Session 11

Components of Statement of Profit and Loss

What is the Statement of Profit and Loss?

• A financial statement that provides a summary of a business organization’s income, expenses, and
profits or losses over a specific period of time

• It shows the Financial Performance of a business over a period of time (usually a quarter or one year).

Additional Information:
The period for which a business reports its income statement is called its reporting period, accounting period,
financial year, or fiscal year. In India, the financial year for companies is the period from April 1 to March 31.
Applicable format of Statement of Profit and Loss (Vertical Format/ Revised Format):
(A) INCOME
Income refers to the money earned or received by a business entity.

Revenue from
Operations • Income generated from a company's primary business activities. It
is usually recurring and central to the company's core operations.
OR
• Ex: Admission fee, tuition fee, hostel fee, mess charges, etc. for an
Operating educational business.
Income

Other Income • Income generated from sources outside the company's core business
OR operations.
Non-Operating • Ex: Profit from the sale of furniture, interest income from
Income investments, dividend income, rental income

(B) EXPENSE
Expenses are the costs incurred to generate revenue or maintain day-to-day operations. These expenses are
used up in one accounting period itself.

• Costs that are related to a company's core business operations. They are
Operating usually recurring and necessary to maintain day-to-day activities.
Expense • Ex: Staff/employee salaries, rent for building in which office is located,
electricity, water, gas expenses, advertisement of services

• Costs that are not directly tied to a company's primary/main business

Non-Operating activities.
Expense • Ex: Interest expenses paid on loans taken by business, expenses
incurred while selling assets such as furniture
(B.1) Cost of Materials Consumed (COMC) and Cost of Goods Sold (COGS)
• COMC refers to the total cost of raw materials that have been used up/consumed while making the final
goods during the year.
• COGS refers to the total cost of the finished goods that have been sold by the business.

• It is calculated as follows:

For a merchandising firm/ trading firm For a manufacturing firm

COGS = Opening stock of stock-in-trade COMC = Opening stock of raw material

+ net purchases of stock-in-trade + net purchases of raw material
+ costs involved in bringing the finished + costs involved in bringing the raw materials
goods to the organization and making them – closing stock of raw materials
ready for resale
– closing stock of stock-in-trade COGS = COMC
+ Opening stock of work in progress
+ Opening stock of finished goods
+ direct costs associated with producing the
finished goods (converting raw materials or WIP into
finished goods) such as direct labor wages, electricity,
factory rent, manufacturing expenses etc.
– Closing stock of work in progress
– Closing stock of finished goods

Note: Manufacturing firms are involved in the production of physical goods. They transform raw materials and
components into finished products through various processes.
Merchandising firms, on the other hand, are involved in the buying and selling of finished goods / stock-in-
trade, without altering their form.
Question 1:
ABC ltd., a smartphone trader, has a stock of 100 smartphones at the beginning of year, at Rs. 9000 each.
It purchases 50 more smartphones for resale, at Rs. 9000 each. The transportation costs are Rs. 5000.
At the end of the year, it is left with 70 units of smartphones, with 80 units being sold.
What is the COGS for the business?

Solution: COGS = (100*9000) + (50*9000) + 5000 – (70*9000)

= 9,00,000 + 4,50,000 + 5,000 – 6,30,000
= Rs. 7,25,000

Question 2: A smartphone manufacturing company in India provided the following details for the month of
July 2025:

• Opening stock of raw material comprising metal, glass and silicon: Rs. 50,000
• Purchases of raw material: Rs. 1,30,000
• Raw materials returned due to defects: Rs. 10,000
• Freight-in for raw materials: ₹10,000
• Closing stock of raw materials: ₹30,000
• Opening stock of partially assembled smartphones: ₹20,000
• Beginning inventory of fully manufactured phones: ₹40,000
• Direct labour wages associated with producing finished goods: ₹70,000
• Closing stock of partially assembled smartphones: ₹15,000
• Closing stock of fully manufactured phones: ₹25,000

Calculate the following:

1. Cost of Materials Consumed (COMC)
2. Cost of Goods Sold (COGS)
Solution:

1. COMC Calculation:

COMC=Opening stock of raw material+Net purchases of raw material+ Freight inward charges for
transporting the raw materials−Closing stock of raw materials

COMC= 50,000+ (1,30,000-10,000) + 10,000 − 30,000

= Rs. 1,50,000

2. COGS Calculation:

COGS= COMC + Opening stock of work in progress + Opening stock of finished goods +
Direct costs associated with producing finished goods − Closing stock of work in progress −
Closing stock of finished goods

COGS= 1,50,000 + 20,000 + 40,000 + 70,000 − 15,000 − 25,000

= Rs. 2,40,000

(B.2) CHANGES IN INVENTORIES OF FINISHED GOODS, STOCK-IN-TRADE, AND WORK-IN-

PROGRESS
= Opening Stock of Inventory – Closing Stock of Inventory

Opening stock/ Closing stock/ ending

beginning inventory inventory
• Stock lying with • Unsold stock left at the
business at the end of the year
beginning of the year
(carried forward from
the end of the previous
year)

Note: If closing stock is higher than opening stock for a period, then we say that the inventory has increased
(and vice versa)
PROFIT
• Profit is the excess of revenue/income over expenses (Revenue – Expenses).
• Loss, on the other hand, is the opposite of profit, and refers to the excess of expenses over revenue.

Types of Profits:

Profit before
Profit before Profit after tax OR
interest, tax,
interest and tax OR Net Profit
Gross Profit depreciation and
operating profit
amortization (PAT or EAT)
(PBIT or EBIT)
(PBITDA/EBITDA)

Calculation of different types of profits:

Item Meaning of item
Net Sales Revenue (Revenue from operations) Net Sales Revenue = Sales Revenue – Sales
Returns and Allowance

(Sales allowances refer to any discounts or

rebates provided by business while selling
goods)
(-) Cost of goods sold COGS= Opening stock + Net purchases +
Direct Costs involved – Closing stock

Net Purchases= Purchases – Purchase

Returns, Purchase Discounts, Rebates,
Allowances
GROSS PROFIT

(+) Other operating income (If any) Operating expenses include all expenses
(-) Operating expenses (excluding depreciation and incurred for making the sales or service, i.e,
amortization) for running the business.

PROFIT BEFORE INTEREST, TAX, DEPRECIATION The ‘E’ in EBITDA stands for ‘earnings’
& AMORTIZATION (PBITDA or EBITDA)

(-) Depreciation and Amortization Depreciation and Amortization are non-cash

operating expenses
PROFIT BEFORE INTEREST AND TAX (PBIT or The ‘E’ in EBIT stands for ‘earnings’
EBIT) or OPERATING PROFIT Hence, EBIT stands for Earnings Before
Interest and Tax

(+) Non-operating income (such as interest income) Interest are non-operating expenses
(-) Interest paid on long term loans/ borrowings, finance costs
paid
PROFIT BEFORE TAX (PBT or EBT)
(-) Taxes paid
PROFIT AFTER TAX / NET PROFIT (PAT or EAT)
Note: This NET PROFIT (after subtracting dividends distributed to shareholders) will be added to the
‘Retained Earnings’ and will, therefore, become a part of the ‘Other Equity’ in the BALANCE SHEET.
Note: While Gross profit, EBITDA and EBIT are an important financial metric, they are not shown as
separate items in the Statement of Profit and Loss.

Scroll down for an extract of Statement of Profit and Loss of Reliance Industries Limited.
Statement of Profit and Loss of
Reliance Industries Limited