Financial statements of a Company are the introductory and formal periodic reports through which the commercial operation communicates fiscal information to its possessors and colourful other external parties which include investors, duty authorities, government, workers, etc. These typically relate to (a) the balance distance ( position statement) at the end of the counting period, and (b) the statement of profit and loss of a. company. Nowadays, the cash inflow statement is also taken as an integral element of the financial statements of a company.
1. Financial Statements of a Company
Meaning of Financial Statements
Financial statements of a Company are the introductory and formal periodic reports through
which the commercial operation communicates fiscal information to its possessors and colourful
other external parties which include investors, duty authorities, government, workers, etc. These
typically relate to (a) the balance distance ( position statement) at the end of the counting
period, and (b) the statement of profit and loss of a. company. Nowadays, the cash inflow
statement is also taken as an integral element of the financial statements of a company.
Nature of Financial Statements
The chronologically recorded data about events expressed in financial terms for a defined
period are the base for the medication of journal financial statements which reveal the financial
position on a date and the financial results attained during a period. The American Institute of
Certified Public Accountants states the nature of financial statements of a company as, “ the
statements. set for presenting a journal review of the report on the progress of the operation and
dealing with the status of investment in the business and the results achieved during the period
under review. They reflect a combination of recorded data, counting principles and particular
judgements”.
The following points explain the nature of financial statements of a Company:
1. Recorded Facts:
Financial statements of a company are prepared on the base of data in the form of cost data
recorded in account books. The original cost or literal cost is the base of recording deals. The
numbers of colourful accounts similar as cash in hand, cash at the bank, trade receivables, fixed
means, etc., are taken as per the numbers recorded in . the account books. The means bought
at different times and at different prices are put together and shown at costs. As these are not
grounded on request prices, the financial statements don’t show the current financial condition
of the concern.
2. Accounting Conventions:
Certain Account conventions are followed while preparing the financial statements of a
company. The convention of valuing force at cost or request price, whichever is lower, is
followed. The valuing of means at cost lower deprecation principle for balance distance
purposes is followed. The convention of materiality is followed in dealing with small particulars
2. like pencils, pens, postage prints, etc. These particulars are treated as expenditure in the time in
which they’re bought indeed though they’re means in nature. The stationery is valued at cost
and not on the principle of cost or request price, whichever is lower. The
use of account conventions makes fiscal statements similar, simple and realistic.
3. Assumptions:
Financial statements of a company are prepared on certain basic assumptions (pre-requisites)
known as postulates such as going concern postulate, money measurement postulate,
realisation postulate, etc. The going concern postulate assumes that the enterprise is treated as
a going concern and exists for a longer period. So the assets are shown on a historical cost
basis. The money measurement postulate assumes that the value of money will remain the
same in different periods. Though there is a drastic change in purchasing power of money, the
assets purchased at different times will be shown at the amount paid for them. While preparing
the 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 several years. The
assumption is known as the realisation postulate.
4. Personal Judgements:
Under further than one circumstance, data and numbers presented through financial statements
are grounded on particular opinions, estimates and judgements. The deprecation is handed
taking into consideration the useful profitable life of fixed means vittles for doubtful debts are
made on estimates and particular judgements. In valuing force, cost or request value, whichever
is lower is being followed. While deciding either cost of force or the request value of force,
numerous particular judgements are to be made grounded on certain considerations. Particular
opinions, judgements and estimates are made while preparing the financial statements to avoid
any possibility of embellishment of means and arrears, income and expenditure, keeping in
mind the convention of traditionalism.
Objectives of Financial Statements of a Company
Financial statements of a company are the introductory sources of information for the
shareholders and other external parties for understanding the profitability and financial position
of any business concern. They give information about the results of the business concern during
a specified period in terms of means and arrears, which give the base for taking opinions.
Therefore, the primary ideal of financial statements is to help the druggies in their decision-
timber. The specific objects include the following:
3. I) To provide information about the economic resources and obligations of a business:
They’re set to give acceptable, dependable and journal information about profitable coffers and
scores of a business establishment to investors and other external parties who have limited
authority, capability or coffers to gain information.
II) To provide information about the earning capacity of the business:
They’re to give useful fiscal information which can gainfully be utilised to prognosticate,
compare and estimate the business establishment’s earning capacity.
III) To provide information about cash flows:
They’re to give information useful to investors and creditors for prognosticating, comparing and
assessing, implicit cash overflows in terms of quantum, timing and related misgivings.
IV) To judge the effectiveness of management:
They supply information useful for judging management’s ability to utilise the resources of a
business effectively.
V) Information about activities of business affecting society:
They’ve to report the conditioning of the business organisation affecting the society, which can
be determined and described or measured and which are important in its social terrain.
VI) Disclosing accounting policies:
These reports have to give the significant programs, generalities followed in the process of
account and changes are taken up in them during the time to understand these statements in a
better way.
Types of Financial Statements
The financial statements of a company generally include two statements a balance distance and
a statement of profit and loss which are needed for external reporting and also for internal
requirements of the operation like planning, decision- timber and control. Piecemeal from these,
there’s also a need to know about movements of finances and changes in the fiscal position of
the company. For this purpose, a statement of changes in the fiscal position of the company or a
cash inflow statement is set.
Every company registered under The Companies Act 2013 shall prepare its balance distance,
statement of profit and loss and notes to regard thereto in agreement with the manner specified
in the revised Schedule III to the Companies Act, 2013 to harmonise the exposure demand with
4. the account norms and to meet with new reforms. About this, the Ministry of Corporate Affairs
(MCA) had specified a ( Revised) Schedule VI to the Companies Act, 1956 (vide Announcement
dated28.02.2011). It’s applied to the financial statements prepared for all fiscal ages beginning
on or after April 01, 2011, by the Indian Companies.
Important Features of Presentation
1. It applies to all Indian companies preparing financial statements commencing on or after April
01, 2011.
2. It doesn’t apply to (i) Insurance or Banking Company, (ii) Company for . which a form of
balance distance or income statement is specified under any other Act.
3. Account norms shall prevail over Schedule III of the Companies Act, 2013.
4. Disclosure on the face of the financial statements or in the notes is essential and obligatory.
5. Terms in the revised Schedule carry the meaning as defined by the applicable account
norms.
6. Balance to be maintained between inordinate details that may not help Druggies of financial
statements and not furnishing important information.
7. Current and-current bifurcation of means and arrears is applicable.
8. Rounding off conditions is obligatory ( relate box 1).
9. Vertical format for a donation of fiscal statement is specified.
10. Dis benefit balance in the statement of profit and loss to be bared as a negative figure under
the head “ Supernumerary”.
11. Obligatory exposure for share operation plutocrat pending allotment.
12.‘Sundry Debtors’ and ‘Sundry Creditors’ replaced by terms trade Receivables and Trade
Payables.
Shareholders Fund
The shareholders’ funds are sub-classified on the face of the balance sheet.
a) Share Capital
b) Reserves and Surplus
c) Money received against Share Warrants
5. a) Share Capital
Exposures relating to partake capital are to be given in notes to accounts. The following
additions/ variations are significant
a) For each class of shares, recognition of the number of shares outstanding in the morning and
at the end of the reporting period is needed.
b) The rights, preferences and restrictions attached to each class of shares including restrictions
on the distribution of tips and prepayment of capital.
c) To bring clarity regarding the identity of the ultimate possessors of the company
i) Disclosure of shares in respect of each class in the company held by its holding company or
its ultimate holding company including shares held by accessories or associates of the holding
company or the ultimate holding company in total.
ii) Disclosure of shares in the company held by each shareholder holding further than 5 shares
specifying the number of shares held.
iii) Disclosure of the following for the period of 5 times in continently antedating the date of the
balance distance
— Aggregate number and class of shares distributed as completely paid up according to
contracts without payment being entered in cash.
— Aggregate number and class of shares distributed as completely paid up by way of perk
shares.
— Aggregate number and class of shares bought back.
This may be noted that the information of shareholders’ finances is presented on the face of
financial statements limited only to broad and significant particulars. Details are given in Notes
to Accounts.
d) for every class of share capital
i) The number and quantum of shares authorised.
ii) The number of shares issued, subscribed, completely paid and subscribed. but not
completely paid.
iii) Par value per share.
iv) Reconciliation of the number of shares outstanding at the morning and end of the accounting
period.
v) Rights, preferences and restrictions attaching each class of shares including restrictions on
the distribution of tips and Prepayment of capital.
vi) an Aggregate number of shares concerning each class in the company held by its company,
its ultimate holding company including shares held by or by accessories or associates of the
company or the last word company.
6. vii) Shares reserved for issue under options and contracts/ commitments for the trade of shares/
disinvestment, including terms and quantum.
viii) For a period of 5 times in continently pacing the date at which balance distance is set for
(a) Shares reserved under contracts/ commitments.
(b) Number and class of shares bought back.
( c) Number and class of shares distributed for consideration other than cash and perk shares.
ix) Terms of any securities convertible into equity/ preference shares
issued along with the foremost date of conversion in descending order, starting from the furthest
similar date.
x) Calls overdue (aggregate).
xi) Topped shares (amount firstly paid up).
b. Reserve & Surplus
Reserves and Supernumerary are needed to be classified as
i) Capital Reserve
ii) Capital Redemption Reserve
iii) Securities Premium Reserve
iv) Debenture Redemption Reserve
v) Revaluation Reserve
vi) Share Options Outstanding Account
vii) Other Reserves ( Specifying nature and purpose)
viii) Supernumerary Balance in the statement of profit and loss; telling allocations and
Appropriation similar as tips, perk shares, transfers to/ from the reserve, etc.
Significant additions/ variations regarding exposure of reserve and surplus are as follows
a) A reserve specifically represented by allocated investments shall be nominated as a “ Fund”.
b)‘ Disbenefit’ balance of statement of profit and loss shall be shown as a negative figure under‘
Supernumerary’ head.
c) The balance of “ Reserve and Supernumerary” after confirming the negative balance of
Supernumerary, if any, shall be shown under “ Reserve and Supernumerary” read indeed
if the performing figure is‘ negative’.
d) Share options outstanding account has been recognised as a separate item underserve and
Supernumerary’. ICAI’s Guidance Note on Accounting for Hand share- grounded payments
require a credit balance in the stock option outstanding Account to be bared in the balance
distance under separate heading between share capital and reserves and fat as a part of
shareholders fund.
c. Money Received against share warrants
Money received against share warrants is to be disclosed as a separate line item under
‘shareholder’s fund’.
● Current and Non-current Classification
7. The classified balance distance in terms of current and non-current means and current and
non-current arrears have been introduced. The criteria for defining current means and arrears
have been easily spelt out with non-current means and arrears being the residual particulars.
Current/Non-current distinction An item is classified as current
— if it’s involved in the reality’s operating cycle or,
— is anticipated to be realised/ settled within twelve months or,
— if it’s held primarily for trading or,
— are cash and cash fellow or,
— if the reality doesn’t have unconditional rights to postpone the agreement of liability for at
least 12 months after the reporting period,
— Other means and arrears are current.
Important points
— Primary charges are to be written off fully in the time in which similar charges are incurred.
They should be written off first from securities decoration and the balance if any, from the
statement of profit & loss.
— Borrowing costs similar to abatements on the issue of debentures could be written off over
the loan period.
Share operation plutocrat pending allotment
Share operation plutocrat not exceeding the issued capital and to the extent non-refundable
shall be classified as non-current. It’ll be shown on this face of the balance distance as share
operation plutocrat pending allotment.
Borrowings
Total borrowings are categorised into long-term borrowings, short-term borrowings and current
majorities to long-term debt.
(i) Loans that are repayable in further than twelve months/ operating cycle are classified as
long-term borrowings on the face of the balance distance.
( ii) Loans repayable on demand or whose original term isn’t further than twelve months/
operating cycle is classified as short-term borrowings on the face of the balance distance.
(iii) Current majorities to long-term loan include quantum repayable within twelve months/
operating cycle under other current arrears with Note to Account.
Prolonged duty means/ arrears are always-current. This is in agreement with IAS-I.
Trade payables
Sundry creditors have been replaced with the term Trade payables and are classified as current
and current. Trade payables to be settled beyond 12 months from the date of the balance
distance or beyond the operating cycle are classified under “ other long-term arrears” with a
Note to Account. For illustration, the purchase of goods and services in the normal course of
business. The balance of trade payables is classified as current arrears on the face of the
balance distance.
8. Provisions
The quantum of provision settled within 12 months from the balance distance date or within the
operating cycle period from the date of its recognition is classified as short term vittles and
shown under current arrears on the face of the balance distance. Others are depicted as
long-term vittles under non-current arrears on the face of the balance distance.
( i) Loans that are repayable in further than twelve months/ operating cycle are classified as
long-term borrowings on the face of the balance distance.
Fixed Assets
There’s no change in the treatment of fixed means. Both palpable and impalpable means are
current. This may also be noted if the useful life of the asset is lower than 12 months, it’ll still fall
undercurrent.
Investments
Investments are also classified into current and non-current orders. Investments anticipated to
realise within twelve months are considered as current investments under current means.
Others are classified as non-current investments under non-current means. Both are still shown
on the face of the balance distance.
Inventories
All supplies are always treated as current.
Trade receivables
Trade receivables realised beyond twelve months from reporting date/ operating cycle starting
from the date of their recognition are classified as “ Other noncurrent means” under the head
non-current means with Note to Accounts. For illustration, trade of goods or services rendered
in the normal course of business. Others are classified as current means and shown on the face
of the balance distance.
Cash and cash original
It’s always current still, quantities which qualify as cash and cash coequals as per IAS-3 are
shown then. The supremacy is accorded to AS over Schedule III, cash and cash coequals are
to the bared in agreement to IAS-3.
Uses and Importance of Financial Statements
The druggies of financial statements of a company include operation, investors, shareholders,
creditors, government, bankers, workers and the public at large. Financial statements give the
necessary information about the performance of the operation to these parties interested in the
organisation and help in taking Applicable profitable opinions. It may be noted that the financial
statements constitute an integral part of the periodic report of the company in addition to the
director’s report, adjudicators report, commercial governance report, and operation discussion
and analysis.
9. The various uses and importance of financial statements are as follows:
1. Report on stewardship function
Financial statements report the performance of the operation to the shareholders. The gaps
between the operation performance and power prospects can be understood with the help of
fiscal statements.
2. Basis for fiscal policies
The financial programs, particularly taxation programs of the government, are related to the
fiscal performance of commercial undertakings. The fiscal statements give introductory input for
artificial, taxation and other profitable programs of the government.
3. Basis for granting of credit
Commercial undertakings have to adopt finances from banks and other financial institutions for
different purposes. Credit granting institutions take opinions grounded on the fiscal performance
of the undertakings. Therefore, fiscal statements form the Base for granting of credit.
4. Basis for prospective investors
The investors include both short-term and long-term investors. Their high considerations in their
investment opinions are security and liquidity of their investment with a reasonable profitability.
Fiscal statements help the investors to assess long-term and short-term solvency as well as the
profitability of the concern.
5. Guide to the value of the investment already made
Shareholders of companies are interested in knowing the status, safety and return on their
investment. They may also need the information to take opinions about the durability or
termination of their investment in the business. Fiscal statements give information to the
shareholders in taking similar important opinions.
6. Aids trade associations in helping their members
Trade associations may assay the financial statements for furnishing services and protection to
their members. They may develop standard rates and design a livery system of accounts.
7. Helps stock exchanges
Fiscal statements help the stock exchanges to understand the extent of translucency in
reporting on fiscal performance and enable them to call for the required information to cover the
interest of investors. The fiscal statements enable the Stockbrokers to judge the fiscal position
of different enterprises and take opinions about the prices to be quoted.
10. Limitations of Financial Statements
Though utmost care is taken in the medication of the financial statements and giving detailed
information to the druggies, they suffer from the following limitations
1. Don’t reflect on the current situation
Fiscal statements are prepared on the base of literal cost. Since the purchasing power of
plutocrats is changing, the values of means and arrears shown in the fiscal statement don’t
reflect the current request situation.
2. Assets may not realise
The account is done on the base of certain conventions. Some of the means may not realise the
stated values if the liquidation is forced on the company. Means shown in the balance distance
reflect simply unexpired or unamortised costs.
3. Bias
Financial statements are the outgrowth of recorded data, counting generalities and conventions
used and particular judgements made in different situations by the accountants. Hence, bias
may be observed
in the results, and the fiscal position depicted in fiscal statements may not be realistic.
4. Aggregate information
Financial statements of a company show aggregate information but not detailed information.
Hence, they may not help the druggies in decision- making important.
5. Vital information missing
Balance distance doesn’t expose information relating to the loss of requests, and conclusion of
agreements, which have a vital bearing on the enterprise.
6. No qualitative information
Fiscal statements contain only financial information but not qualitative information like artificial
relations, artificial climate, labour relations, quality of work, etc.
7. They’re only interim reports
Statement of Profit and Loss discloses the profit/ loss for a specified period. It doesn’t give an
idea about the earning capacity over time also, the fiscal position reflected in the balance
distance is true then, and the likely change on a future date isn’t depicted.
11. Summary
Financial Statements:
Financial statements are the end products of the accounting process, which reveal the fiscal
results of a specified period and fiscal position on a particular date. Fiscal Statements are set
and published by commercial undertakings for the benefit of colourful stakeholders. These
statements include Statements of profit and loss and a balance distance. The introductory ideal
of these statements is to give the information needed for decision-making by the operation as
well as other outlanders who are interested in the affairs of the undertaking.
Balance Sheet:
The balance distance shows all the means possessed by the concern, all the scores or arrears
outstanding to outlanders or creditors and claims of the possessors on a particular date. It’s one
of the important statements depicting the fiscal position or status or strength of an undertaking.
Statement of Profit and Loss:
The Statement of profit and loss is prepared for a specific period to determine the functional
results of an undertaking. It’s a statement of profit earned and the charges incurred for earning
the profit. It’s a performance report showing the changes in income, charges, gains and losses
as a result of business operations during the time between two balance distance dates.
Significance of Financial Statements:
The druggies of fiscal statements include Shareholders, Investors, Creditors, Lenders, Guests,
Management, government, etc. Fiscal statements help all the druggies in their decision-making
process. They give data about the general-purpose requirements of these members.
Limitations of Financial Statements:
Financial statements aren’t free from limitations. They give only aggregate information
to satisfy the general-purpose requirements of the druggies. They’re specialized
statements understood by only persons having some counting knowledge. They about
the organisation’s performance in terms of quantitative changes but not in qualitative
terms like labour relations, quality of work, workers satisfaction, etc. The fiscal
statements are neither complete nor accurate as the inflow of income and charges are
insulated using stylish judgement piecemeal from accepted generalities. Hence, these
statements need proper analysis before their use in decisions- timber.