 Hello everyone, let us start with our third session of management accounting. If you remember in our first two sessions, we have seen what is management accounting, why should we learn it. After that we have gone into financial statements to understand broadly what is a financial statement, what are the major statements and in that we were learning balance sheet into the depth. To have a brief recap, let us look at the balance sheet format for once. As you know balance sheet is basically a statement which shows the financial position as on a particular day. So, it has two sides, one is liabilities, other is assets. Asset represents the resources of the organization and they could be broadly categorized into fixed assets, non-current investments and current assets. Fixed assets are the assets which are for long term use of the organization. Non-current investment is basically money put outside our regular business. Current assets represents the day to day trading assets. They arise from the normal operating activities of the business. On liability side, the first item as you can see is owners fund. As the name tells you, this is the money which owners have put in the form of capital plus the profit which is accumulated by the business. Second item is non-current liabilities. Non-current liabilities represents the loans which are taken for a long term for the activities of the business. Current liabilities are the items which arise from day to day business activities like outstanding salary or outstanding electricity bill and so on. We have also dealt with some of the items in little more elaboration. We will go in now from starting from current liabilities. As you can see here, we had seen this format as per company law. I will not go into format now. After format, we have seen what is assets in little more in depth, the types of assets tangible, intangible. Then current assets which can be divided into monetary, non-monetary. Then we have seen what is a liability, long term liabilities, current liabilities. Up to this we have covered. So, as you can see here, current liability has two prominent examples. One is creditors, other is outstanding expenses. Now let us go into another type of current liability that is known as provision. Now provision is a liability where the amount of it is not substantially defined with proper accuracy. For example, let us assume that we pay electricity bill every month. Now, we are making balance sheet as on 31st March, but as on 31st March, we have not yet received the electricity bill for the month of March. But we know that since we are consuming electricity, we have to pay something, but we do not know the amount. So, what we may do is we will take the average for last 11 months and we may make a provision for the month of March. Now here the term provision is used because I still do not know exactly the amount of bill of electricity which will come for the month of March. But based on the estimate, I am trying to make some provision. In a sense, I am trying to show some liability in the balance sheet. One more example also can be in case of payment of taxes. Now what happens is the taxes are always paid by the assayee that is by the company on the basis of their estimates, but the final amount of tax payable is decided by the government authorities. Hence, the tax which we calculate and for which we assume that is our liability is known as provision for tax. Then decision will come when the government authorities will take a call and make what is known as an assessment. So, government officer will say that this is the amount of tax which you are supposed to pay. Then it will get converted into current liability. As long as that does not happen, we call it a provision. So here you can see some of the examples. So one example is payment of electricity bills. One is provision for tax, third is payment of provision for bonus. Now in case of bonus or incentive, again what happens is as at the end of the year, company is not sure how much is incentive payable. As far as salary is concerned, we know how much is salary payable. So salary which is not paid is categorized as outstanding salary and it is shown as a current liability. But the amount of provision is required to be made for incentive or bonus which may be paid. So based on the estimates, some incentive or bonus is provided. Here again we use the term provision. We can also see the fourth item that is amount which is set aside for writing of bad debts. In case of bad debts, what happens is when we sell the goods on credit, we assume that customers will pay. At the same time, we know that 1 or 2 percent of the customers may not pay us. For that 1 or 2 percent, we make a provision for doubtful debts or provision for bad debts. I think the concept of provision is now clear to you. Now let us go to next liability which is known as contingent liability. In case of contingent liability, what happens is we do not know whether the liability will arise or not arise. So it is not a liability in true sense. At the same time, there is a possibility that liability may arise. So it is known as contingent liability. Can you think of an example of a contingent liability? If you give a little bit thought, you will realize that suppose we provide some service to the customer. Customer is not happy with our service. So customer files a suit against us to claim the damages. On our part, we feel that we will win the case and we do not have to pay any damages. But there is a possibility that by chance if customer wins, we will have to pay some compensation. So this is a case where a contingent liability will be recorded. As you can see here, there is no actual liability which we accept and which has actually realized. So we do not show contingent liability in the balance sheet. However, we have to show contingent liability as a footnote to the balance sheet. So just below the balance sheet, we will make a mention that there is a possibility that liability may become payable which is known as a contingent liability. Let us look at some of the definitions of contingent liability. As first you can see it is a possible obligation which may arise from the past events. But it depends on future uncertain event. See you can see here, it is a present obligation that arises from the past events. But it is not recognized because it is not probable that outflow is enforced. Now a reliable estimate of the amount also cannot be made. That is also one of the reasons that we are not able to make any specific calculation for contingent liability. Now it is required that company must give the best possible estimate. I would also like to give one more example. One example we can see is, we have already discussed is customer filing a suit against us for recovery of some amount. Another example I can give is, suppose I have a friend. My friend wants to have go for a housing loan. So he approaches me to be the guarantor of his housing loan and I agree and I sign the bank loan papers as a guarantor. Now do I have any liability or any obligation? Since loan, I have not taken the loan. My friend has taken the loan, basically I do not have any liability to repay the loan. At the same time what happens is though I do not have any liability to repay the loan, if at all my friend defaults then bank will come to me and from me recover the amount. So there is a possibility that liability may arise. So this is a situation of contingent liability. So if my friend defaults, I may have to pay the part of the loan which is unpaid. So such liabilities are shown by way of footnote and they are known as contingent liabilities. So to make a comparison, let us understand the three terms once again. Suppose we have hired an employee but we do not know, we do not pay the salary at the end of the month. This is a case of outstanding salary. So it is a current liability. Second case, we have an employee however we do not know how much bonus we will pay at the end of the year but some bonus may be payable. So we will make a provision for bonus. So this is a second case, it is a provision. Both contingent liability and provision will be shown in the balance sheet. Third case, suppose we remain guarantor for the employee's loan. So it is not our liability however if employee defaults we will have to pay. So this is a case of contingent liability. I hope all the three types are clear to you. Consequent liabilities are not shown in the balance sheet, they are shown as a footnote to the balance sheet. Now let us go to the next type that is owner's fund. As we know we have basically two types of funds or two types of resources from which the money may come. The first is from outsiders that is known as long term loans. The second one is the owner's fund. So this is the money which company or the organization has to pay back to the owners that is known as owner's fund. Owner's fund it is also can be understood as an excess of aggregate assets of an enterprise over its aggregate liabilities. So if you take all assets reduce all liabilities something extra will remain that something extra is nothing but the owner's fund. Now from the balance sheet items if you look at owner's fund it will consist of two things one the money which owners has put into business that is known as capital. The second is profit which is generated by the business it belongs to the owners. So if it is paid back then no problem but if it is not paid back it will have to be paid in future it is known as reserves. So owner's fund consists of capital plus reserves fine. Let us go to the next thing now. You can write this balance sheet in the form of balance sheet equation. So as you know there are two sides one is assets other is liabilities and owners fund and assets should always match the sum of liabilities plus owners fund. So equation becomes assets equal to liability plus owner fund. You can also say owner fund is assets minus liabilities. As we have seen just now owners fund is also capital plus retain earnings. Now let us try to see some of the transactions in terms of balance sheet equation. Now the first transaction which you can see is company borrows from bank. Now if company borrows from bank the bank loan will increase and bank loan payable will also increase. Second is issue of shares by the company. Now give a thought as how will it affect the balance sheet equation. Now if company has issued shares capital will increase. In other words owner's fund will increase and company will get money. So cash will increase assets will increase as you can see here. So it is plus in bank plus in equity shares in other words plus in A and plus in O. Now let us take the third case. Third case is cash purchase of equipment or you can also see it as collection of debtors. Now what will happen here is I get equipment but I give cash or I have some outstanding dues from customers. So customer balances go down I get cash. So in both the cases it is more like an exchange of cash. So what will happen is equipment balance increasing cash balance or bank balance decreasing or second case 3B bank will increase debtors will decrease. In both the cases it is plus and minus in assets. Now let us go to the fourth one. Now in fourth what happens is company repays the bank loan or creditors are paid back. Now in both the cases what is happening is as you can see here loans payable reduce and bank balance reduce or creditors reduce bank balance reduce. So assets are going down, liabilities are also going down. So you can see in the chart A is also minus, L is also minus. Now let us go to fifth case. Now company pays dividend to the shareholders. Now first of all are you aware what is meant by dividend? As company earns profits it may repay it to the owners. This distribution of profit to the owners is known as dividend. So whenever company earns profit its reserves increase or owners fund increase and when it decides to pay dividend it reduces its reserves and it pays the money to the shareholders in the form of cash or bank. So you can see here this is minus in bank and minus in reserves. So what happens is asset balance reduces and owners fund balance also reduces. Now let us go to the next. Now next what happens company purchases shares from shareholders and pays immediately. This is a unique transaction it is also known as buy back of shares. So when the initially company has issued shares what company has done is company gives shares and takes money from the owners or the shareholders. In this case what has happened is company pays back the money takes back the shares and cancels the shares. This type of transaction is known as buy back of share. Now you can give a thought as to what will happen to the balance sheet following the buy back. As you can see here now the equity capital balance will reduce and bank balance will also reduce. So it is minus in A and minus in O. So you can see here transaction 5 as well as 6 in both the cases minus A minus O. Let us go to the next one now. Now next one is liability is converted into equity shares. Example is loan converted into equity shares. Now give a thought as to what will happen to balance sheet. As you can see here liability is getting converted. So liability balance will go down. In exchange of that I am giving my shares. So when I give shares the equity capital balance will increase. So what will happen is minus in loan payable and minus and plus in equity shares. In other words minus L plus O. Let us go to the 8th one. Now in 8th transaction company incurs new liability to pay the existing liability. Example is craters are converted into long term loans. Now this is a case which will happen when company does not have enough money to pay their liabilities. So suppose I am a company I have purchased goods on credit. So creditors arise but I do not have enough money to pay them. What I may offer them is I cannot pay you immediately. So instead of keeping the amount pending without interest let us convert this craters balance into loan. We will start paying you interest on time. So craters get converted into loan. You can see it here. In this case what will happen is minus in craters and plus in loan payable. In other words it is a exchange of liabilities. So plus and minus both happens in liabilities. I would like to give you one more example also. You might have heard of the term debenture. Now what is a debenture? Debenture also is a type of loan which company takes but typically loan is taken from a bank. In case of debenture what happens is company distributes its debentures to many people and from many people it takes money in the form of loan and I mean it takes money and gives debenture certificate. So this transaction is known as issue of debentures. Now here what may happen is from many people company has some amount which company should pay it is unable to pay. So what it may do is instead of that loan it may convert that loan into debenture. So again exchange of liabilities loan gets converted into debenture. Let us see the ninth transaction now. In ninth transaction what happens is company distributes stock dividend to stockholders. Now this particular feature is also known as bonus share. I hope you have heard of bonus share. So in case of bonus shares what happens is if I am a company and there are many shareholders I give them shares free of cost so it is known as bonus share. So if I have to give my capital free of cost so free of cost means I do not get cash and I give shares but I give shares myself. So when I give shares myself actually I am reducing the reserves and converting that reserves into equity capital and giving the fresh shares to the shareholders. So now you give a thought as to what will be the impact on balance sheet because of it. Will the cash balance increase or decrease? It will not be affected because these shares are given free of cost. No asset is affected. In fact no liability is also affected because there is no transaction with outsiders like taking loan or giving loan. So what is happening is as you can see here equity capital increases and in exchange the reserves go down. So this was in brief nine transactions which we have seen. Now after having seen these nine important transactions let us understand the vertical format of balance sheet. As you can see here in the vertical format instead of using the term liabilities and assets liabilities the name is now changed and it is known as sources of funds. Owners fund is same so you have one item is owners fund second item is borrowed funds. Now borrowed funds may be divided into secured loan and unsecured loan and total known is known as total capital employed. So by capital employed what we mean is the total money which a particular business is using. Money may come from two sources one it comes from owners second it comes from outsiders in the form of loan. What comes from owners is known as owners fund? What come from outsiders in the form of loan is known as borrowed fund. This total is total sources of funds or it is known as total capital employed. Now on the other side of balance sheet you have got application of funds. As we were seeing in the horizontal format here we have fixed assets investments but instead of current assets here we show working capital which is current assets minus current liability. As you might be knowing working capital represents the day to day funds the capital which is used for day to day activities. So it is calculated as current assets minus current liabilities and net working capital is taken to the outer column. So here in total assets employed your fixed assets plus investments plus total working capital and of course total of capital employed and total of assets employed should match. Now as per company law every company has to prepare the balance sheet in part one schedule six of company's act. Now let us go to one example to understand how we can make balance sheet from a very simple transaction. So you can see the example here item number one I have taken on Jan 2nd owners invest rupees 15,000 in Sriram company to begin the business. Now what will be the balance sheet following this transaction? What we are going to do is we will see a series of transactions and we will try to make balance sheet after each transaction. As you know balance sheet is a cumulative statement. So after each transaction the balance sheet will go on adding assets and liabilities. Let us go to the first transaction which says that on Jan 2nd owners invest 15,000 in Sriram company to begin the business. So second, third, fourth I have first listed all the transactions. Now we will see the solution for after each transaction. Now this is how the balance sheet will look like. On Jan 2nd of year one on capital we have got 15,000 and bank balance is 15,000. So the balance sheet total is exactly 15,000. Now we will learn series of transactions. Now second, on Jan 3rd Sriram company borrows 10,000 from Dhanlaksmi bank. Now what will be the balance sheet after this? So company has taken loan. So loan balance will increase by 10,000 and bank balance will also increase by 10,000. So here you can see the balance sheet at it will happen. On the asset side you can see bank has become 25 now. It was 15 earlier, 15 plus 10, 25. On liability side Dhanlaksmi bank loan a new amount of 10,000 has come. Capital which will remain intact it will not change and it will be 15,000. Only thing is I have used a different term now I have used the term paid up capital. So what it means is this is the amount of capital which owners have paid to the company. And again you can see of course the total of balance sheet tallies to 25,000. Now let us go to the third transaction. Now third transaction is on Jan 5th Sriram company purchases rupees 18,000 of inventory from suppliers on account. The payment will be made on Jan 8th. Now what is meant by on account? On account indicates that this is a credit purchase. Cash purchase means I pay cash I take goods. In case of credit purchase I take goods but I do not pay immediately. I just give a promise that I will pay after 3 days, 4 days, 1 month whatever. So in credit purchase the question is should we record the transaction today or it will be recorded only when the payment is made. Now if you are following a cash system of accounting you will record it only when the payment is made but that is not a scientific way. Because as soon as we have booked the order and received the goods we need to record that as a liability because we will have to pay it in future. So you can see here how the balance sheet will show. Now since the goods are purchased on credit it will be shown in the balance sheet as accounts payable and goods which have come in will become the inventory of the concern. So this is how the balance sheet will look like. You can see here inventory is shown in italics because it is a new item inventory 18000. Accounts payable it is also known as creditors they will also become 18000. Other items on assets and liabilities remain unchanged. On the credit side you have got banked 25000. On liability side you have paid up capital 15 and then Lakshmi bank loaned 10. These items will remain unchanged. I hope you are getting it because now slowly the balance sheet is getting built up. What happens is balance sheet is a cumulative statement. So when you have transaction number 2 it does not happen that you just record transaction number 2. You have transaction 1 effect plus transaction 2, plus transaction 3 and so on. So the size of balance sheet goes on increasing. All the earlier assets and liabilities you will continue to show. Let us go to transaction 4th now. Now the 4th transaction is on Jan 9th Sriram company sells the inventory that was costing rupees 6000 but it sold it for 8000 and the sale has happened in cash. So now you can give a thought as to what will be the change in the balance sheet. It is obvious that we have sold goods for 8000. So 8000 worth of goods come in I think 8000 worth of cash comes in that is very clear. As far as the goods is concerned goods of 6000 go out because goods of 6000 are sold and we got back 8000. So cash will increase by 8, goods will reduce by 6 only. So there is a difference of 2. Now where will you show this difference? So what has happened is we have earned a profit of 2000 because goods of 6 are sold for 8. So there is a margin of 2000 which we have earned. In the balance sheet this profit will be shown as reserves. Rewards means the accumulated profit which is earned by the company and kept in the balance sheet. Now let us see how the balance sheet will look like. So you can see here my bank balance has increased by 8. So from 25 it has become 33, inventory from 18 gone down by 6 so it has become 12. Both the items have changed so they are shown in italics. The company side paid up capital is same, Danilakshmi bank loan we same, creditors is same but a new liability called reserves has come which is for 2000. So the total is 45. Now a question which may arise in your mind is why is this 2000 shown as reserves? It is true that this 2000 is not going to be paid to anybody outsider, it is a profit earned by the company but this profit also should be paid back to the owners and that is why we are showing reserves 2000 on the liabilities, are you getting? So now the balance sheet tallies which is at 45000. Now let us go to the fifth transaction. Now here as you can see on Jan 10th company has paid for the inventory which it purchased earlier. I will just take you back, if you remember on Jan 5th they have purchased the inventory that is goods and the payment was due on Jan 8th but nothing was paid on Jan 8th. So there is no transaction on January 8th, however the amount is paid on 10th Jan. So fifth transaction has happened on 10th Jan, one thing you should keep in mind that just because the payment was due, we have not recorded anything. Now the company has actually paid the amount to suppliers. Now what will be the change in the balance sheet? When the payment is made of course the bank balance will reduce and the suppliers balance will also reduce. So both the liabilities will go down, you can see in the balance sheet now. So bank balance has reduced by 18000 from 33 it has become 15, there is no change in the inventory, no change in other liabilities but creditors have become nil. So from 18000 now creditors have become 0, the total of balance sheet is 27. I hope now gradually you are understanding how the balance sheet is getting built up. Let us go to the sixth transaction. Now on Jan 12th Sriram company sells inventory that cost 5000 for rupees 6000 on account and payment will be received on 31st of Jan. Now this is a case of credit sale, it sales on account that means it will sell the goods the money will come later. Shall we record the transaction today or we will record only when the money is received as we have discussed in case of purchase, we will not do really an proper accounting if we do not record it on Jan 12th. Because what has happened is though money is not received we have already given the goods and we have created an asset for us because we will receive the money in future. So we need to record the transaction today only. Now what has happened is goods of 5000 are given out for rupees 6000. So my inventory will reduce by 5000 and my account receivables or debtors will increase by 6000. So one asset reduces other asset is exchanged. Shall I record all the 6000 today or I will record only 5000 today. Now what happens is entire 6000 is going to be recovered from the customer and I know the customer is going to pay me in future. So there is no point in only recording 5000, I will record the whole 6000. So my inventory will reduce by 5, my debtors will increase by 6, there is a difference of 1000. Where will that go? What does that represent? That 1000 is nothing but the profit earned because goods of 5 are sold for 6. So profit of 1000 is earned and that profit will be added to reserves. You can see the balance sheet now. As you can see here a new asset called debtors is created for 6000. Inventory has reduced by 5 and on reserves, reserves have increased from 2 to 3. So total of the balance sheet is now 28000. Let us go to the next transaction, now 7 transaction. This is the last day of this month on Jan 31st, Sriram company collects the debtors and puts it in the bank. So now debtors are paying us the money. So my bank balance will increase and the balance of debtor will decrease. It is a simple transaction of exchange of asset. So you can see the balance sheet. So now the debtors I am recording as nil and bank balance which was 15 has become 21. The balance sheet tallies at 28000. This is the last balance sheet. I hope you have understood that how from series of transactions you can make up a balance sheet. Shall we go to exercise 2? I hope you are very clear. Now again I am going to show you a series of transactions and from these transactions we will try to make the balance sheet. Let us see the transactions. Now in the books of Mesas Krushna stores, Sham and Murlithar set up a stall known as Mesas Krushna book stores in their town. On 1st January 2010, Sham opened a new bank account in the name of their partnership firm and deposited 10,000 in cash. Murlithar bought his own shop worth rupees 20,000 as a capital. So Murlithar brought in his shop whereas Sham bought in some cash and they started with the partnership concern. Now series of transactions are given. First transaction is stores purchased books of rupees 75,000 and stationery of rupees 10,000 on immediate payment from SK international. So this is a case of cash purchase. Now let us see what will be the balance sheet at the end of first two transactions. Now you can see here on Jan 1st, this is the very first transaction. Sham bought in a capital of 1 lakh, Murlithar bought in a capital of 2 lakhs. Shop premises will be shown in the books as 2 lakhs and bank balance is 1 lakh. The balance sheet tallies and it is shown at 3 lakhs. Now the second transaction. Second transaction was a credit purchase. So you can see here both books and stationeries are my inventory. So now the inventory has become 85,000 and bank balance has reduced to 15,000. The balance sheet tallies at 3 lakhs. Now on 5th Jan, see the transaction number 3. Stores supplied books of rupees 90,000 costing rupees 60,000 to Saraswati High School. School paid check of 45,000 immediately and the balance will be paid on 10th Jan. So what has happened is goods of 60 being sold for 90. So the profit of 30 is earned. But the payment will be made 45,000 today and remaining 45 will be paid after 5 days. Shall we record the entire transaction today? The answer is yes. We have already seen the last time that we do not record as and when the cash is received. Rather we record the transaction as soon as it happens. Now in this case we have sold goods of 60 for 90 and payment is going to come in installments. Let us see the balance sheet effect. So here you can see what will happen. A new asset is created known as sundry debtors for rupees 45,000. The bank balance will increase and it will become 60,000 and the inventory will become 25,000. So the total on liability side is 3,30,000 assets is also 3,30,000. Next transaction is on 9th Jan. Now books costing rupees 45,000 are purchased on credit. This is similar to our earlier purchase. Only difference is this is a purchase on credit. So now what will be the balance sheet after this? Now sundry debtors, a new liability is created. The capital of sham and murlithar will remain same. PNL account or the reserves of 30,000 are there because of profits. Sundry craters of 47 are created and in the inventory now the balance has become 72,000. Stock premises, bank and sundry debtors will remain unchanged. So total is 3,77,000. Let us see now the next transaction. On Jan 10th we have received a check of 15,000 from Saraswati's high school. So if you remember our earlier transaction, goods of 60 were sold for 90. After that 90, 45,000 of payment was received immediately and the remaining was due on 10th Jan. But we have not received the remaining amount. But part of the amount that is 15,000 we have received from Saraswati high school. So what we will do is they represent our customers or debtors. Debtors balance will reduce and our cash balance will increase. So see the balance sheet on Jan 10th. You can see here our sundry debtors have now gone down to 30 and our cash balance or the bank balance has increased to 75. The total of balance sheet remains unchanged because there is only an exchange of asset. Let us see now the last transaction. Now on Jan 15th the check of rupees 47,000 is spread to craters. So you can see here what will happen is my bank balance will reduce and my craters balance will also reduce. So this is the last balance sheet which you can see. Now my bank balance has become 28 and the item of craters is not shown in the liability side because the balance has become nil. So this is the last balance sheet of this problem. I hope you are understanding the flow. Now what we are doing is we are taking a series of transactions and after each transaction we are making a balance sheet. Now in real life company may not make balance sheet after every transaction. They make balance sheet only at the end of the month or sometimes at the end of three months and so on. But to make you understand clearly the effects of each transaction we are actually making the balance sheet after each transaction. I hope you are understanding the effect. Now let us go to the next thing. Now we will try to learn little more detail about what is a PNL account. As in the beginning we have seen the financial statement consists of balance sheet as well as PNL. Now here we are going to learn in more detail PNL account it elements and also some of the concepts. Now first of all what is a PNL account? As you can see here this is an account which discloses the result of the working of an entity. So working of an entity may result in profit or loss and that is shown in PNL. That is why it is known as PNL account. Now profit and loss account measures the income generated by the entity. Now to know the profit naturally you must know the incomes and expenses. So we try to list down all the revenues and we also list down all the expenses. The net result is the profit or loss. So a PNL account must show all revenue streams it must also in detail show all the expense items and the net result which is net profit or net loss. This is a simple format of PNL usually we are starting with the sales we will reduce the cost of goods sold which gives me gross profit. Now what is meant by cost of goods sold? Now mostly for a manufacturing or a trading entity when the sales happen company gives out goods. So all the cost which is incurred for purchasing, processing, manufacturing, packing of the goods is known as cost of goods sold. In case of service industry instead of cost of goods sold it will be known as cost of services. The concept is same so we have to create higher staff provide certain basic facilities using them we provide service that total is known as cost of services. So sales minus cost of goods sold or cost of services as the case may be is known as gross profit. Now from the gross profit we will reduce other expenses these other expenses could be for marketing they could be for administration they could be for R and D. We also reduce taxes and the net amount is known as net profit. You can see here cost of goods sold is in showing in bracket to show that it is a negative figure from sales will reduce cost of goods sold to get gross profit. From gross profit again we will reduce other expenses and taxes to get the net profit. So this is a PNL format in short we will also see more in detail but this is showing in brief to few items in PNL so that you understand how the PNL flow is. Now we can also see a more detailed format of PNL which is required as per schedule 6 of company act. So it starts with item number 1 which is known as revenue from operations which is equivalent to sales in simple terms. Then we show other income the total is known as total revenue from total revenue certain expenses are reduced now expenses have been categorized here. So first category is manufacturing expenses which cover these items first one is cost of material consume purchase of stock in trade changes in inventories of finished goods work in progress or stock in trade. So we reduce the purchases we also reduce the changes in inventories of finished goods work in progress and even the raw material. Now next is other manufacturing expenses so other manufacturing expenses include items like factory rent, factory power and so on. So the first heading was manufacturing the second heading is admin expenses in admin expenses you have got employee benefit expenses, administration selling expenses and so on. After reducing manufacturing and admin and selling expenses the next item is finance cost. Now what do you mean by finance cost? The main finance cost is the interest paid for the loans taken. So when the loans are taken company has to pay interest it is known as finance cost the next item is depreciation and amortization. Now as you know whenever company uses its own assets the value of assets is falling and that fall is known as depreciation. So we also reduce that depreciation to get the total expenses. Now from the gross revenue total expenses are reduced we get profit before exceptional and extraordinary items from this exceptional items are reduced extraordinary items are reduced to give us profit before tax. We also reduce taxes which gives us the final profit. We will see more in detail about PNL in next session. So right now you can see how is the format of PNL as per company law we will see some more problems on PNL in the coming session thank you.