Financial Statements of Companies
What the exam tests
Company financial statements follow Schedule III of the Companies Act, 2013: Balance Sheet and Statement of Profit and Loss. Questions test classification, presentation, and computation of revenue, expenses, tax, and appropriations.
Core presentation rules
- Balance Sheet: Equity and Liabilities (shareholders' funds, non-current liabilities, current liabilities) and Assets (non-current assets, current assets). The current/non-current split is based on 12 months or the operating cycle.
- Share capital is shown net of calls in arrears; reserves and surplus are separated into capital reserve, securities premium, and surplus.
- Statement of Profit and Loss: revenue from operations, other income, expenses, profit before tax, tax expense, profit after tax. Finance cost, depreciation, and employee benefits are expenses.
- Appropriations such as dividend and transfer to reserves are not expenses; they are shown after profit.
- Tax provision is an expense; advance tax is an asset until adjusted.
Worked example
A company has revenue from operations ₹8,00,000; other income ₹20,000; cost of materials ₹3,50,000; employee benefits ₹1,20,000; depreciation ₹50,000; finance cost ₹30,000; tax 30%. Compute profit after tax. Total revenue = 8,00,000 + 20,000 = ₹8,20,000. Total expenses = 3,50,000 + 1,20,000 + 50,000 + 30,000 = ₹5,50,000. Profit before tax = ₹2,70,000. Tax = 30% of 2,70,000 = ₹81,000. Profit after tax = ₹1,89,000. Reasoning: other income is included in total income but not in revenue from operations; tax is computed on PBT, not on revenue.
Traps
Including dividend paid in the Statement of Profit and Loss as an expense; netting calls in arrears against reserves instead of share capital; treating advance tax as an expense; and misclassifying a 12-month bank loan as non-current.