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SEBI GRADE A 2020: ACCOUNTANCY & COMMERCE: PREPARATION & PRESENTATION OF FINANCIAL STATEMENTS
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Table of Content Meaning of Financial Statements...................................................................................... 3
Characteristics of Financial Statements: ................................................................ 3
Balance Sheet: .................................................................................................. 3
Format of a Balance Sheet: ................................................................................. 3
Contents of the Balance Sheet: ............................................................................ 4
A. Equity and Liabilities: ............................................................................... 4
B. Assets: ................................................................................................... 8
Statement of a Profit and Loss Account ............................................................... 11
Format of a Statement of a Profit and Loss Account: ............................................ 11
Contents of the Profit and Loss Account: ............................................................. 12
A. Income: ................................................................................................ 12
B. Expenses: ............................................................................................. 12
C. Exceptional Items: ................................................................................. 13
D. Extraordinary Items: .............................................................................. 14
E. Tax Expenses: ....................................................................................... 14
F. Profit / (loss) for the period from discontinuing operations: ......................... 14
G. Tax expenses of discontinuing operations: ................................................ 14
H. Earnings per equity shares: ..................................................................... 14
Final Comments: .............................................................................................. 14
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Meaning of Financial Statements Financial Statements refer to the summarised statement of accounting data prepared at the end of an accounting period. The purpose of preparing the financial statements is to
communicate with the internal and external stakeholders. Further, as per the Companies Act 2013, the Financial Statement shall include the following:
1. Balance Sheet as at the end of the financial year 2. Statement of Profit and Loss
3. Cash Flow Statement for the year 4. Statement for changes in equity, if applicable, and
5. Any explanatory notes attached annexed to or forming part of any document referred to above
Characteristics of Financial Statements: The following are the characteristics of financial statements:
a. They are historical in nature as they relate to the past period b. They are always expressed in monetary terms
c. They show the financial position of a company through the Balance Sheet and the financial performance of the company the Statement of Profit and Loss Account
Balance Sheet: It forms part of the financial statement that summarises a company’s assets, liabilities and shareholders’ equity at a particular point in time. The purpose of this is to show what
the company owns and what it owes. The following are some of the characteristics of the Balance Sheet:
• It shows the financial position of the company at a specific point in time • The accounting equation describes the assets and liabilities, i.e. Assets = Liabilities +
Shareholders’ Fund • A balance sheet is prepared by taking the closing or year-end balances of assets,
liabilities and shareholders’ funds.
• Any account appearing in the balance sheet may have an opening balance, transaction done during the year and the closing balance.
Format of a Balance Sheet: The following is the format of a balance sheet:
Particulars Note
No
Figures as
at the end of the
current reporting
period
Figures as at
the end of the previous
reporting period
A. Equity and Liabilities
1. Shareholders’ Funds a) Share Capital
b) Reserve & Surplus c) Money Received against Share Warrants
2. Share Application Money Pending Allotment
3. Non-Current Liabilities a) Long-term Borrowings
XXX
XXX XXX
XXX
XXX
XXX XXX
XXX
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b) Deferred Tax Liabilities (Net) c) Other Long-term Liabilities
d) Long-term Provisions 4. Current Liabilities
a) Short-term Borrowings b) Trade Payables
c) Other Current Liabilities d) Short-term Provisions
XXX XXX
XXX XXX
XXX
XXX XXX
XXX
XXX XXX
XXX XXX
XXX
XXX XXX
XXX
Total XXX XXX
B. Assets 1. Non-Current Assets
a) Fixed Assets (i) Tangible Assets
(ii) Intangible Assets
(iii) Capital Work-in-Progress (iv) Intangible Assets under
Development b) Non-Current Investments
c) Deferred Tax Assets (Net) d) Long-term Loans and Advances
e) Other Non-Current Assets 2. Current Assets
a) Current Investments b) Inventories
c) Trade Receivables d) Cash and Cash Equivalents
e) Short-term Loans and Advances f) Other Current Assets
XXX
XXX
XXX XXX
XXX
XXX XXX
XXX
XXX XXX
XXX XXX
XXX XXX
XXX
XXX
XXX XXX
XXX
XXX XXX
XXX
XXX XXX
XXX XXX
XXX XXX
Total XXX XXX
Contents of the Balance Sheet: A. Equity and Liabilities: Equity refers to the liabilities towards the shareholders and is
termed as Shareholders’ Funds. It shall include Share Capital, Reserves and Surplus
and Money Received under Share Warrants, while Liabilities means external liabilities
of the company. Further, there is also “Share Application Money Pending Allotment” in-
between Shareholders’ Fund and Non-Current Liabilities.
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1. Shareholders’ Funds: It comprises of three accounts, namely, Share Capital, Reserves,
and Surplus, and Money Received against Share Warrant.
a. Share Capital: It is the shares issued by the company for a consideration which can
be received in either cash or kind. Further, Share Capital shall include both Equity
and Preference Share Capital. Those people who get the shares or are allotted
shares are known as Shareholders. In the schedules or notes to accounts, the
company shall disclose the authorized capital, issued capital and subscribed
capital. The company shall also disclose the amount called-up by the company
and amount paid-up by the shareholders.
b. Reserves and Surplus: It is the amount set aside out of the profits and other
surpluses of the company to meet for any future losses or liabilities and to
strengthen the financial position of the company. Besides, it is also a legal
requirement to create Reserve and Surplus. Since the Reserve and Surplus are
shown as a single amount in the Balance Sheet, the company is required to give
the details of Reserve and Surplus in the notes to accounts. The details can be
regarding the opening balance, additions/deletion during the year and the closing
balance for each of the following items:
i. Capital Reserve
ii. Capital Redemption Reserve
iii. Securities Premium
iv. Debentures Redemption Reserve
v. Revaluation Reserve
vi. Share Options Outstanding Amount
vii. Other Reserves
viii. Surplus, i.e. profit from the statement of profit and loss account
2. Share Application money pending allotment: Any money pertaining to Share Application
Money received by the company shall be credited to Share Application Account is the
amount refundable to the applicants. In other words, it is the amount against which
shares will not get allotted to the applicants or it is the amount received by the company
as Calls-in-Advance.
3. Non-Current Liabilities: It is a form of liabilities that is not current liabilities. Current
liabilities can be defined as a liability which is:
i. Expected to be settled in the company’s normal operating cycle, or
ii. Held primarily for the purpose of being traded, or
iii. Due to being settled within12 months after the reporting date or the
balance sheet date
iv. There exist no unconditional right to defer settlement for at least 12
months after the reporting date
a. Long-term borrowings: It is the loan taken by the company. A company takes loans
by issuing debentures, accepting public deposits, loans from banks and private
lenders or of any other nature. Borrowing shall be classified as long-term only if
the loan is repayable by the company after 12 months or after the period of an
operating cycle from the balance sheet date. The following heads form part of
long-term borrowing and so they need to be shown in the notes to accounts:
i. Bonds/Debentures
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ii. Public Deposits
iii. Premium Payable on Redemption of Debentures
iv. Term loans from banks/private lenders
v. Other loans and advances
b. Deferred Tax Liabilities (Net): As per the regulation, a company is required to compare
its accounting income with taxable income and if there exists a difference
between the two (temporary), then the income tax on the difference is termed
as deferred tax. A Deferred Tax Liability shall arise when the accounting income
is more than the taxable income, whereas, in case the accounting income is less
than taxable income then Deferred Tax Assets will arise. The two amounts, i.e.
Deferred Tax Liabilities and Deferred Tax Assets are adjusted to the existing
balance in Deferred Tax Liabilities (Net) or Deferred Tax Assets (Net), as the case
may be.
c. Other Long-term Liabilities: These are liabilities other than the Long-term Borrowings.
They can be classified into:
i. Trade Payables, if agreed to be paid after 12 months or after the period of
Operating Cycle from the date of Balance Sheet. Trade Payables includes
both Sundry Creditors and Bills Payables.
ii. Any other long-term liabilities, not classified as Long-term Borrowings.
d. Long-term Provisions: It is an amount set aside to meet future liabilities, the amount
of which cannot be determined with reasonable certainty. A provision like liability
can be both Long-term (Non-Current) or Short-term
e. (Current). A long term provision is one whose liabilities will arise after 12 months
or after the period of Operating Cycle from the date of Balance Sheet. An example
of Long-term provision can be a provision made for retirement benefits payable
to employees due to retire after 12 months from the balance sheet date.
4. Current Liabilities: As already mentioned, current liabilities can be defined as those
liabilities which are:
i. Expected to be settled in the company’s normal operating cycle, or
ii. Held primarily for the purpose of being traded, or
iii. Due to being settled within12 months after the reporting date or the
balance sheet date
iv. There exist no unconditional right to defer settlement for at least 12 months
after the reporting date
a. Short-term borrowings: It is the loan taken by the company which is due to be
paid within 12 months, or within the operating cycle of the company from the
date of the balance sheet. These can include:
i. Loan repayable on demand
ii. Overdraft limit
iii. Cash Credit limit from bank
iv. Loan from other parties
v. Deposits
vi. Other Loans and Advances
b. Trade Payables: It is the amount payable against the purchase of goods or
services that are taken by the company in the ordinary course of business.
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The amount shall be payable within 12 months or within the operating cycle
of the company from the date of the balance sheet. Trade Payable shall include
both Sundry Creditors and Bills Payables.
c. Other Current Liabilities: Current Liabilities that are not short-term borrowings or
trade payables are classified as Other Current Liabilities and can include the
following:
i. Current Maturities of Long-term Debts: It is the amount out of the
long-term borrowings that are due to be paid within 12 months or within
the operating cycle of the company from the date of the balance sheet.
ii. Interest Accrued but not Due: It refers to the interest amount
provided in the books of accounts but is yet to become due for payment.
iii. Interest Accrued and Due: It refers to the interest provided in the
books of accounts that are also due for payment.
iv. Income Received in Advance: Any amount received in advance by
the company against which the sale is yet to be made or services are
yet to be rendered, then such amount is classified as Income Received
in Advance.
v. Unpaid Dividend: This refers to the dividend declared by the company
but is unclaimed by the shareholders.
vi. Excess application money due for refund and interest accrued
thereon
vii. Unpaid matured deposits and interest accrued thereon
viii. Unpaid matured debentures and interest accrued thereon
ix. Calls-in-Advance: The amount received by the company in advance for
which the call is yet to be made.
x. Other Payables: This refers to any other liabilities that are due for
payment within 12 months or within the operating cycle of the company
from the date of the balance sheet. An example of this can be Provident
Fund Payable, ESI Payables, Output CGST, Output SGST, etc.
d. Short-term Provisions: A provision against which liability will arise within 12
months or within the operating cycle of the company from the date of the
balance sheet. An example of Short-term provision can be a provision made
for retirement benefits payable to employees due to retire within 12 months
from the balance sheet date. Provision for Tax and Provision for Expenses are
also generally short-term provisions.
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B. Assets: It can be defined as an economic resource that a company owns or controls
with the expectation that it will provide some future benefits. Assets can be classified
into Non-Current and Current Assets.
1. Non-Current Assets: It refers to those assets which are not Current Assets. Current
assets can be defined as assets which are:
i. Expected to be realized in or intended for sale or consumption in the
company’s normal operating cycle, or
ii. Held primarily for the purpose of trading, or
iii. Expected to realized within 12 months after the reporting date or the
balance sheet date
iv. Cash and Cash Equivalents, unless they are restricted from being
exchanged or used to settle a liability for at least 12 months after the
Balance Sheet date.
a. Fixed Assets: Assets held by the company for the purpose of increasing earnings
of the business. These assets are used for a long time to generate revenue for
the business, and can be categorized into the following:
i. Tangible Assets are those which have a physical existence and can be
seen and touched, such as Land, Building, Plant, Machinery, etc. These
assets are subject to depreciation over its useful life.
ii. Intangible Assets are those that do not have physical existence or can
be seen and touched, such as Patent, Goodwill, Copyrights, etc. These
assets are subject to amortization over their useful life.
iii. Capital Work-in-Progress, refers to the tangible assets under
construction by the company
iv. Intangible Assets under Development, are assets (such as patents,
intellectual property rights, etc.) which are under development by the
company.
b. Non-Current Investments: It refers to those investments which are held for the
purpose of retaining it and not to resell them. It can be classified into Trade
Investments (i.e. those investments made by the company in shares or
debentures or another company in order to promote its own business) and
Other Investments (i.e. those investments that are not trade investments).
c. Deferred Tax Assets (Net): Deferred Tax Assets and Deferred Tax Liabilities are
inter-related as the balance in Deferred Tax Liabilities (Net) in one year may
get converted into Deferred Tax Assets (Net) the next year, and vice-versa.
d. Long-term Loans and Advances: These are loans and advances that are expected
to be received in either cash or kind, in the form of an asset after 12 months
or after the operating cycle of the company from the date of balance sheet.
These may include the following:
i. Capital Advances are those advanced that are given for purchasing
fixed assets. Generally, these advances are not received in cash but in
the form of an asset, meaning that the capital advances gets converted
into an asset of the company.
ii. Security Deposit refers to those deposits that are given for a long
period, i.e. for a period more than 12 months or after the operating cycle
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of the company from the date of the balance sheet. An example of a
security deposit can be a deposit given for electricity or telephone
connection.
iii. Other Loans and Advances, refers to loans and advances that are not
classified as Capital Advances and Security Deposit. An example of this
can be an advance given to employees or suppliers for a period of more
than 12 months or after the operating cycle of the company from the
date of the balance sheet.
e. Other Non-Current Assets: Any Non-Current Assets that do not fall under any of
the aforesaid categories are classified under Other Non-Current Assets. The
followings can be classified into Other Non-Current Assets:
i. Long term trade receivables are those trade receivables the amount of
which is receivables after 12 months or after the operating cycle of the
company from the date of the balance sheet.
ii. Others refer to assets others than trade receivables, such as
unamortized expenses/losses
iii. Insurance claim receivables
2. Current Assets: It refers to those assets which are not non-Current Assets. Current
assets can be defined as assets which are:
i. Expected to be realized in or intended for sale or consumption in the
company’s normal operating cycle, or
ii. Held primarily for the purpose of trading, or
iii. Expected to realized within12 months after the reporting date or the
balance sheet date
iv. Cash and Cash Equivalents, unless they are restricted from being
exchanged or used to settle a liability for at least 12 months after the
Balance Sheet date.
a. Current Investments: It refers to those investments which are held to be converted
into cash with a short time, i.e. within 12 months from the date of purchase of
the investments. Examples of such investments can be Investment in Equity
Shares, Preference Shares, Government or Trust Securities Debentures or Bonds,
Mutual Funds, Partnership Firms or any other investments.
b. Inventories: It is the stock that is held for the purpose of trade in the normal course
of business, i.e. for manufacturing or trading of goods. They can be classified or
shown as current assets as they are held with a purpose to convert them into
Cash and Cash Equivalents with a short time. Inventories may include the
following:
i. Raw materials
ii. Work-in-Progress
iii. Finished Goods
iv. Stock-in-Trade
v. Stores and Spares
vi. Loose Tools
vii. Goods-in-Transit
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c. Trade Receivables: Any amount receivables from the sale of goods or by rendering
of services in the normal course of business. Further, these should be receivables
within 12 months from the date of the Balance Sheet or within the period of the
operating cycle of the business. Trade Receivables shall include both Sundry
Debtors and Bills Receivables. Besides this, if there is a provision of doubtful debt
then that should be disclosed by showing it as a deduction from Trade
Receivables.
d. Cash and Cash Equivalents: The Cash and Cash Equivalents consists of the following:
i. Cash in hand
ii. Bank Balance, including deposit with banks
iii. Cheques, Drafts on hand
iv. Earmarked balance with banks
v. Balance with bank held as Margin Money
vi. Short Term Marketable Securities (i.e. those that can be realized within a
period of 3 months). These typically include the treasury bills, commercial
papers, money market instruments, and investments in preference shares
redeemable within three months if there is an insignificant risk of change
in its value.
e. Short-term Loans and Advances: Those loans and advances that are expected to be
realized within 12 months from the date of Balance Sheet or within the period of
the operating cycle of the business.
f. Other Current Assets: Those current assets that do not fall in any of the aforesaid
categories are classified as Other Current Assets. Prepaid Expenses, Dividend
Receivables, Interest Accrued on Investments, Advance Tax, etc. are some of the
examples of Other Current Assets.
3. Contingent Liabilities and Commitments: Although this does not appear as an item in
the Balance Sheet, however, they are disclosed in the notes to accounts for the
information of the stakeholders.
a. Contingent Liabilities: These are liabilities that may or may not arise as they are
dependent on happening of a certain event in the future. The followings are
classified as contingent liabilities:
i. Claims against the company not acknowledged as debts
ii. Bills Receivables discounted from Bank but not yet due for payments
iii. Proposed Dividend
iv. Other money for which the company is contingently liable
b. Commitments: It refers to financial commitment due to activities agreed to by
the company to be undertaken by it in the future. The followings are some of
the commitments:
i. The estimated amount of contracts remaining to be executed on Capital
Account and not provided for.
ii. Uncalled liability on shares and other investments partly paid
iii. Any other commitments
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Statement of a Profit and Loss Account A profit and loss account is prepared by the company wherein all gains and losses are collected to find out the excess of gains over the losses or vice-versa. It helps the
stakeholders to understand the financial performance of the company. The following are the characteristics of the company:
1. This is generally prepared before preparing the Balance Sheet, as the balance of this
account is Net Profit or Net Loss, which will ultimately affect the Reserves and
Surplus account in the Balance Sheet.
2. It is related to a particular accounting period and is prepared at the end of that
period
3. The Profit and Loss Account (P&L Account) is prepared on an accrual basis
Format of a Statement of a Profit and Loss Account: A partnership firm and a sole-proprietorship business can prepare a profit and loss account
in any format as long as it shows the gross profit and net profit of the entity separately. Hence, these entities generally prepare it in a T-shape format. However, a company is
required to prepare it as per Schedule III of Companies Act, 2013. Below is the format of a statement of a profit and loss account as per Schedule III:
Particulars Note
No
Figures as
at the end of the
current reporting
period
Figures as
at the end of the
previous reporting
period
A. Income i. Revenue from Operations
ii. Other Income
XXX
XXX
XXX
XXX
Total Income XXX XXX
B. Expenses i. Cost of material consumed
ii. Purchase of Stock-in-Trade
iii. Changes in Inventories of finished goods, Stock-in-Trade and Work-in-Progress
iv. Employee Benefits expenses v. Finance Costs
vi. Depreciation and Amortization Expenses vii. Other Expenses
XXX XXX
XXX
XXX XXX
XXX XXX
XXX
XXX XXX
XXX
XXX XXX
XXX XXX
XXX
Total Expenses XXX XXX
Profit/(loss) before exceptional items and tax XXX XXX
Exception Items XXX XXX
Profit/ (loss) before tax XXX XXX
Tax Expense: i. Current Tax
ii. Deferred Tax
XXX XXX
XXX XXX
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Profit (Loss) for the period from continuing operations
XXX XXX
Profit/(loss) from discontinued operations XXX XXX
Tax expenses of discontinued operations XXX XXX
Profit/(loss) from Discontinued operations
(after tax)
XXX XXX
Profit/(loss) for the period XXX XXX
Earnings per equity share
1. Basic 2. Diluted
XXX XXX
XXX XXX
Contents of the Profit and Loss Account: A. Income: The revenue earned by the recorded is accounted for under this head. The
income can be classified into the following:
i. Revenue from Operation: It is the income generated by the company from its
core business operations. Further, it is shown as a net of discount and returns.
It can be divided into Sale of Products, Sale of Services and Other Operating
Revenues.
ii. Other Income: A company may earn revenue from non-core operations as well.
For instance, for non-financial company earnings from bank interest or any
interest earned from loans and advances given by them will fall under this head
as they do not form part of its core operation. Net Gain/loss on investments will
also get classified under Other Income.
B. Expenses: In order to generate revenue, a company will be incurring some costs which
can be either direct or indirect in nature. The following are the expenses that a company
will generally incur for generating income:
i. Cost of material consumed: This is direct in nature and is basically the cost of raw
material that the company requires to manufacture its finished goods. The
material consumed may also consist of packaging material and other materials
like the purchase of intermediates and components which are ‘consumed’ in the
manufacturing activities of the company. Generally, this is the largest expense
incurred by the company.
ii. Purchase of Stock-in-Trade: This refers to the goods purchased normally with the
intention to resell or trade-in. If a company purchases any semi-finished
goods/materials with the intention of doing further processing activities on the
same then the same should be included in the ‘cost of materials consumed’
instead of this item.
iii. Changes in Inventories of finished goods, Stock-in-Trade and Work-in-Progress: This
requires disclosure of difference between the opening and closing inventories
of finished goods, work-in-progress and stock-in-trade. The company is
required to disclose the difference for finished goods, work in progress and
stock in trade separately.
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iv. Employee Benefits expenses: Any payment made to employees in the form of
salary or wages are generally accounted for under this head. This following
expense forms part of this head:
a) Salaries and Wages
b) Contribution to Provident and other funds
c) Expense on Employee Stock Option Scheme and Employee Stock
Purchase Plan
d) Staff welfare expense
v. Finance Costs: This cost can be categorized into:
a) Interest Expenses, which covers the interest paid by the company on
borrowings from a bank and private lenders. Interest paid on
debentures, bonds or similar instruments, etc. are also part of this.
Further, any finance charges on finance leases are also classified as
Interest Expenses if they are in the nature of interest expense.
b) Other Borrowing Costs: This will generally include other borrowing costs
such as commitment charges, loan processing charges, guarantee
charges, loan facilitation charges, discounts/premium on borrowings,
other ancillary costs incurred in connection with borrowings, or
amortization of such costs, etc.
c) Net gain/loss on foreign currency transactions and translation: Any exchange
differences arising from foreign currency borrowings to the extent that
they are regarded as an adjustment to interest costs are also included
under Finance Cost.
vi. Depreciation and Amortization Expenses: A company is required to disclose the
amount of depreciation it charged on its fixed assets and amortization of
intangible assets under this head.
vii. Other Expenses: Any expenses that are not categorized under any of the
aforesaid heads get classified under Other Expenses. These expenses can be in
the nature of Rent Payment, Repairs & Maintenance Expenses on building or
machinery, Rates and taxes, (excluding taxes on income), Power and Fuel,
Insurance Expenses, Consumption of stores and spare parts and Miscellaneous
Expenses.
C. Exceptional Items: Although this term is not defined in Schedule III, however, AS-5
“Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies”
has a reference to such items. It may include the following items:
a. disposals of items of fixed assets
b. disposals of long-term investments
c. legislative changes having retrospective application
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d. litigation settlements
e. other reversals of provisions
D. Extraordinary Items: This term is also not defined in Schedule III, however, AS-5 “Net
Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies” has
a reference to such items and states that income or expenses arising from events or
transactions that are clearly distinct from the ordinary activities of the company and,
therefore, are not expected to recur frequently or regularly.
E. Tax Expenses: This is divided into the following:
i. Current Tax: This is the amount of income tax determined to be payable by the
company in respect of its taxable income for the period.
ii. Deferred Tax: It is the charge/credit for deferred taxes that needs to be disclosed
separately on the face of the Statement of Profit and Loss. It is basically a tax
effect of timing difference, i.e. differences between taxable income and
accounting income for a period that originate in one period and are capable of
reversal in one or more subsequent periods.
F. Profit / (loss) for the period from discontinuing operations: A discontinuing operation
is a business operation whose assets have been sold off or the business operation has
been discontinued. The company is required to disclose the amount of pre-tax profit or
loss from ordinary activities attributable to the discontinuing operation during the
current financial reporting period, along with the income tax expense related thereto
to be disclosed on the face of the Statement of Profit and Loss.
G. Tax expenses of discontinuing operations: If there exists any taxes payable or tax
credits available on profits or losses of discontinuing operations then the same is
required to be disclosed as a separate line item on the Statement of Profit and Loss.
H. Earnings per equity shares: A company is required to compute the Basic and Diluted
Earnings per Share and should be made in accordance with Accounting Standard 20
Earnings Per Share. Further, the nominal value of equity shares should be disclosed
along with the Earnings Per Share
Final Comments: As already mentioned, the purpose of preparing a financial statement is to understand the
financial position and performance of the company. Further, the balance sheet and profit and loss statement can be the raw material to perform the ratio analysis on the company
in order to understand the business performance even better.