Financial Statement of a Company: Balance Sheet
What are Financial Statements?
The accounting process ends with the preparation of the financial statement. The information about the financial position of any company is provided with the help of Financial Statements. The main objective of preparing the financial statement is to present a true and fair view of the financial performance and position. Accounting data is summarised in such a way that the profitability of the business is clearly visible. Financial Statements also serve as an information tool for all the parties concerned with the firm. To guarantee consistency in reporting, these statements; which include an income statement, Balance Sheet, and statement of cash flows, must be prepared in accordance with predetermined and established accounting principles and conventions.
The Balance Sheet of an organisation is a statement showing its financial position on a particular date. The Balance Sheet shows the value of assets, liabilities, and capital funds at the end of the accounting year of the organisation on a particular date. It is prepared at the end of the accounting year after preparing the Statement of Profit & Loss Account.
Format of Balance Sheet:
1. The total of each of the sub-items of Equity and Liabilities is directly written in the Balance Sheet, and its detail is shown in Notes to Accounts.
* According to Schedule III of the Companies Act, 2013, the term “Fixed Assets” is replaced with Property, Plant, and Equipment, and Intangible Assets, and “Tangible Assets” by Property, Plant, and Equipment.
I. Items appearing under the head of Equity and Liabilities:
1. Shareholder’s Funds:
(A) Share Capital: Under this head, some of the important items are:
The disclosure of Share Capital in the Balance Sheet is limited to the following items:
Notes to Accounts:
1. Equity Share Capital and Preference Share Capital are to be shown separately.
2. If the question doesn’t say anything about authorised/issued capital, it has to be shown in the notes to accounts. However, no figures will be shown as shown above.
(B) Reserve and Surplus: Under this head, the following items are shown:
- Capital Reserves
- Capital Redemption Reserve **
- Securities Premium Reserve
Securities Premium Reserve will be used to write off the items mentioned under Section 52 of the Companies Act 2013 and the balance, if any, will be shown under this head.
Notes to Accounts:
According to Section 52 of the Companies Act, 2013, the amount of Securities Premium can be used for the following purposes:
- For the issue of fully paid bonus shares.
- For writing off preliminary expenses.
- For the writing of issue expenses of underwriting commission or discount allowed on the issue.
- For buyback of its own shares or other securities under Section 68.
- For the provision of premium payable on the redemption of preference shares or debentures.
- Debenture Redemption Reserve
- Revaluation Reserve **
- Share Options Outstanding Account: It is a form of employee compensation, wherein the employees of a company are offered an option to apply and to get allotment of the Company’s Shares at a future date and at a specified price (usually below the market price of the share).**
- Other Reserves (Restricted to General Reserve only)
- Surplus; i.e., Balance in the Statement of Profit & Loss after appropriation (Such as Dividend, Bonus Shares, and Transfer to/from Reserves, etc.)
(Note: Schedule III does not allow to prepare Profit & Loss Appropriation Account. It means that the Profit & Loss Appropriation Account should be presented in the Notes to Accounts.)
- The debit balance of the Statement of Profit & Loss Account shall be shown as a negative figure under the Surplus head. In the same way, the balance of Reserves and Surplus, after adjustment of the negative balance of surplus; if any, shall be shown under the Reserves & Surplus head, even if the resulting figure is negative.
Notes to Accounts:
(C) Money received against Share Warrants**: A financial instrument that is issued by a public company and gives the holder of the share, the right to acquire a certain number of equity shares specified therein at a later date. The amount received against share warrants is shown in shareholder’s funds as on a specified date, these will be converted into equity shares at a pre-determined price. However, the warrants are not shown as a part of the share capital but as a separate line item.
2. Share Application money pending allotment**:
If a company has issued shares, but the date of allotment of shares falls after the date of the Balance Sheet, the application money pending allotment of such shares will be shown in the following way:
- The Share Application money which is not exceeding the issued capital and to an extent that is not refundable is to be disclosed under this line item.
- The Share Application money to the extent refundable or where the minimum subscription is not met, that amount will be shown separately under Other Current Liabilities.
3. Non-current Liabilities:
A liability that is not classified as a current liability is a non-current liability. A liability is considered a non-current liability if it satisfies any one of the following conditions.
- The liability which settles in the company’s normal operating cycle is a non-current liability. Operating Cycle here means the time period between the acquisition of assets for their processing and their realisation in cash & cash equivalents. The time period may vary from a few days to a few years. If a question does not say anything about the operating cycle, it is assumed to be 12 months.
- If liability is held for the purpose of being traded, it is a non-current liability.
- If liability is due to be settled within 12 months after the reporting date, it is considered a non-current liability.
- When the company does not have an unconditional right to offer a settlement of the liability for at least 12 months after the reporting date, it is considered a non-current liability.
Therefore, every liability which is not classified as current liability shall be classified as non-current liability.
- Long-term Borrowings such as Debentures, Long-term Loans, etc.
- Deferred Tax Liabilities (Net)
- Other Long-term Liabilities such as Trade Payables on account of the purchase of Fixed Assets and interest accrued thereon, Provisional Fund Contribution, etc.
- Long-term Provisions: These are the provisions for which the company expects that their related claims will be settled beyond 12 months after the reporting period. For example, Provision for Warranties, Provision for Employee Benefits, etc.
4. Current Liabilities:
(A) Short-term Borrowings: It includes Loans repayable on demand from banks and other parties, Loans and Advances from Related Parties, Deposits, etc.
(B) Trade Payables: It refers to the amount due on the account of goods purchased or services received by the company in the normal course of business.
(C) Other Current Liabilities: These include Unpaid Dividends, Income Received in Advance, Interest Accrued and due/not due on Borrowings, Calls in Advance and interest thereon, etc.
(D) Short-term Provisions: Every provision for which the company expects that their related claims will be settled within 12 months after the reporting period is included under Short-term Provisions. For example, Proposed Dividend, Provision for tax, Provision for Doubtful Debts, etc.
II. Items appearing under the head of Assets:
1. Non-current Assets:
(A) Property, Plant and Equipment, and Intangible Assets: The assets which are held by the company for increasing its earnings instead of the purpose of sale are included under this head. These assets are used by the company for a long time to earn profit and are categorised as follows:
- Property, Plant, and Equipment: Assets having physical existence, such as Land, Machinery, Equipment, Buildings, Vehicles, Computers, etc., are covered under this head.
- Intangible Assets: Assets that do not have a physical existence, such as Trademarks, Goodwill, Mastheads and Publishing Titles, Patents, Mining Rights, Copyrights, etc., are covered under this head.
- Capital Work-in-Progress: The fixed tangible assets that are under construction are included in this head.
- Intangible Assets under Development: The fixed intangible assets, which are under development are included in this head. For example, Intellectual Property Rights, Patents, etc.
(B) Non-current Investments: Investments that are held for the purpose of retaining them and not reselling are covered under this head. These are classified into two categories; viz., Trade Investments and Other Investments. Trade Investments are those investments that are made by the company in shares or debentures of other companies for the promotion of its own trade and business. Other Investments are those investments that are not trade investments. The investments are classified in the Balance Sheet under the heads:
- Investments in Property, Investments in Preference Shares
- Investments in Equity Instruments
- Investments in Government or Trust Securities
- Investments in Debentures or Bonds
- Investments in Mutual Funds
- Investments in Partnership Firms, and
- Other Non-current Investments (By specifying their nature).
(C) Deferred Tax Assets (Net): It consists of all the deferred tax assets, including the balance of Deferred Tax Liabilities (Net), which gets converted into Deferred Tax Assets (Net).
(D) Long-term Loans and Advances: The loans and advances which are expected to be received back in cash or kind; i.e., in the form of assets after the period of the Operating Cycle from the date of the Balance Sheet or after 12 months. These are classified into two categories:
- Capital Advances: These are the advances that are given for the acquisition of property, plant and equipment, and intangible assets. Usually, the capital advances are received in form of assets instead of cash, which means that they get converted into assets of the company.
- Other Loans and Advances: The long-term advances and loans, which are not covered under capital advances are included under this head. For example, long-term loans to employees, long-term advances to suppliers, etc.
(E) Other Non-current Assets: All the non-current assets that do not fall in any of the above four mentioned heads and their sub-heads are included in Other Non-current Assets. These are classified into four categories as follows:
- Security Deposits: Deposits given for a long period; i.e., for more than 12 months or after the period of the Operating Cycle from the date of the Balance Sheet of the company are covered under this head. For example, security deposit for electricity, etc.
- Long-term Trade Receivables: If the amount received from the trade receivables of the company is to be received after 12 months from the date of the Balance Sheet or after the period of the Operating Cycle, whichever is later, then it is classified as Long-term Trade Receivables.
- Others: There are other assets besides trade receivables like unamortised losses/expenses, etc., and these are covered under Other Non-current Assets.
- Insurance Claim Receivable
2. Current Assets:
(A) Current Investments: Investments that are held for the purpose of converting them into cash within a short period; i.e., within 12 months from the date of purchase of investment are covered under Current Investments. The investments are classified in the Balance Sheet under the heads:
- Investments in Equity Instruments
- Investments in Preference Shares
- Investments in Government or Trust Securities
- Investments in Debentures or Bonds
- Investments in Mutual Funds, and
- Investments in Partnership Firms, etc.
(B) Inventories: The stock held by the company for the purpose of trade in their ordinary course of business is covered under Inventories. In simple terms, stock held for manufacturing or trading goods and converted into Cash and Cash Equivalents within a short period are classified as Current Assets. It consists of Work-in-Progress, Raw Materials, Finished Goods, Stock-in-Trade, Loose Tools, etc.
(C) Trade Receivables: The amount receivable against the sale of goods or services that are rendered by the company in their normal course of business are covered under Trade Receivables. If the amount is receivable within a period of 12 months or within the period of the Operating Cycle from the date of the Balance Sheet, they are shown as current assets. Trade Receivables of a company consist of both Debtors and Bills Receivable.
Provision for Doubtful Debts: It is a provision made by the company to meet the expected loss of bad debts of a company. It is shown under the relevant head separately and leads ti two approaches as follows:
- The first approach is to show the amount of Provision for Doubtful Debts as Provision under either Long-term Provisions or Short-term Provisions depending upon the duration of Trade Receivables.
- Second approach is to show the amount of Provision for Doubtful Debts by deducting it from the amount under Trade Receivables.
(D) Cash and Cash Equivalents: According to Schedule III, Cash and Cash Equivalents can be classified as:
- Balances with Banks
- Drafts on Hand, Cheques,
- Cash in Hand
- Earmarked balances with banks such as Unpaid Dividend
- Balance with banks held as Margin Money, and
- Bank Deposits with more than 12 months of maturity.
(E) Short-term Loans and Advances: The loans and advances, which are expected to be realised within 12 months or the period of the Operating Cycle from the date of the Balance Sheet, whichever is more.
(F) Other Current Assets: All current assets which do not fall under any of the above-mentioned heads and sub-heads, come under Other Current Assets. For example, Accrued Income, Prepaid Expenses, Advance Taxes, etc.
3. Contingent Liabilities and Commitments:
(A) Contingent Liabilities: The liabilities which may or may not arise because of their dependency on the event happening in the future are known as Contingent Liabilities. For example, if there is a claim filed against the company in court, then the court may hold the company innocent or guilty. Now, the liability of the company depends on the court’s order. Therefore, it is a contingent liability. Besides, the Proposed Dividend is also shown as a contingent liability of the company because it depends upon the approval of shareholders, who may or may not reduce the amount of dividend to be paid [AS-4 (Revised)].
Note: Contingent Liability is not shown in the Books of Accounts of the Company. However, it is disclosed in Notes to Accounts to provide information to the users. It is classified into the following:
- Claims against the company not acknowledged as debts
- Bills Receivable discounted from Bank not yet due for payment
- Proposed Dividend (Current Year), and
- Other claims for which the company is contingently liable.
(B) Commitments: It is the financial commitment made because of the activities agreed to by the company that it has to undertake in the future. Commitments are classified as follows:
Estimated amounts of contracts remaining to be executed on Capital Account and not provided for Uncalled liability on shares and other investments partly paid, and Other commitments (Nature to be specified).
- Estimated amounts of contracts remaining to be executed on Capital Account and not provided for Uncalled liability on shares and other investments partly paid, and
- Other commitments (Nature to be specified).