Financial Statements of a Company

A company’s financial statements: the Schedule III balance sheet and Statement of Profit and Loss, their main heads and sub-heads, and totals from given items.

Key ideas

• Financial statements (balance sheet, statement of profit and loss, notes, cash flow statement) mix recorded facts, conventions, postulates and personal judgements.
• The Schedule III balance sheet has I. Equity and Liabilities (shareholders’ funds, non-current liabilities, current liabilities) and II. Assets (non-current, current).
• Shareholders’ funds are share capital (with share forfeiture) and reserves and surplus; a debit balance of surplus is shown as a negative item there.
• Long-term borrowings hold debentures and long-term loans; a bank overdraft is a short-term borrowing, creditors and bills payable are trade payables, and calls in advance are other current liabilities.
• Non-current assets are property, plant and equipment, intangible assets (goodwill, patents) and non-current investments; inventories include loose tools.
• The Statement of Profit and Loss sets total expenses against revenue from operations plus other income to give profit before tax, then deducts tax.
• Interest on debentures and loans is a finance cost; salaries and staff welfare are employee benefits expense; advertisement, rent and repairs are other expenses.

Remember

Watch out

• Adding debentures into shareholders’ funds.
• Showing a bank overdraft as a long-term borrowing.
• Putting calls in advance in share capital instead of other current liabilities.

Worked example