The Notes to Accounts
Chapter Forty-Nine
Syllabus topic 4, "Schedule III of the Companies Act, 2013"
Pages 154 to 157 of 168
In one line
The face of the statements carries the totals; the notes carry the composition of every total, and each face item is cross-referenced to its note.
Why the notes exist
Schedule III's general instruction 3(i) says the notes shall contain information in addition to that presented in the financial statements, and shall provide, where required:
- narrative descriptions or disaggregations of items recognised in the statements; and
- information about items that do not qualify for recognition in them.
Two kinds of content, and they are different in nature. The first breaks a number into its parts. The second reports something that is not a number in the statements at all, which is where contingent liabilities and commitments live.
Cross-referencing
Instruction 3(ii) requires that each item on the face of the balance sheet and the statement of profit and loss be cross-referenced to any related information in the notes.
That is the Note No. column in both prescribed formats. It is column 2, and it is not decoration.
And the instruction ends with a warning against both extremes: a balance shall be maintained between providing excessive detail that may not assist users and not providing important information as a result of too much aggregation.
How a note is built
A note has the same two-column shape as the statement it serves, with the current period and the previous period, and it ends in the total that appears on the face.
Take share capital, in a company with issued capital of 40,000 equity shares of Rs 10 each fully paid.
Note 1: Share capital
| Particulars | 31 Mar 2027, Rs | 31 Mar 2026, Rs |
|---|---|---|
| Authorised: 60,000 equity shares of Rs 10 each | 6,00,000 | 6,00,000 |
| Particulars | 31 Mar 2027, Rs | 31 Mar 2026, Rs |
|---|---|---|
| Issued, subscribed and fully paid up: 40,000 equity shares of Rs 10 each | 4,00,000 | 4,00,000 |
| Total | 4,00,000 | 4,00,000 |
The authorised capital appears in the note and never on the face. It is not a figure the company owes or owns; it is a ceiling. Putting authorised capital into the balance sheet total is a standing error and it makes the two halves disagree. Notice too that it is shown above the total and outside it, which is why it is set out here as a line of its own.
And reserves and surplus, where the year's profit lands.
Note 2: Reserves and surplus
| Particulars | Rs |
|---|---|
| General reserve, closing balance | 70,000 |
| Surplus, being the balance in the statement of profit and loss, closing balance | 99,000 |
| Total | 1,69,000 |
The movement in each, which the Schedule requires to be shown:
| Movement during the year | General reserve, Rs | Surplus, Rs |
|---|---|---|
| Opening balance | 50,000 | 35,000 |
| Add: profit for the year | nil | 84,000 |
| Add: transferred from surplus | 20,000 | nil |
| Less: transfer to general reserve | nil | (20,000) |
| Closing balance | 70,000 | 99,000 |
The Notes to Accounts
This note is where the appropriations appear. Schedule III's head B requires Surplus to disclose allocations and appropriations such as dividend, bonus shares and transfers to and from reserves, and requires additions and deductions since the last balance sheet to be shown under each head. So the appropriation account of the old form has become a note, and this is the note.
The notes a company must give
Head by head, Schedule III prescribes what the note shall contain. The balance sheet chapter set them out; this is the working list, in the order the notes are usually numbered.
| Note | Head | The essentials it must carry |
|---|---|---|
| 1 | Share capital | Authorised, issued and subscribed; par value; reconciliation of shares outstanding; rights and restrictions; holders of more than five per cent; five-year history of bonus, non-cash and bought-back shares; calls unpaid; forfeited shares; promoters' shareholding |
| 2 | Reserves and surplus | The eight classes, with additions and deductions under each; a fund where earmarked; a debit balance shown as a negative figure |
| 3 | Long-term borrowings | The seven classes; secured and unsecured with the nature of security; guarantees by directors; terms of repayment; continuing defaults |
| 4 | Long-term provisions | Employee benefits and others |
| 5 | Short-term borrowings | The four classes, with security, guarantees and defaults; current maturities of long-term borrowings separately |
| 6 | Trade payables | Dues of micro and small enterprises separately from other creditors, with the ageing schedule |
| 7 | Other current liabilities | Interest accrued but not due and accrued and due separately; income received in advance; unpaid dividends; unpaid matured deposits and debentures |
| 8 | Short-term provisions | Employee benefits and others |
| 9 | Property, plant and equipment | By class, with the reconciliation of gross and net carrying amounts, additions, disposals and depreciation |
| 10 | Non-current investments | Trade and other; quoted and unquoted, with market value of quoted and provision for diminution |
| 11 | Inventories | The classes, goods in transit separately, and the mode of valuation |
| 12 | Trade receivables | Over six months from the due date separately; secured, unsecured and doubtful; allowance for doubtful debts; dues from directors |
| 13 | Cash and cash equivalents | Balances with banks, cheques on hand, cash on hand; earmarked balances; margin money; deposits over twelve months |
| 14 | Revenue from operations | Sale of products, sale of services, other operating revenues, less excise duty |
| 15 | Other income | Interest, dividend, net gain on sale of investments, other non-operating income |
| 16 | Employee benefits expense | Salaries and wages; contribution to funds; stock option expense; staff welfare |
| 17 | Finance costs | Interest expense; other borrowing costs; net foreign currency gain or loss |
| 18 | Other expenses | The itemised list, with anything above one per cent of revenue from operations or one lakh named separately, and payments to the auditor |
| 19 | Contingent liabilities and commitments | Claims not acknowledged as debt; guarantees; other contingent liability; capital contracts remaining to be executed; uncalled liability on partly paid investments |
| 20 | Other disclosures | Proposed dividend and the amount per share; arrears of cumulative preference dividend; unutilised issue proceeds; the Board's opinion on realisable value where head W applies |
The Notes to Accounts
Twenty notes is a full set. In an examination problem you will write six to ten of them, and which ones is decided by what the trial balance contains.
Accounting policies
The first note in a real annual report is not share capital; it is significant accounting policies. Schedule III's general instruction 6 says the terms used are as per the applicable accounting standards, and instruction 2 says disclosures required by the standards are in addition to the Schedule's. The standard on disclosure of accounting policies requires the significant policies to be disclosed in one place, and that is why the policies note comes first.
In an examination answer, a short policies note covering the basis of preparation, the method of depreciation and the mode of valuation of inventories is enough, and it is worth a mark where the question gives you the information to write it.
The contingent liability note
The one note that is not a disaggregation of a face item, and therefore the one students omit.
Note: Contingent liabilities and commitments, to the extent not provided for
| Particulars | Rs |
|---|---|
| (i) Contingent liabilities | |
| Claims against the company not acknowledged as debt | 40,000 |
| Guarantees given to the bank on behalf of a subsidiary | 2,00,000 |
| (ii) Commitments | |
| Estimated amount of contracts remaining to be executed on capital account, not provided for | 1,50,000 |
| Uncalled liability on partly paid investments | 25,000 |
Nothing here is in the totals of the balance sheet, and nothing here is a provision. A contingent liability is disclosed; a provision is recognised. The moment an obligation becomes probable and can be measured, it stops being a contingent liability and becomes a provision inside current or non-current liabilities.
The commonest errors in the notes
| Error | The rule |
|---|---|
| Showing authorised capital in the total | It is disclosed, not added |
| No note number against a face item | Instruction 3(ii) requires cross-referencing |
| Giving the closing balance of a reserve without the movement | The Schedule requires additions and deductions under each head |
| Writing a separate appropriation account | Appropriations are disclosed inside the Surplus note |
| Omitting the mode of valuation of inventories | It is a prescribed disclosure |
| Putting contingent liabilities among current liabilities | They are not liabilities; head T disclosure only |
| A note whose total does not equal the face figure | The note is the face figure, itemised |
The Notes to Accounts
The last is the check to run before you put your pen down. Every note ends in a total, and every one of those totals must appear on the face against that note number.
What to write in the exam
If asked what the notes to accounts contain, give instruction 3(i) with the two kinds of content, instruction 3(ii) on cross-referencing and the balance to be maintained, then five or six of the prescribed notes with what each must carry, then the contingent liabilities note as an example of the second kind.
In a problem, number your notes, put the numbers on the face, and make each note end in the figure it supports. That single discipline is worth more marks than any extra detail.
The line to remember
A Schedule III balance sheet is unreadable without its notes, and that is by design. The face is an index; the notes are the accounts.
The rest of this subject
These notes are cut from the University's printed syllabus. Open the syllabus itself, or the past papers, for the same subject.