(7) Other services.
Clause 4C requires that in the case of manufacturing companies, the profit and loss account shall also contain by way of a note, detailed quantitative information in respect of each class of goods manufactured, in regard to the following :
- licensed capacity (Where licence is in force) as on the last date of the year;
- the installed capacity as on the last date of the year; and
- the actual production in respect of the finished products meant for sale. In cases where semi-processed products are also sold, separate details thereof shall be given.
For the above purposes the items for which there are separate industrial licences shall be treated as separate classes of goods. In respect of an item where there is more than one industrial licence for production at different places or for expansion of the licensed capacity, the item covered by all such licences shall be treated as one class. Clause 4D requires that the profit and loss account shall also contain by way of a note the
following information :
1. value of imports calculated on C.I.F. basis during the financial year in respect of :
- raw materials;
- components and spare parts;
- Capital goods.
2. expenditure in foreign currency during the year on account of royalty, know-how, professional consultation fees, interest, and other matters.
3. the value of:
- all imported raw materials, spare parts and components consumed,
- the value of all indigenous raw materials, spare parts and components consumed, and
- the percentage of each item in 1 and2 above, to the total consumption.
4. the amount remitted during the year in foreign currencies on account of dividends. A specific mention should be made of the number of non-resident shareholders, the number of shares held by them on which the dividends were due and the year to which the dividends relate.
5.earnings in foreign exchange classified as under :
- export of goods calculated on F.O.B. basis;
- royalty, know-how, professional and consultation fees;
- interest and dividend;
- other income, indicating the nature thereof.