EXPLAINATION OF PROFIT & LOSS ACCOUNT TERMS

GROSS SALES - Is the total invoice price of goods shipped (services rendered) plus cash sales made during the period. Ordinarily does not include sales tax or excise duty.

SALES RETURNS - Sale value of goods returned by customer, for instance rejected goods. Or on which a credit has been given for some reason, for instance price difference.

TRADE DISCOUNT - Percentage given off published price. Does not feature in accounting records. Given to certain kinds of customers.

SALES / CASH DISCOUNT - Amount of cash discounts taken by customers for prompt payment.

COSTS OF GOODS SOLD - Costs of goods sold, comprises : Raw Materials, Direct Wages Cost and Manufacturing Expenses.

RAW MATERIALS - Materials which actually enter and become a part of the finished product.

DIRECT LABOUR - Labour applied to convert raw material into finished product.

SUPPLIES - Materials used in the operation of the business but not directly in the product itself; for instance cotton waste, machinery spares, etc.

MANUFACTURING EXPENSES / OVERHEADS - All costs other than raw materials and direct labour which are associated with the manufacture of the products; for instance, power and fuel costs, depreciation etc.

GROSS MARGIN - Excess Of Sales Revenue over cost of goods sold.

DEPRECIATION - Spreading the cost over the useful life of an asset so as to allocate it as equitable as possible over the periods the asset is used.

APPRECIATION - Is an increase in the value of an asset.

SELLING / DISTRIBUTION COSTS - Cost incurred to make sales; advertising and sales promotion expenses for instance. Costs incurred in storing the completed product, warehousing expenses, for instance. Costs incurred in transferring products to the customer; transportation cost, for instance.

GENERAL AND ADMINISTRATIVE EXPENSES - All expenses not classified under other heads. General and executive office costs, public relarions costs and miscellaneous expenses.

FINANCIAL EXPENSES - Includes interest and other costs incurred in connection with borrowed capital.

NON - OPERATING EXPENSES - Financial and other expenses not directly related to the conduct and principal activity of the business; interest on investment for instance, for a manufacturing organisation.

PRE - TAX NET PROFIT - Net profit before deduction of tax liability.

APPROPRIATIONS OF PROFIT - Allocation of net income; dividends and transfers to specific and general reserves etc.

DIVIDENDS - Distribution of profits to the shareholders. (In accordance with the Indian Companies Act 1956, these may be paid out of profits of current year after providing for depreciation : may be paid out of prior years profits after providing for depreciations of these years;if there are losses in prior years, these must be set off before dividends can be paid. Dividends must be paid in cash).

BAD DEBTS - Debts which cannot be recovered from the debtors : time barred limitation.

GENERAL EXPENSES - Are costs incurred in connection with the earning of revenue. Assets costs that expire in an enterprise attempt to obtain revenue. Is recognised in the period in which the revenue is direct or indirect identification of association with revenue of the period or measurable expiration of asset costs though not associated with production of revenue for the current period.

EXPENDITURE - Takes place when an asset or service is acquired. Expenditure may be in cash, exchange of other assets or by incurring a liability.

REVENUE - Increase in the asset arising from services rendered or products sold.

INCOME - Excess of revenue over expenses during a given accounting period.

By Dr. Anil Lamba
Lamcon Finance & Management Services Pvt. Ltd.