Financial Statements are the basic and formal annual reports through which corporate management communicates financial information to its owners (shareholders) and various external parties (investors, tax authorities, government, employees, etc.).
These statements are the end products of the accounting process and typically refer to:
Financial statements reflect a combination of recorded facts, accounting principles, and personal judgements. The key points explaining their nature are:
Prepared on the basis of facts in the form of cost data recorded in accounting books. Original or historical cost is the basis of recording transactions. Because they are not based on current market prices, they do not show the current financial condition of the concern.
Certain accounting conventions are followed, such as valuing inventory at cost or market price (whichever is lower), and valuing assets at cost less depreciation. The convention of materiality is followed for small items (e.g., stationery is treated as expenditure in the year of purchase).
Prepared on basic assumptions (pre-requisites) known as postulates, including:
Many figures are based on personal opinions, estimates, and judgements, such as estimating the useful life of fixed assets for depreciation, making provisions for doubtful debts, and choosing inventory valuation methods under the convention of conservatism.
The primary objective of financial statements is to assist users in decision-making. Specific objectives include:
Every company registered under The Companies Act, 2013 must prepare its Balance Sheet and Statement of Profit and Loss in accordance with the revised Schedule III.
| Particulars | Note No. | Figure as at the end of Current reporting period | Figure as at the end of Previous reporting period |
|---|---|---|---|
| I. EQUITY AND LIABILITIES | |||
| 1) Shareholders' Funds (a) Share Capital (b) Reserves and Surplus (c) Money received against share warrants |
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| 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 |
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| 4) Current Liabilities (a) Short-term borrowings (b) Trade payables (c) Other current liabilities (d) Short-term provisions |
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| 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 |
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| 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 |
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| TOTAL | |||
An item is classified as current if it meets any of the following criteria:
All other assets and liabilities are classified as non-current.
The Statement of Profit and Loss is prepared to determine the operational results of an undertaking over a specific period.
| Particulars | Note No. | Current Period (Rs.) | Previous Period (Rs.) |
|---|---|---|---|
| I. Revenue from operations | |||
| II. Other income | |||
| III. Total Revenue (I + II) | |||
| IV. Expenses: - Cost of materials consumed - Purchases of stock-in-trade - Changes in inventories of finished goods, WIP, and stock-in-trade - Employee benefits expense - Finance costs - Depreciation and amortisation expense - Other expenses |
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| Total expenses | |||
| V. Profit before exceptional and extraordinary items and tax (III - IV) | |||
| VI. Exceptional items | |||
| VII. Profit before extraordinary items and tax (V - VI) | |||
| VIII. Extraordinary items | |||
| IX. Profit before tax (VII - VIII) | |||
| X. Tax expense: (1) Current tax, (2) Deferred tax | |||
| XI. Profit/(Loss) for the period from continuing operations (IX - X) |
Financial statements provide critical information to various stakeholders for economic decision-making:
Despite their utility, financial statements suffer from several limitations: