This page carries the official NCERT chapter on financial statements of a company class 12 — Chapter 3, Financial Statements of a Company, from the Class 12 Accountancy Part II textbook. It runs about 27 printed pages, opening on page 143 of the book, and the official NCERT PDF is linked directly below.
Financial Statements of a Company Class 12: Download the Chapter PDF
Open the official NCERT Class 12 Accountancy Part II Chapter 3 Financial Statements of a Company PDF on the NCERT textbook portal to read the chapter exactly as published — both Schedule III formats, the worked illustrations and the exercise sets are inside the file. The same portal carries the complete Part II book under Class XII, Accountancy.
| What the chapter holds | Count | Where it is used |
|---|---|---|
| Printed pages | 27 | |
| Sections in the chapter | 7 | |
| Tables | 29 | |
| Worked examples | 7 | solved step by step in our NCERT Solutions |
| Official NCERT PDF | Download the chapter PDF | the chapter exactly as NCERT publishes it |
Chapter 3 at a Glance: What Is Inside the File
This is a formats-and-classification chapter, not a calculation chapter. It opens with the meaning of financial statements (NCERT, p. 145), moves into their nature (p. 146) and objectives (p. 147), then spends the middle of the book on the two prescribed formats and how items are placed in them.
The balance sheet format of Schedule III appears at p. 148, followed by a run of worked illustrations from pp. 153-161 that show one item after another being slotted. The statement of profit and loss format follows at p. 162.
The chapter then turns to uses (p. 165), limitations (p. 166), a closing summary with key terms (p. 167), and closes with these three exercise sets: short-answer, long-answer and numerical questions on pp. 168-170.
What This Chapter Covers: Route Map With Page Numbers
Use this small map to jump straight to the part of the chapter you need.
| Chapter section | Page | What it does |
|---|---|---|
| 3.1 Meaning of Financial Statements | 145 | Defines the three statements and lists who reads them. |
| 3.2 Nature of Financial Statements | 146 | Four ingredients: recorded facts, conventions, postulates, personal judgements. |
| 3.3 Objectives of Financial Statements | 147 | Primary objective of decision-making plus six specific objectives. |
| 3.4 Types; balance sheet format (Exhibit 3.1) | 148-152 | Schedule III vertical format, presentation features, rounding-off, share capital and reserve disclosures. |
| Current and non-current classification; Illustrations 1-6 | 153-161 | The twelve-month test applied through worked illustrations and a 47-item practice list. |
| Statement of profit and loss format (Exhibit 3.2) and its items | 162-165 | The sixteen-line format, the expense heads, and Illustration 8. |
| 3.5 Uses and Importance | 165 | What the main user groups take from the statements. |
| 3.6 Limitations | 166 | Weaknesses from historical cost to interim reporting. |
| Summary, terms and questions | 167-170 | Chapter summary, five terms introduced, three exercise sets. |
Key Concepts: The Ideas That Carry the Chapter
This chapter is less about arithmetic and more about knowing which slot each item takes in two fixed formats. Once you hold the Schedule III structure in your head, most of the numerical questions solve themselves.
What Kind of Document Is a Financial Statement
NCERT defines financial statements through four ingredients (p. 146). Understanding them explains why a balance sheet shows historical cost, not market value.
- Recorded facts — transactions are recorded at original or historical cost; assets bought at different times sit together at cost, not at market price.
- Accounting conventions — inventory at cost or market value whichever is lower; assets at cost less depreciation; small items like stationery treated as expenditure of the year (materiality).
- Postulates — going concern (the business continues, so assets stay at historical cost), money measurement (money value is assumed stable), realisation (revenue is recognised in the year of sale even if cash arrives later).
- Personal judgements — depreciation over the useful life of an asset, provisions for doubtful debts, and inventory valuation all rest on estimates (p. 146).
The consequence: because the basis is historical cost, the statements do not show the current financial condition of the concern (NCERT, p. 146).
Why Companies Prepare Them: The Objectives
The primary objective of financial statements is to assist users in their decision-making (NCERT, p. 147). Six specific objectives follow from it:
- Provide information about the economic resources and obligations of the business.
- Provide information about the earning capacity of the business, so users can predict, compare and evaluate it.
- Provide information about cash flows in terms of amount, timing and related uncertainties.
- Supply information for judging how effectively management has used the business’s resources.
- Report activities of the business that affect society.
- Disclose the significant accounting policies followed and any changes made during the year (p. 147).
Schedule III and the Balance Sheet Skeleton
Every company registered under the Companies Act 2013 prepares its balance sheet and statement of profit and loss in the manner prescribed by the revised Schedule III (NCERT, p. 148). The balance sheet is a vertical statement in two halves.
I. Equity and Liabilities leads with the claims side: Shareholders’ Funds (Share Capital, Reserves and Surplus, Money received against share warrants), Share application money pending allotment, Non-current Liabilities (Long-term borrowings, Deferred tax liabilities (net), Other long-term liabilities, Long-term provisions) and Current Liabilities (Short-term borrowings, Trade payables, Other current liabilities, Short-term provisions).
II. Assets follows: Non-current Assets (Fixed assets — tangible, intangible, capital work-in-progress, intangible assets under development — plus Non-current investments, Deferred tax assets (net), Long-term loans and advances, Other non-current assets) and Current Assets (Current investments, Inventories, Trade receivables, Cash and cash equivalents, Short-term loans and advances, Other current assets).
Three features matter for the exam (pp. 149-150): the vertical format is mandatory; ‘Sundry Debtors’ and ‘Sundry Creditors’ are replaced by Trade Receivables and Trade Payables; and the face of the statement keeps only broad, significant items while the ‘Note No.’ column routes the detail to the Notes to Accounts (p. 150).
The Twelve-Month Rule: Current Versus Non-Current
The single classification test that governs the whole balance sheet is the current/non-current cut, and nearly every error in this chapter comes from misapplying it. An item is current if any one of these tests is met (NCERT, p. 154):
- it is involved in the entity’s operating cycle;
- it is expected to be realised or settled within twelve months;
- it is held primarily for trading;
- it is cash or a cash equivalent; or
- the entity has no unconditional right to defer settlement of the liability for at least twelve months after the reporting date.
Everything else is non-current — non-current is simply the residual category (p. 154).
Where the Tricky Items Sit in the Balance Sheet
The chapter’s illustrations exist to pin down item-level placement rules. Memorise the contested ones:
- Trade payables to be settled beyond 12 months go under Other long-term liabilities; the rest are current (p. 156).
- Proposed dividend is a contingent liability under AS-4 and appears in Notes to Accounts, not on the face of the balance sheet (p. 156).
- Borrowings split three ways: repayable beyond 12 months: Long-term borrowings; repayable on demand or within 12 months of original tenure: Short-term borrowings; the portion of a long-term loan due within 12 months: current maturities under Other current liabilities, with a note (p. 155).
- Deferred tax assets and liabilities are always non-current (p. 155).
- Fixed assets stay non-current even when their useful life is under 12 months (p. 157).
- Investments split by realisation: realisable within 12 months are current investments; the rest are non-current investments (p. 157).
- Inventories are always current (p. 157).
- Trade receivables realisable beyond 12 months go to Other non-current assets; the rest are current assets (p. 157).
- Cash and cash equivalents are always current (p. 157).
- Preliminary expenses are written off in the year incurred, first from securities premium and the balance from profit and loss (p. 155).
The Profit and Loss Ladder: Sixteen Lines
The statement of profit and loss is built like a ladder: each Roman-numeral line is computed from the lines above it, from total revenue down to earnings per share (pp. 162-163).
| Line | What it does |
|---|---|
| I. Revenue from operations | Sales of products, services and other operating revenue. |
| II. Other income | Interest, dividend, net gain on sale of investments, other non-operating income. |
| III. Total Revenue (I + II) | The top of the ladder. |
| IV. Expenses | Eight sub-heads added to give total expenses. |
| V. Profit before extraordinary items and tax (III – IV) | Operating result before special items. |
| VI. Exceptional items | Items outside normal business but part of operations. |
| VII. Profit before extraordinary items and tax (V – VI) | Result after exceptional items are adjusted. |
| VIII. Extraordinary items | Items distinct from ordinary activities. |
| IX. Profit before tax (VII – VIII) | The profit-before-tax line. |
| X. Tax expense | Current tax plus deferred tax. |
| XI. Profit/(Loss) for the period from continuing operations (IX – X) | After-tax result of continuing operations. |
| XII. Profit/(Loss) from discontinuing operations | Result of operations being wound down. |
| XIII. Tax expense of discontinuing operations | Tax on those operations. |
| XIV. Profit/(Loss) from discontinuing operations after tax (XII – XIII) | Net discontinued result. |
| XV. Profit/(Loss) for the period (XI + XIV) | Final profit for the year. |
| XVI. Earnings per equity share | Basic and diluted EPS. |
Lines V and VII carry the same caption; the difference is that VII is the figure after exceptional items (line VI) have been adjusted. The last expense head, ‘Other expenses’, is the basket for anything that does not fit the named heads (p. 163).
The eight expense heads inside line IV are compared below so you can see which business each one belongs to (p. 163).
| Expense head | What it includes | Who uses it |
|---|---|---|
| Cost of materials consumed | Raw materials and other materials consumed in manufacturing goods. | Manufacturing companies |
| Purchases of stock-in-trade | Goods bought for the purpose of trading. | Trading companies |
| Changes in inventories of finished goods, WIP and stock-in-trade | Opening inventory minus closing inventory. | Companies holding stock |
| Employee benefits expense | Salary, wages, leave encashment, staff welfare. | All companies |
| Finance cost | Interest on borrowings only; bank charges go to other expenses. | Borrowers |
| Depreciation and amortisation expense | Diminution in value of fixed assets; writing off intangibles. | Companies with fixed or intangible assets |
| Other expenses | Everything not falling above; grouped into direct, indirect and non-operating expenses. | All companies |
Two income lines feed the ladder: Revenue from operations covers sales of products, services and other operating revenue — and in a finance company, interest, dividend and income from other financial services — while Other income covers interest, dividend, gains on sale of investments and other non-operating income (p. 163).
Worked Example: The Twelve-Month Rule on a Long-Term Loan
Apply the twelve-month test to one borrowing and you have most of the skill the numerical questions demand. The rule: the part of a long-term loan repayable within twelve months of the reporting date is a current maturity, shown under Other current liabilities with a note (NCERT, p. 155).
Question. Nirmal Ltd. borrowed Rs 30,00,000 from a bank on 1 April 2022. The loan is repayable in ten equal yearly instalments, the first falling due on 31 March 2024. Show how the loan appears in the balance sheet of the company as at 31 March 2023.
Step 1 — find the yearly instalment. Rs 30,00,000 divided by 10 = Rs 3,00,000 per year.
Step 2 — apply the twelve-month test (p. 154). As at 31 March 2023, the next instalment falls due on 31 March 2024, which is exactly twelve months after the reporting date. That instalment is therefore within twelve months and is current.
Step 3 — show the current part. Rs 3,00,000 appears under Current Liabilities, in Other current liabilities, described as current maturities of long-term debt, supported by a note to accounts (p. 155).
Step 4 — show the non-current part. The remaining Rs 30,00,000 – Rs 3,00,000 = Rs 27,00,000 stays under Non-current Liabilities, in Long-term borrowings.
| Balance sheet of Nirmal Ltd. as at 31 March 2023 (relevant items only) | Note No. | Amount (Rs) |
|---|---|---|
| I. Equity and Liabilities — Non-current Liabilities — Long-term borrowings (bank loan less current maturity) | 1 | 27,00,000 |
| I. Equity and Liabilities — Current Liabilities — Other current liabilities (current maturities of long-term loan) | 1 | 3,00,000 |
Check the arithmetic. Rs 3,00,000 + Rs 27,00,000 = Rs 30,00,000, which ties back to the original loan. Had the first instalment fallen due only after 31 March 2024, the entire Rs 30,00,000 would have been a long-term borrowing at this date.
How to Read the Two Prescribed Formats
This chapter has no diagrams; its visual anchors are the two formats — Exhibit 3.1 (balance sheet, p. 148) and Exhibit 3.2 (statement of profit and loss, p. 162). Both use the same four-column layout:
- Particulars — the name of the item.
- Note No. — a number that points to the detail in Notes to Accounts.
- Figure at the end of the current reporting period — this year’s amount.
- Figure at the end of the previous reporting period — last year’s amount, for comparison.
Equity and Liabilities is printed before Assets because the claims side comes first: what the company owes to owners and outsiders, then what those claims are invested in. The Note No. column is what keeps the face clean — only broad, significant items appear there, and the supporting detail travels to the notes (p. 150).
Exhibit 3.2 reads as an arithmetic chain: total revenue, total expenses, then a series of subtractions that ends in earnings per share. Keep the ladder table above open while you trace it.
Key Terms, Defined in Plain Language
Use this table to fix the chapter’s core terms while revising; each entry carries the textbook page where the term is defined or used.
| Term | Plain definition | Page |
|---|---|---|
| Financial statements | The basic annual reports: the balance sheet, the statement of profit and loss and the cash flow statement. | 145 |
| Balance sheet | Statement of assets, liabilities and owners’ claims as on a particular date. | 167 |
| Statement of profit and loss | The revenue and expenses of a period — the performance report between two balance sheet dates. | 167 |
| Current asset / current liability | An item caught by the operating cycle, twelve-month, trading, cash or no-deferral tests. | 154 |
| Trade payables | The Schedule III name for sundry creditors; balances due to suppliers. | 156 |
| Trade receivables | The Schedule III name for sundry debtors. | 157 |
| Proposed dividend | The board’s proposal, contingent until shareholders approve it at the AGM. | 156 |
| Finance cost | Interest on borrowings only; bank charges fall under other expenses. | 163 |
| Deferred tax assets and liabilities | Tax effects of timing differences; always non-current. | 155 |
| Shareholders’ funds | Share capital, reserves and surplus, and money received against share warrants. | 150 |
| Cost of materials consumed | Raw materials and other materials used in manufacturing goods. | 163 |
The chapter itself lists five ‘Terms Introduced’ on p. 167: financial statements, statement of profit and loss, balance sheet, cost of material consumed and shareholders’ funds.
Common Mistakes Students Make Here (and How to Fix Them)
This chapter trips students because it tests whether you know the right Schedule III slot, not whether you can calculate. The six errors below are exactly what the book’s illustrations are built to expose.
| Mistake | Correct treatment | Where the rule sits |
|---|---|---|
| Showing preliminary expenses as an asset | Write them off in the year incurred — first against securities premium, the balance against profit and loss. | p. 155, Illustration 2 |
| Putting proposed dividend on the face of the balance sheet as a liability | It is a contingent liability under AS-4 until shareholders approve, so disclose it in Notes to Accounts. | p. 156 |
| Showing a debit balance of profit and loss under liabilities | Show it as a negative figure under Surplus in Reserves and Surplus, even when that head turns negative. | pp. 152 and 158, Illustrations 3 and 4 |
| Treating every trade receivable as current | Receivables realisable beyond twelve months go to Other non-current assets. | p. 157 |
| Filing loose tools under fixed assets | The chapter’s illustrations carry loose tools inside inventories. | pp. 154 and 161 |
| Merging finance cost with other expenses | Only interest is finance cost; bank charges belong to other expenses. | p. 163 |
Exam Notes: What the Chapter’s Own Questions Ask You to Do
Ground your revision in what the chapter’s exercise sets actually ask: definitions and disclosure for the short set, explanation for the long set, and placement for the numerical set. Textbook contents and the examinable syllabus are not always identical — check the current official CBSE syllabus as well.
| Exercise set | Page | Skill it tests |
|---|---|---|
| Short-answer questions | 168 | Definitions and disclosure: meaning of financial statements, limitations, three objectives, importance to shareholders, creditors, government and investors, and where named items appear in the balance sheet. |
| Long-answer questions | 169 | Explanations: nature, significance, limitations, usefulness to interested parties, and preparing or explaining the two formats up to profit before tax. |
| Numerical questions | 169-170 | Placement: recording given items under the correct major head and sub-head of a Schedule III balance sheet, including debenture issues at discount and provisions. |
The 47-item ‘Do it yourself’ list on p. 159 drills the same skill as the numerical set: decide current or non-current first, then the major head and sub-head. The book’s own illustrations show the shape of a complete answer — the item on the face under its head with a note number, and the workings in Notes to Accounts.
Chapter Recap: The Whole Chapter in One Screen
Financial statements are the end products of the accounting process: the balance sheet is a position-on-a-date statement of assets, liabilities and owners’ claims, and the statement of profit and loss is the performance report between two balance sheet dates (NCERT, p. 167). Shareholders, investors, creditors, lenders, customers, management and government all read them to make decisions (p. 165).
The comparison below sets what the statements deliver against what they cannot.
| Uses of financial statements (p. 165) | Limitations of financial statements (p. 166) |
|---|---|
| Report on management’s stewardship to shareholders. | Prepared at historical cost, so they do not reflect the current market situation. |
| Basis for the government’s fiscal and taxation policies. | Some assets may not realise their stated values in a forced liquidation. |
| Basis for banks and institutions granting credit. | Results carry bias from the personal judgements involved. |
| Basis for prospective investors judging security, liquidity and profitability. | Only aggregate information, not the detail users often need. |
| Guide to shareholders on the safety and return of their investment. | Vital information missing — loss of markets, cessation of agreements not shown. |
| Aid trade associations in setting standards and ratios. | No qualitative information such as labour relations or quality of work. |
| Help stock exchanges judge transparency and protect investor interests. | Interim reports only — the position is true only as on that date. |
Related Chapters and Resources
This listing is maintained for the 2026-27 academic session using the NCERT textbook information available to us. NCERT remains the authority for confirming the latest edition.
Chapter 3 sits in Part II of the Class 12 Accountancy book. The chapter that precedes it, Chapter 2, Issue and Redemption of Debentures, feeds the long-term borrowings and reserves lines you have just placed; the chapter that follows it, Chapter 4, Analysis of Financial Statements, works on these very statements through ratios.
For revision beyond this chapter, work from the Class 12 Accountancy notes hub, the Class 12 notes index and the main CBSE notes hub. Related accountancy pages on the same site include dissolution of a partnership firm and accountancy spreadsheet resources.
Sources and Data Verification
- This page describes Chapter 3 of the NCERT Class 12 Accountancy textbook (Part II), published as the official PDF on ncert.nic.in. All page numbers refer to that printed edition, in which the chapter opens at page 143.
- This page covers only Chapter 3 of Part II. The rest of Part II and Part I have their own pages.
- The listing is maintained for the current academic session using the NCERT information available to us.
- NCERT settles textbooks, editions and PDFs; CBSE settles the curriculum, syllabus and examinations. Textbook contents and the examinable syllabus are not always identical — check the current official syllabus.
Reference: NCERT Class 12 Accountancy textbook, chapter 3, official edition on ncert.nic.in.
Frequently Asked Questions
What is meant by financial statements of a company?
Financial statements are the basic and formal annual reports through which a company’s management communicates financial information to its owners and outside parties such as investors, tax authorities, government and employees (NCERT, p. 145). They refer to the balance sheet as at the end of the accounting period, the statement of profit and loss, and the cash flow statement (p. 145).
What is the balance sheet format as per Schedule III of the Companies Act 2013?
Schedule III prescribes a vertical balance sheet in two parts: I. Equity and Liabilities and II. Assets (p. 148).
Equity and Liabilities runs from Shareholders’ Funds (share capital, reserves and surplus, money received against share warrants) through share application money pending allotment, non-current liabilities and current liabilities; Assets run from non-current assets (fixed assets, non-current investments, deferred tax assets, long-term loans and advances) to current assets (current investments, inventories, trade receivables, cash and cash equivalents, short-term loans and advances).
Every row has four columns: Particulars, Note No., current period figure and previous period figure (pp. 148-150).
How do you decide whether an item is current or non-current in the balance sheet?
Classify an item as current if any one test applies (p. 154): it belongs to the entity’s operating cycle; it will be realised or settled within twelve months; it is held for trading; it is cash or a cash equivalent; or the entity cannot defer settling it for at least twelve months after the reporting date. Everything else is non-current.
Why is proposed dividend shown as a contingent liability and not a liability?
Because the board only proposes it; shareholders approve it at the Annual General Meeting in the next financial year, and they may reduce but not increase it (p. 156). Until that approval, the company has no present obligation, so AS-4 requires proposed dividend to be shown in Notes to Accounts as a contingent liability.
Once approved, it becomes a liability and is accounted for in the books.
Where is the debit balance of the statement of profit and loss disclosed in the balance sheet?
It is shown as a negative figure under ‘Surplus’ within Reserves and Surplus (pp. 152, 158). If the debit balance is larger than the reserves, the whole Reserves and Surplus head appears as a negative figure — the book demonstrates both cases in Illustrations 3 and 4 (pp. 157-158).
What is the rounding-off rule for presenting figures in financial statements?
The rule depends on turnover (p. 150): if turnover is less than Rs 100 crore, round to the nearest hundreds, thousands, lakhs or millions, or a decimal of these; if turnover is more than Rs 100 crore, round to the nearest lakhs or millions, or a decimal of these. Rounding off is mandatory.
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