NOTE

Schedule III of the Companies Act, 2013 contains a format for preparation and presentation of financial statements.

It is followed by Private and Unlisted Public Companies with Net Worth up to Rs. 500 Cr.

History Check

• Schedule VI existed prior 2011 (Since 1956).

• Then came Revised Schedule VI applicable to financials commencing on or before 01-04-2011.

• Vertical format was mandated.

• Schedule III was launched in 2013 with “Comapanies Act 2013”

What is Schedule III?

Schedule III of Companies Act 2013 is a specified set of instructions for preparation of Balance Sheet and Statement of Profits and Losses of a company. 

It includes Accounting Standard Compliances, Disclosure Compliances and Notes to Accounts.

COMPONENTS OF BALANCE SHEET

EQUITY AND LIABILITIES

Share Capital

• Number and amount of shares authorized.

• Different classes of Preference Shares should be shown separately.

• Number of shares issued, subscribed and paid up details.

• Face Value per share.

• Reconciliation of opening and closing shares.

• Rights, preference and restrictions on shares.

• Forfeited Shares

Reserves and Surplus

• Capital Reserves, Capital / Debenture Redemption Reserves.

• Securities Premium, Revaluation Reserve,  Option Outstanding Account.

• Surplus of profit and loss with allocations and appropriations.

Share Application Money Pending Allotment 

• Only equity and preference shares.

• Share Application Money Pending Allotment for other securities are shown under OCL.

• Should include number of shares proposed to be issued, amount of premium and the period before which shares should be allotted.

• Time period for which allotment is pending.

Long Term Borrowings

• Bonds, Debentures (with security details)

• Term loans Banks  / Other Parties

• Deferred Liabilities, Deposits Taken

• Loans & Advances from related parties

• Long Term Finance Lease Obligation

• Will not include loan taken for goods and services

• Deferred payment for fixed assets

Deferred Tax Liabilities

• A fact that the company will pay additional income tax in the future.

• Arises when Book Profits are higher than profits as per Income Tax Rules due to Timing Differences.

• Shown as a net against Deferred Tax Asset.

Other Long Term Liabilities

• Deferred Trade Payables for goods purchased or services received.

• Interest accrued on Deferred Trade Payables, Statutory & Contractual Obligations.

Long Term Provisions

Provision for Employee Benefits like all Long term contingencies, provident fund, insurance, pension, etc.

Short Term Borrowings

• Loans repayable on demand from Banks / other parties.

• Loans and Advances from related parties. (with security details)

• Deposits

Trade Payables

Purchases of goods and receipt of services like Creditors, Bills for business

Other Current Liabilities

• Current maturities of LT Debt/Lease Finance obligations.

• Interest accrued (due / not due) on borrowings.

• Income received in advance.

• Unpaid dividends.

• Application money received for other securities and due for refund with interest.

• Matured deposits / debentures with interest.

Short Term Provisions

• ST provision for employee benefits.

• Provision for Taxation

ASSETS

Tangible Fixed Assets

• Land, Buildings, Plant and Equipment, Furniture and Fixtures, Vehicles, Office Equipment.

• Includes additions, disposals, depreciation and revaluation. 

Intangible Fixed Assets

• Goodwill, IPR, Computer Software owned, Mining rights, Business Licenses and Franchise, Formulas, etc.

• Includes additions, deductions, amortization and revaluation.

Capital Work in Progress

• Capital work undertaken but incomplete as of the date of Balance Sheet.

• Valued at the total cost of man and materials applied for the project.

Intangible Assets Under Development

• A new process under development, software or prototype under development as of year end.

• Valued at the total cost of input as on the year end.

Non Current Investments

• An investment which is to be held for a period more than one year.

• Includes investment in property, equity, preference, govt securities, debentures, bonds, mutual funds, firms, etc.

• Info related to names of the body corporate, market value of investment should be disclosed. 

LT Loans and Advances

Capital Advances, Security Deposits, Loans to related parties (secured and unsecured), loans to be realised in more thn 12 months. 

Other Non Current Assets

• LT Trade Receivables (with nature, security details, doubtfulness)

• Debts due from Directors / Officers / Partner / Associate of the Company.

Current Investments

Investments for a period less than 12 months (with all details)

Inventories

• Raw Materials

• Work in Progress

• Finished Goods

• Stock in Trade (trading goods)

• Stores and Spares, Loose Tools

• Including the mode of valuation and goods in transit

Trade Receivables

• Only related to goods sold and services rendered (regular course of business).

• Separate disclosure of trade receivables exceeding 6 months period.

• Should include security and doubtfulness details.

Cash and Cash Equivalents

• Balance in Bank A/c

• Cash in hand

• Cheques, Drafts in hand

• Others like Business E-Wallets

ST Loans and Advances

• Loans to related parties.

• With nature and security details.

Other Current Assets

• Unbilled Revenue

• Interest accrued on Investments

• Fixed Deposit (less than 365 days)

Contingent Liabilities

• Claims against companies not treated as debts.

• Guarantees

• Arrears for which company is liable.

• Dividend declared after Balance Sheet date before approval

Commitments

• Estimated amount of contracts remaining to be executed.

• Uncalled liability on shares partly paid.

COMPONENTS OF PROFIT AND LOSS STATEMENT

Revenue from Operations

Income from usual business activities. Supply of goods and services.

Other Income

Interest & Dividend Received, Gain/Loss on ale of Investment, Discount, Rent Received and other non-operating income. 

Cost of Materials Consumed

Opening Stock of Materials

(+) Purchase of Materials

(+) Carriage and Other Incidental Expenses on Materials

(-) CLosing Stock of Materials

Changes in Inventory

Difference between inventory at the end of the year and beginning of the year. (Add with expenses if Opening Stock is greater than Closing Stock and deduct from expenses if Opening Stock is less than Closing Stock)

Employee Benefit Expenses

• Salaries and Wages

• Contribution to Provident Fund and Other Funds

• Expenses on Employee Stock Options and Employee Stock Purchase Plan

• Employee Welfare Expenses

Note: Managerial Remuneration paid to whole time directors in employment with the organization is also included in Employee Benefit Expenses but, remuneration paid to directors who are not under a contract of service will not appear under Employee Benefit Expenses. That shall be disclosed under 'Other Expenses'.

Managerial Remuneration / Director's Remuneration

Money or anything equivalent provided to a person for extending services towards an organization is called remuneration. When it comes to Public Companies, there are set regulations provided by Section 197 of the Indian Companies Act, 2013 while paying remuneration to the directors. Whereas, there is no limit in the director's remuneration in case of Private Ltd. Companies. Let's understand the prescribed limits for Public Companies.

1. The total remuneration paid to Directors, Managing Director (MD) and Whole-Time Director (WTD) shall not be more than 11% of the company's net profits for that financial year. 

2. Managerial remuneration exceeding 11% can be paid only after obtaining approval from shareholders by passing a special resolution.

3. A company having only one managing director / whole-time director / manager shall not pay more than 5% of its net profits.

4. A company having more than one managing director / whole-time director / manager shall not pay more than 10% of its net profits.

5. A company having directors (where there is a managing director / whole-time director) who are neither managing directors nor whole-time directors shall not pay more than 1% of its net profits.

6. A company having directors who are neither managing directors nor whole-time directors shall not pay more than 1% of its net profits.

Note: When a company has insufficient profits, the following provisions will be followed bypassing the earlier provisions.

a. Capital up to ₹  5 Crores............................................₹60 Lakhs

b. Capital between ₹ 5 Crores to ₹ 100 Crores.............₹84 Lakhs

c. Capital between ₹ 100 Crores to ₹ 250 Crores..........₹120 Lakhs

d. Capital above ₹ 250 Crores...................................₹120 Lakhs plus 0.01% of the effective capital in excess of ₹ 250 Crores.

Finance Cost

• Interest on Borrowings from Banks & Others

• Interest on Debentures

• Finance Charge on Lease Financing

• Interest levied by Tax Department

• Net Gain / Loss on foreign exchange transactions

Depreciation and Amortization Charges

Depreciation is calculated considering the cost, useful applicable life and the residual (leftover) value of the asset. Assets can be purchased or sold during any time of the Financial year, which is also subject to depreciation on pro-rata basis. 

Example:

Original Cost (OC) of an asset = Rs. 10,00,000/-

Useful Life (UL) of the asset = Rs. 5 years

Residual Value (RV) @ 5% of OC (cannot be more than 5% of the OC) = Rs. 50,000/-

Hence, Depreciation will be (OC - RV) ÷ UL

= (10,00,000 - 50,000) ÷ 5 years

= 95,000 ÷  5 years

= Rs. 19,000/-

In Company Accounts, there is an existence of accumulated depreciation shown as 'Provision for Depreciation' right from the beginning of the asset. With the passing of every year, the amount of depreciation is added to Provision for Depreciation, thereby leading to an accumulation of depreciation. This accumulated depreciation when deducted from the original cost of the  assets will deliver the Written Down Value of the asset.

Includes depreciation on Buildings, Plant & Machinery, Vehicles, Equipment, Furniture, Brands, Computer s/w, etc. Depreciation also includes another concept similar to depreciation which is called Amortization. This is applicable on Intangible Assets and Intellectual Property Rights where a specific amount is written-off every year till the intangible asset's value comes down to zero.

Example: Socrates Ltd submits the following details as on 1st April, 2020.

1. Cost of Land Rs. 2,00,00,000/- and Zero Accumulated Depreciation.

2. Cost of Building Rs. 80,00,000/- and Accumulated Depreciation Rs. 7,20,000/-

3. Cost of Equipment Rs. 1,58,09,000/- and Accumulated Depreciation Rs. 42,09,000/-

4. Cost of Motor Vehicles Rs. 12,84,500/- and Accumulated Depreciation rs. 5,69,540/-.

The company ahs the following depreciation policy:

Rate of Depreciation

1. Land - NIL

2. Building 2% p.a. on Straight Line basis.

3. Equipments 20% p.a. on Straight Line basis.

4. Motor Vehicles 25% p.a. on Written Down Value basis.

During the year, the following transactions took place:

1. The directors decided to revalue land at Rs. 2,40,00,000/- on 31st March, 2021,

2. A motor vehicle was sold on 1st April, 2020 for Rs. 41,000/- where its original cost was Rs. 1,28,000/-. The accumulated depreciation as on 1st April, 2020 was Rs. 74,000/-.

3. Equipment was bought for Rs. 10,28,000/-.

Calculate the Depreciation for the FY 2020-21.

Solution:

In this problem, we will calculate depreciation individually for all the assets.

1. Land = Depreciation will be NIL as there is no depreciation applicable on Land.

2. Building = 80,00,000 X 2% = 1,60,000/-

Depreciation on Building is Rs. 1,60,000/-

3. Equipment

Cost 1,58,09,000

(+) Purchases   10,28,000

Total Cost   1,68,37,000

Depreciation on Equipment = 1,68,37,000 X 20% = 33,67,400/-

4. Motor Vehicles

Cost 12,84,500

(-) Sale @ Cost (1,28,000)

Gross Block   11,56,500

From this Gross Block Value, we will adjust the amount of net accumulated depreciation to arrive at the Net WDV of the Motor Vehicles.

As depreciation is chargeable on WDV basis on Motor Vehicles, we will have to deduct the amount of accumulated depreciation from the Gross Block first before calculating the amount of depreciation.

Gross Block 11,56,500

(-) Depreciation

Accumulated Depreciation (till 1st April, 2020) 5,69,540

(-) Accumulated Depreciation on the Motor Vehicle which was sold (74,000)

Deductible Depreciation       (4,95,540)

Written Down Value 6,60,960

Depreciation on Motor Vehicles for the CY = 6,60,960 X 25% = 1,65,240/-

Alternative Method

Accumulated Depreciation (till 1st April, 2020) on the Motor Vehicle which was sold Rs. 74,000/-

Accumulated Depreciation on the remaining Motor Vehicles (unsold)

Accumulated Depreciation (till 1st April, 2020) 5,69,540

(-) Accumulated Depreciation (till 1st April, 2020) (74,000)

Net Accumulated Depreciation (till 1st April, 2020)     4,95,540

Calculation of Depreciation for the CY

Gross Block Value 11,56,500

(-) Net Accumulated Depreciation (4,95,540)

Written Down Value 6,60,960

Depreciation on Motor Vehicles for the CY = 6,60,960 X 25% = 1,65,240/-

Therefore, total Depreciation = 1,60,000 (Land) + 33,67,400 (Equipment) + 1,65,240 (Motor Vehicles) = Rs. 36,92,640/-.

Other Expenses

Stores and Spares, Power, Fuel and Oil, Rent, Insurance, Repairs a& Maintenance, Reserve for Doubtful Debts, Auditor's Fees, Selling & Distribution Expenses, Discount Allowed, Loss on Forex Transactions, etc.

Exceptional Items

Certain expenses and incomes of ordinary activities affecting the performance of a company due to its size, nature or incidence are called exceptional items. 

• Restructuring Cost

• Disposal / Derecognition of Investment and Fixed Asset

• Litigation Settlement

• Reversal of Provision

• Writing Down of Inventories to its Net Realizable Value

Tax Expenses

An Indian Company is subject to taxation on its income as per Indian Income Tax Rules. This is absolutely different compared to (GST) Goods and Services Tax which is levied on individual transactions at the time of supply. A domestic company registered in India is taxed on its overall income whereas a foreign company located in India is taxed only on its income earned in Indian territories. A company may have income in various forms such as business profits, capital gains, income from letting out of business property or any interest / dividend income. Corporate Tax is applicable as follows as for the Assessment Year 2022-2023:

Example: Netra Pvt. Ltd. furnishes the following information as on 31st March, 2022.

Provision for Taxation Rs. 5,40,000 (Cr)

Advance Payment of Tax Rs. 16,50,000 (Dr)

Additional Information:

1. Advance Tax includes Rs. 6,20,000/- paid for 2020-21.

2. Assessment for tax in 2020-21 was completed and actual tax liability amounted to Rs. 6,40,000/-. No payment has been made yet.

3. For 2021-22, the Net Profit before Tax stood at Rs. 20,00,000/- and the company falls in 40% tax bracket.

Pass necessary journal entries and show the reflection in the Balance Sheet as on 31st March, 2022.

Solution:

The provision existing as on 31st March, 2022 is the provision provided by the company for the previous year. This provision has to be first converted into liability before settlement. 

Explanation

In the year 2020-21, the company had provided for Rs. 5,40,000 towards taxation but got a demand of Rs. 6,40,000 (liability) from the Income Tax department. This difference has given rise to 'Prior Period Tax Expense a/c' worth Rs. 1,00,000. The company has paid an advance tax of Rs. 6,20,000 for the year 2020-21 during the current year, thereby partly settling the liability to that extent. This has lead to an unsettled tax liability of Rs. 20,000 (difference of Rs. 6,40,000 and Rs. 6,20,000), which will be shown in the current year's Balance Sheet. 

For the Current Year 2021-2022, the company has to maintain a provision for tax @ 40% of Rs. 20,00,000 = Rs. 8,00,000. However, the company has paid an advance tax of Rs. 16,50,000 whch includes Rs. 6,20,000 for the previous year. That means, advance tax for the current year stands at R. 10,30,000/- (difference of Rs. 16,50,000 and Rs. 6,20,000)

The following journal entries will be passed:

1. Converting Provision for Taxation into a Liability

Provision for Taxation a/c.........................................Dr 5,40,000

Prior Period Tax Expense a/c....................................Dr 1,00,000

To Tax Liability a/c.....................................................Cr 6,40,000 

(Being provision converted into liability and previous year's balance tax adjusted)

2. Adjusting Prior Period Tax Expense against Current year's profits

Profit and Loss a/c.....................................................Dr 1,00,000

To Prior Period Tax Expense a/c...............................Cr 1,00,000

(Being prior period tax expense a/c closed by transferring to P/L a/c)

3. Final Settlement and Carry Forward

Tax Liability a/c..........................................................Dr 6,40,000

To Advance Tax Paid a/c...........................................Cr 6,20,000

To Tax Payable a/c.....................................................Cr 20,000

(Being tax liability worth Rs. 6,20,000/- settled and tax liability of Rs. 20,000/- created)

4. Transfer of CY Provision for Taxation to Profit & Loss a/c

Profit and Loss a/c.....................................................Dr 8,00,000

To Provision for Taxation a/c....................................Cr 8,00,000

(Being provision created through a charge on profits)

Reflection on Balance Sheet as on 31st March, 2022

1. Tax Payable Rs. 20,000 will appear under Other Current Liabilities 

2. Provision for Taxation Rs. 8,00,000 will appear under Short Term Provisions

3. Advance Tax Paid Rs. 10,30,000 will appear under Other Current Assets

Deferred Taxes

• Deferred tax is the gap between income tax determined by the company’s accounting methods and the tax payable as per the Income Tax Authorities.

• Deferred tax arises when there is a difference in the treatment of income, expenses, assets and liabilities under the company’s accounting procedure and the tax provision.

• It is the difference between income tax paid and income tax accrued. The difference results in a surplus or deficit.

Payment of Dividends

'Dividend' refers to distribution of any sums to shareholders out of profits and wherever permitted out of free reserves available with the company. 

'Final Dividend' refers to the Dividend recommended by the Board of Directors and declared by the Members at the Annual General Meeting. 

Extra Ordinary Items

Certain incomes or expenses arising from transactions that are different from ordinary activities, unexpected or irregular are called extra ordinary items.

• Loss due to uncertain events

• Profit from Insurance Claim

Discontinued Operations

Discontinued operations refer to parts of a company’s core business or product line that have been divested or shut down which are reported separately from continuing operations on the income statement. During mergers and acquisitions, such information gives a great idea about product and service lines capable of handing over favorable profits. Though a business element might have been discarded, it could still generate a possible gain or loss in the current accounting period. Therefore, the total gain or loss from the discontinued operations is reported, followed by relevant income taxes thereupon.