Take a slow breath before we start. If you opened this chapter because the words Schedule III made your stomach drop a little, you are in exactly the right place, and we are going to move slowly enough that nothing gets left behind. There is no cleverness hiding here. There is a form, the form has a fixed order, and once the order lives in your head, this chapter turns into one of the most generous mark-scoring topics in the whole of Part B.
Here is the picture I want you to carry the whole way through. A Balance Sheet is a photograph. It is taken on one single day — usually 31st March — and it freezes what the company owns and what it owes at that instant. A Statement of Profit and Loss is a video. It runs for twelve months, from 1st April to 31st March, and it shows everything that happened in between: what came in, what went out, what was left over. Photograph, video. Say it once more to yourself. Almost every confusion in this chapter comes from forgetting which of the two you are holding.
In Class 11 you prepared a Trading and Profit and Loss Account and a Balance Sheet for a sole trader, and you were fairly free about the order of items. A company cannot be free like that. A company belongs to thousands of shareholders who never walk into the office, so Parliament stepped in and said: you will present your statements in this shape, with these headings, in this sequence, so that any shareholder anywhere can read them. That instruction is Schedule III to the Companies Act, 2013, and learning it is what this chapter is about.
Do not try to memorise anything on the first read. Read once for the story, once for the shape, and only on the third pass reach for a pen. I will be right here the whole time.
What You’ll Learn
Every stop on the journey — tap any line to jump straight there.
- What Financial Statements Are And Who Reads Them
- The Companies Act 2013 And Schedule III
- Nature And Objectives Of Financial Statements
- Limitations Of Financial Statements
- The Balance Sheet Format: Equity And Liabilities
- Shareholders’ Funds
- Share Application Money Pending Allotment
- Non-Current Liabilities
- Current Liabilities
- The Balance Sheet Format: Assets
- Non-Current Assets
- Current Assets
- Classifying A Tricky Item: The Twelve-Month Test
- The Statement Of Profit And Loss Format
- Revenue From Operations And Other Income
- Expenses And The Change In Inventories Line
- Notes To Accounts And How To Present Them
- Contingent Liabilities And Commitments
- Common Mistakes Students Make
- How Marks Are Awarded In The Board Exam
Your Game Plan
- Learn the skeleton before the flesh. Spend your first sitting only on the six main heads of the Balance Sheet and the seven lines of the Statement of Profit and Loss. Nothing else.
- Write the format from memory, badly, every day for a week. Blank sheet, no peeking, then correct it in red. Speed comes from repetition, not from understanding alone.
- Practise classification in tiny doses. Take ten random items, decide the heading and the sub-heading for each. Ten items a day beats fifty items once.
- Only then attempt a full question. When you can place items confidently, a six-mark Balance Sheet becomes copying, not thinking.
- Check the totals every single time. Total of Equity and Liabilities must equal Total of Assets. If it does not, you have found your own mistake before the examiner did.
Study Notes
What Financial Statements Are And Who Reads Them
Let us begin at the very bottom, assuming you remember nothing. Through the year, a company records thousands of transactions in its books. Every rupee of sale, every salary paid, every machine bought. By 31st March there might be lakhs of entries sitting in ledgers. Nobody outside the company can read lakhs of entries. So the accountant does something kind: he squeezes all of it into two small, readable summaries. Those summaries are the financial statements.
For a company under the Companies Act, 2013, financial statements ordinarily include a Balance Sheet as at the end of the year, a Statement of Profit and Loss for the year, a Cash Flow Statement (where required), and the notes that explain the figures. In our syllabus, this chapter concentrates on the first two, in the form prescribed by Schedule III. The Cash Flow Statement gets a chapter of its own, and ratios get another.
Now, who actually reads these things? This matters more than students expect, because CBSE loves a three-mark question on users of financial statements. Think of it as a small crowd standing outside the company gate, each person waiting for a different answer.
| Who is reading | Internal or external | The question in their head |
|---|---|---|
| Shareholders and investors | External | Is my money safe here, and will it grow? |
| Lenders and banks | External | Will this company be able to repay my loan with interest? |
| Suppliers and trade creditors | External | If I supply on credit for sixty days, will I be paid? |
| Management | Internal | Where did we do well, where did we leak money? |
| Employees and their unions | Internal | Is the company healthy enough for job security and a raise? |
| Government and tax authorities | External | Has the correct tax been computed and paid? |
| Customers | External | Will this supplier still exist to honour my warranty? |
| Researchers and the public | External | How is this industry behaving as a whole? |
Solution. Kalyani is a trade creditor, an external user with a short horizon. She is not interested in whether the company will thrive in ten years; she wants to know whether it can pay a bill in three months. So she looks at (i) Current Assets, especially Cash and Cash Equivalents and Trade Receivables, (ii) Current Liabilities, to see how many other claims are already queued ahead of her, and (iii) the trend in Trade Payables from last year to this year. A large jump in Trade Payables with flat cash would make her ask for advance payment.
Why it works. Every user reads the same two statements but stops at a different line. Learn to ask “what is this person afraid of?” and the answer to a users question writes itself.
The Companies Act 2013 And Schedule III
Imagine a hundred different companies each inventing their own layout. One puts loans at the top, another buries them at the bottom, a third invents a heading called “miscellaneous stuff”. Comparing them would be impossible. So the Companies Act, 2013 attaches a schedule — a kind of official template — that every company must follow. That template is Schedule III.
For our syllabus you need two things from it. Part I gives the form of the Balance Sheet. Part II gives the form of the Statement of Profit and Loss. Both are presented in vertical form — one column running down the page, not the old T-shape with left and right sides. In CBSE practice, the Balance Sheet is required in this prescribed vertical form, and the Statement of Profit and Loss follows the Schedule III format alongside it.
There is a fifth rule about rounding off that is worth a sentence. A company states its figures in a consistent unit — rupees, thousands, lakhs, crores — and once chosen, the unit must be used throughout. In this chapter, wherever I show statements, the amounts are stated in ₹ in lakh, and every column is clearly headed with its year. Copy that discipline. An examiner reading a column with no year and no unit has to guess, and guessing costs you presentation marks.
One more comfort. Schedule III does not ask you to invent anything. It is a filing cabinet with pre-printed labels on the drawers. Your entire job in an exam is to pick up each item from the question and drop it into the correctly labelled drawer, then add up the drawers. That is genuinely all it is.
Solution. Two things are wrong. First, “for the year ended” belongs to the Statement of Profit and Loss, not the Balance Sheet; a Balance Sheet is prepared as at a date. Second, she has not indicated the unit or the two-year columns. The correct heading is:
“Balance Sheet of Ridgeline Ceramics Ltd as at 31st March, 2026”, followed by column heads: Particulars | Note No. | 31-03-2026 (₹ in lakh) | 31-03-2025 (₹ in lakh).
Why it works. The heading is the first thing the examiner reads and it is often worth half a mark on its own. Getting it right also forces your own brain into the correct statement before you write a single figure.
Nature And Objectives Of Financial Statements
Before the formats, let us be honest about what these documents actually are, because the “nature” of financial statements is a favourite short-answer question and most students answer it vaguely.
Financial statements are the end product of the accounting process. And that end product is built out of three ingredients, which is exactly what “nature” means here.
| Ingredient | What it means in plain words | Everyday example |
|---|---|---|
| Recorded facts | Amounts actually written in the books from real transactions, at the price actually paid. | Land bought in 2009 for ₹ 20 lakh still appears at ₹ 20 lakh. |
| Accounting conventions | Agreed habits the profession follows so that everyone behaves the same way. | Inventory valued at cost or net realisable value, whichever is lower. |
| Personal judgements | Honest estimates made by management where certainty is impossible. | Deciding a machine will last eight years, or that 3% of debtors will not pay. |
Notice how the third ingredient quietly softens the whole thing. A Balance Sheet looks arithmetically exact — totals match to the last rupee — but sitting inside it are judgements that a different, equally honest accountant might have made differently. Hold that thought; it becomes the first limitation in the next sub-topic.
Now the objectives. Why does the law force a company to produce these at all?
- To present a true and fair view of the financial position — what the company owns and owes on the closing date. That is the Balance Sheet’s job.
- To present a true and fair view of the financial performance — whether the year produced a profit or a loss, and from where. That is the Statement of Profit and Loss’s job.
- To provide information about earning capacity, so that a reader can judge whether this year’s profit is likely to repeat.
- To provide information useful for judging liquidity and solvency — can the company pay its bills next month, and its loans in five years?
- To help users take economic decisions — buy the share, grant the loan, supply on credit, accept the job.
- To disclose information about the effectiveness of management, since the same resources in different hands produce different results.
- To satisfy statutory requirements, because the Companies Act simply demands it.
Solution. Primarily the objective of providing information useful in judging solvency — the long-term ability to meet obligations. She is also using the statements to take an economic decision (sanction or refuse). She is not chiefly interested in this year’s profit figure, so “financial performance” is secondary here.
Why it works. The clue is the time horizon. Seven years is long, so the answer is solvency. Had she been assessing a ninety-day working-capital facility, the answer would have been liquidity.
Limitations Of Financial Statements
This sub-topic is short, easy and appears with unfair regularity in board papers. Do not skip it because it looks like theory. Six lines of clean writing here can be worth as much as a whole Balance Sheet.
A good way to remember the limitations is to think of what a photograph cannot show you. It cannot show the weather tomorrow. It cannot show whether the smiling people actually like each other. It cannot show the room next door. Financial statements are the same kind of frozen, partial, tidy image.
| Limitation | Explain it like this in the exam |
|---|---|
| Historical in nature | They report what has already happened. A reader wanting to know about the future must infer it, and inference can be wrong. |
| Ignore price level changes | Assets are carried at historical cost. Land bought long ago sits at its old price, so the Balance Sheet understates real worth during inflation. |
| Qualitative factors are ignored | A brilliant research team, a loyal customer base, high staff morale — none of these appear anywhere, because they cannot be measured in rupees. |
| Affected by personal judgement | Depreciation method, useful life, provision for doubtful debts — change any estimate and the profit changes with it. |
| Incomplete / interim in nature | The true profit of a business is known only when it closes down. Annual statements chop a continuing story into arbitrary twelve-month slices. |
| Window dressing is possible | Management can time transactions near the year end so that the statements look healthier than the underlying reality. |
| Different accounting policies reduce comparability | Two identical companies using different depreciation methods will report different profits, and a reader may compare them unfairly. |
Solution. He is not right, but he has spotted something real. The accounts are not wrong — they correctly follow the historical cost basis, so the land is properly carried at ₹ 40 lakh. What he has bumped into is the limitation that financial statements ignore price level changes. The understatement is ₹ 310 lakh − ₹ 40 lakh = ₹ 270 lakh of unrecorded value.
Why it works. The examiner wants you to separate “incorrect” from “incomplete”. The books obey the rules; the rules themselves have a blind spot. Saying both sentences earns full marks.
Solution.
Provision at 2% = ₹ 300 lakh × 2% = ₹ 6 lakh.
Provision at 5% = ₹ 300 lakh × 5% = ₹ 15 lakh.
Increase in provision = ₹ 15 lakh − ₹ 6 lakh = ₹ 9 lakh.
Effect: profit before tax falls by ₹ 9 lakh, and Trade Receivables shown under Current Assets fall from ₹ 294 lakh to ₹ 285 lakh.
Limitation: financial statements are affected by personal judgement.
Why it works. Not one transaction happened. No customer paid or defaulted. Only an opinion changed, and ₹ 9 lakh of reported profit vanished. That single illustration explains the limitation better than any definition.
The Balance Sheet Format: Equity And Liabilities
Look at that diagram until it feels boring. The whole Balance Sheet is two big heads. I. Equity and Liabilities answers “where did the money come from?” and II. Assets answers “where is that money sitting now?”. Because every rupee that came in must be sitting somewhere, the two totals are compelled to be equal. That is not a coincidence you have to remember; it is arithmetic you can rely on.
Under Equity and Liabilities there are exactly four sub-headings, and they run in a fixed order from the most permanent money to the most temporary money. Owners first, because they can never demand their capital back from the company. Then money that is halfway to becoming owners’ money. Then long-term outsiders. Then short-term outsiders.
| Particulars | Note No. | Figures as at 31-03-2026 | Figures as at 31-03-2025 |
|---|---|---|---|
| I. EQUITY AND LIABILITIES | |||
| 1. Shareholders’ Funds | |||
| (a) Share Capital | 1 | ||
| (b) Reserves and Surplus | 2 | ||
| (c) Money Received against Share Warrants | |||
| 2. Share Application Money Pending Allotment | |||
| 3. Non-Current Liabilities | |||
| (a) Long-term Borrowings | 3 | ||
| (b) Deferred Tax Liabilities (Net) | |||
| (c) Other Long-term Liabilities | 4 | ||
| (d) Long-term Provisions | 5 | ||
| 4. Current Liabilities | |||
| (a) Short-term Borrowings | 6 | ||
| (b) Trade Payables | 7 | ||
| (c) Other Current Liabilities | 8 | ||
| (d) Short-term Provisions | 9 | ||
| TOTAL | xxx | xxx |
Solution.
1. Shareholders’ Funds — (a) Share Capital ₹ 500 lakh; (b) Reserves and Surplus (Securities Premium) ₹ 65 lakh → sub-total ₹ 565 lakh
3. Non-Current Liabilities — (a) Long-term Borrowings (10% Debentures) ₹ 200 lakh
4. Current Liabilities — (a) Short-term Borrowings (Bank overdraft) ₹ 25 lakh; (d) Short-term Provisions (Provision for tax) ₹ 40 lakh → sub-total ₹ 65 lakh
Total of Equity and Liabilities = 565 + 200 + 65 = ₹ 830 lakh
Why it works. Notice we did not need to think hard about any single item. Securities Premium is a reserve, debentures are a long-term borrowing, overdraft is repayable on demand so it is short-term, and tax will be paid within the year so it is a short-term provision. The order then follows automatically.
Shareholders’ Funds
This is the owners’ corner of the Balance Sheet. It has three parts, and in Class 12 questions you will almost always meet the first two.
(a) Share Capital. The face value of shares actually issued and subscribed. In the Note you show Authorised, Issued, Subscribed and Fully Paid, Subscribed but Not Fully Paid, and you deduct Calls in Arrears. What appears on the face of the Balance Sheet is a single figure.
(b) Reserves and Surplus. This is everything the company has piled up out of profits or out of premiums, and it is the sub-heading that students most often get wrong. Items that belong here include Capital Reserve, Capital Redemption Reserve, Securities Premium, Debenture Redemption Reserve, Revaluation Reserve, General Reserve, and finally Surplus, i.e. Balance in Statement of Profit and Loss.
(c) Money Received against Share Warrants. Rare in question papers, but it exists, so write it in your format sheet.
Solution.
Step 1 — Share Capital. Both equity and preference capital sit here: 500 + 200 = ₹ 700 lakh.
Step 2 — Reserves and Surplus. 130 + 90 − 46 = ₹ 174 lakh. The debit balance is deducted, shown as (46).
Step 3 — Total. Shareholders’ Funds = 700 + 174 = ₹ 874 lakh.
Why it works. Preference share capital is still share capital — it is not a borrowing, because the company has no unconditional obligation to repay it like a loan. And the accumulated loss reduces what the owners really have left, so it belongs inside their own section as a minus.
Share Application Money Pending Allotment
This little sub-heading confuses people because it stands completely alone, between Shareholders’ Funds and Non-Current Liabilities, with nothing under it. Let me explain why it exists, and then you will never misplace it.
Suppose a company issues shares in February. Applications come in with money attached. By 31st March, the directors have not yet finished allotting the shares. So the money is sitting in the company’s bank account, but the applicants are not shareholders yet — no shares have been allotted to them. They are in a waiting room. Not owners, not lenders. Halfway.
Schedule III therefore gives that waiting room its own line, placed exactly where it belongs logically: after the owners and before the outsiders. On the face of the Balance Sheet it appears as main head 2. Share Application Money Pending Allotment with a single amount.
Solution.
Amount to be refunded = 84 − 60 = ₹ 24 lakh.
Under main head 2. Share Application Money Pending Allotment — ₹ 60 lakh.
Under 4. Current Liabilities → (c) Other Current Liabilities — Share application money refundable ₹ 24 lakh.
Why it works. The test is simply: will this money turn into shares? If yes, it is on its way to becoming capital, so it sits near capital. If it is going back out of the door within twelve months, it is an ordinary short-term debt.
Non-Current Liabilities
A non-current liability is simply a liability that is not current — one the company will not have to settle within twelve months of the reporting date, or within its operating cycle. These are the patient outsiders. Four sub-headings live here.
| Sub-heading | What goes inside |
|---|---|
| (a) Long-term Borrowings | Debentures and bonds; term loans from banks; term loans from other parties; deferred payment liabilities; public deposits; loans from related parties; long-term maturities of finance lease obligations. |
| (b) Deferred Tax Liabilities (Net) | Tax the company will owe in future years because of timing differences between accounting profit and taxable profit. Shown as one net figure, no note needed for our level. |
| (c) Other Long-term Liabilities | Trade payables that fall due after twelve months or after the operating cycle; long-term security deposits received from customers or dealers; other long-term dues that are not borrowings. |
| (d) Long-term Provisions | Provision for employee benefits such as gratuity and leave encashment payable after twelve months; provision for warranty claims extending beyond a year. |
Solution.
Each instalment = 450 ÷ 5 = ₹ 90 lakh.
Due within twelve months of 31-03-2026 = one instalment = ₹ 90 lakh → Current Liabilities → Other Current Liabilities (Current maturities of long-term debt).
Remaining = 450 − 90 = ₹ 360 lakh → Non-Current Liabilities → Long-term Borrowings.
Check: 90 + 360 = 450. The whole loan is accounted for.
Why it works. Classification always looks forward from the reporting date and asks “how much of this must I find cash for in the next twelve months?”. That part is current, whatever the original tenure of the loan was.
Current Liabilities
These are the claims that will come knocking within twelve months, or within the operating cycle if that is longer. Four sub-headings again, and this time each one has a personality worth learning.
| Sub-heading | Typical contents |
|---|---|
| (a) Short-term Borrowings | Bank overdraft; cash credit; loans repayable on demand from banks; short-term loans from related parties; deposits repayable within twelve months. |
| (b) Trade Payables | Sundry creditors for goods and services; bills payable. Only dues arising out of the ordinary purchase of goods or services. |
| (c) Other Current Liabilities | Current maturities of long-term debt; interest accrued but not due; interest accrued and due; unpaid or unclaimed dividend; calls in advance; outstanding expenses such as salaries and rent; income received in advance; share application money refundable; statutory dues payable. |
| (d) Short-term Provisions | Provision for tax; provision for employee benefits payable within twelve months; proposed dividend where it qualifies as a provision under the applicable rules. |
Solution.
(a) Short-term Borrowings = 42 + 68 = ₹ 110 lakh
(b) Trade Payables = 156 + 34 = ₹ 190 lakh
(c) Other Current Liabilities = 9 + 6 + 15 + 12 = ₹ 42 lakh
(d) Short-term Provisions = 55 + 18 = ₹ 73 lakh
Total Current Liabilities = 110 + 190 + 42 + 73 = ₹ 415 lakh
Why it works. Take each item and ask two questions in order: “is it a borrowing?” then “did it arise from buying trading goods or services?” If both answers are no, and it is not an estimate, it lands in Other Current Liabilities. If it is an estimate of an amount not yet exactly known, it is a Provision. Four buckets, two questions.
The Balance Sheet Format: Assets
Cross over to the right-hand branch of the tree. The assets side answers the second question: the money came in, so where is it now? Only two sub-headings here — Non-Current Assets and Current Assets — but each opens into a wide drawer.
| Particulars | Note No. | Figures as at 31-03-2026 | Figures as at 31-03-2025 |
|---|---|---|---|
| II. ASSETS | |||
| 1. Non-Current Assets | |||
| (a) Property, Plant and Equipment and Intangible Assets | |||
| (i) Property, Plant and Equipment (Tangible Assets) | 10 | ||
| (ii) Intangible Assets | 11 | ||
| (iii) Capital Work-in-Progress | |||
| (iv) Intangible Assets under Development | |||
| (b) Non-current Investments | 12 | ||
| (c) Deferred Tax Assets (Net) | |||
| (d) Long-term Loans and Advances | 13 | ||
| (e) Other Non-current Assets | 14 | ||
| 2. Current Assets | |||
| (a) Current Investments | 15 | ||
| (b) Inventories | 16 | ||
| (c) Trade Receivables | 17 | ||
| (d) Cash and Cash Equivalents | 18 | ||
| (e) Short-term Loans and Advances | 19 | ||
| (f) Other Current Assets | 20 | ||
| TOTAL | xxx | xxx |
Solution.
(i) Loose tools → Current Assets → Inventories.
(ii) Goodwill → Non-Current Assets → Property, Plant and Equipment and Intangible Assets → Intangible Assets.
(iii) Building under construction → Non-Current Assets → Capital Work-in-Progress.
(iv) Advance recoverable in cash within six months → Current Assets → Short-term Loans and Advances.
(v) Ten-year government bonds → Non-Current Assets → Non-current Investments.
Why it works. Loose tools surprises everyone — they look like equipment but Schedule III classifies them within Inventories. And a half-built building is not yet a building you can use, so it waits in Capital Work-in-Progress until it is ready.
Non-Current Assets
Non-current assets are the things the business keeps and uses, rather than the things it turns over quickly. Take them one drawer at a time.
Property, Plant and Equipment (Tangible Assets). Things you can touch and that the company uses for more than a year: land, buildings, plant and machinery, furniture and fixtures, vehicles, office equipment. In the Note you show the gross figure and deduct accumulated depreciation to arrive at the net carrying amount. Only the net figure appears on the face of the Balance Sheet.
Intangible Assets. Things of value you cannot touch: goodwill, brands and trademarks, computer software, patents, copyrights, licences, mining rights. Accumulated amortisation is deducted in the Note in exactly the same way depreciation is.
Capital Work-in-Progress. Tangible assets that are being built and are not yet ready for use — a factory shed half-constructed, machinery installed but not commissioned. The moment it is ready for use it moves out of here into Property, Plant and Equipment.
Intangible Assets under Development. The same idea for intangibles — software being written in-house, a patent application still in process.
Non-current Investments. Investments the company intends to hold for more than twelve months: shares of other companies held long term, debentures of other companies, government securities held to maturity, investment property.
Deferred Tax Assets (Net). The mirror image of Deferred Tax Liabilities, arising when the company has paid tax earlier than the accounting profit suggests. It is shown net, and a company shows either a deferred tax asset or a deferred tax liability, not both.
Long-term Loans and Advances. Capital advances paid to suppliers of fixed assets, security deposits paid, loans given to employees recoverable after twelve months.
Other Non-current Assets. Long-term trade receivables, and items such as unamortised share issue expenses that do not fit anywhere else.
Solution.
(i) Property, Plant and Equipment (Tangible)
Land 300
Building 480 − 96 = 384
Plant and machinery 620 − 214 = 406
Sub-total = 300 + 384 + 406 = ₹ 1,090 lakh
(ii) Intangible Assets
Goodwill 120
Patents 64 − 19 = 45
Sub-total = 120 + 45 = ₹ 165 lakh
(iii) Capital Work-in-Progress = ₹ 88 lakh
(iv) Intangible Assets under Development = ₹ 24 lakh
(b) Non-current Investments = ₹ 150 lakh
(d) Long-term Loans and Advances = ₹ 36 lakh
Total Non-Current Assets = 1,090 + 165 + 88 + 24 + 150 + 36 = ₹ 1,553 lakh
Why it works. Notice we kept the half-built shed and the half-written software separate from the finished assets. That is not fussiness — those items earn nothing yet and are not depreciated yet, so the reader deserves to see them apart. Notice also that the security deposit, though it is money the company will get back, is not current, because it comes back after three years.
Current Assets
Current assets are the working parts of the business — the stock that will be sold, the money customers owe, the cash in the bank. They churn. Six sub-headings, in this fixed order.
| Sub-heading | What belongs here | Easy trap to avoid |
|---|---|---|
| (a) Current Investments | Investments intended to be held for twelve months or less, such as units of a liquid mutual fund bought to park surplus cash. | Intention decides, not the nature of the security. |
| (b) Inventories | Raw materials; work-in-progress; finished goods; stock-in-trade; stores and spares; loose tools. | Loose tools and stores and spares live here, not with machinery. |
| (c) Trade Receivables | Sundry debtors and bills receivable arising from the sale of goods or services, net of provision for doubtful debts. | A loan given to a director is not a trade receivable. |
| (d) Cash and Cash Equivalents | Cash in hand; cheques and drafts on hand; balances with banks; short-maturity bank deposits; earmarked balances such as unpaid dividend accounts. | Bank overdraft is not deducted here. |
| (e) Short-term Loans and Advances | Advances to suppliers, advance tax, and loans recoverable within twelve months. | Advance for purchase of machinery is long-term, not here. |
| (f) Other Current Assets | Prepaid expenses, accrued income, interest receivable and anything current that fits nowhere above. | Use it as a last resort, not a first guess. |
Solution.
(a) Current Investments = ₹ 65 lakh
(b) Inventories = 88 + 42 + 130 + 16 + 9 = ₹ 285 lakh
(c) Trade Receivables = (240 − 14) + 38 = 226 + 38 = ₹ 264 lakh
(d) Cash and Cash Equivalents = 74 + 12 + 6 + 40 = ₹ 132 lakh
(e) Short-term Loans and Advances = ₹ 29 lakh
(f) Other Current Assets = 7 + 5 = ₹ 12 lakh
Total Current Assets = 65 + 285 + 264 + 132 + 29 + 12 = ₹ 787 lakh
Why it works. The provision for doubtful debts is deducted from debtors inside the Note, and only the net ₹ 264 lakh reaches the face of the Balance Sheet. The two-month fixed deposit is a cash equivalent because it is so close to maturity that it is practically cash. Had it matured in eighteen months it would have been a Non-current Investment instead.
Classifying A Tricky Item: The Twelve-Month Test
Everything in this chapter finally rests on one decision: is this item current or non-current? Get that right and the heading follows automatically. So let us slow right down here, because this is the sub-topic that separates a five-mark answer from a two-mark one.
First, the phrase operating cycle. It means the time between buying the raw material and finally receiving cash from the customer who bought the finished product. Buy clay → make tiles → store them → sell them on credit → collect the money. For a ceramics factory that whole loop might take four months. For a shop selling bread it might take four days. For a company that ages whisky in barrels it might take three years.
Now the rule. An asset is current if any one of these is true: it is expected to be realised in, or is intended for sale or consumption in, the company’s normal operating cycle; it is held primarily for trading; it is expected to be realised within twelve months of the reporting date; or it is cash or a cash equivalent that is not restricted. Everything else is non-current. A liability is current on a mirror-image test: it is expected to be settled in the normal operating cycle, or is held primarily for trading, or is due to be settled within twelve months, or the company has no unconditional right to defer settlement beyond twelve months.
Solution. The company’s normal operating cycle is roughly 15 months of maturing plus about 3 months of credit, that is about 18 months. The maturing spirit will be realised inside that normal operating cycle. Applying the first limb of the test, it is a current asset, shown under Current Assets → Inventories at ₹ 620 lakh — even though it will not become cash within twelve months.
Why it works. The twelve-month rule is only the fallback. The primary question is whether the item belongs to the ordinary trading loop, and maturing spirit is the whole point of a distillery’s business.
(i) Debentures redeemable on 30th September, 2026 (reporting date 31-03-2026).
(ii) Debentures redeemable on 30th September, 2028.
(iii) Machinery held for sale, expected to be sold in two months.
(iv) Trade receivables of the ordinary business, collectible in eight months.
(v) Provision for gratuity, of which ₹ 12 lakh is payable within the year and ₹ 88 lakh later.
(vi) Deposit with a landlord, refundable at the end of a nine-year lease.
Solution.
(i) Due within twelve months → current → Current Liabilities → Other Current Liabilities (Current maturities of long-term debt).
(ii) Due after twelve months → non-current → Non-Current Liabilities → Long-term Borrowings.
(iii) Held for sale and realisable in two months → current. It is no longer part of Property, Plant and Equipment; show it under Other Current Assets.
(iv) Trade receivables of the ordinary business are current regardless of the eight months → current → Current Assets → Trade Receivables.
(v) Split it. ₹ 12 lakh → Short-term Provisions; ₹ 88 lakh → Long-term Provisions.
(vi) Refundable after nine years → non-current → Non-Current Assets → Long-term Loans and Advances.
Why it works. Item (i) and item (ii) are the same security with the same name. Only the date differs, and the date is everything. Item (v) proves that one balance can be sliced across two headings. Never let the label of an account decide for you — let the timing decide.
The Statement Of Profit And Loss Format
Now the video. The Statement of Profit and Loss runs for twelve months and it is a single downward column — no debit side, no credit side. It has Roman-numbered lines, and getting those Roman numerals in the right order is genuinely worth marks.
| Particulars | Note No. | Year ended 31-03-2026 | Year ended 31-03-2025 |
|---|---|---|---|
| I. Revenue from Operations | 21 | xxx | xxx |
| II. Other Income | 22 | xxx | xxx |
| III. Total Revenue (I + II) | xxx | xxx | |
| IV. Expenses: | |||
| Cost of Materials Consumed | 23 | xxx | xxx |
| Purchases of Stock-in-Trade | xxx | xxx | |
| Changes in Inventories of Finished Goods, Work-in-Progress and Stock-in-Trade | 24 | xxx | xxx |
| Employee Benefits Expense | 25 | xxx | xxx |
| Finance Costs | 26 | xxx | xxx |
| Depreciation and Amortisation Expense | xxx | xxx | |
| Other Expenses | 27 | xxx | xxx |
| Total Expenses | xxx | xxx | |
| V. Profit before Tax (III − IV) | xxx | xxx | |
| VI. Tax Expense | xxx | xxx | |
| VII. Profit (Loss) for the Period (V − VI) | xxx | xxx | |
| VIII. Earnings per Equity Share: Basic and Diluted | xxx | xxx |
Revenue from operations 1,850; Other income 46; Cost of materials consumed 720; Purchases of stock-in-trade 110; Opening inventory of finished goods 180; Closing inventory of finished goods 214; Employee benefits expense 268; Finance costs 58; Depreciation and amortisation 96; Other expenses 218.
Solution — Statement of Profit and Loss for the year ended 31st March, 2026 (₹ in lakh)
I. Revenue from Operations — 1,850
II. Other Income — 46
III. Total Revenue = 1,850 + 46 = 1,896
IV. Expenses:
Cost of Materials Consumed — 720
Purchases of Stock-in-Trade — 110
Changes in Inventories = Opening 180 − Closing 214 = (34)
Employee Benefits Expense — 268
Finance Costs — 58
Depreciation and Amortisation Expense — 96
Other Expenses — 218
Total Expenses = 720 + 110 − 34 + 268 + 58 + 96 + 218 = 1,436
V. Profit before Tax = 1,896 − 1,436 = 460
VI. Tax Expense = 460 × 30% = 138
VII. Profit for the Period = 460 − 138 = 322
Why it works. The one line that trips people is Changes in Inventories. Closing stock is bigger than opening stock, which means the company produced more than it sold, so part of this year’s cost is still sitting on the shelf. That part must be taken out of expenses — hence the negative ₹ 34 lakh. Adding it instead of subtracting it would inflate expenses by ₹ 68 lakh and destroy the whole answer.
Revenue From Operations And Other Income
The first two lines of the statement look simple, and then a question drops in “profit on sale of machinery” and half the class puts it in the wrong place. Let us settle it once.
Revenue from Operations is income from what the company is in the business of doing. For a company that sells goods, it is the sale of products. For a service company, it is the sale of services. It also includes other operating revenues — scrap sales, export incentives, commission earned where that is the trade. Sales are shown net of returns, and the Note shows the split between sale of products, sale of services and other operating revenues.
Other Income is everything else that increased profit but is not the main business: interest income, dividend income, rent received where letting property is not the business, net gain on sale of investments, profit on sale of an asset, and net gain on foreign currency transactions.
Solution.
(A) Ridgeline Ceramics Ltd
Revenue from Operations = sale of tiles 900 + sale of scrap 24 = ₹ 924 lakh (scrap arises from the manufacturing process, so it is an other operating revenue)
Other Income = 18 + 9 + 7 = ₹ 34 lakh
Total Revenue = 924 + 34 = ₹ 958 lakh
(B) Sunehra Finance Ltd
Revenue from Operations = interest on loans 900 + processing fees 24 = ₹ 924 lakh
Other Income = dividend 9 + profit on sale of kiln 7 = ₹ 16 lakh; and interest on fixed deposits 18 would also be revenue from operations if the deposits are part of its lending business, so state your assumption.
Why it works. Same rupees, different labels, because the two companies are in different trades. Where the question does not make the intention obvious, write one line stating your assumption — examiners give credit for a reasoned assumption clearly stated.
Expenses And The Change In Inventories Line
Seven expense heads, and every single expense in the question must land in one of them. There is no eighth box, and there is no “miscellaneous”.
| Expense head | What lands here |
|---|---|
| Cost of Materials Consumed | Opening raw material + purchases of raw material + carriage inwards − closing raw material. Used by manufacturing companies. |
| Purchases of Stock-in-Trade | Goods bought ready-made for resale, by a trading company. |
| Changes in Inventories | Opening inventory − closing inventory of finished goods, work-in-progress and stock-in-trade. May be positive or negative. |
| Employee Benefits Expense | Wages, salaries, bonus, contribution to provident fund, gratuity, staff welfare expenses. |
| Finance Costs | Interest on debentures, term loans, overdraft; discount on issue of debentures written off; other borrowing costs. Bank charges are not finance costs. |
| Depreciation and Amortisation | Depreciation on tangible assets and amortisation of intangible assets, in one combined line. |
| Other Expenses | Everything else: power and fuel, rent, rates and taxes, insurance, repairs, carriage outwards, advertisement, audit fees, bad debts, provision for doubtful debts, loss on sale of assets, bank charges, general office expenses. |
Now the line that causes the most damage. Changes in Inventories is not the closing stock and it is not the opening stock. It is opening minus closing, and the sign tells a story.
Case A: Opening finished goods 210, work-in-progress 60; Closing finished goods 172, work-in-progress 51.
Case B: Opening stock-in-trade 95; Closing stock-in-trade 143.
Solution.
Case A. Opening total = 210 + 60 = 270. Closing total = 172 + 51 = 223.
Changes in Inventories = 270 − 223 = ₹ 47 lakh (positive). Expenses increase by ₹ 47 lakh, because stock was drawn down and sold.
Case B. Changes in Inventories = 95 − 143 = ₹ (48) lakh. Expenses decrease by ₹ 48 lakh, because ₹ 48 lakh of goods bought this year are still unsold.
Why it works. Think of a shopkeeper. If he started the year with more goods than he ended with, he has consumed his own shelves — that consumption is a cost of this year. If he ended with more than he started with, some of what he bought is still on the shelf, so it is not yet a cost.
Solution.
Net purchases = 690 − 14 = 676
Cost of Materials Consumed = 128 + 676 + 26 − 155
= 128 + 676 = 804; 804 + 26 = 830; 830 − 155 = ₹ 675 lakh
Why it works. Carriage inwards is a cost of bringing the material into the factory, so it belongs to the material, not to Other Expenses. Purchase returns reduce what you actually bought. And the closing stock is material you have not used yet, so it is taken out. Note that this raw-material calculation is entirely separate from the Changes in Inventories line.
Notes To Accounts And How To Present Them
The face of the Balance Sheet is deliberately bare. One line says “Reserves and Surplus — 570” and tells you nothing about what those reserves are. That detail lives in the Notes to Accounts, numbered and cross-referenced from the Note No. column. Notes are not optional decoration; in a six-mark question they usually carry two or three of the marks.
Three habits will make your notes look professional. First, number them in the order the items appear on the face of the statement. Second, give every note a heading that repeats the line item exactly. Third, show both years inside the note, just as you do on the face.
Now let us put the entire chapter together in one long worked answer. Take your time with this one. It is exactly the shape of a full-length board question, and everything below has been checked so that both years balance.
Balance Sheet of Ridgeline Ceramics Ltd as at 31st March, 2026 — (₹ in lakh)
| Particulars | Note No. | 31-03-2026 | 31-03-2025 |
|---|---|---|---|
| I. EQUITY AND LIABILITIES | |||
| 1. Shareholders’ Funds | |||
| (a) Share Capital | 1 | 900 | 700 |
| (b) Reserves and Surplus | 2 | 570 | 322 |
| 2. Share Application Money Pending Allotment | 60 | — | |
| 3. Non-Current Liabilities | |||
| (a) Long-term Borrowings | 3 | 428 | 610 |
| (b) Deferred Tax Liabilities (Net) | 74 | 66 | |
| (c) Long-term Provisions | 4 | 96 | 82 |
| 4. Current Liabilities | |||
| (a) Short-term Borrowings | 5 | 180 | 205 |
| (b) Trade Payables | 6 | 268 | 231 |
| (c) Other Current Liabilities | 7 | 112 | 98 |
| (d) Short-term Provisions | 8 | 94 | 76 |
| TOTAL | 2,782 | 2,390 | |
| II. ASSETS | |||
| 1. Non-Current Assets | |||
| (a) Property, Plant and Equipment and Intangible Assets | |||
| (i) Property, Plant and Equipment | 9 | 1,180 | 1,042 |
| (ii) Intangible Assets | 10 | 96 | 110 |
| (iii) Capital Work-in-Progress | 140 | 65 | |
| (b) Non-current Investments | 210 | 210 | |
| (c) Long-term Loans and Advances | 58 | 44 | |
| (d) Other Non-current Assets | 26 | 19 | |
| 2. Current Assets | |||
| (a) Current Investments | 90 | 55 | |
| (b) Inventories | 11 | 386 | 351 |
| (c) Trade Receivables | 12 | 322 | 288 |
| (d) Cash and Cash Equivalents | 13 | 210 | 141 |
| (e) Short-term Loans and Advances | 46 | 38 | |
| (f) Other Current Assets | 18 | 27 | |
| TOTAL | 2,782 | 2,390 |
Notes to Accounts — (₹ in lakh). Selected notes are reproduced below so that you can see the style; the remaining note numbers shown on the face of the Balance Sheet would be completed in exactly the same way.
| Note | Particulars | 31-03-2026 | 31-03-2025 |
|---|---|---|---|
| 1 | Share Capital Authorised: 1,20,00,000 equity shares of ₹ 10 each Issued, subscribed and fully paid up: 90,00,000 equity shares of ₹ 10 each (previous year 70,00,000 shares) | 1,200 900 | 1,200 700 |
| 2 | Reserves and Surplus Securities Premium General Reserve Surplus, i.e. Balance in Statement of Profit and Loss Total | 210 150 210 570 | 120 120 82 322 |
| 3 | Long-term Borrowings 10% Debentures Term loan from bank Total | 300 128 428 | 400 210 610 |
| 6 | Trade Payables Sundry creditors Bills payable Total | 214 54 268 | 186 45 231 |
| 11 | Inventories Raw material Work-in-progress Finished goods Stores and spares Loose tools Total | 118 47 196 19 6 386 | 104 41 178 21 7 351 |
| 13 | Cash and Cash Equivalents Balances with banks Cheques and drafts on hand Cash in hand Bank deposits with maturity of less than three months Total | 146 21 8 35 210 | 96 14 6 25 141 |
Statement of Profit and Loss of Ridgeline Ceramics Ltd for the year ended 31st March, 2026
2025-26 2024-25
I. Revenue from Operations — 3,120 / 2,740
II. Other Income — 84 / 61
III. Total Revenue — 3,204 / 2,801
IV. Expenses:
Cost of Materials Consumed — 1,742 / 1,560
Changes in Inventories of Finished Goods and Work-in-Progress — (24) / 22
Employee Benefits Expense — 448 / 402
Finance Costs — 92 / 104
Depreciation and Amortisation Expense — 138 / 126
Other Expenses — 368 / 337
Total Expenses — 2,764 / 2,551
V. Profit before Tax — 440 / 250
VI. Tax Expense — 132 / 75
VII. Profit for the Period — 308 / 175
Workings and checks.
Changes in Inventories = opening (178 + 41 = 219) − closing (196 + 47 = 243) = (24), taken from Note 11 of the Balance Sheet.
Total Expenses 2025-26 = 1,742 − 24 + 448 + 92 + 138 + 368 = 2,764.
Profit before Tax = 3,204 − 2,764 = 440. Tax = 440 × 30% = 132. Profit = 440 − 132 = 308.
Surplus check: opening Surplus 82 + profit 308 − transfer to General Reserve 30 − dividend paid 150 = 210, which is the Surplus figure in Note 2. The two statements agree.
Earnings per equity share, computed on the 90 lakh shares outstanding at the year end, = 308 ÷ 90 = ₹ 3.42 (previous year 175 ÷ 70 = ₹ 2.50).
Why it works. This is the moment the whole chapter clicks. The video ends with a profit of ₹ 308 lakh, and that profit walks straight into the photograph and sits inside Reserves and Surplus. The two statements are not two separate exercises; they are two views of one story. If your profit does not reconcile with the movement in Surplus, something is wrong somewhere — and finding it yourself is worth more than any answer key.
Contingent Liabilities And Commitments
Here is a genuinely elegant idea, and it is worth understanding rather than memorising. Some obligations are real but not certain. A customer has sued the company for ₹ 90 lakh and the case is still in court. The company might have to pay, or might not. It depends on a future event nobody controls.
You cannot record such an amount as a liability, because it may never arise, and recording it would understate the company’s position. But you cannot ignore it either, because a shareholder deserves to know that ₹ 90 lakh of trouble is hanging in the air. Schedule III solves this neatly: such items are not shown in the Balance Sheet totals at all. They are disclosed in the Notes to Accounts under the heading Contingent Liabilities and Commitments (to the extent not provided for).
| Category | Typical items |
|---|---|
| (i) Contingent Liabilities | Claims against the company not acknowledged as debts; guarantees given on behalf of others; disputed tax demands; bills discounted with banks that are not yet matured. |
| (ii) Commitments | Estimated amount of contracts remaining to be executed on capital account and not provided for; uncalled liability on partly paid shares held as investments; other commitments. |
(i) A supplier has filed a claim for ₹ 90; the company’s lawyers think it is unlikely to succeed.
(ii) Income tax demand of ₹ 55 disputed in appeal; the company believes it will probably have to pay ₹ 55.
(iii) Contracts placed for new kilns, remaining to be executed, ₹ 240.
(iv) Guarantee given to a bank on behalf of an associate company, ₹ 120.
Solution.
(i) Outflow only possible, not probable → Contingent Liability, disclosed in Notes at ₹ 90. Not added anywhere in the Balance Sheet.
(ii) Outflow probable and measurable → create a provision of ₹ 55 and show it under Current Liabilities → Short-term Provisions. It does enter the totals.
(iii) → Commitment, disclosed in Notes at ₹ 240 as estimated amount of contracts remaining to be executed on capital account.
(iv) → Contingent Liability, disclosed at ₹ 120. The company pays only if the associate defaults.
Why it works. Only item (ii) changes any total, because only item (ii) is probable. This is why a Balance Sheet can balance perfectly and still be sitting next to ₹ 450 lakh of disclosed risk. Reading only the totals is not reading the accounts.
Common Mistakes Students Make
I have gathered here the errors that cost the most marks, in the order I see them most often. Read this list the night before the exam. It is the cheapest revision in the chapter.
| The mistake | What to do instead |
|---|---|
| Showing a debit balance of the Statement of Profit and Loss on the assets side | Deduct it inside Reserves and Surplus, in brackets, on the Equity and Liabilities side. |
| Deducting bank overdraft from Cash and Cash Equivalents | Show it in full under Current Liabilities → Short-term Borrowings. |
| Putting outstanding salaries or unpaid dividend into Trade Payables | Both belong to Other Current Liabilities. Trade Payables is only for goods and services bought in the ordinary course of business. |
| Writing a single line called “Fixed Assets” | Write Property, Plant and Equipment and Intangible Assets, then show tangibles, intangibles, CWIP and intangibles under development separately. |
| Adding Changes in Inventories instead of subtracting when closing stock is higher | Always compute opening minus closing. A negative answer is normal and is shown in brackets. |
| Treating preference share capital as a borrowing | It is part of Share Capital under Shareholders’ Funds. |
| Forgetting the previous year column | Schedule III requires comparative figures. Draw four columns before you begin. |
| Ignoring current maturities of long-term debt | Split the loan. The instalment due within twelve months goes to Other Current Liabilities. |
| Including contingent liabilities in the totals | Disclose them separately under Contingent Liabilities and Commitments, outside the totals. |
| Showing gross block and accumulated depreciation on the face of the Balance Sheet | Do that deduction in the Note; put only the net carrying amount on the face. |
| Preparing a Trading Account and showing Gross Profit | A company’s Statement of Profit and Loss has no Trading section. Go straight to the seven expense heads. |
| Skipping the heading, unit and year labels | Always write “as at” or “for the year ended”, the unit such as ₹ in lakh, and both year headings. |
How Marks Are Awarded In The Board Exam
This chapter sits in Unit 3 of Part B, Analysis of Financial Statements, which carries 12 marks in the theory paper. Unit 4, Cash Flow Statement, carries 8 marks and is a separate chapter. Accounting ratios, which also live in Unit 3, are dealt with in their own chapter too. If the earlier units still feel shaky, revise Accounting for Partnership Firms: Fundamentals before diving in. What follows is about how the marks in this chapter are handed out.
| Question type | Usual weight | Where the marks sit |
|---|---|---|
| Name the sub-heading under which an item appears | 1 mark | The exact sub-heading name. Half answers such as “current liability” without the sub-heading may not score. |
| Classify three or four items under main head and sub-heading | 3 marks | Usually one mark for each correct pair of main head plus sub-heading. |
| Prepare an extract or a Note to Accounts | 3 to 4 marks | Correct heading, correct grouping of items, correct sub-total. |
| Prepare a full Statement of Profit and Loss | 4 to 6 marks | Roman numeral sequence, correct expense heads, correct sign on Changes in Inventories, correct tax and final profit. |
| Prepare a full Balance Sheet with Notes | 6 marks | Format and order, correct classification of each item, the two totals agreeing, and the Notes. |
| Theory: objectives, nature, limitations, users | 3 to 4 marks | One mark per point, usually requiring a named point plus a sentence of explanation. |
Full-mark answer.
(i) Unclaimed dividend — Main head: Current Liabilities; Sub-heading: Other Current Liabilities.
(ii) Capital advance for machinery — Main head: Non-Current Assets; Sub-heading: Long-term Loans and Advances.
(iii) Stores and spares — Main head: Current Assets; Sub-heading: Inventories.
Why it works. Notice the shape of the answer: item, main head, sub-heading, each labelled. Three marks, three lines, no prose. The capital advance is the one students lose — it feels like an advance and therefore current, but it is money paid towards a fixed asset, so it waits with the non-current family.
Practice Worksheet
Ten questions, written fresh for you. Attempt each one on paper before you open the answer — the reveal is only useful after you have committed to something. All amounts are ₹ in lakh unless stated. When you have finished here, attempt the CBSE Class 12 Accountancy Sample Paper 2025-26 under exam timing to see how this chapter sits in the full paper.
Q1. Under which main head and sub-heading will each of these appear: (i) Loose tools; (ii) Interest accrued but not due on debentures; (iii) Computer software; (iv) Advance tax paid? (2 marks)
(i) Loose tools — Current Assets → Inventories.
(ii) Interest accrued but not due on debentures — Current Liabilities → Other Current Liabilities.
(iii) Computer software — Non-Current Assets → Property, Plant and Equipment and Intangible Assets → Intangible Assets.
(iv) Advance tax paid — Current Assets → Short-term Loans and Advances.
Note. Interest is never merged into the borrowing itself, and loose tools never travel with machinery.
Q2. State the four sub-headings under Non-Current Liabilities and the four under Current Liabilities, in the order prescribed by Schedule III. (2 marks)
Non-Current Liabilities: (a) Long-term Borrowings; (b) Deferred Tax Liabilities (Net); (c) Other Long-term Liabilities; (d) Long-term Provisions.
Current Liabilities: (a) Short-term Borrowings; (b) Trade Payables; (c) Other Current Liabilities; (d) Short-term Provisions.
Note. The order itself carries marks. Borrowings first, provisions last, on both sides.
Q3. Compute Shareholders’ Funds: Equity Share Capital 640; 8% Preference Share Capital 160; Securities Premium 96; Capital Reserve 40; General Reserve 74; Surplus, i.e. Balance in Statement of Profit and Loss (Dr.) 58. (3 marks)
Share Capital = 640 + 160 = 800 (preference capital is share capital, not a borrowing).
Reserves and Surplus = 96 + 40 + 74 − 58 = 152. The debit balance is deducted and shown as (58).
Shareholders’ Funds = 800 + 152 = ₹ 952 lakh.
Check. 96 + 40 = 136; 136 + 74 = 210; 210 − 58 = 152. And 800 + 152 = 952.
Q4. A company’s Balance Sheet is as at 31st March, 2026. Classify each as current or non-current and give the sub-heading: (i) 9% Debentures redeemable on 31st December, 2026; (ii) Security deposit given to a landlord, refundable after six years; (iii) Provision for warranty, of which 18 is expected to be used within a year and 42 later. (3 marks)
(i) Redeemable within twelve months of 31-03-2026, so current → Current Liabilities → Other Current Liabilities (Current maturities of long-term debt).
(ii) Refundable after six years, so non-current → Non-Current Assets → Long-term Loans and Advances.
(iii) Split it: 18 → Current Liabilities → Short-term Provisions; 42 → Non-Current Liabilities → Long-term Provisions. Total 18 + 42 = 60, fully accounted for.
Note. The twelve-month window here runs from 31-03-2026 to 31-03-2027, so 31st December, 2026 falls inside it.
Q5. Give any four limitations of financial statements, each with a one-line explanation. (4 marks)
Historical in nature — they report past transactions, so a reader wanting to know the future must guess.
Price level changes ignored — assets are carried at historical cost, so during inflation the Balance Sheet understates real values.
Qualitative factors ignored — skilled staff, brand loyalty and management quality cannot be measured in rupees and so never appear.
Affected by personal judgement — depreciation methods and provisions rest on estimates, and a different estimate produces a different profit.
Window dressing possible — transactions can be timed around the year end to make the position look better than it is.
Note. Bold heading plus one sentence. Four done properly beats eight listed carelessly.
Q6. Prepare the Current Liabilities portion of the Balance Sheet from: Bank overdraft 38; Sundry creditors 122; Bills payable 26; Interest accrued and due on borrowings 7; Unclaimed dividend 4; Outstanding wages 11; Calls-in-advance 9; Provision for tax 46; Provision for warranty payable within one year 13. (4 marks)
(a) Short-term Borrowings (bank overdraft) = 38
(b) Trade Payables = 122 + 26 = 148
(c) Other Current Liabilities = 7 + 4 + 11 + 9 = 31
(d) Short-term Provisions = 46 + 13 = 59
Total Current Liabilities = 38 + 148 + 31 + 59 = ₹ 276 lakh
Check. 38 + 148 = 186; 186 + 31 = 217; 217 + 59 = 276. Every one of the nine items has been used exactly once.
Q7. Where would each of these appear in the Statement of Profit and Loss of a furniture manufacturer: (i) Carriage inwards on timber; (ii) Carriage outwards; (iii) Interest on bank overdraft; (iv) Bank charges; (v) Profit on sale of an old lathe? (3 marks)
(i) Carriage inwards on timber → part of Cost of Materials Consumed.
(ii) Carriage outwards → Other Expenses.
(iii) Interest on bank overdraft → Finance Costs.
(iv) Bank charges → Other Expenses (a service charge, not a cost of borrowing).
(v) Profit on sale of an old lathe → Other Income (selling machinery is not the furniture business).
Note. Items (iii) and (iv) both mention a bank and belong in different places. Read what the payment is for, not who it is paid to.
Q8. Prepare the Statement of Profit and Loss of Larkspur Foods Ltd for the year ended 31st March, 2026: Revenue from operations 1,240; Other income 38; Cost of materials consumed 546; Purchases of stock-in-trade 62; Opening inventory of finished goods 96; Closing inventory of finished goods 118; Employee benefits expense 196; Finance costs 34; Depreciation and amortisation 58; Other expenses 134. Tax at 30% of profit before tax. (6 marks)
I. Revenue from Operations — 1,240
II. Other Income — 38
III. Total Revenue = 1,240 + 38 = 1,278
IV. Expenses:
Cost of Materials Consumed — 546
Purchases of Stock-in-Trade — 62
Changes in Inventories = 96 − 118 = (22)
Employee Benefits Expense — 196
Finance Costs — 34
Depreciation and Amortisation Expense — 58
Other Expenses — 134
Total Expenses = 546 + 62 − 22 + 196 + 34 + 58 + 134 = 1,008
V. Profit before Tax = 1,278 − 1,008 = 270
VI. Tax Expense = 270 × 30% = 81
VII. Profit for the Period = 270 − 81 = 189
Check. 546 + 62 = 608; 608 − 22 = 586; 586 + 196 = 782; 782 + 34 = 816; 816 + 58 = 874; 874 + 134 = 1,008. Closing stock exceeds opening stock, so the inventory line is negative.
Q9. Prepare the Balance Sheet of Windmere Papers Ltd as at 31st March, 2026 in the prescribed form: Equity share capital 500; Reserves and surplus 186; Long-term borrowings 240; Deferred tax liabilities (net) 34; Long-term provisions 40; Short-term borrowings 70; Trade payables 128; Other current liabilities 36; Short-term provisions 52; Property, plant and equipment 620; Intangible assets 54; Capital work-in-progress 40; Non-current investments 90; Long-term loans and advances 26; Current investments 35; Inventories 180; Trade receivables 148; Cash and cash equivalents 78; Short-term loans and advances 10; Other current assets 5. (6 marks)
I. EQUITY AND LIABILITIES
1. Shareholders’ Funds: (a) Share Capital 500; (b) Reserves and Surplus 186 → 686
3. Non-Current Liabilities: (a) Long-term Borrowings 240; (b) Deferred Tax Liabilities (Net) 34; (d) Long-term Provisions 40 → 314
4. Current Liabilities: (a) Short-term Borrowings 70; (b) Trade Payables 128; (c) Other Current Liabilities 36; (d) Short-term Provisions 52 → 286
TOTAL = 686 + 314 + 286 = 1,286
II. ASSETS
1. Non-Current Assets: PPE 620; Intangible Assets 54; Capital Work-in-Progress 40; Non-current Investments 90; Long-term Loans and Advances 26 → 830
2. Current Assets: Current Investments 35; Inventories 180; Trade Receivables 148; Cash and Cash Equivalents 78; Short-term Loans and Advances 10; Other Current Assets 5 → 456
TOTAL = 830 + 456 = 1,286
Check. Total Equity and Liabilities 1,286 = Total Assets 1,286. The Balance Sheet balances, so the classification is internally consistent.
Q10. Compute Changes in Inventories and state its effect on Total Expenses: Opening finished goods 142; Opening work-in-progress 58; Closing finished goods 118; Closing work-in-progress 71. Also state how you would treat opening raw material of 90 and closing raw material of 84. (3 marks)
Opening inventory of finished goods and work-in-progress = 142 + 58 = 200
Closing inventory of finished goods and work-in-progress = 118 + 71 = 189
Changes in Inventories = 200 − 189 = ₹ 11 lakh (positive)
Effect: Total Expenses increase by ₹ 11 lakh, because stock has been drawn down and sold during the year.
Raw material. Raw material does not enter this line at all. Opening 90 and closing 84 are used inside Cost of Materials Consumed: opening raw material 90 + purchases + carriage inwards − closing raw material 84.
Note. This is the single most common trap in the chapter. Three inventories go into the Changes line — finished goods, work-in-progress and stock-in-trade — and raw material is not one of them.
One Question Better Than Yesterday
You have just read a very long chapter, and if parts of it are still blurry, that is completely normal. Nobody absorbs Schedule III in one sitting. What matters is the shape of tomorrow, not the shape of today.
So here is the only instruction I want to leave you with. Tomorrow, do not attempt the whole chapter again. Attempt one question more than you managed today. If you classified five items correctly today, classify six tomorrow. If you wrote the Equity and Liabilities side from memory today, add the Assets side tomorrow. If you completed one full Balance Sheet today, complete one full Balance Sheet tomorrow and get the Notes right as well.
This is kaizen — improvement so small that it is impossible to refuse. One extra question a day is thirty extra questions a month, and thirty worked questions is the difference between hoping the format comes back to you in the exam hall and simply knowing that it will. Do not move on from this chapter until writing the two formats feels as ordinary as writing your own address. And when it does, walk on to the Cash Flow Statement and to Accounting Ratios with the quiet confidence of someone who already knows where every figure lives.
You are doing better than you think. See you in the next chapter.