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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:
- Balance Sheet: A snapshot of the company's assets, liabilities, and equity at a specific point in time.
- Profit and Loss Account (also known as Income Statement): Shows the company's revenues, expenses, and profit or loss over a specific period.
- Cash Flow Statement: Tracks the movement of cash into and out of the company during a specific period.
- 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 |