Financial Statements of a Company

The full picture

You have already learned how a sole proprietor prepares a Trading and Profit & Loss Account along with a Balance Sheet. A company works differently. Every company registered in India under the Companies Act 2013 must prepare two core financial statements in a strictly prescribed layout called Schedule III. The two statements are: the Statement of Profit & Loss (which shows income and expenses for the year) and the Balance Sheet (which shows the company's financial position on a single date). This standardised format exists so that investors, banks, and regulators like SEBI can compare Reliance with Tata Steel, or a startup in Bengaluru with a factory in Pune, using the same measuring stick.

The Statement of Profit & Loss opens with Revenue from Operations — the income earned from the company's core business, such as selling goods or providing services. To this is added Other Income: money earned outside the main business, like interest received on fixed deposits or rent from a spare warehouse. Together, these form Total Income. Why separate them? Because a bank lending ₹10 crore wants to know whether your profit comes reliably from selling goods (predictable) or from a one-time land sale (not repeatable). Next, all expenses are listed separately: cost of materials consumed, purchases of stock-in-trade, changes in inventories, employee benefits expense, Finance Costs (interest on loans), depreciation and amortisation, and other expenses. Each has its own line. After deducting total expenses from total income you arrive at Profit Before Tax. Deduct income tax, and what remains is the Profit for the Period — the figure that belongs to shareholders.

One item students often find confusing is 'Changes in Inventories of Finished Goods, WIP, and Stock-in-Trade.' Under Schedule III, this line = Opening Stock minus Closing Stock. If your closing inventory is less than your opening inventory, the result is a positive number — meaning you drew down stock to fulfil sales, so your cost of goods consumed is higher and this positive figure increases total expenses, reducing profit. If closing inventory is more than opening, the result is a negative number — you produced more than you sold, so inventory built up and total expenses are effectively reduced, leaving profit higher. This adjustment ensures your expenses reflect only the goods actually sold, not everything you manufactured.

The Balance Sheet is a snapshot of what the company owns and owes on a specific date, usually 31 March (the end of the Indian financial year). Under Schedule III it is arranged in two blocks. The first block is Equity and Liabilities: Shareholders' Funds (Share Capital plus Reserves and Surplus), Non-Current Liabilities (long-term borrowings, deferred tax liabilities, long-term provisions), and Current Liabilities (trade payables, short-term borrowings, other current liabilities). The second block is Assets: Non-Current Assets (property, plant and equipment, intangible assets like goodwill or patents, long-term investments, long-term loans and advances) and Current Assets (inventories, trade receivables, cash and bank balances, short-term loans and advances). The fundamental accounting equation still holds: Total Assets = Equity + Total Liabilities.

Classification matters enormously. An asset or liability is 'current' if it is expected to be converted into cash or settled within twelve months of the reporting date, or within the company's normal operating cycle — whichever is longer. Everything else is 'non-current.' So a loan repayable in three years is a non-current liability, but the instalment due in the next twelve months must be reclassified as a current liability. Trade receivables (money owed by customers) are usually current; goodwill is always non-current. Getting this wrong in an exam — or in a real company's books — triggers an auditor qualification.

Notes to Accounts are not a separate optional document — they are a mandatory, numbered extension of the financial statements themselves. Every major line item on the Balance Sheet and Statement of Profit & Loss must have a corresponding note. For example, the note on Property, Plant and Equipment shows a table with gross block (original cost), accumulated depreciation, and net block for each category. The note on Share Capital shows authorised capital, issued capital, subscribed capital, and paid-up capital. These notes are tested directly in CBSE board exams: expect questions asking you to draft a note or identify what a specific note must contain. A company that omits notes faces a qualified audit report and possible SEBI action.

An Indian example

Imagine Meera Textiles Pvt. Ltd., a garment exporter based in Tirupur. In the year ending 31 March 2026, the company reported Revenue from Operations of ₹3.5 crore (exports to Bangladesh and Sri Lanka) and Other Income of ₹8 lakh (interest on a fixed deposit with Canara Bank). Total Income is therefore ₹3.58 crore. Its expenses include cost of fabrics consumed (₹1.8 crore), employee benefits (₹60 lakh), Finance Costs on a working-capital loan (₹12 lakh), depreciation on sewing machines (₹18 lakh), and other expenses (₹45 lakh) — totalling ₹3.15 crore. Profit Before Tax comes to ₹43 lakh. After paying income tax at 25% (₹10.75 lakh), the Profit for the Period is ₹32.25 lakh. On the Balance Sheet, Meera's factory building (₹90 lakh) and machinery (₹45 lakh net) sit under Non-Current Assets; the fabric stock (₹28 lakh) and receivables from overseas buyers (₹35 lakh) sit under Current Assets. The ₹20 lakh bank loan due for repayment in November 2026 is shown as a Current Liability, not a long-term one. A bank officer considering Meera's application for a fresh loan would read exactly this Schedule III document to decide whether to sanction ₹50 lakh.

Key concepts covered

• Schedule III format
• Statement of Profit & Loss
• Balance sheet

Common misconceptions to watch for

• Misconception: 'Changes in Inventories' is an income item when closing stock is higher than opening stock. Reality: under Schedule III, Change in Inventories = Opening Stock minus Closing Stock. When closing exceeds opening, this formula yields a negative number on the expense side — meaning total expenses are reduced and profit is actually higher, not lower. The confusion arises because students think 'more stock = more expense', but Schedule III treats the unsold buildup as a cost not yet recognised, so it reduces the current period's expense. Conversely, when opening exceeds closing (stock falls), it yields a positive expense, reducing profit.
• Misconception: Share Capital and Reserves & Surplus are the same thing and can be shown as a single 'Capital' figure in a company's Balance Sheet. Reality: Schedule III requires them to be shown separately. Share Capital is the nominal value of shares actually issued and paid up; Reserves & Surplus is accumulated retained profit and other gains (like a Securities Premium Reserve). Merging them is a Schedule III violation.
• Misconception: All liabilities and all assets can be shown as two single totals without further classification. Reality: Schedule III mandates classification into current and non-current for both assets and liabilities, with specific sub-headings for each category. This classification is directly tested in board exams and is legally required under the Companies Act 2013.