A profit and loss account lists what a business earned over a period and subtracts what it spent in that same period, and what is left is net profit or net loss. It covers a stretch of time rather than a single date.
The layout depends on how the business is registered. A private limited company has a format fixed by law, while a proprietorship or partnership firm has no prescribed format and can pick whatever reads best.
Below are four profit and loss account formats, with one worked example running through all four so you can check that the figures tie.
In the sets of accounts we see, the year-end argument is rarely about the layout. It is about whether the numbers underneath it agree.
Key Takeaways
- Only companies have a legally fixed format: Schedule III of the Companies Act, 2013.
- Gross profit answers a pricing question, net profit a running-cost question.
- The trading account holds direct costs only. Salaries, rent and interest sit below it.
- A monthly comparative P&L catches a slipping margin. An annual one never will.
What Does a Profit and Loss Account Show?
The whole statement is built from one subtraction:
Income earned in the period minus expenses incurred in the same period = profit or loss
The phrase “in the same period” is doing most of the work. An expense belongs to the year it relates to and not the year you paid it, which is why a March power bill settled in April still sits in the March accounts.
Two profit lines matter in most Indian layouts. Gross profit is what remains after the cost of the goods you sold, and net profit is what remains after every other running cost.
Both figures come out of the same ledgers that feed your balance sheet, which is why the two statements are prepared together rather than one after the other.
Which Profit and Loss Account Format Applies to You?
Only one of the four formats below is required by law, and only for companies.
| Type of Business | Profit and Loss Format You Must Use |
|---|---|
| Private or public limited company | Schedule III, Part II, Companies Act, 2013 |
| Limited liability partnership | Statement of Income and Expenditure, Form 8 |
| Partnership firm | No prescribed format |
| Sole proprietorship | No prescribed format |
The LLP is the case people usually get wrong. Schedule III does not apply to an LLP, though an LLP cannot choose freely either, because Part B of its yearly Form 8 sets out a Statement of Income and Expenditure in its own layout.
Schedule III sits inside the Companies Act, 2013 and has three divisions. Division I covers companies following Accounting Standards, Division II covers those on Ind AS, and Division III covers NBFCs.
Everyone else may choose, until a bank, a buyer or an assessing officer asks for a set layout. Settle on one and repeat it every year.
The 4 Profit and Loss Account Formats
All four use one business: a Rajkot electrical goods trading firm with revenue of ₹1,84,50,000 for the year ended 31 March 2026 (an example). The same heads suit a Surat textile wholesaler, a Pune diagnostic lab or a Coimbatore engineering workshop. Only the cost names change.
Every figure below is invented for this guide. None of it is drawn from a real customer’s books.
1. Schedule III Statement of Profit and Loss
This is the format the law sets for companies. Everything is stacked in a single column with the expenses under one block, and the previous year’s figures go in a second column beside the current year.
| Particulars | Amount (₹) |
|---|---|
| I. Revenue from operations | 1,84,50,000 |
| II. Other income | 2,15,000 |
| III. Total income (I + II) | 1,86,65,000 |
| IV. Expenses | |
| Purchases of stock-in-trade | 1,32,40,000 |
| Changes in inventories of stock-in-trade | (6,80,000) |
| Employee benefits expense | 18,60,000 |
| Finance costs | 3,45,000 |
| Depreciation and amortisation expense | 2,90,000 |
| Other expenses | 24,35,000 |
| Total expenses | 1,74,90,000 |
| V. Profit before tax (III − IV) | 11,75,000 |
| VI. Tax expense: current tax | 3,05,000 |
| VI. Tax expense: deferred tax | 15,000 |
| VII. Profit for the period | 8,55,000 |
Line III used to read “Total Revenue”. An amendment notified on 24 March 2021 replaced the word with “Income”, so a template still carrying the old wording predates the current rule.
The table above shows one year to keep it short, but a filed statement carries two columns. Every line needs the previous year’s figure beside it, which is why the row labels must stay the same from one year to the next.
Rounding off is required rather than optional, and the unit depends on total income. Below ₹100 crore you may round to hundreds, thousands, lakhs or millions, and at ₹100 crore or above the choice narrows to lakhs, millions or crores. Companies also report earnings per equity share below the profit line, both basic and diluted.
2. Trading and Profit and Loss Account (T-Format)
The older two-sided layout, prepared in two stages. The trading account settles gross profit first, and the profit and loss account then works that down to net profit.
| Trading Account (Dr) | Amount (₹) | Trading Account (Cr) | Amount (₹) |
|---|---|---|---|
| Opening stock | 22,40,000 | Sales | 1,84,50,000 |
| Purchases | 1,32,40,000 | Closing stock | 29,20,000 |
| Freight inward | 2,60,000 | ||
| Gross profit c/d | 56,30,000 | ||
| Total | 2,13,70,000 | Total | 2,13,70,000 |
Only costs tied to buying and selling the goods belong above. Freight inward sits here because it adds to what the stock cost you, while freight outward on customer orders belongs in the section below.
| Profit and Loss Account (Dr) | Amount (₹) | Profit and Loss Account (Cr) | Amount (₹) |
|---|---|---|---|
| Salaries and wages | 18,60,000 | Gross profit b/d | 56,30,000 |
| Rent, power and other expenses | 21,75,000 | Other income | 2,15,000 |
| Interest on loan | 3,45,000 | ||
| Depreciation | 2,90,000 | ||
| Net profit | 11,75,000 | ||
| Total | 58,45,000 | Total | 58,45,000 |
Notice that the T-format stops at ₹11,75,000, the same figure Schedule III calls profit before tax. For a proprietor that is right. Income tax is charged on the owner, not the firm, so it is not a business cost.
3. Vertical Profit and Loss Account for a Small Business
The same year, stacked instead of two-sided, with the running totals a proprietor or partnership actually wants to see. This is the version to hand a bank.
| Particulars | Amount (₹) |
|---|---|
| Revenue from operations | 1,84,50,000 |
| Less: Cost of goods sold | 1,28,20,000 |
| Gross profit (30.5% of revenue) | 56,30,000 |
| Less: Employee costs | 18,60,000 |
| Less: Rent, power and other operating expenses | 21,75,000 |
| Operating profit before depreciation | 15,95,000 |
| Less: Depreciation | 2,90,000 |
| Add: Other income | 2,15,000 |
| Less: Finance costs | 3,45,000 |
| Net profit before tax (6.4% of revenue) | 11,75,000 |
Cost of goods sold is opening stock plus purchases plus freight inward, less closing stock. Here that comes to ₹1,28,20,000. Gross profit then lands at the same ₹56,30,000 the trading account produced, because the two layouts are the same sums in a different shape.
Keeping finance costs below the operating profit line separates how well the business trades from how it is funded, which is exactly the split a lender looks for.
4. Comparative Monthly Profit and Loss Account
Not a filing format, a reading format, and the one most owners should have in front of them. Below is the January to March 2026 quarter for the same firm, before depreciation and finance costs (an example).
| Particulars | Jan 2026 (₹) | Feb 2026 (₹) | Mar 2026 (₹) | Quarter (₹) |
|---|---|---|---|---|
| Revenue | 14,20,000 | 13,60,000 | 17,90,000 | 45,70,000 |
| Cost of goods sold | 9,85,000 | 9,60,000 | 12,45,000 | 31,90,000 |
| Gross profit | 4,35,000 | 4,00,000 | 5,45,000 | 13,80,000 |
| Gross margin % | 30.6% | 29.4% | 30.4% | 30.2% |
| Employee costs | 1,55,000 | 1,55,000 | 1,62,000 | 4,72,000 |
| Other operating expenses | 1,80,000 | 1,74,000 | 2,05,000 | 5,59,000 |
| Net profit | 1,00,000 | 71,000 | 1,78,000 | 3,49,000 |
Read the margin row, not the profit row. February’s 29.4% against 30.6% in January is a gap of roughly ₹16,000 on that month’s sales. Small enough to ignore once, and expensive to ignore for a year.
A drift of one percentage point never shows up in a year-end statement, because nothing sits beside it for comparison. That is the case for a monthly margin report alongside the annual accounts.
Line-by-Line Breakdown of the Main Heads
Most disagreements between an owner and an accountant are about which head a cost belongs under, not the layout.
| Line | What Goes In It |
|---|---|
| Revenue from operations | Sales of goods or services, net of returns and discounts, excluding GST collected |
| Other income | Interest earned, rent received, scrap sales, supplier discounts unrelated to trading |
| Purchases of stock-in-trade | Goods bought for resale, net of purchase returns |
| Changes in inventories | Opening stock less closing stock; a negative figure means stock grew |
| Employee benefits expense | Salaries, wages, bonus, PF and ESIC employer share, staff welfare |
| Finance costs | Interest on loans and overdrafts, plus loan processing charges |
| Depreciation and amortisation | The year’s wear on fixed assets, taken from the fixed asset register |
| Other expenses | Rent, power, freight outward, repairs, professional fees, everything else |
The changes in inventories line is the one people read backwards. It is opening stock less closing stock, so in the example above ₹22,40,000 less ₹29,20,000 gives a negative ₹6,80,000. A minus figure in the expense block means stock grew over the year, and a plus figure means you sold down what you were holding.
Three others cause most of the remaining trouble. GST collected on a sale is never revenue, because it is money held for the government. Stock movement is an expense head in its own right, not an adjustment tucked into purchases. Freight outward belongs in other expenses, never in the trading account.
Read as a share of revenue, the example firm’s year splits like this.
Building the Profit and Loss Format in Excel
Knowing the heads is one thing. Laying them out so the sheet catches its own mistakes is another.
Three columns carry the whole thing: the row label, this year and last year. Build it once and every later year is a copy of the same file.
- Put the row labels in column A, worded exactly as they appear in the format you picked. Changing wording between years is what makes a comparative view impossible later.
- Total each block with its own SUM. One SUM down the full column double-counts every subtotal. The sheet still looks tidy while being wrong.
- Enter closing stock in one cell only and reference it everywhere else. Typing it twice is how the trading account and the balance sheet end up disagreeing.
- Add a check cell holding gross profit less all indirect expenses, less the net profit you reported.
- Set conditional formatting on that cell so anything other than zero turns red the moment a figure is edited.
That check cell is the reason to build it yourself. Our annual financial summary template carries the same structure if you would rather not start from a blank sheet.
5 Errors That Distort a Profit and Loss Account
The layout is rarely the problem. These five are.
- GST treated as revenue. Tax collected on a sale is a liability, not income. Include it and both revenue and profit are overstated.
- Closing stock valued at selling price. Stock is carried at cost or net realisable value, whichever is lower. Valuing it at what you hope to sell it for invents gross profit that has not happened.
- Drawings shown as an expense. Money the owner took out reduces capital. It is never a business cost, however regularly it is withdrawn.
- Capital purchases put through expenses. A ₹95,000 delivery scooter is a fixed asset that depreciates over years, not one month’s cost.
- Direct and indirect costs mixed together. Put freight outward in the trading account and gross profit falls while net profit stays right, so the error hides in the middle of the statement.
Most of these start upstream, in how a transaction was captured rather than how it was presented. Petpooja Invoice separates tax from taxable value on every bill and posts the stock movement at the same time, so the revenue and stock lines are built from the invoices themselves.
Hunt for the rest deliberately, because a trial balance will tally happily with a cost sitting under the wrong head. Fixing one after the year has closed means a rectification entry, which the journal entries guide works through.
Conclusion
Pick the profit and loss account format your business is entitled to use, then stop changing it. A company files Schedule III. Everyone else should choose between the T-format and the vertical layout on which one reads better.
Getting the format right is the easy half. The harder half is capturing sales, stock and expenses under the right head on the day they happen, because a statement can only be as honest as the entries beneath it.
Petpooja Invoice builds those figures out of your billing and stock records as you go, so the year-end statement becomes an assembly job rather than a reconstruction.
Frequently Asked Questions
They describe the same thing. Account is the older term and points to the two-sided T-format. Statement points to the stacked vertical layout, which is what the Companies Act uses and what the P&L report in most software looks like.
Yes, and it happens often. A sale counts as income the day you raise the invoice, not the day the customer pays. A year of strong credit sales can leave the bank thinner than it started. Money locked into extra stock does the same thing.
The return carries its own profit and loss schedule. The figures go under its heads whatever your books look like, and ITR-3 and ITR-5 both include one. Keeping your ledger heads close to those names saves work at filing time. The current forms sit on the income tax return download page.
Once a year is the legal minimum. A monthly version is far more useful, because a slipping gross margin only shows up when months sit side by side, and the owners who catch a cost problem early are almost always reading a monthly statement. A shop running on a point of sale can pull that view straight from its billing software. A quick profit margin calculator check between statements catches the same drift.
