In the last blog, we began looking at the different heads in the PnL account. In today's blog we continue this attempt.
Continuing from the way we could deduce what would be the operating income; how this income is generate directly from the operations of the company. But the cash put by the companies into the bank also generates interest. This needs to be captured as well - this is indicated by the title "Other Incomes"; in addition to this, when a onetime sale of some of the assets is done; this wouldn’t be capture anywhere else; this is classified into the title - "Extraordinary Income".
At this point we have all the income that the company has earned; this is called: "Earnings before Interest and Taxes" and has an acronym - "EBIT". Clearly the names comes as we have not subtracted the interest and taxes that the company needs to pay.
When the interest amount that is to be paid on borrowed amount is deducted from this earning, we get the Net profit before tax - NPBT, and once Tax is deducted we call it Net profit after tax - NPAT.
The amount that is remaining is used partially to pay the dividends; if it was approved in the shareholder's meeting else the remaining amount is all classified into the Retained Earnings head.
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