Financial Statements of a Company (Schedule III)

Meaning and parts of a company's financial statements

Financial statements are the formal record of a company's financial activities. Under Section 129 and Schedule III of the Companies Act 2013, they include: the Balance Sheet, the Statement of Profit and Loss, the Cash Flow Statement, the Statement of Changes in Equity (if applicable) and Notes to Accounts. The format is vertical, with figures for the current and previous year.

They must give a true and fair view and follow accounting standards.

Balance Sheet: Equity and Liabilities

1. Shareholders' Funds: (a) Share capital; (b) Reserves and surplus (capital reserve, securities premium, general reserve, surplus i.e. balance in P&L); (c) Money received against share warrants.
2. Share application money pending allotment.
3. Non-current Liabilities: (a) Long-term borrowings (debentures, long-term loans); (b) Deferred tax liabilities (net); (c) Other long-term liabilities; (d) Long-term provisions (e.g. provision for employee benefits).
4. Current Liabilities: (a) Short-term borrowings (bank overdraft, current maturities of long-term debt); (b) Trade payables (creditors, bills payable); (c) Other current liabilities (interest accrued, calls in advance, unpaid dividend, income received in advance); (d) Short-term provisions (provision for tax).

Balance Sheet: Assets

1. Non-current Assets: (a) Property, Plant and Equipment and Intangible Assets — (i) PPE (land, buildings, machinery, vehicles), (ii) Intangible assets (goodwill, patents, software), (iii) Capital work-in-progress, (iv) Intangible assets under development; (b) Non-current investments; (c) Deferred tax assets (net); (d) Long-term loans and advances; (e) Other non-current assets.
2. Current Assets: (a) Current investments; (b) Inventories (raw materials, WIP, finished goods, stores, loose tools); (c) Trade receivables (debtors, bills receivable); (d) Cash and cash equivalents (cash, bank, cheques in hand); (e) Short-term loans and advances; (f) Other current assets (prepaid expenses, accrued income).

Current vs non-current: the rules

An asset is current if it is expected to be realised, sold or used within 12 months or the operating cycle, is held for trading, or is cash. A liability is current if it is to be settled within 12 months or the operating cycle, or is held for trading. Everything else is non-current.

Operating cycle = time from buying materials to getting cash from customers; if it cannot be identified, take 12 months.

Statement of Profit and Loss

1. Revenue from operations (sales of products/services, less GST).
2. Other income (interest, dividend, rent, profit on sale of assets).
3. Total income (I + II).
4. Expenses: cost of materials consumed; purchases of stock-in-trade; changes in inventories of finished goods, WIP and stock-in-trade; employee benefits expense; finance costs; depreciation and amortisation expense; other expenses.
5. Profit before exceptional and extraordinary items and tax; then tax; then profit (loss) for the period, and earnings per share.

Notes to accounts, uses and limits

Only totals appear in the statements; details go into numbered Notes (e.g. Note 1 Share Capital with authorised, issued, subscribed). Statements help shareholders, lenders, government and managers judge profit and safety. Limits: they show historical cost, ignore non-money facts (staff skill), and use estimates.

Key formulas and definitions

• Balance Sheet: Equity + Liabilities = Assets
• Shareholders' Funds = Share capital + Reserves and surplus + Money against share warrants
• Total income = Revenue from operations + Other income
• Profit before tax = Total income − Total expenses
• Profit for the year = Profit before tax − Tax
• Current = to be settled/realised within 12 months or the operating cycle

Worked examples

Common mistakes

• Putting calls in advance under share capital. It is an other current liability.
• Showing loose tools under PPE. They are inventories.
• Showing the whole long-term loan as non-current when an instalment is due within 12 months.
• Mixing up 'Other income' (non-operating) with 'Revenue from operations'.