Final Accounts of Companies
This domain tests preparation and interpretation of company final accounts under Schedule III: the statement of profit and loss, balance sheet, and adjustments for outstanding, prepaid, depreciation, inventory, provisions and tax.
Core rules
- Schedule III Division I applies to companies following AS; Division II applies to companies following Ind AS.
- Expenses are classified by nature; finance costs, depreciation and tax are separate line items.
- Adjustments must follow the accrual concept: outstanding expenses are liabilities, prepaid expenses are assets, and closing stock is an asset credited to trading account.
- Provision for tax is a charge and a current liability; advance tax is an asset until adjusted.
- Dividends are appropriations, not charges, and are recognised when declared.
Worked example
Gross profit 8,00,000; salaries 1,50,000 plus outstanding 20,000; rent 60,000; depreciation 70,000; tax rate 30%. Total expenses are 1,70,000 + 60,000 + 70,000 = 3,00,000. Profit before tax is 5,00,000; tax is 1,50,000; profit after tax is 3,50,000. Outstanding salaries appear as a current liability, and tax provision is shown separately.
Traps
Omitting outstanding expenses; treating advance tax as an expense; confusing provision with appropriation; and forgetting depreciation in the computation.
Exam focus
Adjustment-based computation of profit and classification in Schedule III.