Key Takeaways:
- Understand the prescribed structure and format of company financial statements under Schedule III of the Companies Act, 2013.
- Learn how to handle common adjustments—depreciation, provisions, proposed dividend, managerial remuneration—when preparing final accounts.
- Work through a step-by-step practical example, moving from trial balance to final accounts, and recognize the distinctions between old Schedule VI and Schedule III.
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Introduction to Final Accounts of Companies
Final accounts form the backbone of a company’s statutory reporting. Every company registered under the Companies Act, 2013, must prepare its financial statements in the standardized format prescribed by Schedule III. This ensures clarity, comparability, and transparency for all stakeholders. Let’s walk through the structure, key adjustments, and practical application, with special attention to what you’re expected to know for academic and professional examinations.
Format of Financial Statements under Schedule III
a. Balance Sheet
The balance sheet provides a snapshot of the company’s financial position at the end of the reporting period. Schedule III mandates a vertical format, categorizing assets and liabilities into current and non-current groups. Here’s how it’s structured:
| Balance Sheet (as per Schedule III) | |
|---|---|
| Particulars | Notes |
| ASSETS | |
| Non-current assets | Property, Plant & Equipment, Intangible Assets, Financial Assets (Investments, Loans), Deferred Tax Assets, etc. |
| Current assets | Inventories, Trade Receivables, Cash & Cash Equivalents, Bank Balances, Other Current Assets |
| EQUITY AND LIABILITIES | |
| Equity | Share Capital, Other Equity (Reserves & Surplus) |
| Non-current liabilities | Long-term Borrowings, Provisions, Deferred Tax Liabilities, etc. |
| Current liabilities | Short-term Borrowings, Trade Payables, Other Current Liabilities, Provisions |
Every figure must be referenced to detailed notes, which disclose the composition and movement of items in accordance with statutory accounting standards.
b. Statement of Profit & Loss
This statement reflects the company’s performance over the period. Schedule III requires a vertical presentation, segregating revenue from operations and other income, then deducting expenses to arrive at profit before and after tax. The layout is:
| Particulars | Notes |
|---|---|
| Revenue from Operations | Main business income |
| Other Income | Interest, Dividends, etc. |
| Total Income | Sum above |
| Expenses | Cost of Materials, Employee Benefits, Depreciation, Finance Costs, Other Expenses |
| Profit Before Tax | Total Income – Total Expenses |
| Tax Expense | Current and Deferred Tax |
| Profit After Tax | Profit Before Tax – Tax Expense |
Additional disclosures—such as Earnings Per Share and changes in equity—are also required.
Adjustments in Final Accounts
a. Depreciation
Depreciation is the annual reduction in value of tangible fixed assets due to wear and tear. It must be calculated as per the methods allowed by the Companies Act and relevant accounting standards, then shown both in the profit & loss statement (as an expense) and in the balance sheet (as accumulated depreciation reducing asset value).
b. Provision for Tax
Companies estimate the current year’s tax liability and provide for it as an expense, even if the actual payment will occur later. This amount appears as an expense in the profit & loss statement and as a liability in the balance sheet until settled.
c. Proposed Dividend
If the Board recommends a dividend before the balance sheet date but pays it after, this is termed ‘proposed dividend’. As per recent amendments, proposed dividends are disclosed under ‘Contingent Liabilities’ until declared at the AGM, rather than as a provision. However, exam questions may still require you to show it as a provision, so follow the instructions given.
d. Managerial Remuneration
Payments to directors and key managerial personnel are subject to strict limits and disclosure norms. Managerial remuneration is shown as an expense in the profit & loss statement. If any part remains unpaid at year-end, it appears as a liability.
Example: Preparation of Final Accounts from Trial Balance
Let’s walk through a practical example. Imagine a company’s trial balance as at 31st March (figures in ₹):
| Particulars | Debit (₹) | Credit (₹) |
|---|---|---|
| Share Capital | 5,00,000 | |
| Reserves & Surplus | 1,00,000 | |
| Plant & Machinery | 4,00,000 | |
| Inventory (Opening) | 1,50,000 | |
| Trade Receivables | 1,00,000 | |
| Trade Payables | 70,000 | |
| Sales | 7,00,000 | |
| Purchases | 4,00,000 | |
| Wages | 60,000 | |
| Depreciation (to be provided @10% on Plant & Machinery) | ||
| Provision for Tax (to be made @30% on profits) | ||
| Proposed Dividend | ||
| Managerial Remuneration (@5% of Net Profit) | ||
| Other Expenses | 30,000 | |
| Cash at Bank | 1,30,000 | |
| Total | 12,70,000 | 13,70,000 |
Step 1: Adjustments
- Depreciation: 10% of ₹4,00,000 = ₹40,000 (to be recorded as an expense and deducted from Plant & Machinery)
- Provision for Tax: Calculate on Net Profit before Tax
- Proposed Dividend: Assume 10% of Paid-up Capital (₹5,00,000) = ₹50,000 (to be shown as per exam instructions)
- Managerial Remuneration: 5% of Net Profit before Tax and Managerial Remuneration
Step 2: Statement of Profit & Loss
| Particulars | ₹ |
|---|---|
| Revenue from Operations (Sales) | 7,00,000 |
| Less: Purchases | (4,00,000) |
| Less: Wages | (60,000) |
| Less: Depreciation | (40,000) |
| Less: Managerial Remuneration | (calculated below) |
| Less: Other Expenses | (30,000) |
| Net Profit before Tax | Balance |
| Less: Provision for Tax (30%) | (to be calculated) |
| Profit after Tax | Balance |
Managerial Remuneration and Provision for Tax must be calculated iteratively, since remuneration is charged before tax, but after all other expenses.
Step 3: Balance Sheet
Assets and liabilities are grouped and presented in vertical form, referencing notes for details. Don’t forget to adjust Plant & Machinery for depreciation, show provision for tax and proposed dividend under current liabilities, and update reserves for retained earnings after appropriations.
Difference Between Schedule VI and Schedule III
| Aspect | Schedule VI (Old) | Schedule III (New) |
|---|---|---|
| Format | Horizontal or Vertical (option) | Only Vertical |
| Classification | Less detailed; fewer groupings | Strict grouping: Current vs Non-current assets/liabilities |
| Disclosure | Limited notes and schedules | Comprehensive notes to accounts and detailed disclosures |
| Applicability | Companies Act, 1956 | Companies Act, 2013 |
| Compliance | Less aligned with international standards | Better alignment with IFRS/Ind AS |
Schedule III brings much-needed standardization and transparency, making Indian company accounts easier to compare and analyze, both domestically and globally.
Final Thoughts
Treat the prescribed format of final accounts as non-negotiable. Practise the adjustments until you’re comfortable calculating and presenting them. Remember, clarity and accuracy are more valuable to examiners than unnecessary complexity. If you ever feel stuck, ask yourself: What information would help an investor or regulator make a sound decision? That’s the spirit of good accounting.