AccountancyCBSE Class 12 · Financial Statements of a Company

Statement of Profit and Loss under Schedule III: Class 12 Format and Calculations

Updated 15 October 2026 · Fact-checked

A company's Statement of Profit and Loss under Schedule III is a vertical statement: revenue from operations plus other income gives total income; less expenses (materials consumed, purchases of stock-in-trade, changes in inventories, employee benefits, finance costs, depreciation and other expenses) gives profit before tax; less tax gives profit for the period.

Follow the steps down: add other income, subtract total expenses to get profit before tax, then subtract tax to reach profit for the period.

Illustration drawn for QuestionBuddy.

Understand Statement of Profit and Loss under Schedule III

Format (vertical, with Note No. and two years' figures).

I. Revenue from operations (sale of products and services, net of returns, plus other operating revenue such as sale of scrap)
II. Other income (interest, dividend, rent, profit on sale of investments, when not the main business)
III. Total income (I + II)
IV. Expenses: cost of materials consumed; purchases of stock-in-trade; changes in inventories of finished goods, work-in-progress and stock-in-trade; employee benefits expense; finance costs; depreciation and amortisation expense; other expenses. Total expenses.
V. Profit before tax (III − IV)
VI. Tax expense
VII. Profit for the period (V − VI)

(Exceptional items, extraordinary items and discontinued operations are excluded from the 2026-27 syllabus.)

The two calculations the board loves.

Cost of materials consumed = Opening raw materials + Purchases of raw materials − Closing raw materials.
Changes in inventories = (Opening WIP + opening finished goods + opening stock-in-trade) − (closing WIP + closing finished goods + closing stock-in-trade). A positive figure (stock fell) adds to expenses; a negative figure (stock rose) reduces expenses. Raw materials are not part of this line; they are in cost of materials consumed.

Where common items go.

Employee benefits expense: salaries, wages, bonus, contribution to provident fund, staff welfare.
Finance costs: interest on loans and debentures, other borrowing costs, discount or loss on issue of debentures written off.
Depreciation and amortisation: depreciation on PPE, amortisation of intangibles (patents, software).
Other expenses: rent, power, insurance, repairs, advertising, carriage outward, audit fees, bad debts, loss on sale of assets.
Other income: interest received, dividend received, rent received, profit on sale of fixed assets or investments (for a non-finance company).

Tax. Tax expense is usually given as a percentage of profit before tax.

Statement of Profit and Loss under Schedule III: key facts

Total income: Revenue from operations + Other income
Cost of materials consumed: Opening raw materials + Purchases − Closing raw materials
Changes in inventories: (Opening WIP + FG + stock-in-trade) − (Closing WIP + FG + stock-in-trade); Negative when stock increases.
Profit before tax: Total income − Total expenses
Profit for the period: Profit before tax − Tax expense; PBT = PAT ÷ (1 − tax rate) when working back.
Revenue from operations: Sales − returns + other operating revenue (e.g. scrap sales)

How to answer Statement of Profit and Loss under Schedule III questions

Most questions either classify items under the right head or compute one line. Build the statement top to bottom.

1Separate operating revenue (main business) from other income.
2Compute cost of materials consumed from raw material balances and purchases.
3Compute changes in inventories from WIP and finished goods only; keep the sign.
4Place each remaining expense under its head (employee, finance, depreciation, other).
5Total expenses; PBT = total income − total expenses.
6Deduct tax for profit for the period.

Statement of Profit and Loss under Schedule III in real life

The idea, met in an everyday situation. Answer the question in your own words, then compare with the model answer. The one-line hook is what to remember.

Changes in inventories

Suppose Golden Crust Bakers Ltd (a fictional company) bakes more bread than it sells this year because it expects a festival rush in April. Its stock of finished goods and work-in-progress rises from ₹1,50,000 to ₹1,90,000 during the year.

How does this appear in the Statement of Profit and Loss, and why does it raise the reported profit?

Try it first, then show the solutionSolution

Changes in inventories = opening 1,50,000 − closing 1,90,000 = −₹40,000.
The negative figure reduces total expenses by ₹40,000.
The cost of goods still in stock is carried forward, not charged this year.

Answer: It appears as (−)₹40,000 under changes in inventories, reducing expenses and raising profit before tax by ₹40,000. The cost of the extra stock is matched with next year's sales, when the stock is sold.

Memory hook: Stock up, expenses down; stock down, expenses up.

Tricks to remember Statement of Profit and Loss under Schedule III

Short memory aids. Say each one aloud once, then use it on a question the same day.

Opening minus closing
Changes in inventories always = opening − closing; let the sign do the work.
Use it when: Change in inventories.
Main business = operations
If it is what the company exists to do, it is revenue from operations; otherwise other income.
Use it when: Revenue classification.
C-P-C-E-F-D-O
Cost of materials, Purchases, Changes, Employee, Finance, Depreciation, Other: the expense order.
Use it when: Writing the format.

Statement of Profit and Loss under Schedule III: solved examples

Ordered from board level to HOTS. Try each one before you open the solution.

Example 1: Changes in inventories · 1 mark · MCQBoard level

Opening work-in-progress ₹1,40,000 and finished goods ₹1,00,000; closing work-in-progress ₹1,00,000 and finished goods ₹70,000. Changes in inventories of finished goods and work-in-progress will be:
(a) ₹70,000
(b) (−)₹70,000
(c) ₹1,70,000
(d) ₹2,40,000

Try it first, then show the solutionSolution

Opening = 2,40,000; closing = 1,70,000.
Change = 2,40,000 − 1,70,000 = ₹70,000 (stock fell, so it adds to expenses).

Answer: (a) ₹70,000

Example 2: Classify six items · 3 marks · Short answerBoard level

Under which head of the Statement of Profit and Loss will these appear for a manufacturing company: (i) salaries; (ii) interest on debentures; (iii) sale of scrap; (iv) dividend received; (v) amortisation of patents; (vi) advertisement? (3 marks)

Try it first, then show the solutionSolution

(i) Employee benefits expense; (ii) Finance costs.
(iii) Revenue from operations (other operating revenue); (iv) Other income.
(v) Depreciation and amortisation expense; (vi) Other expenses.

Answer: As listed.

Example 3: Cost of materials consumed · 3 marks · Short answerHarder board level

Opening raw materials ₹40,000; purchases of raw materials ₹3,00,000; closing raw materials ₹50,000. Calculate cost of materials consumed, and say whether raw materials enter the 'changes in inventories' line. (3 marks)

Try it first, then show the solutionSolution

Cost of materials consumed = 40,000 + 3,00,000 − 50,000 = ₹2,90,000.
Raw material stocks are already adjusted here.
So they are not part of changes in inventories, which covers WIP, finished goods and stock-in-trade only.

Answer: ₹2,90,000; raw materials do not enter changes in inventories.

Example 4: Profit before and after tax · 3 marks · Short answerHarder board level

Revenue from operations ₹20,00,000; other income ₹50,000; cost of materials consumed ₹9,00,000; changes in inventories (−)₹30,000; employee benefits ₹3,00,000; finance costs ₹60,000; depreciation ₹1,20,000; other expenses ₹2,00,000; tax 30%. Calculate profit before tax and profit for the period. (3 marks)

Try it first, then show the solutionSolution

Total income = ₹20,50,000.
Total expenses = 9,00,000 − 30,000 + 3,00,000 + 60,000 + 1,20,000 + 2,00,000 = ₹15,50,000.
PBT = ₹5,00,000; tax = 1,50,000; profit for the period = ₹3,50,000.

Answer: PBT ₹5,00,000; profit for the period ₹3,50,000.

Example 5: Prepare the statement · 6 marks · Long answerHOTS / competency

From the following, prepare the Statement of Profit and Loss of Orbit Tools Ltd for the year ended 31st March 2026: sales ₹25,00,000; sales returns ₹1,00,000; sale of scrap ₹20,000; interest on investments ₹30,000; raw materials opening ₹60,000, purchases ₹12,00,000, closing ₹80,000; WIP opening ₹50,000, closing ₹70,000; finished goods opening ₹1,00,000, closing ₹1,20,000; wages and salaries ₹4,00,000; interest on loan ₹50,000; depreciation ₹1,00,000; rent and advertising ₹1,50,000; tax rate 30%. (6 marks)

Try it first, then show the solutionSolution

Revenue from operations = 25,00,000 − 1,00,000 + 20,000 = 24,20,000; other income 30,000; total income 24,50,000.
Cost of materials consumed = 60,000 + 12,00,000 − 80,000 = 11,80,000.
Changes in inventories = (50,000 + 1,00,000) − (70,000 + 1,20,000) = (−)40,000.
Expenses: 11,80,000 − 40,000 + 4,00,000 + 50,000 + 1,00,000 + 1,50,000 = 18,40,000.
PBT = 24,50,000 − 18,40,000 = 6,10,000; tax 1,83,000; profit for the period 4,27,000.

Answer: Profit before tax ₹6,10,000; tax ₹1,83,000; profit for the period ₹4,27,000.

Example 6: Sign of the inventory change · 1 mark · Assertion-reasonHOTS / competency

Assertion (A): An increase in inventories of finished goods during the year is added to total expenses.
Reason (R): Changes in inventories = opening stock − closing stock, so an increase gives a negative figure that reduces expenses.
(a) Both A and R are true, and R is the correct explanation of A.
(b) Both A and R are true, but R is not the correct explanation of A.
(c) A is true, but R is false.
(d) A is false, but R is true.

Try it first, then show the solutionSolution

An increase in stock lowers expenses; A is false and R is true.

Answer: (d) A is false, but R is true.

Where students lose marks in Statement of Profit and Loss under Schedule III

The slips examiners see most often, and what to write instead.

Mistake: Computing closing − opening for changes in inventories
Reversing the formula.
Wrong working
1,90,000 − 1,50,000 = 40,000 added to expenses.
Right working
1,50,000 − 1,90,000 = (−)40,000.
Do this: Always opening − closing.
Usually costs: 1 mark.
Mistake: Including raw materials in changes in inventories
Treating all stock alike.
Wrong working
Change = (RM + WIP + FG) opening − closing.
Right working
Raw materials go to cost of materials consumed.
Do this: Changes line: WIP, FG and stock-in-trade only.
Usually costs: 1 mark.
Mistake: Showing scrap sales under other income
It is not a main product.
Wrong working
Other income: sale of scrap 20,000.
Right working
Revenue from operations: other operating revenue.
Do this: Scrap arises from operations.
Usually costs: 1/2 to 1 mark.
Mistake: Putting debenture interest under other expenses
Not knowing the finance cost head.
Wrong working
Other expenses: interest on debentures.
Right working
Finance costs: interest on debentures.
Do this: All borrowing costs are finance costs.
Usually costs: 1/2 mark.

Exam tips

Write the formula line for cost of materials consumed and changes in inventories before the numbers.
Keep the sign of the inventory change in brackets, e.g. (−)40,000.
Use notes for heads with several items, such as other expenses.
Expect 1-mark MCQs on classification and change in inventories, and 3-mark items on computing lines.

Practice questions on Statement of Profit and Loss under Schedule III

Write each answer on paper first. Open the hint only if you are stuck, and the answer only when you have finished.

Q1 · 1 mark · MCQBoard level
Interest on debentures is shown in the Statement of Profit and Loss under:
(a) Other expenses
(b) Finance costs
(c) Employee benefits expense
(d) Other income
Hint
Borrowing cost.
Answer
(b) Finance costs
Q2 · 1 mark · MCQBoard level
Dividend received by a manufacturing company is shown as:
(a) Revenue from operations
(b) Other income
(c) Reduction in finance costs
(d) Reserves and surplus
Hint
Not its main business.
Answer
(b) Other income
Q3 · 1 mark · Very short answerBoard level
Opening WIP ₹30,000 and finished goods ₹70,000; closing WIP ₹45,000 and finished goods ₹40,000. Calculate changes in inventories. (1 mark)
Hint
Opening − closing.
Answer
1,00,000 − 85,000 = ₹15,000 (added to expenses).
Q4 · 3 marks · Short answerHarder board level
Sales ₹8,00,000; sales returns ₹40,000; sale of scrap ₹10,000; interest received ₹12,000. Calculate revenue from operations and other income. (3 marks)
Hint
Scrap is operating.
Answer
Revenue from operations = 8,00,000 − 40,000 + 10,000 = ₹7,70,000. Other income = ₹12,000.
Q5 · 1 mark · Very short answerHarder board level
Salaries ₹2,00,000; employer's contribution to provident fund ₹20,000; staff welfare expenses ₹15,000; office rent ₹60,000. Calculate employee benefits expense. (1 mark)
Hint
Rent is not an employee cost.
Answer
2,00,000 + 20,000 + 15,000 = ₹2,35,000.
Q6 · 3 marks · Short answerHarder board level
State the head under which each appears: (i) carriage outward; (ii) loss on sale of machinery; (iii) discount on issue of debentures written off; (iv) bonus to employees; (v) profit on sale of investments (non-finance company); (vi) depreciation on building. (3 marks)
Hint
Two are other expenses.
Answer
(i) Other expenses; (ii) Other expenses; (iii) Finance costs; (iv) Employee benefits expense; (v) Other income; (vi) Depreciation and amortisation expense.
Q7 · 3 marks · Short answerHarder board level
Revenue from operations ₹10,00,000; other income ₹20,000; total expenses ₹7,20,000; tax rate 25%. Calculate profit for the period. (3 marks)
Hint
PBT first.
Answer
PBT = 10,20,000 − 7,20,000 = ₹3,00,000; tax = 75,000; profit for the period = ₹2,25,000.
Q8 · 1 mark · Assertion-reasonHarder board level
Assertion (A): Loss on issue of debentures written off to the Statement of Profit and Loss is shown under finance costs.
Reason (R): It is a borrowing cost, treated as a finance cost as per AS 16.
(a) Both A and R are true, and R is the correct explanation of A.
(b) Both A and R are true, but R is not the correct explanation of A.
(c) A is true, but R is false.
(d) A is false, but R is true.
Hint
Debentures topic link.
Answer
(a) Both A and R are true, and R is the correct explanation of A.
Q9 · 3 marks · Short answerHOTS / competency
Cost of materials consumed is ₹4,50,000. Opening raw materials ₹70,000; closing raw materials ₹90,000. Find purchases of raw materials. (3 marks)
Hint
Rearrange the formula.
Answer
Purchases = 4,50,000 − 70,000 + 90,000 = ₹4,70,000.
Q10 · 3 marks · Short answerHOTS / competency
A company's profit for the period is ₹3,50,000 after tax at 30%. Total income is ₹18,00,000. Find profit before tax and total expenses. (3 marks)
Hint
PBT = PAT ÷ 0.7.
Answer
PBT = 3,50,000 ÷ 0.7 = ₹5,00,000; total expenses = 18,00,000 − 5,00,000 = ₹13,00,000.

Test your recall

Answer in your head or on paper first, then open the card. Pulling an answer out of memory makes it stick far better than re-reading.

1.Formula for cost of materials consumed?Show answer
Opening raw materials + purchases − closing raw materials.
2.Which inventories are included in 'changes in inventories'?Show answer
Work-in-progress, finished goods and stock-in-trade.
3.Where is rent received by a manufacturing company shown?Show answer
Other income.
4.PBT ₹4,00,000, tax 25%: profit for the period?Show answer
₹3,00,000.
5.Are extraordinary items in the 2026-27 syllabus?Show answer
No.

Statement of Profit and Loss under Schedule III: frequently asked questions

What is the Statement of Profit and Loss format in Class 12?

Revenue from operations, other income, total income, expenses under prescribed heads, profit before tax, tax expense and profit for the period, in vertical form under Schedule III.

How do I calculate changes in inventories?

Opening (WIP + finished goods + stock-in-trade) minus closing (the same); a negative answer reduces expenses.

What is the difference between revenue from operations and other income?

Revenue from operations comes from the company's main business, including scrap sales; other income comes from incidental sources like interest, dividend and rent.

Where are bad debts shown?

Under other expenses.