Reserves and surplus under Schedule III: negative surplus, securities premium and other reserves

Reserves and surplus is the note most drafts get almost right: the closing figures agree to the trial balance, but the movement is missing, a loss is parked on the assets side, or share issue expenses have quietly reduced the securities premium without anyone checking section 52. This guide sets out how reserves and surplus under Schedule III (Division I) is presented — the eight sub-heads, the negative surplus rule, the movement each reserve must show, the legal restrictions on using each reserve, and where share warrants and share application money sit. It closes with a worked surplus reconciliation in the format the note should take. It is part of our Schedule III guide; Ind AS companies follow Division II, which presents "other equity" and is not covered here.

Reserves and surplus under Schedule III: the eight sub-heads

On the face of the Balance Sheet, "Reserves and surplus" is item (1)(b) under shareholders' funds, between share capital and money received against share warrants. Note B of Part I of Schedule III classifies it as follows:

Two definitions sit alongside the list. A reserve specifically represented by earmarked investments is to be called a "fund". And a reserve is not a provision: the Guidance Note distinguishes reserves (appropriations of profit) from provisions under AS 29 (liabilities measured with estimation). A "reserve for income tax" or "reserve for bad debts" in a Tally trial balance is usually a provision and belongs in provisions or as a deduction from receivables, not in this note.

The "other reserves" line is not a dumping ground. The Guidance Note says each reserve must be shown separately because its nature, purpose and amount are required — general reserve, a reserve under the Income-tax Act, a special reserve under section 45-IC of the RBI Act for an NBFC, and so on.

Additions and deductions since the last balance sheet

Schedule III requires "additions and deductions since last balance sheet" under each of the specified heads. The Guidance Note reads this as disclosure of the movement in each reserve since the last balance sheet; in practice that means opening balance, additions, deductions and closing balance, with the same for the comparative year. A note that lists only closing balances, even if they total correctly, does not meet the requirement.

The movement in surplus is where appropriations now live. Under Schedule III the Statement of Profit and Loss ends at profit for the year; it no longer shows appropriations. Transfers to general reserve, transfers to DRR, dividends paid and bonus shares issued out of surplus are all shown in the surplus reconciliation inside this note. The general instructions for the Statement of Profit and Loss (paragraph 5(iv)) also ask for the aggregate, if material, of amounts set aside to, and withdrawn from, reserves; the Guidance Note confirms these are disclosed under the relevant line of reserves and surplus, not charged in the Statement of Profit and Loss, because they are appropriations.

Two dividend points follow. First, since AS 4 was amended in 2016, a dividend proposed or declared after the balance sheet date is not a liability at that date unless a statute requires it; it is disclosed in the notes. Schedule III separately asks for the amount of dividends proposed to be distributed to equity and preference shareholders and the amount per share, and for arrears of fixed cumulative preference dividends. Secondly, the final dividend for last year, approved at this year's AGM, is recognised this year — it appears as a deduction in the current year's surplus reconciliation.

Debit balance of profit and loss under Schedule III: the negative surplus rule

Paragraph (iii) of Note B is explicit: a debit balance of the Statement of Profit and Loss is shown as a negative figure under "Surplus". The total of reserves and surplus is then shown after adjusting that negative surplus, even if the resulting figure is negative.

So accumulated losses never appear on the assets side as "Profit and loss account (debit balance)" — a habit some small-company drafts carry over from old formats or from Tally's own balance sheet. And the losses are not silently netted against general reserve: every reserve stays on its line, any transfer from general reserve to surplus is shown in both movements, the surplus is shown as negative, and the total is whatever it comes to.

On the face, reserves and surplus shows (2,90,000), and with share capital of ₹5,00,000 shareholders' funds are ₹2,10,000. Figures are illustrative. The negative total does not let the company write the losses off against securities premium: section 52(1) applies the capital-reduction provisions to the securities premium account as if it were paid-up capital, so that set-off needs a reduction of capital, not a journal entry. A negative net worth also feeds the going concern assessment and ratios such as debt-equity and return on equity — see Schedule III ratios and the 25% variance.

Securities premium and other reserves: restrictions on use

The classification matters because the Act restricts what each reserve can be used for:

Three practical points. A DRR is not required in every case: since the August 2019 amendment of rule 18(7), no DRR is needed by banks and all-India financial institutions, by listed companies (for both public issues and private placements), or by unlisted NBFCs and housing finance companies for privately placed debentures; other unlisted companies maintain a DRR of 10% of the value of outstanding debentures — check the current rule for the specific case. Share issue expenses debited to securities premium are a permitted use under s.52(2)(c), but they must appear as a deduction in the premium's movement, not netted silently against the addition. And a capital reserve is not available for dividend, which is why the Guidance Note prefers to keep capital profits there rather than in surplus.

Dividend out of reserves: section 123 in brief

Section 123(1) permits dividend out of the current year's profits, out of undistributed profits of earlier years, or both, after providing depreciation under Schedule II. Unrealised gains, notional gains and revaluation of assets are excluded in computing profits, and dividend cannot be declared from reserves other than free reserves. Previous losses and depreciation not provided must be set off against the current year's profit first.

Where, owing to inadequate or absent profits, a company proposes dividend out of accumulated profits transferred to free reserves, rule 3 of the Companies (Declaration and Payment of Dividend) Rules, 2014 adds conditions: the rate cannot exceed the average of the three preceding years (not applicable if no dividend was declared in those years); the amount drawn cannot exceed one-tenth of paid-up capital plus free reserves per the latest audited financial statements; the amount drawn first sets off the current year's loss; and reserves after the withdrawal must not fall below 15% of paid-up capital. Whatever is declared appears as a deduction in the movement of the reserve it came from. For the year's profit, s.123(1) allows the company to transfer such percentage to reserves as it thinks fit — there is no mandatory transfer.

Share warrants and share application money: where they go

Neither is a reserve, but both sit next to this note and are often mixed into it.

• Money received against share warrants — a separate line, item (1)(c) within shareholders' funds. The Guidance Note explains that warrants give the holder a right to acquire equity shares; until allotment the money is not share capital, so it gets its own line.
• Share application money pending allotment — a separate line, item (2), between shareholders' funds and non-current liabilities. Only the amount not exceeding the issued capital and not refundable goes here. The refundable part — the amount in excess of the issued capital, or the whole amount where minimum subscription is not met — goes to "Other current liabilities", with interest accrued on it. The Guidance Note adds that application money in excess of authorised capital, where the increase is still pending, is also shown under other current liabilities.
• Calls received in advance — not share capital or application money; the Guidance Note places them in other current liabilities.

The share application money disclosures (terms, number of shares, premium, period for allotment, whether authorised capital is sufficient, and the period and reason for any money pending beyond the allotment period) apply to both the equity and the liability portions. For the share capital note itself, see share capital note under Schedule III.

Worked example: the reserves and surplus note with the surplus reconciliation

Example Pvt Ltd had 2,00,000 equity shares of ₹10 at 1 April 2025. In January 2026 it made a rights issue of 10,000 shares at ₹50 (premium ₹40 per share) and incurred ₹35,000 of issue expenses, which the board decided to write off against securities premium. Profit after tax was ₹12,60,000. The AGM in September 2025 approved a final dividend of ₹1 per share for FY 2024-25 on 2,00,000 shares, paid in October. The board transferred ₹1,00,000 to general reserve. Figures are illustrative.

Below the table, the proposed dividend note: "The Board has proposed a final dividend of ₹1.50 per equity share for FY 2025-26, amounting to ₹3,15,000 on 2,10,000 shares, subject to approval at the annual general meeting. It has not been recognised as a liability."

Three tie-outs make this note reliable. The profit added to surplus equals the profit for the year in the Statement of Profit and Loss. The rights issue premium agrees to the allotment working and the share capital reconciliation (₹1,00,000 added to share capital, ₹4,00,000 to premium). And the closing surplus agrees to the trial balance after the dividend and transfer entries — if the client booked the dividend through a "dividend paid" ledger in the P&L group, it has to come out of profit and into this reconciliation. For the place of this note among the others, see notes to accounts format under Schedule III.

Before you sign: reserves and surplus checks

• Every reserve on its own Schedule III line, in order; "other reserves" broken into each reserve with its nature and purpose.
• Opening, additions, deductions and closing shown for each reserve, for both years; openings agree to last year's signed accounts.
• Debit balance of profit and loss shown as negative surplus, and a negative total shown as negative — nothing on the assets side.
• Every debit to securities premium is a s.52(2) purpose; capital redemption reserve created for redemption or buy-back out of profits.
• Provisions labelled "reserve" in the trial balance moved to provisions.
• Dividend paid in the year shown as an appropriation in surplus; proposed dividend disclosed, not provided.
• Share warrants and share application money on their own lines; refundable application money and calls in advance in other current liabilities.

A loss parked on the assets side is among the Schedule III mistakes in small company accounts that a reviewer spots on the first page.

Frequently asked questions

Sources

• Companies Act, 2013 — sections 2(43), 52, 55, 63, 71(4) and 123, and Schedule III, Division I, Part I, Note B, Note G(g) and paragraph U; Part II, paragraph 5(iv) (India Code, amended text)
• ICAI — Guidance Note on Division I – Non Ind AS Schedule III to the Companies Act, 2013 (Revised January 2022), paras 8.1.2 to 8.2.5, 8.8.7.7, 10.9 and 10.10
• Companies (Declaration and Payment of Dividend) Rules, 2014 — rule 3
• Companies (Share Capital and Debentures) Amendment Rules, 2019 — G.S.R. 574(E), 16 August 2019 (rule 18(7))
• AS 4, Contingencies and Events Occurring after the Balance Sheet Date, para 14 — Companies (Accounting Standards) Rules, 2021 (amended 2016)

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