MSME Disclosure in Financial Statements in 2026
Last updated: 16 October 2026
Quick Answer: MSME disclosure in financial statements is the note reporting dues to micro and small suppliers, required by section 22 of the MSMED Act, 2006. It shows year-end unpaid principal and interest, late payments and the interest on them. Companies also split trade payables into MSME and other dues, aged by due date under Schedule III.
Take a Tiruppur garment exporter buying trims from small units, or a Coimbatore foundry paying micro job workers. For both, MSME disclosure in financial statements starts in the vendor master, not at the audit table.
Each March the finance controller must decide whether the vendor master can carry this note or whether supplier status must be rebuilt first.
What Must the Section 22 Note Show?
Five figures, each for the current and the previous year, whenever the buyer's annual accounts must be audited under any law.
| Item | What section 22 asks for | What usually goes in the figure |
|---|---|---|
| (a) | Principal and the interest due on it (shown separately), unpaid to any supplier at year-end | Closing dues to micro and small suppliers, plus interest on the overdue part |
| (b) | Interest paid under section 16, with payments made beyond the appointed day during the year | Interest actually paid, and the bills settled late |
| (c) | Interest due for the delay on payments made late during the year, without adding the interest specified under the Act | All interest on this year's late payments, paid or not |
| (d) | Interest accrued and unpaid at year-end | The unpaid interest balance at the balance sheet date |
| (e) | Further interest due in later years until actually paid, for disallowance under section 23 | Interest carried forward until the supplier is paid |
The disclosure duty in section 22 of the MSMED Act, 2006 binds every buyer under a statutory audit: a company, an LLP, a partnership firm or a trust.
The supplier test is narrower. The Act defines a supplier as a registered micro or small enterprise, so dues to medium enterprises stay out of all five figures.
Which Suppliers Count as Micro or Small Enterprises in 2026?
A supplier belongs in the note when it holds a Udyam Registration. Both its investment in plant and machinery or equipment and its turnover must also sit within the micro or small limits below.
| Category | Investment in plant and machinery or equipment | Turnover | In the section 22 note? |
|---|---|---|---|
| Micro | Up to ₹2.5 crore | Up to ₹10 crore | Yes |
| Small | Up to ₹25 crore | Up to ₹100 crore | Yes |
| Medium | Up to ₹125 crore | Up to ₹500 crore | No |
These are the revised investment and turnover limits that took effect on 1 April 2025. Crossing either ceiling moves an enterprise up a category; it moves down only when it falls below both.
The revision widened the small band, so re-check vendors near the old ceilings. A supplier with ₹80 crore of turnover and modest machinery was medium under the 2020 limits but is small now.
How Do You Confirm a Supplier's Udyam Status?
Ask for the certificate, check the number on the government's Udyam Registration portal and record the category and date in the vendor master.
The category is refreshed from the enterprise's income-tax and GST returns, so last year's confirmation may be out of date. Keep a signed statement from every unregistered supplier as evidence for leaving it out.
MSME Disclosure as per Schedule III: How Are Trade Payables Shown?
In three places: a split on the face of the balance sheet and the section 22 details in the notes, both inserted by G.S.R. 679(E) of 2015 for Division I and G.S.R. 1022(E) of 2018 for Division II, and an ageing schedule in force since 1 April 2021. Division I (Accounting Standards companies) and Division II (Ind AS companies) carry all three.
Where the MSME figures sit under Schedule III
| Where | What it shows |
|---|---|
| Face of the balance sheet | Trade payables split into total outstanding dues of micro enterprises and small enterprises, and of other creditors |
| Notes, paragraph FA | The five section 22 details, using the Act's meanings of buyer, supplier and appointed day |
| Notes, paragraph FB | Trade payables due for payment, aged under 1 year, 1 to 2 years, 2 to 3 years and over 3 years |
The trade payables ageing schedule added by the 24 March 2021 amendment has four rows: MSME, others, disputed dues of MSMEs and other disputed dues. Ages run from the due date of payment or, where none is agreed, from the date of the transaction. Unbilled dues are shown separately.
Two checks keep the MSME disclosure consistent. The MSME rows of the ageing must add to the micro and small figure on the face, and item (a) normally starts from that figure. Agree with your auditor how a small enterprise's dues for a machine are treated. The Act speaks of amounts unpaid to any supplier, while ICAI's Guidance Note on Division II (para 8.2.4.2) keeps amounts due for capital goods outside trade payables.
How Do the 45-Day Limit and Interest Feed the Note?
They decide which payments are late and how much interest each figure carries.
The Payment Limit and Section 16 Interest
Under section 15, the buyer pays by the date agreed in writing, and that period can never exceed 45 days from acceptance or deemed acceptance. Where no period is agreed in writing, payment falls due before the appointed day: the day after 15 days from acceptance or deemed acceptance. Past either point, section 16 charges interest compounded at monthly rests, at a rate three times the bank rate notified by the Reserve Bank.
The Tax Effect From 1 April 2026
Under section 37(2)(g) of the Income-tax Act, 2025, a sum owed to a micro or small enterprise beyond the section 15 limit is deductible only in the tax year it is actually paid. There is no grace up to the return due date. The MSMED interest itself is never deductible (section 23), which is why item (e) tracks it until payment.
How Do Auditors Review the MSME Note?
Auditors test the MSME disclosure on three points. Did the company identify its micro and small suppliers, do the figures tie to the vendor ledgers, and was interest worked out on every late payment?
A note that says only that no information was received from suppliers, with nil figures, invites the question of whether the company asked. ICAI's Financial Reporting Review Board, in its 2022 Study on Compliance of Financial Reporting Requirements (Ind AS Framework), Volume II, recorded missing micro and small dues and missing section 22 details as non-compliance with Schedule III.
A separate half-yearly return, MSME Form 1, reports outstanding payments to micro and small suppliers to the Registrar for the companies it covers.
What Does MSME Disclosure in Tax Audit Reports Cover?
For the previous year 2025-26 (assessment year 2026-27), clause 22 of Form 3CD asks for MSMED interest that is not allowable and the total payable to micro and small enterprises in the year, and how much of that was paid in time. From tax year 2026-27, under the Income-tax Act, 2025, clause 33 of Form No. 26 asks for the section 23 interest, the section 37(2)(g) disallowance and earlier disallowances now allowable.
Does MSME Disclosure in Financial Statements Apply to LLPs, Firms and Trusts?
Yes, wherever their accounts must be audited under any law; section 22 is not limited to companies.
ICAI's August 2023 guidance note for non-corporate entities and its Guidance Note on Financial Statements of Limited Liability Partnerships place the same five items in the notes and split trade payables into MSME and other dues. ICAI announced on 31 March 2026 that they apply to accounting periods from 1 April 2025 where turnover exceeds ₹5 crore, and to all such entities from 1 April 2026. The illustrative formats in neither guidance note include the Schedule III ageing schedule.
Sample Section 22 Note With Illustrative Figures
Illustrative figures, in ₹ lakh, for a company with a March year-end.
Details of dues to micro and small enterprises under section 22 (illustrative)
| Particulars | 31 March 2026 | 31 March 2025 |
|---|---|---|
| (a) Principal unpaid to micro and small suppliers at year-end | 186.40 | 152.75 |
| (a) Interest due on that principal at year-end | 2.10 | 1.35 |
| (b) Interest paid under section 16 during the year | 0.85 | 0.40 |
| (b) Payments made beyond the appointed day during the year | 64.20 | 48.90 |
| (c) Interest due for the delay on payments made late during the year | 2.45 | 1.55 |
| (d) Interest accrued and unpaid at year-end | 6.20 | 2.50 |
| (e) Further interest remaining due, carried forward until paid | 6.20 | 2.50 |
On the face of the balance sheet, trade payables then read: total outstanding dues of micro enterprises and small enterprises ₹186.40 lakh, and of other creditors ₹1,291.90 lakh.
Trade payables ageing at 31 March 2026, undisputed dues (illustrative, ₹ lakh)
| Outstanding from due date | MSME | Others |
|---|---|---|
| Not due | 121.80 | 905.40 |
| Less than 1 year | 60.10 | 334.90 |
| 1 to 2 years | 2.10 | 36.80 |
| 2 to 3 years | 0.00 | 4.10 |
| More than 3 years | 0.00 | 1.20 |
| Total | 184.00 | 1,282.40 |
Disputed dues (illustrative, ₹ lakh)
| Outstanding from due date | Disputed dues, MSME | Disputed dues, others |
|---|---|---|
| Less than 1 year | 2.40 | 6.50 |
| 1 to 2 years | 0.00 | 3.00 |
| Total | 2.40 | 9.50 |
The "not due" row is added so the tables tie to the balance sheet; the prescribed periods count from the due date. The two MSME columns add to ₹186.40 lakh, the same principal as item (a). Item (d) is cumulative: ₹2.50 lakh brought forward, plus ₹2.10 lakh and ₹2.45 lakh accrued, less ₹0.85 lakh paid.
Supplier-Classification Working Checklist
- In March, ask every active vendor for its Udyam Registration Number, category and certificate date, or a signed statement that it holds none.
- Verify each number on the Udyam Registration portal and file the result with the certificate.
- Flag the category (micro, small, medium or not registered) and the check date in the vendor master; create no new vendor without it.
- Record each micro or small vendor's written credit period, capped at 45 days from acceptance or deemed acceptance.
- Capture the acceptance date against each GRN or service entry, or the date the supplier removed a written objection.
- At year-end, run the vendor ageing by due date in MSME, others and disputed rows, and reconcile it to the ledger.
- Work out interest on every late payment and overdue balance, and carry unpaid interest forward.
- Tie the note, the ageing and the tax audit figures to one working file before the statutory auditor arrives.
Who Prepares the MSME Disclosure in Financial Statements at Year-End?
Management prepares it and the board approves it with the financial statements; a company's statutory auditor audits it but cannot build it. The Companies Act, 2013 closes that route in section 144: an auditor may not keep the books of the company it audits or render it outsourced financial services.
Where the vendor master already tags each supplier, the in-house finance team can prepare the schedule. Without that tagging, an accounts outsourcing firm can build the data and the working.
Astral Business Consulting LLP, a Coimbatore-based management consulting and audit firm, offers accounts outsourcing through its Best Accountant division. Its year-end books finalisation and vendor ageing support lists vendor master management, preparing vendor ageing, creditors reconciliations, preparation of financial statements and liaison with statutory auditors.
Where an outsourced accounts payable desk tags micro and small vendors through the year, the year-end MSME note becomes a reconciliation rather than a search. To catch late payments earlier, payment assurance reviews that check vendors are paid on time can run during the year.
For a unit that wants payable days watched monthly, the firm's virtual CFO services in Coimbatore review the ledger every month, so the year-end schedule starts from a reviewed ageing.
Need a Year-End MSME Schedule Your Auditor Can Test?
Does your vendor master not yet show which suppliers are micro or small? Talk to the Best Accountant division of Astral Business Consulting LLP about preparing the vendor ageing and MSME working before the books close.