Q.Classify the following items under major heads and sub-heads (if any) in the Balance Sheet of a company as per Schedule III, Part I of the Companies Act, 2013 :
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Start your 14-day free trial to unlock the full solution →Licenses and Franchise are Intangible Assets under Non-Current Assets; Loans Repayable on Demand are Short-term Borrowings under Current Liabilities; Accrued Income is Other Current Assets under Current Assets.
Understanding the structure of a company's Balance Sheet is fundamental, especially as per Schedule III, Part I of the Companies Act, 2013. This schedule prescribes a specific format to ensure uniformity and comparability of financial statements across companies. It categorises assets and liabilities into major heads and then further into sub-heads, providing a clear picture of the company's financial position.
The classification depends entirely on the nature of the item and its expected realisation or settlement period.
Let's break down each item:
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Licenses and Franchise:
- Concept: These represent rights acquired by a company to use certain intellectual property (like a brand name, patent, or software) or to operate a business under specific terms and conditions (like a franchise agreement). They are not physical assets but provide economic benefits over a period.
- Treatment (Balance Sheet Presentation): Since they lack physical substance but provide future economic benefits, they are classified as Intangible Assets. Intangible Assets are typically held for long-term use and are not intended for sale in the ordinary course of business. Therefore, they fall under the major head of Non-Current Assets.
- Rule: As per Schedule III, Part I, "Property, Plant and Equipment and Intangible Assets" is a sub-head under Non-Current Assets, and "Intangible Assets" is a further classification within it.
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Loans Repayable on Demand:
- Concept: These are funds borrowed by the company where the lender has the right to demand repayment at any time, without a fixed maturity date.
- Treatment (Balance Sheet Presentation): The crucial aspect here is "on demand." Even if the company intends to repay them over a longer period, the lender's ability to demand immediate repayment makes these loans a Current Liability. This is because they could potentially become due for settlement within the company's operating cycle or within twelve months from the reporting date. They are a form of borrowing.
- Rule: Schedule III classifies such borrowings under the major head Current Liabilities, specifically under the sub-head Financial Liabilities, and further as Short-term borrowings.
Watch outA common mistake is to classify "Loans Repayable on Demand" as non-current if the company expects to repay them over a longer period. However, the legal right of the lender to demand repayment at any time overrides the company's intention, making it a current liability.
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Accrued Income: …
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