Final Accounts of Companies under Schedule III

Understand Final Accounts of Companies under Schedule III

Key rules to remember

Total income

Total income = Revenue from operations + Other income

Revenue from operations is shown net of what the question says to net off, such as returns.

Total expenses

Total expenses = Cost of materials consumed + Purchases of stock-in-trade + Changes in inventories + Employee benefit expense + Finance costs + Depreciation and amortisation + Other expenses

Changes in inventories = Opening stock − Closing stock of finished goods and work-in-progress. A result that is negative reduces expenses.

Profit before tax

Profit before tax = Total income − Total expenses

Exceptional items, if any, are shown before this figure.

Profit for the period

Profit for the period = Profit before tax − Tax expense

Tax expense includes current tax and deferred tax if the question gives it.

Surplus carried to Balance Sheet

Closing balance in surplus = Opening balance + Profit for the period − Transfers to reserves − Dividends declared and approved

Shown under Reserves and Surplus as Surplus in the Statement of Profit and Loss. Under AS 4 (revised), a dividend proposed or declared after the balance sheet date is not a liability at that date and is disclosed in the notes. Follow the question's instruction if it says otherwise.

Current classification test

Current if realised or settled within the operating cycle or within 12 months of the reporting date

Everything else is non-current.

How to solve Final Accounts of Companies under Schedule III questions

1. 1Read the adjustments first and mark each trial balance item they touch. Note the two effects of each adjustment: profit statement and Balance Sheet.
2. 2Prepare working notes: closing stock, depreciation, outstanding and prepaid expenses, provision for doubtful debts, tax provision and any transfer to reserve.
3. 3Draw the Statement of Profit and Loss in Schedule III format. Show Revenue from operations, Other income, each expense head, Profit before tax, Tax and Profit for the period.
4. 4Carry the profit to Surplus: add the opening balance, deduct transfers and dividends you are told to record, and find the closing surplus.
5. 5Draw the Balance Sheet in Schedule III format. List Equity (share capital, reserves and surplus), then non-current and current liabilities, then non-current and current assets.
6. 6Apply every adjustment to the Balance Sheet: net depreciation against assets, outstanding expenses in current liabilities, prepaid expenses in current assets, closing stock in inventories.
7. 7Check that Equity and Liabilities equal Total Assets. If not, find the item posted only once.
8. 8Attach short notes for share capital, reserves and any figure that combines several items.

Quickest way: Trial balance tick-and-place method

Common mistakes in Final Accounts of Companies under Schedule III

• Showing the Balance Sheet in the old horizontal style or the Profit and Loss in T-form.

  Students carry over habits from sole proprietor accounts.

  Fix: For companies always use the vertical Schedule III format with the correct headings, and remember that the question is often marked on format.

• Classifying items wrongly between current and non-current.

  Students go by the name of the item rather than the time it is due.

  Fix: Apply the twelve month or operating cycle test. Debentures repayable after one year are non-current; the portion due within a year goes to current liabilities.

• Showing dividends and transfers to reserves in the Statement of Profit and Loss as expenses.

  Older formats had an appropriation section.

  Fix: Schedule III does not use an appropriation section in the Statement of Profit and Loss. Show them as movements in Surplus within Reserves and Surplus.

• Showing depreciation in the Balance Sheet as a separate liability or ignoring it on assets.

  Students charge the expense but forget the effect on the asset.

  Fix: Deduct accumulated depreciation from the asset, and show net amounts under Property, Plant and Equipment.

• Treating the entire opening and closing stock as part of Cost of materials consumed.

  The expense heads look similar.

  Fix: Use Purchases of stock-in-trade for traded goods, and Changes in inventories for finished goods and work-in-progress. Raw material stock goes into the cost of materials consumed working.

• Forgetting the effect of tax provision on both the profit statement and the Balance Sheet.

  Tax is mentioned late in the adjustments.

  Fix: Deduct tax in the Statement of Profit and Loss and show the provision under Short-term provisions in current liabilities.

Worked examples