Financial Statements of a Company

The full picture

A company's financial statements are the official, legally required summary of its money story. Under the Companies Act 2013, every company must prepare at least two statements: the Balance Sheet and the Statement of Profit and Loss (P&L). Think of the Balance Sheet as a photograph taken on one specific date (say, 31 March), showing what the company owns, what it owes, and what belongs to its owners. The P&L is more like a video — it records every sale made and every expense incurred across the entire financial year, ending with a net profit or net loss figure.

The Balance Sheet follows a strict vertical format prescribed by Schedule III of the Companies Act 2013. It is divided into two broad halves. The top half shows Equity and Liabilities — meaning, where all the money came from. Equity (Shareholders' Funds) includes Share Capital (money investors paid for shares) and Reserves and Surplus (profits kept in the company over the years). Liabilities are split into Non-Current Liabilities (loans due after one year, like a 5-year term loan from SBI) and Current Liabilities (amounts due within one year, like creditors and outstanding wages). The bottom half shows Assets — how that money was used. Non-Current Assets (land, buildings, machinery — things used for many years) are listed first, followed by Current Assets (inventory, debtors, cash — things that cycle within one year). The golden rule always holds: Total Assets = Equity + Total Liabilities.

The Statement of Profit and Loss tells you whether the business earned more than it spent. It starts with Revenue from Operations — the money earned from selling goods or services. From this, the Cost of Goods Sold (COGS) is deducted to find Gross Profit. COGS is calculated as: Opening Inventory + Purchases − Closing Inventory. Next, all operating expenses (staff salaries, rent, power, depreciation) are deducted to get Profit Before Tax (PBT). After paying income tax, what remains is Net Profit (or Net Loss). This net profit either stays in the company as Retained Earnings under Reserves and Surplus on the Balance Sheet, or is paid out as dividends to shareholders.

Both statements follow the accrual basis of accounting — not the cash basis. This means revenue is recorded when it is earned (even if the customer has not paid yet), and expenses are recorded when they are incurred (even if the supplier has not been paid yet). For example, if a textile company in Tirupur delivers ₹2,00,000 worth of fabric in March but the buyer pays in May, the ₹2,00,000 is still income in March's P&L. This matching of revenue with the expenses that generated it gives a more truthful picture of performance than simply tracking cash in and cash out.

Depreciation is one item that confuses many students. When a company buys machinery for ₹10,00,000, it does not record ₹10,00,000 as an expense all at once. Instead, the cost is spread over the machine's useful life — say, 10 years — so ₹1,00,000 is charged as depreciation expense each year. This reduces profit, but no cash leaves the company in that year. On the Balance Sheet, the machinery is shown at its Written Down Value (WDV): original cost minus accumulated depreciation. After 3 years, the machine's WDV is ₹10,00,000 − ₹3,00,000 = ₹7,00,000. This reflects how much of the asset's economic value still remains.

Schedule III also requires Notes to Accounts — numbered notes attached to the statements that give details behind each line item. For example, the Balance Sheet line 'Property, Plant and Equipment ₹7,60,000' is supported by a note showing each asset, its original cost, depreciation charged, and current book value. These notes are part of the financial statements and are tested in board exams. When you read a company's annual report, these notes are where the real detail lives.

An Indian example

Priya's father runs a medium-sized electronics shop in Kochi — registered as a private limited company. At the end of March, the chartered accountant prepares the annual statements. The Balance Sheet shows Non-Current Assets of ₹15 lakh (shop fixtures and delivery van), Current Assets of ₹9 lakh (inventory ₹6 lakh, cash and bank ₹3 lakh), Share Capital of ₹8 lakh, a bank loan of ₹7 lakh due in three years, and trade creditors of ₹9 lakh. Assets total ₹24 lakh; Equity plus Liabilities also total ₹24 lakh — the equation balances. The P&L shows sales of ₹48 lakh for the year, COGS of ₹34 lakh, gross profit of ₹14 lakh, operating expenses (salaries, rent, electricity, depreciation) of ₹8 lakh, and Profit Before Tax (PBT) of ₹6 lakh. Priya sees that the business earned ₹6 lakh profit before tax — but the bank account only grew by ₹1.5 lakh, because the rest went into buying more inventory and paying off a portion of the loan. This is the accrual-cash gap in action — profit and cash are not the same thing.

Common misconceptions to watch for

• Many students think 'profit = cash in the bank.' It does not. Profit is calculated on the accrual basis — sales made on credit count as revenue even if the cash has not arrived yet. A shop can show a ₹5 lakh profit while its bank account has barely ₹50,000 because most sales were on 60-day credit to retailers.
• Students often assume the Balance Sheet lists assets first, like older T-format Balance Sheets. Under Schedule III of the Companies Act 2013, Equity and Liabilities must appear first (top of the vertical format) and Assets appear second — the reverse of what older textbooks may show. This is mandatory, not optional.
• A high asset value on the Balance Sheet is not the same as a financially strong company. A factory with ₹50 lakh in old machinery may show huge assets, but if that machinery is mostly depreciated and generating losses, the company is in trouble. Always read the P&L alongside the Balance Sheet — assets alone say nothing about profitability or the ability to repay debts.