Financial Statements of the Company

FINANCIAL STATEMENTS OF THE COMPANY

Introduction to Financial Statements:

Meaning of Financial Statements:

 Meaning:
i. An accounting process initiates with journalizing of the transactions and ends
with the preparation of Trial Balance which comprises of all the debit and credit
account balances.
ii. A summary of accounting data which is prepared by an enterprise at the end of
an accounting process with the help of such Trial Balance is known as Financial
Statements.
iii. As per Section 2(40) of the Companies Act, 2013, a set of Financial Statements
prepared in accordance with Schedule III of this Act comprises of a Balance
Sheet, Notes to Accounts, Statement of Profit and Loss and Cash Flow
Statement.

 Definition:
i. As per John N. Myer: “The Financial Statements provide a summary of accounts
of a business enterprise, the Balance Sheet reflecting the assets, liabilities and
capital as on a certain date and income statement showing the results and
operations during a certain period.”

Nature and Characteristics of Financial Statements:

 Nature: Nature of Financial Statements can be understood as a result of a
combination of the following points:

i. Recorded Facts: It refers to the recorded transactions in the books of account on

the basis of evidences.

ii. Conventions: All the transactions that are recorded in the books of account
should follow all the relevant accounting conventions as may be applicable to
the respective transactions. Such conventions make financial statements
reliable, understandable and comparable.

iii. Accounting Concepts: All the transactions that are recorded in the books of
account should follow the accounting concepts. Such concepts also make the
financial statements reliable, understandable and comparable.

iv. Personal Judgments: Personal judgments also have an important bearing on the
financial statements as it facilitates the selection of methods, etc. when any one
alternative is to be chosen out of the various alternatives.

v. Source of Financial Information: Financial statements acts a source of financial

information on the basis of which conclusions and interpretations can be drawn
about the financial performance and position of a company.

 Characteristics: Following are the Characteristics of Financial Statements:

2
Financial Statements of the Company
i. They are historical documents as are related to past period.

ii. They are expressed in monetary terms.

3
Financial Statements of the Company

iii. They show financial performance through the Statement of Profit and Loss
and financial position through Balance Sheet.

Objectives, Essentials and Limitations of Financial Statements:

Objectives: Financial Statements are prepared with an objective to:

i. Compute profit or loss from operating activities of the business.

ii. Present a true view of the financial position of the business.

iii. Provide information on economic resources of the business.

iv. Provide data about the inflow and outflow of cash and cash equivalent.

v. Determine the effectiveness of the management activities to ensure better

performance of its business.

vi. Provide necessary information to the users of such financial statements.

vii. Present and disclose accounting policies and conventions used in the preparation
of books of accounts of the business entity.

Essentials: Following are the Essentials of Financial Statements:

i. Factual Information: Financial Statements should disclose the factual information about
the financial position of the company.

ii. Understandability: Financial Statements should be prepared following the accepted

accounting principles for the better understanding of the users.

iii. Comparable: Financial Statements should disclose the information in a manner that the
user can compare the information of the same entity over years and also compare the
reporting company’s financial information with that of others.

iv. Verifiable: Financial Statements of the company should disclose such information which
is verifiable from the records of the company.

v. Relevant: Financial Statements should disclose the financial information which is in

accordance with the legal requirements.

vi. Timeliness: After the end of the accounting period, financial statements should be
prepared and presented within a reasonable period to avoid any undue effect on the
relevance of these statements.

Limitations: Following are the limitations of the financial statements:

i. Historical Records: Financial Statements provide information which is historical in
nature and therefore, it is not useful for the potential investors or lenders as it does
not provide any information of the future business or its future financial position.

4
Financial Statements of the Company

ii. Affected by Estimated: Financial Statements are the outcome of accounting concepts
and conventions combined with estimates and are therefore, not free from bias.

iii. Different Accounting Practices: Financial Statements can be drawn up on the basis of
different accounting practices. Profitability determined by each of these practise will
be different and hence, there is no standard practice which can be followed by all.

iv. Qualitative Elements are ignored: Financial Statements are based completely on
monetary items and therefore, many non-monetary important factors that affect the
profitability of the business are ignored.

v. Price Level Changes are ignored: Financial Statements follow the historical cost concept
while disclosing the value of assets. Because of such practices, current market value is
not taken into consideration.

vi. Does not meet the Interests of all Parties: Financial Statements for a period are used by a
number of interested users for various purposes and interests. It is not possible to
meet the purpose of all interested parties.

vii. Aggregate Information: Financial Statements show aggregate information and not
detailed information and hence, it is not useful for the users in decision making.

Users of Financial Statements:

Following are the categories of Users of Financial Statements:

1. Internal Users:

i. Shareholders: Shareholders are those users who provide funds or contribute

capital to the company and are therefore, exposed to risks. In view of the risk
involved, they are always interested in the profitability, returns, financial and
cash position of the company.

ii. Management: Management is responsible to safeguard the investment in

business and increase the value of business by managing the business
effectively and thereby maximising the profits. It makes use of the financial
information to arrive at the informed decisions to increase the profitability of the
business.

iii. Employees: Employees work in the company for a consideration in the form of
salary. In addition to the salary these employees are also entitled to various
benefits in form of bonus which is directly linked to the profits of the business.

2. External Users:

i. Banks and Financial Institutions: These are the organisations which provide loans
to the businesses and are therefore, concerned about the performance of the
company to ensure that the business is able to repay the loan along with the
interest due.

ii. Investors and Potential Investors: Investors wish to know how safe their
investments into a business are. The investors gain the information related to
investment directly from financial reports of the business so as to judge
profitability and growth status of business.
5
Financial Statements of the Company
iii. Creditors: Creditors are the suppliers who provide goods and services on credit
and are therefore, concerned about the financial stability of the company to
ensure that the dues are cleared on time without any delay.

6
Financial Statements of the Company

iv. Government and its Authorities: These users use the financial statements to
compile national income and then further take some important policy decisions.

v. Securities and Exchange Board of India (SEBI): SEBI and Other agencies study the
financial statements of the companies to check if the companies are operating
within the prescribed limits and investor interests are being protected.

Understanding Balance Sheet:

Meaning, Characteristics, Format and Contents of a Balance Sheet:

 Meaning: Balance Sheet or the Position Statement shows the financial position of a
business by providing complete details of its Assets, Liabilities and Equity at a
particular date.
o Equity: A liability towards the shareholders is termed as ‘Equity’ or
'Shareholders’ Funds’. Equity includes Share Capital, Money received against
Share Warrants.
o Liabilities: It is a liability towards the outsiders/external parties. It is shown as
Non-Current Liabilities and Current Liabilities.
 Characteristics: Following are the characteristics:
i. It comprises of balances of all the assets, liabilities and owner’s equity.
ii. It considers opening balances, transactions during the year and closing
balances for the items appearing in the Balance Sheet.
iii. It satisfies the accounting equation of Assets = Liabilities + Owner’s Equity.
iv. It gives a true picture of the financial position of an entity on a particular date.

7
Financial Statements of the Company

 Format: As prescribed in Part I of Schedule III of the Companies Act, 2013, Balance
Sheet is prepared as follows:
Particulars Note Figures at the Figures at the
end of the end of the
no.
Current Previous
(1) Reporting Reporting Period
Period (4)
(2) (3)
I. EQUITY AND LIABILITIES
1. Shareholders’ Funds
a) Share Capital … …
b) Reserves and 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) Fixed Assets:
i. Tangible Assets … …
ii. Intangible Assets … …
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 … …
… …
c) Trade Receivables
… …
d) Cash and Cash Equivalents
… …
e) Short-term Loans and Advances
f) Other Current Assets
Total … …

8
Financial Statements of the Company

9
Financial Statements of the Company

 Contents/Heads of Balance Sheet:

I. Items under Equity and Liabilities part of the Balance Sheet:
1. Shareholders’ Funds: This heading comprises of 3 more items which are as follows:
a. Share Capital: It is the value of shares issued by the company for
subscription to be received in cash or for consideration other than cash.
As per schedule III of the Companies Act, 2013 details of such share
capital are to be shown in the Notes to Accounts as follows:
i. Authorized Capital: or Nominal Capital is the amount of capital that
is stated in the Memorandum of Association under Capital Clause. It
is the maximum capital that a company can issue for subscription.
ii. Issued Capital: It is a part of Authorized Capital which is issued by the
company for subscription up to the date of Balance Sheet.
iii. Subscribed Capital (fully paid, not fully paid, calls in arrears, and
forfeited shares are also to be shown under Subscribed Capital): It is
a part of the Issued Capital which has been subscribed.
1. Subscribed and Fully Paid-up: To disclose shares on which
company has called the entire face value of share and same has
been received.
2. Subscribed but Not Fully Paid-up: To disclose shares on which
company has either called full amount but not received or
company has not called the full face value.
3. Calls-in-Arrears: Amount not received by the company against the
amount called up by it towards share capital.
4. Amount in Forfeiture Account, i.e. Amount received on forfeited
shares and not reissued.

10
Financial Statements of the Company

b. Reserves and Surplus: It is the amount of profits set aside out of profits
and surpluses and not distributed to the shareholders which can then be
used for any future uncertainties. As per Schedule III of the Companies
Act, 2013, reserves and surplus is to be shown in Notes to Accounts under
following heads:
i. Capital Reserve: It is a reserve which is created out of capital profits
like gain on sale of investment, gain on sale of fixed assets, gain on
reissue of shares, etc.
ii. Capital Redemption Reserve: It is a reserve created at the time when
the company purchases it’s owns shares out of free reserves or
securities premium reserve.
iii. Securities Premium Reserve: It is a reserve which is created with the
amount received in excess of the nominal or face value of securities
issued.
iv. Debenture Redemption Reserve: It is a reserve which is credited with
the amount prescribed under section 71(4) of the Companies Act,
2013 and its respective rules by a company before redeeming its
debentures.
v. Revaluation Reserve: It is a reserve which is credited by the upward
revision of the book value of an assets and debited with a downward
revision of the book value of an asset or when asset is sold or
discarded.
vi. Shares Options Outstanding Account: It is a reserve which is credited
with the amount of difference between the market value of the
shares issued to the employees and its issue price over its vesting
period.
vii. Other Reserves: It is a reserve which is of such nature and purpose
which is not specified under any of the heads above.
viii. Surplus, i.e., Balance in Statement of Profit and Loss: It is the excess of
incomes over expenses during a particular period.
c. Money Received against Share Warrants: Financial instruments that give the
holder right to acquire equity shares at a specified date and specified
price. These warrants will be converted into Equity Shares at a later date
at a predetermined price and therefore, are classified under Shareholder’s
Funds.
2. Share Application Money Pending Allotment: It shows the amount received by
the company towards the share application and against which it will certainly
allot shares. Share Application Money to be treated as Current Liability:
When share application money received by the company is to be refunded to
the applicants against which shares will not be allotted is shown as ‘Current
Liabilities’ under the sub-head ‘Other Current Liabilities’.
3. Non-Current Liabilities: As per Schedule III of the Companies Act, 2013, these
are those liabilities which are not current liabilities. Such liabilities are to be
classified into following heads:
a. Long-term Borrowings: These are the borrowings/loan that is repayable by
the company after 12 months from the date of Balance Sheet or after the
period of operating cycle. Long term borrowings are shown under
11
Financial Statements of the Company
following heads, (i) Debentures, (ii) Bonds, (iii) Term Loans- a. from Banks
and b. Others, (iv) Public Deposits, (v) Other Loans and Advances
b. Deferred Tax Liabilities: Deferred tax is the amount of tax that is calculated
on the amount of difference being temporary in nature, between the
Accounting Income and the Taxable Income for a particular year. If the
Accounting Income is more than the Taxable Income, it results in Deferred
Tax Liability.

12
Financial Statements of the Company

c. Other Long-term Liabilities: This head comprises of all long-term liabilities

other than long-term borrowings which are classified as follows:
i. Trade Payables: As per Schedule III of the Companies Act, 2013,
“Trade Payables are the amounts payable for goods purchased and
services taken in the normal course of business.” Trade Payables if
agreed to be settled after 12 months of the date of Balance Sheet or
after the period of operating cycle are shown under Other Long term
Liabilities.
ii. Others: This head comprises of all long-term liabilities other than
long-term borrowings and trade payables.
d. Long-term Provisions: It is an amount that is kept aside to meet future
liability with an amount that is difficult to ascertain but may be estimated
and only in case if liability will arise after 12 months or after the period of
operating cycle.
4. Current Liabilities: As per Schedule III of the Companies Act, 2013, a current
liability is the one which satisfies any of the following conditions:
a. to be settled within the company’s operating cycle or
b. to be settled within 12 months after the reporting date or
c. primarily held for the purpose of being traded or
d. There is no unconditional right to defer settlement for at least 12
months after the reporting date.
Such current liabilities are further classified as follows:
i. Short-term Borrowings: These are the borrowings which are repayable
within 12 months from the date of Balance Sheet or within the period
of Operating Cycle.
ii. Trade Payables: As per Schedule III of the Companies Act, 2013,
“Trade Payables are the amounts payable for goods purchased and
services taken in the normal course of business.” Such amount
includes sundry creditors and bills payable, i.e. when amount is due
to be paid within an operating cycle or 12 months from the date of
reporting.
iii. Other Current Liabilities: All current liabilities that are not short-term
borrowings or trade payables are shown as Other Current Liabilities.
This includes Current Maturities of Long term debt, Interest Accrued
but not due on borrowings, Interest Accrued and due on borrowings,
Income received in Advance, etc.
iv. Short term Provisions: It is a liability of an uncertain amount that has
been estimated, which is likely to be paid within 12 months of the
date of Balance Sheet or within the period of Operating Cycle,
whichever is longer.

II. Items under Assets part of the Balance Sheet:

o Non-Current Assets: As per Schedule III of the Companies Act, 2013, these are
the assets which are not current assets. It includes following major heads:
a. Fixed Assets: These are the assets which are not held by the company for
the purpose of trade or resale. Instead they are used to earn more and
more profits or are held by the business to increase earning capacity of
13
Financial Statements of the Company
business. These are further categorised as follows:
i. Tangible: Assets which can be seen, touched and have a physical
existence are termed as Tangible Assets.
ii. Intangible: Assets which cannot be seen, touched and do not have a
physical existence are termed as Intangible Assets.

14
Financial Statements of the Company

iii. Capital Work-in-Progress: These are the Tangible Assets which are
under construction.
iv. Intangible assets under development: These are the Intangible Assets
which are under development.
b. Non-current Investments: These are the investments which are not held by
the business for the purpose of trade or resell. Instead they are retained
for a longer period of time to earn income. This includes both Trade
Investments held by business to promote its own trade and business and
other investments like investments in property, binds, mutual funds, etc.
c. Deferred Tax Assets (Net): Deferred tax is the amount of tax that is
calculated on the amount of difference being temporary in nature,
between the Accounting Income and the Taxable Income for a particular
year. If the Accounting Income is less than the Taxable Income, it results
in Deferred Tax Assets.
d. Long-term Loans and Advances: These are those loans and advances which
are expected to be received back in cash or kind after a period of 12
months from the date of Balance Sheet or after the period of Operating
Cycle. Such loans are classified as follows:
i. Capital Advances: These are the advances which are advanced for
acquiring of fixed assets.
ii. Security Deposits: These are the security deposits which are given for
a period that is beyond 12 months from the date of Balance Sheet or
after the period of Operating Cycle of the business.
iii. Others: It comprises of all the long term loans and advances other
than those classified as Capital Advances and Security Deposits.
e. Other Non-Current Assets: It comprises of all the non-current assets other
than those specifically classified under each of the above heads.

o Current Assets: As per Schedule III of the Companies Act, 2013, a current
asset is the one that satisfies any of the following conditions:
a. to be realised or intended for sale or consumption within the
company’s operating cycle or
b. to be realised within 12 months after the reporting date or
c. primarily held for the purpose of being traded or
d. 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.
Current Assets are further classified into following heads:
i. Current Investment: These are those investments that are held to be
converted into cash within a period of 12 months from the date of
purchase of investment.
ii. Inventories: This refers to the stock of goods held in the ordinary
course of business for the purpose of trade and also stock of
materials which are used in the manufacturing of goods. This will also
include work in progress, stock in trade, stores and spares, loose
tools, etc.
iii. Trade Receivables: It is the amount receivable as a consideration for
15
Financial Statements of the Company
goods sold or services offered in the normal course of business where
such amount is receivable within a period of 12 months from the date
of Balance Sheet or within the period of operating cycle of the
business.

16
Financial Statements of the Company

iv. Cash and Cash Equivalents: It includes balances with banks, cheques,
cash in hand, earmarked balances with banks, balances held as
margin money by the banks, bank deposits with more than 12
months maturity, etc.
v. Short term Loans and Advances: These are those loans and advances
which are expected to be realised within 12 months from the date of
Balance Sheet or within the period of operating cycle.
vi. Other Current Assets: This includes all the current assets which are
not specifically categorized under any of the above heads.
o Contingent Liabilities: These are the liabilities which may or may not arise
depending on the happening or non-happening of an event in the future.
Such amount is not recorded in the books of account and therefore, is
required to be disclosed in the Notes to Accounts in order to inform the users
of the financial statements.
o Commitments: These are the financial commitments due to activities agreed
to by the company to be undertaken by it in future.

 Provisions and Reserves:

Basis Provisions Reserves

Meaning Proportion of profits set aside to Appropriation of profits for specific
meet purpose
known losses and expenses in
future
Nature Liability or Diminution in value of Shareholder’s Money
asset
or a loss
Purpose It is created for specific purposes It may either be created for a
like specific
depreciation, expenses, etc. purpose or for a general purpose.
Charge vs. It is a charge against the profit and It is an appropriation out of profits
Appropriation therefore, reduces amount of profit. and therefore, can be created only
when there
is profit.
Disclosure in It is shown in the Income It is not shown in the Income
the Income Statement under expenses. Statement.
Statement
Disclosure in It is shown in the Balance Sheet It is shown in the Balance Sheet
Balance under Long-term or Short-term under Reserves and Surplus in the
Sheet Provisions or as deduction from Equity and Liabilities part of the
the value of concerned assets in Balance Sheet.
the assets part of
the Balance Sheet.
Investment It cannot be invested anywhere It can be invested outside the
Outside and therefore, remains in the business which is then termed as fund.
Business business.
Legal It is created in accordance with It is created as a matte of financia
Requirement the legal requirements and also to prudence. r l

17
Financial Statements of the Company
comply with the prescribed
accounting
concepts and conventions.

18
Financial Statements of the Company

Understanding Statement of Profit and Loss:

Meaning, Characteristics, Format and Contents/Heads of a Statement of Profit

and Loss:
 Meaning: It is known as an Income Statement as it takes into consideration all the
incomes and expenses for a particular period in order to determine whether the entity
is a profit making entity or is running into losses. It shows the profitability of the
business entity for a given period of time, say if the given period is accounting year
2018-19, then such statement is prepared for a period of 12 months starting from 1st
April, 2018 to 31st March, 2019.
 Characteristics: Following are the characteristics:
i. It comprises of all the incomes earned and all the expenses incurred during a
particular accounting period.
ii. It is based on the historical data as it records all transactions which have
already taken place during that particular period.
 Format: As prescribed in Part II of Schedule III of the Companies Act, 2013,
statement of profit and loss is prepared as follows:

19
Financial Statements of the Company

Statement of Profit and Loss

for year ended...
Figures for Figures for
Note
S. No. Particulars the Current the Previous
No.
Year Year
I Revenue from Operations
II Other Income
III Total Revenue (I + II)
IV Expenses:
i. Cost of Material Consumed
ii. Purchase of Stock-in-Trade
iii. Changes in inventories of finished goods
iv. Work-in-progress and Stock-in-Trade
v. Employee Benefit Expenses
vi. Finance Cost
vii. Depreciation and Amortization Expenses
viii. Other Expenses
Total Expenses
V Profit before exceptional and extraordinary
items and tax (III – IV)
VI Exceptional items
VII Profit before extraordinary item and tax (V – VI)
VIII Extraordinary Items
IX Profit Before Tax (VII – VIII)
X Tax Expenses
(1) Current Tax
(2) Deferred Tax
XI Profit/(Loss) for period from continuing
operations (IX – X)
XII Profit/ (Loss) from discontinuing operations
XIII Tax expenses of discontinuing operations
XIV Profit/(Loss) from discontinuing operations
(after Tax (XII – XIII)
XV Profit (Loss) for the period (XI + XIV)
XVI Earning Per Equity Shares
(1) Basic
(2) Diluted

Note no. column has been kept for the purpose of specifying cross reference to the
Note no. in the Notes to Accounts where detail of the respective item can be given.

20
Financial Statements of the Company

 Contents/Heads:
a. Revenue:
i. Revenue from Operations: It is the amount of revenue earned by the entity
from the activities carried out by it with an objective to earn profits or
operating activities.
o In case of a manufacturing or trading company, revenue from operations
is the amount of net sales i.e., Sales less Sales Return.
o In case of a service company, revenue from operations is amount of fee
earned.
o In case of a finance company, revenue from operations is amount of
interest and dividend earned.
ii. Other Income: It is the amount of revenue earned by an entity from its non-
operating activities, i.e. sources that are not its business activities.
o In case of a manufacturing, trading or service company, other income
shall comprise of gain or loss on sale of fixed assets, bad debts
recovered, interest on fixed deposits, etc.
o In case of a finance company, other income shall comprise of any amount
that is earned from a non-finance activity.

b. Expenses:
i. Cost of Materials Consumed: It is the amount of raw or other materials used in
the manufacturing of finished goods. In order to compute the amount of
materials consumed, following formula is to be follows:
Cost of Materials Consumed = Opening Inventory (Stock) of Materials
 Purchases of Materials
 Closing Inventory (Stock) of Materials

ii. Purchases of Stock-in-Trade: It the amount of goods purchased for the

purpose of trading or reselling. If any further process is carried out on such
purchased goods then they are no longer termed as Stock-in-Trade as they
become a part of Cost of Materials Consumed.
iii. Changes in Inventories (Finished goods, Work-in-Progress and Stock-in-Trade): It
is the difference between the opening and closing inventories of finished
goods, work-in- progress and stock-in-trade which is recorded as an expense
in the Statement of Profit and Loss.
iv. Employee Expenses: It is the amount of payments made to and for the benefit
of employees. It includes the amounts of wages, salaries, bonus, amount
spent on staff welfare expenses, etc. Detailed information of the total
amount spent is presented in the Notes to Accounts provided with the
financial statements.
v. Finance Costs: It is cost that is incurred by the company on the borrowings or
loans taken by it which includes interests on such borrowings, loans,
overdraft, etc. used during a particular period by the entity.
vi. Depreciation Expenses: It is a fall in the value of tangible fixed assets due to
its use or obsolescence. Such amount is written off over the useful life of the
respective asset by showing it as an expense in the Statement of Profit and
Loss.

21
Financial Statements of the Company
vii. Amortisation Expenses: It is a fall in the value of intangible fixed assets
which is written off over their useful life and accordingly shown as an
expense in the Statement of Profit and Loss.

22
Financial Statements of the Company

viii. Other Expenses: The expenses which are not shown separately in the
Statement of Profit and Loss are shown under this head. Complete details of
such expenses are given in the Note to Accounts as direct and indirect
expenses.

23