Financial Statements are formal records that show the financial performance and financial position of a company. They help shareholders, creditors, government, and other users to understand how the company is performing. In India, preparation of financial statements of companies is governed by the Companies Act 2013. Schedule III of the Act provides the format and presentation rules for financial statements. Corporate entities include public companies, private companies, and One Person Company. One Person Company is a company with only one member but it follows almost the same accounting rules as other companies.
Schedule III is divided into Division I and Division II. Division I applies to companies following Accounting Standards. Division II applies to companies following Indian Accounting Standards. For academic purpose, focus is mainly on format, classification, and presentation. Calculation of managerial remuneration is excluded.
Financial statements are structured reports prepared at the end of an accounting period. As per Companies Act 2013, financial statements include
Balance Sheet
Statement of Profit and Loss
Notes to Accounts
Cash Flow Statement except for One Person Company, Small Company, and Dormant Company
These statements present true and fair view of company affairs.
- Applicability of Schedule III
Schedule III applies to all companies registered under Companies Act 2013. Banking companies, insurance companies, and electricity companies follow separate formats. One Person Company also follows Schedule III but with certain relaxations like cash flow statement exemption.
- Division I of Schedule III
Division I is applicable to companies that prepare financial statements as per Accounting Standards.
Financial Statements under Division I
Balance Sheet
Statement of Profit and Loss
Notes to Accounts
Balance Sheet as per Division I
Balance Sheet is prepared in vertical format. Items are classified into current and non current.
Equity and Liabilities
Shareholders Funds
Equity Share Capital
Preference Share Capital
Reserves and Surplus
Share Application Money Pending Allotment
Non Current Liabilities
Long term borrowings
Deferred tax liabilities
Long term provisions
Current Liabilities
Short term borrowings
Trade payables
Other current liabilities
Short term provisions
Assets
Non Current Assets
Property plant and equipment
Intangible assets
Capital work in progress
Non current investments
Deferred tax assets
Current Assets
Current investments
Inventories
Trade receivables
Cash and cash equivalents
Short term loans and advances
Statement of Profit and Loss as per Division I
Statement of Profit and Loss shows income and expenses of the company for the accounting period.
Income
Revenue from operations
Other income
Expenses
Cost of materials consumed
Purchases of stock in trade
Changes in inventories
Employee benefit expenses
Finance cost
Depreciation and amortisation
Other expenses
Profit before tax
Tax expense
Profit after tax
Notes to Accounts
Notes provide detailed explanation of items shown in balance sheet and profit and loss account. They include accounting policies, share capital details, reserves, borrowings, contingencies, and commitments.
Division II of Schedule III
Division II applies to companies following Indian Accounting Standards.
Key Difference between Division I and Division II
- Division II uses Statement of Profit and Loss with Other Comprehensive Income
- Terminology changes like property plant and equipment instead of fixed assets
- More disclosure requirements
Financial Statements under Division II
Balance Sheet
Statement of Profit and Loss including Other Comprehensive Income
Notes to Accounts
Balance Sheet as per Division II
Structure is similar to Division I but follows Ind AS terminology.
Equity
Equity share capital
Other equity
Liabilities
Non current liabilities
Current liabilities
Assets
Non current assets
Current assets
Statement of Profit and Loss under Division II
Profit and Loss Account is divided into two parts
Profit or Loss Section
Revenue
Expenses
Profit before tax
Other Comprehensive Income
Items that will not be reclassified to profit or loss
Items that will be reclassified to profit or loss
Total Comprehensive Income
One Person Company and Financial Statements
One Person Company is a company with only one member. It is treated as a private company. OPC prepares financial statements as per Schedule III.
Special Provisions for OPC
Cash Flow Statement is not compulsory
AGM is not required
Signing of financial statements is done by one director
Except these relaxations, format and presentation remain same as other companies.
Journal Entries related to Preparation of Financial Statements
Generally, financial statements are prepared from trial balance. No special journal entries are required only for preparation. However, certain adjustment entries are passed before final accounts.
Closing Entries
| Particulars | Debit ₹ | Credit ₹ |
|---|---|---|
| Trading and Profit and Loss A c Dr | Total expenses | |
| To All Expense Accounts | Total expenses |
| Particulars | Debit ₹ | Credit ₹ |
|---|---|---|
| All Income Accounts Dr | Total income | |
| To Trading and Profit and Loss A c | Total income |
Transfer of Profit
| Particulars | Debit ₹ | Credit ₹ |
|---|---|---|
| Profit and Loss A/c Dr | Net profit | |
| To Surplus A/c | Net profit |
Provision for Tax
| Particulars | Debit ₹ | Credit ₹ |
|---|---|---|
| Profit and Loss A c Dr | Tax amount | |
| To Provision for Tax A c | Tax amount |
Depreciation Adjustment
| Particulars | Debit ₹ | Credit ₹ |
|---|---|---|
| Depreciation A/c Dr | Amount | |
| To Accumulated Depreciation A c | Amount |
Presentation Principles under Schedule III
Items should be classified properly
Comparative figures of previous year must be shown
Material items must be disclosed separately
Notes form integral part of financial statements
Rounding off should be done as per rules
Importance of Schedule III Format
Ensures uniformity
Improves transparency
Helps comparison between companies
Ensures compliance with law
Very important for exams and practice
