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VASANT by VASANT
PUNJAJI
PUNJAJI DARADE
Date:
DARADE 2022.09.21
22:02:14 +05'30'

Financial Statements of a Company 3

H aving understood how a company raises its

capital, we have to learn the nature, objectives
and types of financial statements it has to prepare
including their contents, format, uses and
limitations. The financial statements are the end
products of accounting process. They are prepared
following the consistent accounting concepts,
principles, procedures and also the legal
environment in which the business organisations
operate. These statements are the outcome of the
summarising process of accounting and are,
therefore, the sources of information on the basis of
LEARNING OBJECTIVES
which conclusions are drawn about the profitability
After studying this chapter, and the financial position of a company. Hence, they
you will be able to : need to be arranged in a proper form with suitable
• explain the nature and contents so that the shareholders and other users
objectives of financial of financial statements can easily understand and
statements of a
use them in their economic decisions in a meaningful
company;
way.
• describe the form and
content of Statement of
Profit and Loss of a
3.1 Meaning of Financial Statements
company as per Financial statements are the basic and formal annual
(revised) schedule VI; reports through which the corporate management
• describe the form and communicates financial information to its owners
content of balance sheet and various other external parties which include
of a company as per investors, tax authorities, government, employees,
(revised) schedule VI; etc. These normally refer to: (a) the balance sheet
• explain the significance (position statement) as at the end of accounting
and limitations of period, and (b) the statement of profit and loss of a
financial statements;
company. Now-a-days, the cash flow statement is
and
also taken as an integral component of the financial
• prepare the financial statements of a company.
statements.
150 Accountancy : Company Accounts and Analysis of Financial Statements

3.2 Nature of Financial Statements

The chronologically recorded facts about events expressed in monetary terms
for a defined period of time are the basis for the preparation of periodical financial
statements which reveal the financial position as on a date and the financial
results obtained during a period. The American Institute of Certified Public
Accountants states the nature of financial statements as, “the statements
prepared for the purpose of presenting a periodical review of report on progress
by the management and deal with the status of investment in the business and
the results achieved during the period under review. They reflect a combination
of recorded facts, accounting principles and personal judgements”.
The following points explain the nature of financial statements:
1. Recorded Facts: Financial statements are prepared on the basis of
facts in the form of cost data recorded in accounting books. The original
cost or historical cost is the basis of recording transactions. The figures
of various accounts such as cash in hand, cash at bank, trade
receivables, fixed assets, etc., are taken as per the figures recorded in
the accounting books. The assets purchased at different times and at
different prices are put together and shown at costs. As these are not
based on market prices, the financial statements do not show current
financial condition of the concern.
2. Accounting Conventions: Certain accounting conventions are followed
while preparing financial statements. The convention of valuing
inventory at cost or market price, whichever is lower, is followed. The
valuing of assets at cost less depreciation principle for balance sheet
purposes is followed. The convention of materiality is followed in dealing
with small items like pencils, pens, postage stamps, etc. These items
are treated as expenditure in the year in which they are purchased
even though they are assets in nature. The stationery is valued at cost
and not on the principle of cost or market price, whichever is less. The
use of accounting conventions makes financial statements comparable,
simple and realistic.
3. Postulates: Financial statements are prepared on certain basic
assumptions (pre-requisites) known as postulates such as going
concern postulate, money measurement postulate, realisation
postulate, etc. Going concern postulate assumes that the enterprise is
treated as a going concern and exists for a longer period of time. So the
assets are shown on historical cost basis. Money measurement
postulate assumes that the value of money will remain the same in
different periods. Though there is drastic change in purchasing power
of money, the assets purchased at different times will be shown at the
Financial Statements of a Company 151

amount paid for them. While, preparing statement of profit and loss
the revenue is included in the sales of the year in which the sale was
undertaken even though the sale price may be received over a number
of years. The assumption is known as realisation postulate.
4. Personal Judgements: Under more than one circumstance, facts and
figures presented through financial statements are based on personal
opinion, estimates and judgements. The depreciation is provided taking
into consideration the useful economic life of fixed assets. Provisions
for doubtful debts are made on estimates and personal judgements.
In valuing inventory, cost or market value, whichever is less is being
followed. While deciding either cost of inventory or market value of
inventory, many personal judgements are to be made based on certain
considerations. Personal opinion, judgements and estimates are made
while preparing the financial statements to avoid any possibility of
over statement of assets and liabilities, income and expenditure,
keeping in mind the convention of conservatism.
Thus, financial statements are the summarised reports of recorded facts and
are prepared the following accounting concepts, conventions and requirements
of Law.

3.3 Objectives of Financial Statements

Financial statements are the basic sources of information to the shareholders
and other external parties for understanding the profitability and financial
position of any business concern. They provide information about the results of
the business concern during a specified period of time in terms of assets and
liabilities, which provide the basis for taking decisions. Thus, the primary
objective of financial statements is to assist the users in their decision-making.
The specific objectives include the following:
1. To provide information about economic resources and obligations of
a business: They are prepared to provide adequate, reliable and
periodical information about economic resources and obligations of a
business firm to investors and other external parties who have limited
authority, ability or resources to obtain information.
2. To provide information about the earning capacity of the business:
They are to provide useful financial information which can gainfully
be utilised to predict, compare and evaluate the business firm’s earning
capacity.
3. To provide information about cash flows: They are to provide
information useful to investors and creditors for predicting, comparing
and evaluating, potential cash flows in terms of amount, timing and
related uncertainties.
152 Accountancy : Company Accounts and Analysis of Financial Statements

4. To judge effectiveness of management: They supply information

useful for judging management’s ability to utilise the resources of a
business effectively.
5. Information about activities of business affecting the society: They
have to report the activities of the business organisation affecting the
society, which can be determined and described or measured and which
are important in its social environment.
6. Disclosing accounting policies: These reports have to provide the
significant policies, concepts followed in the process of accounting and
changes taken up in them during the year to understand these
statements in a better way.

3.4 Types of Financial Statements

The financial statements generally include two statements: balance sheet and
statement of profit and loss which are required for external reporting and also
for internal needs of the management like planning, decision-making and control.
Apart from these, there is also a need to know about movements of funds and
changes in the financial position of the company. For this purpose, a statement
of changes in financial position of the company or a cash flow statement is
prepard.
3.4.1 Form and Content of Balance Sheet : Balance sheet of a company is
prepared and presented in the form prescribed in (Revised) Schedule VI of the
Companies Act, 1956. The form prescribed is vertical and is given in Exhibit
3.1.
Every company registered under the Act shall prepare its balance sheet,
statement of profit and loss and notes to account thereto in accordance with the
manner prescribed in the revised Schedule VI to the Companies Act, 1956 to
harmonise the disclosure requirement with the accounting standards and to
converge with new reforms. With regard to this, the Ministry of Corporate Affairs
(MCA) has prescribed a (Revised) Schedule VI to the Companies Act, 1956 (vide
Notification dated 28.02.2011). It is applied to the financial statements prepared
for all financial periods beginning on or after April 01, 2011 by the Indian
Companies. The revised Schedule VI has introduced many disclosure
requirements. It has also done away with several statutory disclosure
requirements.
Financial Statements of a Company 153

Balance Sheet as at 31st March, 20.....

Particulars Note No. Figure as Figure as

at the end at the end
of Current of Previous
reporting reporting
period period

I. EQUITY AND LIABILITIES

1) Shareholder’s 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

See accompanying notes to the financial statements

NOTES:

Exhibit. 3.1: Vertical Form of Balance Sheet

154 Accountancy : Company Accounts and Analysis of Financial Statements

Important Features of Revised Schedule VI

1. It applies to all Indian companies preparing financial statement
commencing on or after April 01, 2011.
2. It does not apply to (i) Insurance or Banking Company, (ii) Company for
which a form of balance sheet or income statement is specified under
any other Act.
3. Accounting standards shall prevail over Schedule VI of the Companies
Act, 1956.
4. Disclosure on the face of the financial statements or in the notes are
essential and mandatory.
5. Revised Schedule VI has eliminated the concept of ‘Schedule’.
6. Terms in the revised Schedule VI will carry the meaning as defined by
the applicable accounting standards.
7. Balance to be maintained between excessive details that may not assist
users of financial statements and not providing important information.
8. Current and non-current bifurcation of assets and liabilities is applicable.

Box 1
Rounding-off Rule for figures in the Presentation of Financial Statements
Rounding off of figures to be reported in the financial statements is based on the size of
turnover:
1. Turnover < Rs.100 crore: Nearest hundreds, thousands, lakhs or millions or
decimal thereof;
2. Turnover > Rs.100 crore: Nearest lakhs or millions or decimal thereof;

9. Rounding off requirements is mandatory (refer box 1).

10. Vertical format for presentation of financial statement is prescribed (refer
Exhibit 3.1).
11. Debit balance in the statement of profit and loss to be disclosed as negative
figure under the head “Surplus”.
12. Mandatory disclosure for share application money pending allotment.
13. ‘Sundry Debtors’ and ‘Sundry Creditors’ replaced by terms ‘Trade
Receivables’ and ‘Trade Payables’.

Shareholders fund: Implication of Revised Schedule VI

In (revised) Schedule VI, the shareholders’ funds are sub-classified on the
face of the balance sheet.
a) Share Capital
b) Reserves and Surplus
c) Money received against Share Warrants
Financial Statements of a Company 155

Share Capital
Disclosures relating to share capital are to be given in notes to accounts of
(revised) Schedule VI. The following additions/modifications are significant:
a) For each class of shares, recognition of the number of shares outstanding
at the beginning and at the end of the reporting period is required.
b) The rights, preferences and restrictions attached to each class of shares
including restrictions on the distribution of dividends and repayment of
capital.
c) In order to bring clarity regarding the identity of ultimate owners of the
company:
i) Disclosure of shares in respect of each class in the company held
by its holding company or its ultimate holding company including
shares held by subsidiaries or associates of holding company or
the ultimate holding company in aggregate.
ii) Disclosure of shares in the company held by each shareholder
holding more than 5% shares specifying the number of shares held.
iii) Disclosure of the following for the period of 5 years immediately
preceding the date of the balance sheet:
— Aggregate number and class of shares allotted as fully paid up
pursuant to contracts without payment being received in cash.
— Aggregate number and class of shares allotted as fully paid up
by way of bonus shares.
— Aggregate number and class of shares bought back.
This may be noted that as per (revised) Schedule VI, the information of
shareholders funds are presented on the face of financial statements limited only to
broad and significant items. Details are given in Notes to Accounts.
In (revised) Schedule VI, there is no provision of Schedule 1, 2 or 3. All details are to
be given mandatorily in Notes to Accounts by note no.1, 2 or 3.
d) For each class of share capital:
i) The number and amount of share authorised.
ii) The number of shares issued, subscibed, fully paid and subscribed
but not fully paid.
iii) Par value per share.
iv) Reconciliation of the number of shares outstanding at the beginning
and end of the accounting period.
v) Rights, preferences and restrictions attaching each class of shares
including restrictions on the distribution of dividends and
repayment of capital.
vi) Aggregate number of shares with respect to each class in the
company held by its holding company, its ultimate holding
company including shares held by or by subsidiaries or associates
of the holding company or the ultimate holding company.
156 Accountancy : Company Accounts and Analysis of Financial Statements

vii) Shares reserved for issue under options and contracts/

commitments for the sale of shares/disinvestment, including terms
and amount.
viii) For a period of 5 years immediately proceeding the date at which
balance sheet in prepared for:
(a) Shares reserved under contracts/commitments.
(b) Number and class of shares bought back.
(c) Number and class of shares allotted for consideration other
than cash and bonus shares.
ix) Terms of any securities convertible into equity/preference shares
issued along with earliest date of conversion in descending order,
starting from the farthest such date.
x) Calls unpaid (aggregate).
xi) Forfeited shares (amout originally paid up).
Reserve and Surplus
As per (revised) Schedule VI, Reserves and Surplus are required to be classified
as:
i) Capital Reserve
ii) Capital Redemption Reserve
iii) Securities Premium Reserve
iv) Debenture Redemption Reserve
v) Revaluation Reserve
vi) Share Options Outstanding Account
vii) Other Reserves (Specifying nature and purpose)
viii) Surplus: Balance in statement of profit and loss; disclosing allocations
and Appropriation such as dividend, bonus shares, transfer to/from
reserve, etc.
Significant additions/modifications regarding disclosure of reserve and surplus
are as follows:
a) A reserve specifically represented by earmarked investments shall be
termed as “Fund”.
b) ‘Debit’ balance of statement of profit and loss shall be shown as a negative
figure under ‘Surplus’ head.
c) The balance of “Reserve and Surplus” after adjusting negative balance of
Surplus, if any, shall be shown under “Reserve and Surplus” read even
if the resulting figure is ‘negative’.
d) Share options outstanding account has been recognised as a separate
item under ‘Reserve and Surplus’. ICAI’s Guidance Note on Accounting
for Employee share based payments requires a credit balance in the ‘Stock
option outstanding Account’ to be disclosed in balance sheet under
separate heading’ between share capital and reserves and surplus as a
part of shareholders fund.
Financial Statements of a Company 157

Money Received against share warrants

The (revised) Schedule VI specifically requires ‘money received against share
warrants’ to be disclosed as a separate line item under ‘shareholder’s fund’.
Illustration 1
Dinkar Ltd. has an authorised capital of Rs. 50,00,000 divided into equity shares
of Rs. 100 each. The company invited applications for 40,000 shares, applications
for 36,000 shares were received. All calls were made and duly received except
for 500 shares on which the final call of Rs. 20 was not received. The company
forfeited 200 shares on which final call was not received. Show how share capital
will appear in the balance sheet of the company as per (revised) Schedule VI
Part-I of the Companies Act, 1956. Also prepare ‘Notes to Accounts’ for the
same.
Solution:
Books of Dinkar Limited
Balance Sheet as at .......... (Date)

Particulars Note Amount

No. (Rs.)
I. Equity and Liabilities
1. Shareholders’ funds
a) Share capital 1 35,90,000

Notes to Accounts
Particulars Amount Amount
(Rs.) (Rs.)
1. Share capital
Authorised share capital
50,000 equity shares of Rs. 100 each 50,00,000
Issued capital
40,000 equity shares of Rs. 100 each 40,00,000
Subscirbed and fully paid up capital
35,500 equity shares of Rs. 100 each
fully paid 35,50,000
Subscirbed but not fully paid-up capital
300 equity shares of Rs. 100 each fully
called up 30,000
Less: Calls-in-arrears (300×20) (6,000)
24,000
Add: Share forfeiture A/c (200 shares × Rs. 80) 16,000 40,000
35,90,000

Current and Non-current Classification

(Revised) Schedule VI has introduced the classified balance sheet in terms of
current and non-current assets and current and non-current liabilities. The
158 Accountancy : Company Accounts and Analysis of Financial Statements

criteria for defining current assets and liabilities has been clearly spelled out
with non-current assets and liabilities being the residual items.
Current/Non-current distinction
A item is classified as current:
— if it is involved in entity’s operating cycle or,
— is expected to be realised/settled within twelve months or,
— if it is held primarily for trading or,
— is cash and cash equivalent or,
— if entity does not have on unconditional rights to defer settlement of
liability for atleast 12 months after the reporting period,
— other assets and liabilities are non-current.
Illustration 2
Show the following items in the balance sheet of Amba Ltd. as per revised schedule
VI as on March 31, 2013: Rs.
8% Debentures 10,00,000
Equity share capital 50,00,000
Securities premium 20,000
Preliminary expenses 40,000
Statement of Profit & Loss (cr.) 1,50,000
Discount on issue of 8% debentures 40,000
(Amount to be written in next 4 years approx.)
Loose tools 20,000
Bank balance 60,000
Cash in hand 38,000

Solution:
Books of Amba Ltd.
*Balance Sheet as at March 31, 2013
Particulars Note Amount
No. (Rs.)
I. Equity and Liabilities
1. Shareholders’ Funds
a) Share capital 50,00,000
b) Reserve and surplus 1 1,30,000
2. Non-current Liabilities
a) Long-term borrowings 2 10,00,000
II. Assets
1. Non-current assets
a) Other non-current assets 3 30,000
2. Current assets
a) Inventories 4 20,000
b) Cash and cash equivalents 5 98,000
c) Other current assets 6 10,000
* Relevant items only
Financial Statements of a Company 159

Notes to Accounts
Particulars Amount Amount
(Rs.) (Rs.)
1. Reserve and surplus
Securities premium 20,000
Less: Preliminary expenses (40,000)
(20,000)
Statement of profit and loss 1,50,000 1,30,000

2. Long-term borrowings
8% debentures 10,00,000
3. Other non-current assets
Discount on issue of 8% debentures 30,000
(¾ of Rs. 40,000)
4. Inventory
Loose tools 20,000
5. Cash and cash equivalents
Bank balance 60,000
Cash in hand 38,000 98,000
6. Other current assets
Discount on issue of 8% debentures 10,000
(¼ of Rs. 40,000)

Important points:
— Preliminary expenses are to be written-off completely in the year in which
such expenses are incurred. They should be written-off first from
securities premium and the balance if any, from statement of profit &
loss.
— Borrowing costs such as discount on issue of debentures could be written-
off over loan period.
Share application money
(Revised) Schedule VI requires share application money not exceeding the issued
capital and to the extent non-refundable shall be classified as non-current. It
will be shown on this face of balance sheet as share application money pending
allotment.
Borrowings
Total borrowings are categorised into long-term borrowings, short-term
borrowings and current maturities to long-term debt.
(i) Loans which are repayable in more than twelve months/operating cycle
are classified as long-term borrowings on the face of balance sheet.
160 Accountancy : Company Accounts and Analysis of Financial Statements

(ii) Loans repayable on demand or whose original tenure is not more than
twelve months/operating cycle are classified as short-term borrowings
on the face of balance sheet.
(iii) Current maturities to long-term loan include amount repayable within
twelve months/operating cycle under other current liabilities with Note
to Account.
Deferred tax assets/liabilities are always non-current. This is in accordance
to IAS-I.
Trade payables
Sundry creditors have been replaced with the term Trade payables and are
classified as current and non-current. Trade payables to be settled beyond 12
months from the date of balance sheet or beyond the operating cycle are classified
under “other long-term liabilities” with Note to Account. For example, purchase
of goods and services in normal course of business. The balance of trade payables
are classified as current liabilities on the face of balance sheet.
Provisions
The amount of provision settled within 12 months from balance sheet date or
within operating cycle period from date of its recognition is classified as short
term provisions and shown under current liabilities on the face of balance sheet.
Others are depicted as long-term provisions under non-current liabilities on the
face of balance sheet.
Fixed assets
There is no change in the treatment of fixed assets. Both tangible and intangible
assets are non-current. This may also be noted if the useful life of the asset is
less than 12 months. It will still fall under non-current.
Investments
Investments are also classified into current and non-current categories.
Investments expected to realise within twelve months are considered as current
investments under current assets. Others are classified as non-current
investments under non-current assets. Both are however shown on the face of
the balance sheet.
Inventories
All inventories are always treated as current.
Financial Statements of a Company 161

Trade receivables
Trade receivables realised beyond twelve months from reporting date/operating
cycle starting from the date of their recognition are classified as “Other non-
current assets” under the head non-current assets with Note to Accounts. For
example, sale of goods or services rendered in normal course of business. Others
are classified as current assets and shown on the face of the balance sheet.
Cash and cash equivalent
It is always current however, amounts which qualify as cash and cash equivalents
as per IAS-3 is shown here. The old Schedule VI contained cash and bank
balances on the face of balance sheet as against cash and cash equivalents. Now
that supremacy is accorded to AS over Schedule VI, cash and cash equivalents
are to the disclosed in accordance to IAS-3.
Illustration 3
Show the following items in the balance sheet of Sunfill Ltd. as at March 31,
2013 as per (revised) Schedule VI, Part-I of the Companies Act, 1956:

Particulars Amount (Rs.)

General Reserve (since 31 March 2012) 5,00,000

Statement of profit & loss (debit balance) for 2012-13 (3,00,000)

Solution:
Books of Sunfill Ltd.
Balance Sheet as at March 31, 2013

Particulars Note 31st March 31st March

No. 2012 (Rs.) 2013 (Rs.)
I. Equity and Liabilities
1. Shareholders’ Funds
Reserve and surplus 1 2,00,000 5,00,000

Notes to Accounts
Particulars Amount
(Rs.)
1. Reserve and surplus
General Reserve (1 April, 2012) 5,00,000
Less: Statement of profit and loss (3,00,000)
(Dr. balance)
2,00,000
162 Accountancy : Company Accounts and Analysis of Financial Statements

Illustration 4
Show the following items in the balance sheet of Avalon Ltd. as at March 31,
2013 as per (revised) Schedule VI, Part-I of the Companies Act, 1956:

Rs. in
Lakh
General Reserve (since 31 March 2012) 5
Statement of Profit & Loss (Debit Balance) for 2012-13 (8)

Solution:
Books of Avalon Ltd.
Balance Sheet as at March 31, 2013

Particulars Note 31 March

No. 2013 (Rs.)
I. Equity and Liabilities
1. Shareholders’ Funds
a) Reserve and Surplus 1 (3,00,000)

Notes to Accounts
Particulars Amount
(Rs.)
1. Reserve and Surplus
i) General reserve (1 April, 2012) 5,00,000
ii) Less: Statement of profit and loss (8,00,000)
(debit balance) (3,00,000)

Illustration 5
Arushi Ltd. issued 5,000, 10% debentures of Rs. 100 each at par but redeemable
at a premium of 5% after 5 years. Give journal entries and also prepare the
balance sheet of the company.
Solution:
Books of Arushi Ltd.
Journal
Date Particulars LF Debit Credit
Rs. Rs.
Bank A/c Dr. 5,00,000
To 10% Debenture Application 5,00,000
and Allotment A/c
(Being application money received)
10% Debenture Application Dr. 5,00,000
and Allotment A/c
Loss on Issue of Debentures A/c Dr. 25,000
To 10% Debentures A/c
To Premium on Redemption of 5,00,000
Debentures A/c 25,000
(Being debentures issued at par but
redeemable at premium)
Financial Statements of a Company 163

Arushi Ltd.
Balance Sheet as at ............
Particulars Note 31 March
No. 2013 (Rs.)
I. Equity and Liabilities
1. Non-current Liabilities
a) Long-term borrowing 1 5,00,000
b) Other long-term liabilities 2 25,000
Total 5,25,000
II. Assets
1. Non-current assets
a) Other non-current assets 3 20,000
2. Current Assets
a) Cash and cash equivalents 4 5,00,000
b) Other current assets 5 5,000
Total 5,25,000

Notes to Accounts
Particulars Amount
(Rs.)
1. Long-term borrowings
5,000, 10% debentures of Rs. 100 each 5,00,000
2. Other long term liabilities
Premium on redemption of debentures A/c 25,000
3. Other non-current assets
Loss on issue of debentures 20,000
(4/5th of Rs. 25,000)
4. Cash and cash equivalents
Cash at bank 5,00,000
5. Other current assets
Loss on issue of debentures 5,000
(1/5th of Rs. 25,000, i.e., amount to
be written-off in next 12 months)

Do it yourself
Classify the following items in the balance sheet of a company as per Section-
211 and Part-I of (revised) Schedule VI of the Companies Act, 1956
Sl. No. Items Major Head Sub-head (if any)
1. Goodwill
2. Forfeited shares
3. Acceptances
4. Preliminary expenses
5. Capital reserve
6. Loans from banks
7. Investment in shares and
debentures
8. Interest accrued and due on
debentures
164 Accountancy : Company Accounts and Analysis of Financial Statements

9. Interest accrued but not due on

Secured Loans
10. Interest accrued but not due on
Unsecured Loans
11. Interest accrued on Investments
12. Surplus
13. Securities Premium Reserve
14. Loose Tools
15. Provision for Taxation
16. Under writing Commission
17. Bills of Exchange
18. Unclaimed dividend
19. Short term loans & advances
20. Live stock
21. Calls unpaid/class in arrears
22. Uncalled liability on shares partly
paid
23. Discount allowed on issue of shares
and debentures (if amortised after
12 months)
24. Discount allowed on issue of shares
and debentures ( if amortised within
12 months)
25. Pre-paid Insurance
26. Stores and spare parts
27. Advances from customers
28. Debentures redemption reserve
29. Premium on redemption of
debentures
30. Loss on issue of debentures
31. Debentures redemption fund
32. Debentures redemption fund
investment
33. Vehicles
34. Sinking fund
35. Sinking fund investment
36. Advances to suppliers
37. Patents, trademarks, design
38. Calls in advance
39. Deposits with custom authorities
40. Arrears of fixed cumulative
dividend
41. Furniture and fittings
42. Brokerage on issues of shares
43. Statement of profit & loss (Dr.)
44. Capital work-in-progress
45. Provision for doubtful debts
46. Statement of profit & loss (Cr.)
Financial Statements of a Company 165

47. Uncalled liability on partly paid

shares held as investments
48. Claims against the company not
acknowledged as debt
49. Capital redemption reserve
50. Public deposits
51. Authorised capital

Illustration 6
From the given particulars of Shine and Bright Co. Ltd. as at March 31, 2013,
prepare balance sheet in accordance to the (revised) Schedule VI:

Particulars Amount Particulars Amount

Rs. Rs.
Preliminary expenses 2,40,000 Goodwill 30,000
Discount on Issue of shares 20,000 Loose Tools 12,000
10% Debentures 2,00,000 Motor vehicles 4,75,000
Stock in trade 1,40,000 Provision for tax 16,000
Cash at bank 1,35,000
Bills receivables 1,20,000

Solution:
Book of Shine and Bright Ltd.
Balance Sheet as at March 31, 2013
Particulars Note Figure as Figure as
No. at the end at the end
of current of previous
reporting reporting
period period
I. Equity and Liabilities
1. Non-current Liabilities
a) Long-term borrowings 1 2,00,000
2. Current liabilities
a) Short-term provisions 2 16,000
II. Assets
1. Non-current assets
a) Fixed assets
Tangible assets 3 4,75,000
Intangible assets 4 30,000
2. Other non-current assets* 5 2,60,000
Current assets
a) Inventories 6 1,52,000
b) Trade receivables 7 12,000
c) Cash and cash equivalents 1,35,000
166 Accountancy : Company Accounts and Analysis of Financial Statements

Notes to Accounts
Particulars Amount
(Rs.)
1. Long-term borrowings:
10% debentures 2,00,000
2. Short-term provisions:
Provision for taxation 16,000
3. Fixed assets:
(i) Tangible assets
Motor vehicles 4,75,000
(ii) Intangible assets
Goodwill 30,000
4. Other non-current assets
Preliminary expenses 2,40,000
Discount on issue of debentures 20,000 2,60,000
5. Inventories
Stock in trade 1,40,000
Loose tools 12,000 1,52,000
6. Trade receivables
Bills receivables 12,000
7. Cash & cash equivalents
Cash at bank 1,35,000

*It has been assumed that discount on issue of debentures is not written-off in the next
12 months of the reporting period.

3.4.2 Form and content of Statement of Profit and Loss

Statement of Profit and Loss represents revenue, expenses and financial result
of a business entity. A form for preparing Statement of Profit and Loss under
(Revised) Schedule VI, Part-II of the Companies Act 1956, is given in Exhibit
3.2.

Statement of Profit and Loss for the year ended ______________

Particulars Note No. Figure as Figure as
at the end at the end
of Current of Previous
reporting reporting
period period
I Revenue from operations
II Other income
III Total Revenue (I+II)
IV Expenses:
Cost of materials consumed
Purchases of stock-in-trade
Changes in inventories of finished goods
Financial Statements of a Company 167

Work-in-progress and stock-in-trade

Employee benefits expense
Finance costs
Depreciation and amortisation expense
Other expenses
Total expenses
V Profit before extraordinary items and tax
(III-IV)
VI Exceptional items
VII Profit before extraordinary items and tax
(V-VI)
VIII Extraordinary items
IX Profit before tax (VII-VIII)
X Tax expense:
(1) Current tax
(2) Deferred tax
XI Profit/(Loss) for the period from continuing
operations (IX-X)
XII Profit/(Loss) from discontinuing operations
XIII Tax expense of discontinuing operations
XIV Profit/(Loss) from Discontinuing operations
(after tax) (XII-XIII)
XV Profit/(Loss) for the period (XI + XIV)
XVI Earnings per equity share:
(1) Basic
(2) Diluted

Exhibit. 3.2: Form of Statement of Profit and Loss

The items of statement of profit and loss are discussed as follows:

1. Revenue from operations
This includes:
(i) Sale of products
(ii) Sale of services
(iii) Other operating revenues
In respect to a finance company, revenue from operational shall include
revenue from interest, dividend and income from other financial services.
It may be noted that under each of the above heads shall be disclosed
separately by way of notes to accounts to the extent applicable.
2. Other income
(Revised) Schedule VI requires the following classification:
(i) Interest income (in case of a company other than a finance company),
(ii) Dividend income,
(iii) Net gain/loss on sale of investments,
(iv) Other non-operating income (net of expenses directly attributable to
such income).
168 Accountancy : Company Accounts and Analysis of Financial Statements

3. Expense
(Revised) Schedule VI requires the following classification:

Expenses incurred to earn the income shown under various heads as discussed below:

(a) Cost of Materials It applies to manufacturing companies. It consists of

raw materials and other materials consumed in
manufacturing of goods.
(b) Purchase of Stock-in-trade It means purchases of goods for the purpose of trading.
(c) Changes in inventories of It is the difference between opening inventory (stock)
finished goods, WIP and of finished goods, WIP and stock-in-trade and closing
stock-in-trade inventory.
(d) Employees benefit expenses Expenses incurred on employees towards salary, wages,
leave encashment, staff welfare, etc., are shown under
this head. Employees benefit expenses may be further
categorised into direct and indirect expenses.
(e) Finance cost It is the expenses towards interest charges during the
year on the borrowings. Only the interest cost is to be
shown under this head. Other financial expenses such
as bank charges are shown under “Other Expenses”.
(f) Depreciation Depreciation is the diminution in the value of fixed
assets whereas amortisation is writing off the amount
relating to intangible assets.
(g) Other expenses All other expenses which do not fall in the above
categories are shown under other expenses. Other
expenses may further be categorised into direct
expenses, indirect expenses and non-operating
expenses.
Illustration 8
From the following particulars, prepare Statement of profit and loss for the year
ending March 2013, as per the revised Schedule VI:

Balances Rs. Rs.

Plant and Machinery 1,60,000
Land 6,74,000
Depreciation on Plant and Machinery 16,000
Purchases (Adjusted) 4,00,000
Closing stock 1,50,000
Wages 1,20,000
Sales (Net) 10,00,000
Salaries 80,000
Bank overdraft 2,00,000
10% debentures (issued on 1st April, 2012) 1,00,000
Equity share capital– shares of Rs. 100 each (fully paid) 2,00,000
Preference share capital– 1,000; 6% shares of Rs. 100 1,00,000
each (fully paid)
16,00,000 16,00,000
Financial Statements of a Company 169

Additional information
(i) Equity dividend @ 10% declared on paid up capital.
(ii) Dividend on the preference share capital paid in full.
(iii) Rs. 2,00,000 transferred to general reserve.

Solution
Statement of Profit and Loss
for the year ending 31st March, 2013
Particulars Note Amount
No. (Rs.)
I. Income
Revenue from operations (Sales) 10,00,000
Total 10,00,000
II. Expenses
Cost of materials consumed (Adjusted purchase) 4,00,000
Employees benefit expenses 1 2,00,000
Finance cost 10,000
Depreciation and amortisation 16,000
Total 6,26,000
Profit before tax (I-II) 3,74,000

Notes to Accounts
Particulars Amount Amount
Rs. Rs.
Employee Benefit Expenses
(i) Wages 1,20,000
(ii) Salary 80,000 2,00,000

3.5 Uses and Importance of Financial Statements

The users of financial statements include management, investors, shareholders,
creditors, government, bankers, employees and public at large. Financial
statements, provide the necessary information about the performance of the
management to these parties interested in the organisation and help in taking
appropriate economic decisions. It may be noted that the financial statements
constitute an integral part of the annual report of the company in addition to
the directors report, auditors report, corporate governance report, and
management discussion and analysis.
The various uses and importance of financial statements are as follows:
1. Report on stewardship function: Financial statements report the
performance of the management to the shareholders. The gaps between
the management performance and ownership expectations can be
understood with the help of financial statements.
170 Accountancy : Company Accounts and Analysis of Financial Statements

2. Basis for fiscal policies: The fiscal policies, particularly taxation policies
of the government, are related with the financial performance of
corporate undertakings. The financial statements provide basic input
for industrial, taxation and other economic policies of the government.
3. Basis for granting of credit: Corporate undertakings have to borrow
funds from banks and other financial institutions for different purposes.
Credit granting institutions take decisions based on the financial
performance of the undertakings. Thus, financial statements form the
basis for granting of credit.
4. Basis for prospective investors: The investors include both short-term
and long-term investors. Their prime considerations in their investment
decisions are security and liquidity of their investment with reasonable
profitability. Financial statements help the investors to assess long-
term and short-term solvency as well as the profitability of the concern.
5. Guide to the value of the investment already made: Shareholders of
companies are interested in knowing the status, safety and return on
their investment. They may also need information to take decision
about continuation or discontinuation of their investment in the
business. Financial statements provide information to the shareholders
in taking such important decisions.
6. Aids trade associations in helping their members: Trade associations
may analyse the financial statements for the purpose of providing
service and protection to their members. They may develop standard
ratios and design uniform system of accounts.
7. Helps stock exchanges: Financial statements help the stock exchanges
to understand the extent of transparency in reporting on financial
performance and enables them to call for required information to protect
the interest of investors. The financial statements enable the Stock
brokers to judge the financial position of different concerns and take
decisions about the prices to be quoted.

3.6 Limitations of Financial Statements

Though utmost care is taken in the preparation of the financial statements and
provide detailed information to the users, they suffer from the following
limitations:
1. Do not reflect current situation: Financial statements are prepared on
the basis of historical cost. Since the purchasing power of money is
changing, the values of assets and liabilities shown in financial
statement do not reflect current market situation.
2. Assets may not realise: Accounting is done on the basis of certain
conventions. Some of the assets may not realise the stated values, if
Financial Statements of a Company 171

the liquidation is forced on the company. Assets shown in the balance

sheet reflect merely unexpired or unamortised cost.
3. Bias: Financial statements are the outcome of recorded facts,
accounting concepts and conventions used and personal judgements
made in different situations by the accountants. Hence, bias may be
observed in the results, and the financial position depicted in financial
statements may not be realistic.
4. Aggregate information: Financial statements show aggregate
information but not detailed information. Hence, they may not help
the users in decision-making much.
5. Vital information missing: Balance sheet does not disclose information
relating to loss of markets, and cessation of agreements, which have
vital bearing on the enterprise.
6. No qualitative information: Financial statements contain only
monetary information but not qualitative information like industrial
relations, industrial climate, labour relations, quality of work, etc.
7. They are only interim reports: Statement of Profit and Loss discloses
the profit/loss for a specified period. It does not give an idea about the
earning capacity over time similarly, the financial position reflected in
the balance sheet is true at that point of time, the likely change on a
future date is not depicted.

Terms Introduced in the Chapter

1. Financial Statements
2. Statement of profit and loss
3. Balance Sheet
4. Cost of Material consumed
5. Postulates
6. Shareholders Funds

Summary
Financial Statements: Financial statements are the end products of accounting
process, which reveal the financial results of a specified period and financial position
as on a particular date. Financial Statements are prepared and published by
corporate undertakings for the benefit of various stakeholders. These statements
include Statement of profit and loss and balance sheet. The basic objective of
these statements is to provide information required for decision-making by the
management as well as other outsiders who are interested in the affairs of the
undertaking.
172 Accountancy : Company Accounts and Analysis of Financial Statements

Balance Sheet: The balance sheet shows all the assets owned by the concern, all
the obligations or liabilities payable to outsiders or creditors and claims of the
owners on a particular date. It is one of the important statements depicting the
financial position or status or strength of an undertaking.
Statement of Profit and Loss: The Statement of profit and loss is prepared for a
specific period to determine the operational results of an undertaking. It is a
statement of revenue earned and the expenses incurred for earning the revenue.
It is a performance report showing the changes in income, expenses, profits and
losses as a result of business operations during the year between two balance
sheet dates.
Significance of Financial Statements: The users of financial statements include
Shareholders, Investors, Creditors, Lenders, Customers, Management, Government,
etc. Financial statements help all the users in their decision-making process. They
provide data about general purpose needs of these members.
Limitations of Financial Statements: Financial statements are not free from limitations.
They provide only aggregate information to satisfy the general purpose needs of
the users. They are technical statements understood by only persons having some
accounting knowledge. They reflect historical information but not current situation,
which is essential in any decision making. In addition, one can get idea about the
organisation’s performance in terms of quantitative changes but not in qualitative
terms like labour relations, quality of work, employees satisfaction, etc. The financial
statements are neither complete nor accurate as the flow of income and expenses
are segregated using best judgement apart from accepted concepts. Hence, these
statements need proper analysis before their use in decision-making.

Questions for Practice

Short Answer Questions
1. State the meaning of financial statements?
2. What are limitations of financial statements?
3. List any three objectives of financial statements?
4. State the importance of financial statements to :
(i) shareholders
(ii) creditors
(iii) government
(iv) investors
Financial Statements of a Company 173

5. How will you disclose the following items in the Balance Sheet of a company;
(i) Loose tools
(ii) Uncalled liability on partly paid-up shares
(iii) Debentures redemption reserve
(iv) Mastheads and publishing titles
(v) 10% debentures
(vi) Proposed dividend
(vii) Share forfeited account
(viii) Capital redemtion reserve
(ix) Mining rights
(x) Work-in-progress

Long Answer Questions

1. Explain the nature of the financial statements.
2. Explain in detail about the significance of the financial statements.
3. Explain the limitations of financial statements.
4. Prepare the format of statement of profit and loss and explain its items.
5. Prepare the format of balance sheet and explain the various elements of
balance sheet.
6. Explain how financial statements are useful to the various parties who are
interested in the affairs of an undertaking?
7. ‘Financial statements reflect a combination of recorded facts, accounting
conventions and personal judgements’ discuss.
8. Explain the process of preparing income statement and balance sheet.

Numerical Questions
1. Show the following items in the balance sheet as per the provisions of the
companies Act, 1956 in (Revised) Schedule VI:
Particulars Rs. Particulars Rs.
Preliminary Expenses 2,40,000 Goodwill 30,000
Discount on issue of shares 20,000 Loose tools 12,000
10% Debentures 2,00,000 Motor Vehicles 4,75,000
Stock in trade 1,40,000 Provision for tax 16,000
Cash at bank 1,35,000
Bills receivable 1,20,000
174 Accountancy : Company Accounts and Analysis of Financial Statements

2. On 1 April, 2013, Jumbo Ltd., issued 10,000; 12% debentures of

Rs. 100 each a discount of 20%, redeemable after 5 years. The
company decided to write-off discount on issue of such debentures
over the life time of the Debentures. Show the items in the balance
sheet of the company immediately after the issue of these
debentures.
3. From the following information prepare the balance sheet of Gitanjali
Ltd., as per the (Revised) Schedule VI:
Inventories Rs. 14,00,000; Equity Share Capital Rs. 20,00,000;
Plant and Machinery Rs. 10,00,000; Preference Share Capital
Rs. 12,00,000; Debenture Redemption Reserve Rs. 6,00,000;
Outstanding Expenses Rs. 3,00,000; Proposed Dividend Rs. 5,00,000;
Land and Building Rs. 20,00,000; Current Investments Rs. 8,00,000;
Cash Equivalent Rs. 10,00,000; Short term loan from Zaveri Ltd. (A
Subsidiary Company of Twilight Ltd.) Rs. 4,00,000; Public Deposits
Rs. 12,00,000.
4. From the following information prepare the balance sheet of Jam
Ltd. as per the (revised) Schedule VI:
Inventories Rs. 7,00,000; Equity Share Capital Rs. 16,00,000; Plant
and Machinery Rs. 8,00,000; Preference Share Capital Rs. 6,00,000;
General Reserves Rs. 6,00,000; Bills payable Rs. 1,50,000; Provision
for taxation Rs. 2,50,000; Land and Building Rs. 16,00,000; Non-
current Investments Rs. 10,00,000; Cash at Bank Rs. 5,00,000;
Creditors Rs. 2,00,000; 12% Debentures Rs. 12,00,000.
5. Prepare the balance sheet of Jyoti Ltd., as at March 31, 2013 from
the following information as per provisions of (Revised) Schedule VI
of the Companies Act, 1956:
Building Rs. 10,00,000; Investments in the shares of Metro Tyers
Ltd. Rs. 3,00,000; Stores & Spares Rs. 1,00,000; Discount on issue
of 10% debentures Rs. 10,000; Statement of Profit and Loss (Dr.)
Rs. 90,000; 5,00,000 Equity Shares of Rs. 20 each fully paid-up;
Capital Redemption Reserve Rs. 1,00,000; 10% Debentures Rs. 3,00,000;
Unpaid dividends Rs. 90,000; Share options outstanding account Rs.
10,000.
6. Brinda Ltd., has furnished the following information:
(a) 25,000, 10% debentures of Rs.100 each;
(b) Bank Loan of Rs.10,00,000 repayable after 5 years;
(c) Interest on debentures is yet to be paid.
Financial Statements of a Company 175

Show the above items in the balance sheet of the company as at March 31,
2013.
7. Prepare a balance sheet of Black Swan Ltd., as at March 31, 2013 as per
the provisions of Schedule VI of the Companies Act, 1956 from the following
information:
Rs.
General Reserve : 3,000
10% Debentures : 3,000
Balance in Statement of : 1,200
Profit and Loss
Depreciation on fixed assets : 700
Gross Block : 9,000
Current Liabilities : 2,500
Preliminary Expenses : 300
6% Preference Share Capital : 5,000
Cash & Cash Equivalents : 6,100

Answers to Test your Understanding

Test your Understanding – I

1. (i) True (ii) True (iii) False (iv) False (v) True
2. (i) Basic sources (ii) Shareholders (iii) Accrual
(iv) Balance sheet (v) Income.