Bank Balances explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Money in a bank account is not automatically money the company can use — and Division III gives the unusable part a line of its own.
Cash and cash equivalents
Cash and cash equivalents shall be classified as:
- Cash on hand;
- Balances with banks (of the nature of cash and cash equivalents);
- Cheques, drafts on hand; and
- Others (specify nature).
The term "Cash and cash equivalents" is not defined in Division III to Schedule III. Ind AS 7 supplies it: cash is defined to include cash on hand and demand deposits with banks. Cash equivalents are defined as short term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value.
An investment normally qualifies as a cash equivalent only when it has a short maturity of, say, three months or less from the date of acquisition. This would include term deposits with banks that have an original maturity of three months or less.
The separate line
Bank balances other than cash and cash equivalents, i.e. having a maturity of more than three months, shall be disclosed as "Bank Balances other than cash and cash equivalents" on the face of the Balance Sheet.
Note (A) of the General Instructions for Preparation of Balance Sheet then requires three further disclosures:
| Disclosure | Example |
|---|---|
| Earmarked balances with banks shall be separately stated | For unpaid dividend |
| Balances held as margin money or security against the borrowings, guarantees, other commitments shall be disclosed separately | Deposits lodged with a lender |
| Repatriation restrictions, if any, in respect of cash and bank balances shall be separately stated | Balances held in a jurisdiction with exchange controls |
Margin money is excluded from cash equivalents because such balances are neither in the nature of demand deposits, nor readily available for use by the company. The same reasoning explains earmarked balances: an unpaid dividend account holds money that belongs, in substance, to shareholders who have not yet claimed it.
Repatriation restrictions extend the idea across borders. Funds an NBFC's foreign operation cannot remit are real balances, but they cannot fund obligations elsewhere in the group.
For an NBFC this classification is not cosmetic. Liquidity coverage is the central prudential question about such a business, and a cash figure inflated by margin deposits and blocked foreign balances would misstate exactly the number a reader most relies on.
One presentational detail follows the same logic in reverse: interest accrued on a fixed deposit is included in the carrying value of the fixed deposit rather than shown as a separate receivable.
Bank overdrafts
Generally there should not be a difference in the amount of cash and cash equivalents as per Ind AS 1 and as per Ind AS 7. But paragraph 8 of Ind AS 7 provides that where bank overdrafts which are repayable on demand form an integral part of an entity's cash management, bank overdrafts are included as a component of cash and cash equivalents. A characteristic of such banking arrangements is that the bank balance often fluctuates from being positive to overdrawn.
The Guidance Note is clear on where that permission stops: although Ind AS 7 permits bank overdrafts to be included as cash and cash equivalents, for the purpose of presentation in the balance sheet it is not appropriate to include a bank overdraft as a component of cash and cash equivalents unless the offset conditions as given in paragraph 42 of Ind AS 32 are complied with. Bank overdraft, in the balance sheet, should be included as "borrowings" under Financial Liabilities.
So the cash flow statement and the balance sheet can legitimately differ here — the Ind AS 7 treatment governs the former, and Ind AS 32 offsetting governs the latter.
Common mistakes
- Including margin money deposits within cash and cash equivalents.
- Netting a bank overdraft against bank balances on the balance sheet.
- Reporting unpaid dividend accounts without separately stating them.
- Testing maturity from the reporting date rather than the date of acquisition.