Preparation of Financial Statements

What are financial statements?

Financial statements are the formal summary of a business's year: its balance sheet, its profit and loss statement, a cash flow statement where required, and the notes that explain them. For a company, they're prepared in the format set out in Schedule III of the Companies Act, 2013, following the applicable accounting standards.

They're what the auditor audits, what the board approves, what's filed with the ROC in AOC-4, and what the income-tax return, bank, and investors all rely on.

The key terms

A few components and rules make up every set of company accounts:

Balance sheet

What the company owns and owes at the year end: assets, liabilities, and shareholders' equity.

Statement of profit and loss

Income and expenses for the year, and the resulting profit or loss.

Cash flow statement

How cash moved through operating, investing, and financing activities. OPCs, small companies, and dormant companies don't need one.

Notes to accounts

Accounting policies, breakdowns of balances, related party transactions, and the other disclosures Schedule III requires.

Schedule III

The format the Companies Act prescribes for company financial statements, with separate divisions for companies following Accounting Standards and Ind AS.

Accounting standards

Most private companies follow the Accounting Standards (AS). Larger and listed companies follow Ind AS, which is aligned with IFRS.

True and fair view

The statements must give a true and fair view of the company's affairs. The board is responsible for that, not just the accountant.

Why they matter

Financial statements are the company's public record and the base for everything else:

They're filed publicly

Company financial statements go to the ROC in AOC-4 and are available to anyone on the MCA portal.

The audit depends on them

The auditor audits the statements the company prepares. Poorly prepared statements mean a longer audit and possibly a qualified report.

Tax returns follow them

The income-tax return is built on the audited accounts. Errors in the accounts carry through.

Banks and investors read them

Loan renewals, credit ratings, tenders, and due diligence all start with the latest financial statements.

Directors sign them

The board approves and signs the statements and is responsible for them giving a true and fair view.

Format is prescribed

Schedule III sets the format and required disclosures. Statements that don't follow it draw auditor comments and ROC queries.

Deadlines follow the AGM

The statements must be ready for the AGM by 30 September, so delays in preparing them delay every filing after.

Who is this for?

Companies whose accounts must follow Ind AS need a different level of preparation — see our Ind AS / IFRS Conversion & Reporting service.

What each entity prepares

The requirements differ by type of entity:

What we'll need from you

Books of account

The year's ledgers, reconciled with bank statements, GST returns, and TDS records.

Closing balances

Stock, receivables, payables, and loan balances as at 31 March, with confirmations where available.

Fixed asset register

Assets bought and sold during the year, for depreciation and the fixed asset schedule.

Related party details

Transactions and balances with directors, their relatives, and group companies.

Previous year's accounts

Last year's audited statements, for comparatives and opening balances.

Legal and tax matters

Pending cases, tax demands, and guarantees, for contingent liability disclosures.

The better reconciled your books are, the faster and cheaper the statements are to prepare.

How we prepare them

Financial statements are prepared after the year's books are closed:

1. 1

   Close the books

   Year-end entries are made for accruals, prepaid expenses, depreciation, provisions, and inventory.

2. 2

   Reconcile balances

   Bank, GST, TDS, receivables, and payables are reconciled, and differences resolved.

3. 3

   Compute tax

   Current tax and deferred tax are calculated and provided for.

4. 4

   Draft in Schedule III format

   The balance sheet, profit and loss statement, cash flow statement where needed, and notes are drafted.

5. 5

   Support the audit

   We answer the auditor's queries and make any adjustments agreed during the audit.

6. 6

   Board approval

   The final statements are approved and signed by the board, ready for the AGM and AOC-4.

After the statements are approved

Approved statements feed into several filings and uses:

AGM adoption

Shareholders adopt the audited statements at the AGM, held by 30 September.

AOC-4

The statements are filed with the ROC in AOC-4 within 30 days of the AGM.

Income-tax return

The company's income-tax return is prepared from the audited accounts.

Directors' report

The board's report, which accompanies the statements, draws on them for its financial summary.

Bank submissions

Lenders usually ask for audited statements within a set period after the year end.

Next year's opening balances

The audited closing balances become next year's opening balances in the books.

Benefits and responsibilities