Vilas Gharat
President (Textile Association India-Mumbai)
Managing Director (Gharat & Associates)
Email: vilasgharat@gmail.com
Profit and Loss Account Profit and Loss Account is the first financial statement prepared before preparing the Balance Sheet. It is also known as the P&L account or Income Statement.
The Income Statement provides a complete summary of revenue generated and expenses incurred by a company, which in turn gives an insight into a company’s financial status. It helps us to define whether the company is making profits or incurring losses.
In simple terms, the profit and loss statement provides a detailed look into the financial health of a company during the accounting year.
Generally, all of units are calculating monthly P/ L on or before 7th of next month. In this case we have only 12 chances to take corrective action. Hence, we suggest working out daily Gross P/L statement with certain assumptions so that we have minimum 350 chances to take corrective action. If properly panned daily P/L is matching 95% to monthly P/L.
Methods to Prepare Profit and Loss Account You can prepare the Profit and Loss Account or Income Statement by two methods:
Single Step Statement
Multiple-Step Statement.
A. Single-Step Method Generally, small companies prepare the Income Statement using the Single Step statement. It is a simple method and widely used.
In this method, you just take the total amount of Revenues and subtract them from the total expenses to find the gain or loss made by any business.
The formula to calculate Profit/Loss by Single-step method is as follows:
Net Revenues – Total Expenses = Net Profit or Loss.
B. Multiple-Step Method Big volume companies use a Multi-Step method. To prepare this statement, generally following steps are followed:
Calculate gross profit.
Make a total of operating expenses.
Deduct them from the gross profit.
You will get the income from operating activities.
Deduct Expenses from Income from operations. This is your Earnings before Investments and Taxes.
The final step is to deduct taxes.
This gives you the net income/loss for the period.
The formula to calculate Profit/Loss by Multiple-Step Method is as follows:
Revenues – Expenses – Taxes = Net Profit or Loss
Revenues = Sales Revenue – Sales Returns + Service Revenue + Wastage Revenue + Other Revenue
Expenses = All operating expenses + Cost of goods sold + Research and Development + Salaries and Wages + Administrative Expenses + Travel + Utilities + Other Expenses.
Purpose of Preparing Profit and Loss Account
It provides a brief understanding of the financial health of a company.
It helps to project revenues.
Forecast Expenditures.
Compare actual performance with projection.
Maintain provision and reserves depending on the financial health of the company.
It gives us to take corrective action.
It should be reviewed with operation staff for improvements.
The daily profit and loss account is also called as Padta in Textile Industry & customized formats can be created. We can assist you online to create such formats provided all necessary details are provided to us.
It is very essential for CEO or Business Head for taking prompt corrective action.
Similarly, we can monitor daily with person concern for taking corrective actions immediately to avoid further losses.
It is preventive statement for making your business grow with sound financial Heath.
Founder & Editor of Textile Learner. He is a Textile Consultant, Blogger & Entrepreneur. He is working as a textile consultant in several local and international companies. He is also a contributor of Wikipedia.
2 thoughts on “How to Prepare Profit and Loss Account in Textile Industry”
What is mentioned in article about famous ‘pasta system’ of Birla’s is different where principles of calculation are:
1) Taking in to consideration standard operating norms, present & forecasted product portfolio and pricing, calculation are made to find out potential profit unit can make.
2) Raw material Purchase, production & marketing are considered as individual profit centres. They are further bifurcated into individual micro profit centres like spinning, weaving, processing etc…
3) Daily padta (P&L) is worked out for each major & micro profit centres with figures of monthly/yearly cumulative and are also compared with potential profit worked out as per pt.1. Special mentions & comparisons are also made for best achieved figures during running month/running year.
4) Comparison made as per pt.3 gives very clear indication as from which area profit/loss is coming.
5) It is also compared with the figures units potential profit. To understand this let us say: Unit has potential to make Rs.3L/day as profit but calculation showed profit of Rs.2L only, means Rs.2L is not profit but Rs.1L loss.
6)This system very clearly shows area very efforts are required for improvement.
Thus compared to system of working out normal P&L whether single or multi layer type, Birla’s padta system as explained above is much more effective providing more clarity about corrective steps.
I had 10 yrs experience working in Birlas and had certain contribution in developing this system hence had in-depth knowledge and can help companies in developing and implementing such systems.
What is mentioned in article about famous ‘pasta system’ of Birla’s is different where principles of calculation are:
1) Taking in to consideration standard operating norms, present & forecasted product portfolio and pricing, calculation are made to find out potential profit unit can make.
2) Raw material Purchase, production & marketing are considered as individual profit centres. They are further bifurcated into individual micro profit centres like spinning, weaving, processing etc…
3) Daily padta (P&L) is worked out for each major & micro profit centres with figures of monthly/yearly cumulative and are also compared with potential profit worked out as per pt.1. Special mentions & comparisons are also made for best achieved figures during running month/running year.
4) Comparison made as per pt.3 gives very clear indication as from which area profit/loss is coming.
5) It is also compared with the figures units potential profit. To understand this let us say: Unit has potential to make Rs.3L/day as profit but calculation showed profit of Rs.2L only, means Rs.2L is not profit but Rs.1L loss.
6)This system very clearly shows area very efforts are required for improvement.
Thus compared to system of working out normal P&L whether single or multi layer type, Birla’s padta system as explained above is much more effective providing more clarity about corrective steps.
I had 10 yrs experience working in Birlas and had certain contribution in developing this system hence had in-depth knowledge and can help companies in developing and implementing such systems.
Thanks for informative comment.