Advanced Accounting · Financial Statements of Companies

Statement of Profit and Loss and Items of Income and Expense (Schedule III)

Updated 4 October 2026 · Fact-checked

The Statement of Profit and Loss shows a company's revenue, other income, expenses, exceptional items, tax and EPS for a period, in the Schedule III (Division I) format. Solve it by classifying each item, building the format in order, and finding profit before exceptional items and tax, profit before tax and profit for the period.

Understand Statement of Profit and Loss and Items of Income and Expense

The Statement of Profit and Loss reports a company's financial performance for a year. A company under the Companies Act, 2013 must prepare it in the format given in Schedule III. The Balance Sheet shows position on a date. This statement shows what happened over a period.

The format works in a fixed order. First comes Revenue from operations, then Other income. Their total is Total income. Then you list expenses: cost of materials consumed, purchases of stock-in-trade, changes in inventories of finished goods, work-in-progress and stock-in-trade, employee benefits expense, finance costs, depreciation and amortisation expense, and other expenses. Total income less total expenses gives profit before exceptional items and tax.

Next you deduct exceptional items to get profit before tax. The Exceptional items line sits above profit before tax. A gain on this line is added instead of deducted.

Then you deduct tax expense (current tax and deferred tax) to get profit for the period from continuing operations. If there are discontinued operations, their result is shown separately, net of tax. The result is profit for the period. Last, you show earnings per share (basic and diluted).

Know the difference between operating and non-operating items. Sales and service income are revenue from operations. Interest income, dividend income, and gain on sale of investments or fixed assets go in other income. Interest paid goes in finance costs, not other expenses.

Exceptional items arise from ordinary activities but are unusual in size or nature. You disclose them separately on the Exceptional items line, with details in the notes, so users understand performance. A large write-down, litigation settlement or restructuring cost are typical candidates.

AS 5 still defines extraordinary items as income or expenses arising from events or transactions that are clearly distinct from the ordinary activities of the enterprise. It requires them to be disclosed separately so that their nature and amount can be assessed. The Schedule III Division I format has no separate line for them, so you make this disclosure through a note. You will not see a subtotal like 'profit before extraordinary items and tax'.

Prior period items are income or expenses that arise in the current period because of errors or omissions in the financial statements of one or more earlier periods. AS 5 requires you to disclose them separately, so that their effect on the current period's profit or loss can be seen.

Every line in the statement links to a note. Marks are earned by getting each item in the correct head and by showing clean workings for the notes.

Key rules to remember

Total income: Total income = Revenue from operations + Other income; Revenue from operations is shown net of returns and discounts as per the question; GST collected is excluded.
Profit before exceptional items and tax: Total income − Total expenses; Total expenses include finance costs and depreciation.
Profit before tax (PBT): Profit before exceptional items and tax − Exceptional items; An exceptional gain is added instead of deducted. The Exceptional items line is above PBT.
Profit for the period: Profit from continuing operations = PBT − (Current tax + Deferred tax); Profit for the period = Profit from continuing operations + Profit or loss from discontinued operations (net of tax); If there are no discontinued operations, profit for the period equals profit from continuing operations. Deferred tax charge is added to tax expense; a deferred tax credit reduces it.
Changes in inventories: Opening stock of FG, WIP and stock-in-trade − Closing stock; A positive figure is an expense; a negative figure (stock increase) reduces total expenses.
Cost of materials consumed: Opening raw materials + Purchases (net, with carriage inwards) − Closing raw materials; Purchases of trading goods go under purchases of stock-in-trade.
Basic EPS: (Profit after tax − Preference dividend) ÷ Weighted average number of equity shares; Use AS 20; adjust for bonus issue and rights issue.

How to solve Statement of Profit and Loss and Items of Income and Expense questions

Use the same sequence for any question on the Statement of Profit and Loss. It keeps you in Schedule III order and protects step marks.

1Read the trial balance or data and the adjustments. Mark each item as revenue, other income, expense, or a balance sheet item.
2Apply the adjustments first: closing stock, outstanding and prepaid expenses, depreciation, provisions, and any tax figure given.
3Compute revenue from operations and other income. Add them to get total income.
4Compute each expense head: materials consumed, purchases of stock-in-trade, changes in inventories, employee benefits, finance costs, depreciation, other expenses. Add them.
5Find profit before exceptional items and tax. Deduct exceptional items, if any, to get profit before tax.
6Deduct current tax and deferred tax to get profit for the period.
7Compute EPS if asked, using the weighted average number of equity shares.
8Show notes and workings separately, and tally every trial balance item to exactly one place. Do not deduct dividend or transfers to reserves in this statement. A dividend is accounted for only when it is declared, and appropriations are shown in the Statement of Changes in Equity or the Reserves and Surplus note.

Quickest way: Head-by-head tick method

When to use it: Use it when the question has a long trial balance and little time, and for MCQs on classification.

Write the format skeleton first with just the heads: I Revenue, II Other income, III Total income, IV Expenses, V Profit before exceptional items and tax, VI Exceptional items, VII PBT, VIII Tax, IX Profit for the period, X EPS.
Tick each trial balance item as you place it under a head. An unticked item means a missed adjustment.
For MCQs, ask: is it operating, non-operating, financial, exceptional or a prior period item? Interest paid is always finance cost. Profit on sale of a fixed asset or investment is normally shown as other income, unless it is exceptional or the entity deals in such assets.
Do the stock movement as one figure: opening minus closing.
Write the answer in the Schedule III order with a clear total at each stage, even if notes are brief.

Common mistakes in Statement of Profit and Loss and Items of Income and Expense

Showing interest on loans under other expenses.
Students treat every cost as an administrative expense.
Fix: Show interest and other borrowing costs under finance costs.
Putting profit on sale of a fixed asset or investment in revenue from operations.
Students see it as income and place it in the first head.
Fix: Show it under other income, since it is not the core business activity.
Reversing the sign of change in inventories.
Students add closing stock to expenses by habit.
Fix: Compute opening minus closing. An increase in stock lowers expenses.
Treating exceptional items as part of ordinary expenses, or placing them after tax.
Students fold an unusual item into other expenses, or deduct it late, because it looks like a one-off charge outside the normal operating costs.
Fix: Show exceptional items on the Exceptional items line above profit before tax. Give details in the notes.
Forgetting deferred tax in the tax expense.
Students stop after current tax.
Fix: Add or deduct deferred tax when the data gives it, and show it separately from current tax.
Deducting proposed dividend or transfer to reserves from profit in this statement.
Students carry over the old appropriation style.
Fix: Do not deduct them in the Statement of Profit and Loss. A dividend is accounted for only when it is declared. Appropriations are shown in the Statement of Changes in Equity or the Reserves and Surplus note, and the balance of profit goes into Reserves and Surplus in the Balance Sheet.

Worked examples

Example 1

From the following, find profit before tax and profit for the period of ABC Ltd. for the year: Revenue from operations ₹50,00,000; Interest income ₹1,00,000; Cost of materials consumed ₹20,00,000; Employee benefits expense ₹8,00,000; Finance costs ₹2,00,000; Depreciation ₹3,00,000; Other expenses ₹5,00,000; Exceptional loss ₹1,00,000. Current tax ₹3,00,000; deferred tax charge ₹50,000.

Show the solution

Total income = 50,00,000 + 1,00,000 = ₹51,00,000.
Total expenses = 20,00,000 + 8,00,000 + 2,00,000 + 3,00,000 + 5,00,000 = ₹38,00,000.
Profit before exceptional items and tax = 51,00,000 − 38,00,000 = ₹13,00,000.
Less exceptional loss ₹1,00,000, so profit before tax = 13,00,000 − 1,00,000 = ₹12,00,000.
Tax expense = 3,00,000 + 50,000 = ₹3,50,000.
Profit for the period = 12,00,000 − 3,50,000 = ₹8,50,000.

Answer: Profit before tax is ₹12,00,000 and profit for the period is ₹8,50,000.

Example 2

XYZ Ltd. had opening stock of raw materials ₹2,00,000, finished goods ₹3,00,000 and closing stock of raw materials ₹2,50,000, finished goods ₹2,60,000. Raw material purchases were ₹18,00,000. Profit after tax was ₹6,00,000. Preference dividend is ₹50,000. There are 1,10,000 equity shares outstanding all year. Find cost of materials consumed, change in inventories of finished goods and basic EPS.

Show the solution

Cost of materials consumed = 2,00,000 + 18,00,000 − 2,50,000 = ₹17,50,000.
Change in inventories of finished goods = opening − closing = 3,00,000 − 2,60,000 = ₹40,000 (an addition to expenses).
Earnings for equity holders = 6,00,000 − 50,000 = ₹5,50,000.
Basic EPS = 5,50,000 ÷ 1,10,000 = ₹5 per share.

Answer: Cost of materials consumed is ₹17,50,000, change in inventories of finished goods is ₹40,000 (expense), and basic EPS is ₹5.

Exam tips

Practise the format until you can write the skeleton in under a minute. Examiners give marks for correct heads and order.
Read each adjustment twice. Closing stock, depreciation and tax adjustments are the usual traps.
In MCQs, decide the head first (revenue, other income, finance cost, exceptional) and then choose the number.
Show workings for notes such as materials consumed and employee benefits. Step marks are awarded even if a later figure is wrong.
State the exceptional item clearly with its nature and amount. A one-line note can earn the disclosure mark.

Practice questions from Financial Statements of Companies

Statement of Profit and Loss and Items of Income and Expense in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Statement of Profit and Loss and Items of Income and Expense: frequently asked questions

What is the difference between exceptional items and prior period items?

Exceptional items arise from ordinary activities but are unusual in size or nature, so they appear on the Exceptional items line above profit before tax, with details in the notes. Prior period items are income or expenses that arise in the current period from errors or omissions in earlier periods' statements. AS 5 requires them to be disclosed separately so their effect on current profit is clear. AS 5 also still requires extraordinary items to be disclosed separately, but the Schedule III format has no separate Extraordinary items line, so you make this disclosure through a note.

Where do I show profit on sale of a fixed asset?

Show it under other income, not under revenue from operations. A loss on sale goes under other expenses unless it is large enough to be exceptional.

Do I show proposed dividend in the Statement of Profit and Loss?

No. Do not deduct it in this statement. A dividend is accounted for only when it is declared, and appropriations are shown in the Statement of Changes in Equity or the Reserves and Surplus note. The balance of profit goes into Reserves and Surplus in the Balance Sheet.

Is EPS part of the Statement of Profit and Loss?

Yes. The Schedule III format includes earnings per share, basic and diluted, at the end of the statement. Compute it as per AS 20.