1.18     Query

Accounting for

Prior-Year Expenses

Query No. 1.

We have been showing separately “prior-year expenses and prior-year receipts” in our Profit and Loss Account. We shall be grateful if you kindly advise us whether it is necessary to show these prior-year expenses and receipts separately in the Profit and Loss Account even if the amount involved is not material.

                                                                         Opinion                                       August 7, 1969

There is no basic or fundamental requirement to show prior-year expenses and receipts separately in the Profit and Loss Account. The requirement to do so arises only if the amount involved is material. Therefore, if the amount of the prior-year expenses and receipts is not material, it is not necessary to disclose the same separately in the Profit and Loss Account.

  Query Nos. 2 & 3.

If the reply to Query No. 1 is in affirmative, we shall be grateful if you could kindly advise us whether such prior-year expenses and prior-year receipts should be shown in the body of the Profit and Loss Account itself or should be shown only in Profit and Loss Appropriation Account.

In case of straight-line presentation of Profit and Loss Account, whether the items ‘Prior-Year Expenses and Prior-Year Receipts’ should appear separately on the Profit and Loss Account itself or the could be grouped in the Schedule.

                                                                                Opinion                                August 7, 1969

The Companies Act does not envisage a Profit and Loss Appropriation Account although such an account is often prepared in practice. Sometimes, the Profit and Loss Account is divided into two parts referred to customarily as “above the line” and “below the line” respectively. The basic requirement which must be borne in mind is that the Profit and Loss Account should disclose a true and fair view of the profit or loss for the year. Therefore, if the prior-year expenses and /or receipts are material in amount, it is preferable that they should be reflected in such a manner that the current year’s balance of profit or loss is fairly disclosed. One way in which this can be done in the case of two-sided or horizontal form of profit and loss account, is to reflect the prior-year items in the appropriation section or in the section “below the line” after a balance in struck “above the line” indicating the current year’s profit or loss. In the case of a Profit and Loss Account prepared in the vertical form, the same purpose can be achieved by arriving at the current year’s result and thereafter adding or deducting therefrom, as the case may be, the prior-year items.

Query

(b)          Classification of Expenditure in Accounts.

We have been indicating separately by way of a note the amount of Stores Material utilized for repairs and maintenance. Kindly advise us whether it is necessary to show the same under provisions of the Companies Act. We feel the words ‘Repairs and Maintenance’ include the Stores therein and no separate note is necessary.

                                                                             Opinion                                   August 7, 1969

Part II of Schedule VI to the Companies Act requires a two-fold method of classification of expenditure.  In the case of most of the items of expenditure, the classification is required by reference to the nature of the expense, or what has been referred to as a “primary” allocation of expenses, - for example, rent, salaries & wages, etc. However, in a few cases, what is required is a functional – or a “secondary” – analysis of the expenditure, - for example, welfare expenses, repairs to buildings, and repairs to machinery.  One way of looking at the matter is to ensure that each of the items enumerated in Part II of Schedule VI is duly and properly reflected in the accounts. Since functional classification of expenditure is a further classification in respect of a few special items, as compared to the primary classification by reference to the nature of the expense which is the general basis required by Part II Schedule VI, it may be implied that, if an expenditure is classified under the functional head by reason of the requirements of Part II Schedule VI, its components need not again be re-classified by reference to their nature and separate figures on this basis need not be specified where the Schedule otherwise requires expenses of such nature to be disclosed.  For example, if expenditure by way of salaries and wages and stores consumed on repairs is classified and disclosed under the heading of “repairs to buildings” or “repairs to machinery”, as the case may be it may not be necessary again to re-classify and disclose the same expenditure by reference to its primary nature – that is, under the heads “salaries and wages”, and “stores consumed”, respectively. At the same time, it may be mentioned that several companies have in fact adopted the practice of disclosing such a dual classification in their published accounts as a matter of further information. In that case, the most customary method of disclosure is to reflect the expenditure initially by reference to its functional classification where such classification is required by virtue of Part II Schedule VI, and thereafter append a footnote on the Profit and Loss Account indicating the dual classification aspect of those expenses – for example, the footnote may state: “Classified under other heads of accounts – Salaries and Wages Rs. 10,000, Stores consumed Rs. 7500”.

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