Current and non-current classification under Schedule III: the tests, the operating cycle and examples

Every line on a Schedule III balance sheet is either current or non-current, and the split decides the current ratio, the working capital a banker sees, and whether a term loan is shown as a long-term or a short-term liability. Yet in small-company accounts, current non-current classification under Schedule III is often left to whichever side of the balance sheet the Tally group happens to sit on. This guide covers the four asset tests, the four liability tests, the operating cycle, the cases that cause most arguments in review (loans repayable on demand, covenant breaches, deposits, deferred tax, capital advances), a table of 15 common items with the answer, and a worked example. It applies to Division I (non-Ind AS) companies. For the full layout of the statements, see the Schedule III guide.

Current non-current classification under Schedule III: the eight tests

Notes 1 to 3 of the General Instructions for Preparation of Balance Sheet in Division I define a current asset, the operating cycle and a current liability. Only "current" is defined, so non-current is whatever is left. ICAI's Guidance Note on Division I (paragraph 7.1.5) draws the consequence: each balance must be split into its current and non-current portions at the reporting date. It cannot be put on one side as a whole.

Two points in the liability column are easy to miss. Test (d) looks at the company's right, not at what management expects the lender to do. And the definition adds that terms which could, at the counterparty's option, lead to settlement by issuing equity do not affect classification. The Guidance Note (paragraphs 7.5.1 and 7.5.2) limits that relief to options held by the holder. Where conversion is at the issuer's option, or the instrument is mandatorily convertible, the conversion is treated as settlement, and its timing decides the classification.

Where an Accounting Standard conflicts with Schedule III, the standard prevails, as the Schedule III general instructions provide.

The operating cycle under Schedule III and the twelve-month default

Note 2 defines the operating cycle as the time between acquiring assets for processing and realising them in cash or cash equivalents. Where the normal operating cycle cannot be identified, it is assumed to be twelve months. For most trading and service companies, the cycle is well under a year and the twelve-month tests decide almost everything. The cycle matters where it is genuinely long. Wine-making is the Guidance Note's example (paragraph 7.2).

• Inventory is current if it will be consumed or realised within the operating cycle, even if that is more than twelve months away (GN 7.1.6). Finished goods held for sale are current because they are held primarily to be traded. The Guidance Note's example keeps even excess stock beyond a fifteen-month cycle as current.
• Operating liabilities such as trade payables, salaries and other operating costs are part of working capital and stay current even if due after more than twelve months (GN 7.1.7).
• Trade receivables are judged on expected realisation. In the Guidance Note's example, a receivable from a company with a six-month cycle that will not be collected within twelve months is non-current. One that will be collected within twelve months is current, even though that is beyond the cycle.
• Several businesses, several cycles. A company with different lines of business classifies each line's assets and liabilities using that line's cycle (GN 7.2.1).

The Guidance Note recommends disclosing the operating cycle in the notes (paragraph 7.1.4). A single line in the accounting policies, such as "The Company has determined its operating cycle as twelve months", is enough for most small companies.

Current liabilities definition in Schedule III: the unconditional right to defer

Test (d) is where most classification disputes end up, because it turns on the loan's terms rather than on the repayment schedule management has in mind.

Loans repayable on demand

A loan that is repayable on demand from the day it is taken is current, even if the lender never asks for repayment (GN 7.1.9). That includes cash credit and overdraft limits, which are renewed every year and can be recalled. It also includes unsecured loans from directors, relatives or group companies with no fixed repayment terms. Schedule III itself lists "loans repayable on demand" under short-term borrowings. If a director's loan is genuinely long-term, the way to show that is a written agreement giving a fixed tenure beyond twelve months. A note that "the director does not intend to ask for it" does not create a right to defer.

Covenant breaches: ICAI GN 7.1.9

Term loan sanctions often let the bank recall the loan if the borrower misses a condition, such as filing quarterly stock statements. The Guidance Note's position for Division I companies:

• Strictly, a breach that gives the bank the right to recall removes the unconditional right to defer. But in the Indian context such clauses are usually included "as a matter of abundant caution". Where the breach is minor and the bank has not demanded repayment before the accounts are approved, the loan can continue to be classified as non-current.
• If the bank has recalled the loan before the accounts are approved, for a breach that occurred before year end, the loan is current.
• Where a material provision is breached on or before the reporting date, so that the loan is payable on demand at that date, it is not classified as current if the lender agrees, after the reporting date but before the accounts are approved, not to demand payment because of the breach. Without such an agreement, the loan is current. Material provisions are substantive breaches, such as financial covenants, and are judged case by case.

In practice, get the latest sanction letter and any bank correspondence after year end, and record the conclusion on each breach. Ind AS companies (Division II) follow Ind AS 1, which has its own rules; do not carry this reasoning across.

Current maturities of long-term borrowings

The instalments of a term loan, debentures or other long-term borrowing that fall due within twelve months of the balance sheet date are current. Since the 2021 amendment (G.S.R. 207(E)), Schedule III requires them to be shown under short-term borrowings, disclosed separately. They no longer go under other current liabilities. The rest stays in long-term borrowings, so one loan can appear in both notes (GN 8.3.1.11). The Guidance Note also asks for the current and non-current parts of each category of long-term borrowing to be shown by note or cross-reference (GN 8.6.1.2). Finance lease obligations follow the same split, but the current part goes under other current liabilities (GN 8.6.3).

Employee benefits

AS 15 governs how employee benefit obligations are measured. Their classification still follows the Schedule III tests (GN 7.3). Bonus payable within a year is current. Accumulated leave that employees can take at any time is current to that extent, even if it is measured as a long-term benefit. For unfunded gratuity, the part attributable to employees who have resigned, are expected to leave or are retiring within twelve months is current, and the rest is non-current. The Guidance Note expects the actuary to give the split, so ask for it in the valuation report.

Items with a fixed answer

• Deferred tax is always non-current. Net deferred tax assets and liabilities are presented as non-current, whatever the timing of reversal (GN 7.6). The face of the balance sheet has no current deferred tax line.
• Capital advances are always non-current. Advances for property, plant and equipment or intangible assets are shown under long-term loans and advances, not in capital work-in-progress. This applies even if the asset will arrive next month, because they turn into non-current assets rather than cash (GN 8.7.3 and 8.7.6).
• Investments follow Schedule III, not AS 13's labels. AS 13 classifies an investment as current or long-term at the date it is made. Schedule III looks at the balance sheet date. The part of a long-term investment expected to be realised within twelve months is shown as a current investment (GN 7.4.1 and 7.4.2).

Security deposits and bank deposits

Security deposits paid (rent, electricity, tender deposits) have had their own line since 2021: G.S.R. 207(E) moved them out of long-term loans and advances and into other non-current assets. Apply asset test (c). A deposit refundable only when the lease ends or the connection is closed, more than twelve months away, is non-current. One that will genuinely come back within twelve months is current. Division I has no current security deposits line, so show it under short-term loans and advances (others) or other current assets, with its nature stated.

Security and trade deposits received that are not in the nature of borrowings go under other non-current or other current liabilities (GN 8.6.3). Apply test (d). If the dealer or tenant can end the arrangement and claim a refund at any time, the company has no unconditional right to defer, and the deposit is current.

Bank deposits. Normally, only deposits with an original maturity of three months or less are cash equivalents under AS 3. Longer deposits and margin money go under "Other bank balances" (GN 6.4 and 8.8.4). Deposits with more than twelve months to run, and margin money restricted beyond twelve months, are non-current and are disclosed separately under other non-current assets (GN 8.8.4).

Classification table: 15 common items

Worked example: one company, before and after

Asha Components Private Limited (illustrative) has these balances at 31 March 2026. In the draft, each balance sits wherever its Tally group points.

In the client's draft, the full term loan and the director's loan were in long-term borrowings, the fixed deposit and capital advance were in current assets, and gratuity was entirely long-term. With other current assets of ₹180 lakh and other current liabilities of ₹70 lakh, the current ratio moves as follows:

A fall of that size changes the Schedule III ratios commentary. If last year was classified the same corrected way, the variance may be ordinary. If last year was wrong too, the comparatives need reclassifying, with a regrouping note.

Checks before you sign

• Every loan has a sanction letter or agreement on file, and its repayment schedule supports the current maturities figure.
• Covenant compliance is checked against the sanction terms, and any breach and the bank's response up to the approval date are recorded.
• Loans from directors and group companies are classified by their written terms, not by intention.
• Capital advances are not sitting in CWIP or in short-term advances, and deferred tax has no current portion.
• Fixed deposits and margin money are split by remaining maturity, and the actuary's report gives the current and non-current split.
• The previous year is classified on the same basis. These are among the Schedule III mistakes in small company accounts that a reviewer checks first. Receivables beyond twelve months also need to agree with the trade receivables ageing schedule.

Frequently asked questions

Sources

• Companies Act, 2013 — Schedule III, Division I, General Instructions for Preparation of Balance Sheet, Notes 1–3 and Note 6 (India Code, amended text)
• Schedule III amendment — G.S.R. 207(E), 24 March 2021 (Gazette)
• ICAI — Guidance Note on Division I – Non Ind AS Schedule III to the Companies Act, 2013 (Revised January 2022), paragraphs 6.4, 7.1–7.6, 8.3.1.11, 8.6.1.2, 8.6.3, 8.7.3, 8.7.6, 8.8.4
• Companies (Accounting Standards) Rules, 2021 — AS 3, AS 13, AS 15, AS 22

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