Under Schedule III of the Companies Act, 2013, where is Securities Premium Reserve shown in the balance sheet?

Answer: B. Securities premium is listed among the reserves, and Reserves and surplus sits within Shareholders' funds. It is not share capital, because share capital shows only the face value of shares.

In the balance sheet of a company, Loose Tools will be shown under:

Answer: C. Loose tools are treated as inventories, which are always current assets. Option (A) is the usual wrong choice because tools are physical, but physical form alone does not make an item a fixed asset.

300 equity shares of ₹100 each are fully called up, and calls-in-arrears amount to ₹6,000. How will the Notes to Accounts show the capital?

Answer: B. Calls-in-arrears are deducted from the called up capital, so ₹30,000 − ₹6,000 = ₹24,000 is carried to the balance sheet. They are never shown as a current asset (A), and adding them (D) would double count money not yet received.

Financial Statements of a Company — CUET Accountancy Notes & MCQs

📌 Snapshot

Master the Schedule III balance sheet and profit and loss format with solved examples and exam traps.
Why every company must present its accounts in one prescribed vertical format, and what the format contains.
How to place any item under the correct major head and sub head, using the twelve month test.
How to build a Schedule III balance sheet and a Statement of Profit and Loss that balance and tie.

📖 Detailed Notes

Written and reviewed by Devendra Dubey, Mathematics & Commerce faculty at UniDrill (M.Sc. Mathematics, Osmania University · 10 years teaching). Based on NCERT Accountancy Class XII (Accountancy Part II), Chapter 3.

Why does every company's annual report look the same?

Open the annual report of any Indian company, a steel maker or a software firm, and the balance sheet follows the same order: shareholders' funds first, then non-current liabilities, then current liabilities, then the assets. That is not a coincidence. A company is owned by thousands of shareholders who cannot walk into the office and ask to see the books, so the law fixes the format. An investor in Mumbai can then compare a company in Chennai line by line. This chapter teaches that fixed format, Schedule III of the Companies Act, 2013, and the skill CUET tests most from it: putting an item under the right head.

What financial statements are and why they exist

Financial statements are the formal annual reports through which a company's management tells its owners and outsiders how the business stands. They consist of the balance sheet (position on one date), the Statement of Profit and Loss (performance over a year) and the cash flow statement (movement of cash). The first two are compulsory in the Schedule III format.

What you read in a balance sheet is not pure fact. It rests on four things, and each one can be tested.

Pillar	What it means	Example
Recorded facts	Transactions recorded at actual (historical) cost	A machine is shown at the price paid, not today's price
Conventions	Accepted practices such as conservatism and materiality	Inventory valued at cost or market value, whichever is lower
Postulates	Basic assumptions: going concern, money measurement, realisation	Assets are shown at cost because the firm will keep running; revenue belongs to the year of sale even if cash comes later
Personal judgements	Estimates made by the accountant	Life of an asset for depreciation, provision for doubtful debts, inventory valuation method

Financial statements aim to give information about economic resources and obligations, earning capacity, cash flows, the effectiveness of management, activities that affect society, and the accounting policies followed. Different users lean on them for different reasons.

User	What they use the statements for
Shareholders and owners	A report on how management used their money (stewardship)
Lenders and trade payables	Credit decisions: will we be paid back?
Prospective investors	Whether to buy shares; what the existing investment is worth
Government	Basis for fiscal policy and taxation
Trade associations and stock exchanges	Industry comparisons and listing decisions

The statements also have limits. They use historical cost, so they do not show current market values. Assets may not fetch their book value in a forced sale. Personal judgement can bias the figures. They give aggregate information, miss important qualitative facts such as the quality of management, and describe only a point in time or a past period.

Schedule III: one format for every company

Every company registered in India must prepare its accounts in the form prescribed by Schedule III, except insurance companies, banking companies and companies for which another Act prescribes a separate form. The rules below decide how you present a statement.

Rule	What it means	Why
Vertical format	Items run in a single column, with the current and previous year side by side	Easy comparison across years and companies
Accounting standards prevail	If Schedule III and an accounting standard conflict, the standard wins	Schedule III governs presentation, standards govern substance
Rounding off	Amounts must be rounded, and the unit depends on turnover (below ₹100 crore: hundreds, thousands, lakhs or millions; above: lakhs or millions)	Large numbers are unreadable in rupees
Negative surplus	A debit balance of the Statement of Profit and Loss is shown as a negative figure under Surplus	Reserves and Surplus can then be reported even when it is negative
New names	Sundry debtors become Trade receivables; sundry creditors become Trade payables	Common names across all companies

Beyond the textbook. For the exam: every company follows Schedule III in the vertical format described here. In reality: large listed companies, and unlisted companies with a net worth of ₹250 crore or more, follow the Indian Accounting Standards (Ind AS), which are aligned with international standards, and they use a companion version of Schedule III for Ind AS companies. Why it matters: the layout you learn here is the same skeleton real annual reports use, so the heads you memorise today are the heads you will meet in a real balance sheet.

The balance sheet: how the two sides are organised

Think of the balance sheet as a question and an answer. The Equity and Liabilities side asks, "Where did the money come from?" and the Assets side answers, "Where is it now?" The two totals are always equal.

Major head	Sub heads	Typical items
Shareholders' funds	Share capital; Reserves and surplus; Money received against share warrants	Equity and preference capital, general reserve, securities premium
Share application money pending allotment	Single line	Application money received but shares not yet allotted
Non-current liabilities	Long-term borrowings; Deferred tax liabilities (net); Other long-term liabilities; Long-term provisions	Debentures due after one year, term loans, public deposits
Current liabilities	Short-term borrowings; Trade payables; Other current liabilities; Short-term provisions	Bank overdraft, creditors and bills payable, unclaimed dividend, provision for tax
Non-current assets	Fixed assets (tangible, intangible, capital work in progress, intangible assets under development); Non-current investments; Deferred tax assets (net); Long-term loans and advances; Other non-current assets	Land, plant, goodwill, patents, shares held long term
Current assets	Current investments; Inventories; Trade receivables; Cash and cash equivalents; Short-term loans and advances; Other current assets	Stock, debtors and bills receivable, bank balance, prepaid expenses

Share capital is shown in the Notes to Accounts in layers: authorised (the maximum the company may issue), issued (offered to the public), subscribed (taken up by investors). Subscribed capital is split into fully paid-up and not fully paid-up. For shares that are not fully paid, two adjustments follow. Calls-in-arrears (money called but not paid by a shareholder) are deducted, because that money has not come in. Forfeited shares (the amount originally paid on shares the company has taken back) are added, because the company keeps that money.

Worked example: share capital note. Dhruv Ltd. has an authorised capital of 20,000 equity shares of ₹100 each. It issued 15,000 shares. Of these, 12,000 are fully paid; 3,000 are fully called up, but ₹10 per share on all 3,000 shares remains unpaid. The company earlier forfeited 200 shares on which ₹60 per share had been paid. Show the Notes to Accounts.

Step	What we do	Amount (₹)
1	Authorised: 20,000 × ₹100	20,00,000
2	Issued and subscribed, fully paid: 12,000 × ₹100	12,00,000
3	Subscribed but not fully paid: 3,000 × ₹100 fully called	3,00,000
4	Less calls-in-arrears: 3,000 × ₹10	(30,000)
5	Add forfeited shares (amount originally paid): 200 × ₹60	12,000
6	Total share capital shown in the balance sheet (12,00,000 + 2,70,000 + 12,000)	14,82,000

Common wrong step. Showing calls-in-arrears as a current asset, or leaving them out, so the balance sheet reports ₹15,00,000 of capital the company has not actually received. Calls-in-arrears reduce capital. The opposite, calls-in-advance (money received before it was called), is a liability shown under Other current liabilities, never under share capital.

Reserves and surplus hold the profits a company keeps and the premiums it receives. Securities premium is part of reserves, not share capital, because share capital records only the face value of shares.

Item	Where it sits	Note
Capital reserve, capital redemption reserve	Reserves and surplus	Reserves created out of capital profits
Securities premium reserve	Reserves and surplus	Premium received over face value
Debenture redemption reserve, revaluation reserve	Reserves and surplus	Set aside for specific purposes
General and other reserves	Reserves and surplus	Profit transferred to reserves
Share options outstanding account	Reserves and surplus	Value of options granted to employees
Surplus	Reserves and surplus	Balance in the Statement of Profit and Loss; negative if a debit balance

A reserve that is backed by specific earmarked investments is called a fund.

Pause and predict: a company has a general reserve of ₹1,00,000 and a debit balance of ₹40,000 in the Statement of Profit and Loss. What will Reserves and surplus show?

Check your answer: ₹60,000. The debit balance is shown as a negative Surplus of ₹(40,000) and netted against the reserve. If the debit balance were ₹1,30,000, Reserves and surplus would still be shown, as ₹(30,000).

Current or non-current? The twelve month test

Every asset and liability line depends on one decision. An item is current if any one of these is true: it belongs to the operating cycle (the time from buying raw material to collecting cash), it will be realised or settled within twelve months of the balance sheet date, it is held mainly for trading, or it is cash or a cash equivalent. For a liability there is a further test: it is also current if the company has no unconditional right to postpone settlement for at least twelve months. Everything else is non-current.

Schedule III then overrides common sense in a few places. Learn these as fixed rules.

Item	Classification	Note
Inventories	Always current	Even if the stock will sit in the godown for two years
Cash and cash equivalents	Always current	Bank balances and cash in hand
Fixed assets, tangible or intangible	Always non-current	Even if the useful life is less than twelve months
Deferred tax assets and liabilities	Always non-current	Even if they may reverse within a year
Investments	Split by the twelve month rule	Current if meant to be held for less than twelve months, otherwise non-current
Borrowings	Split by repayment date	The instalment due within twelve months (current maturity) is shown under Other current liabilities

Why the odd rules? Schedule III wants every company to answer the same question the same way. A tool kit that lasts six months is still part of the permanent set-up of a factory, so it is a fixed asset; stock is always meant to be sold, so it is always current.

Pause and predict: a machine bought for the factory will be fully worn out in eight months. Is it current or non-current?

Check your answer: non-current. Fixed assets are non-current whatever their useful life. The depreciation is charged quickly, but the classification does not change.

Worked example: classification drill. Place each item under its major head and sub head.

Item	Major head	Sub head	Reason
Securities premium	Shareholders' funds	Reserves and surplus	Premium is not face value
Loose tools	Current assets	Inventories	Inventory of tools, not a fixed asset
Calls-in-advance	Current liabilities	Other current liabilities	Money owed back or adjusted soon
Bank overdraft	Current liabilities	Short-term borrowings	Repayable on demand
Bills payable	Current liabilities	Trade payables	Arises from purchases in the normal course
Unclaimed dividend	Current liabilities	Other current liabilities	Payable to shareholders on claim
Provision for tax	Current liabilities	Short-term provisions	Tax due within the year
Public deposits repayable after 3 years	Non-current liabilities	Long-term borrowings	Beyond twelve months
Goodwill	Non-current assets	Fixed assets: intangible	No physical form
Shares held for 5 years	Non-current assets	Non-current investments	Held beyond twelve months
Debtors and bills receivable	Current assets	Trade receivables	Realisable within the operating cycle
Work in progress	Current assets	Inventories	Part of stock

Common wrong step. Putting loose tools under tangible fixed assets because they are physical, or putting calls-in-advance with share capital because they are connected with shares. Ask what the item is (a tool kept for use as stock, a liability owed to shareholders) before you ask what it is connected to.

The Statement of Profit and Loss

This statement answers a different question: how much did the company earn and spend in the year? It also has a fixed vertical layout.

Line	How it is found
I. Revenue from operations	Sale of products, sale of services and other operating revenues (for a finance company it also includes interest, dividend and income from financial services)
II. Other income	Interest income (for a non-finance company), dividend income, net gain on sale of investments, other non-operating income
III. Total revenue	I + II
IV. Total expenses	Seven heads, shown in the next table
V. Profit before exceptional and extraordinary items and tax	III − IV
VI. Exceptional items	Items of unusual size or nature that belong to normal business
VII. Profit before extraordinary items and tax	V − VI
VIII. Extraordinary items	Items outside normal business, such as a loss from an earthquake
IX. Profit before tax	VII − VIII
X. Tax expense	Current tax and deferred tax
XI to XV. Profit for the period	After tax, adjusted for any discontinuing operations
XVI. Earnings per share	Basic and diluted

The expense section has seven heads, and CUET keeps testing which cost goes where.

Expense head	What goes in	Watch out
Cost of materials consumed	Raw materials used in manufacturing	Used only by manufacturers
Purchases of stock-in-trade	Goods bought for resale	Used only by traders
Changes in inventories of finished goods, work in progress and stock-in-trade	Opening inventory minus closing inventory	An increase in stock reduces expenses, so the figure is a deduction
Employee benefits expense	Salaries, wages, leave encashment, staff welfare	Includes all staff costs
Finance costs	Interest on borrowings	Only interest. Bank charges are not here
Depreciation and amortisation	Depreciation on fixed assets; amortisation on intangibles	Two names for writing off two kinds of asset
Other expenses	Everything else: rent, insurance, bank charges, repairs	The residual head

Worked example: Statement of Profit and Loss. Zenith Ltd. (a manufacturer) for the year ended 31 March 2025: revenue from operations ₹20,00,000; interest and dividend on investments ₹50,000; raw materials consumed ₹8,00,000; opening finished goods ₹1,50,000; closing finished goods ₹1,10,000; salaries and wages ₹3,00,000; interest on debentures ₹60,000; depreciation ₹1,20,000; bank charges ₹5,000; rent and office expenses ₹95,000. Tax rate 30%. Find profit after tax.

Step	What we do	Amount (₹)
1	Total revenue = 20,00,000 + 50,000 (other income)	20,50,000
2	Changes in inventories = opening − closing = 1,50,000 − 1,10,000 (stock fell, so cost is added)	40,000
3	Finance costs = interest on debentures only	60,000
4	Other expenses = bank charges 5,000 + rent and office 95,000	1,00,000
5	Total expenses = 8,00,000 + 40,000 + 3,00,000 + 60,000 + 1,20,000 + 1,00,000	14,20,000
6	Profit before tax = 20,50,000 − 14,20,000	6,30,000
7	Tax at 30%	(1,89,000)
8	Profit after tax	4,41,000

Common wrong step. Putting the bank charges into finance costs (making them ₹65,000). The total profit does not change, but the head is wrong, and CUET asks about heads. A second slip is subtracting opening from closing inventory: that gives (₹40,000), which would understate expenses and overstate profit by ₹80,000.

Putting it together: a complete balance sheet

Worked example: balance sheet from a list of balances. Rudra Ltd. has these balances on 31 March 2025 (₹): equity share capital (fully paid) 10,00,000; general reserve 2,00,000; securities premium 1,00,000; credit balance in Statement of Profit and Loss 50,000; 10% debentures repayable after 3 years 5,00,000; provision for employee benefits (long-term) 30,000; bank overdraft 60,000; creditors 90,000; bills payable 30,000; unclaimed dividend 10,000; calls-in-advance 15,000; provision for tax 40,000. Assets: land and building 5,00,000; plant 4,00,000; goodwill 1,00,000; shares held for 5 years 3,00,000; shares to be sold within 6 months 1,00,000; raw materials 1,50,000; work in progress 50,000; finished goods 1,00,000; loose tools 25,000; debtors 2,50,000; bills receivable 30,000; cash and bank 1,20,000. Prepare the balance sheet.

Particulars	Working	Amount (₹)
I. Equity and liabilities
1. Shareholders' funds: Share capital		10,00,000
Reserves and surplus	2,00,000 + 1,00,000 + 50,000	3,50,000
2. Non-current liabilities: Long-term borrowings	10% debentures	5,00,000
Long-term provisions	Employee benefits	30,000
3. Current liabilities: Short-term borrowings	Bank overdraft	60,000
Trade payables	90,000 + 30,000	1,20,000
Other current liabilities	10,000 + 15,000	25,000
Short-term provisions	Provision for tax	40,000
Total		21,25,000
II. Assets
1. Non-current assets: Fixed assets, tangible	5,00,000 + 4,00,000	9,00,000
Fixed assets, intangible	Goodwill	1,00,000
Non-current investments	Shares held for 5 years	3,00,000
2. Current assets: Current investments	Shares to be sold in 6 months	1,00,000
Inventories	1,50,000 + 50,000 + 1,00,000 + 25,000	3,25,000
Trade receivables	2,50,000 + 30,000	2,80,000
Cash and cash equivalents		1,20,000
Total		21,25,000

Both sides total ₹21,25,000, which is the check you must always run. Common wrong step. Leaving the credit balance of the Statement of Profit and Loss out of Reserves and surplus, or putting the securities premium into share capital. Each slip makes the two totals differ, and that mismatch is your clue that something has been misplaced.

Preliminary expenses and proposed dividend

Preliminary expenses are the costs of forming a company. They are not an asset. They must be written off in full in the year they are incurred, first against the securities premium balance (if there is one) and then against the Statement of Profit and Loss. Discount on the issue of debentures is likewise written off in the same year.

Worked example: writing off preliminary expenses. A company incurs ₹50,000 of preliminary expenses and has ₹30,000 in its securities premium account. Pass the entry.

Date	Particulars	Dr (₹)	Cr (₹)
31 Mar	Securities Premium Reserve A/c ... Dr	30,000
	Statement of Profit and Loss ... Dr	20,000
	To Preliminary Expenses A/c		50,000
	(Being preliminary expenses written off in the year incurred)

Debits ₹50,000 equal credit ₹50,000. Common wrong step. Leaving the balance as an asset to write off over five years. Under the rule here, nothing is left on the balance sheet.

Proposed dividend is a dividend the Board recommends but the shareholders have not yet approved at the Annual General Meeting. Because it depends on approval, it is shown in the Notes to Accounts as a contingent liability, and no entry is made until it is declared. Once approved, it becomes a current liability, Dividend payable.

Beyond the textbook. For the exam: proposed dividend is a contingent liability disclosed in the Notes to Accounts, not a liability on the face of the balance sheet. In reality: the current accounting standards go a step further. A dividend proposed after the balance sheet date is not recognised as a liability on that date at all, and is only disclosed. Why it matters: the treatment is the same, since it stays out of the balance sheet figures until the shareholders approve it, but the standards no longer call it a contingency.

Exam traps

The trap	Why it's tempting	The truth
"Securities premium is part of share capital."	It arises when shares are issued	It is a reserve; share capital carries only face value
"Loose tools are tangible fixed assets."	They are physical and used for years	They are shown under Inventories
"Calls-in-arrears and calls-in-advance are treated alike."	Both involve unpaid or early calls	Arrears are deducted from capital; advance is a current liability
"A fixed asset with a six month life is current."	The twelve month test sounds general	Fixed assets are always non-current
"Bank charges are a finance cost."	Banks are lenders	Finance costs hold interest only; bank charges are other expenses
"Proposed dividend is a short term provision."	A dividend is a payable amount	It is a contingent liability in the Notes until approved
"Deferred tax liability is current if it reverses soon."	It might settle within a year	It is always non-current
"Preliminary expenses stay as an asset."	They benefit the company for years	They are written off completely in the year incurred

Formula sheet

Quantity	Formula	When to use
Total revenue	$\text{Revenue from operations} + \text{Other income}$	Top line of the Statement of Profit and Loss
Changes in inventories	$\text{Opening inventory} - \text{Closing inventory}$	An increase in stock gives a negative figure
Profit before tax	$\text{Total revenue} - \text{Total expenses}$	After taking exceptional and extraordinary items into account
Profit after tax	$\text{PBT} - \text{Tax}$	Bottom line before per share figures
Net subscribed capital	$\text{Called up capital} - \text{Calls-in-arrears} + \text{Forfeited shares}$	Share capital note
Shareholders' funds	$\text{Share capital} + \text{Reserves and surplus} + \text{Share warrants money}$	First major head of the balance sheet
Balance sheet check	$\text{Equity and liabilities} = \text{Total assets}$	Final check of every statement

60-second revision

Topic	Lock this in
Statements	Balance sheet, Statement of Profit and Loss, cash flow statement
Schedule III	Vertical format; accounting standards prevail; rounding off; negative surplus allowed
Exempt from Schedule III	Insurance and banking companies, and companies with a separate Act
Balance sheet heads	Shareholders' funds; Non-current liabilities; Current liabilities; Non-current assets; Current assets
Current test	Operating cycle or twelve months or trading or cash
Always current	Inventories, cash and cash equivalents
Always non-current	Fixed assets, deferred tax
Share capital	Less calls-in-arrears, add forfeited shares; calls-in-advance is a liability
Securities premium	Reserves and surplus
Loose tools	Inventories
Finance costs	Interest only; bank charges in other expenses
Preliminary expenses	Written off in full in the year incurred
Proposed dividend	Notes to Accounts until approved

Where this chapter connects

Previous: Issue and Redemption of Debentures creates the long-term borrowings, discount on issue and debenture redemption reserve that you now place in the balance sheet.
Next: Analysis of Financial Statements takes the statements prepared here and compares them across years.
Class XI link: Financial Statements I introduced the sole trader's version of these statements.

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