Step-by-Step Guide 8 Steps

How to Prepare Financial Statements for Small Companies

Complete guide to preparing balance sheet, profit and loss, and notes for small companies under Schedule III of the Companies Act, 2013. Exemptions, formats, and filing requirements.

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Dhanush Prabha
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How to Prepare Financial Statements for Small Companies
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Quick Overview
Estimated Cost₹5000
Time Required15 to 30 Days
Total Steps8 Steps
What You'll Need

Documents Required

  • Trial balance as of the financial year-end (March 31) from the accounting software or books of account
  • Bank statements for all company bank accounts for the entire financial year
  • Fixed asset register with depreciation schedule as per Companies Act rates
  • Debtors and creditors aging schedule with reconciliation statements
  • Inventory valuation report as on the balance sheet date (if applicable)
  • Income tax computation and advance tax payment details
  • Previous year's audited financial statements for comparative figures

Tools & Prerequisites

  • Accounting software (Tally Prime, Zoho Books, or QuickBooks) with updated chart of accounts
  • Schedule III Division I template for balance sheet and profit and loss formatting
  • Depreciation calculator aligned with Companies Act, 2013 useful life schedule (Schedule II)
  • Active company account on MCA V3 portal at mca.gov.in for AOC-4 filing

Small companies -- private companies with paid-up capital up to Rs 4 crore and turnover up to Rs 40 crore -- enjoy several compliance relaxations under the Companies Act, 2013, including exemption from cash flow statements and CARO reporting. However, they must still prepare and file proper financial statements in Schedule III format with the ROC through Form AOC-4 within 30 days of the AGM. Professional fees for financial statement preparation range from Rs 5,000 to Rs 25,000. This guide covers the complete process from closing books of account to filing with the MCA portal.

  • Small company thresholds: paid-up capital up to Rs 4 crore AND turnover up to Rs 40 crore
  • Key exemptions: no cash flow statement, no CARO, no auditor rotation, abridged directors' report
  • Filing deadline: AOC-4 within 30 days of AGM (AGM by September 30)
  • Format: Schedule III Division I (Indian GAAP, not Ind AS)
  • Board meetings: minimum 2 per year (vs 4 for non-small companies)

What is a Small Company?

A small company is defined under Section 2(85) of the Companies Act, 2013 as a company (other than a public company) whose paid-up share capital does not exceed Rs 4 crore and whose turnover as per the last profit and loss account does not exceed Rs 40 crore. Both conditions must be satisfied simultaneously. These thresholds were increased from Rs 2 crore (capital) and Rs 20 crore (turnover) by MCA notification dated September 15, 2022, effective from the financial year 2023-24.

The small company classification excludes: public companies (regardless of size), Section 8 companies (not-for-profit), holding companies, and subsidiary companies. A company that qualifies as a small company in one year but crosses the threshold the next year loses its small company status and must comply with full reporting requirements from that financial year onward. The classification is assessed based on the previous year's financial statements.

Financial statement preparation is governed by Section 129 (Financial Statement), Section 133 (Accounting Standards), and Section 137 (Filing with ROC) of the Companies Act, 2013. The format follows Schedule III Division I. Small company exemptions are provided through MCA notifications under Sections 462 and 463. Filing is done on mca.gov.in.

Exemptions Available to Small Companies

Small companies enjoy significant compliance relaxations compared to non-small companies. Understanding these exemptions helps save cost and preparation time.

RequirementNon-Small CompanySmall CompanyExemption Source
Cash Flow StatementMandatoryExemptMCA notification dt. 13.06.2017
CARO 2020ApplicableExemptCARO 2020 Order, Para 2
Auditor RotationMandatory (5/10 years)ExemptThird proviso, Section 139(2)
Directors' ReportFull report (Section 134)Abridged (Rule 8A)Rule 8A, Companies Rules
Board Meetings per YearMinimum 4Minimum 2Second proviso, Section 173(1)
Internal AuditRequired (if criteria met)Generally exemptSection 138 threshold
Compliance AuditRequired (if criteria met)ExemptSection 204 threshold
Annual Return CertificationExpert certification neededSelf-certification by directorSection 92(1) proviso

Based on our experience preparing financial statements for 3,000+ small companies, the cash flow statement exemption saves the most preparation time (typically 3 to 5 hours of accountant work). However, we recommend preparing an internal cash flow statement anyway because banks and lenders frequently request it during loan applications. Having it ready avoids delays during credit appraisals. The CARO exemption saves Rs 5,000 to Rs 15,000 in audit fees annually.

Step-by-Step Financial Statement Preparation

Step 1: Verify Small Company Status

Before applying any exemptions, confirm your company qualifies. Check the last audited financial statements for: paid-up capital (not authorized capital) and turnover from operations (not total income). If either threshold is exceeded, prepare full financial statements without exemptions.

CriterionThresholdWhat CountsWhat Does Not Count
Paid-up CapitalUp to Rs 4 croreFace value of shares issued and paidSecurities premium, reserves, authorized capital
TurnoverUp to Rs 40 croreRevenue from operations onlyOther income, exceptional items, investment income

Step 2: Close Books of Account

Complete all accounting entries for the financial year (April 1 to March 31). The year-end closing process involves multiple adjustments:

  1. Accrued expenses: Record all expenses incurred but not yet paid (salaries payable, rent due, professional fees outstanding)
  2. Prepaid expenses: Defer portions of expenses paid for future periods (insurance premium, annual software licenses)
  3. Outstanding income: Record income earned but not yet received (accrued interest, unbilled revenue)
  4. Depreciation: Calculate and record depreciation on all fixed assets per Schedule II rates
  5. Provision for bad debts: Assess receivables and create appropriate provisions for doubtful debts
  6. Inventory adjustment: Record closing stock based on physical count and valuation
  7. Tax provisions: Calculate and record current tax, advance tax adjustments, and deferred tax

Step 3: Calculate Depreciation (Schedule II)

Depreciation must follow the useful life prescribed in Schedule II of the Companies Act, 2013. Key rates for common asset categories:

Asset CategoryUseful Life (Years)SLM Rate (%)WDV Rate (%)
Factory Building303.17%9.50%
Office Building601.58%4.87%
Plant and Machinery (General)156.33%18.10%
Furniture and Fittings109.50%25.89%
Vehicles8-1011.88%31.23%
Computers and Laptops331.67%63.16%
Mobile Phones331.67%63.16%
Software3-616.21%39.30%

Companies Act depreciation rates (Schedule II) differ from Income Tax Act depreciation rates. For tax purposes, use the rates under Section 32 (15%, 25%, 40% WDV on different asset blocks). The difference creates a deferred tax asset or liability that must be recorded in the financial statements per AS 22. Calculate both sets of depreciation separately -- one for the books of account and one for the income tax return.

Step 4: Prepare the Balance Sheet

The balance sheet follows Schedule III Division I format. Small companies may use the abridged format with consolidated line items.

The balance sheet has two sides. Equity and Liabilities includes: Share Capital (authorized, issued, subscribed, paid-up), Reserves and Surplus (securities premium, retained earnings, general reserve), Non-Current Liabilities (long-term borrowings, deferred tax liability, long-term provisions), and Current Liabilities (short-term borrowings, trade payables, other current liabilities, short-term provisions). Assets includes: Non-Current Assets (property/plant/equipment, intangible assets, long-term investments, long-term loans and advances), and Current Assets (inventories, trade receivables, cash and bank balances, short-term loans and advances, other current assets). Both sides must match (total equity + liabilities = total assets).

Step 5: Prepare the Profit and Loss Statement

The statement of profit and loss follows Schedule III Division I format with the following structure:

Line ItemDescriptionNotes
Revenue from OperationsSales of goods/servicesNet of GST, returns, and discounts
Other IncomeInterest, dividends, gainsNon-operational income
Total IncomeSum of above
Cost of Materials ConsumedRaw material purchasesOpening + Purchases - Closing stock
Employee Benefit ExpensesSalaries, PF, gratuityInclude all employee costs
Finance CostsInterest on borrowingsBank interest, loan interest
DepreciationSchedule II ratesRefer fixed asset schedule
Other ExpensesRent, utilities, professional feesAll other operating expenses
Total ExpensesSum of above
Profit Before TaxIncome minus Expenses
Tax ExpenseCurrent tax + Deferred taxAs per Income Tax Act rates
Profit After TaxNet profit for the year
Earnings Per Share (EPS)Basic and DilutedPAT / Weighted average shares

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Step 6: Prepare Notes to Financial Statements

Notes are an integral part of the financial statements. Every line item in the balance sheet and P&L must have a corresponding note with detailed breakdowns.

Note 1: Significant Accounting Policies is the most critical note. It must disclose: basis of preparation (historical cost convention, going concern), revenue recognition policy, depreciation method (SLM or WDV), inventory valuation method (FIFO or weighted average), employee benefit accounting (gratuity, leave encashment, PF), tax accounting (current and deferred), and impairment policy. The accounting policy note sets the foundation for all other disclosures.

Trade Payables Aging Schedule (MSME Disclosure): Since FY 2021-22, all companies must disclose trade payables aging with separate classification for MSME and non-MSME creditors. The aging schedule shows outstanding amounts in brackets: less than 1 year, 1 to 2 years, 2 to 3 years, and more than 3 years. Similarly, trade receivables must be disclosed with an aging schedule showing unbilled, not due, and overdue categories.

Step 7: Board Approval and Audit

Present the draft financial statements to the statutory auditor for the annual audit. The auditor examines the books of account, verifies balances, tests transactions, reviews internal controls, and issues the audit report. After the audit, present the final financial statements (with auditor's report) to the board of directors for approval at a board meeting. The financial statements are signed by:

  1. Chairperson of the meeting (if authorized by the board)
  2. Two directors (one being the managing director, if any)
  3. Chief Financial Officer (CFO) -- if appointed
  4. Compliance Professional -- if appointed

Step 8: File AOC-4 with ROC

File the approved and audited financial statements with the ROC using Form AOC-4 within 30 days of the AGM. Small companies file the standard AOC-4 form (not AOC-4 XBRL, which is mandatory only for specified companies). Upload: signed balance sheet, profit and loss account, notes, directors' report, and auditor's report as PDF attachments. Pay the filing fee through the MCA payment gateway. Affix DSC of a director and the Compliance Professional (if appointed).

AOC-4 Filing Fees and Penalties

Authorized CapitalNormal Filing FeeLate Filing (Per Day)Maximum Penalty (Company)
Up to Rs 1 lakhRs 200Rs 100/dayRs 2,00,000
Rs 1 lakh to Rs 5 lakhRs 300Rs 100/dayRs 2,00,000
Rs 5 lakh to Rs 25 lakhRs 400Rs 100/dayRs 2,00,000
Rs 25 lakh to Rs 1 croreRs 500Rs 100/dayRs 2,00,000
Above Rs 1 croreRs 600Rs 100/dayRs 2,00,000

Based on our compliance practice, the biggest risk for small companies is director disqualification. Under Section 164(2), if a company fails to file financial statements for 3 consecutive years, all directors on the board are disqualified from being appointed as director in any company for 5 years. This disqualification affects all current and future directorships. Never delay AOC-4 filing beyond 30 days of the AGM -- the Rs 100/day penalty is the lesser concern compared to disqualification.

Common Mistakes in Financial Statement Preparation

1. Incorrect Depreciation Rates

Using Income Tax Act depreciation rates instead of Companies Act Schedule II rates is the most common error. This results in incorrect profit figures and potential audit qualifications. Maintain two depreciation schedules: one for the books (Schedule II) and one for tax computation (Section 32). The difference creates deferred tax entries.

2. Missing MSME Trade Payables Disclosure

Failure to separately disclose MSME creditors in the trade payables aging schedule leads to audit qualifications and non-compliance with Schedule III amendments. Obtain MSME declarations from all vendors at the start of each financial year. Classify trade payables into MSME and non-MSME categories in the accounting software.

3. Not Recording Deferred Tax

Many small companies ignore deferred tax accounting, resulting in incorrect tax expense and profit figures. AS 22 requires recording deferred tax for all timing differences. Common triggers: depreciation rate differences between Companies Act and Income Tax Act, provisions not allowed for tax purposes until actually paid, and carry-forward tax losses. Use a simple spreadsheet to track all timing differences.

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Summary

Preparing financial statements for small companies involves closing the books of account, calculating depreciation per Schedule II, preparing the balance sheet and profit and loss in Schedule III Division I format, drafting comprehensive notes to accounts, obtaining board approval and auditor sign-off, and filing Form AOC-4 within 30 days of the AGM. Small companies benefit from key exemptions -- no cash flow statement, no CARO, no auditor rotation -- but must still maintain proper books and file annual accounts. Professional preparation costs Rs 5,000 to Rs 25,000. Never miss the filing deadline as 3 consecutive years of non-filing triggers director disqualification.

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Frequently Asked Questions

What is a small company under the Companies Act, 2013?
A small company under Section 2(85) is a company (other than a public company) with paid-up share capital not exceeding Rs 4 crore AND annual turnover not exceeding Rs 40 crore (thresholds updated by MCA notification in 2023). Both conditions must be met simultaneously. Section 8 companies (not-for-profit) and holding/subsidiary companies are excluded from the small company definition regardless of their capital or turnover.
What financial statements must a small company prepare?
A small company must prepare: Balance Sheet (statement of assets, liabilities, and equity), Statement of Profit and Loss (income and expenses), and Notes to Financial Statements (explanations and disclosures). Small companies are exempt from preparing a Cash Flow Statement (MCA notification dated June 13, 2017). All statements must follow Schedule III Division I format and include comparative figures from the previous year.
Are small companies exempt from the cash flow statement?
Yes. Small companies are exempt from preparing the Cash Flow Statement under the MCA notification dated June 13, 2017, amending Schedule III. This exemption reduces the reporting burden. However, it is good practice to prepare a cash flow statement for internal management use, bank loan applications, and investor discussions. If the company loses small company status in any year, the cash flow statement becomes mandatory from that year.
What is Schedule III of the Companies Act?
Schedule III prescribes the format for preparing financial statements. Division I applies to companies required to comply with Indian Accounting Standards (Ind AS) that are not applicable, i.e., companies following Indian GAAP. Division II applies to Ind AS-compliant companies. Small companies follow Division I format. The schedule specifies line items for the balance sheet, statement of profit and loss, and mandatory disclosures in notes.
Is CARO applicable to small companies?
No. CARO (Companies Auditor's Report Order) 2020 is not applicable to small companies as defined under Section 2(85). This is a significant exemption as CARO requires detailed reporting on fixed assets, inventory, loans, deposits, statutory dues, defaults, fraud, and other compliance matters. The exemption reduces both audit cost and compliance time. However, the statutory auditor must still issue a standard audit report under Section 143.
Is auditor rotation applicable to small companies?
No. Small companies are exempt from mandatory auditor rotation under the third proviso to Section 139(2). This means the same audit firm can continue as statutory auditor beyond the 5-year (individual) or 10-year (firm) term without mandatory rotation. The exemption provides continuity and cost savings. However, the company must still appoint the auditor at each AGM for a term of up to 5 years with shareholders' approval.
What is the deadline for filing financial statements with ROC?
Financial statements must be filed with the ROC using Form AOC-4 within 30 days of the AGM (Section 137(1)). The AGM must be held within 6 months from the financial year-end (September 30 for March year-end companies). Late filing attracts additional fees: Rs 100 per day of delay (no maximum cap). The company, directors, and CFO can also face penalties under Section 137(3) for non-filing.
What is the abridged balance sheet format?
The abridged balance sheet is a simplified version where small companies report consolidated figures for certain line items instead of detailed sub-classifications. For example, instead of separately disclosing all categories of non-current assets, a small company may group them with less granularity. The abridged format reduces preparation time while meeting statutory requirements. The notes to accounts still need to provide breakdowns where material.
What depreciation method should small companies use?
Small companies can use either Straight Line Method (SLM) or Written Down Value (WDV) method for depreciation. The method chosen must be consistently applied across all assets of the same class and disclosed in the accounting policies. Depreciation rates must follow the useful life prescribed in Schedule II of the Companies Act. For example: buildings 30-60 years, plant and machinery 15 years, computers 3 years, vehicles 8-10 years.
What is the directors' report requirement for small companies?
Small companies prepare an abridged directors' report (Section 134(3) read with Rule 8A). The abridged report covers: web address for annual return disclosure, number of board meetings, directors' responsibility statement, details of fraud reported by auditors, explanatory statement for board recommendations, CSR details (if applicable), and company's financial performance. Items like risk management, internal controls, and managerial remuneration details can be omitted.
What are the accounting standards applicable to small companies?
Small companies follow Indian GAAP (Indian Accounting Standards issued by the relevant professional body), not Ind AS. Ind AS is mandatory only for companies with net worth of Rs 250 crore or more, or listed companies. Small companies apply all Accounting Standards (AS) issued by the relevant professional body as notified by MCA, including AS 1 (Disclosure), AS 6 (Depreciation), AS 9 (Revenue Recognition), AS 10 (Fixed Assets), and AS 15 (Employee Benefits), with simplified disclosures.
What is Form AOC-4 and how to file it?
Form AOC-4 is the e-form used to file financial statements with the ROC under Section 137. Small companies file AOC-4 (not AOC-4 XBRL). Steps: log in to MCA V3 portal, select Form AOC-4, enter financial data (revenue, profit, assets, liabilities), upload attachments (balance sheet, P&L, notes, directors' report, auditor's report), affix DSC, and pay the filing fee. Fee: Rs 200 to Rs 600 based on authorized capital.
What happens if a small company exceeds the threshold?
If a small company's paid-up capital exceeds Rs 4 crore or turnover exceeds Rs 40 crore, it loses small company status from the following financial year. The company must then: prepare a cash flow statement, comply with CARO 2020 auditor reporting, follow mandatory auditor rotation, prepare a full directors' report (not abridged), and comply with all provisions applicable to non-small companies. The transition is immediate.
What is the penalty for not filing financial statements?
Non-filing of AOC-4 attracts: additional fees of Rs 100 per day of delay (no maximum cap), penalty on the company of Rs 10,000 (minimum) and Rs 1,000 per day of continuing default (maximum Rs 2 lakh), and penalty on every officer in default of Rs 10,000 and Rs 1,000 per day (maximum Rs 50,000) under Section 137(3). Directors of companies with 3+ years of non-filing can be disqualified under Section 164(2).
Can a small company use Tally for financial statement preparation?
Yes. Tally Prime is the most widely used accounting software among small companies in India. It supports Schedule III format for balance sheet and P&L preparation, depreciation calculation, GST compliance, and can generate the financial statements in the required format. Other options include Zoho Books, QuickBooks, and BUSY Accounting. Ensure the software's chart of accounts is mapped to Schedule III line items for accurate statement generation.
What are related party disclosures for small companies?
Small companies must disclose related party transactions in the notes to financial statements as required by AS 18 (Related Party Disclosures). This includes: names of related parties, nature of relationship, transaction amounts, outstanding balances, and terms and conditions. Related parties include: holding/subsidiary companies, directors and their relatives, KMP, and entities in which directors have significant influence. Material transactions must be disclosed individually.
What is the auditor's report format for small companies?
The statutory auditor issues an independent auditor's report under Section 143(2) covering: opinion on the financial statements (true and fair view), basis for opinion, management's responsibility, auditor's responsibility, key audit matters (optional for small companies), and reporting on other legal requirements under Section 143(3). Since CARO is exempt, the auditor does not need to report on the CARO clauses. The report follows SA 700/SA 705/SA 706 standards.
What is the AGM deadline for small companies?
The Annual General Meeting (AGM) must be held within 6 months from the end of the financial year (Section 96). For companies with a March 31 year-end, the AGM deadline is September 30. The AGM must consider: adoption of financial statements, declaration of dividend, appointment of directors, appointment of auditors, and any special business. Financial statements must be approved by the board before the AGM.
How to prepare notes to accounts for a small company?
Notes to accounts should include: Note 1: Significant Accounting Policies (basis of preparation, revenue recognition, depreciation, inventory valuation), followed by numbered notes for each balance sheet and P&L line item. Key notes: share capital (authorized, issued, subscribed), reserves, borrowings (secured/unsecured, terms), fixed assets (schedule with additions, deletions, depreciation), trade receivables aging, trade payables aging (MSME and non-MSME separately), contingent liabilities, and related party transactions.
What is the MSME disclosure requirement?
Small companies must disclose trade payables to Micro and Small Enterprises separately under the MSMED Act, 2006. Required disclosures: principal amount outstanding, interest due on delayed payments, interest paid, amount of further interest remaining due, and amounts paid beyond the appointed day. This disclosure is mandatory in the notes to financial statements. Obtain MSME declarations from all vendors to identify covered entities. Non-disclosure attracts audit qualifications.
What is deferred tax and do small companies need to account for it?
Deferred tax arises from timing differences between accounting income and taxable income (e.g., depreciation differences). Small companies must account for deferred tax as per AS 22 (Accounting for Taxes on Income). The deferred tax asset/liability is shown in the balance sheet and the deferred tax expense/income is shown in the P&L. Common items: depreciation difference (Companies Act vs Income Tax Act rates), provision for bad debts, and employee benefit provisions.
Can a small company opt for tax audit instead of statutory audit?
No. Tax audit under Section 44AB of the Income Tax Act is separate from statutory audit under Section 143 of the Companies Act. Every company, including small companies, must have a statutory audit regardless of turnover. Tax audit is additionally required if turnover exceeds Rs 1 crore (Rs 10 crore if 95% of transactions are digital). Both audits are independent and can be conducted by the same or different auditors.
What is the board meeting requirement for financial statement approval?
The board must approve financial statements at a duly convened board meeting. Small companies must hold a minimum of 2 board meetings per year (reduced from 4 for non-small companies) with at least 90 days gap between meetings. The financial statement approval meeting typically happens in July-August, before the AGM. The board resolution approving financial statements requires MGT-14 filing within 30 days.
What is the minimum number of board meetings for small companies?
Small companies must hold at least 2 board meetings per calendar year with a gap of at least 90 days between meetings (second proviso to Section 173(1)). This is a relaxation from the standard requirement of 4 meetings per year with a maximum gap of 120 days. One meeting is typically for financial statement approval (July-August), and the other for routine business or compliance review (January-March).
How to handle inventory valuation for small companies?
Inventory must be valued at lower of cost or net realizable value as per AS 2 (Valuation of Inventories). Cost methods: FIFO (First In First Out) or Weighted Average Cost. LIFO is not permitted. For manufacturing companies, cost includes: material cost, direct labor, and factory overheads. Conduct a physical stock count on or near the balance sheet date. Prepare a detailed inventory valuation report reconciled with the books of account.
What are contingent liabilities and how to disclose them?
Contingent liabilities are potential obligations depending on future events (e.g., pending lawsuits, guarantees given, disputed tax demands). They are not recorded in the balance sheet but disclosed in the notes under a separate heading. Disclose: nature of the contingency, estimated financial effect, uncertainties about the amount or timing, and possibility of reimbursement. Common items for small companies: income tax demands under appeal, bank guarantees, and pending litigation.
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Guide by Dhanush Prabha

Dhanush Prabha is the Chief Technology Officer and Chief Marketing Officer at IncorpX, leading platform development, digital growth, and product strategy. With experience in full-stack development, scalable systems, SEO, and marketing automation, he focuses on building technology-driven solutions and educational business resources for startups and growing businesses. He writes on technology, entrepreneurship, business setup processes, and digital transformation.