Q.Classify the following items under major heads and subheads (if any) in the Balance Sheet of the 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 →Interest Accrued on Investments is an 'Other Current Asset', Calls-in-Advance is an 'Other Current Liability', and Mortgage Loans are 'Long-term Borrowings' under Non-Current Liabilities.
Understanding the classification of items in a company's Balance Sheet is crucial for presenting a true and fair view of its financial position. Schedule III, Part I of the Companies Act, 2013, prescribes the format for the Balance Sheet, ensuring uniformity and comparability across companies. The primary objective is to categorise assets and liabilities based on their nature and liquidity (for assets) or settlement period (for liabilities).
Let's break down each item:
(a) Interest Accrued on Investments
Concept and Treatment:
'Interest Accrued on Investments' represents income that the company has earned from its investments (e.g., fixed deposits, bonds) but has not yet received in cash. According to the accrual concept of accounting, income is recognised when earned, regardless of when cash is received. Since this is an amount receivable by the company, it is an asset.
For classification under Schedule III, we need to determine if it's a current or non-current asset. Current assets are those expected to be realised, consumed, or sold within the company's normal operating cycle or within twelve months from the reporting date, whichever is longer. Interest typically accrues over short periods (e.g., quarterly, half-yearly) and is expected to be received within the next twelve months. Therefore, it is classified as a current asset. Within current assets, it doesn't fit into categories like Inventories, Trade Receivables, Cash and Cash Equivalents, or Short-term Loans and Advances. Hence, it falls under 'Other Current Assets'.
(b) Calls-in-Advance
Concept and Treatment:
'Calls-in-Advance' refers to the money received by a company from its shareholders for calls on shares that have not yet been made. For instance, if a company has called for ₹50 per share, but a shareholder pays ₹70 (including the next call of ₹20 not yet made), the extra ₹20 is calls-in-advance. From the company's perspective, this amount is a liability because it represents money received for which shares are not yet fully called up. It is not yet part of the share capital.
For classification, we consider its settlement. The company will either adjust this amount against future calls when they are made or, in rare cases, refund it. Typically, calls are made within a reasonable timeframe, usually within the next twelve months. Therefore, it is treated as a current liability. Schedule III specifically places 'Calls-in-Advance' under 'Other Current Liabilities' because it is not a Trade Payable, Short-term Borrowing, or Short-term Provision.
Calls-in-Advance is not part of Share Capital. It is a liability until the call is formally made and the amount is adjusted against the share capital. It is also distinct from 'Unpaid Calls' (or Calls-in-Arrears), which is a deduction from Share Capital.
(c) Mortgage Loans
Concept and Treatment:
'Mortgage Loans' are borrowings taken by the company, where specific assets (like land and building) are pledged as security. These are typically long-term financing arrangements, meaning the repayment period extends beyond twelve months from the reporting date. Since the company has an obligation to repay these funds, they are liabilities. …
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