Revision: Joint Stock Company Accounts >> Final Accounts of Companies Accounts ISC (Commerce) Class 12 CISCE

Definitions [2]

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."

Definition: Operating Cycle

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

"Operating Cycle is the time between the acquisition of an asset for processing and its realisation in Cash and Cash Equivalents. Where the normal operating cycle cannot be identified, it is assumed to have a duration of 12 months."

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		...

Difference Between Company's Balance Sheet and Firm's Balance Sheet

Basis	Company’s Balance Sheet	Firm’s Balance Sheet
Format & Contents	As per Schedule III of the Companies Act, 2013	No prescribed format
Previous Year Figures	Must show the previous year’s figures	Not mandatory
Order	Prepared in order of permanence	Can be in order of permanence or liquidity
Format Type	Prepared in vertical form	Generally prepared in horizontal form

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.

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.

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.

Format: Disclosure of Share Capital in a Company's Balance sheet

BALANCE SHEET OF...

as at

Particulars	Note No.	₹
I. EQUITY AND LIABILITIES
1. Shareholders’ Funds
(a) Share Capital	1	...

Format: Notes to Account of Share Capital

Note to Accounts

Particulars	₹
1. Share Capital
Authorised Capital
... Equity Shares of ₹ ... each	...
... % Preference Shares of ₹ ... each	...
Total Authorised Capital	...

Issued Capital
... Equity Shares of ₹ ... each	...
... % Preference Shares of ₹ ... each	...
Total Issued Capital	...

Subscribed Capital
Subscribed and fully paid-up:
... Equity Shares of ₹ ... each	...
... % Preference Shares of ₹ ... each	...
Total Subscribed and Fully Paid-up	...

Subscribed but not fully paid-up:
... Equity Shares of ₹ ... each, ₹ ... called-up	...
Less: Calls-in-Arrears	(… )
... % Preference Shares of ₹ ... each, ₹ ... called-up	...
Less: Calls-in-Arrears	(… )
Total Subscribed but Not Fully Paid-up	...

Add: Forfeited Shares Account	...

Amount to be shown in the Balance Sheet against Share 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)

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.

Format: Notes to Accounts of Reserves and Surplus

Notes to Accounts

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	...	...
		...

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: Current Liabilities - Based on Operating Cycle

Meaning: Operating Cycle is the time between the acquisition of assets for processing and their realisation in cash or cash equivalents.
Default Duration: If the operating cycle can't be identified, it is assumed to be 12 months.
Example: If the cycle is 13 months (e.g., raw materials 3M + production 4M + inventory 2M + receivables 4M), the entire 13M is considered the operating cycle.
Current Liabilities: A liability is treated as current if it is due for settlement within the operating cycle or within 12 months, whichever is longer.
No Right to Defer: If the company cannot unconditionally defer settlement for 12 months from the balance sheet date, the liability is also classified as current.

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.

Key Points: Current Assets - Based on Operating Cycle

Meaning: The Operating Cycle is the time between buying assets for processing and converting them into cash or cash equivalents.
Default Duration: If not clearly identifiable, the operating cycle is assumed to be 12 months.
Classification Rule: Assets expected to be realised within the operating cycle or within 12 months from the Balance Sheet date are classified as Current Assets.
Held for Trading: Assets held primarily for trading (like inventory or shares) are always Current Assets.
Cash & Cash Equivalents: These are Current Assets, unless restricted for more than 12 months to settle a liability, in which case they become Non-Current Assets.

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.

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: Current Assets

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.

Key Points: Contingent Liabilities and Commitments

Contingent Liabilities are possible future obligations shown in Notes, not in books.
Examples: claims not acknowledged as debt, discounted bills, proposed dividends, and guarantees.
Capital Commitments are future expenses for which contracts are already made.
Examples: uncalled share amounts, pending capital contracts, and unpaid preference dividends.
Both are disclosed in Notes to Accounts, not recorded in the Balance Sheet.

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	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

Difference Between Provision and Reserve

Basis	Provision	Reserve
Nature	Liability or asset reduction	Shareholders' money
Purpose	For specific loss/expense	For specific or general use
Charge vs. Appropriation	Charged to profit	Appropriated from profit
Disclosure in Financial Statement	Shown as an expense in P&L	Shown under Shareholders' Funds
Disclosure in Balance Sheet	Under Provisions or asset deduction	Under 'Reserves & Surplus'
Investment Outside Business	Not allowed	Allowed (as fund)
Legal Requirement	Legally required	Based on prudence
Necessity	Mandatory even without profit	Created only if profits exist
Utilisation for Dividends	Not allowed	Allowed
Utilisation for Other Purposes	Only for the loss provided	Can be used for any purpose

Difference Between Revenue Reserves and Capital Reserves

Basis	Revenue Reserves	Capital Reserves
Source	Created from revenue profits of normal operations.	Created from capital profits, not from normal operations.
Usage	Can be used freely, including for dividend distribution.	Not usually for dividends; allowed only under certain conditions.
Purpose	For unforeseen losses and to strengthen the financial position.	To meet capital losses or as per the Companies Act.

Important Questions [1]

Mention the heading and sub-heading under which Vehicles are shown in the Balance Sheet of a company prepared as per Schedule III of the Companies Act, 2013.

Dissolution of a Partnership Firm Financial Statement Analysis

Revision: Joint Stock Company Accounts >> Final Accounts of Companies Accounts ISC (Commerce) Class 12 CISCE

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Definitions [2]

Key Points

Important Questions [1]

Concepts [21]

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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'	........	........