The Columnar Statement of Profit and Loss
Chapter Thirty-Three
Syllabus topic 3, "Computation of Pre and Post Incorporation Profit/ Loss"
Pages 99 to 101 of 168
In one line
One statement, four columns, with the total from the books, the basis of division, and the two periods' shares.
The form
| Particulars | Total, Rs | Basis | Pre, Rs | Post, Rs |
|---|---|---|---|---|
| Gross profit | x | Sales | x | x |
| Less: expenses, item by item | x | Time or Sales or Post | x | x |
| Net profit or loss | x | x | x |
Four columns and not three. A statement without the basis column can be right and still lose marks, because the examiner cannot see the reasoning that produced each split.
The order of the lines
Follow the order of an ordinary profit and loss account and the marker can follow you.
| Order | Lines |
|---|---|
| 1 | Gross profit, brought from the trading account |
| 2 | Add: other income, if any, apportioned on its own basis |
| 3 | Less: expenses on the time ratio, grouped |
| 4 | Less: expenses on the sales ratio, grouped |
| 5 | Less: expenses wholly post-incorporation |
| 6 | Less: expenses wholly pre-incorporation, if any |
| 7 | Net profit or loss for each period |
Grouping by basis rather than by nature is the improvement most students miss. It puts every time-apportioned item together, so a wrong ratio applied once shows up as a block rather than scattered through the statement.
Building it, line by line
Take each expense in turn and do three things.
Write the total from the trial balance into the total column, unchanged.
Write the basis in the basis column, in one or two words: Time, Sales, Post, Pre, or Actual.
Divide it into the two columns using that basis.
Then check the line: pre plus post must equal the total. Do it as you go, not at the end; an error found on the line it was made on costs seconds, and one found at the bottom costs a rebuild.
The trading account comes first
The columnar statement starts from the gross profit, which means the trading account has already been prepared for the whole period.
| Rs | |
|---|---|
| Sales | x |
| Less: cost of goods sold, being opening stock plus purchases plus carriage inward less closing stock | x |
| Gross profit | x |
Carriage inward, wages of factory workers and other direct costs are inside that calculation and are not separately apportioned. Only the gross profit that emerges is apportioned, and it goes on the sales ratio.
Where a question asks for the trading account in columnar form too, apportion the sales on the sales ratio and the cost of goods sold on the same ratio, which produces the same gross profit split. Most questions do not ask for it, and starting from the gross profit is quicker.
What the basis column should say
Short, and specific enough to be checked.
The Columnar Statement of Profit and Loss
| Write | Not |
|---|---|
| Time 1:2 | "Apportioned" |
| Sales 1:3 | "Ratio" |
| Post | "Company" |
| Pre | "Firm" |
| Actual, 4:4 months | "Special" |
Putting the ratio itself in the column is worth doing. It lets the marker verify a line without going back to your working notes.
The three checks
| Check | How |
|---|---|
| Each line | Pre plus post equals the total |
| Each column | The expenses total agrees with the trial balance |
| The result | Pre profit plus post profit equals the total profit for the year |
The third is the one that proves the whole statement. If the two results do not add back to the year's profit, a line has been split wrongly or an item has been counted twice.
A common presentational error
Do not show a single "net profit" figure only. MU's topic is the computation of pre and post incorporation profit or loss, so the two figures are the answer. A statement ending in one number has not answered the question asked.
And label them. "Profit prior to incorporation Rs 17,000" and "Profit after incorporation Rs 65,000", in words, at the foot. The next chapter turns those labels into entries.
What it does NOT mean
The total column is not decoration. It is the control that proves each line.
The basis column is not optional. It carries marks of its own.
The statement is not a Schedule III profit and loss. That form belongs to Module IV; this is a working statement.
Quick revision
- Four columns: total, basis, pre, post.
- Group by basis, not by nature, so a wrong ratio shows up as a block.
- Start from the gross profit; the trading account has already absorbed carriage inward and direct costs.
- Write the ratio in the basis column, as "Time 1:2" or "Sales 1:3".
- Three checks: each line adds across; each column agrees with the trial balance; the two results add to the year's profit.
- End with two labelled figures, not one.
Test yourself
1. What are the four columns? Total, basis, pre-incorporation and post-incorporation.
2. Why group expenses by basis rather than by nature? Because a wrong ratio applied once then shows up as a block of adjacent lines rather than scattered through the statement, which makes it far easier to find.
3. Where does the statement begin, and why not with sales? With the gross profit, because the trading account for the whole period has already absorbed the carriage inward and the other direct costs, and it is the gross profit that is apportioned, on the sales ratio.
4. What should the basis column say for salaries in a question with a 1:2 time ratio? "Time 1:2", because writing the ratio itself lets the marker verify the line without turning to the working notes.
The Columnar Statement of Profit and Loss
5. State the check that proves the whole statement. That the pre-incorporation result plus the post-incorporation result equals the profit or loss for the whole year; if they do not, a line has been split wrongly or an item counted twice.
Answer in one sentence
How is the columnar statement prepared? As one statement in four columns, the total taken unchanged from the books, the basis stated in a column of its own as Time, Sales, Post, Pre or Actual together with the ratio used, and the two remaining columns carrying each item's share of the pre-incorporation and post-incorporation periods; it begins with the gross profit brought from a trading account already prepared for the whole period, groups the expenses by basis rather than by nature so that a misapplied ratio shows as a block, and ends with two separately labelled results rather than one; and it is proved by three checks, that each line's two shares add back to its total, that each column of expenses agrees with the trial balance, and that the two results together equal the profit or loss for the year.
The rest of this subject
These notes are cut from the University's printed syllabus. Open the syllabus itself, or the past papers, for the same subject.