1.24     Query

Charge of Sales and Distribution Charges to Trading

Account Instead of Profit & Loss Account.

We being a manufacturing concern are compiling a Manufacturing Account showing the cost of producing finished products, Trading Account showing gross profit and a Profit & Loss Account showing net profit earned.  Sale and distribution charges comprising loading, freight, octroi, transit shortage etc. consist of a major part of our costs, as most of our products are sold at F.O.R. destination basis. As a normal procedure mentioned in most of the books, such expenses are chargeable to the Profit and Loss Account which has the effect of influencing the amount of net profit only and not the gross profit.

In our opinion these charges are a better charge to the Trading Account and not of the Profit & Loss Account in view of the following reasons: -

1.Sale and distribution charges are directly related to sale and as such should be exhibited at a place where sale value is shown, such an exhibition will help the Management to control these expenses. Besides it may not be fruitless to deduct these expenses from Sale Value shown in the credit of Trading Account which would inter-alia have the effect of comparing both the realisation and their corresponding costs on an identical footing. i.e., on ex-works basis.

2. Quotations of products having similar sale prices may be given on different basis, i.e., on ex-works basis and F.O.R. destination rates being comparatively higher are liable to bring higher gross profit to the concern as against the one quoting on ex-works basis only.  Obviously it does not mean that the Gross Profit rate earned in two cases are dissimilar even through the net realization earned in each case would be the same.

In view of above, kindly advise whether the sale and distribution charges should not be charged to Trading Account instead of the Profit & Loss Account.

                                                                    Opinion                                       February 13, 1974

The Companies Act requires the disclosure of certain matters in the Profit and Loss Account but the form of the Profit and Loss Account is not prescribed. Accordingly, the sub-division of Profit and Loss Account into a Manufacturing Account, Trading Account and Profit and Loss Account is discretionary and not mandatory.

Where a Profit and Loss Account is sub-divided into a Trading Account and a Profit and Loss Account, sale and distribution charges are generally charged to the Profit and Loss Account. However, in the circumstances mentioned in your letter, the charging of Sale and Distribution charges in the Trading Account would not be objectionable.