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karnataka class 12 commerce Accountancy Preparation of Financial Statements in vertical form

karnataka class 12 commerce Accountancy Preparation of Financial Statements in vertical form

karnataka class 12 commerce Accountancy Preparation of Financial Statements in vertical form

1. Form and Content of Balance Sheet : Balance sheet of a company is prepared and presented in the form prescribed in (Revised) Schedule VI of the Companies Act, 1956. The form prescribed is vertical and is given in Exhibit 3.1.

Every company registered under the Act shall prepare its balance sheet, statement of profit and loss and notes to account thereto in accordance with the manner prescribed in the revised Schedule VI to the Companies Act, 1956 to harmonise the disclosure requirement with the accounting standards and to converge with new reforms. With regard to this, the Ministry of Corporate Affairs (MCA) has prescribed a (Revised) Schedule VI to the Companies Act, 1956 (vide Notification dated 28.02.2011). It is applied to the financial statements prepared for all financial periods beginning on or after April 01, 2011 by the Indian Companies. The revised Schedule VI has introduced many disclosure requirements. It has also done away with several statutory disclosure requirements.

karnataka class 12 commerce Accountancy Preparation of Financial Statements in vertical form

Important Features of Revised Schedule VI

1. It applies to all Indian companies preparing financial statement commencing on or after April 01, 2011.

2. It does not apply to (i) Insurance or Banking Company, (ii) Company for which a form of balance sheet or income statement is specified under any other Act.

3. Accounting standards shall prevail over Schedule VI of the Companies Act, 1956.

4. Disclosure on the face of the financial statements or in the notes are essential and mandatory.

5. Revised Schedule VI has eliminated the concept of ‘Schedule’.

6. Terms in the revised Schedule VI will carry the meaning as defined by the applicable accounting standards.

7. Balance to be maintained between excessive details that may not assist users of financial statements and not providing important information.

8. Current and non-current bifurcation of assets and liabilities is applicable.

9. Rounding off requirements is mandatory (refer box 1).

10. Vertical format for presentation of financial statement is prescribed (refer Exhibit 3.1).

11. Debit balance in the statement of profit and loss to be disclosed as negative figure under the head “Surplus”.

12. Mandatory disclosure for share application money pending allotment.

13. ‘Sundry Debtors’ and ‘Sundry Creditors’ replaced by terms ‘Trade Receivables’ and ‘Trade Payables’

Shareholders fund: Implication of Revised Schedule VI

In (revised) Schedule VI, the shareholders’ funds are sub-classified on the face of the balance sheet.

a) Share Capital

b) Reserves and Surplus

c) Money received against Share Warrants

karnataka class 12 commerce Accountancy Preparation of Financial Statements in vertical form

Meaning of Financial Statements Financial statements are the basic and formal annual reports through which the corporate management communicates financial information to its owners and various other external parties which include investors, tax authorities, government, employees, etc. These normally refer to: (a) the balance sheet (position statement) as at the end of accounting period, and (b) the statement of profit and loss of a company. Now-a-days, the cash flow statement is also taken as an integral component of the financial statements of a company.

karnataka class 12 commerce Accountancy Preparation of Financial Statements in vertical form

Objectives of Financial Statements Financial statements are the basic sources of information to the shareholders and other external parties for understanding the profitability and financial position of any business concern. They provide information about the results of the business concern during a specified period of time in terms of assets and liabilities, which provide the basis for taking decisions. Thus, the primary objective of financial statements is to assist the users in their decision-making. The specific objectives include the following:

1. To provide information about economic resources and obligations of a business: They are prepared to provide adequate, reliable and periodical information about economic resources and obligations of a business firm to investors and other external parties who have limited authority, ability or resources to obtain information.

2. To provide information about the earning capacity of the business: They are to provide useful financial information which can gainfully be utilised to predict, compare and evaluate the business firm’s earning capacity.

3. To provide information about cash flows: They are to provide information useful to investors and creditors for predicting, comparing and evaluating, potential cash flows in terms of amount, timing and related uncertainties.

4. To judge effectiveness of management: They supply information useful for judging management’s ability to utilise the resources of a business effectively.

5. Information about activities of business affecting the society: They have to report the activities of the business organisation affecting the society, which can be determined and described or measured and which are important in its social environment.

6. Disclosing accounting policies: These reports have to provide the significant policies, concepts followed in the process of accounting and changes taken up in them during the year to understand these statements in a better way.

karnataka class 12 commerce Accountancy Preparation of Financial Statements in vertical form

Uses and Importance of Financial Statements

The users of financial statements include management, investors, shareholders, creditors, government, bankers, employees and public at large. Financial statements, provide the necessary information about the performance of the management to these parties interested in the organisation and help in taking appropriate economic decisions. It may be noted that the financial statements constitute an integral part of the annual report of the company in addition to the directors report, auditors report, corporate governance report, and management discussion and analysis.

The various uses and importance of financial statements are as follows:

1. Report on stewardship function: Financial statements report the performance of the management to the shareholders. The gaps between the management performance and ownership expectations can be understood with the help of financial statements.

2. Basis for fiscal policies: The fiscal policies, particularly taxation policies of the government, are related with the financial performance of corporate undertakings. The financial statements provide basic input for industrial, taxation and other economic policies of the government.

3. Basis for granting of credit: Corporate undertakings have to borrow funds from banks and other financial institutions for different purposes. Credit granting institutions take decisions based on the financial performance of the undertakings. Thus, financial statements form the basis for granting of credit.

4. Basis for prospective investors: The investors include both short-term and long-term investors. Their prime considerations in their investment decisions are security and liquidity of their investment with reasonable profitability. Financial statements help the investors to assess longterm and short-term solvency as well as the profitability of the concern.

5. Guide to the value of the investment already made: Shareholders of companies are interested in knowing the status, safety and return on their investment. They may also need information to take decision about continuation or discontinuation of their investment in the business. Financial statements provide information to the shareholders in taking such important decisions.

6. Aids trade associations in helping their members: Trade associations may analyse the financial statements for the purpose of providing service and protection to their members. They may develop standard ratios and design uniform system of accounts.

7. Helps stock exchanges: Financial statements help the stock exchanges to understand the extent of transparency in reporting on financial performance and enables them to call for required information to protect the interest of investors. The financial statements enable the Stock brokers to judge the financial position of different concerns and take decisions about the prices to be quoted.

karnataka class 12 commerce Accountancy Preparation of Financial Statements in vertical form

Limitations of Financial Statements

Though utmost care is taken in the preparation of the financial statements and provide detailed information to the users, they suffer from the following limitations:

1. Do not reflect current situation: Financial statements are prepared on the basis of historical cost. Since the purchasing power of money is changing, the values of assets and liabilities shown in financial statement do not reflect current market situation.

2. Assets may not realise: Accounting is done on the basis of certain conventions. Some of the assets may not realise the stated values, if the liquidation is forced on the company. Assets shown in the balance sheet reflect merely unexpired or unamortised cost.

3. Bias: Financial statements are the outcome of recorded facts, accounting concepts and conventions used and personal judgements made in different situations by the accountants. Hence, bias may be observed in the results, and the financial position depicted in financial statements may not be realistic.

4. Aggregate information: Financial statements show aggregate information but not detailed information. Hence, they may not help the users in decision-making much.

5. Vital information missing: Balance sheet does not disclose information relating to loss of markets, and cessation of agreements, which have vital bearing on the enterprise.

6. No qualitative information: Financial statements contain only monetary information but not qualitative information like industrial relations, industrial climate, labour relations, quality of work, etc.

7. They are only interim reports: Statement of Profit and Loss discloses the profit/loss for a specified period. It does not give an idea about the earning capacity over time similarly, the financial position reflected in the balance sheet is true at that point of time, the likely change on a future date is not depicted.

karnataka class 12 commerce Accountancy Preparation of Financial Statements in vertical form

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karnataka class 12 commerce Accountancy Preparation of Financial Statements in vertical form

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