- Meaning: Current Assets are assets expected to be realised or converted into cash within 12 months or within the operating cycle.
- Types: Classified into Current Investments, Inventories, Trade Receivables, Cash & Bank Balance, Short-term Loans & Advances, and Other Current Assets.
- Inventories: Includes raw materials, WIP, finished goods, stock-in-trade, spares, tools, and goods-in-transit held for trade or production.
- Trade Receivables: Amounts receivable from customers for goods/services sold; includes debtors and bills receivable, shown net of provisions.
- Other Current Assets: Includes prepaid expenses, dividend receivable, interest accrued, and advance taxes not covered under other heads.
Definitions [1]
Definition: Financial Statements
- "Financial Statements are the end product of financial accounting prepared by the accounts of a business enterprise that purport to reveal the financial position of the enterprise, the result of its recent activities and an analysis of what has been done with earnings." - Smith and Ashburne
- "The Financial Statements are a summary of accounts of a business enterprise, the Balance Sheet showing the assets, liabilities and capital as on a certain date and income statement showing the results, i.e., profit or loss for the period." - John N. Myer
- "The Statements which are prepared by the business to find out profitability, efficiency, solvency, growth of business to judge the financial strength and status are called as Financial Statements."
Key Points
Key Points: Financial Statements
- Meaning & Parts: Show a business’s profit and financial position. Include Balance Sheet, P&L A/c, Cash Flow, Equity Statement, and Notes.
- Purpose: Provide a true and fair view to help users make informed decisions.
- Features: Based on past data, in monetary terms. A balance sheet is for a date; a P&L is for a period. Must be verifiable, relevant, understandable, and comparable.
- Nature: Influenced by facts, accounting concepts, conventions, standards, and judgments.
- Legal Requirement: As per the Companies Act, 2013, companies must prepare them yearly in the prescribed format (Schedule III).
Format: Company's Balance Sheet
BALANCE SHEET as at
| Particulars | Note No. | ₹ |
|---|---|---|
| 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) Property, Plant and Equipment and Intangible Assets | ||
| (i) Property, Plant and Equipment | ... | |
| (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 Bank Balance | ... | |
| (e) Short-term Loans and Advances | ... | |
| (f) Other Current Assets | ... | |
| Total | ... |
Key Points: Equity and Liabilities
- Classification: As per Schedule III of the Companies Act, 2013, liabilities are classified into two parts – Equity and Liabilities.
- Equity: It refers to shareholders' funds, including Share Capital, Reserves & Surplus, and Money received against share warrants.
- Share Capital: Includes Equity Share Capital and Preference Share Capital.
- Liabilities: Refers to external obligations of the company towards outsiders.
- Special Item: Share Application Money Pending Allotment is shown between Shareholders’ Funds and Non-current Liabilities.
Key Points: Share Capital of a Company
- Share Capital is the total money raised by issuing shares, representing ownership in the company.
- Authorised Capital is the maximum amount a company can issue, as stated in its Memorandum of Association.
- Issued Capital is the part of the authorised capital offered to the public for subscription.
- Subscribed Capital is the portion of issued capital that investors agree to take.
- Called-up Capital is the amount demanded by the company, and Paid-up Capital is what shareholders actually pay; the difference is called Calls-in-Arrears.
- Reserve Capital is the part of subscribed capital to be called only during winding up.
- A Prospectus invites the public to buy shares, and the company must receive at least 90% subscription before allotting shares.
Difference Between Authorised Capital and Issued Capital
| Basis | Authorised Capital | Issued Capital |
|---|---|---|
| Meaning | Maximum capital a company can issue | Part of authorised capital offered to public |
| Disclosure | Stated in the Memorandum of Association | Stated in the Articles of Association |
| Limit | It is equal to or more than the issued capital. | It is equal to or less than the authorised capital. |
Journal Entries: For Appropriation of Profit
Surplus,i.e., Balance in Statement of Profit & Loss A/c ...Dr.
To Debentures Redemption Reserve A/c
To General Reserve A/c
(Being the profit appropriation towards DRR and General Reserve)
Format: Notes to Accounts of Securities Premium
Note to Accounts
| Particulars | ₹ | ₹ |
|---|---|---|
| Securities Premium — Opening Balance | ... | |
| Add: Premium received during the year | ... | |
| ... | ||
| Less: Discount/Loss on Issue of Debentures Written Off | ... | |
| Preliminary Expenses Written Off | ... | |
| Premium Payable on Redemption of Preference Shares/Debentures Written Off | ... | |
| Fully paid bonus shares issued | ... | |
| Purchase (Buy-back) of own securities | ... | ... |
| ... |
Format: Notes to Accounts of Reserves and Surplus
Notes to Accounts
| NOTES TO RESERVE AND SURPLUS | ₹ | ₹ |
|---|---|---|
| (1) Capital Reserve | ........ | |
| (2) Securities Premium Reserve | ........ | |
| (3) General Reserve | ........ | |
| (4) Surplus : | ||
| Last year’s Surplus | ........ | |
| Add: Current year’s Surplus (i.e., Profit for the current year) | ........ | |
| Add: Transfer from Reserve (if any) | ........ | |
| Add: Adjustments relating to past years (e.g., tax savings) | ........ | |
| Less: Transfer to Reserves: | ||
| 1. Transfer to General Reserve | ........ | |
| 2. Transfer to Development Rebate Reserve | ........ | |
| 3. Transfer to Dividend Equalisation Reserve | ........ | |
| 4. Transfer to Debenture Redemption Fund etc. | ........ | |
| Less: Adjustments relating to past years (e.g., Depreciation arrears) | ........ | |
| Less: Interim Dividend on Equity Shares | ........ | |
| Closing Balance of Surplus carried to Balance Sheet under the head 'Reserve and Surplus' | ........ | ........ |
Key Points: Reserves and Surplus
- Classification: Reserves and Surplus include Capital Reserve, Capital Redemption Reserve, Securities Premium, Debenture Redemption Reserve, Revaluation Reserve, Share Options Outstanding A/c, Other Reserves, and Surplus from Profit & Loss A/c.
- Securities Premium Use (Sec 52): Can be used for bonus shares, writing off preliminary/issue expenses, redemption of shares/debentures, and buy-back of securities.
- Share Options Outstanding A/c: Records compensation to employees for stock options at a future date below market value.
- Surplus (P&L): Shows profit after appropriations like dividends, reserves, etc. Appropriations must be shown in the Notes to Accounts.
- Negative Balance: If P&L shows a loss, it is still shown under ‘Surplus’ as a negative figure in the Balance Sheet.
Key Points: Money Received Against Share Warrants
- A share warrant gives the holder the right to buy equity shares at a future date and fixed price.
- The money received is considered part of shareholders' funds as the shares will be issued later.
- It is not treated as share capital and is shown as a separate line item in the Balance Sheet.
- Represents advances received from potential shareholders before actual share allotment.
- Shown under the main head "Shareholders' Funds"; no sub-head is used.
Key Points: Share Application Money Pending Allotment
- It is the amount received for shares before the allotment date, which falls after the Balance Sheet date.
- This money is not refundable and is shown as Share Application Money Pending Allotment.
- If more money is received than the number of shares issued, the excess refundable amount is shown under Other Current Liabilities.
- It applies only to the amount within issued capital and is not refundable.
- Placement in Balance Sheet: Shown as a line item between Shareholders' Funds and Non-Current Liabilities.
Key Points: Non-Current Liabilities
- Non-Current Liabilities are those payable after 12 months from the Balance Sheet date or beyond the operating cycle.
- Shown under the head "Non-Current Liabilities" in the Balance Sheet as per Schedule III of the Companies Act, 2013.
- It includes:
- Long-term Borrowings – Debentures, term loans, public deposits.
- Deferred Tax Liabilities – When accounting income is more than taxable income.
- Other Long-term Liabilities – Dues payable after 12 months (e.g. long-term trade payables).
- Long-term Provisions – For future expenses like gratuity, leave, and warranties.
Key Points: Current Liabilities
- Meaning: Liabilities payable within 12 months or within the operating cycle (whichever is longer) are treated as current liabilities.
- Types: Current liabilities are classified into Short-term Borrowings, Trade Payables, Other Current Liabilities, and Short-term Provisions.
- Short-term Borrowings: Includes loans repayable on demand, bank overdrafts, cash credits, deposits, and current maturities of long-term debt.
- Other Current Liabilities: Includes interest accrued (due or not due), unpaid dividends, excess application money, calls-in-advance, and unpaid matured deposits or debentures.
- Short-term Provisions: Made for liabilities expected within 12 months, like employee benefits, taxes, and expenses. If the amount is uncertain, it is considered a provision, not a liability.
Comparison Between Kinds of Assets
| Item | Property, Plant and Equipment | Intangible Assets |
|---|---|---|
| Existence | Have physical form (can be seen/touched) | No physical form (can't be seen/touched) |
| Depreciation / Amortisation | Depreciated | Amortised |
| Consideration | Purchased or made by the company | Purchased or developed by the company |
Key Points: Non-Current Assets
- Non-Current Assets are long-term assets not meant for resale, used for business operations.
- Major types include Property, Plant & Equipment, Intangible Assets, Non-Current Investments, Deferred Tax Assets, Long-term Loans & Advances, and Other Non-Current Assets.
- Intangible Assets have no physical form and include software, patents, franchises, mining rights, etc.
- Capital Work-in-Progress includes tangible assets under construction, not yet ready for use.
- Other Non-Current Assets include long-term trade receivables, security deposits, and insurance claims.
Key Points: Current Assets
Format: Statement of Profit & Loss
FORMAT OF STATEMENT OF PROFIT AND LOSS
Name of the Company............................
Profit and loss statement for the year ended..............................
| Particulars | Note No. | Figures for the current reporting period | Figures for the previous reporting period |
|---|---|---|---|
| I. Revenue from operations | xxx | xxx | |
| II. Other Income | xxx | xxx | |
| III. Total Income (I + II) | xxx | xxx | |
| IV. Expenses: | |||
| Cost of materials consumed | xxx | xxx | |
| Purchases of Stock-in-Trade | xxx | xxx | |
| Changes in inventories of finished goods, work-in-progress and Stock-in-Trade | xxx | xxx | |
| Employee benefits expenses | xxx | xxx | |
| Finance costs | xxx | xxx | |
| Depreciation and amortisation expenses | xxx | xxx | |
| Other expenses | xxx | xxx | |
| Total expenses | xxx | xxx | |
| V. Profit before Tax (III – IV) | xxx | xxx | |
| VI. Less: Tax | (xxx) | (xxx) | |
| VII. Profit after Tax (V – VI) | xxx | xxx |
Important Questions [39]
- State Any Two Limitations and Any Two Objectives Of 'Analysis of Financial Statement'.
- Financial Statements Are Prepared Following the Consistent Accounting Concepts, Principles, Procedures and Also the Legal Environment in Which the Business Organisations Operate.
- Briefly Explain the Significance of 'Analysis of Financial Statements' to (A) the Finance Manager, and (B) Trade Payables.
- Complete the Following Journal Entries Left Blank in the Books of Vk Ltd.:
- State the Interest of Tax Authorities in the Analysis of Financial Statements.
- What is Meant by 'Financial Statements' of a Company?
- State the Objectives of 'Analysis of Financial Statements'.
- Good Blankets Ltd.' Are the Manufacturers of Woollen Blankets. Blankets of the Company Are Exported to Many Countries. Also, Identify Anyone Value Which the Company Wants to Communicate to the Society.
- State the Significance of Analysis of Financial Statements to ‘Top Management’.
- Name Any Two Financial Statements Prepared by a Not-for-profit Organisation.
- Choose the Appropriate Alternative from the Given Options: Which of the Following is a Limitation of Financial Analysis?
- Financial Statements Are Prepared Following the Constituent Accounting Concepts Principles Procedures and Also the Legal Environment in Which the Business Organisation Operate from the Abo
- 'Panipat Blankets Limited' Are the Manufacturers and Exporters of Blankets. Pass Necessary Journal Entries for the Above Transactions in the Books of the Company. Also, Identify Anyone Value Which the Company Wants to Communicate to the Society.
- State Any Objective of Financial Statement Analysis’.
- State Any One Limitation of Financial Statement Analysis’
- What is Meant by 'Analysis of Financial Statements'? State Any Two Objectives of Such an Analysis.
- Financial Statements Are Prepared Following the Consistent Accounting Concepts, Principles, Procedures and Also the Legal Environment in Which the Business Organizations Operate.
- Classify the following items under major heads and sub-heads (if any) in the balance sheet of a company as per schedule III, part I of the companies Act, 2013:
- Under which major heads and sub-heads will the following items be presented in the Balance Sheet of the company as per Schedule III, Part I of the Companies Act, 2013?
- Name the major heads and sub-heads under which the following items will be presented in the Balance Sheet of a company as per Schedule III, Part I of the Companies Act, 2013 :
- Under which major heads and sub-heads will the following items be presented in the Balance Sheet of a Company as per Schedule III, Part I of the Companies Act, 2013:
- List Any Four Items that Are Shown Under the Sub-heading 'Cash and Cash Equivalents' as per Schedule Iii of the Companies Act, 2013.
- Under which heads and sub-heads the following items will appear in the Balance Sheet of Company as per Schedule III, Part-I of the Companies Act, 2013: Loose tools Calls-in-Advance Capital Reserve
- Under Which Major Sub-headings the Following Items Will Be Placed in the Balance Sheet of a Company as per Revised Schedule-vi, Part-i of the Companies Act, 1956:
- List Any Four Items of 'Reserves' that Are Shown Under the Heading 'Reserves and Surplus' in the Balance Sheet of a Company as per Schedule Ill of the Companies Act 2013
- List Any Four Items Other than 'Stock-in-trade' that Are Presented Under the Sub-head 'Inventories' as per Schedule Ill of the Companies Act, 2013.
- Nk Ltd., a Truck Manufacturing Company, is Registered with an Authorised Capital of Rs 1,00,00,000 Divided into Equity Shares of Rs 100 Each Present the Share Capital in the Balance Sheet of the Company as per the Provisions of Schedule Iii of the Companies Act, 2013. Also, Identify Any Two Values that the Company Wants to Communicate
- Prepare a Common Size Balance Sheet of Kj Ltd. from the Following Information:
- C and D Are the Partner in a Firm Sharing Profits in the Ratio of 4:1. on 31.3.2016 Their Balance Sheet Was as Follows :
- Balance Sheet of Sameer, Yasmin and Saloni as at 31.3.2016. Debtors of 4,000 will be written off as bad debts and a provision of 5% on debtors for bad and doubtful debts will be maintained.
- From the Following Balance Sheet as Srs Ltd and the Additional Information as in 31.3.2016, Prepare a Cash Flow Statements :
- Present the 'Share Capital in The Balance Sheet of 'Tractors India Ltd.' as per Schedule Vi Part I of the Companies Act, 1956, Also Prepare Notes to Accounts for the Same.
- Under Which Heads the Following Items Will Be Placed in the Balance Sheet of a Company as per Schedule Vi Part I of the Companies Act, 1956? (1) Cash in Hand (2) Mining Rights (3) Short-term Deposits (4) Debenture Redemption Reserve (5) Income Received in Advance (6) the Balance of the Statement of Profit and Loss (7) Office Equipment and (8) Work-in-progress.
- Following is the Balance Sheets of Solar Power Ltd as at 31.3.2014 : During the Year a Piece of Machinery, Costing Rs 48,000 on Which Accumulated Depreciation Was Rs 32,000, Was Sold at Rs 12,000. Prepare Cash Flow Statement.
- List the Items Which Are Shown Under the Heading Current Liabilities and Provisions as per Schedule Vi Part-i of the Companies’ Act,1956.
- Prepare a Comparative Income Statement from the Following Information:
- From the Followings Balances Sheet of Vikas Ltd. as on 31.3.2009 and 31.3.2010, Prepare a Cash Flow Statement:
- Name an item which is never shown on the ‘Payments’ side of ‘Receipts and Payments Account’, but is shown as an Expenses while preparing ‘Income and Expenditure Account’
- State Under Which Major Headings and Sub-headings Will the Following Items Be Presented in the Balance Sheet of a Company as per Schedule-iii, Part-i of the Companies Act, 2013.
Concepts [13]
- Concept of Financial Statements
- Format of Company's Balance Sheet
- Contents of Balance Sheet> Equity and Liabilities
- Shareholder's Fund> Share Capital of a Company
- Shareholders' Fund> Reserves and Surplus
- Shareholders' Fund> Money Received Against Share Warrants
- Equity and Liabilities> Share Application Money Pending Allotment
- Equity and Liabilities> Non-Current Liabilities
- Equity and Liabilities> Current Liabilities
- Contents of Balance Sheet> Assets
- Assets> Non-Current Assets
- Assets> Current Assets
- Statement of Profit and Loss
