Accountancy · Ch 7 — Financial Statements of a Company
Form and content of Balance Sheet
Form and content of Balance Sheet
Understanding the Balance Sheet: Form and Content
The balance sheet of a company is not just a list of assets and liabilities — it is a legally prescribed document. Every company registered under the Companies Act, 2013 must prepare its balance sheet in the format specified by Schedule III of the Act. This format is designed to bring uniformity, align with accounting standards, and make financial statements comparable across companies.
The prescribed format is vertical, not horizontal. This means assets and liabilities are listed one below the other, not side by side as in the traditional T-shape. The balance sheet is divided into two main sides: Equity and Liabilities on one side, and Assets on the other.
The Vertical Format of the Balance Sheet
The standard format as per Schedule III is shown below. Note that the balance sheet is presented "as at" a particular date — it is a snapshot of the company's financial position on that day.
| Particulars | Note No. | Figures as at the end of Current Reporting Period (₹) | Figures as at the end of Previous Reporting Period (₹) |
|---|---|---|---|
| I. EQUITY AND LIABILITIES | |||
| 1) Shareholder's Funds | |||
| (a) Share Capital | |||
| (b) Reserves and Surplus | |||
| (c) Money received against share warrants | |||
| 2) Share Application money pending allotment | |||
| 3) Non-current Liabilities | |||
| (a) Long term borrowings | |||
| (b) Deferred tax liabilities (net) | |||
| (c) Other long term liabilities | |||
| (d) Long term provisions | |||
| 4) Current Liabilities | |||
| (a) Short-term borrowings | |||
| (b) Trade payables | |||
| (c) Other current liabilities | |||
| (d) Short-term provisions | |||
| Total | |||
| II. ASSETS | |||
| 1) Non-Current Assets | |||
| (a) Fixed assets | |||
| (i) Tangible assets | |||
| (ii) Intangible assets | |||
| (iii) Capital work-in-progress | |||
| (iv) Intangible assets under development | |||
| (b) Non-current investments | |||
| (c) Deferred tax assets (net) | |||
| (d) Long-term loans and advances | |||
| (e) Other non-current assets | |||
| 2) Current Assets | |||
| (a) Current investments | |||
| (b) Inventories | |||
| (c) Trade receivables | |||
| (d) Cash and cash equivalents | |||
| (e) Short term loans and advances | |||
| (f) Other current assets | |||
| Total | |||
| See accompanying notes to the financial statements |
The balance sheet must show comparative figures — amounts for both the current reporting period and the previous reporting period. This allows users to see changes over time.
Key Features of Presentation
The Schedule III format comes with several important rules that govern how the balance sheet is prepared:
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Applicability: This format applies to all Indian companies preparing financial statements under the Companies Act, 2013. It does not apply to insurance companies, banking companies, or companies for which a different form is specified under any other Act.
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Supremacy of Accounting Standards: Where there is a conflict between Schedule III and an Accounting Standard (AS), the Accounting Standard prevails. This is a critical point — the standards override the Schedule.
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Mandatory Disclosures: Information must be disclosed either on the face of the balance sheet or in the Notes to Accounts. Both are essential and mandatory.
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Terminology: Terms used in Schedule III carry the meaning defined by the applicable accounting standards. For example, "Trade Receivables" replaces the old term "Sundry Debtors," and "Trade Payables" replaces "Sundry Creditors."
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Current/Non-current Classification: Assets and liabilities must be bifurcated into current and non-current categories. This is a fundamental feature of the new format.
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Rounding-off Rule: The figures in financial statements must be rounded off based on the size of turnover:
- Turnover less than ₹100 crore: Round to nearest hundreds, thousands, lakhs, or millions (or decimal thereof)
- Turnover ₹100 crore or more: Round to nearest lakhs or millions (or decimal thereof)
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Debit Balance in Profit & Loss: If the Statement of Profit and Loss shows a debit balance (a loss), it must be disclosed as a negative figure under the head "Surplus" within Reserves and Surplus.
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Share Application Money: Any share application money pending allotment must be disclosed separately on the face of the balance sheet.
Understanding Each Head in Detail
Shareholder's Funds
This section represents the owners' stake in the company. It is sub-classified into three items:
a) Share Capital
Share capital is not shown in detail on the face of the balance sheet. Instead, the Notes to Accounts provide the full breakdown. The following disclosures are required for each class of shares:
- Authorised capital: Number of shares and amount
- Issued capital: Number of shares issued
- Subscribed and fully paid up: Shares that have been subscribed and fully paid
- Subscribed but not fully paid: Shares subscribed but on which calls are unpaid
- Par value per share
- Reconciliation of the number of shares outstanding at the beginning and end of the accounting period
- Rights, preferences, and restrictions attached to each class, including restrictions on dividend distribution and repayment of capital
- Shares held by holding company, ultimate holding company, and their subsidiaries/associates
- Shares held by each shareholder holding more than 5% shares, specifying the number of shares held
- For the 5 years immediately preceding the balance sheet date:
- Aggregate number and class of shares allotted as fully paid up pursuant to contracts without payment being received in cash
- Aggregate number and class of shares allotted as fully paid up by way of bonus shares
- Aggregate number and class of shares bought back
- Shares reserved for issue under options and contracts/commitments
- Terms of any securities convertible into equity/preference shares, with earliest date of conversion
- Calls unpaid (aggregate amount)
- Forfeited shares (amount originally paid up)
The face of the balance sheet shows only the broad heading "Share Capital." All the detailed information goes into the Notes to Accounts.
b) Reserves and Surplus
This head is further classified into:
| Type of Reserve | Description |
|---|---|
| Capital Reserve | Reserves created from capital profits (e.g., profit on sale of fixed assets) |
| Capital Redemption Reserve | Created when shares are redeemed out of profits |
| Securities Premium Reserve | Amount received in excess of par value on issue of shares |
| Debenture Redemption Reserve | Created for redemption of debentures |
| Revaluation Reserve | Arises from revaluation of assets |
| Share Options Outstanding Account | Credit balance from employee stock options |
| Other Reserves | Specify nature and purpose |
| Surplus | Balance in Statement of Profit and Loss |
Key rules for Reserves and Surplus:
- A reserve specifically represented by earmarked investments shall be termed as a "Fund."
- A debit balance in the Statement of Profit and Loss (i.e., accumulated losses) shall be shown as a negative figure under "Surplus."
- The balance of "Reserves and Surplus" after adjusting the negative balance of Surplus (if any) shall be shown under "Reserves and Surplus" — even if the resulting figure is negative.
- "Share Options Outstanding Account" is now a separate item under this head.
c) Money Received against Share Warrants
This is the amount received by the company against share warrants — instruments that can be converted into shares at a specified date and rate. It is shown as a separate line item under Shareholder's Funds.
Share Application Money Pending Allotment
Share application money that does not exceed the issued capital and is non-refundable is classified here. It is shown on the face of the balance sheet as a separate item.
Non-current Liabilities
These are liabilities that are not expected to be settled within 12 months or the operating cycle, whichever is longer. They include:
| Sub-head | Description |
|---|---|
| Long-term borrowings | Loans repayable after more than 12 months/operating cycle |
| Deferred tax liabilities (net) | Always classified as non-current |
| Other long-term liabilities | Includes trade payables to be settled beyond 12 months |
| Long-term provisions | Provisions settled after 12 months from the balance sheet date |
Current Liabilities
These are liabilities expected to be settled within 12 months or the operating cycle. They include:
| Sub-head | Description |
|---|---|
| Short-term borrowings | Loans repayable on demand or with original tenure not exceeding 12 months |
| Trade payables | Amounts payable for goods/services purchased in the normal course of business (replaces "Sundry Creditors") |
| Other current liabilities | Includes current maturities of long-term debt |
| Short-term provisions | Provisions settled within 12 months from the balance sheet date |
Current maturities of long-term debt — the portion of a long-term loan that is repayable within 12 months — must be shown under "Other current liabilities" with a note to account. Do not leave it under long-term borrowings.
Non-current Assets
These are assets that are not expected to be realised within 12 months or the operating cycle. They include:
| Sub-head | Description |
|---|---|
| Fixed assets | Tangible assets, intangible assets, capital work-in-progress, intangible assets under development |
| Non-current investments | Investments expected to be held for more than 12 months |
| Deferred tax assets (net) | Always classified as non-current |
| Long-term loans and advances | Loans/advances recoverable after 12 months |
| Other non-current assets | Includes trade receivables realisable after 12 months |
Even if the useful life of a fixed asset is less than 12 months, it is still classified as non-current. The classification is based on the nature of the asset, not its useful life.
Current Assets
These are assets expected to be realised within 12 months or the operating cycle. They include:
| Sub-head | Description |
|---|---|
| Current investments | Investments expected to be realised within 12 months |
| Inventories | Always treated as current |
| Trade receivables | Amounts receivable from sale of goods/services in normal course (replaces "Sundry Debtors") |
| Cash and cash equivalents | Always current; disclosed as per AS-3 |
| Short-term loans and advances | Recoverable within 12 months |
| Other current assets | Includes items like prepaid expenses, accrued income |
Inventories are always current — there is no such thing as "non-current inventories" in this format.
Special Items and Their Treatment
Proposed Dividend
Proposed dividend has a unique treatment:
- The Board of Directors proposes the dividend after the annual accounts are prepared.
- The shareholders declare (approve) the dividend in the Annual General Meeting, which is held in the next financial year.
- Since declaration depends on shareholders' approval, proposed dividend is shown as a contingent liability in the Notes to Accounts (as per AS-4).
- Once declared by shareholders, it becomes a liability and is accounted in the books.
- Practical effect: Proposed dividend of the previous year is accounted in the current year after approval. Proposed dividend for the current year will be relevant for the next financial year.
Borrowings
Total borrowings are categorised into three:
- Long-term borrowings: Loans repayable after more than 12 months/operating cycle
- Short-term borrowings: Loans repayable on demand or with original tenure not exceeding 12 months
- Current maturities of long-term debt: The portion of long-term loans repayable within 12 months — shown under "Other current liabilities"
Trade Payables
- Trade payables to be settled beyond 12 months from the balance sheet date are classified under "Other long-term liabilities" with a note.
- The balance of trade payables is classified as current liabilities on the face of the balance sheet.
Provisions
- Provisions settled within 12 months from the balance sheet date: Short-term provisions (current liabilities)
- Provisions settled after 12 months: Long-term provisions (non-current liabilities)
Fixed Assets
- Both tangible and intangible assets are non-current.
- Even if the useful life is less than 12 months, the asset remains non-current.
Investments
- Current investments: Expected to be realised within 12 months
- Non-current investments: Held for more than 12 months …