A few of the entries of the Profit and Loss Account (P & L A/c) are explained in some detail in subsequent paragraphs.
Depreciation
Depreciation of fixed assets for the year is a very important item to be charged against gross profit. Because of use, there is wear and tear on any asset and its value goes on diminishing with continued use, i.e. over time. The same may happen without being continuously used also; loss in value of asset over time is yet a reality. Not only to ascertain the profit but also to reflect the correct financial position, a proper amount for this reduction In value, called depreciation, should be calculated.
Moreover, to keep the capital of the firm conserved, the firm must accumulate enough funds to enable the firm to replace the fixed assets at the end of their life. By debiting an amount (the depreciation amount) to the P & L A/c, the firm manages to keep aside that sum of money and does not allow it to be distributed to shareholders as dividend. The accumulated funds (through setting aside depreciation) will enable the firm to buy a new asset when the life of the old one is over. These considerations are summed up as under : The purpose of charging depreciation to the P & L A/c is three-fold : namely, to ascertain the true profit, to correctly state the financial position and to accumulate funds to replace the asset at the end of its useful life.
The policies or the methodologies to compute depreciation and its effects on tax liability of the firm and other details are deferred to later sections.
Interest Liabilities
Firms raise loans for improving the scope of their business. Loans can be unsecured (though unusual), or secured. Loans can be lump sum amounts or by uniformly-divided parts offered to the public for their subscription. The former approach results simply in a "loan" whereas the latter approach results in "debentures". Debentures are usually secured, i.e. some specific asset is mortgaged in favour of debenture holders or there may be a charge on the assets of the firm in general. Loans and debentures must be shown in the BS along with the particulars of the security given by or on behalf of the firm.
Interest on loan or debentures is payable at a fixed rate irrespective of profits or losses to the firm. Interest on debentures is paid usually on half-yearly basis. Interest on loans in paid as per terms settled between the firm and the lender.
Managerial Remuneration
Section 198 of the Companies Act prescribes the maximum limit (usually 11% of the net profit) of remuneration payable by the firm to its Directors or its Manager. In years when the profits are low, upto a prescribed maximum amount (generally Rs. 50000) may be paid as total managerial remuneration, with government's approval. More too can be paid with government's approval for whole-time Directors and Manager.
Managerial remuneration includes rent-free accommodation (and/or any amenity in the accommodation), any other amenity free to charge, life insurance, pension, gratuity, etc., payable also to spouse or child as per law.
Several other Sections (e.g. 200, 309, 3 10, 349, 350) also govern managerial remuneration. Detailed information is beyond the scope of this text.
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