Statement of Profit or Loss | Sahithyan's Notes

The statement of profit and loss and other comprehensive income (P&L and OCI) is prepared in 2 stages, each revealing a different layer of profitability.

Trading Account

The trading account calculates gross profit earned from buying and selling goods over a period, usually 1 year.

Purchases
Cost of all goods bought during the year, adjusted for carriage in, import duty, and purchase returns.
Opening stock
Value of stock carried over from the previous year, the first to be sold in the new year.
Closing stock
Value of goods remaining at year end, excluded from cost of sales since it was not sold during the year.

\text{Cost of Sales} = \text{Opening Stock} + \text{Purchases} - \text{Closing Stock}

\text{Gross Profit} = \text{Sales} - \text{Cost of Sales}

Profit or Loss

Builds on gross profit from the trading account to arrive at net profit for the period.

\begin{aligned} \text{Net Profit} = \ &\text{Gross Profit} \\ + \ &\text{Other Income} \\ - \ &\text{Administrative Expenses} \\ - \ &\text{Distribution Expenses} \\ - \ &\text{Finance Expenses} \end{aligned}

Income

Sales revenue / turnover, service revenue, interest income, dividend income, rental income, commission income.
Net sales
Sales revenue after deducting returns, discounts, and allowances.
Other operating income
Income from activities related to normal operations but outside core sales.
Gain on disposal of assets
Profit from selling an asset above its carrying value.

Administrative Expenses

Salaries, office rent, utilities, insurance, stationery and printing, professional fees, audit fees, repairs and maintenance, travel, training, depreciation, amortization.
Bad debt expense
Receivables already confirmed uncollectible, written off during the period.
Provision for doubtful debts
Estimated future losses on receivables not yet confirmed uncollectible.

Distribution and Finance Expenses

Distribution: advertising, sales commission, delivery expense / carriage outwards, marketing, packaging.
Finance: interest expense, bank charges, interest income, foreign exchange gain or loss.

Other Comprehensive Income

Items of income and expense not recognized in profit or loss, recognized directly in equity instead. Excluded from net profit because they represent unrealized or non-operating value changes, not the result of trading activity.

Revaluation surplus
Gain from revaluing property, plant, and equipment above cost.
Foreign currency translation differences
Gains or losses from converting a foreign operation’s results into the reporting currency.
Actuarial gains and losses
Changes in the value of a defined benefit pension obligation from revised assumptions.