Net Profit Definition Companies Act 2013
Quick summary: Under the Companies Act 2013, net profit is the profit calculated in accordance with the prescribed provisions of the Act, which is used for determining dividends, managerial remuneration, and statutory compliance in Indian companies.
Definition
Net profit under the Companies Act 2013 refers to the profit of a company computed in accordance with the provisions of the Act and after making adjustments as required under sections such as Section 198 and Schedule V. It is used to determine:
- Managerial remuneration limits
- Dividend declaration
- Compliance with statutory reporting
Formula (simplified view):
Net Profit (as per Companies Act 2013) = Profit before tax − any adjustments required by the Act
Adjustments may include exclusion of certain extraordinary items, prior period expenses, or specific provisions as defined in the Act.
Example Calculation
Example: A company reports a profit before tax of ₹50,00,000. As per Companies Act 2013, the following adjustments are required:
- Managerial remuneration exceeding limits: ₹2,00,000
- Prior period expenses: ₹1,00,000
Net Profit as per Companies Act 2013 = ₹50,00,000 − ₹2,00,000 − ₹1,00,000 = ₹47,00,000
Importance in Corporate Governance
- Determines maximum remuneration for directors and managerial personnel.
- Forms the basis for declaring dividends in accordance with the law.
- Ensures statutory compliance and proper financial reporting.
- Helps auditors and company secretaries in preparing financial statements accurately.
Related Sections & Concepts
- Section 198: Overall managerial remuneration limits
- Section 123: Dividend declaration from net profits
- Schedule V: Provisions for managerial remuneration