Preparation of the Statement of Profit and Loss and Balance Sheet

Introduction
financial statements are compilation of financial data, collected and classified in a systematic manner
according to the accounting principles, to assess the financial performance and financial position of an
enterprise. Financial statements provide information that is useful to a wide range of users in making
economic decisions.

Types of Financial Statement

The following are the major types of financial statements prepared by entities.
(a) Statement of Financial Performance or Income Statement
(b) Statement of Financial State of Affairs or Balance Sheet
(c) Statement of Changes in Financial Position
(d) Statement of Inflow and Outflow of Cash

Regulatory Framework Related to Preparation of Financial Statements

In India, preparation and presentation of financial statements is guided by –
(a) The Companies Act, 2013;
(b) The Companies (Accounts) Rules 2014;
(c) Accounting Standards (AS or Ind AS as applicable)
The relevant provisions under the above three regulatory sources are mentioned below.

Meaning of Financial Statements

According to Section 2(40) of Companies Act, 2013, financial statement in relation to a company, includes—
(i) a balance sheet as at the end of the financial year;
(ii) a profit and loss account, or in case of a company carrying on any activity not for profit,
an income and
expenditure account for the financial year;
(iii) cash flow statement for the financial year; and

(iv) any explanatory note annexed to, or forming part of, any document referred to
in sub-clause (i) to sub- clause (iv).
However, the financial statement, with respect to one person company, small company and dormant
company (Section 455) may not include cash flow statement.

Meaning of Financial Year

According to Section 2(41), financial year, in relation to any company or body corporate, means the period
ending on the 31st day of march every year. Where a company has been incorporated on or after 1st day of
January of a year, the first financial year will end on 31st day of March of the following year.
Frequency of Financial Statements
Financial statements are prepared as -
(i) Annual financial statements (i.e., once a financial year)
(ii) Quarterly financial statements which are prepared by listed companies on
quarterly basis as per SEBIrequirements.

Form and Content of Financial Statements

The form and content of Financial Statements have been specified in Schedule III of the Companies
Act, 2013. The objective of such specification is to improve the comparability of financial information
across entities.
Schedule III of the Companies Act, 2013 comprises of three divisions as follows:
(a) Division I: General Instructions for Preparation of Balance Sheet and Statement of
Profit and Loss of a company whose Financial Statements are required to comply
with the Companies (Accounting Standards) Rules, 2021.
(b) Division II: General Instructions for Preparation of Financial Statements of a
company whose Financial Statements are drawn up in compliance of the Companies
(Indian Accounting Standards) Rules, 2015.
(c) Division III: General Instructions for Preparation of Financial Statements for a Non-
Banking Financial Company (NBFC) whose financial statements are drawn up in
compliance of the Companies (Indian Accounting Standards) Rules, 2015.
Statement of Profit and Loss (as per Division I of Schedule III)

The Statement of Profit and Loss of a company is the statement of financial performance of the
entity and is also known as the Income Statement. The objective of preparing this statement is to
determine the profit (orloss) of a company for a particular reporting period.
Following is the pro-forma of the Statement of Profit and Loss suggested in Part II of Division I of
Schedule III.
Name of the Company: …………………………………………………

Statement of Profit and Loss for the year ended:… (Amount in `)

Not Figures Figures for

Particulars e forthe the Previous
No. Current Reporting
Reporting Period
Period
1 2 3 4
I Revenue from Operations XXX XXX
II Other Income XXX XXX
III Total Income (I+II) XXX XXX
IV Expenses:
Cost of Mat. Consumed XXX XXX
Purch. of Stock-In-Trade XXX XXX
Changes in Inventories of Finished Goods / Work- in- XXX XXX
progressand Stock-In-Trade
Employee Benefits Expense XXX XXX
Finance Costs XXX XXX
Depreciation and Amortization Expense XXX XXX
Other Expenses XXX XXX
Total Expenses XXX XXX
V Profit before Exceptional & Extraordinary Items XXX XXX
and Tax(III – IV)
VI Exceptional Items XXX XXX
VII Profit before Extraordinary Items and TAX (V-VI) XXX XXX
VIII Extraordinary Items XXX XXX
IX Profit before Tax (VII-VIII) XXX XXX
X Tax Expenses: XXX XXX
XI Profit /(Loss) for the period from Continuing XXX XXX
Operations (IX – X)
XII Profit /(Loss) from Discontinuing Operations XXX XXX
XIII Tax Expense of Discontinuing Operations XXX XXX
XIV Profit /(Loss) from Discontinuing Operations (After XXX XXX
Tax) (XII-XIII)
XV Profit / (Loss) for the period (XI + XIV) XXX XXX
XVI Earnings per Equity Share:
(1) Basic XXX XXX
(2) Diluted
Explanation of Statement of Profit & Loss
Revenue from Operation
• For Company other than a Finance Company: Revenue from Operations shall disclose separately in the
Notes, Revenue from –
(a) Sale of Products
(b) Sale of Services
(c) Grants or Donations received (relevant for Section 8 companies)
(d) Other Operating Revenues
Less: Excise Duty
• For Finance Company:
Revenue from Operations shall include Revenue from:
(a) Interest &
(b) Other Financial Services
Revenue under each of the above heads shall be disclosed separately by way of Notes toAccounts to the
extent applicable.

Other Income
Other Income shall be classified as –
(a) Interest Income (in case of a Company other than a Finance Company),
(b) Dividend Income,
(c) Net Gain/Loss on Sale of Investments,
(d) Other Non-Operating Income (Net of Expenses directly attributable to such income).
Note: Other operating revenues include Discount Received, Bad Debt Recovery etc.

Example 1:

Example 2:
Example 3:

Example 4:
Cost of material consumed
Cost of Materials Consumed is the first entry or line item in the 'Expenses' part of the Statement of Profit
& Loss. The term 'Materials' means raw materials and other materials used in manufacturing of goods.
'Cost of Materials Consumed' means cost of raw materials and other materials consumed in
manufacturing the goods. Thus, it is, Opening Inventory (Stock) of Materials + Purchases of Materials -
Closing Inventory (Stock) of Materials.

Example 1:

Example 2:
Example 3:

Purchases of Stock-in-Trade
Purchase of Stock-in- Trade means goods purchased for reselling. If the company carries out further
processing on the goods purchased, they do not remain Stock-in- Trade but become part of the Cost of
Materials Consumed. For example, if a company purchases paper for resale, it will be shown as 'Purchases
of Stock-in-Trade'. But, if paper is purchased for (say) manufacturing copies, it will be shown under 'Cost of
Materials Consumed.'

Changes in Inventories of Finished Goods, Work-in-Progress and

Stock-in-Trade
Changes in Inventories of Finished Goods, Work-in-Progress and Stock-in-Trade means the difterence
between the Opening and Closing Inventories (Stock) of Finished Goods, Work-in-Progress and Stock-
in- Trade.
In the Note to Accounts on Changes in Inventories of Finished Goods, Work-in-Progress and Stock-in-Trade
each item of Inventory is shown separately. This item is positive when opening inventory is more than the
closing inventory and is negative when opening inventory is less than the closing inventory. The balance
under each Inventory is added to show one amount against the entry in the Statement of Profit & Loss.

Example 1:
Employees Benefit Expenses
Employees Benefit Expenses mean payments made to and for the benetit of employees. For example,
wages, salaries, bonus, leave encashment, staff welfare expenses, etc., are shown in the Note to Accounts
on Employees Benefit Expenses and the total amount is shown on the face of the Statement of Profit &
Loss against Employees Benefit Expenses.
Expenses detailed in the Note to Accounts on Employees Benefit Expenses may be further shown as direct
expenses and indirect expenses. Following example (with imaginary data)
Example 1:
Example 2:
Finance Cost
Finance Costs mean costs incurred by the company on the borrowings, ve, loans taken by it. It, therefore,
includes interest paid on borrowings (such as term loans, bank overdraft and cash credit limit) from banks
and from others (such as public deposits, debentures, bonds, etc.).
Finance Costs also include expenses incurred for the borrowings such as loan processing fee, discount on
issue of debentures and premium payable on redemption ot debentures, etc., as these expenses are
incurred by the company for borrowings. However, Bank Charges are not shown under Finance Costs but
are shown under 'Other Expenses', they being an expense for services availed from the bank.
Example 1:

Depreciation and Amortization Expenses

Depreciation is an expense written off to Statement of Profit & Loss, it being cost of tangible fixed assets
written off over their estimated useful life. Depreciation is the fall in value of fixed asset due to its usage or
efflux of time or obsolescence.
Amortization, like depreciation is also an expense written off to Statement of Profit & Loss, being cost of
intangible fixed assets written off over their estimated useful life.
In the Statement of Profit & Loss, total amount is shown against Depreciation and Amortization Expenses
and the details are given in the Note to Accounts on Depreciation and Amortization Expenses.

Other Expenses
Expenses that are not shown under the above discussed six entries are shown under Other Expenses. The
detail of expenses shown under Other Expenses is given in the Note to Accounts. It should be kept in mind
that expenses shown as Other Expenses in the Note to Accounts on Other Expenses may be shown as
direct expenses and indirect expenses. For example, Carriage Inwards and Carriage Outwards are shown as
Other Expenses. Carriage Inwards is a direct expense and Carriage Outwards is an indirect expense.
Balance Sheet (as per Division I of Schedule III)
The Balance Sheet of a company is the statement of financial affairs of the entity. The objective of
preparing this statement is to determine the financial position of a company for a particular reporting
period.
Following is the pro-forma of the Balance Sheet suggested in Part I of Division I of Schedule III.
Name of the Company: ……………………………………………….
Balance Sheet as at: …………………………………………………… (` in……)
Particulars Not Figures as at the Figures as at the
e endof Current endof the
No. Reporting Previous
Period Reporting Period
1 2 3 4
I. EQUITY AND LIABILITIES
(1) Shareholders’ Funds
(a) Share Capital
(b) Reserves & Surplus
(c) Money Received against Share Warrants
(2) Share Application money pending allotment
(3) Non-Current Liabilities
(a) Long Term Borrowings
(b) Deferred Tax Liabilities (Net)
(c) Other Long-Term Liabilities
(d) Long Term Provisions
(4) Current Liabilities
(a) Short Term Borrowings
(b) Trade Payables
(c) Other Current Liabilities
(d) Short Term Provisions
Total
II ASSETS
(1) Non-Current Assets
(a) PPE and Intangible Assets
(i) Property, Plant and Equipment
(ii) Intangible Assets
(iii) Capital WIP
(iv) Intangible Assets under Development
(b) Non-Current Investment
(c) Deferred Tax Assets (Net)
(d) Long Term Loans & Advances
(e) Other Non-Current Assets
(2) Current Assets
(a) Current Investments
(b) Inventories
(c) Trade Receivables
(d) Cash & Cash Equivalents
(e) Short Term Loans & Advances
Total
HEADS AND CONTENTS OF BALANCE SHEET
Balance Sheet is divided in two parts, i.e., I. Equity and Liabilities; and II. Assets.

I. EQUITY AND LIABILITIES

Equity is the liability towards the shareholders and is termed as Shareholders' Funds. It includes Share
Capital, Reserves and Surplus and Money Received against Share Warrants.
The term Liabilities means external liabilities of the company, i.e., liabilities towards outsiders. It is further
categorized and shown as Non-current Liabilities and Current Liabilities.
In between Shareholders' Funds and Non-current Liabilities, 'Share Application Money Pending Allotment'
is shown.

1. Shareholders' Funds
Shareholders' Funds include three items, i.e., (a) Share Capital; (b) Reserves and Surplus; and (c) Money
Received against Share Warrants. Let us discuss them in detail.
(a) Share Capital
Share Capital includes.
(i) Shares issued against amount to promoters as subscribers to Memorandum of Association;
(ii) Shares issued by private placement.
(iii) Shares issued for subscription and subscribed.
(iv) Shares issued for consideration other than cash.
It includes both Equity Share Capital and Preference Share Capital.
The persons (individuals and companies) to whom shares are allotted are known as shareholders.
Schedule III of the Companies Act, 2013 prescribes that the Balance Sheet disclose, i.e., show authorized
capital, issued capital, subscribed capital, amount called-up by the company and paid-up by the
shareholders. Details required by the schedule are given in the Note to Accounts on Share Capital. The
details prescribed to be given for share capital are:

(i) Authorized Capital or Nominal Capital or Registered Capital

It is the maximum amount of capital that a company can issue as Share Capital. It is stated in the
Memorandum of Association of the company under Capital Clause and is divided into different classes of
Share Capital such as Equity Share Capital and Preference Share Capital. It is the maximum amount up to
which a company can issue shares under each class of Share Capital.
The amount of Authorized Capital is shown in the Note to Accounts on Share Capital for information only.
It is not added to the liability.
Definition of Authorised Capital [Section 2(8) of the Companies Act, 2013]
"Authorised Capital" or "Nominal Capital" or "Registered Capital" means such capital as is authorised by
the memorandum of a company to be the maximum amount of share capital of the company.

(ii) Issued Capital

Issued Capital is that part of authorized capital which the company has issued to promoters (as subscribers
to the Memorandum of Association), by private placement and for subscription up to the date of Balance
Sheet. Shares issued under each class of Share Capital (Equity or Preference) giving the number of shares
issued and their nominal (face) value is shown in the Note to Accounts on Share Capital.
It should be kept in mind that Issued Capital can be equal to or less than the Authorized Capital.
Also, it can be equal to or more than the Subscribed Capital.
Like Authorized Capital, the amount of Issued Capital is shown in the Note to Accounts on Share Capital for
information only. It is not added to the liability.
Definition of Issued Capital [Section 2(50) of the Companies Act, 2013]
"Issued Capital" means such capital as the company issues from time to time for subscription.

(iii) Subscribed Capital

Subscribed Capital is that part of the Issued Capital which has been subscribed. Amount received by the
company, whether in cash or kind, as Subscribed Capital is shown as Share Capital on the face of the
Balance Sheet.
Definition of Subscribed Capital [Section 2(86) of the Companies Act, 2013]
"Subscribed Capital" means such part of the capital which is for the time being subscribed by the
members of a company.
Subscribed Capital is classified, i.e., shown under the following two heads:
(a) Subscribed and fully paid-up; and
(b) Subscribed but not fully paid-up.

Subscribed and Fully Paid-up

Shares are shown as 'Subscribed and fully paid-up' when both the following conditions.
are met:
(i) the company has called the full nominal (face) value of the share; and
(ii) the company has received the amount called-up.

Subscribed but Not Fully Paid-up

Shares are shown as 'Subscribed but not fully paid-up' under the following two situations:
(i) When the Company has Called the full Nominal (Face) Value of the Share but has not received
the Amount Called-up.
(ii) When the Company has not Called the Full Nominal (Face) Value of the Share.

Definition of Called-up Capital [Section 2(15) of the Companies Act, 2013]

"Called-up Capital" means such part of the capital, which has been called for payment.

Definition of Paid-up Share Capital or Share Capital Paid-up [Section 2(64) of the Companies Act, 2013]
"Paid-up Share Capital" or "Share Capital Paid-up" means such aggregate of money credited as paid-up
as is equivalent to the amount received as paid-up in respect of shares issued and also includes any
amount credited as paid-up in respect of shares of a company but does not include any other amount
received in respect of such shares, by whatever name called.

Besides the above, following information is given in the Note to Accounts on Share Capital:
1. Shares allotted for consideration other than cash (say for purchase of assets, services taken and
underwriting commission, etc.) and shares allotted as fully paid bonus shares. This information is
disclosed under Subscribed Capital.
2. Calls-in-Arrears are shown by way of deduction from the amount of Subscribed Capital under the
heading 'Subscribed but not fully paid-up. Calls-in-Arrears from directors and officers are disclosed
(given) separately.
3. Amount in Forfeited Shares Account, i.e., the amount received on forfeited shares and not reissued
is shown in the Notes to Accounts under the head 'Share Capital' as a separate entry.
b) Reserves and Surplus
Reserve is the amount set aside, re., transferred out of profits.
(a) to meet the legal requirement such as Capital Reserve, Capital Redemption Reserve, Debentures
Redemption Reserve and Shares Options Outstanding Account.
(b) amount received being a capital receipt such as Securities Premium; or
(c) to meet any liability (say, Workmen Compensation Reserve) or to strengthen the financial position of
the company.

Schedule IlI of the Companies Act, 2013 prescribes the heads of Reserves and Surplus to be:
a) Capital Reserve.
b) Capital Redemption Reserve.
c) Securities Premium.
d) Debentures Redemption Reserve.
e) Revaluation Reserve.
f) Shares Options Outstanding Account.
g) Other Reserves (to specify the nature and purpose of each reserve); and
h) Surplus, i.e., Balance in Statement of Profit & Loss.

Capital Reserve
A reserve created out of the capital profit is known as Capital Reserve. It is created out of the profit earned
from transactions of capital nature and is not available for the distribution to the shareholders as dividend.
The examples of capital profit from which Capital Reserve is created are:
• Gain (Proft) on sale of Property, Plant and Equipment;
• Gain (Profit) on sale of investment.
• Gain (Profit) on reissue of forfeited shares; and
• Gain (Profit) on purchase of an existing business.

Capital Redemption Reserve

Capital Redemption Reserve is a reserve created when a company purchases its own shares out of free
reserves or Securities Premium. Section 69(1) of the Companies Act, 2013, requires that a sum equal to
nominal (face) value of shares so purchased shall be transferred to Capital Redemption Reserve. The
reserve may be used by the company to issue fully-paid bonus shares.
Section 55 of the Companies Act, 2013, requires that where preference shares are redeemed out of profits
which would be otherwise available for declaration of dividend a sum equal to Nominal (Face) Value of the
shares redeemed must be transferred to 'Capital Redemption Reserve.

Securities Premium
Securities Premium is a reserve to which amount received in excess of the nominal (face) value of
securities (e.g., shares, debentures, etc.) is credited. It can be used by a company for the purposes stated in
Section 52(2) of the Companies Act, 2013.

Debentures Redemption Reserve (DRR)

Debentures Redemption Reserve is a reserve credited by the amount prescribed under Section 71(4) of the
Companies Act, 2013 and Rule 18(7)(b) of the Companies (Share Capital and Debentures) Rules, 2014 by a
company before redemption of debentures.
It is discussed in the chapter Redemption of Debentures.

Revaluation Reserve
Revaluation Reserve is a reserve which is credited by the upward revision of the book value of an asset. It is
debited when the value of that asset is revised downward or the asset is sold or discarded. The amount
standing to the credit of Revaluation Reserve Account cannot be used for payment of dividend or issuing
bonus shares.

Shares Options Outstanding Account

Shares Options Outstanding Account is a reserve to which difference between the market value and issue
price of shares issued to employees is credited over the vesting period. For example, the market price of
the share is 75 and is to be issued to employees at 50. The difference
25 (i.e., < 75 - < 50) should be credited to this reserve.

(c) Money Received against Share Warrants

Share Warrants give the holder the right to get Equity Shares on a specified date and at a specified value.
Thus, Share Warrants will be converted into Equity Shares at a later date at a predetermined price. Since
these are to be converted into Equity Shares, these are classified or shown as Shareholders' Funds.

2. Share Application Money Pending Allotment

The amount received by the company as shares application and against which the company will certainly
allot shares is shown against Share Application Money Pending Allotment.
This situation will arise only when the application money is received before the Balance Sheet date and
allotment is made after the Balance Sheet date, i.e., 3lst March of that year,

When is Share Application Money a Current Liability?

Share Application Money received by the company and which is refundable to the applicants, ie, against
which shares will not be allotted, is shown as 'Other Current Liabilities' under the main head 'Current
Liabilities' in the Equity and Liabilities part of the Balance Sheet.
Share Application Money becomes refundable in the following circumstances:
(d) When the Issue is Oversubscribed
The amount received as application money in excess of issued capital being refundable to the applicants is
classified or shown under the major head 'Current Liabilities' and sub-head Other Current Liabilities' in the
Equity and Liabilities part of the Balance Sheet.
(a) When the issue is Oversubscribed and the amount is Payable in Instalments
In this case, the amount in excess of amount retained by the company to be adjusted against calls. It is
shown as 'Other Current Liabilities' under Current Liabilities.
(in) In case the Company has not received Minimum Subscription
In such a situation, it is classified or shown under major head 'Current Liabilities', and sub-head 'Other
Current Liabilities' in the Equity and Liabilities part of the Balance Sheet because the share application
money received is refundable to the applicants.

Liabilities
Liabilities are classified or shown as Non-current Liabilities and Current Liabilities in the Balance Sheet. The
two terms have been defined in Schedule Ill of the Companies Act, 2013.
The term 'Current Liabilities' is defined in Schedule III of the Companies Act, 2013 as follows:
Current Liability is that liability which Is:
(1) expected to be settled in company's normal operating cycle; or
(1) due to be settled within 12 months after the reporting date, i.e., Balance Sheet date; or (in) held
primarily for the purpose of being traded; or
(io) there is no unconditional right to defer settlement for at least 12 months after the
reporting date.
If a liability meets any of the above conditions, it is classified or shown as current liability.

The term Operating Cycle is defined in Schedule IlI of the Companies Act, 2013 as follows:
"Operating Cycle is the time between the acquisition of an asset for processing and its realisation into
Cash and Cash Equivalents.
Chart

Non-Current Liabilities
The term Non-current Liabilities is defined in Schedule III of the Companies Act, 2013 in a negative manner, i.e., non-
current liabilities are those liabilities which are not current liabilities.

Schedule III of the Companies Act, 2013 requires Non-current Liabilities to be classified into:

(a) Long-term Borrowings.

(b) Deferred Tax Liabilities (Net).

(c) Other Long-term Liabilities. and

(d) Long-term Provisions.

Let us now discuss each line item under non-current liabilities in detail.

(a) Long-term Borrowings

Borrowings mean the amount taken as loan by the company. It may be by issue of debentures, loan from banks or
private lenders, public deposits or of any other nature.

Borrowings are classified or shown as 'Long-term Borrowings' when the loan is repayable by the company after 12
months or after the period of operating cycle from the date of Balance Sheet. Whether a borrowing is Long-term
Borrowing or Short-term Borrowing, it is determined on the date of borrowing. Long-term Borrowings are shown
under the following heads in the Note to Accounts on Long-term Borrowings:

1. Debentures;
2. Bonds;
3. Term Loans: (a) from Banks; and (b) Other Parties; (iv) Public Deposits; and
4. Other Loans and Advances (nature to be specified).

(b) Deferred Tax Liabilities (Net)

Every year Accounting Income is compared with Taxable Income and if the difference between the two exists which is
temporary in nature, income tax on the difference amount is termed as deferred tax.

In case Accounting Income is more than the Taxable Income, it results in Deferred Tax Liability.

In case Accounting Income is less than the Taxable Income, it results in Deferred Tax Asset. The amount of Deferred
Tax Liability or Asset is adjusted to the existing balance in Deferred Tax Liabilities (Net) or Deferred Tax Assets (Net) as
the case may be.

(c) Other Long-term Liabilities

Long-term Liabilities other than Long-term Borrowings are classified or shown as Other

Long-term Liabilities under Non-current Liabilities. They are classified into:

1. Trade Payables
The term Trade Payables is defined in Schedule IlI of the Companies Act, 2013 as follows:
"Trade Payables are the amounts payable for goods purchased and services taken in the normal course of
business."
Trade payables include both sundry creditors and bills payable.
2. Others

(d) Long-term Provisions

Provision is the amount set aside to meet future liability, the amount of which cannot be determined with accuracy
but is estimated. Liability, on the other hand, means a liability the amount of which is determined, i.e., the amount
payable to meet the liability is known. Provision, like liability, can be long-term (non-current) provision and short-
term (current) provision.
Current Liabilities
Current Liability as defined in Schedule Ill of the Companies Act, 2013

Schedule III of the Companies Act, 2013 prescribes that Current Liabilities shall be classified into:

(a) Short-term Borrowings;

(b) Trade Payables;

(c) Other Current Liabilities; and

(d) Short-term Provisions.

Short-term borrowings
Short-term borrowings are borrowings of the company which are due for payment within 12 months or within the
period of Operating Cycle from the date of Balance Sheet. Whether a borrowing is Short-term Borrowing is
determined on the date of borrowing. Accordingly, loans that are repavable on demand or within 12 months or
within the period of Operating Cycle from the date of Balance Sheet are classified or shown as Short-term
Borrowings.

Each Short-term Borrowing is disclosed or shown in the Note to Accounts on Short-term

Borrowings. The items included are:

1. Loans repayable on demand;

2. Bank Overdraft or Cash Credit from banks;
3. Current Maturities of Long-term Debts;
4. Loans from other parties repayable within 12 months from the date of loan;
5. Deposits; and
6. Other Loans and Advances (Nature to be specified).

(b) Trade Payables

The term 'Trade Payables' is defined in Schedule III of the Companies Act, 2013 as the amount payable against
purchase of goods or services taken in the normal course of business and includes both sundry creditors and bills
payable. Thus, a liability on account of a transaction which is not the normal business of the company is not shown as
Trade Payables. For example, a trading company sells its fixed asset through an agent. The agent is to be paid §
10,000 as fee. © 10,000 will be shown as Other Current Liabilities and not as 'Trade Payables

(c) Other Current Liabilities

All current liabilities that are not short-term borrowings or trade payables are classified or shown as Other Current
Liabilities. These include:

(i) Interest Accrued but not Due on Borrowings

Interest accrued but not due means interest is provided in the books of account but it has not become due for
payment. For example, interest is payable half-yearly in June and December. If the company closes its books on 31st
March, it will provide interest for the quarter Januarv to March following the Accrual Concept of accounting. But the
interest will become due for payment on 30th June along with the interest for the quarter April to June. The interest
for the quarter January to March will be classified as 'Interest accrued but not dué' (it) Interest Accrued and Due on
Borrowings
Interest accrued and due means interest is provided in the books of account and is due for payment. In the above
example, interest for half-year June to December is provided in the books of account but has not been paid. It is
'Interest accrued and due' and shown as Other Current Liabilities. (ini) Income Received in Advance

Income received in advance means advance received by the company against which sale is yet to be made and/or
services are yet to be rendered. Since the income has not been earned, i.e., sales made or services rendered, it is
shown as 'Other Current Liabilities' and when it is earned it is transferred to income. (iv) Unpaid Dividends

Unpaid dividends are dividends declared but they remain unclaimed by the shareholders.

(U) Excess application money refundable and interest accrued thereon.

(vi) Unpaid matured deposits and interest accrued thereon.

(wit) Unpaid matured debentures and interest accrued thereon. (viii Calls-in-Advance.

(ix) Other Payables (Nature to be Specified)

Other payables include any other liability that is due for payment within 12 months or within the period of Operating
Cycle from the date of Balance Sheet. Examples are:

Outstanding Expenses, Provident Fund Payable, ESI Payable, etc.

(d) Short-term Provisions

Short-term Provisions are the provisions for liabilities which are likely to be paid within 12 months or within the
period of Operating Cycle from the date of Balance Sheet. Each item of short-term provision is disclosed or shown
separately in the Note to Accounts on Short-term Provisions, which are totalled and a single amount is shown against
Short-term Provisions in the Balance Sheet.

Short-term Provisions are classified into:

1. Provision for Employees Benefits;

2. Provision for Expenses;
3. Provision for Tax; and
4. Other Provisions.

Liability and Provision

The two terms 'Liability' and 'Provision' differ from each other as follows:

Liability: The term 'Liability' is used where the amount of the liability is known. For example, salary for March, 2023
of 1,00,000 is payable. It is classified or shown as Outstanding Salary (Liability) because the liability and the amount is
known Liability.

Provision: The term Provision' is used where the liability is known to exist, but the amount is not known. It is
estimated with substantial accuracy. Provision, if for providing as expense, is a charge against profit and is transferred
to the debit of Statement of Profit & Loss.

Examples of Provision: Provision for Doubtful Debts, Provision for Discount on Debtors, Provision for Depreciation,
Provision for Warranties, Provision for Repairs, Provision for Expenses (say Electricity), Provision for Tax, etc.
 II. ASSETS
Assets, like liabilities, are also divided into non-current assets and current assets.

Non-current assets is defined in Schedule III of the Companies Act, 2013 as "Non-current assets are those assets
which are not current assets."

Since non-current assets are defined in a negative manner, it is important to understand the meaning of current
assets.

Current Assets are defined in Schedule III of the Companies Act, 2013 as follows:

Current Assets are those assets which are:

1. expected to be realized in or intended for sale or consumption in the company's normal operating cycle; or
2. held primarily for the purpose of trading; or
3. expected to be realized within 12 months from the reporting date, i.e., Balance Sheet date; or
4. Cash and Cash Equivalents unless they are restricted from being exchanged or used to settle a liability for at
least 12 months after the reporting date, i.e., Balance Sheet date.

Operating Cycle

Operating Cycle is defined in Schedule III of the Companies Act, 2013 as follows:

Operating Cycle is the time between the acquisition of assets for processing and their realisation in Cash or Cash
Equivalents. If operating cycle cannot be identified, it is assumed to be of 12 months."

Non-Current Assets
Non-current Assets are classified into following five major heads:

(a) Property, Plant and Equipment and Intangible Assets.

(b) Non-current Investments.

(c) Deferred Tax Assets (Net).

(d) Long-term Loans and Advances; and

(e) Other Non-Current Assets.

Let us discuss them in detail.

Property, Plant and Equipment and Intangible Assets
Propertv, Plant and Equipment and Intangible Assets are those assets which are held by a company not for the
purpose of sale but for the purpose to increase earnings of the business. They are used for a long time to earn profit.
These assets are categorised into:

1. Property, Plant and Equipment.

2. Intangible Assets.
3. Capital Work-in-Progress; and
4. Intangible Assets under Development.
 1. Property, Plant and Equipment are the assets which have physical existence, i.e., they can be seen and
touched. Examples are: Land, Building, Machinery, Furniture and Fixtures, Computers, Vehicles, Office
Equipment, etc.
2. Intangible Assets are the assets which do not have physical existence and, thus, cannot be seen and touched.
Examples of Intangible Assets are:Goodwill, Brands/Trademarks, Computer Software,Mastheads and
Publishing Titles, Mining Rights, Copyrights, Patents, Licences and Franchise, etc.
3. Capital Work-in-Progress means (fixed) tangible assets under construction. (iv) Intangible Assets under
Development means (fixed) intangible assets like patents, intellectual property rights, etc., under
development.

Non-Current Investments
Non-current Investments are investments which are held not with the purpose to resell but to retain them. Non-
current Investments are further classified into "Trade Investments" and "Other Investments" Trade Investments are
investments made by a company in shares or debentures of another company to promote its own trade and
business. Other Investments are those investments which are not trade investments.

Investments are classified or shown under the following heads:

1. Investments in Property.
2. Investments in Equity Instruments.
3. Investments in Preference Shares.
4. Investments in Government or Trust Securities.
5. Investments in Debentures or Bonds.
6. Investments in Mutual Funds.
7. Investments in Partnership Firms; and\
8. Other Non-current Investments (Nature to be specified).

Deferred Tax Assets (Net) and Deferred Tax Liabilities (Net)

Deferred Tax Liabilities (Net) appears under Non-current Liabilities in the Equitv and Liabilities part of the Balance
Sheet and Deferred Tax Assets (Net) appears under Non-current Assets in the Assets part of the Balance Sheet. The
two terms are interrelated as balance in Deferred Tax Liabilities (Net) in one year may get converted into Deferred Tax
Assets (Net) in the next year and vice versa.

Long-term Loans and Advances

Long-term loans and advances are those loans and advances that are expected to be received back in cash or kind,
ie., in the form of an asset after 12 months or after the period of Operating Cycle from the date of Balance Sheet.
These are classified into:

(i) Capital Advances

Advances given for acquiring property, plant and equipment and intangible assets are known as Capital Advances.
Normally, such advances are not received back in cash but are received in the form of an asset. It means capital
advances get converted into asset of the company.

(ii) Other Loans and Advances (Nature to be specified)

Long-term loans and advances, other than those classified or shown under Capital Advances are classified or shown
as Other Loans and Advances. Other loans and advances are shown according to its nature. Examples of such loans
and advances are long-term loans to employees and long-term advances to suppliers, etc.
Other Non-Current Assets
All other non-current assets that do not fall into any of the above classifications (categories) are classified or shown
as Other Non current Assets. They are classified into:

• Security Deposits
Security deposits that are given for a long period, i.e., for a period of more than 12 months or after the
period of Operating Cycle from the date of Balance Sheet of the business are classified or shown as other
non-current asset. Example is security deposit for electricity.
• Long-term Trade Receivables
If the amount of trade receivable is receivable after 12 months from the date of Balance Sheet or after the
period of Operating Cycle, whichever is later, it is classified i.e., shown as Long-term Trade Receivable.
• Others
Besides trade receivables there may be other assets such as unamortised expenses/losses, insurance claim
receivable or amount due for asset sold, etc. Such assets are classified or shown under Other Non-current
Assets.
• Insurance Claim Receivable

Current Assets
Current Assets are classified or shown under following six heads:

(a) Current Investments.

(b) Inventories.

(c) Trade Receivables.

(d) Cash and Cash Equivalents.

(e) Short-term Loans and Advances; and

(f) Other Current Assets.

Let us discuss them in detail.

a) Current Investments
It refer to those investments which are held to be converted into cash within a short period, ie., within 12
months from the date of purchase of investment.
These are to be classified into:
1. Investments in Equity Instruments
2. Investments in Preference Shares.
3. Investments in Government or Trust Securities
4. Investments in Debentures or Bonds.
5. Investments in Mutual Funds; and
6. Investments in Partnership Firms, etc.

b) Inventories (stock)
 Inventories held for the purpose of trade in the ordinary course of business, i.e., for manufacturing or
trading of goods are classified or shown as current assets because they are held with the purpose to convert
them into Cash and Cash Equivalents within a short period. It includes Raw Materials; Work-in-Progress;
Finished Goods; Stock-in-Trade (for goods purchased for trading); Stores and Spares and Loose Tools, etc.

c)Trade Receivables
Trade Receivables means amounts receivable against sale of goods or services rendered by the company in
the normal course of business. They are classified or shown as current assets if they are receivable within a
period of 12 months or within the period of operating cycle from the date of Balance Sheet. Trade
Receivables includes both Debtors and Bills Receivable, Provision for Doubtful Debts:

(d) Cash and Cash Equivalents

Schedule IlI requires that Cash and Cash Equivalents be classified or shown as follows:

1. Balances with banks

2. Cheques, drafts on hand
3. Cash in Hand
4. Others.
5. Earmarked balances with banks (for example, Unpaid Dividend).
6. Balance with banks held as Margin Money; and
7. Bank Deposits with more than 12 months maturity.

(e) Short-term Loans and Advances

Short-term Loans and Advances are those loans and advances which are expected to be realised within 12 months or
within the period of operating cycle from the date of Balance Sheet, if operating cycle is more.

(f) Other Current Assets

All other current assets that do not fall in any of the above classifications or categories under Current Assets are
classified or shown as Other Current Assets. Examples of Other Current Assets are prepaid expenses, accrued
income, dividend receivable, advance taxes, etc.