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SEBI GRADE A 2020: ACCOUNTANCY & COMMERCE: PREPARATION & PRESENTATION OF FINANCIAL STATEMENTS

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Table of Content Meaning of Financial Statements...................................................................................... 3

Characteristics of Financial Statements: ................................................................ 3

Balance Sheet: .................................................................................................. 3

Format of a Balance Sheet: ................................................................................. 3

Contents of the Balance Sheet: ............................................................................ 4

A. Equity and Liabilities: ............................................................................... 4

B. Assets: ................................................................................................... 8

Statement of a Profit and Loss Account ............................................................... 11

Format of a Statement of a Profit and Loss Account: ............................................ 11

Contents of the Profit and Loss Account: ............................................................. 12

A. Income: ................................................................................................ 12

B. Expenses: ............................................................................................. 12

C. Exceptional Items: ................................................................................. 13

D. Extraordinary Items: .............................................................................. 14

E. Tax Expenses: ....................................................................................... 14

F. Profit / (loss) for the period from discontinuing operations: ......................... 14

G. Tax expenses of discontinuing operations: ................................................ 14

H. Earnings per equity shares: ..................................................................... 14

Final Comments: .............................................................................................. 14



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Meaning of Financial Statements Financial Statements refer to the summarised statement of accounting data prepared at the end of an accounting period. The purpose of preparing the financial statements is to

communicate with the internal and external stakeholders. Further, as per the Companies Act 2013, the Financial Statement shall include the following:

1. Balance Sheet as at the end of the financial year 2. Statement of Profit and Loss

3. Cash Flow Statement for the year 4. Statement for changes in equity, if applicable, and

5. Any explanatory notes attached annexed to or forming part of any document referred to above

Characteristics of Financial Statements: The following are the characteristics of financial statements:

a. They are historical in nature as they relate to the past period b. They are always expressed in monetary terms

c. They show the financial position of a company through the Balance Sheet and the financial performance of the company the Statement of Profit and Loss Account

Balance Sheet: It forms part of the financial statement that summarises a company’s assets, liabilities and shareholders’ equity at a particular point in time. The purpose of this is to show what

the company owns and what it owes. The following are some of the characteristics of the Balance Sheet:

• It shows the financial position of the company at a specific point in time • The accounting equation describes the assets and liabilities, i.e. Assets = Liabilities +

Shareholders’ Fund • A balance sheet is prepared by taking the closing or year-end balances of assets,

liabilities and shareholders’ funds.

• Any account appearing in the balance sheet may have an opening balance, transaction done during the year and the closing balance.

Format of a Balance Sheet: The following is the format of a balance sheet:

Particulars Note

No

Figures as

at the end of the

current reporting

period

Figures as at

the end of the previous

reporting period

A. Equity and Liabilities

1. Shareholders’ Funds a) Share Capital

b) Reserve & Surplus c) Money Received against Share Warrants

2. Share Application Money Pending Allotment

3. Non-Current Liabilities a) Long-term Borrowings

XXX

XXX XXX

XXX

XXX

XXX XXX

XXX



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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

XXX XXX

XXX XXX

XXX

XXX XXX

XXX

XXX XXX

XXX XXX

XXX

XXX XXX

XXX

Total XXX XXX

B. 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

XXX

XXX

XXX XXX

XXX

XXX XXX

XXX

XXX XXX

XXX XXX

XXX XXX

XXX

XXX

XXX XXX

XXX

XXX XXX

XXX

XXX XXX

XXX XXX

XXX XXX

Total XXX XXX

Contents of the Balance Sheet: A. Equity and Liabilities: Equity refers to the liabilities towards the shareholders and is

termed as Shareholders’ Funds. It shall include Share Capital, Reserves and Surplus

and Money Received under Share Warrants, while Liabilities means external liabilities

of the company. Further, there is also “Share Application Money Pending Allotment” in-

between Shareholders’ Fund and Non-Current Liabilities.



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1. Shareholders’ Funds: It comprises of three accounts, namely, Share Capital, Reserves,

and Surplus, and Money Received against Share Warrant.

a. Share Capital: It is the shares issued by the company for a consideration which can

be received in either cash or kind. Further, Share Capital shall include both Equity

and Preference Share Capital. Those people who get the shares or are allotted

shares are known as Shareholders. In the schedules or notes to accounts, the

company shall disclose the authorized capital, issued capital and subscribed

capital. The company shall also disclose the amount called-up by the company

and amount paid-up by the shareholders.

b. Reserves and Surplus: It is the amount set aside out of the profits and other

surpluses of the company to meet for any future losses or liabilities and to

strengthen the financial position of the company. Besides, it is also a legal

requirement to create Reserve and Surplus. Since the Reserve and Surplus are

shown as a single amount in the Balance Sheet, the company is required to give

the details of Reserve and Surplus in the notes to accounts. The details can be

regarding the opening balance, additions/deletion during the year and the closing

balance for each of the following items:

i. Capital Reserve

ii. Capital Redemption Reserve

iii. Securities Premium

iv. Debentures Redemption Reserve

v. Revaluation Reserve

vi. Share Options Outstanding Amount

vii. Other Reserves

viii. Surplus, i.e. profit from the statement of profit and loss account

2. Share Application money pending allotment: Any money pertaining to Share Application

Money received by the company shall be credited to Share Application Account is the

amount refundable to the applicants. In other words, it is the amount against which

shares will not get allotted to the applicants or it is the amount received by the company

as Calls-in-Advance.

3. Non-Current Liabilities: It is a form of liabilities that is not current liabilities. Current

liabilities can be defined as a liability which is:

i. Expected to be settled in the company’s normal operating cycle, or

ii. Held primarily for the purpose of being traded, or

iii. Due to being settled within12 months after the reporting date or the

balance sheet date

iv. There exist no unconditional right to defer settlement for at least 12

months after the reporting date

a. Long-term borrowings: It is the loan taken by the company. A company takes loans

by issuing debentures, accepting public deposits, loans from banks and private

lenders or of any other nature. Borrowing shall be classified as long-term only if

the loan is repayable by the company after 12 months or after the period of an

operating cycle from the balance sheet date. The following heads form part of

long-term borrowing and so they need to be shown in the notes to accounts:

i. Bonds/Debentures



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ii. Public Deposits

iii. Premium Payable on Redemption of Debentures

iv. Term loans from banks/private lenders

v. Other loans and advances

b. Deferred Tax Liabilities (Net): As per the regulation, a company is required to compare

its accounting income with taxable income and if there exists a difference

between the two (temporary), then the income tax on the difference is termed

as deferred tax. A Deferred Tax Liability shall arise when the accounting income

is more than the taxable income, whereas, in case the accounting income is less

than taxable income then Deferred Tax Assets will arise. The two amounts, i.e.

Deferred Tax Liabilities and Deferred Tax Assets are adjusted to the existing

balance in Deferred Tax Liabilities (Net) or Deferred Tax Assets (Net), as the case

may be.

c. Other Long-term Liabilities: These are liabilities other than the Long-term Borrowings.

They can be classified into:

i. Trade Payables, if agreed to be paid after 12 months or after the period of

Operating Cycle from the date of Balance Sheet. Trade Payables includes

both Sundry Creditors and Bills Payables.

ii. Any other long-term liabilities, not classified as Long-term Borrowings.

d. Long-term Provisions: It is an amount set aside to meet future liabilities, the amount

of which cannot be determined with reasonable certainty. A provision like liability

can be both Long-term (Non-Current) or Short-term

e. (Current). A long term provision is one whose liabilities will arise after 12 months

or after the period of Operating Cycle from the date of Balance Sheet. An example

of Long-term provision can be a provision made for retirement benefits payable

to employees due to retire after 12 months from the balance sheet date.

4. Current Liabilities: As already mentioned, current liabilities can be defined as those

liabilities which are:

i. Expected to be settled in the company’s normal operating cycle, or

ii. Held primarily for the purpose of being traded, or

iii. Due to being settled within12 months after the reporting date or the

balance sheet date

iv. There exist no unconditional right to defer settlement for at least 12 months

after the reporting date

a. Short-term borrowings: It is the loan taken by the company which is due to be

paid within 12 months, or within the operating cycle of the company from the

date of the balance sheet. These can include:

i. Loan repayable on demand

ii. Overdraft limit

iii. Cash Credit limit from bank

iv. Loan from other parties

v. Deposits

vi. Other Loans and Advances

b. Trade Payables: It is the amount payable against the purchase of goods or

services that are taken by the company in the ordinary course of business.



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The amount shall be payable within 12 months or within the operating cycle

of the company from the date of the balance sheet. Trade Payable shall include

both Sundry Creditors and Bills Payables.

c. Other Current Liabilities: Current Liabilities that are not short-term borrowings or

trade payables are classified as Other Current Liabilities and can include the

following:

i. Current Maturities of Long-term Debts: It is the amount out of the

long-term borrowings that are due to be paid within 12 months or within

the operating cycle of the company from the date of the balance sheet.

ii. Interest Accrued but not Due: It refers to the interest amount

provided in the books of accounts but is yet to become due for payment.

iii. Interest Accrued and Due: It refers to the interest provided in the

books of accounts that are also due for payment.

iv. Income Received in Advance: Any amount received in advance by

the company against which the sale is yet to be made or services are

yet to be rendered, then such amount is classified as Income Received

in Advance.

v. Unpaid Dividend: This refers to the dividend declared by the company

but is unclaimed by the shareholders.

vi. Excess application money due for refund and interest accrued

thereon

vii. Unpaid matured deposits and interest accrued thereon

viii. Unpaid matured debentures and interest accrued thereon

ix. Calls-in-Advance: The amount received by the company in advance for

which the call is yet to be made.

x. Other Payables: This refers to any other liabilities that are due for

payment within 12 months or within the operating cycle of the company

from the date of the balance sheet. An example of this can be Provident

Fund Payable, ESI Payables, Output CGST, Output SGST, etc.

d. Short-term Provisions: A provision against which liability will arise within 12

months or within the operating cycle of the company from the date of the

balance sheet. An example of Short-term provision can be a provision made

for retirement benefits payable to employees due to retire within 12 months

from the balance sheet date. Provision for Tax and Provision for Expenses are

also generally short-term provisions.



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B. Assets: It can be defined as an economic resource that a company owns or controls

with the expectation that it will provide some future benefits. Assets can be classified

into Non-Current and Current Assets.

1. Non-Current Assets: It refers to those assets which are not Current Assets. Current

assets can be defined as assets which are:

i. Expected to be realized in or intended for sale or consumption in the

company’s normal operating cycle, or

ii. Held primarily for the purpose of trading, or

iii. Expected to realized within 12 months after the reporting date or the

balance sheet date

iv. Cash and Cash Equivalents, unless they are restricted from being

exchanged or used to settle a liability for at least 12 months after the

Balance Sheet date.

a. Fixed Assets: Assets held by the company for the purpose of increasing earnings

of the business. These assets are used for a long time to generate revenue for

the business, and can be categorized into the following:

i. Tangible Assets are those which have a physical existence and can be

seen and touched, such as Land, Building, Plant, Machinery, etc. These

assets are subject to depreciation over its useful life.

ii. Intangible Assets are those that do not have physical existence or can

be seen and touched, such as Patent, Goodwill, Copyrights, etc. These

assets are subject to amortization over their useful life.

iii. Capital Work-in-Progress, refers to the tangible assets under

construction by the company

iv. Intangible Assets under Development, are assets (such as patents,

intellectual property rights, etc.) which are under development by the

company.

b. Non-Current Investments: It refers to those investments which are held for the

purpose of retaining it and not to resell them. It can be classified into Trade

Investments (i.e. those investments made by the company in shares or

debentures or another company in order to promote its own business) and

Other Investments (i.e. those investments that are not trade investments).

c. Deferred Tax Assets (Net): Deferred Tax Assets and Deferred Tax Liabilities are

inter-related as the balance in Deferred Tax Liabilities (Net) in one year may

get converted into Deferred Tax Assets (Net) the next year, and vice-versa.

d. Long-term Loans and Advances: These are loans and advances that are expected

to be received in either cash or kind, in the form of an asset after 12 months

or after the operating cycle of the company from the date of balance sheet.

These may include the following:

i. Capital Advances are those advanced that are given for purchasing

fixed assets. Generally, these advances are not received in cash but in

the form of an asset, meaning that the capital advances gets converted

into an asset of the company.

ii. Security Deposit refers to those deposits that are given for a long

period, i.e. for a period more than 12 months or after the operating cycle



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of the company from the date of the balance sheet. An example of a

security deposit can be a deposit given for electricity or telephone

connection.

iii. Other Loans and Advances, refers to loans and advances that are not

classified as Capital Advances and Security Deposit. An example of this

can be an advance given to employees or suppliers for a period of more

than 12 months or after the operating cycle of the company from the

date of the balance sheet.

e. Other Non-Current Assets: Any Non-Current Assets that do not fall under any of

the aforesaid categories are classified under Other Non-Current Assets. The

followings can be classified into Other Non-Current Assets:

i. Long term trade receivables are those trade receivables the amount of

which is receivables after 12 months or after the operating cycle of the

company from the date of the balance sheet.

ii. Others refer to assets others than trade receivables, such as

unamortized expenses/losses

iii. Insurance claim receivables

2. Current Assets: It refers to those assets which are not non-Current Assets. Current

assets can be defined as assets which are:

i. Expected to be realized in or intended for sale or consumption in the

company’s normal operating cycle, or

ii. Held primarily for the purpose of trading, or

iii. Expected to realized within12 months after the reporting date or the

balance sheet date

iv. Cash and Cash Equivalents, unless they are restricted from being

exchanged or used to settle a liability for at least 12 months after the

Balance Sheet date.

a. Current Investments: It refers to those investments which are held to be converted

into cash with a short time, i.e. within 12 months from the date of purchase of

the investments. Examples of such investments can be Investment in Equity

Shares, Preference Shares, Government or Trust Securities Debentures or Bonds,

Mutual Funds, Partnership Firms or any other investments.

b. Inventories: It is the stock that is held for the purpose of trade in the normal course

of business, i.e. for manufacturing or trading of goods. They can be classified or

shown as current assets as they are held with a purpose to convert them into

Cash and Cash Equivalents with a short time. Inventories may include the

following:

i. Raw materials

ii. Work-in-Progress

iii. Finished Goods

iv. Stock-in-Trade

v. Stores and Spares

vi. Loose Tools

vii. Goods-in-Transit



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c. Trade Receivables: Any amount receivables from the sale of goods or by rendering

of services in the normal course of business. Further, these should be receivables

within 12 months from the date of the Balance Sheet or within the period of the

operating cycle of the business. Trade Receivables shall include both Sundry

Debtors and Bills Receivables. Besides this, if there is a provision of doubtful debt

then that should be disclosed by showing it as a deduction from Trade

Receivables.

d. Cash and Cash Equivalents: The Cash and Cash Equivalents consists of the following:

i. Cash in hand

ii. Bank Balance, including deposit with banks

iii. Cheques, Drafts on hand

iv. Earmarked balance with banks

v. Balance with bank held as Margin Money

vi. Short Term Marketable Securities (i.e. those that can be realized within a

period of 3 months). These typically include the treasury bills, commercial

papers, money market instruments, and investments in preference shares

redeemable within three months if there is an insignificant risk of change

in its value.

e. Short-term Loans and Advances: Those loans and advances that are expected to be

realized within 12 months from the date of Balance Sheet or within the period of

the operating cycle of the business.

f. Other Current Assets: Those current assets that do not fall in any of the aforesaid

categories are classified as Other Current Assets. Prepaid Expenses, Dividend

Receivables, Interest Accrued on Investments, Advance Tax, etc. are some of the

examples of Other Current Assets.

3. Contingent Liabilities and Commitments: Although this does not appear as an item in

the Balance Sheet, however, they are disclosed in the notes to accounts for the

information of the stakeholders.

a. Contingent Liabilities: These are liabilities that may or may not arise as they are

dependent on happening of a certain event in the future. The followings are

classified as contingent liabilities:

i. Claims against the company not acknowledged as debts

ii. Bills Receivables discounted from Bank but not yet due for payments

iii. Proposed Dividend

iv. Other money for which the company is contingently liable

b. Commitments: It refers to financial commitment due to activities agreed to by

the company to be undertaken by it in the future. The followings are some of

the commitments:

i. The estimated amount of contracts remaining to be executed on Capital

Account and not provided for.

ii. Uncalled liability on shares and other investments partly paid

iii. Any other commitments



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Statement of a Profit and Loss Account A profit and loss account is prepared by the company wherein all gains and losses are collected to find out the excess of gains over the losses or vice-versa. It helps the

stakeholders to understand the financial performance of the company. The following are the characteristics of the company:

1. This is generally prepared before preparing the Balance Sheet, as the balance of this

account is Net Profit or Net Loss, which will ultimately affect the Reserves and

Surplus account in the Balance Sheet.

2. It is related to a particular accounting period and is prepared at the end of that

period

3. The Profit and Loss Account (P&L Account) is prepared on an accrual basis

Format of a Statement of a Profit and Loss Account: A partnership firm and a sole-proprietorship business can prepare a profit and loss account

in any format as long as it shows the gross profit and net profit of the entity separately. Hence, these entities generally prepare it in a T-shape format. However, a company is

required to prepare it as per Schedule III of Companies Act, 2013. Below is the format of a statement of a profit and loss account as per Schedule III:

Particulars Note

No

Figures as

at the end of the

current reporting

period

Figures as

at the end of the

previous reporting

period

A. Income i. Revenue from Operations

ii. Other Income

XXX

XXX

XXX

XXX

Total Income XXX XXX

B. Expenses i. Cost of material consumed

ii. Purchase of Stock-in-Trade

iii. Changes in Inventories of finished goods, Stock-in-Trade and Work-in-Progress

iv. Employee Benefits expenses v. Finance Costs

vi. Depreciation and Amortization Expenses vii. Other Expenses

XXX XXX

XXX

XXX XXX

XXX XXX

XXX

XXX XXX

XXX

XXX XXX

XXX XXX

XXX

Total Expenses XXX XXX

Profit/(loss) before exceptional items and tax XXX XXX

Exception Items XXX XXX

Profit/ (loss) before tax XXX XXX

Tax Expense: i. Current Tax

ii. Deferred Tax

XXX XXX

XXX XXX



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Profit (Loss) for the period from continuing operations

XXX XXX

Profit/(loss) from discontinued operations XXX XXX

Tax expenses of discontinued operations XXX XXX

Profit/(loss) from Discontinued operations

(after tax)

XXX XXX

Profit/(loss) for the period XXX XXX

Earnings per equity share

1. Basic 2. Diluted

XXX XXX

XXX XXX

Contents of the Profit and Loss Account: A. Income: The revenue earned by the recorded is accounted for under this head. The

income can be classified into the following:

i. Revenue from Operation: It is the income generated by the company from its

core business operations. Further, it is shown as a net of discount and returns.

It can be divided into Sale of Products, Sale of Services and Other Operating

Revenues.

ii. Other Income: A company may earn revenue from non-core operations as well.

For instance, for non-financial company earnings from bank interest or any

interest earned from loans and advances given by them will fall under this head

as they do not form part of its core operation. Net Gain/loss on investments will

also get classified under Other Income.

B. Expenses: In order to generate revenue, a company will be incurring some costs which

can be either direct or indirect in nature. The following are the expenses that a company

will generally incur for generating income:

i. Cost of material consumed: This is direct in nature and is basically the cost of raw

material that the company requires to manufacture its finished goods. The

material consumed may also consist of packaging material and other materials

like the purchase of intermediates and components which are ‘consumed’ in the

manufacturing activities of the company. Generally, this is the largest expense

incurred by the company.

ii. Purchase of Stock-in-Trade: This refers to the goods purchased normally with the

intention to resell or trade-in. If a company purchases any semi-finished

goods/materials with the intention of doing further processing activities on the

same then the same should be included in the ‘cost of materials consumed’

instead of this item.

iii. Changes in Inventories of finished goods, Stock-in-Trade and Work-in-Progress: This

requires disclosure of difference between the opening and closing inventories

of finished goods, work-in-progress and stock-in-trade. The company is

required to disclose the difference for finished goods, work in progress and

stock in trade separately.



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iv. Employee Benefits expenses: Any payment made to employees in the form of

salary or wages are generally accounted for under this head. This following

expense forms part of this head:

a) Salaries and Wages

b) Contribution to Provident and other funds

c) Expense on Employee Stock Option Scheme and Employee Stock

Purchase Plan

d) Staff welfare expense

v. Finance Costs: This cost can be categorized into:

a) Interest Expenses, which covers the interest paid by the company on

borrowings from a bank and private lenders. Interest paid on

debentures, bonds or similar instruments, etc. are also part of this.

Further, any finance charges on finance leases are also classified as

Interest Expenses if they are in the nature of interest expense.

b) Other Borrowing Costs: This will generally include other borrowing costs

such as commitment charges, loan processing charges, guarantee

charges, loan facilitation charges, discounts/premium on borrowings,

other ancillary costs incurred in connection with borrowings, or

amortization of such costs, etc.

c) Net gain/loss on foreign currency transactions and translation: Any exchange

differences arising from foreign currency borrowings to the extent that

they are regarded as an adjustment to interest costs are also included

under Finance Cost.

vi. Depreciation and Amortization Expenses: A company is required to disclose the

amount of depreciation it charged on its fixed assets and amortization of

intangible assets under this head.

vii. Other Expenses: Any expenses that are not categorized under any of the

aforesaid heads get classified under Other Expenses. These expenses can be in

the nature of Rent Payment, Repairs & Maintenance Expenses on building or

machinery, Rates and taxes, (excluding taxes on income), Power and Fuel,

Insurance Expenses, Consumption of stores and spare parts and Miscellaneous

Expenses.

C. Exceptional Items: Although this term is not defined in Schedule III, however, AS-5

“Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies”

has a reference to such items. It may include the following items:

a. disposals of items of fixed assets

b. disposals of long-term investments

c. legislative changes having retrospective application



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d. litigation settlements

e. other reversals of provisions

D. Extraordinary Items: This term is also not defined in Schedule III, however, AS-5 “Net

Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies” has

a reference to such items and states that income or expenses arising from events or

transactions that are clearly distinct from the ordinary activities of the company and,

therefore, are not expected to recur frequently or regularly.

E. Tax Expenses: This is divided into the following:

i. Current Tax: This is the amount of income tax determined to be payable by the

company in respect of its taxable income for the period.

ii. Deferred Tax: It is the charge/credit for deferred taxes that needs to be disclosed

separately on the face of the Statement of Profit and Loss. It is basically a tax

effect of timing difference, i.e. differences between taxable income and

accounting income for a period that originate in one period and are capable of

reversal in one or more subsequent periods.

F. Profit / (loss) for the period from discontinuing operations: A discontinuing operation

is a business operation whose assets have been sold off or the business operation has

been discontinued. The company is required to disclose the amount of pre-tax profit or

loss from ordinary activities attributable to the discontinuing operation during the

current financial reporting period, along with the income tax expense related thereto

to be disclosed on the face of the Statement of Profit and Loss.

G. Tax expenses of discontinuing operations: If there exists any taxes payable or tax

credits available on profits or losses of discontinuing operations then the same is

required to be disclosed as a separate line item on the Statement of Profit and Loss.

H. Earnings per equity shares: A company is required to compute the Basic and Diluted

Earnings per Share and should be made in accordance with Accounting Standard 20

Earnings Per Share. Further, the nominal value of equity shares should be disclosed

along with the Earnings Per Share

Final Comments: As already mentioned, the purpose of preparing a financial statement is to understand the

financial position and performance of the company. Further, the balance sheet and profit and loss statement can be the raw material to perform the ratio analysis on the company

in order to understand the business performance even better.



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