Financial statements are formal records that present the financial activities and position of a business. For companies incorporated under the Companies Act 2013, financial statements must be prepared as per Schedule III of the Act and comply with applicable Accounting Standards (AS).
Components of Financial Statements
- 1.Balance Sheet (Statement of Financial Position) — shows assets, liabilities, and equity at a specific date.
- 2.Statement of Profit and Loss — shows revenues, expenses, and net profit/loss for a period.
- 3.Cash Flow Statement — shows cash inflows and outflows during a period.
- 4.Statement of Changes in Equity (if applicable).
- 5.Notes to Accounts — supplementary information explaining line items.
Schedule III: Format of Financial Statements
Schedule III of the Companies Act 2013 prescribes the format of Balance Sheet and Statement of P&L. The Balance Sheet is presented in vertical format.
Balance Sheet Structure (Schedule III)
- Equity and Liabilities
- Shareholders Funds:
- Share Capital
- Reserves and Surplus (Securities Premium, General Reserve, Surplus/Retained Earnings)
- Non-Current Liabilities:
- Long-term borrowings (debentures, long-term loans)
- Deferred tax liabilities
- Long-term provisions
- Current Liabilities:
- Short-term borrowings
- Trade payables (creditors)
- Other current liabilities
- Short-term provisions
- Assets
- Non-Current Assets:
- Fixed Assets: Tangible (plant, machinery, land) and Intangible (goodwill, patents)
- Non-current investments
- Deferred tax assets
- Long-term loans and advances
- Current Assets:
- Current investments
- Inventories (stock)
- Trade receivables (debtors)
- Cash and cash equivalents
- Short-term loans and advances
- Other current assets
Statement of Profit and Loss (Schedule III)
- The Statement of P&L shows:
- Revenue from Operations (net sales, other operating revenue)
- Other Income (interest income, dividend income, profit on sale of assets)
- Total Revenue = Revenue from Operations + Other Income
- Expenses:
- Cost of Materials Consumed
- Purchases of Stock-in-Trade
- Changes in Inventories of Finished Goods, WIP, and Stock-in-Trade
- Employee Benefit Expenses (salaries, PF, gratuity)
- Finance Costs (interest on borrowings)
- Depreciation and Amortisation
- Other Expenses (rent, power, selling expenses)
- Profit Before Tax (PBT) = Total Revenue - Total Expenses
- Tax Expense (Current Tax + Deferred Tax)
- Profit After Tax (PAT)
Notes to Accounts
- Notes provide detailed breakdown of each line item in the Balance Sheet and P&L, including:
- Composition of share capital (authorised, issued, subscribed, called-up)
- Details of reserves and surplus
- Breakup of fixed assets (cost, accumulated depreciation, net block)
- Details of trade receivables (outstanding for more or less than 6 months, secured/unsecured)
- Contingent liabilities
Worked Example 1: Shareholders Funds Section
Share Capital: Authorised - 1,00,000 equity shares of Rs. 10 each = Rs. 10,00,000
Issued, Subscribed and Paid-up: 80,000 equity shares of Rs. 10 each fully paid = Rs. 8,00,000
Securities Premium Reserve = Rs. 1,20,000
General Reserve = Rs. 50,000
Surplus (balance in P&L) = Rs. 30,000
Total Shareholders Funds = Rs. 8,00,000 + Rs. 1,20,000 + Rs. 50,000 + Rs. 30,000 = Rs. 10,00,000
Worked Example 2: Revenue from Operations
A company reports: Sales Rs. 15,00,000; Sales Returns Rs. 20,000; Other Operating Revenue Rs. 30,000.
Revenue from Operations = Rs. 15,00,000 - Rs. 20,000 + Rs. 30,000 = Rs. 15,10,000
Worked Example 3: Cost of Materials Consumed
Opening Stock of Raw Materials Rs. 40,000; Purchases Rs. 3,00,000; Closing Stock Rs. 50,000.
Cost of Materials Consumed = Rs. 40,000 + Rs. 3,00,000 - Rs. 50,000 = Rs. 2,90,000
Worked Example 4: Employee Benefit Expenses
Salaries Rs. 2,00,000; PF contribution Rs. 24,000; Gratuity Rs. 10,000; Staff welfare Rs. 5,000.
Total Employee Benefit Expenses = Rs. 2,39,000
Worked Example 5: Finance Costs
Interest on bank loan Rs. 30,000; Interest on debentures Rs. 45,000; Bank charges Rs. 2,000.
Total Finance Costs = Rs. 77,000
Worked Example 6: Profit Before Tax Calculation
Total Revenue = Rs. 20,00,000; Total Expenses = Rs. 15,50,000.
PBT = Rs. 20,00,000 - Rs. 15,50,000 = Rs. 4,50,000
Tax at 30% = Rs. 1,35,000
PAT = Rs. 4,50,000 - Rs. 1,35,000 = Rs. 3,15,000
Worked Example 7: Contingent Liability Note
A company has pending lawsuit; estimated liability Rs. 5,00,000. This is disclosed as a contingent liability in Notes to Accounts — it is NOT recorded in the Balance Sheet since the outflow is not certain. If it becomes probable, a provision is created.
Distinction Between Provisions and Reserves
| Provisions | Reserves |
|---|---|
| Created for a specific liability | Created from profits for general or specific purposes |
| Charge against profit | Appropriation of profit |
| Cannot be used as dividend | Free reserves can be used as dividend |
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Common mistakes
- Showing authorised capital as issued capital — these are different; only subscribed and paid-up capital is shown in the Balance Sheet, with notes disclosing authorised capital.
- Placing "Surplus" under liabilities — the Balance Sheet shows Equity and Liabilities on one side; Surplus is part of Shareholders Funds (under Equity).
- Confusing "finance costs" with "other expenses" — interest on loans/debentures is finance costs, not other expenses.
- Forgetting to adjust for sales returns when computing "Revenue from Operations."
- Treating contingent liabilities as actual liabilities on the Balance Sheet face.
Summary
Companies must prepare financial statements as per Schedule III format. The Balance Sheet lists equity and liabilities on one side and assets on the other in vertical format. The Statement of P&L shows revenues and expenses arriving at PAT. Notes to Accounts are integral and mandatory. Provisions are charges against profit; reserves are appropriations. Contingent liabilities are disclosed in notes, not on the Balance Sheet face.