What the final accounts contain
The five statements, and the question each one answers.
A bank asks a company for its accounts before lending. Is one statement enough?
A company’s final accounts have five parts: the balance sheet shows position on a date, the profit and loss account performance, the cash flow statement cash, the statement of changes in equity owners’ funds, and the notes the detail.
A bank is deciding whether to lend ₹50 lakh to Sundaram Textiles. It asks for the company’s accounts. What does each statement tell the banker that the others do not?
In plain wordsA company’s final accounts are a set of statements: one photograph of what it has and owes on a day, and several accounts of what happened over the year.
Exam definitionThe financial statements of a company comprise the Balance Sheet, the Statement of Profit and Loss, the Cash Flow Statement, the Statement of Changes in Equity, and the Notes to Accounts.
| Statement | What it shows | Time | Key relation |
|---|---|---|---|
| Balance Sheet | What the company has and owes | On one date | Assets = Liabilities + Equity |
| Statement of Profit and Loss | How much it earned and spent | Over a period | Income − Expenses = Profit |
| Cash Flow Statement | Where cash came from and went | Over a period | Closing cash = Opening cash + Net change |
| Statement of Changes in Equity | How owners’ funds moved | Over a period | Opening + Profit + Shares issued − Dividends = Closing |
| Notes to Accounts | Policies, details and disclosures | Attached to all the above | Explains figures; adds contingent liabilities |
Here are Sundaram Textiles’ statements for the year ended 31 March, in one set of figures. Look for the same numbers turning up in different statements.
| Particulars | Amount |
|---|---|
| Revenue from operations | ₹12,00,000 |
| Other income | ₹40,000 |
| Total income | ₹12,40,000 |
| Total expenses | ₹9,40,000 |
| Profit before tax | ₹3,00,000 |
| Tax expense | ₹90,000 |
| Profit for the year | ₹2,10,000 |
| Equity and liabilities | Amount | Assets | Amount |
|---|---|---|---|
| Share capital | ₹6,00,000 | Property, plant and equipment | ₹6,50,000 |
| Other equity | ₹5,30,000 | Inventories | ₹2,40,000 |
| Long-term borrowings | ₹2,00,000 | Trade receivables | ₹2,20,000 |
| Trade payables | ₹1,50,000 | Cash and cash equivalents | ₹3,70,000 |
| Total | ₹14,80,000 | Total | ₹14,80,000 |
| Cash flow | Amount | Changes in equity | Amount |
|---|---|---|---|
| Operating activities | ₹2,60,000 | Opening balance | ₹8,00,000 |
| Investing activities | −₹1,80,000 | Profit for the year | +₹2,10,000 |
| Financing activities | +₹1,70,000 | Shares issued | +₹1,50,000 |
| Net increase in cash | ₹2,50,000 | Dividends paid | −₹30,000 |
| Opening cash | ₹1,20,000 | Closing balance | ₹11,30,000 |
| Closing cash | ₹3,70,000 |
The links. Cash on the balance sheet, ₹3,70,000, is the closing cash in the cash flow statement. Equity on the balance sheet, ₹6,00,000 + ₹5,30,000 = ₹11,30,000, is the closing balance in the statement of changes in equity. The profit of ₹2,10,000 flows into equity. But the company earned ₹2,10,000 and cash rose by ₹2,50,000: profit and cash are different things.
Schedule III. The Companies Act, 2013 prescribes the layout. Division I is for companies following AS, Division II for those following Ind AS. Both list equity and liabilities on one side, assets on the other, each split into current and non-current.
Don’t confuse the balance sheet with the profit and loss account. A balance sheet is a snapshot on one date. The profit and loss account is a film of a whole year. One shows position, the other performance.
Where it breaks. Statements look back, rest on estimates, and say nothing about the strength of the team or the brand. A company can also choose when to record some items so that a snapshot looks better than the year was.
For exams. Name the five parts, say which one answers which question (position, performance, cash, owners’ funds, details), and give the equation for each.
Position at a date, performance over a period, cash by activity, owners’ funds, and notes.
Go deeper for practitioners
Other comprehensive income. Under Ind AS some gains and losses, such as revaluation of certain assets, bypass the profit and loss account and go to “other comprehensive income”. They still change equity, which is why the statement of changes in equity has a line for them.
A decision. Sundaram’s profit is ₹2,10,000 but cash rose by ₹2,50,000, and its receivables are ₹2,20,000. As the banker, which statement would you read first to see whether it can repay a loan, and what would you ask?
1. Which statement shows what a company has and owes on a single date?
Not quite. The answer is “The Balance Sheet”. The profit and loss account and the cash flow statement cover a period. Only the balance sheet is a snapshot on one date.
2. A company’s equity is ₹8,00,000 at the start of the year. It earns ₹2,10,000, issues shares for ₹1,50,000 and pays ₹30,000 in dividends. Closing equity is…
Not quite. The answer is “₹11,30,000”. ₹8,00,000 + ₹2,10,000 + ₹1,50,000 − ₹30,000 = ₹11,30,000. ₹12,60,000 adds the dividend instead of subtracting it.
3. A company earned a profit of ₹2,10,000, yet its cash rose by ₹2,50,000. What does this show?
Not quite. The answer is “Profit and cash are different; other items moved cash too”. Cash also changes with share issues, loans, asset purchases and the build-up of receivables and stock. Profit is measured on the accrual basis, cash on the cash basis.
- My view
The statement of income and expenditure and the sources of revenue
The Arthaśāstra lists the heads of the state’s revenue: fortified cities, countryside, mines, irrigation works, forests, herds and trade routes. It pairs them with an accounts office that records income and expenditure. A profit and loss account is that kind of statement. The passage describes a state’s revenue, not a company’s profit, so the link is a reading.
A reading offered for reflection, not a claim about what the authors meant.
समाहर्ता दुर्गं राष्ट्रं खनिं सेतुं वनं व्रजं वणिक्पथं चावेक्षेत । samāhartā durgaṃ rāṣṭraṃ khaniṃ setuṃ vanaṃ vrajaṃ vaṇikpathaṃ cāvekṣeta. Arthaśāstra 2.6.1; accounts office at 2.7
About this text: ArthaśāstraDiscuss
What it addsA list of the heads of the state’s revenue, paired with an accounts office that records income and expenditure.
Where they differIt describes a state’s revenue, not a business’s profit, and it is not a statement in the modern sense; the link to a profit and loss account is a reading.
“If you could ask a company for only one of its five statements before lending it money, which would you ask for, and which question would you still be unable to answer?”
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- Balance sheet: position on a date; Assets = Liabilities + Equity.
- Profit and loss: performance over a period; Income − Expenses = Profit.
- Cash flow: Closing cash = Opening cash + Net change; changes in equity: Opening + Profit + Shares − Dividends = Closing.
- Notes explain the figures; Schedule III sets the company layout.
Position at a date, performance over a period, cash by activity, owners’ funds, and notes.