Notes to Accounts

Notes to Accounts are used for presenting additional information, or details of items that appear in the financial statements as aggregated figures. These are an integral part of the financial statements. They typically span over a number of pages and elaborate the data present in the financial statements. They also comprise explanations of the management about the various assumptions and policies adopted in the preparation of financial statements. They mainly contain information about the items in the financial statements which unless so explained may lead to impairment of true and fair view of state of affairs. Drafting of these notes requires considerable skill and knowledge to ensure that the information is adequately conveyed to the end user of the statements. The need for Notes to Accounts is -

1. They enhance the understanding of the figures in the accounts.

2. They avoid cluttering the financial statements with details.

3. They are more technical and sophisticated in nature and helps acquire a complete understanding of the financial statements.

4. Notes to Accounts give information as required by Parts II, III and IV of the Schedule VI of the Companies Act, 1956 along with other disclosures required by statutes, notifications or orders prescribed from time to time.

5. They take care of most of the auditor queries on accounts, which are explanatory in nature.

6. They take care of qualitative information giving  support to the bare  figures appearing in the financial statements and schedules  and convey complete information to users.

The Notes to Accounts may be broadly classified into the following categories:

• Explanatory notes, and

• Notes which provide statutory information.

Notes, which merely provide explanation or information are known as explanatory notes. The directors give these notes to supplement or explain any information given in the profit and loss account or balance sheet. These notes constitute an integral part of the financial accounting statements. 

The following is an exhaustive list of various explanatory notes that form an integral part of the financial statements:

• Disclosure of accounting policies.

• Income taxes.

• Pension and other post employment benefit plans.

• Fixed assets.

• Business segments.

• Labor problems.

• Sales being accounted net of excise duty.

• Defalcation by an employee.

• Contingencies.

The vertical form of financial statements is easily comprehendible since it is not loaded with too many details. The detailed break-up of each figure contained in the Balance Sheet and Profit and Loss Account is  present in the Schedules.  The need for schedules is -

1. Even a layman can easily ascertain the financial position of the company since it is not cluttered up with a mass of details.

2. The shareholders do not lose interest in the financial statements since they need not have to go through long drawn financial statements, but at the same time those who are interested in details have the schedules to look into and the notes to analyze the performance.

3. Shareholders can easily move to item-wise details since they are cross referenced on the face of the financial statements.

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