Understanding Financial Statements of a Joint Stock Company as per the Companies Act 2013

What is a Joint Stock Company (JSC)?

A Joint Stock Company (JSC) is a type of business structure where ownership is represented by shares. These shares are traded on the stock market.

Key Features:

• Limited Liability: Shareholders of a JSC have limited liability. This means their financial responsibility is restricted to the amount they haven't paid on the shares they own.
• Governing Act: The financial reporting of JSCs in India is governed by the Companies Act, 2013.
• Mandated Financial Statements: The Act requires JSCs to prepare specific financial statements. These statements provide a clear view of the company's financial status and performance.

Required Financial Statements:

Under the Companies Act, 2013, a JSC must prepare the following financial statements:

1. Balance Sheet: A snapshot of the company's assets, liabilities, and equity at a specific point in time.
2. Profit and Loss Account (also known as Income Statement): Shows the company's revenues, expenses, and profit or loss over a specific period.
3. Cash Flow Statement: Tracks the movement of cash into and out of the company during a specific period.
4. Notes to Accounts: These provide additional information and explanations to clarify the figures presented in the other financial statements.

Compliance Requirements:

These financial statements must be prepared following:

• The Provisions of the Companies Act, 2013: The Act sets out the legal framework for financial reporting.
• Generally Accepted Accounting Principles (GAAP): These are a set of rules and guidelines for financial accounting.
• Accounting Standards prescribed by the Institute of Chartered Accountants of India (ICAI): The ICAI is responsible for developing and maintaining accounting standards in India.

1. Balance Sheet:

Definition:

The Balance Sheet is a financial statement that provides a snapshot of a company's financial position at a specific point in time. It outlines what the company owns (assets), what it owes (liabilities), and the net worth of the business (equity).

Structure:

According to the Schedule III of the Companies Act, 2013, the balance sheet is divided into two main sections:

• Equity and Liabilities:

  • This section details the owner's equity, which is the residual interest in the company's assets after deducting liabilities.
  • It includes non-current liabilities, which are long-term obligations, such as long-term debt and deferred tax liabilities.
  • It also lists current liabilities, which are short-term obligations, such as short-term debts, accounts payable.
  • Additionally, it includes provisions for future expenses.

• Assets:

  • This section lists non-current assets which are not expected to be converted into cash within one year, such as property, plant, equipment, and long-term investments.
  • It also includes current assets which are expected to be converted into cash within one year, such as cash, receivables, and inventories.

Basic Accounting Equation:

The core principle of the balance sheet is represented by the following accounting equation:

Assets = Liabilities + Shareholders' Equity

This equation demonstrates that a company's assets are funded by either liabilities (obligations to creditors) or shareholders' equity (the owners' investment and retained earnings).

Example

Balance Sheet as of [Date]

Particulars	Amount (₹)
Equity and Liabilities
Share Capital	10,00,000
Reserves and Surplus	5,00,000
Long-term Borrowings	3,00,000
Short-term Borrowings	2,00,000
Total Liabilities	20,00,000
Assets
Fixed Assets (Tangible & Intangible)	8,00,000
Current Assets (Cash, Receivables)	12,00,000
Total Assets	20,00,000

2. Profit and Loss Account:

Definition:

The Profit and Loss Account, also known as the Income Statement, is a financial statement that illustrates a company's profitability over a specific period, typically a financial year. It encompasses all revenues, gains, expenses, and losses incurred during that period. The ultimate goal of this statement is to determine the net profit or loss.

Components:

According to the Companies Act, 2013, the profit and loss account includes:

• Income:

  • Revenue from operations which is the core revenue generated by the business's activities.
  • Other income, such as interest income, and any gains.

• Expenditures:

  • Operating expenses, such as the cost of goods sold.
  • Administrative expenses.
  • Selling expenses.
  • Financial costs, like interest on loans,
  • Other expenses.

• Net Profit/Loss:

  • The difference between total revenue and total expenses. This indicates whether the company has earned a profit or incurred a loss.
  • The net profit or loss is transferred to the balance sheet under "reserves and surplus".

Example of Profit and Loss Account:

Particulars	Amount (₹)
Revenue
Sales Revenue	20,00,000
Other Income	2,00,000
Total Revenue	22,00,000
Expenditure
Cost of Goods Sold	8,00,000
Administrative Expenses	3,00,000
Selling Expenses	2,00,000
Finance Costs	1,00,000
Total Expenditure	14,00,000
Net Profit Before Tax	8,00,000
Provision for Tax	2,00,000
Net Profit After Tax	6,00,000

3. Cash Flow Statement:

Definition:

The Cash Flow Statement provides a comprehensive view of a company's cash and cash equivalents' inflows and outflows. It categorizes these cash movements based on their origin: operating, investing, and financing activities. This statement is crucial for assessing the company's liquidity (ability to meet short-term obligations), solvency (ability to meet long-term obligations), and overall cash position, which are vital for informed decision-making.

Categorization of Cash Flows:

Under the Companies Act, 2013, the Cash Flow Statement is divided into three main categories:

• Operating Activities:

  • These cash flows result from the core business operations of the company.
  • They include cash receipts from customers and cash payments to suppliers for goods or services, and other operating expenses.

• Investing Activities:

  • These cash flows relate to the purchase and sale of long-term assets, such as property, plant, and equipment.
  • They include cash inflows from the sale of investments and cash outflows for the purchase of new assets.

• Financing Activities:

  • These cash flows involve activities related to borrowing, debt repayments, and transactions concerning the company's equity.
  • They include cash inflows from issuing shares or taking out loans, and cash outflows for repaying debt and distributing dividends to shareholders.

Example of Cash Flow Statement:

Particulars	Amount (₹)
Operating Activities
Net Profit	6,00,000
Depreciation	1,00,000
Changes in Working Capital	(1,00,000)
Net Cash from Operating Activities	6,00,000
Investing Activities
Purchase of Fixed Assets	(2,00,000)
Net Cash from Investing Activities	(2,00,000)
Financing Activities
Proceeds from Borrowings	3,00,000
Repayment of Borrowings	(1,00,000)
Net Cash from Financing Activities	2,00,000
Net Increase in Cash and Cash Equivalents	6,00,000

4. Notes to Accounts:

Definition:

The Notes to Accounts section is a vital component of financial statements. It offers detailed explanations and breakdowns of the figures presented in the main financial statements. This additional information helps users gain a deeper understanding of the underlying assumptions, methodologies, and other factors that influence the financial numbers.

Purpose and Content:

According to the Companies Act, 2013, the Notes to Accounts must include various details, such as:

• Accounting Policies: A description of the specific accounting methods used in preparing the financial statements. This helps users understand how different transactions and events are recorded and measured.
• Contingent Liabilities: Disclosure of any potential liabilities that may arise based on the outcome of uncertain future events. This allows users to assess the company's risk exposure.
• Long-Term Debt: Detailed information on the company's long-term borrowings, including terms, repayment schedules, and interest rates.
• Other Significant Disclosures: Any other relevant information that is essential for a fair presentation of the company's financial position and performance. This could include information on related party transactions, changes in accounting policies, and details of significant events.