NCERT Textbook - Financial Statements of a Company Commerce Notes | EduRev

Accountancy Class 12

Created by: Nipun Tuteja

Commerce : NCERT Textbook - Financial Statements of a Company Commerce Notes | EduRev

 Page 1


H
aving understood how a company raises its
capital, we have to learn the nature, objectives
and types of financial statements it has to prepare
including their contents, format, uses and
limitations. The financial statements are the end
products of accounting process. They are prepared
following the consistent accounting concepts,
principles, procedures and also the legal
environment in which the business organisations
operate. These statements are the outcome of the
summarising process of accounting and are,
therefore, the sources of information on the basis of
which conclusions are drawn about the profitability
and the financial position of a company. Hence, they
need to be arranged in a proper form with suitable
contents so that the shareholders and other users
of financial statements can easily understand and
use them in their economic decisions in a meaningful
way.
3.1 3.1 3.1 3.1 3.1 Meaning of Financial Statements Meaning of Financial Statements Meaning of Financial Statements Meaning of Financial Statements Meaning of Financial Statements
Financial statements are the basic and formal annual
reports through which the corporate management
communicates financial information to its owners
and various other external parties which include–
investors, tax authorities, government, employees,
etc. These normally refer to: (a) the balance sheet
(position statement) as at the end of accounting
period, and (b) the statement of profit and loss of a
company. Now-a-days, the cash flow statement is
also taken as an integral component of the financial
statements of a company.
Financial Statements of a Company Financial Statements of a Company Financial Statements of a Company Financial Statements of a Company Financial Statements of a Company 3 3 3 3 3
L L L L LEARNING EARNING EARNING EARNING EARNING O O O O OBJECTIVES BJECTIVES BJECTIVES BJECTIVES BJECTIVES
After studying this chapter ,
you will be able to :
• Explain the nature and
objectives of financial
statements of a
company;
• Describe the form and
content of Statement of
Profit and Loss of a
company as per
(revised) schedule VI;
• Describe the form and
content of balance sheet
of a company as per
(revised) schedule VI;
• Explain the significance
and limitations of
financial statements;
and
• Prepare the financial
statements.
Page 2


H
aving understood how a company raises its
capital, we have to learn the nature, objectives
and types of financial statements it has to prepare
including their contents, format, uses and
limitations. The financial statements are the end
products of accounting process. They are prepared
following the consistent accounting concepts,
principles, procedures and also the legal
environment in which the business organisations
operate. These statements are the outcome of the
summarising process of accounting and are,
therefore, the sources of information on the basis of
which conclusions are drawn about the profitability
and the financial position of a company. Hence, they
need to be arranged in a proper form with suitable
contents so that the shareholders and other users
of financial statements can easily understand and
use them in their economic decisions in a meaningful
way.
3.1 3.1 3.1 3.1 3.1 Meaning of Financial Statements Meaning of Financial Statements Meaning of Financial Statements Meaning of Financial Statements Meaning of Financial Statements
Financial statements are the basic and formal annual
reports through which the corporate management
communicates financial information to its owners
and various other external parties which include–
investors, tax authorities, government, employees,
etc. These normally refer to: (a) the balance sheet
(position statement) as at the end of accounting
period, and (b) the statement of profit and loss of a
company. Now-a-days, the cash flow statement is
also taken as an integral component of the financial
statements of a company.
Financial Statements of a Company Financial Statements of a Company Financial Statements of a Company Financial Statements of a Company Financial Statements of a Company 3 3 3 3 3
L L L L LEARNING EARNING EARNING EARNING EARNING O O O O OBJECTIVES BJECTIVES BJECTIVES BJECTIVES BJECTIVES
After studying this chapter ,
you will be able to :
• Explain the nature and
objectives of financial
statements of a
company;
• Describe the form and
content of Statement of
Profit and Loss of a
company as per
(revised) schedule VI;
• Describe the form and
content of balance sheet
of a company as per
(revised) schedule VI;
• Explain the significance
and limitations of
financial statements;
and
• Prepare the financial
statements.
150 Accountancy : Company Accounts and Analysis of Financial Statements
3.2 3.2 3.2 3.2 3.2 Nature of Financial Statements Nature of Financial Statements Nature of Financial Statements Nature of Financial Statements Nature of Financial Statements
The chronologically recorded facts about events expressed in monetary terms
for a defined period of time are the basis for the preparation of periodical financial
statements which reveal the financial position as on a date and the financial
results obtained during a period. The American Institute of Certified Public
Accountants states the nature of financial statements as, “the statements
prepared for the purpose of presenting a periodical review of report on progress
by the management and deal with the status of investment in the business and
the results achieved during the period under review. They reflect a combination
of recorded facts, accounting principles and personal judgements”.
The following points explain the nature of financial statements:
1. Recorded Facts:     Financial statements are prepared on the basis of
facts in the form of cost data recorded in accounting books. The original
cost or historical cost is the basis of recording transactions. The figures
of various accounts such as cash in hand, cash at bank, trade
receivables, fixed assets, etc. are taken as per the figures recorded in
the accounting books. The assets purchased at different times and at
different prices are put together and shown at costs. As these are not
based on market prices, the financial statements do not show current
financial condition of the concern.
2. Accounting Conventions:     Certain accounting conventions are followed
while preparing financial statements. The convention of valuing
inventory at cost or market price, whichever is lower, is followed. The
valuing of assets at cost less depreciation principle for balance sheet
purposes is followed. The convention of materiality is followed in dealing
with small items like pencils, pens, postage stamps, etc. These items
are treated as expenditure in the year in which they are purchased
even though they are assets in nature. The stationery is valued at cost
and not on the principle of cost or market price, whichever is less. The
use of accounting conventions makes financial statements comparable,
simple and realistic.
3. Postulates:     Financial statements are prepared on certain basic
assumptions (pre-requisites) known as postulates such as going
concern postulate, money measurement postulate, realisation
postulate, etc. Going concern postulate assumes that the enterprise is
treated as a going concern and exists for a longer period of time. So the
assets are shown on historical cost basis. Money measurement
postulate assumes that the value of money will remain the same in
different periods. Though there is drastic change in purchasing power
of money, the assets purchased at different times will be shown at the
Page 3


H
aving understood how a company raises its
capital, we have to learn the nature, objectives
and types of financial statements it has to prepare
including their contents, format, uses and
limitations. The financial statements are the end
products of accounting process. They are prepared
following the consistent accounting concepts,
principles, procedures and also the legal
environment in which the business organisations
operate. These statements are the outcome of the
summarising process of accounting and are,
therefore, the sources of information on the basis of
which conclusions are drawn about the profitability
and the financial position of a company. Hence, they
need to be arranged in a proper form with suitable
contents so that the shareholders and other users
of financial statements can easily understand and
use them in their economic decisions in a meaningful
way.
3.1 3.1 3.1 3.1 3.1 Meaning of Financial Statements Meaning of Financial Statements Meaning of Financial Statements Meaning of Financial Statements Meaning of Financial Statements
Financial statements are the basic and formal annual
reports through which the corporate management
communicates financial information to its owners
and various other external parties which include–
investors, tax authorities, government, employees,
etc. These normally refer to: (a) the balance sheet
(position statement) as at the end of accounting
period, and (b) the statement of profit and loss of a
company. Now-a-days, the cash flow statement is
also taken as an integral component of the financial
statements of a company.
Financial Statements of a Company Financial Statements of a Company Financial Statements of a Company Financial Statements of a Company Financial Statements of a Company 3 3 3 3 3
L L L L LEARNING EARNING EARNING EARNING EARNING O O O O OBJECTIVES BJECTIVES BJECTIVES BJECTIVES BJECTIVES
After studying this chapter ,
you will be able to :
• Explain the nature and
objectives of financial
statements of a
company;
• Describe the form and
content of Statement of
Profit and Loss of a
company as per
(revised) schedule VI;
• Describe the form and
content of balance sheet
of a company as per
(revised) schedule VI;
• Explain the significance
and limitations of
financial statements;
and
• Prepare the financial
statements.
150 Accountancy : Company Accounts and Analysis of Financial Statements
3.2 3.2 3.2 3.2 3.2 Nature of Financial Statements Nature of Financial Statements Nature of Financial Statements Nature of Financial Statements Nature of Financial Statements
The chronologically recorded facts about events expressed in monetary terms
for a defined period of time are the basis for the preparation of periodical financial
statements which reveal the financial position as on a date and the financial
results obtained during a period. The American Institute of Certified Public
Accountants states the nature of financial statements as, “the statements
prepared for the purpose of presenting a periodical review of report on progress
by the management and deal with the status of investment in the business and
the results achieved during the period under review. They reflect a combination
of recorded facts, accounting principles and personal judgements”.
The following points explain the nature of financial statements:
1. Recorded Facts:     Financial statements are prepared on the basis of
facts in the form of cost data recorded in accounting books. The original
cost or historical cost is the basis of recording transactions. The figures
of various accounts such as cash in hand, cash at bank, trade
receivables, fixed assets, etc. are taken as per the figures recorded in
the accounting books. The assets purchased at different times and at
different prices are put together and shown at costs. As these are not
based on market prices, the financial statements do not show current
financial condition of the concern.
2. Accounting Conventions:     Certain accounting conventions are followed
while preparing financial statements. The convention of valuing
inventory at cost or market price, whichever is lower, is followed. The
valuing of assets at cost less depreciation principle for balance sheet
purposes is followed. The convention of materiality is followed in dealing
with small items like pencils, pens, postage stamps, etc. These items
are treated as expenditure in the year in which they are purchased
even though they are assets in nature. The stationery is valued at cost
and not on the principle of cost or market price, whichever is less. The
use of accounting conventions makes financial statements comparable,
simple and realistic.
3. Postulates:     Financial statements are prepared on certain basic
assumptions (pre-requisites) known as postulates such as going
concern postulate, money measurement postulate, realisation
postulate, etc. Going concern postulate assumes that the enterprise is
treated as a going concern and exists for a longer period of time. So the
assets are shown on historical cost basis. Money measurement
postulate assumes that the value of money will remain the same in
different periods. Though there is drastic change in purchasing power
of money, the assets purchased at different times will be shown at the
151 Financial Statements of a Company
amount paid for them. While, preparing statement of profit and loss
the revenue is included in the sales of the year in which the sale was
undertaken even though the sale price may be received over a number
of years. The assumption is known as realisation postulate.
4. Personal Judgments: Under more than one circumstance, facts and
figures presented through financial statements are based on personal
opinion, estimates and judgments. The depreciation is provided taking
into consideration the useful economic life of fixed assets. Provisions
for doubtful debts are made on estimates and personal judgments. In
valuing inventory, cost or market value, whichever is less is being
followed. While deciding either cost of inventory or market value of
inventory many personal judgments are to be made based on certain
considerations. Personal opinion, judgments and estimates are made
while preparing the financial statements to avoid any possibility of
over statement of assets and liabilities, income and expenditure,
keeping in mind the convention of conservatism.
Thus, financial statements are the summarised reports of recorded facts and
are prepared following the accounting concepts, conventions and requirements
of Law.
3 3 3 3 3.3 .3 .3 .3 .3 Objectives of Financial Statements Objectives of Financial Statements Objectives of Financial Statements Objectives of Financial Statements Objectives of Financial Statements
Financial statements are the basic sources of information to the shareholders
and other external parties for understanding the profitability and financial
position of any business concern. They provide information about the results of
the business concern during a specified period of time in terms of assets and
liabilities, which provide the basis for taking decisions. Thus, the primary
objective of financial statements is to assist the users in their decision-making.
The specific objectives include the following:
1. To provide information about economic resources and obligations of
a business: They are prepared to provide adequate, reliable and
periodical information about economic resources and obligations of a
business firm to investors and other external parties who have limited
authority, ability or resources to obtain information.
2. To provide information about the earning capacity of the business:
They are to provide useful financial information which can gainfully
be utilised to predict, compare, and evaluate the business firm’s earning
capacity.
3. To provide information about cash flows: They are to provide
information useful to investors and creditors for predicting, comparing
and evaluating, potential cash flows in terms of amount, timing and
related uncertainties.
Page 4


H
aving understood how a company raises its
capital, we have to learn the nature, objectives
and types of financial statements it has to prepare
including their contents, format, uses and
limitations. The financial statements are the end
products of accounting process. They are prepared
following the consistent accounting concepts,
principles, procedures and also the legal
environment in which the business organisations
operate. These statements are the outcome of the
summarising process of accounting and are,
therefore, the sources of information on the basis of
which conclusions are drawn about the profitability
and the financial position of a company. Hence, they
need to be arranged in a proper form with suitable
contents so that the shareholders and other users
of financial statements can easily understand and
use them in their economic decisions in a meaningful
way.
3.1 3.1 3.1 3.1 3.1 Meaning of Financial Statements Meaning of Financial Statements Meaning of Financial Statements Meaning of Financial Statements Meaning of Financial Statements
Financial statements are the basic and formal annual
reports through which the corporate management
communicates financial information to its owners
and various other external parties which include–
investors, tax authorities, government, employees,
etc. These normally refer to: (a) the balance sheet
(position statement) as at the end of accounting
period, and (b) the statement of profit and loss of a
company. Now-a-days, the cash flow statement is
also taken as an integral component of the financial
statements of a company.
Financial Statements of a Company Financial Statements of a Company Financial Statements of a Company Financial Statements of a Company Financial Statements of a Company 3 3 3 3 3
L L L L LEARNING EARNING EARNING EARNING EARNING O O O O OBJECTIVES BJECTIVES BJECTIVES BJECTIVES BJECTIVES
After studying this chapter ,
you will be able to :
• Explain the nature and
objectives of financial
statements of a
company;
• Describe the form and
content of Statement of
Profit and Loss of a
company as per
(revised) schedule VI;
• Describe the form and
content of balance sheet
of a company as per
(revised) schedule VI;
• Explain the significance
and limitations of
financial statements;
and
• Prepare the financial
statements.
150 Accountancy : Company Accounts and Analysis of Financial Statements
3.2 3.2 3.2 3.2 3.2 Nature of Financial Statements Nature of Financial Statements Nature of Financial Statements Nature of Financial Statements Nature of Financial Statements
The chronologically recorded facts about events expressed in monetary terms
for a defined period of time are the basis for the preparation of periodical financial
statements which reveal the financial position as on a date and the financial
results obtained during a period. The American Institute of Certified Public
Accountants states the nature of financial statements as, “the statements
prepared for the purpose of presenting a periodical review of report on progress
by the management and deal with the status of investment in the business and
the results achieved during the period under review. They reflect a combination
of recorded facts, accounting principles and personal judgements”.
The following points explain the nature of financial statements:
1. Recorded Facts:     Financial statements are prepared on the basis of
facts in the form of cost data recorded in accounting books. The original
cost or historical cost is the basis of recording transactions. The figures
of various accounts such as cash in hand, cash at bank, trade
receivables, fixed assets, etc. are taken as per the figures recorded in
the accounting books. The assets purchased at different times and at
different prices are put together and shown at costs. As these are not
based on market prices, the financial statements do not show current
financial condition of the concern.
2. Accounting Conventions:     Certain accounting conventions are followed
while preparing financial statements. The convention of valuing
inventory at cost or market price, whichever is lower, is followed. The
valuing of assets at cost less depreciation principle for balance sheet
purposes is followed. The convention of materiality is followed in dealing
with small items like pencils, pens, postage stamps, etc. These items
are treated as expenditure in the year in which they are purchased
even though they are assets in nature. The stationery is valued at cost
and not on the principle of cost or market price, whichever is less. The
use of accounting conventions makes financial statements comparable,
simple and realistic.
3. Postulates:     Financial statements are prepared on certain basic
assumptions (pre-requisites) known as postulates such as going
concern postulate, money measurement postulate, realisation
postulate, etc. Going concern postulate assumes that the enterprise is
treated as a going concern and exists for a longer period of time. So the
assets are shown on historical cost basis. Money measurement
postulate assumes that the value of money will remain the same in
different periods. Though there is drastic change in purchasing power
of money, the assets purchased at different times will be shown at the
151 Financial Statements of a Company
amount paid for them. While, preparing statement of profit and loss
the revenue is included in the sales of the year in which the sale was
undertaken even though the sale price may be received over a number
of years. The assumption is known as realisation postulate.
4. Personal Judgments: Under more than one circumstance, facts and
figures presented through financial statements are based on personal
opinion, estimates and judgments. The depreciation is provided taking
into consideration the useful economic life of fixed assets. Provisions
for doubtful debts are made on estimates and personal judgments. In
valuing inventory, cost or market value, whichever is less is being
followed. While deciding either cost of inventory or market value of
inventory many personal judgments are to be made based on certain
considerations. Personal opinion, judgments and estimates are made
while preparing the financial statements to avoid any possibility of
over statement of assets and liabilities, income and expenditure,
keeping in mind the convention of conservatism.
Thus, financial statements are the summarised reports of recorded facts and
are prepared following the accounting concepts, conventions and requirements
of Law.
3 3 3 3 3.3 .3 .3 .3 .3 Objectives of Financial Statements Objectives of Financial Statements Objectives of Financial Statements Objectives of Financial Statements Objectives of Financial Statements
Financial statements are the basic sources of information to the shareholders
and other external parties for understanding the profitability and financial
position of any business concern. They provide information about the results of
the business concern during a specified period of time in terms of assets and
liabilities, which provide the basis for taking decisions. Thus, the primary
objective of financial statements is to assist the users in their decision-making.
The specific objectives include the following:
1. To provide information about economic resources and obligations of
a business: They are prepared to provide adequate, reliable and
periodical information about economic resources and obligations of a
business firm to investors and other external parties who have limited
authority, ability or resources to obtain information.
2. To provide information about the earning capacity of the business:
They are to provide useful financial information which can gainfully
be utilised to predict, compare, and evaluate the business firm’s earning
capacity.
3. To provide information about cash flows: They are to provide
information useful to investors and creditors for predicting, comparing
and evaluating, potential cash flows in terms of amount, timing and
related uncertainties.
152 Accountancy : Company Accounts and Analysis of Financial Statements
4. To judge effectiveness of management: They supply information
useful for judging management’s ability to utilise the resources of a
business effectively.
5. Information about activities of business affecting the society: They
have to report the activities of the business organisation affecting the
society, which can be determined and described or measured and which
are important in its social environment.
6. Disclosing accounting policies:     These reports have to     provide the
significant policies, concepts followed in the process of accounting and
changes taken up in them during the year to understand these
statements in a better way.
3.4 3.4 3.4 3.4 3.4 Types of Financial Statements Types of Financial Statements Types of Financial Statements Types of Financial Statements Types of Financial Statements
The financial statements generally include two statements: balance sheet and
statement of profit and loss which are required for external reporting and also
for internal needs of the management like planning, decision-making and control.
Apart from these, there is also a need to know about movements of funds and
changes in the financial position of the company. For this purpose, a statement
of changes in financial position of the company or a cash flow statement is
prepard.
Balance Sheet : Balance Sheet : Balance Sheet : Balance Sheet : Balance Sheet : Balance sheet of a company is prepared and presented in the
form prescribed in (Revised) Schedule VI of the Companies Act, 1956. The form
prescribed is vertical and is given in figure 3.1.
Every company registered under the Act shall prepare its balance sheet,
statement of profit and loss and Notes to Account thereto in accordance with the
manner prescribed in teh Schedule VI to the Companies Act, 1956 to harmonise
the disclosure requirement with the accounting standards and to converge with
new reforms. With regard to this, the Ministry of Corporate Affairs (MCA) has
prescribed a (Revised) Schedule VI to the Companies Act, 1956 (vide Notification
dated 28.02.2011). It is applied to the financial statements prepared for all
financial periods beginning on or after April 01, 2011 by the Indian Companies.
The revised Schedule VI has introduced many disclosure requirements. It has
also done away with several statutory disclosure requirements.
Page 5


H
aving understood how a company raises its
capital, we have to learn the nature, objectives
and types of financial statements it has to prepare
including their contents, format, uses and
limitations. The financial statements are the end
products of accounting process. They are prepared
following the consistent accounting concepts,
principles, procedures and also the legal
environment in which the business organisations
operate. These statements are the outcome of the
summarising process of accounting and are,
therefore, the sources of information on the basis of
which conclusions are drawn about the profitability
and the financial position of a company. Hence, they
need to be arranged in a proper form with suitable
contents so that the shareholders and other users
of financial statements can easily understand and
use them in their economic decisions in a meaningful
way.
3.1 3.1 3.1 3.1 3.1 Meaning of Financial Statements Meaning of Financial Statements Meaning of Financial Statements Meaning of Financial Statements Meaning of Financial Statements
Financial statements are the basic and formal annual
reports through which the corporate management
communicates financial information to its owners
and various other external parties which include–
investors, tax authorities, government, employees,
etc. These normally refer to: (a) the balance sheet
(position statement) as at the end of accounting
period, and (b) the statement of profit and loss of a
company. Now-a-days, the cash flow statement is
also taken as an integral component of the financial
statements of a company.
Financial Statements of a Company Financial Statements of a Company Financial Statements of a Company Financial Statements of a Company Financial Statements of a Company 3 3 3 3 3
L L L L LEARNING EARNING EARNING EARNING EARNING O O O O OBJECTIVES BJECTIVES BJECTIVES BJECTIVES BJECTIVES
After studying this chapter ,
you will be able to :
• Explain the nature and
objectives of financial
statements of a
company;
• Describe the form and
content of Statement of
Profit and Loss of a
company as per
(revised) schedule VI;
• Describe the form and
content of balance sheet
of a company as per
(revised) schedule VI;
• Explain the significance
and limitations of
financial statements;
and
• Prepare the financial
statements.
150 Accountancy : Company Accounts and Analysis of Financial Statements
3.2 3.2 3.2 3.2 3.2 Nature of Financial Statements Nature of Financial Statements Nature of Financial Statements Nature of Financial Statements Nature of Financial Statements
The chronologically recorded facts about events expressed in monetary terms
for a defined period of time are the basis for the preparation of periodical financial
statements which reveal the financial position as on a date and the financial
results obtained during a period. The American Institute of Certified Public
Accountants states the nature of financial statements as, “the statements
prepared for the purpose of presenting a periodical review of report on progress
by the management and deal with the status of investment in the business and
the results achieved during the period under review. They reflect a combination
of recorded facts, accounting principles and personal judgements”.
The following points explain the nature of financial statements:
1. Recorded Facts:     Financial statements are prepared on the basis of
facts in the form of cost data recorded in accounting books. The original
cost or historical cost is the basis of recording transactions. The figures
of various accounts such as cash in hand, cash at bank, trade
receivables, fixed assets, etc. are taken as per the figures recorded in
the accounting books. The assets purchased at different times and at
different prices are put together and shown at costs. As these are not
based on market prices, the financial statements do not show current
financial condition of the concern.
2. Accounting Conventions:     Certain accounting conventions are followed
while preparing financial statements. The convention of valuing
inventory at cost or market price, whichever is lower, is followed. The
valuing of assets at cost less depreciation principle for balance sheet
purposes is followed. The convention of materiality is followed in dealing
with small items like pencils, pens, postage stamps, etc. These items
are treated as expenditure in the year in which they are purchased
even though they are assets in nature. The stationery is valued at cost
and not on the principle of cost or market price, whichever is less. The
use of accounting conventions makes financial statements comparable,
simple and realistic.
3. Postulates:     Financial statements are prepared on certain basic
assumptions (pre-requisites) known as postulates such as going
concern postulate, money measurement postulate, realisation
postulate, etc. Going concern postulate assumes that the enterprise is
treated as a going concern and exists for a longer period of time. So the
assets are shown on historical cost basis. Money measurement
postulate assumes that the value of money will remain the same in
different periods. Though there is drastic change in purchasing power
of money, the assets purchased at different times will be shown at the
151 Financial Statements of a Company
amount paid for them. While, preparing statement of profit and loss
the revenue is included in the sales of the year in which the sale was
undertaken even though the sale price may be received over a number
of years. The assumption is known as realisation postulate.
4. Personal Judgments: Under more than one circumstance, facts and
figures presented through financial statements are based on personal
opinion, estimates and judgments. The depreciation is provided taking
into consideration the useful economic life of fixed assets. Provisions
for doubtful debts are made on estimates and personal judgments. In
valuing inventory, cost or market value, whichever is less is being
followed. While deciding either cost of inventory or market value of
inventory many personal judgments are to be made based on certain
considerations. Personal opinion, judgments and estimates are made
while preparing the financial statements to avoid any possibility of
over statement of assets and liabilities, income and expenditure,
keeping in mind the convention of conservatism.
Thus, financial statements are the summarised reports of recorded facts and
are prepared following the accounting concepts, conventions and requirements
of Law.
3 3 3 3 3.3 .3 .3 .3 .3 Objectives of Financial Statements Objectives of Financial Statements Objectives of Financial Statements Objectives of Financial Statements Objectives of Financial Statements
Financial statements are the basic sources of information to the shareholders
and other external parties for understanding the profitability and financial
position of any business concern. They provide information about the results of
the business concern during a specified period of time in terms of assets and
liabilities, which provide the basis for taking decisions. Thus, the primary
objective of financial statements is to assist the users in their decision-making.
The specific objectives include the following:
1. To provide information about economic resources and obligations of
a business: They are prepared to provide adequate, reliable and
periodical information about economic resources and obligations of a
business firm to investors and other external parties who have limited
authority, ability or resources to obtain information.
2. To provide information about the earning capacity of the business:
They are to provide useful financial information which can gainfully
be utilised to predict, compare, and evaluate the business firm’s earning
capacity.
3. To provide information about cash flows: They are to provide
information useful to investors and creditors for predicting, comparing
and evaluating, potential cash flows in terms of amount, timing and
related uncertainties.
152 Accountancy : Company Accounts and Analysis of Financial Statements
4. To judge effectiveness of management: They supply information
useful for judging management’s ability to utilise the resources of a
business effectively.
5. Information about activities of business affecting the society: They
have to report the activities of the business organisation affecting the
society, which can be determined and described or measured and which
are important in its social environment.
6. Disclosing accounting policies:     These reports have to     provide the
significant policies, concepts followed in the process of accounting and
changes taken up in them during the year to understand these
statements in a better way.
3.4 3.4 3.4 3.4 3.4 Types of Financial Statements Types of Financial Statements Types of Financial Statements Types of Financial Statements Types of Financial Statements
The financial statements generally include two statements: balance sheet and
statement of profit and loss which are required for external reporting and also
for internal needs of the management like planning, decision-making and control.
Apart from these, there is also a need to know about movements of funds and
changes in the financial position of the company. For this purpose, a statement
of changes in financial position of the company or a cash flow statement is
prepard.
Balance Sheet : Balance Sheet : Balance Sheet : Balance Sheet : Balance Sheet : Balance sheet of a company is prepared and presented in the
form prescribed in (Revised) Schedule VI of the Companies Act, 1956. The form
prescribed is vertical and is given in figure 3.1.
Every company registered under the Act shall prepare its balance sheet,
statement of profit and loss and Notes to Account thereto in accordance with the
manner prescribed in teh Schedule VI to the Companies Act, 1956 to harmonise
the disclosure requirement with the accounting standards and to converge with
new reforms. With regard to this, the Ministry of Corporate Affairs (MCA) has
prescribed a (Revised) Schedule VI to the Companies Act, 1956 (vide Notification
dated 28.02.2011). It is applied to the financial statements prepared for all
financial periods beginning on or after April 01, 2011 by the Indian Companies.
The revised Schedule VI has introduced many disclosure requirements. It has
also done away with several statutory disclosure requirements.
153 Financial Statements of a Company
Balance Sheet as at 31st March, 20..... Balance Sheet as at 31st March, 20..... Balance Sheet as at 31st March, 20..... Balance Sheet as at 31st March, 20..... Balance Sheet as at 31st March, 20.....
Particulars Note No. Figure as Figure as
at the end at the end
of Current of Previous
reporting reporting
period period
I. EQUITY AND LIABILITIES I. EQUITY AND LIABILITIES I. EQUITY AND LIABILITIES I. EQUITY AND LIABILITIES 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 Total Total Total Total
II. II. II. II. II. ASSETS ASSETS ASSETS ASSETS ASSETS
1) Non-current Assets
(a) Fixed assets
(i) Tangible assets
(ii) Intangible assets
(iii) Capital work-in-progress
(iv) Intangible assets under developement
(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 Total Total Total Total
See accompanying notes to the financial statements See accompanying notes to the financial statements See accompanying notes to the financial statements See accompanying notes to the financial statements See accompanying notes to the financial statements
NOTES: NOTES: NOTES: NOTES: NOTES:
Fig. 3.1: V Fig. 3.1: V Fig. 3.1: V Fig. 3.1: V Fig. 3.1: Vertical For ertical For ertical For ertical For ertical Form of Balance Sheet m of Balance Sheet m of Balance Sheet m of Balance Sheet m of Balance Sheet
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