Intro to Corporate Accounting & Final Accounts Explained
An Introduction to Corporate Financial Statements
For any company, the financial statements are the final, formal annual reports that summarize the results of its accounting process. These statements are the primary way management communicates financial information to the company’s owners (shareholders) and other external parties like investors, creditors, and the government.
The main financial statements include:
Statement of Profit and Loss (P&L): Shows the company’s profitability over a period.
Balance Sheet: Shows the company’s financial position (assets and liabilities) on a specific date.
Cash Flow Statement: Shows the movement of cash (inflows and outflows).
These statements must be prepared according to the legal environment (the Companies Act, 2013), Accounting Standards (AS/Ind AS), and core accounting principles.
1. The Nature of Financial Statements
It’s important to understand what financial statements truly represent. They are not just a collection of exact facts, but a blend of the following:
Recorded Facts: They are based on data recorded in the accounting books, which is primarily based on historical cost (the original price paid). They do not reflect the current market value of assets.
Accounting Conventions: They follow established rules. For example, the convention of conservatism is why inventory is valued at “cost or market price, whichever is lower.” The materiality convention is why a small item like a ₹20 stapler is treated as an expense, even though it’s technically an asset.
Postulates (Assumptions): They are built on basic assumptions. The most important is the Going Concern postulate, which assumes the business will continue to operate for a long time. This is why we show assets at their cost, not their “break-up” or liquidation value.
Personal Judgments: They involve estimates. An accountant must use personal judgment to estimate the “useful life” of an asset for depreciation or to create a “provision for doubtful debts.”
2. Objectives of Financial Statements (Why We Prepare Them)
The primary goal of financial statements is to provide reliable information that helps users make informed economic decisions.
To show the company’s economic resources (Assets) and obligations (Liabilities).
To provide information on the earning capacity (Profitability) of the business.
To show how the company is generating and using cash (Cash Flow).
To allow shareholders to assess the effectiveness of management (stewardship).
To disclose the main accounting policies used to prepare the statements.
3. The New Format (Schedule III, Companies Act 2013)
To harmonize reporting, the Companies Act, 2013, requires all companies to prepare their Balance Sheet and P&L Statement in the specific vertical format prescribed in Schedule III.
Key features of this format include:
A clear distinction between Current and Non-Current items.
The terms “Sundry Debtors” and “Sundry Creditors” have been replaced with “Trade Receivables” and “Trade Payables.”
The “debit” balance of a P&L Account (a loss) is shown as a negative number under the “Surplus” heading.
4. The Balance Sheet (Schedule III Format)
The Balance Sheet is presented vertically in this order:
Balance Sheet as at [Date]
| Particulars | Note No. | Amount (₹) |
|---|---|---|
| I. EQUITY AND LIABILITIES | ||
| (1) Shareholders’ Funds | ||
| (a) Share Capital | ||
| (b) Reserves and Surplus | ||
| (c) Money received against share warrants | ||
| (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 | ||
| (4) Current Liabilities | ||
| (a) Short-term borrowings | ||
| (b) Trade payables | ||
| (c) Other current liabilities | ||
| (d) Short-term provisions | ||
| TOTAL EQUITY AND LIABILITIES | ||
| II. ASSETS | ||
| (1) Non-Current Assets | ||
| (a) Fixed Assets: | ||
| (i) Tangible Assets | ||
| (ii) Intangible Assets | ||
| (b) Non-current investments | ||
| (c) Long-term loans and advances | ||
| (d) Other non-current assets | ||
| (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 | ||
| TOTAL ASSETS |
5. Key Balance Sheet Items Explained
(A) Share Capital
This is a key part of Shareholders’ Funds. The company must provide a detailed “Note to Account” that breaks down the Share Capital as follows:
Authorised Capital: The maximum amount of capital the company is legally allowed to issue, as stated in its Memorandum of Association.
Issued Capital: The portion of Authorised Capital that the company has offered to the public to subscribe to.
Subscribed Capital: The portion of Issued Capital that the public has actually applied for and agreed to buy. This is divided into:
Subscribed and Fully Paid up: Shares on which the company has called the full amount, and the shareholders have paid in full.
Subscribed but not Fully Paid up: Shares on which the company has either not called the full amount, or it has called the full amount, but shareholders have failed to pay (known as “Calls in Arrears”).
Shares Forfeited: The amount originally paid up on shares that have been canceled by the company due to non-payment of calls. This is added to the total Share Capital.
(B) Reserves and Surplus
This is the second part of Shareholders’ Funds. It represents the accumulated profits and gains of the company. It includes:
Capital Reserve: A reserve created from capital profits (e.g., profit on sale of a fixed asset).
Capital Redemption Reserve (CRR): A reserve created when the company buys back its own shares.
Securities Premium Reserve: The extra amount received over the face value of a share.
Debenture Redemption Reserve (DRR): A reserve set aside to repay debentures.
Revaluation Reserve: A reserve created if the company revalues its assets upwards.
Surplus (P&L Balance): This is the company’s retained earnings. The “debit” balance (a loss) is shown as a negative number.
(C) Proposed Dividend
This is the dividend recommended by the Board of Directors but not yet approved by the shareholders. As per AS-4, this is not a liability. It is shown only as a contingent liability in the “Notes to Accounts.”
(D) Trade Receivables & Payables
Trade Receivables: The new term for “Sundry Debtors.” It’s the amount the company is owed by its customers for goods or services sold on credit.
Trade Payables: The new term for “Sundry Creditors.” It’s the amount the company owes to its suppliers for goods or services purchased on credit.
6. The Statement of Profit and Loss (Schedule III Format)
This statement is also presented vertically. It begins with income and then lists all expenses to arrive at the profit.
Statement of Profit and Loss for the year ended [Date]
| Particulars | Note No. | Amount (₹) |
|---|---|---|
| I. Revenue from Operations (Net Sales) | ||
| II. Other Income (e.g., Interest, Dividends) | ||
| III. Total Revenue (I + II) | ||
| IV. Expenses: | ||
| (a) Cost of materials consumed | ||
| (b) Purchases of Stock-in-Trade | ||
| (c) Changes in inventories of finished goods, WIP, etc. | ||
| (d) Employee benefits expense (Salaries, Wages) | ||
| (e) Finance costs (Interest on borrowings) | ||
| (f) Depreciation and amortization expense | ||
| (g) Other expenses (Rent, Admin., Selling expenses, etc.) | ||
| Total Expenses (IV) | ||
| V. Profit before tax (III − IV) | ||
| VI. Tax expense: (Current Tax & Deferred Tax) | ||
| VII. Profit (Loss) for the period (V − VI) | ||
| VIII. Earnings per Equity Share (Basic & Diluted) |
7. Uses and Importance of Financial Statements
Financial statements are the primary source of information for all stakeholders:
Shareholders/Investors: To assess management’s performance (stewardship) and decide whether to buy, hold, or sell shares.
Lenders/Creditors (Banks): To decide whether to grant credit (loans) to the company. They check the company’s solvency.
Government & Tax Authorities: To form fiscal policies, collect taxes, and ensure compliance with laws.
Management: For internal planning, decision-making, and controlling the business.
Employees: To assess the company’s stability and profitability, which impacts their job security and potential for a bonus.
Stock Exchanges: To monitor the financial health of listed companies and protect investors.
8. Limitations of Financial Statements
Despite their importance, financial statements have several limitations:
They are Historical: They are based on historical cost, not the current market value. Inflation is often ignored.
They Involve Bias: They rely on personal judgments and estimates (e.g., useful life of an asset, doubtful debts), which can be subjective.
They are Aggregate: They show aggregate (total) data. Details that might be important for a decision are often hidden.
They Ignore Qualitative Information: They only show what can be measured in money. They do not show qualitative data like employee morale, customer satisfaction, or the quality of the management team.
They are only Interim Reports: They are a “snapshot” at a point in time (Balance Sheet) or for a period (P&L), but they don’t perfectly predict the future.
📚 Keep Studying!
We hope these Financial Management and Accounting notes help you build a strong foundation for your BBA. LuNotes is your one-stop solution for all Lucknow University notes. Don’t forget to check out our notes for other subjects in your semester!
[Link to Principles of Management Notes]
[Link to Personality Development Notes]
[Link to Complete Computer application Notes]
Found a mistake? We work hard to ensure all notes are 100% accurate and as per the latest LU syllabus. If you spot an error or have a suggestion, please [click here to report it]. (You would link this text to a contact form or email).
By LuNotes – your trusted for Lucknow University Semester exam notes, crafted with love. ❤️