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Written by: Anil Kumar Gupta Article Overview: It is the summary of such accounts which effect the profit or loss of the concern. These are prepared by transferring from the trial balance all nominal accounts and accounts relating to goods by means of journal entries called 'closing entries'. All remaining accounts i.e. real and personal, relating to properties, assets, debtors and creditors are shown in the balance sheet. In order to know the overall picture of the effect of these accounts they are grouped at one place. Items' increasing profit (revenue) are put on one side (credit) and those decreasing profits (losses and expenses) un the other side (debit). The balance is either net profit or net loss. This income statement is normally divided into two parts first part is called trading account. Free Download - Secret Reserves By Anil Kumar Gupta
Trading and Profit and Loss Account
Trading Account As already discussed, first section of trading and profit and loss account is called trading account. The aim of preparing trading account is to find out gross profit or gross loss while that of second section is to find out net profit or net loss.
Perperation of Trading Account Trading account is prepared mainly to know the profitability of the goods bought (or manufactured) sold by the businessman. The difference between selling price and cost of goods sold is the,5 earning of the businessman. Thus in order to calculate the gross earning, it is necessary to know: (a) cost of goods sold. (b) sales. Total sales can be ascertained from the sales ledger. The cost of goods sold is, however, calculated. n order to calculate the cost of sales it is necessary to know its meaning. The 'cost of goods' includes the purchase price of the goods plus expenses relating to purchase of goods and brining the goods to the place of business. In order to calculate the cost of goods " we should deduct from the total cost of goods purchased the cost of goods in hand. We can study this phenomenon with the help of following formula: Opening stock + cost of purchases - closing stock = cost of sales As already discussed that the purpose of preparing trading account is to calculate the gross profit of the business. It can be described as excess of amount of 'Sales' over 'Cost of Sales'. This definition can be explained in terms of following equation: Gross Profit = Sales-Cost of goods sold or (Sales + Closing Stock) -(Stock in the beginning + Purchases + Direct Expenses)
2. It is normally second item on the debit side of trading account. excise duty. Of course. octroi and import duty etc. on the date of preparing final accounts an entry should be passed to debit the purchases account and to credit the suppliers' account with the cost of goods. It is the stock which remained unsold at the end of previous year. carriage inwards freight.) are recorded the debit side whereas sales and closing stock is recorded on the credit side.e. Any return outwards (purchases return) should be deducted out of purchases to find out the net purchases. so it always appears inside the trial balance. Purchases. When the debit side exceeds the credit side. Usual Items in a Trading Account: A) Debit Side 1. dock charges. 3. duty. Buying Expenses. These includewages. Generally. Opening Stock. it is shown as first item at the debit side of trading account. cash plus credit purchases. clearing charges.The opening stock and purchases along with buying and bringing expenses (direct exp. 'Purchases' mean total purchases i. If credit side isJeater than the debit side the difference is written on the debit side as gross profit which is ultimately recorded on the credit side of profit and loss account. All expenses relating to purchase of goods are also debited in the trading account. Sometimes goods are received before the relevant invoice from the supplier. the difference is gross loss which is recorded at credit side and ultimately shown on the debit side of profit & loss account. In such a situation. It must have been brought into books with the help of opening entry. . in the first year of a business there will be no opening stock.
factory expenses. Sales mean total sales i. Such expenses are incurred by businessmen to manufacture or to render the goods in saleable condition viz. On the basis of physical observation the stock lists are prepared and the value of total stock is calculated on the basis of unit value. (B) Credit Side 1. Closing stock should be valued at cost or market price whichever is less. So net sales are credited to trading account. motive power. these should be deducted from sales. Normally closing stock is given outside the trial balance in that case it is shown on the credit side of trading account. Though manufacturing expenses are strictly to be taken in the manufacturing account since we are preparing only trading account. 2. cash plus credit sales. foreman and supervisor's salary etc. stores.4. it is clear . Thus. If there are any sales returns. expenses of this type may also be included in the trading account. Sales. gas fuel. it is not to be shown on the credit side of trading account but appears only in the balance sheet as asset. Valuation of Closing Stock The ascertain the value of closing stock it is necessary to make a complete inventory or list of all the items in the god own together with quantities. royalties. It is the value of stock lying unsold in the godown or shop on the last date of accounting period. Closing Stock. But if it is given inside the trial balance. If an asset of the firm has been sold. Manufacturing Expenses. it should not be included in the sales..e.
The ratio of gross profit to sales is very significant: it is arrived at : Gross Profit X 100 / Sales With the help of G. Pricing an inventory at cost is easy if cost remains fixed. following closing entries recorded: (i) For opening Stock: Debit trading account and credit stock account (ii) For purchases: Debit trading account and credit purchases account. (ii) pricing.that stock-taking entails (i) inventorying. But prices remain fluctuating. better will be the efficiency. The preparation of trading account helps the trade to know the relationship between the costs be incurred and the revenues earned and the level of efficiency with which operations have been conducted. (iv) For returns inwards: Debit sales account and credit sales return account . Closing Entries pertaining to trading Account For transferring various accounts relating to goods and buying expenses. so the valuation of stock is done on the basis of one of many valuation methods. unless the market price is lower. Each item is priced at cost.P. (iii) For purchases returns: Debit purchases return account and credit purchases account. ratio he can ascertain as to how efficiently he is running the business higher the ratio. the amount being the et amount after deducting purchases returns.
These comprise of following expenses: . the resultant figure will be net profit or net loss. Those expenses are deducted from profit (or added to gross loss). Profit and Loss Account The profit and loss account is opened by recording the gross profit (on credit side) or gross loss (debit side). The expenses which are recorded in profit and loss account are ailed 'indirect expenses'. These be classified as follows: Selling and distribution expenses. If credit side is more the result is gross profit for which following entry is recorded.(v) For direct expenses: Debit trading account and credit direct expenses accounts individually. For earning net profit a businessman has to incur many more expenses in addition to the direct expenses. (vi) For sales: Debit sales account and credit trading account. We will find that all the accounts as mentioned above will be closed with the exception of trading account (vii) For closing stock: Debit closing stock account and credit trading account After recording above entries the trading account will be balanced and difference of two sides ascertained. (viii) For gross profit: Debit trading account and credit profit and loss account If the result is gross loss the above entry is reversed.
These include: (a) Office salaries & wages (b) Insurance (c) Legal expenses (d) Trade expenses (e) Rates & taxes (f) Audit fees (g) Insurance .(a) Salesmen's salary and commission (b) Commission to agents (c) Freight & carriage on sales (d) Sales tax (e) Bad debts (j) Advertising (g) Packing expenses (h) Export duty Administrative Expenses.
(h) Rent (i) Printing and stationery (j) Postage and telegrams (k) Bank charges Financial Expenses These comprise: (a) Discount allowed (b) Interest on Capital (c) Interest on loan (d) Discount Charges on bill discounted Maintenance. Along with above indirect expenses the debit side of profit . These include following expenses (a) Repairs (b) Depreciation on assets (c) Provision or reserve for doubtful debts (d) Reserve for discount on debtors. depreciations and Provisions etc.
. On the credit side of profit and loss account the items recorded are: (a) Discount received (b) Commission received (c) Rent received (d) Interest received (e) Income from investments (j) Profit on sale of assets (g) Bad debts recovered (h) Dividend received (i) Apprenticeship premium etc.and loss account comprises of various business losses also. This results in closing of indirect expenses and losses account. Preparation of Profit and Loss Account As already stated profit and loss account is commenced with gross profit or gross loss as ascertained by trading account. Then the profit and loss account is debited with all indirect expenses and losses. The profit and loss account is then credited with various incomes and gains accounts by which all these accounts are closed.
It being an indirect expenditure is shown on the debit side of profit and loss account. Rent Rent of the office shop showroom or godown is an indirect expense and so is debited to profit & loss account. When a part of the building has been sublet the rent received should be shown on the credit side of profit and loss account as a separate item. Interest Interest on loan. If any salary has been paid to proprietor or partners. However. so debited to profit and loss account. Interest on loan advanced by the firm on depositor .count being indirect expense. rent of factory is debited to trading account. 2. Rates and Taxes These are levied by the local authorities to meet public expenditure. It is an indirect expense. it should be shown separately because it requires special treatment at the time of income tax assessment. 5. overdraft or overdue debts is payable by the firm. 3. Salaries and Wages When wages account is included with salaries it treated is as indirect expense and is taken into profit and loss account. 4.Explanation of Certain items of Profit and Loss Account 1. Salaries Salaries are paid for the services of employees and are debited to profit and loss ac.
7. Trade expenses represent expenses of such a nature for which it is not worthwhile to open separate accounts. who are paid commission as their remuneration. traveling expenses are treated as . Trade Expenses They are also termed as 'sundry expenses'. Commission In business sometimes agents are appointed to effect sales. Commission so received is shown on the credit side of profit and loss account. machinery. Repairs Repairs to the plant. 9. building are indirect expenses are treated expense and are debited to profit and loss account. So this being a selling expenses is shown on the debit side of profit and loss account. Sometimes commission is also paid on purchases of goods. Traveling Expenses Unless mentioned otherwise. such 'as expense should be debited in the trading account. 8.investments is an income of the firm and so is credited to the profit and loss account. If business has paid any interest on capital to its proprietor or partners it should also be debited in the profit and loss account but separately because this item needs special treatment at the time of income-tax assessment.. Sometimes the firm can also act as an agent to the other business houses and in such cases it receives commission from them. Trade expenses are not taken to trading account. 6.
Horse & stable Expentses Expenses incurred for the fodder of horses and wages paid for looking after stable are treated as indirect expenses and debited to profit and loss account. then the amount is distributed over number of years and each year's profit and loss account is credited with its share of income. 11. Insurance Premium If insurance premium account appears in the trial balance. Life Insurance Premium If the premium is paid on the life policy of the proprietor of the business. 10. Apprentice Premium This is the amount charged from persons to whom training is imparted by the business. It is a business loss. In case apprentice premium is charged in advance for two or three years. factory machines are treated as direct . This is taken to profit and loss account. It is an income and is credited to profit and loss account. 13. so is debited in the profit and loss account.indirect expenses and are debited to profit and loss account. factory building. it stands for the insurance of the business. it is treated as his drawings and is shown by way of deduction from the capital account. 12. Insurance premium on goods purchased. Bad debts It is the amount which could not be recovered by the trader on account of credit sales. 14. It should not be taken to profit and loss account.
Generally. On the other hand. It is belief to show discount received and discount allowed separately on the credit and debit side of profit and loss account respectively instead of showing the net balance of this account. 18. If rate is without words 'per annum'. 15. It is important to emphasize the rule that balance appearing in . The students should exercise great care as regards the rate of depreciation. 17. 16. Stock at the end appearing in the trial balance. Income Tax In the case of merchant income-tax paid is treated as a personal expense and is shown by way of deduction from capital account. it is charged from profit and loss account at a fixed percentage. it is advisable to ignore depreciation on additions if the date of additions is not given.expense and are taken to trading account. Discount allowed and Received Discount is a reward for prompt payment. Income-tax in case of companies is treated differently. This is very important when the period of accounts is less than one year. then the rate will be taken irrespective of the period of accounts. Depreciation Depreciation is a loss incurred on account of use of fixed assets in the business. Same rule shall hold good for the sale of assets during the year. In case of additions to assets during the year. if the rate of depreciation is 'per annum' the depreciation should be calculated on the assets with due consideration to the period for which the asset has been used in business during the year.
the trial balance is taken to one and only one place. 1961?” . November 22. Judiciary 49 views Provision for NPA debited to P & L account as per RBI Act. ------------------------------------------------------------------------------------------------Provision for NPA debited to P & L account as per RBI Act. 1998. it will betaken to balance sheet. not eligible for deduction under I-T Act – Bad debts under I-T does not include doubtful debts – No conflict between RBI Act and I-T Act : ITAT Special Bench THE issue before the Special Bench of the ITAT was : “Whether. a Provision for Non Performing Assets (‘NPA’) debited to profit and loss account and claimed as a deduction in accordance with the prudential norms issued by the RBI in exercise of powers conferred on it under section 45JA of the RBI Act. called the Non Banking Financial Companies Prudential Norms (Reserve Bank) Directions. not eligible for deduction under I-T Act Thursday. 14:40 Income Tax Case Laws Articles. account for that must be kept open and thus be taken to the assets side of balance sheet. Since stock at the end is an asset. 1934. so long as there is stock in trade. On the other hand. It may either be trading account or profit and loss account or balance sheet. 2007. should be allowed as deduction while computing income from business under the provisions of the Income-tax Act.
758/ – in its profit and loss account.. On appeal by the assessee. the claim of the assessee was disallowed. As per the prudential norms. in some other cases a contrary view has been adopted: .The appellant is a Non Banking Finance Company (‘NBFC’) registered with the Reserve Bank of India (‘RBI’). It was found that in some judgments. 1934 are to be allowed as deduction while computing the income under the Income-tax Act: However. The assessee submitted that being a NBFC registered with the RBI. being provision for Non Performing Assets. the Division Bench of the Tribunal noted that there is an apparent conflict in the decision rendered by various benches of the Tribunal. the action of the AO in rejecting the claim of the assessee was justified At the.38. lease rental and hire purchase instalments. held that the assessee did not furnish a detailed calculation of provision for NPA claimed partywise as per RBI guidelines and therefore. it has to follow the prudential norms as prescribed by the RBI from time to time and the deduction claimed in the profit and loss account on account of provision for NPA was in consonance with such guidelines issued by the RBI.6. which have become overdue for a period of 12 months or more have to be termed as NPA and the assessee has to create a provision for such NPA and debit it to the profit and loss account. therefore. the Tribunal have held that provision for NPA made in accordance with prudential norms for NBFC issued by the RBI in exercise of its power under the RBI Act. however. The AO. time of hearing. wherein it has been held that provision for NPA made in consonance with the prudential norms of the RBI has to be allowed as deduction in computing income for the purpose of Income-tax Act also. the CIT(A) held that income has to be computed only as per the provisions of the Income-tax Act and the provision for NPA is neither an expenditure nor an allowance which are permitted deductions u/s 28 to 43B of the Act and. The assessee debited a sum of Rs. The assessee relied on the decision of Chennai Bench of the ITAT in the case of Overseas Sanmar Financial Ltd.
the RBI could issue orders prohibiting erring companies from accepting further deposits. The amended Act. Thus. 2. The RBI Act was amended in January. provides for vesting with the RBI powers to give directions to the NBFC regarding Prudential Norms. The said provisions. So long as these directions relating to deposit acceptance was complied. 6. 1977 by effecting comprehensive changes in Chapter IIIB and V of the RBI Act and vesting more powers with the RBI. While the overall borrowing capacity of NBFCs would be restricted by the capital adequacy . The regulatory attention was focused on NBFC accepting public deposits. The provisions of Chapter IIIB of the RBI Act before the amendment were in existence for more than three decades. inter alia.The Special Bench observed. however. 5. For violation of directions. the size of NOF and the activities of the companies. the legislative intent in RBI Act and focus thereof were thus mainly to moderate the resource mobilizing exercise by way of deposits by NBFC and thereby providing indirect protection to the depositors by linking the quantum of deposit to their NOF. no further stringent action could be initiated. 3. 4. The RBI has favoured a policy to restrict the short term and the unsecured borrowings of the NBFCs on the strength of their credit rating. 1. capital adequacy based on the risk weightage etc. vested with very limited powers in RBI in as much as the RBI was only empowered to regulate or prohibit issue of prospectus or advertisement soliciting deposits. The RBI Act and the Prudential Norms issued in exercise of the powers conferred by Section 45JA of the RBI Act provide mainly for income recognition accounting standards in order to ensure making of proper provision for bad and doubtful debts.
as per Section 36(1 )(vii) only the bad debt or part thereof which is written off as irrecoverable in the accounts is allowable as deduction. both the Acts i. RBI Act vs Income Tax Act – which is superior? The Tribunal observed. 3. the RBI Act and the Income-tax Act operate in altogether different fields. However. Though Section 45Q of the RBI Act provides that provisions of Chapter IIIB of the RBI Act shall have effect notwithstanding anything inconsistent therewith contained in any other law. Thus. there is no inconsistency between the provision of RBI Act or the Prudential Norms prescribed thereunder and the provisions of the Income-tax Act.requirement. 4. 5. The RBI Act is a Special Act in relation to computation of NOF of NBFC whereas Income-tax Act is a special Act so far as computation of tax liability of a person in respect of its income computed under the provisions of the Income-tax Act. 2. it cannot be held that the provision made in the accounts of the assessee in respect of NPA shall be treated as sufficient compliance with the provisions of Section 36(1)(vii) of the Income-tax Act so as to . Thus.e. 7. Therefore. under the Income-tax Act. it cannot be said that there is any inconsistency between the two Acts so as to hold that the provision of RBI Act shall have effect notwithstanding anything contained in the Income-tax Act. The Income-tax Act is an act relating to charge of tax on the income of a person as computed under the provisions of the Income-tax Act is concerned. maximum ceiling on public deposits which an NBFC can accept is related to its rating and level of NOF. 1.
4. the same is not allowable as deduction u/s 36(1)(vii). Depending upon the period for which the asset has been considered as doubtful. Under section 36(1)(vii). various percentage of the amount is to be provided. Thus. . the statutory condition under the Income-tax Act provides that any bad debt or part thereof shall not include any provision for bad and doubtful debts. 3. 2.allow the provision for bad and doubtful debts as deduction permissible under the Income-tax Act. the Tribunal observed. Thus. Explanation to Section 36(1)(vii) provides that any bad debt or part thereof written off as irrecoverable shall not include any provision for bad and doubtful debts. 1. Whether provision for NPA debited to profit and loss account can be allowed as deduction while computing income from business under the provisions of Income-tax Act. the provisioning requirement under clause 8 of the Prudential Norms is still in respect of doubtful debts or doubtful assets and not in respect of debt which has turned bad 5. so long as the amounts written off is in respect of provision for bad and doubtful debts or provision for NPA or so long as amount provided is not in respect of a bad debt. only the amount of any bad debt or part thereof which is written off as irrecoverable in the accounts is an allowable deduction. NBFC is to make a provision even for doubtful assets or doubtful debts. The provisions for NPA under the RBI directions is not only in respect of loss assets but also doubtful assets and sub standard assets. Thus. though under the Prudential Norms. Answering this question. 6.
the pre condition is that the debt has turned into ‘bad debt’ and not anything else. cannot be considered as income though treated as such under the RBI Act. Thus. An alternate contention has been raised that if deduction claimed in respect of provision for NPA is not admissible. Sub: Allowance of Deduction against Provisioning for NPAs This is one of the long standing demands of the NBFC sector. the same should be accordingly reduced. FIs. subsequent realization of such NPA is realizing its capital itself and hence. the deduction is not allowed in respect of NPA. The amount recovered is not an income u/s 41(4) unless in the first instance is allowed as deduction u/s 36(1)(vii).7. the real issue lies in the sheer discrimination against the NBFC sector being shown by the government. While all other players like banks. While in the above case the concerned NBFC contested the matter on different grounds. a proper direction be given that as and when this amount is received and shown as income as per RBI’s directions in computing the income of subsequent years. . since the amount received is in respect of capital sum lent. The tribunal agreed with this. it do not partake the character of income when subsequently such amount is realized. So the Special Bench held that there is no error in the order of the CIT(A) in not allowing provision for NPA debited to profit and loss account. Section 36(1)(vii) provides for allowance of ‘bad debt’ and not ‘any debt’. the same is denied only to the NBFC sector. If on the first instance. If the deduction is not allowed in respect of provision for NPA itself. Housing Finance companies and Co-operative banks are allowed deduction u/s 36(1) of the IT Act against provisioning made by them.
We have been representing on this matter for the last 10 years now.in/income-tax-caselaws/provision-for-npa-debited-to-p-l-account-as-per-rbi-act-not-eligiblefor-deduction-under-i-t-act-2. Raman Aggarwal Co-Chairman Finance Industry Development Council (SRO for NBFC-AFCs) Related posts: Read more: Provision for NPA debited to P & L account as per RBI Act.html#ixzz1h9PaPg6e . not eligible for deduction under I-T Act http://taxguru. Every year this issue is on the top of our list of pre-budget memorandum submitted to the Finance Ministry. There seems to be no logical reason for the govt to deny this benefit ONLY TO NBFCs.
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