What Is a Profit and Loss Statement? Schedule III Format, Proprietor P&L and a Worked MSME Example (2026)

The profit and loss statement is the report most business owners look at first and understand least. It answers one question: over the year, did the business make money, and where did the money go? This guide is for MSME owners, first-time founders and accounts staff in India. It explains what a P&L shows, the Schedule III format that companies must follow, how a proprietor's P&L feeds into the income-tax return, the difference between gross, operating and net profit, and a complete worked P&L for a small manufacturing company, with tax.

Quick answer

A profit and loss (P&L) statement shows a business's income and expenses over a period — usually the financial year 1 April to 31 March — and the resulting profit or loss. Companies must present it in the Schedule III format of the Companies Act. Proprietors and firms prepare one for their tax return (ITR-3), bank loans and audits.

• Revenue − expenses = profit before tax; minus tax = net profit

• Gross profit, operating profit and net profit answer different questions

• It covers a period; the balance sheet is a single date

• Small companies and OPCs need no cash-flow statement, but always a P&L

What is a profit and loss statement?

A profit and loss statement, also called a P&L, profit and loss account, statement of profit and loss or income statement, summarises the revenue a business earned and the expenses it incurred in a period, and the difference between them. If income exceeds expenses, the business made a profit; if not, a loss.

Schedule III to the Companies Act, 2013 says in terms that "Statement of Profit and Loss" has the same meaning as "Profit and Loss Account", so the names are interchangeable. Section 2(40) of the Act lists it as one of the financial statements every company must prepare, along with the balance sheet, cash-flow statement (for most companies), statement of changes in equity where applicable, and notes.

A P&L is prepared on the accrual basis. Income is recorded when it is earned, not when cash arrives, and expenses when they are incurred, not when paid. A sale invoiced on 25 March and paid in May belongs to the year ending 31 March. This is why a profitable business can still run short of cash, and why you need the cash-flow statement as well.

The P&L also covers only revenue items. Buying a machine is not an expense in the year of purchase; it goes to the balance sheet as an asset, and only the year's depreciation comes to the P&L. Repaying a loan is not an expense either; only the interest is. Getting these two points right fixes most of the errors small businesses make when they draw up their own P&L.

How the P&L connects to the other statements

Step 1

Sales and other income

Step 2

Less: all expenses for the year

Step 3

Profit after tax

the P&L result

Step 4

Reserves / owner's capital

balance sheet

Step 5

Cash movement explained

cash-flow statement

The Schedule III format for companies

Every company prepares its P&L under section 129 and Schedule III. Division I applies to companies that follow the Accounting Standards, which covers almost every MSME company. Division II applies to companies on Ind AS, which are mainly listed companies and those above ₹250 crore net worth, and has a different layout that includes other comprehensive income.

Division I uses a vertical format with two figure columns: the current year and the previous year. Each line refers to a note number where the detail sits. The order of lines is fixed:

What the notes must show

The face of the statement is only the summary. The general instructions in Part II of Schedule III require notes that break revenue into sale of products, services and other operating revenue; finance costs into interest, other borrowing costs and certain foreign-exchange differences; and other income into interest, dividends, net gains on investments and other non-operating income.

Notes must also disclose employee benefits split into salaries and wages, contributions to provident and other funds, ESOP cost and staff welfare; payments to the auditor by type of service; and any item of income or expenditure exceeding 1% of revenue from operations or ₹1,00,000, whichever is higher. Expenses such as power and fuel, rent, repairs to buildings and machinery, insurance, and rates and taxes are listed separately.

What changed in 2021

Amendments notified on 24 March 2021 and applying from 1 April 2021 added three P&L disclosures: any undisclosed income surrendered in tax assessments, details of CSR spending for companies covered by section 135, and profit or loss on, and holdings of, crypto or virtual currency. The rounding rule was also tightened: rounding off is now compulsory and depends on total income, with companies below ₹100 crore rounding to the nearest hundreds, thousands, lakhs or millions. These items rarely affect a small company, but your auditor will ask you to confirm them.

Gross profit, operating profit and net profit

Schedule III does not print a gross profit line, but every owner, banker and investor calculates it. The three profit levels answer different questions, and confusing them leads to wrong pricing decisions.

Gross profit is revenue from operations minus the direct cost of what you sold: materials consumed, goods purchased for resale and the change in inventories. Some businesses also deduct direct labour and factory power. Gross profit tells you whether your pricing covers your product cost. If gross margin falls while sales rise, you are probably discounting or your input costs have jumped.

Operating profit, often called EBIT (earnings before interest and tax), deducts all the other operating expenses as well: staff costs, rent, administration, selling expenses and depreciation. It shows whether the business itself is profitable, before considering how it is financed. Add back depreciation and you get EBITDA, a rough measure of cash generated by operations, which lenders use widely.

Net profit is what remains after finance costs and income tax, plus any other income. It is the figure that flows to the balance sheet as an increase in reserves or the owner's capital. Two businesses with identical operating profit can have very different net profit if one is funded by expensive loans.

The four profit lines in one place

Gross profit

Revenue − cost of goods sold

pricing vs product cost

EBITDA

Operating profit + depreciation

lenders' favourite

Operating profit (EBIT)

Gross profit − operating expenses

before interest and tax

Net profit

EBIT + other income − interest − tax

goes to reserves

Worked example: a small manufacturing company's P&L

Meenakshi Weaves Private Limited is a small company in Erode that makes cotton fabric, with a few traded items such as yarn. Its figures for the year ended 31 March 2026 are below, in the Schedule III order. Figures are in ₹ lakh.

Now the three profit lines:

• Gross profit = 120.00 − (66.00 + 4.00 − 2.00) = ₹52.00 lakh, a gross margin of 43.3%. The increase in closing stock reduces cost of goods sold, because some of the year's materials are sitting in the warehouse as finished cloth.
• Operating profit (EBIT) = 120.00 − (68.00 + 18.00 + 4.80 + 14.40) = ₹14.80 lakh, or 12.3% of revenue. EBITDA is ₹19.60 lakh.
• Net profit = 14.80 + 0.60 other income − 3.20 interest − 3.07 tax = ₹9.13 lakh, a net margin of 7.6%.

The tax line assumes the company has opted for the concessional company rate of 22% (+ surcharge & cess), which with the 10% surcharge and 4% cess comes to about 25.17% of ₹12.20 lakh. A bank looking at this P&L would compute interest coverage of 14.80 ÷ 3.20 = 4.6 times, comfortably above what most lenders want, and would compare the margins with last year's column. Because its paid-up capital and turnover are within the small company limits, Meenakshi Weaves need not attach a cash-flow statement, though its bank may still ask for one.

To see how far sales could fall before this business makes a loss, split the expenses into fixed and variable and use our break-even point guide or the break-even calculator.

A proprietor's or firm's P&L for the income-tax return

Proprietorships and partnership firms do not follow Schedule III. Most accountants prepare a trading account, which arrives at gross profit, followed by a profit and loss account, which arrives at net profit. From financial years beginning 1 April 2024, ICAI's Guidance Note on Financial Statements of Non-Corporate Entities gives a standard format that is close to Schedule III and shows the movement in the owner's capital account. Lenders increasingly expect it.

A few items are treated differently from a company:

• Drawings are not expenses. Money the proprietor takes for personal use reduces capital in the balance sheet; it never appears in the P&L.
• Income tax is not an expense of a proprietorship, because the tax is the owner's personal liability.
• Owner's salary and interest on own capital are not deductible for a proprietor. A partnership firm can pay partners salary and interest within limits set by the income-tax law and the partnership deed.

Company P&L vs proprietor's P&L

Point	Company	Proprietor / firm
Format	Schedule III, Division I (vertical)	Trading + P&L account; ICAI non-corporate format from FY 2024-25
Owner's pay	Director's salary is an expense	Proprietor's drawings are not an expense
Income tax	Shown as tax expense	Not in the P&L (owner's liability)
Audit	Always audited under the Companies Act	Only if a tax audit applies
Filed with	RoC in AOC-4, and ITR-6	ITR-3 / ITR-5 schedules, or ITR-4 if presumptive

Format

Company

Schedule III, Division I (vertical)

Proprietor / firm

Trading + P&L account; ICAI non-corporate format from FY 2024-25

Owner's pay

Company

Director's salary is an expense

Proprietor / firm

Proprietor's drawings are not an expense

Income tax

Company

Shown as tax expense

Proprietor / firm

Not in the P&L (owner's liability)

Audit

Company

Always audited under the Companies Act

Proprietor / firm

Only if a tax audit applies

Filed with

Company

RoC in AOC-4, and ITR-6

Proprietor / firm

ITR-3 / ITR-5 schedules, or ITR-4 if presumptive

Which return uses the P&L

The Income Tax Department's guidance says ITR-3 applies to individuals and HUFs with income from business or profession. ITR-3 has its own balance sheet and profit and loss schedules, so your books must produce a P&L in that layout. Firms and LLPs use ITR-5; companies use ITR-6.

ITR-4 (Sugam) is for resident individuals, HUFs and firms (other than LLPs) who declare business income on a presumptive basis. Small businesses within ₹3 crore (if cash receipts ≤ 5%), else ₹2 crore turnover can declare a deemed profit of 8% of turnover, or 6% for receipts through banking channels, without maintaining a full P&L. ITR-4 cannot be used by someone who is a company director, has total income above ₹50 lakh, or has certain capital gains and foreign assets. Declaring a profit below the presumptive rate brings in books of account and, in many cases, a tax audit, so talk to your CA before doing so. From 1 April 2026 the Income-tax Act, 2025 replaces the 1961 Act and renumbers these provisions; the presumptive scheme continues.

Example. Arjun runs a grocery store in Madurai as a proprietor. In 2025-26 his sales are ₹60 lakh, opening stock ₹4 lakh, purchases ₹52 lakh and closing stock ₹5 lakh. His trading account shows cost of goods sold of ₹51 lakh and gross profit of ₹9 lakh, a 15% margin. Rent ₹1.80 lakh, helper wages ₹2.40 lakh, electricity ₹0.36 lakh, cash-credit interest ₹0.50 lakh, depreciation ₹0.30 lakh and sundry expenses ₹0.24 lakh total ₹5.60 lakh, leaving a net profit of ₹3.40 lakh. If most of his sales are received digitally, the presumptive deemed profit would be 6% of ₹60 lakh, or ₹3.60 lakh. He can simply file ITR-4 on ₹3.60 lakh. If he wants to declare his actual ₹3.40 lakh, he needs proper books and must check whether an audit is triggered.

How to read a P&L — what owners and banks look for

Reading a P&L is mostly about comparisons: this year against last year, margins against your industry, and expenses against revenue. Our profit margin calculator helps with the arithmetic.

Banks lending to MSMEs look at the P&L together with the balance sheet. They take two or three years of audited statements and a projection. Beyond margins, they compute the debt service coverage ratio from net profit, depreciation and interest, compare reported sales with GST returns and bank credits, and check that the owner's or directors' remuneration is reasonable. A P&L that shows high sales but thin profit year after year, or sudden profit just before a loan application, invites questions.

P&L review checklist

0/8

• Revenue growth: compare with last year's column, and check that GST returns show the same sales
• Gross margin: stable or rising; investigate any fall of more than a few percentage points
• Employee cost and other expenses as a % of revenue: rising faster than sales is a warning
• Finance cost: interest coverage (EBIT ÷ interest) of at least 2–3 times
• Depreciation: consistent with the fixed assets in the balance sheet
• Other income: is profit dependent on one-off gains rather than operations?
• Exceptional items: understand each one before relying on the bottom line
• Tax: current tax roughly matches the expected rate on profit before tax

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Common P&L mistakes small businesses make

Booking capital spending as expenses. A new machine, a computer or office renovation that lasts years belongs in fixed assets. Charging it to the P&L understates profit this year, overstates it in future years, and the tax officer will disallow the expense anyway.

Treating loan repayments as expenses. Only interest is a P&L expense. The principal reduces the loan in the balance sheet. Owners who put EMI totals in the P&L understate profit badly.

Ignoring closing stock. Without a proper stock count at year end, cost of goods sold and gross profit are guesses. A lower closing stock figure makes profit look smaller; a higher one inflates it. Banks and auditors will test it.

Mixing personal and business expenses. Household bills, personal travel and family phone bills paid from the business account are not business expenses. For a proprietor they are drawings; for a company they are a problem for the director.

Cash basis instead of accrual. Recording only what was received and paid leaves out unpaid bills, unbilled work and prepaid expenses. Companies must use accrual accounting, and so should any business that wants a credible P&L.

Not reconciling with GST and TDS data. The income-tax department's annual information statement already knows your GST turnover and the TDS deducted on your receipts. If your P&L revenue does not match, expect a notice. Reconcile before you file.

When the P&L has to be ready

For a company, the audited P&L is approved by the board, signed by the auditor and then filed with the Registrar in Form AOC-4 within 30 days of the AGM; an AGM must be held by 30 September for a March year end. One Person Companies, which hold no AGM, file within 180 days of the year end. The same P&L is the base for the company's income-tax return in ITR-6.

For businesses that need a tax audit, the deadlines are set each year. For the year 2025-26 the audit report was due by 21 October 2026 and the return by 21 November 2026 after the CBDT's extension. In practice that means your books should be closed, stock counted and the draft P&L ready by July or August, so the auditor has time to test it. A P&L prepared in a hurry the week before the deadline is the one most likely to carry the mistakes listed above.

Monthly or quarterly management P&Ls are not required by law, but they are the most useful habit a growing MSME can build. A simple monthly P&L from your accounting software, compared with the same month last year, shows margin pressure months before the annual accounts do.

Official links

• Companies Act, 2013 including Schedule III (India Code)Section 2(40), section 129 and the P&L format
• Income Tax Department — which ITR appliesITR-3 and ITR-4 eligibility
• ICAI — Accounting Standards applicability to non-company entitiesMSME and large entity classes from 1 April 2024

What to do next

Pull last year's and this year's P&L side by side and work out gross, operating and net margin for each; the profit margin calculator does it in seconds. Then read the matching balance sheet guide and cash-flow statement guide so you can see how profit turns into assets and cash. If your company's accounts are due for audit, our statutory audit guide explains what the auditor will check.

This is general information, not legal or tax advice — confirm on the official source or with a professional.

Frequently asked questions

What is a profit and loss statement in simple words?

A profit and loss (P&L) statement shows how much a business earned and spent over a period, usually the financial year from 1 April to 31 March, and whether it made a profit or a loss. It starts with sales and other income, deducts the costs of goods, salaries, rent, interest, depreciation and other expenses, and ends with profit before and after tax.

What is the Schedule III format of the profit and loss statement?

Companies following the Accounting Standards use Division I of Schedule III. It lists Revenue from operations, Other income, Total income, then expenses — cost of materials consumed, purchases of stock-in-trade, changes in inventories, employee benefits, finance costs, depreciation and other expenses — then profit before exceptional items, exceptional items, profit before tax, current and deferred tax, profit for the period and earnings per share.

What is the difference between gross profit, operating profit and net profit?

Gross profit is sales minus the direct cost of the goods sold. Operating profit (EBIT) also deducts staff costs, rent, power, depreciation and other operating expenses, but not interest and tax. Net profit is what remains after interest and income tax; it is the figure that adds to reserves or the owner's capital in the balance sheet.

Does a proprietor need a profit and loss account for ITR?

A proprietor who files ITR-3 reports business income through the return's balance sheet and profit and loss schedules, so a P&L is needed. A proprietor who opts for the presumptive scheme and files ITR-4 does not report a full P&L, only turnover and deemed profit, subject to the scheme's limit of ₹3 crore (if cash receipts ≤ 5%), else ₹2 crore. Banks lending to a proprietor still ask for a P&L and balance sheet.

Is the profit and loss account the same as the income statement?

Yes. Schedule III itself says the term Statement of Profit and Loss has the same meaning as Profit and Loss Account. 'Income statement' is the international name. Not-for-profit entities prepare a similar statement called an income and expenditure account.

Do small companies and OPCs need a cash-flow statement along with the P&L?

No. Under section 2(40) of the Companies Act, the financial statements of a One Person Company, a small company and a dormant company need not include a cash-flow statement. They still prepare the balance sheet, the statement of profit and loss and notes. A small company currently means paid-up capital up to ₹10 crore and turnover up to ₹100 crore.

Sources & verification

Figures on this page were checked against the sources below when it was last reviewed on 9 October 2026. Each rate and limit is stored once with its own official source and review date, and official update channels are monitored daily so changes are picked up. How we verify

1. 1.The Companies Act, 2013 — section 2(40), section 129 and Schedule III — India Code (Legislative Department) · accessed 9 October 2026
2. 2.ITR-3 and ITR-4 — applicable returns — Income Tax Department · accessed 9 October 2026
3. 3.Applicability of Accounting Standards to non-company entities (from 1 April 2024) — EIRC of ICAI · accessed 9 October 2026
4. 4.MCA raises small company thresholds to ₹10 crore capital and ₹100 crore turnover — Taxmann · accessed 9 October 2026
5. 5.ICAI's new balance sheet format for non-corporate entities — ClearTax · accessed 9 October 2026
6. 6.Specimen exhibit of subdivision of profit and loss account (1910) — Wikimedia Commons · accessed 9 October 2026