Financial Statements of a Company — NCERT Solutions

The balance sheet is prepared as at a particular date to show the financial position of the company.

Main elements of the balance sheet

It has two main parts:

1. Equity and Liabilities

• Shareholders’ funds: share capital, reserves and surplus, money received against share warrants.
• Share application money pending allotment.
• Non-current liabilities: long-term borrowings, deferred tax liabilities, other long-term liabilities, long-term provisions.
• Current liabilities: short-term borrowings, trade payables, other current liabilities, short-term provisions.

2. Assets

• Non-current assets: fixed assets, non-current investments, deferred tax assets, long-term loans and advances, other non-current assets.
• Current assets: current investments, inventories, trade receivables, cash and cash equivalents, short-term loans and advances, other current assets.

Thus, the balance sheet shows what the company owns and what it owes on a particular date.

Financial statements are useful to different parties in different ways:

• Shareholders: They know the return, safety and status of their investment.
• Investors: They assess profitability, liquidity and solvency before investing.
• Creditors and lenders: They judge the company’s ability to repay loans and decide on credit.
• Management: They use them for planning, control and decision-making.
• Government: They use them for taxation and economic policy.
• Employees: They get an idea of the company’s stability and earning capacity.
• Public: They can understand the company’s contribution and economic position.

So, financial statements help all interested parties make proper economic decisions.

The statement is correct because financial statements are prepared from a combination of:

1. Recorded facts — actual figures from accounting books, usually at historical cost.
2. Accounting conventions — such as prudence, consistency, and valuing inventory at cost or market price, whichever is lower.
3. Personal judgements — such as estimates for depreciation, doubtful debts and inventory valuation.

For example, depreciation depends on the estimated useful life of an asset, and provision for doubtful debts is made on estimates. Therefore, the figures in financial statements are not entirely objective; they reflect accounting rules and judgement as well as recorded transactions.

The process of preparing the income statement and balance sheet is as follows:

1. Record transactions in journals and post them to ledger accounts.
2. Prepare trial balance to check arithmetical accuracy.
3. Make adjustments for outstanding expenses, prepaid expenses, depreciation, provision for doubtful debts, inventory, accrued income, etc.
4. Prepare Statement of Profit and Loss:

• show revenue from operations and other income,
• deduct expenses,
• find profit before tax, then arrive at profit or loss for the period.

5. Prepare Balance Sheet:

• classify items under equity and liabilities and assets,
• arrange them under current and non-current heads as per Schedule III.

6. Disclose important details in notes to accounts wherever required.

Thus, the income statement is prepared to ascertain profit or loss, and the balance sheet is prepared to show the financial position on the reporting date.

Classify the items in the balance sheet as follows:

• Preliminary expenses → Other non-current assets
• Discount on issue of shares → Other current assets / adjusted against securities premium if available; here, in balance sheet classification it is treated as a deferred/unamortised expense and shown as Other non-current assets
• 10% Debentures → Non-current liabilities → Long-term borrowings
• Stock in trade → Current assets → Inventories
• Cash at bank → Current assets → Cash and cash equivalents
• Bills receivable → Current assets → Trade receivables
• Goodwill → Non-current assets → Fixed assets → Intangible assets
• Loose tools → Current assets → Inventories
• Motor vehicles → Non-current assets → Fixed assets → Tangible assets
• Provision for tax → Current liabilities → Short-term provisions

The debentures issued are:

• Number of debentures = 10,000
• Face value each = Rs. 100
• Total face value = $10{,}000 \times 100 = Rs. 10{,}00{,}000$
• Discount = 20% of face value = $20\% \times 10{,}00{,}000 = Rs. 2{,}00{,}000$
• Cash received = $10{,}00{,}000 - 2{,}00{,}000 = Rs. 8{,}00{,}000$

Immediately after issue, the balance sheet will show:

• Long-term borrowings = Rs. 10,00,000
• Other current assets = Discount on issue of debentures Rs. 2,00,000
• Cash and cash equivalents = Rs. 8,00,000

Since the company decided to write off the discount on 31 March 2018, the unamortised discount remains as an asset till then.

Prepare the balance sheet by grouping the items:

Balance Sheet of Gitanjali Ltd.

Equity and Liabilities

• Shareholders’ Funds
• Share capital:
• Equity share capital = Rs. 20,00,000
• Preference share capital = Rs. 12,00,000
• Non-current liabilities
• Long-term borrowings:
• Public deposits = Rs. 12,00,000
• Current liabilities
• Trade payables / other current liabilities / short-term provisions:
• Outstanding expenses = Rs. 3,00,000
• Proposed dividend = Rs. 5,00,000
• Short term loan from Zaveri Ltd. So the balance sheet balances correctly.

Balance Sheet of Jam Ltd.

Equity and Liabilities

• Shareholders’ Funds
• Equity share capital = Rs. 16,00,000
• Preference share capital = Rs. 6,00,000
• Reserves and surplus = Rs. 6,00,000
• Non-current liabilities
• Long-term borrowings:
• 12% debentures = Rs. 12,00,000
• Current liabilities
• Bills payable = Rs. 1,50,000
• Provision for taxation = Rs. 2,50,000
• Creditors = Rs. 2,00,000

Assets

• Non-current assets
• Fixed assets:
• Land and building = Rs. 16,00,000
• Plant and machinery = Rs. 8,00,000
• Non-current investments = Rs. 10,00,000
• Current assets
• Inventories = Rs. 7,00,000
• Cash at bank = Rs. 5,00,000

Check:

• Total liabilities = 16,00,000 + 6,00,000 + 6,00,000 + 12,00,000 + 1,50,000 + 2,50,000 + 2,00,000 = Rs. 46,00,000
• Total assets = 16,00,000 + 8,00,000 + 10,00,000 + 7,00,000 + 5,00,000 = Rs. 46,00,000

Hence, the balance sheet tallies.

Balance Sheet of Jyoti Ltd. as at March 31, 2017

Equity and Liabilities

• Shareholders’ Funds
• Share capital = 5,00,000 × Rs. 20 = Rs. 1,00,00,000
• Reserve and surplus:
• Capital Redemption Reserve = Rs. 1,00,000
• Less: Statement of Profit and Loss (Dr.) = Rs. 90,000
• Net reserve and surplus = Rs. 10,000
• Share options outstanding account = Rs. 10,000
• Non-current liabilities
• Long-term borrowings:
• 10% debentures = Rs. 3,00,000
• Current liabilities
• Unpaid dividends = Rs. 90,000

Assets

• Non-current assets
• Fixed assets:
• Building = Rs. 10,00,000
• Investments in shares of Metro Tyers Ltd. = Rs. 3,00,000
• Current assets
• Stores and spares = Rs. 1,00,000

The amount of equity share capital is clearly Rs. 1,00,00,000 because 5,00,000 shares of Rs. 20 each are fully paid-up.

The items are shown in the balance sheet as follows:

Equity and Liabilities

• Non-current liabilities
• Long-term borrowings:
• 25,000, 10% debentures of Rs. 100 each = Rs. 25,00,000
• Other current liabilities / interest accrued but not due on debentures, if applicable:
• Interest on debentures yet to be paid = shown as interest accrued and due under current liabilities
• Non-current liabilities
• Bank loan of Rs. 10,00,000 repayable after 5 years = Long-term borrowings

So the balance sheet classification is:

• Long-term borrowings: Debentures Rs. 25,00,000 and Bank loan Rs. 10,00,000
• Current liabilities: Interest on debentures due but unpaid (if amount is given separately, it goes under current liabilities as interest accrued and due).

Black Swan Ltd.

Balance Sheet as at March 31, 2017

Working:

• Shareholders’ funds = Share capital + Reserve and surplus

= $5,000 + 3,000 + 1,200 = 9,200$

• Net fixed assets = Gross block − Depreciation

= $9,000 - 700 = 8,300$

• Total liabilities = $9,200 + 3,000 + 2,500 = 14,700$
• Total assets = $8,300 + 300 + 6,100 = 14,700$

The balance sheet is balanced.