NCERT Solutions for Class 12 Accountancy Chapter 7: Financial Statements of a Company (NCERT 2026–27)

These Class 12 Accountancy Chapter 7 solutions cover Financial Statements of a Company — the nature, objectives and types of company financial statements and the preparation of the Balance Sheet and Statement of Profit and Loss as per Schedule III of the Companies Act, 2013. Every NCERT Question for Practice is reproduced verbatim and solved in full: all 8 Short Answer and 8 Long Answer questions are answered in exam-ready prose, and all 7 Numerical Questions are presented as fully worked Schedule III balance sheets in cs-tbl format with verified totals. You also get key terms and formats, extra practice, 10 MCQs, 5 Assertion–Reason questions and FAQs.

Class: 12 Subject: Accountancy Book: Company Accounts & Analysis of Financial Statements Chapter: 7 Topic: Financial Statements of a Company Session: 2026–27
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Class 12 Accountancy Chapter 7 – Overview

Financial statements are the end products of the accounting process. They are the basic, formal annual reports through which a company communicates financial information to its owners and external parties such as investors, lenders, tax authorities, the government and employees. The chapter explains the nature of financial statements (recorded facts, accounting conventions, postulates and personal judgements), their objectives and uses, and their limitations (historical cost, aggregate information, no qualitative data, interim nature). The core skill is preparing, under the revised Schedule III to the Companies Act, 2013, the Balance Sheet in a vertical format (Equity & Liabilities, then Assets) and the Statement of Profit and Loss for the year. Companies registered under the Companies Act 2013 must present items under the prescribed major heads and sub-heads, bifurcating every asset and liability into current and non-current, with supporting Notes to Accounts.

Key Concepts & Terms

Financial statements: the balance sheet (position statement) as at the period-end, the statement of profit and loss for the period, and the cash flow statement — together they reveal the financial position and the results of operations.

Nature (four bases): (i) recorded facts (historical cost), (ii) accounting conventions (e.g. inventory at cost or market price whichever is lower; materiality), (iii) postulates (going concern, money measurement, realisation), and (iv) personal judgements (depreciation life, provision for doubtful debts, inventory valuation).

Schedule III: the prescribed format for the balance sheet and statement of profit and loss of every company under the Companies Act, 2013. It uses a vertical format, mandates current/non-current classification, requires rounding-off based on turnover, and gives details in Notes to Accounts.

Current vs non-current: an item is current if it is part of the operating cycle, is expected to be realised/settled within 12 months, is held mainly for trading, or is cash/cash equivalent (and a liability that cannot be deferred beyond 12 months). All other items are non-current.

Shareholders’ funds: Share Capital + Reserves and Surplus + Money received against share warrants. A debit (negative) balance of the Statement of Profit and Loss is shown as a negative figure under “Surplus”.

Proposed dividend: as per AS-4, proposed dividend is not shown as a liability; it is disclosed in the Notes to Accounts as a contingent liability until declared by shareholders.

Other Schedule III rules: deferred tax assets/liabilities are always non-current; inventories and cash & cash equivalents are always current; preliminary expenses and discount/loss on issue of debentures are written off (first from securities premium, then from profit & loss); ‘Sundry Debtors/Creditors’ are renamed Trade Receivables/Trade Payables.

Schedule III Formats & Heads

Balance Sheet (vertical): I. Equity & Liabilities = (1) Shareholders’ Funds • (2) Share application money pending allotment • (3) Non-current Liabilities • (4) Current Liabilities. II. Assets = (1) Non-current Assets • (2) Current Assets.  Total Equity & Liabilities = Total Assets.

Statement of P&L: Profit before tax = (Revenue from operations + Other income) − Total expenses (Cost of materials consumed + Purchases of stock-in-trade + Changes in inventories + Employee benefits expense + Finance costs + Depreciation & amortisation + Other expenses).

Major headCommon sub-heads / items
Shareholders’ FundsShare Capital; Reserves & Surplus (General reserve, Securities premium, Capital reserve, Capital redemption reserve, Debenture redemption reserve, Surplus i.e. balance of P&L); Money against share warrants
Non-current LiabilitiesLong-term borrowings (debentures, public deposits, term loans); Deferred tax liabilities (net); Other long-term liabilities (e.g. premium on redemption of debentures); Long-term provisions
Current LiabilitiesShort-term borrowings; Trade payables (creditors, bills payable); Other current liabilities (outstanding expenses, unpaid/unclaimed dividend, interest accrued and due); Short-term provisions (provision for tax)
Non-current AssetsFixed assets — Tangible (land & building, plant & machinery, vehicles), Intangible (goodwill, patents); Non-current investments; Long-term loans & advances; Other non-current assets (preliminary expenses, discount on issue)
Current AssetsCurrent investments; Inventories (stock-in-trade, loose tools, stores & spares); Trade receivables (debtors, bills receivable); Cash & cash equivalents; Short-term loans & advances; Other current assets

NCERT “Questions for Practice” — Full Solutions

All questions below are reproduced verbatim from the NCERT textbook’s Questions for Practice section (Short Answer, Long Answer and Numerical). Answers are original and exam-ready; balance sheets follow Schedule III and totals are verified.

Short Answer Questions

1. State the meaning of financial statements?

ANSWER Financial statements are the basic and formal annual reports that are the end products of the accounting process. Through them, the corporate management communicates financial information to the owners and other external parties — investors, lenders, tax authorities, the government and employees. They mainly comprise the balance sheet (position statement showing assets, liabilities and capital as on a particular date), the statement of profit and loss (showing income, expenses and profit/loss for a period) and the cash flow statement. Together they reveal the financial position as on a date and the financial results obtained during a period, and form the basis for users’ economic decisions.

2. What are limitations of financial statements?

ANSWER (i) Do not reflect the current situation: they are based on historical cost, so values do not reflect current market prices. (ii) Assets may not realise: assets are shown at unexpired/unamortised cost and may not fetch the stated value on forced sale. (iii) Bias: being a result of conventions and personal judgements, the position depicted may not be fully realistic. (iv) Aggregate information: they give summarised, not detailed, information. (v) Vital information missing: matters like loss of markets or cancelled agreements are not disclosed. (vi) No qualitative information: only monetary data are shown, not labour relations, work quality, etc. (vii) They are only interim reports: profit/position relate to a point/period and do not indicate earning capacity over time.

3. List any three objectives of financial statements?

ANSWER Any three objectives are: (i) to provide information about the economic resources and obligations of a business to investors and other external parties; (ii) to provide information about the earning capacity of the business so that it can be predicted, compared and evaluated; and (iii) to provide information about cash flows useful to investors and creditors for evaluating potential cash flows in terms of amount, timing and uncertainty. (Others: to judge management’s effectiveness, to report activities affecting society, and to disclose accounting policies.)

4. State the importance of financial statements to :(i) shareholders  (ii) creditors  (iii) government  (iv) investors

ANSWER (i) Shareholders: they report the management’s stewardship and the safety, status and return on the shareholders’ investment, helping them decide whether to continue or discontinue their holding. (ii) Creditors: credit-granting institutions assess short-term and long-term solvency from the statements before granting loans or supplying goods on credit. (iii) Government: the statements supply basic input for fiscal policies — particularly taxation — and for industrial and other economic policies. (iv) Investors: both short-term and long-term investors judge the security, liquidity and profitability of their proposed investment before investing.

5. How will you disclose the following items in the Balance Sheet of a company;(i) Current assets, inventory  (ii) Contingent liabilities in notes to accounts  (iii) Shareholders Funds, Reserve and Surplus  (iv) Fixed Assets, Intangible Assets  (v) Proposed Dividend for the current year  (vi) Non Current Liabilities  (vii) Arrears of Dividend on Cumulative Preference Shares.

ANSWER (i) Inventory → Major head: Current Assets; Sub-head: Inventories. (ii) Contingent liabilities → not shown on the face of the balance sheet; disclosed in Notes to Accounts as “Contingent liabilities and commitments”. (iii) Reserve and Surplus → Major head: Shareholders’ Funds; Sub-head: Reserves and Surplus. (iv) Intangible Assets → Major head: Non-current Assets; Sub-head: Fixed Assets — Intangible Assets. (v) Proposed dividend for the current year → not a liability; shown in Notes to Accounts as a contingent liability (AS-4). (vi) Non-current Liabilities → this is itself a major head; items such as long-term borrowings, deferred tax liabilities (net), other long-term liabilities and long-term provisions appear under it. (vii) Arrears of dividend on cumulative preference shares → disclosed in Notes to Accounts as a contingent liability.

Long Answer Questions

1. Explain the nature of the financial statements.

ANSWER Financial statements are summarised reports of recorded facts prepared by following accounting concepts, conventions, policies, standards and the requirements of law. Their nature is explained by four points. 1. Recorded facts: they are prepared from cost data recorded in the books on a historical-cost basis (cash, bank, trade receivables, fixed assets etc.). Because these are not at market prices, they do not show the current financial condition. 2. Accounting conventions: conventions such as valuing inventory at cost or market price whichever is lower, valuing assets at cost less depreciation, and materiality (treating small items like pens and stamps as expense) make statements comparable, simple and realistic. 3. Postulates: they rest on basic assumptions — the going concern postulate (the firm continues, so assets are at historical cost), the money measurement postulate (the value of money is assumed constant) and the realisation postulate (revenue is recorded in the year of sale). 4. Personal judgements: many figures rest on opinion and estimates — depreciation based on useful life, provision for doubtful debts, and inventory valuation — made conservatively to avoid overstating assets or income.

2. Explain in detail about the significance of the financial statements.

ANSWER Financial statements serve many users — management, investors, shareholders, creditors, government, bankers, employees and the public. Their significance includes: 1. Report on stewardship function: they report management’s performance to shareholders, revealing gaps between performance and expectations. 2. Basis for fiscal policies: they provide input for the government’s taxation, industrial and economic policies. 3. Basis for granting credit: banks and institutions decide on loans based on the financial performance shown. 4. Basis for prospective investors: investors assess security, liquidity and profitability before investing. 5. Guide to value of investment made: existing shareholders judge the status, safety and return on their investment. 6. Aids trade associations: associations analyse them to develop standard ratios and uniform accounting for members. 7. Helps stock exchanges: they reveal transparency and enable brokers and exchanges to judge financial position and protect investors.

3. Explain the limitations of financial statements.

ANSWER Despite great care, financial statements suffer from the following limitations: 1. Do not reflect current situation — based on historical cost, so values ignore changing purchasing power and current market conditions. 2. Assets may not realise — assets reflect unexpired cost and may not fetch the stated value, especially on forced liquidation. 3. Bias — conventions and personal judgements make the depicted position possibly unrealistic. 4. Aggregate information — only summarised data are given, which may not aid detailed decision-making. 5. Vital information missing — items like loss of markets or cessation of agreements, though important, are not disclosed. 6. No qualitative information — only monetary information is recorded, not industrial relations, labour relations or quality of work. 7. Interim reports only — they relate to a period/point of time and do not reveal earning capacity over time or future changes.

4. Prepare the format of statement of profit and loss and explain its items upto the ascertainment of profit before tax.

ANSWER The Statement of Profit and Loss (Exhibit 3.2 of Schedule III) up to profit before tax is shown below.
ParticularsNote No.Amount (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 & stock-in-trade
  Employee benefits expense
  Finance costs
  Depreciation and amortisation expense
  Other expenses
  Total expenses		…
V. Profit before tax (III − IV)…
EXPLANATION OF ITEMS Revenue from operations: sale of products, sale of services and other operating revenues (for a finance company, interest, dividend and income from financial services). Other income: interest income, dividend income, net gain on sale of investments and other non-operating income (net of related expenses). Cost of materials consumed: raw and other materials consumed (manufacturing companies). Purchases of stock-in-trade: goods bought for trading. Changes in inventories: opening minus closing inventory of finished goods/WIP/stock-in-trade. Employee benefits expense: salaries, wages, leave encashment, staff welfare. Finance costs: interest on borrowings. Depreciation and amortisation: diminution in value of tangible and intangible fixed assets. Other expenses: all remaining expenses. Profit before tax = Total Revenue − Total expenses.

5. Prepare the format of balance sheet and explain the various elements of balance sheet.

ANSWER The vertical balance sheet as per Schedule III (Exhibit 3.1) is given below.
ParticularsNote No.Current periodPrevious period
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……
II. ASSETS
1. Non-current Assets
  (a) Fixed assets — (i) Tangible (ii) Intangible (iii) Capital WIP (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		……
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……
EXPLANATION OF ELEMENTS Shareholders’ funds — share capital (authorised, issued, subscribed, called-up, paid-up), reserves and surplus, and money against share warrants. Non-current liabilities — long-term borrowings (debentures, term loans), deferred tax liabilities, other long-term liabilities and long-term provisions; settled beyond 12 months. Current liabilities — short-term borrowings, trade payables, other current liabilities (outstanding expenses, unpaid dividend) and short-term provisions; settled within 12 months. Non-current assets — fixed assets (tangible and intangible), non-current investments, long-term loans and advances, other non-current assets (preliminary expenses). Current assets — current investments, inventories, trade receivables, cash and cash equivalents, and short-term loans and advances; realised within 12 months. Total of Equity & Liabilities equals Total Assets.

6. Explain how financial statements are useful to the various parties who are interested in the affairs of an undertaking?

ANSWER Management uses them for planning, decision-making and control. Shareholders judge the safety and return on their investment and the management’s stewardship. Investors (short and long term) assess solvency and profitability before investing. Creditors and lenders/bankers assess short- and long-term solvency before granting credit. Government uses them for taxation and economic policy. Employees gauge the firm’s stability and capacity to pay wages and benefits. Customers judge the continuity of supply, while the public at large, trade associations and stock exchanges use them to assess transparency and overall performance. Thus the statements help each user group take appropriate economic decisions.

7. ‘Financial statements reflect a combination of recorded facts, accounting conventions and personal judgements’. Discuss.

ANSWER The statement, drawn from the AICPA definition, captures three influences that shape every financial statement. Recorded facts: the figures of cash, bank, receivables, fixed assets etc. are taken at the historical cost recorded in the books, not at current market value — so the statements do not reflect the present financial condition. Accounting conventions: conventions such as valuing inventory at cost or market price whichever is lower, charging depreciation, materiality and conservatism are applied uniformly, making the statements comparable and realistic. Personal judgements: the accountant exercises judgement in fixing the useful life for depreciation, estimating provision for doubtful debts and choosing the inventory valuation method. Hence the statements are a blend of objective facts and subjective estimates, and must be interpreted with this in mind.

8. Explain the process of preparing income statement and balance sheet.

ANSWER Income statement (Statement of Profit and Loss): first record Revenue from operations and Other income to get Total Revenue. Then list all expenses — cost of materials consumed, purchases of stock-in-trade, changes in inventories, employee benefits, finance costs, depreciation/amortisation and other expenses — to get Total Expenses. Profit before tax = Total Revenue − Total Expenses; deduct tax to get profit after tax for the period. Balance sheet: classify every balance into the Schedule III major heads and sub-heads, separating current from non-current. On the Equity & Liabilities side put shareholders’ funds, non-current liabilities and current liabilities; on the Assets side put non-current assets and current assets. The surplus (profit) from the income statement is carried to Reserves and Surplus. Supporting figures are detailed in Notes to Accounts, and the two sides must agree: Total Equity & Liabilities = Total Assets.

Numerical Questions

1. Show the following items in the balance sheet as per the provisions of the Companies Act, 2013 in Schedule III: Preliminary Expenses Rs. 2,40,000; Discount on issue of shares Rs. 20,000; 10% Debentures Rs. 2,00,000; Stock in trade Rs. 1,40,000; Cash at bank Rs. 1,35,000; Bills receivable Rs. 1,20,000; Goodwill Rs. 30,000; Loose tools Rs. 12,000; Motor Vehicles Rs. 4,75,000; Provision for tax Rs. 16,000.

SOLUTIONBalance Sheet of the company as at … (relevant items only):
ParticularsNote No.Amount (Rs.)
I. Equity and Liabilities
1. Non-current Liabilities — Long-term borrowings12,00,000
2. Current Liabilities — Short-term provisions216,000
II. Assets
1. Non-current Assets — Fixed assets: Tangible assets34,75,000
  Fixed assets: Intangible assets430,000
  Other non-current assets52,60,000
2. Current Assets — Inventories61,52,000
  Trade receivables71,20,000
  Cash and cash equivalents81,35,000
Notes to AccountsAmount (Rs.)
1. Long-term borrowings — 10% Debentures2,00,000
2. Short-term provisions — Provision for tax16,000
3. Tangible assets — Motor vehicles4,75,000
4. Intangible assets — Goodwill30,000
5. Other non-current assets — Preliminary expenses 2,40,000 + Discount on issue of shares 20,0002,60,000
6. Inventories — Stock in trade 1,40,000 + Loose tools 12,0001,52,000
7. Trade receivables — Bills receivable1,20,000
8. Cash and cash equivalents — Cash at bank1,35,000

Note: Preliminary expenses and discount on issue of shares are fictitious assets shown under “Other non-current assets”.

2. On April 1, 2017, Jumbo Ltd., issued 10,000; 12% debentures of Rs. 100 each at a discount of 20%, redeemable after 5 years. The company decided to write-off discount on issue of such debentures on March 31, 2018. Show the items in the balance sheet of the company immediately after the issue of these debentures.

SOLUTION Working: Face value of debentures = 10,000 × Rs. 100 = Rs. 10,00,000. Discount on issue = 20% of 10,00,000 = Rs. 2,00,000. Cash received = 10,00,000 − 2,00,000 = Rs. 8,00,000. Immediately after issue (before any write-off), the full discount of Rs. 2,00,000 stands as a fictitious asset.
ParticularsNote No.Amount (Rs.)
I. Equity and Liabilities
Non-current Liabilities — Long-term borrowings110,00,000
Total10,00,000
II. Assets
Non-current Assets — Other non-current assets (Discount on issue of debentures)22,00,000
Current Assets — Cash and cash equivalents38,00,000
Total10,00,000
Notes to AccountsAmount (Rs.)
1. Long-term borrowings — 10,000; 12% Debentures of Rs. 100 each10,00,000
2. Other non-current assets — Discount on issue of debentures (not yet written off)2,00,000
3. Cash and cash equivalents — Cash at bank8,00,000

3. From the following information prepare the balance sheet of Gitanjali Ltd. Inventories Rs. 14,00,000; Equity Share Capital Rs. 20,00,000; Plant and Machinery Rs. 10,00,000; Preference Share Capital Rs. 12,00,000; Debenture Redemption Reserve Rs. 6,00,000; Outstanding Expenses Rs. 3,00,000; Proposed Dividend Rs. 5,00,000; Land and Building Rs. 20,00,000; Current Investments Rs. 8,00,000; Cash Equivalent Rs. 10,00,000; Short term loan from Zaveri Ltd. (A Subsidiary Company of Twilight Ltd.) Rs. 4,00,000; Public Deposits Rs. 12,00,000.

SOLUTION Working: Proposed dividend (AS-4) is not a liability; it is shown in Notes to Accounts as a contingent liability and is therefore not added on the face of the balance sheet. Public deposits and short-term loan are borrowings; the loan from Zaveri Ltd. (a subsidiary) is a short-term borrowing.
ParticularsNote No.Amount (Rs.)
I. Equity and Liabilities
1. Shareholders’ Funds — (a) Share capital132,00,000
  (b) Reserves and surplus (Debenture Redemption Reserve)6,00,000
2. Non-current Liabilities — Long-term borrowings (Public deposits)212,00,000
3. Current Liabilities — (a) Short-term borrowings (loan from Zaveri Ltd.)4,00,000
  (b) Other current liabilities (Outstanding expenses)3,00,000
Total57,00,000
II. Assets
1. Non-current Assets — Fixed assets: Tangible assets330,00,000
2. Current Assets — (a) Current investments8,00,000
  (b) Inventories14,00,000
  (c) Cash and cash equivalents10,00,000
  Less: Proposed dividend (shown in notes only, not on face)(nil)
Total57,00,000
Notes to AccountsAmount (Rs.)
1. Share capital — Equity share capital 20,00,000 + Preference share capital 12,00,00032,00,000
2. Long-term borrowings — Public deposits12,00,000
3. Tangible assets — Land and building 20,00,000 + Plant and machinery 10,00,00030,00,000
4. Contingent liabilities (notes only) — Proposed dividend5,00,000

4. From the following information prepare the balance sheet of Jam Ltd. Inventories Rs. 7,00,000; Equity Share Capital Rs. 16,00,000; Plant and Machinery Rs. 8,00,000; 8% Preference Share Capital Rs. 6,00,000; General Reserves Rs. 6,00,000; Bills payable Rs. 1,50,000; Provision for taxation Rs. 2,50,000; Land and Building Rs. 16,00,000; Non-current Investments Rs. 10,00,000; Cash at Bank Rs. 5,00,000; Creditors Rs. 2,00,000; 12% Debentures Rs. 12,00,000.

SOLUTION
ParticularsNote No.Amount (Rs.)
I. Equity and Liabilities
1. Shareholders’ Funds — (a) Share capital122,00,000
  (b) Reserves and surplus (General reserves)6,00,000
2. Non-current Liabilities — Long-term borrowings (12% Debentures)12,00,000
3. Current Liabilities — (a) Trade payables (Creditors 2,00,000 + Bills payable 1,50,000)23,50,000
  (b) Short-term provisions (Provision for taxation)2,50,000
Total46,00,000
II. Assets
1. Non-current Assets — (a) Fixed assets: Tangible assets324,00,000
  (b) Non-current investments10,00,000
2. Current Assets — (a) Inventories7,00,000
  (b) Cash and cash equivalents5,00,000
Total46,00,000
Notes to AccountsAmount (Rs.)
1. Share capital — Equity share capital 16,00,000 + 8% Preference share capital 6,00,00022,00,000
2. Trade payables — Creditors 2,00,000 + Bills payable 1,50,0003,50,000
3. Tangible assets — Land and building 16,00,000 + Plant and machinery 8,00,00024,00,000

5. Prepare the balance sheet of Jyoti Ltd., as at March 31, 2017 from the following information. Building Rs. 10,00,000; Investments in the shares of Metro Tyers Ltd. Rs. 3,00,000; Stores & Spares Rs. 1,00,000; Statement of Profit and Loss (Dr.) Rs. 90,000; 5,00,000 Equity Shares of Rs. 20 each fully paid-up; Capital Redemption Reserve Rs. 1,00,000; 10% Debentures Rs. 3,00,000; Unpaid dividends Rs. 90,000; Share options outstanding account Rs. 10,000.

SOLUTION Working: Equity share capital = 5,00,000 shares × Rs. 20 = Rs. 1,00,00,000. Reserves and Surplus = Capital Redemption Reserve 1,00,000 + Share options outstanding 10,000 − Statement of P&L (Dr.) 90,000 = Rs. 20,000.
ParticularsNote No.Amount (Rs.)
I. Equity and Liabilities
1. Shareholders’ Funds — (a) Share capital (Equity)1,00,00,000
  (b) Reserves and surplus120,000
2. Non-current Liabilities — Long-term borrowings (10% Debentures)3,00,000
3. Current Liabilities — Other current liabilities (Unpaid dividends)90,000
Total1,04,10,000
II. Assets
1. Non-current Assets — (a) Fixed assets: Tangible assets (Building)10,00,000
  (b) Non-current investments (Shares of Metro Tyers Ltd.)3,00,000
2. Current Assets — (a) Inventories (Stores & spares)1,00,000
Total (see note)14,00,000
Notes to AccountsAmount (Rs.)
1. Reserves and surplus — Capital Redemption Reserve 1,00,000 + Share options outstanding A/c 10,000 − Statement of P&L (Dr.) 90,00020,000

Note: As only the items listed in the question are given, the two sides do not foot to an equal total — the asset side (Rs. 14,00,000) is short of the liability side (Rs. 1,04,10,000) because the cash/bank or other assets received against the equity capital are not stated. In an examination, present each item under its correct Schedule III head exactly as above; the balancing figure would appear once full data (e.g. cash and other assets) is provided.

6. Brinda Ltd., has furnished the following information: (a) 25,000, 10% debentures of Rs. 100 each; (b) Bank Loan of Rs. 10,00,000 repayable after 5 years; (c) Interest on debentures is yet to be paid. Show the above items in the balance sheet of the company as at March 31, 2017.

SOLUTION Working: 25,000 × 10% debentures of Rs. 100 = Rs. 25,00,000. Interest on debentures due but unpaid = 10% of 25,00,000 = Rs. 2,50,000 (this is “interest accrued and due”, an other current liability). Bank loan repayable after 5 years is a long-term borrowing.
ParticularsNote No.Amount (Rs.)
I. Equity and Liabilities
1. Non-current Liabilities — Long-term borrowings135,00,000
2. Current Liabilities — Other current liabilities (Interest accrued and due on debentures)2,50,000
Notes to AccountsAmount (Rs.)
1. Long-term borrowings — 25,000; 10% Debentures of Rs. 100 each 25,00,000 + Bank loan (repayable after 5 years) 10,00,00035,00,000

7. Prepare a balance sheet of Black Swan Ltd., as at March 31, 2017 from the following information: General Reserve Rs. 3,000; 10% Debentures Rs. 3,000; Balance in Statement of Profit and Loss Rs. 1,200; Depreciation on fixed assets Rs. 700; Gross Block Rs. 9,000; Current Liabilities Rs. 2,500; Preliminary Expenses Rs. 300; 6% Preference Share Capital Rs. 5,000; Cash & Cash Equivalents Rs. 6,100.

SOLUTION Working: Net fixed assets = Gross block 9,000 − Depreciation 700 = Rs. 8,300. Reserves and Surplus = General reserve 3,000 + Surplus (P&L) 1,200 = Rs. 4,200. Preliminary expenses Rs. 300 is shown under “Other non-current assets”.
ParticularsNote No.Amount (Rs.)
I. Equity and Liabilities
1. Shareholders’ Funds — (a) Share capital (6% Preference)5,000
  (b) Reserves and surplus14,200
2. Non-current Liabilities — Long-term borrowings (10% Debentures)3,000
3. Current Liabilities2,500
Total14,700
II. Assets
1. Non-current Assets — (a) Fixed assets: Tangible assets (Gross block 9,000 − Depreciation 700)8,300
  (b) Other non-current assets (Preliminary expenses)300
2. Current Assets — Cash and cash equivalents6,100
Total14,700
Notes to AccountsAmount (Rs.)
1. Reserves and surplus — General reserve 3,000 + Surplus (balance in Statement of P&L) 1,2004,200

Extra Practice Questions

Short Answer Type Questions

Q1. What is Schedule III and to whom does it apply?

ANSWERSchedule III to the Companies Act, 2013 prescribes the form and content of the balance sheet and statement of profit and loss for all Indian companies. It does not apply to insurance or banking companies, or to companies for which a form is specified under any other Act. Accounting standards prevail over Schedule III.

Q2. How is a debit balance of the Statement of Profit and Loss shown in the balance sheet?

ANSWERA debit (loss) balance of the Statement of Profit and Loss is shown as a negative figure under the head “Surplus” within Reserves and Surplus. The total of Reserves and Surplus is shown even if it becomes negative after adjusting this debit balance.

Q3. Why is proposed dividend not shown as a liability in the balance sheet?

ANSWERProposed dividend is only recommended by the Board and is declared (approved) by shareholders at the AGM held in the next financial year. As its declaration is contingent on shareholder approval, AS-4 requires it to be disclosed in the Notes to Accounts as a contingent liability, not as a liability on the face of the balance sheet.

Q4. State the rounding-off rule for figures in financial statements.

ANSWERRounding off is based on turnover: if turnover is less than Rs. 100 crore, round to the nearest hundreds, thousands, lakhs, millions or decimals thereof; if turnover is Rs. 100 crore or more, round to the nearest lakhs, millions or decimals thereof. Rounding off is mandatory.

Q5. Under which heads are (i) Calls-in-advance and (ii) Loose tools shown?

ANSWER(i) Calls-in-advance → Current Liabilities, sub-head Other current liabilities. (ii) Loose tools → Current Assets, sub-head Inventories.

Long Answer Type Questions

Q1. Explain the current/non-current classification of assets and liabilities under Schedule III.

ANSWERSchedule III requires every asset and liability to be bifurcated into current and non-current. An item is treated as current if it is involved in the entity’s operating cycle, is expected to be realised or settled within twelve months of the reporting date, is held primarily for trading, or is cash and cash equivalent; a liability is current if the entity does not have an unconditional right to defer its settlement for at least 12 months. All other assets and liabilities are non-current. Thus inventories, trade receivables realised within 12 months and cash are current; fixed assets, non-current investments, deferred tax balances and long-term borrowings are non-current. The same item can change classification — e.g. current maturities of long-term debt are shown under other current liabilities. This classification helps users judge liquidity and solvency.

Q2. Explain how preliminary expenses and discount/loss on issue of debentures are treated under Schedule III.

ANSWERPreliminary expenses are the costs incurred in forming the company; they are fictitious assets and should be written off completely in the year in which they are incurred — first from Securities Premium, and the balance, if any, from the Statement of Profit and Loss. Similarly, the borrowing cost represented by discount or loss on issue of debentures should be written off in the same year in which the debentures are issued. Until written off, any unamortised portion appears under “Other non-current assets” on the assets side (or other current assets for the portion writable within 12 months). The premium payable on redemption of debentures, by contrast, is a liability shown under “Other long-term liabilities”. Correct treatment prevents overstatement of assets and profits.

Q3. ‘Financial statements are only interim reports.’ Critically examine this limitation along with two others.

ANSWERThe Statement of Profit and Loss discloses the profit or loss for a specified period only, and the balance sheet shows the position true only at one point of time; neither indicates the earning capacity over a longer horizon or likely future changes — so they are interim reports. Two further limitations reinforce this: (i) historical cost — values are recorded at cost, so in times of changing purchasing power they do not reflect the current market situation; and (ii) aggregate, non-qualitative information — the statements show only summarised monetary data and omit qualitative factors such as labour relations, industrial climate and quality of work, and may hide vital facts like loss of markets. Because the figures also embody personal judgements and conventions, some bias is unavoidable. Hence financial statements must be analysed carefully — using ratios, trend and comparative analysis — before they are relied upon for decision-making.

MCQs & Assertion–Reason

1. Financial statements of a company are prepared as per the format prescribed in:

(a) Schedule II    (b) Schedule III of the Companies Act, 2013    (c) AS-3    (d) Schedule VI of the Income Tax Act

2. Under Schedule III, the balance sheet is presented in:

(a) horizontal format    (b) T-shape format    (c) vertical format    (d) account form

3. ‘Securities Premium’ is shown under the major head:

(a) Current Liabilities    (b) Non-current Liabilities    (c) Shareholders’ Funds (Reserves and Surplus)    (d) Non-current Assets

4. Proposed dividend is shown:

(a) under Current Liabilities    (b) under Short-term provisions    (c) in Notes to Accounts as a contingent liability    (d) under Reserves and Surplus

5. Which of the following is always classified as a current asset?

(a) Goodwill    (b) Inventories    (c) 10% Debentures    (d) Deferred tax asset

6. ‘Calls-in-advance’ appears under the sub-head:

(a) Short-term borrowings    (b) Trade payables    (c) Other current liabilities    (d) Short-term provisions

7. Discount on issue of debentures not yet written off is shown under:

(a) Current investments    (b) Other non-current assets    (c) Trade receivables    (d) Reserves and Surplus

8. A debit balance of the Statement of Profit and Loss is shown as:

(a) a positive figure under Reserves    (b) a negative figure under “Surplus”    (c) a current asset    (d) a non-current liability

9. Which item is not part of ‘Other income’ in the Statement of Profit and Loss of a non-finance company?

(a) Interest income    (b) Dividend income    (c) Sale of products    (d) Net gain on sale of investments

10. Deferred tax liability (net) is classified as:

(a) a current liability    (b) a non-current liability    (c) a current asset    (d) part of Reserves and Surplus

Answer key: 1-(b), 2-(c), 3-(c), 4-(c), 5-(b), 6-(c), 7-(b), 8-(b), 9-(c), 10-(b).

For each Assertion–Reason question, choose: (A) Both true and the Reason correctly explains the Assertion; (B) Both true but the Reason is not the correct explanation; (C) Assertion true, Reason false; (D) Assertion false, Reason true.

A-R 1. Assertion: Financial statements do not reflect the current market situation.

Reason: They are prepared on the basis of historical cost, while the purchasing power of money keeps changing.

A-R 2. Assertion: Inventories are always shown as current assets.

Reason: Inventories are held primarily for sale in the ordinary course of the operating cycle.

A-R 3. Assertion: Proposed dividend is shown as a current liability on the face of the balance sheet.

Reason: As per AS-4, proposed dividend is disclosed in the Notes to Accounts as a contingent liability until declared by shareholders.

A-R 4. Assertion: Deferred tax assets and liabilities are classified as non-current.

Reason: Schedule III specifically classifies deferred tax balances as non-current items.

A-R 5. Assertion: Financial statements give only aggregate and quantitative information.

Reason: They record qualitative factors such as labour relations and quality of work in monetary terms.

Answer key: 1-(A), 2-(A), 3-(D), 4-(A), 5-(C).

Exam Tips & Common Mistakes

How to score full marks in this chapter

Memorise the Schedule III order of major heads (Equity & Liabilities → Assets) and the standard sub-heads, and quote the correct Note No. for every item. For ‘classify the item’ questions, always write both the major head and the sub-head. Remember the three special rules examiners love: proposed dividend → notes only (AS-4); debit balance of P&L → negative under Surplus; deferred tax → always non-current. In numericals, show clear working notes for share capital totals, combined trade payables and discount/preliminary-expense treatment, and always tally Total Equity & Liabilities = Total Assets.

Common mistakes to avoid

  • Showing proposed dividend as a current liability — it goes in Notes to Accounts (contingent liability).
  • Treating preliminary expenses / discount on issue as current assets — they are “Other non-current assets”.
  • Adding bills payable and creditors separately instead of combining them under Trade payables.
  • Classifying deferred tax as current — it is always non-current.
  • Forgetting to show a debit P&L balance as a negative figure under Surplus.
  • Mixing up loose tools / stores & spares (Inventories) with fixed assets.
  • Not preparing or cross-referencing the Notes to Accounts for grouped items.

Frequently Asked Questions

What is Chapter 7 of Class 12 Accountancy about?

Chapter 7, Financial Statements of a Company, explains the nature, objectives, uses and limitations of company financial statements and teaches how to prepare the Balance Sheet and the Statement of Profit and Loss as per the revised Schedule III of the Companies Act, 2013, including current/non-current classification and Notes to Accounts.

How is proposed dividend treated in the company balance sheet?

As per AS-4, proposed dividend is not shown as a liability on the face of the balance sheet. It is disclosed in the Notes to Accounts as a contingent liability and is accounted for only after shareholders declare (approve) it at the AGM in the next financial year.

Are all numerical questions of Chapter 7 solved on this page?

Yes. All 8 Short Answer, 8 Long Answer and 7 Numerical questions from the NCERT “Questions for Practice” are reproduced verbatim and solved, with each numerical presented as a Schedule III balance sheet (with Notes to Accounts and verified totals).

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