Profit and Loss Account:
Profit and loss account of a banking company is prepared in vertical form. ‘Form B’ of the Third Schedule of the Banking Regulation Act, 1949 is to be used for preparing Profit and Loss Account. It is Divided into 4 sections:
I. Income
II. Expenditure
III. Profit/Loss and
IV. Appropriations
(I). Income: The Schedules of Income are :
I. Interest Earned : It includes interest/discount on advances/bills, income on investments, interest on balance with RBI etc.. it should be noted that according to the new form, bad debts and provision for bad debts and other provisions are not to be deducted from the interest earned. For greater transparency in accounts, these items are shown as separate item in the Profit and Loss Account.
II. Other Incomes: It include commission, exchange and brokerage, profit on sale of investments, profit on revaluation of investments, profit on sale of land, building and other assets, profit on exchange transactions, and income earned by way of dividends from subsidiaries.
(II). Expenditure :
I. Interest Expended: Interest paid on deposits, interest on RBI Borrowings; interest on inter bank borrowings, etc. are shown under this item.
II. Operating Expenses: Salaries and wages of staff, rent, rates and taxes; printing and stationary; advertisements; depreciation on bank’s property; directors’s fees, auditor’s fees; law charges; postage; repairs, insurance etc. are shown under this item.
Third item of this section is provisions and contingencies, provisions for bad debts, provision for taxation and other provision are shown under this item.
(III). Profit/Loss : in this section, profit/loss for the current year (difference between income and expenditure explained above) and brought forward profit/loss are shown.
(IV). Appropriations : in this section amount transferred to statutory reserve as per section 17 of the Banking Regulation Act; amount transferred to other reserve; proposed dividend, etc. are shown. The Balance is transferred to the Balance Sheet.
Comments on the Items of Profit and Loss Account and It’s Schedules :
Schedule 13: A. Interest Earned
1. Interest /Discount on Advances/Bills: Includes interest and discounts on all type of loans and advances like cash credit, demand loans, overdrafts, export loans, term loans, domestic and foreign bills purchased and discounted (including those rediscounted), overdue interest and also interest subsidy, if any, relating to such advance /bills.
2. Income on Investments: include all income derived from the investment portfolio by way of interest and dividend.
3. Income on balance with Reserve Bank of India and other inter bank funds : includes the interest on balance with RBI and other banks call loans and money market placements etc.
4. Others : Includes any other interest/discount income not included in the above heads.
Schedule14:B. Other Incomes:
1. Exchange and Brokerage: includes all remuneration on services such as commission on collection, commission/exchange on remittances and transfers, commission on letter of credit, letting out of lockers and guarantees, commission on Government Business, commission on the other permitted agency business including consultancy and other services, brokerage etc., on securities. It does not include foreign exchange income.
2. Profit on sale of investments : Less – loss on sale of investment.
3. Profit on revaluation of Investments: Less – Loss on revaluation of Investments.
4. Profit on sale of land, building and other assets: Less-Loss on sale of land, building and other assets. Includes profit/loss on the sale of securities, furniture, land and buildings, motor vehicles, gold, silver etc. only the net position should be shown. If the net position is a loss, the amount should be shown as deduction. The profit or loss on revaluation may also be shown.
5. Profit on Exchange Transactions : Less- Loss on Exchange Transaction: Includes profit/loss on dealing in foreign exchange, all income earned by way of foreign exchange, commission and charges on foreign exchange transactions excluding interest which will be shown under interest. Only the net position should be shown. If the net position is loss, it is to be shown as deduction.
6. Income Earned by way of dividends: includes from subsidiaries, companies, joint ventures abroad-and in India.
7. Miscellaneous Income: Includes recoveries from constituents for godown rents, income from bank’s properties, security charges, insurance etc., and any other miscellaneous income. In case any item under this head exceeds one percentage of the total income, particulars may be given in the notes.
Schedule 15: C. Interest Expenses
1. Interest on Deposits: Includes interest paid on all type of deposits from banks and other institution.
2. Interest on RBI/Inter – Bank Borrowings: include discounts/interest on all borrowings and refinance from Reserve Bank of India and other banks.
3. Others: Includes discount/interest on all borrowings/refinance, penal interest paid etc.
Schedule 16: D. Operating Expenses
1. Payment to and provision for employees: include staff salaries/wages, allowances, bonus, other staff benefits like provident fund, pension, gratuity, leave fare concessions, staff welfare, medical allowance to staff, etc.
2. Rent, taxes and lighting: includes rent paid by the banks on buildings and municipal and other taxes paid excluding income tax and interest tax, electricity and other similar charges and levies. House rent allowance and other similar payments to staff should appear under the head “Payments to and Provision to Employees”
3. Printing and Stationary: includes books and forms and stationery used by bank and other printing charges which are not incurred by way of publicity matter.
4. Depreciation on bank’s property: includes depreciation on bank’s own property, motor cars and other vehicles, furniture, electric fittings, vaults, lifts, leasehold properties, non-banking assets, etc.
5. Directors fees, allowances and expenses: include sitting fees and all other items of expenditure incurred on behalf of directors. It includes the daily allowance, hotel charges, conveyance charge,etc. which though in the nature of reimbursement of expenses in curred may be included under this head. Similar expenses of local committee members may also be included under this head.
6. Advertising and Publicity: includes expenditure incurred by the bank for advertisement and publicity purposes including printing charges for publicity matter.
7. Auditors Fees and Expenses: (including branch auditor’s fees and expenses) includes the fees paid to the statutory auditors and branch auditors for professional services rendered and all expenses for performing their duties, even though they may be in the nature of reimbursements. If external auditors have been appointed by the banks themselves for internal inspections and audit and other services, the expenses incurred in that context including fees may not be included under this head but shown under ‘Other Expenditure’.
8. Law Charges: all legal expenses and reimbursement of expenses incurred in connection with legal services are to be included here.
9. Postage, telegram, telephones etc.: includes all postage charges like stamps, telegrams, teleprinters, communication etc.
10. Repairs and Maintenance: includes repairs to bank’s property, their maintenance charges etc.
11. Insurance: include insurance charges on bank’s property and insurance premium paid to DICGC, to the extant it is not recovered from customers.
12. Other Expenditure: all expenses other than those not included in any of the other heads like, license fees, donations, subscriptions to papers, periodicals, entertainment expenses, travel expenses etc., may be included under this head. In case any particular item under this head exceeds one percent of the total income, particulars may be given in notes.
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