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 →Prepaid insurance is classified as a Current Asset under the sub-head Other Current Assets; Securities Premium is classified under Shareholders' Funds as part of Reserves and Surplus; Design (capitalised) is classified as a Non-Current Asset under the sub-head Intangible Assets.
Let us understand the logic behind each classification. The Balance Sheet under Schedule III, Part I of the Companies Act, 2013, is structured to show a clear distinction between items based on their nature and the period of benefit. The guiding principle is: if an item provides economic benefit for more than 12 months from the reporting date, it is non-current; if within 12 months, it is current. Additionally, the source of funds (equity or liability) and the nature of the asset (tangible or intangible) determine the sub-head.
- Prepaid Insurance
Prepaid insurance is an expense paid in advance. The benefit (insurance cover) will be consumed within the next 12 months. It is not a physical asset like machinery, nor is it a long-term investment. Because the benefit expires within the operating cycle (usually one year), it is classified as a Current Asset. Within Current Assets, it does not fit into Inventories, Trade Receivables, Cash, or Short-term Investments. The correct sub-head is Other Current Assets, which is a catch-all for current assets not specifically listed elsewhere.
Watch out
A common mistake is to show prepaid insurance as a "Current Liability" or as "Other Expenses." Remember: prepaid insurance is an asset because the company has a right to receive future service (insurance cover). It is not an expense yet — the expense will be recognised only as the cover period elapses.
- Securities Premium
Securities Premium is the amount received by a company in excess of the face value of its shares. For example, if a ₹10 share is issued at ₹15, the extra ₹5 is credited to the Securities Premium Account. This is not a liability — the company does not have to repay it. It is a part of the shareholders' funds, representing a reserve created out of capital receipts. Under Schedule III, it falls under Shareholders' Funds and specifically under the sub-head Reserves and Surplus. It is shown separately within that sub-head, often as "Securities Premium Reserve."
Tip
Securities Premium can be used only for specific purposes allowed by the Companies Act (e.g., issuing bonus shares, writing off preliminary expenses). It cannot be distributed as a dividend. This restricted nature is why it is shown distinctly under Reserves and Surplus.
- Design …
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