Terminology in Profit & Loss Account

Net sales:

Net Sales are generally defined as Gross Sales less value of Goods returned by customers less excise duty.

Sales are the sum of the invoice price of goods and services rendered during the period. Sales returns represent the invoice value of goods returned by the customers. Excise duty refers to the amount paid to the excise department.

Cost of goods sold: The cost of goods sold (COGS), also called cost of sales represents the cost of goods sold during the accounting period. For a distribution firm, the COGS are the acquisition cost of inventories sold during the accounting period. For a manufacturing firm COGS is manufacturing and overhead costs incurred for producing the goods sold during the accounting period. The COGS should be distinguished from the cost of production which represents the cost of goods produced during the accounting period.

Gross profit:

Gross profit is the difference between net sales and the cost of goods sold. It is the first and the broadest measure of profit.

Operating expenses:

Operating expenses are the expenses incurred by a firm for running its operations during the accounting period. General administration expenses, selling and distribution expenses and deprecation are the major items of operating expenses.

Operating profit:

Operating profit represents profit from operations after considering the cost of goods sold and operating expenses. It reflects the profit generated by the normal and recurring business activities of the firm and does not take into account non operating gains, interest expenses, and taxes.

Non operating gains and losses:

This item reflects the balance of gains and losses arising from transactions not related to the normal and recurring operating activities of the firm. Items like interest and dividend income, profit or loss from the sale of fixed assets and investments, restructuring expenses, and so on are included under this heading.

Profit before interest or taxes:

Profit before interest and taxes (PBIT), referred to also as earnings before interest and taxes (EBIT), is the operating profit of the firm plus any non operating surplus less any non operating loss. It is a measure of profit before considering interest expenses and tax burden. It abstracts away the effect of debt policy as well as the tax code. Hence, it is pre eminently suitable for comparing profitability of firms with different debt policies and tax obligations.


Interests is the periodic expense incurred for borrowings like term loans, debentures, working capital loans, commercial paper, fixed deposits, and unsecured loans provided by promoters. Remember that the interest income received on financial assets owned by the firm was included under non operating surplus. Some firms, however, deduct the interest income on financial assets from the interest to arrive at the net interest expense which is shown here.

Profit before tax:

Profit before tax is the difference between the firm’s profit before interest and tax and its interest expense. It is a measure of profit before taking taxes into account.

Income tax provision:

Income tax provision represents that tax provision calculated according to accounting rules adopted by the firm. Thanks to the deferred tax accounting rule being followed now, the income tax provision consists of two items, namely current tax and deferred tax liability. The current tax is the income tax payable on the basis of taxable income as computed under the income tax act. The deferred tax liability arises on account of temporary differences caused by items which are considered for calculating the taxable income and accounting profit, but in different periods.

Profit after tax:

Profit after tax is obtained by subtracting the income tax provision from profit before tax. It is also called the net profit or the net income or the bottom line. When the profit after tax is positive the firm is said to be in the black; when it is negative, the firm is said to be in the red. Profit after tax is a measure of the change in the owner’s equity arising from the revenues and expenses of the accounting period.

Prior period adjustments:

After the profit after tax is calculated some adjustments are made to arrive at profit available for appropriation. The common adjustments involve adding the profit brought forward, adding the reserves written back, and subtracting extra burdens for previous years on items such as taxation.

Amount available for appropriation:

Profit available for appropriation is equal to profit after tax plus prior period adjustments.


From the amount available for appropriations, transfers are made to varios reserve accounts and provision is made for the proposed dividend.

Balance carried forward:

What is left after various appropriations represents the balance in the profit and loss account which is carried forward.