MCom I Semester Corporate Final Accounts Company Study Material Notes 

MCom I Semester Corporate Final Accounts Company Study Material Notes:  Balance Sheet Schedule Part I Prescribed VerticalCompany Balance Sheet Clarification Different Items Balance Sheet Schedule of Fixed Assets Format and Contents Profit and Loss Account Long Answer Questions Short Answer Questions :

BCom 2nd Year Advance Payment Tax Study Material Notes in Hindi

Final Accounts of the Company

It is desirable but not compulsory for a sole trader and partnership firm to keep a systematic record of its financial transactions. But the Companies Act made it compulsory for every company to keep a proper and systematic record of its transactions and to prepare the final accounts (annual statements) in the prescribed form at the proper time. A company has to publish its accounts compulsorily. Final accounts of a company comprised of profit and loss account, balance sheet, auditor’s report and directors’ report. Further as per SEBI circular dated February 4, 2000, Cash Flow Statement shall also be prepared by the listed companies and others whose annual turnover exceeds Rs. 50 crore in accordance with AS-3 (Revised). A copy of these final accounts has to be sent to every member, every registered debenture holders and other officers atleast 21 days before the date of annual general meeting. If default is made in complying with this provision, the company and every officer of the company in default is punishable with fine upto Rs. 500. The provisions governing the keeping of books and the publication of final accounts have been laid down under Sections 209 to 223.

Section 209 makes it compulsory for a company to keep certain books of account. Section 210 provides that at every general meeting of a company held in pursuance of Section 166, the Board of Directors shall lay before the company –

(a) a balance sheet at the end of the period specified in sub-section (3); and

(b) a profit and loss account for that period.

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Balance Sheet

Section 211 prescribes the form and contents of balance sheet and profit and loss account. This section provides that the balance sheet should be prepared in such a way that it gives a true and fair view of the state of affairs of the company as at the end of the financial year. This means that there should be no window dressing in the balance sheet so that every person could know the true picture of the financial position of the company. In order to give true and fair view of the financial position, it must satisfy the following conditions :

(1) The assets and liabilities are correctly described.

(2) The position is neither understated nor overstated.

(3) The provisions are neither excessive nor inadequate.

(4) Material contingent assets and contingent liabilities are noted clearly on the balance sheet.

(5) The stock has been valued on a consistent basis.

(6) Notes are appended to the balance sheet in order to remove any doubt or misleading impression.

Form of Company Balance Sheet

The balance sheet of a company must be in the form set out in Part I of Schedule VI or as near thereto as circumstances admit or in such other form as may be permitted by the Central Government. These rules do not apply to any insurance, banking and electricity companies and also other companies governed by any other special Act for which a form of balance sheet has been specified in or under the Act governing such class of company.

Part 1 of Schedule VI prescribes two alternative forms of balance sheet – (1) horizontal form and (2) vertical form. A company can select any of these forms but mostly companies adopt vertical form.

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Clarification of different items of Balance Sheet

1 Share Capital (i) The Share Capital of a company after the commencement of Companies Act, 1956 shall be of two kinds – equity share capital and preference share capital. It sall be disclosed as authorised share capital, issued share capital and subscribed share capital. Under authorised capital, the amount of capital, number of shares and face value of the shares into which it is divided. Issued capital is shown after authorised capital, stating the different classes of shares with the nominal value of each share. After issued capital, subscribed capital is shown stating the different classes of shares together with the nominal value of and the amount called up on, each share.

If all the shares of a company have been issued then authorised capital and issued capital can be shown combined. Similarly, if the shares are fully called up then issued capital and subscribed capital can be shown combined.

(ii) Shares issued for consideration other then cash are to be separately stated under the heading! “subscribed capital’. Similarly shares issued as bonus shares shall also be shown separately under this heading. It is also necessary to specify the source from which bonus shares are issued.

(iii) Different classes of preference shares are to be shown separately. In the case of redeemable preference shares, the terms of their redemption or conversion and earliest date of redemption or conversion must be mentioned.

(iv) The amount of unpaid calls is to be shown as a deduction from the amount called up under the heading ‘subscribed capital’: the amount of calls due from directors and others is to be stated separately.

(v) The amount received on forfeited shares (excluding the amount of share premium forfeited) can be shown either as an addition to subscribed capital or as a separate item after subscribed capital and profit on the reissue of forfeited shares must be transferred to capital reserve.

(vi) Particulars of any option on unissued share capital are to be stated by way of a note.

(vii) In the case of subsidiary companies, the number of shares held by the holding company as well as by the ultimate holding company and its subsidiaries shall be separately stated in the subscribed capital.

(viii)Amount of calls in advance should be shown separately under the heading ‘subscribed capital after the paid up amount of subscribed capital.

(ix) Amount received on shares pending allotment on the date of balance sheet should be shown separately under the heading ‘subscribed capital after the paid up amount of subscribed capital as “New Issue Application Deposits” or “Amount received on shares pending allotment”. Similarly, bonus shares pending allotment on the date of balance sheet should be shown in the same way as “Capital in Suspense”.

(2) Reserves and Surplus : Legal requirements relating to reserves and surplus are as follows:

(i) In the case of each reserve, additions to and deductions from it since the last balance sheet must be disclosed.

(ii) The share premium account must disclose full details of its utilisation in the year of its utilization.

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(iii) The debit balance on the profit and loss account must be shown as a deduction from the uncommitted revenue reserves.

(iv) The word “fund” in relation to any reserve must be used only when such reserve is specifically represented by earmarked investments. (3) Secured Loans : Secured loans refer to such loans which are taken by the company on mortgage of or lien on its certain specific tangible assets. Legal requirements relating to secured loans are as follows:

(i) Secured loans and advances from directors or manager should be shown separately, but this requirement does not apply to debentures held by them.

(ii) The nature of security given by the company is to be stated in the case of each secured loan.

(iii) When any loans have been guaranteed by manager and/or directors, a mention thereof must be made and the aggregate amount of such loans must also be made in each case.

(iv) Interest accrued and due on secured loans must be included under the appropriate items under this head but interest accrued and not due is to be shown under “current liabilities’.

(v) Besides the above information, the following further information is to be disclosed in regard to debentures issued by a company :

(a) The terms of redemption or conversion and the earliest date of redemption or conversion.

(b) Particulars of any redeemed debentures which the company has power to reissue.

(c) Debentures deposited as security for a loan must be disclosed with the concerning loans.

(d) Debentures redeemed but not paid off on the date of balance sheet must be shown under the heading current liabilities’ and not under secured loans.

(e) Where any of the company’s debentures are held by a nominee or a trustee for the company, the nominal amount of the debentures and the amount at which they are stated in the books of the company must be stated.

(4) unsecured Loans : These are the loans and advances for which no security is given by the company w also include those loans which are in excess of the market value of the security as on the balance sheet. Short-term loans shown in the balance sheet are those that are due for repayment within a period of not more than a year from the date of the balance sheet I Insecure loans from directors and/or manager must be shown separately. If any of such loans have been guaranteed by directors and/or manager, a mention of this fact must be made together with the aggregate amount of such loans under cach head. interest accrued and due on unsecured loans should be included in each item under this head but interest accrued but not due is to be shown under current liabilities.

(5) Current Liabilities and Provisions : This head is divided into two sub-heads – (a) Current Liabilities and (b) Provisions. Current liabilities are such liabilities which are payable within one year from the date of balance sheet. Provisions include any amount written off or retained by way of providing for depreciation, renewals or diminution in value of assets or retained by way of providing for depreciation, renewals or diminution in value of assets or retained by way of providing for any known liability of which the amount can not be determined with substantial accuracy. It is important to note here that the provisions made in excess of the required amount will be regarded as reserves and not as provisions.

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(6) Investor Education and Protection Fund : Section 205C of Companies Act provides for the establishment of Investor Education and Protection Fund w.e.f. 31-10-1998. The following amounts will be credited to this Fund:

(a) Amounts in the Unpaid Dividend Accounts of the companies, which remain unpaid or unclaimed for a period of 7 years from the date of such transfer.

(b) Application moneys received by the companies for allotment of any securities and due for refund for 7 years after they became due.

(c) Matured deposits with companies for 7 years after they became due.

(d) Matured debentures with companies for 7 years after they became due.

(e) The interest accrued on the amounts referred to clause (a) to (d) above.

(f) Grants and donations received by the Fund from the Central and State Governments and any other institutions for the purpose of the fund.

(g) The interest or other income received out of the investments made from the fund.

(7) Contingent Liabilities : As per AS-29 of ICAI, a contingent liability is a, “possible obligation that arises from past events, the existence of which will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of enterprise.” These are the liabilities, which may or may not become the actual liability depending on the happening or non-happening of certain events. These liabilities are shown either by way of a footnote to the balance sheet or in the body of balance sheet on the liabilities side after “Provisions”; in the latter case, the amounts of such liabilities are shown in the inner column and are not included in the total of the liabilities side.

(8) Fixed Assets : These are the assets which are acquired with the intention of use for a long period and not for sale in the normal course of business. Capital work-in-progress is also shown under this head. As far as possible, the various fixed assets should be stated separately. In the case of each fixed asset, the original cost, the additions thereto and deductions there from made during the year and the total depreciation provided must be given. If provisions for depreciation in respect of any fixed asset is in excess of reasonable amount, then such excess amount should be shown as reserve under the heading ‘Reserves and Surplus’.

Where sums have been written off on a reduction of capital or a revaluation of assets, every balance sheet (after the first balance sheet) subsequent to the reduction or revaluation shall show the reduced figures with the date of the reduction in place of the original cost and

Illustration 2. Given below is information relating to the Block Account of a joint-stock company for the year ended 31st December 2005. You are required to prepare therefrom, in proper form, a Schedule to be attached to the company’s Balance Sheet as on that date :

(a) Cost as per Balance Sheet dated 31st December 2004 : Land and Buildings Rs. 35,00,000; Machinery and Plant Rs. 95,00,000; Furniture Rs. 80,000; Flotilla Rs. 30,000; and Motor Vehicles Rs. 81,000.

(b) Amounts written off under Court order dated 1st June 2002 : Land and Buildings Rs. 1,50.000 Machinery and Plant Rs. 2,00,000; and Furniture Rs. 50,000.

(C) Amount added on reorganization of capital as per resolution dated 1st July 1998: Motor Vehicles Rs. 10,000.

(d) Additions made during the year : Land and Building Rs. 17,500; Machincry and Plant Rs. 35,000: and Motor Vehicles Rs. 15,000.

(e) During the year machinery (cost Rs. 50,000) and a boat (cost Rs. 7,500) were sold off for Rs. 17,000 and Rs. 2,500 respectively. The depreciation provided in respect of these two items was Rs. 47,000 and Rs. 3,500 respectively.

(f) Total depreciation written off to 31st December 2004 : Land and Buildings Rs. 20,00,000; Machinery and Plant Rs. 70,00,000; Furniture Rs. 25,000; Flotilla Rs. 18,000; and Motor Vehicles Rs. 40,000.

(g) Depreciation added on 31st December 2005 : Land and Buildings Rs. 50,000; Machinery and Plant Rs. 1,00,000; Furniture Rs. 5,000; and Motor Vehicles Rs. 10,000.

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investments: Only those investments are shown under this heading which are acquired and ca principally for earning income (and not with a view to resale) or which are held for trade purposes . shares in a subsidiary company). On the other hand, investments acquired with the intention of earning profit by their resale or are held as stock-in-trade, they are shown under the heading current assets. As regards their disclosure, the following points are significant :

(i) All investments are classified into the following five categories :

(a) Investments in Government or Trustee Securities.

(b) Investments in shares, debentures or bonds of various companies showing separately investments in shares, debentures or bonds of subsidiary companies. Fully paid and partly paid shares should  be shown separately.

(C) Investments in immovable properties.

(d) Investments in the capital of partnership firms.

(e) Balance of unutilised monies raised by issue.

(f) Investments in subsidiaries.

(ii) The nature of investment and mode of valuation.

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(iii) The aggregate amount of company’s quoted and unquoted investments and market value of quoted investments should be shown.

(iv) A statement of investment (whether shown under “investments” or under “current assets” as stock-in trade) separately classifying trade investments and other investments should be annexed to the balance sheet.

Note: A “trade investment” means an investment by a company in the shares or debentures of another company, not being its subsidiary, for the purpose of promoting the trade or business of the first company.

10. Current Assets, Loans and Advances : This heading is sub-divided into (a) Current Assets and (B) Loans and Advances.

Current Assets : Current assets are such assets which are convertible into cash within a year or on completion of normal operating cycle of the business. These are shown in a company’s balance sheet in the following order :

(i) Interest Accrued on Investments. This may also include dividends declared but not received on the date of the balance sheet. But this should not include dividends declared by subsidiary companies after the date of balance sheet.

(ii) Stores and Spare Parts stating the mode of valuation.

(iii) Loose Tools.

(iv) Stock-in-trade. As far as possible stock of raw materials, stock-in-process and stock of finished goods should be shown separately, showing in each case the mode of valuation.

(V) Work-in-progress, stating the mode of valuation.

(vi) Sundry Debtors. This includes the amounts due in respect of goods sold or services rendered or in respect of other contractual obligations. All debtors are shown classifying into two parts:

(a) Debts outstanding for a period exceeding six months.

(b) Other debts.

The amount of debtors is to be shown after deduction of provisions for doubtful debts and the provisions for doubtful debts should not exceed the amount of debts considered doubtful, and any surplus of provision should be shown as “Reserve for Doubtful Debts” under the heading “Reserves and Surplus”.

Sundry debtors are to be classified as follows:

(a) Debts considered good and in respect of which the company is fully secured,

(b) Debts considered goods for which the company holds no security other than security

(c) Debts are considered doubtful or bad. The following particulars are also to be given in respect of debtors.

(a) Debts due by directors or other officers of the company stating the maximum amount due at any time during the year.

(b) Debts due by firms in which any director is a partner.

(c) Debts due by private companies in which any director is a director or member.

(d) Debts due from other companies under the same management.

(vii) Cash balance on hand.

(VIII)Bank balances, stating separately balances with scheduled banks and other banks giving their names and also stating whether on current account, call account and fixed deposit account.

Loans and Advances : This item includes (i) advances recoverable in cash or in kind, e.g. temporary loans, and (ii) advances for value to be received to be received, e.g. prepaid expenses.

The following items are shown under this sub-head:

(i) Advances and loans to subsidiaries.

(ii) Advances and loans to firms in which the company or any of its subsidiaries is a partner.

(iii) Bills of Exchange.

(iv) Advances recoverable in cash or in kind or for value to be received.

(v) Balance with Customs, Port Trust etc., where payable on demand.

(vi) Prepaid expenses.

(vii) Advance tax paid and tax deducted at source.

(viii) Advance to employees.

(ix) Advance to suppliers.

(x) Advance for capital expenditure.

Note: The instructions regarding debtors apply to loans and advances also.

11. Miscellaneous Expenditure: Under this heading, all such expenditures are shown which could not be written off.

12. Profit and Loss Account : The debit balance in the profit and loss account should be shown on the assets side after deduction of the uncommitted (i.e. free) reserves, if any.

Profit and Loss Account

Basic Requirements

Profit and Loss Account should be prepared in such a manner as to clearly disclose the results of the working of the company during the period covered by the account. The following principles govern the preparation of this account:

(1) Accrual Basis of Accounting: Section 209(3) requires every company to keep its books of accounts on an accrual basis and follow the double-entry system of accounting.

(2) Materiality: All significant points which are likely to influence the investment decisions of its users must be disclosed clearly.

(3) Prior Period Items : Such items should be stated in the ‘below the line’ section of profit and loss account.

(4) Extra-ordinary Items : Gains or losses, if material arising from extra-ordinary and non-recurring items should be shown separately so that their effect on current operating results can be clearly seen.

(5) Change in Accounting Policies : The effect of change in an accounting policy on profit or loss, e.g.. change in the method of inventory valuation, should be disclosed clearly.

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Format and Contents

No standard form is prescribed by law for profit and loss account of a company, as has been done for the balance sheet but each company (excluding banking, insurance and electricity companies) is required to disclose in its profit and loss account the following information relating to income and expenditure of the company as specified in Part II of Schedule VI :

(1) (a) Turnover of the company, giving the amount and quantities of sales in respect of each class of goods dealt with by the company. Excise duty and freight and despatch charges, if included in selling price will form part of turnover but freight and despatch charges, if charged separately, sales tax, entertainment tax and export incentives are not included in turnover.

(b) Commission paid to sole selling agents, commission paid to other selling agents, brokerage and discount on sales (other than usual trade discount) shall be shown separately.

(2) (a) In the case of manufacturing companies, the value and quantities of each raw material consumed shall be given separately. The opening and closing stocks of goods produced separately giving break-up in respect of each class of goods and indicating the quantities thereof. In addition, opening and closing balances of work-in-progress are also to be given.

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(b) In the case of trading companies, the amount and quantities of purchases, opening and closing stocks of each class of goods traded.

(c) In the case of companies rendering services, the gross income derived from services.

(d) In the case of other companies, the gross income derived under different heads.

(3) The amount provided for depreciation, renewals or diminution in value of fixed assets and the method adopted for such a provision. If no provision is made for depreciation, the disclosure of this fact and quantum of arrears of depreciation shall be disclosed by way of a note.

(4) The amount of interest on the company’s debentures and other fixed loans, stating separately the amount of interest, if any, paid or payable to the managing director and the manager.

(5) The amount of charge for Indian income tax and other Indian taxation on profits.

(6) The amounts reserved for repayment of share capital and loans.

(7) The amounts, if material, set aside for reserves and provisions and the amounts withdrawn from such reserves and provisions.

(8) Expenditure incurred on each of the following items :

(i) Stores and spare parts, (ii) Power and fuel, (iii) Rent, (iv) Repairs to buildings, (v) Repairs to machinery (vi) Salaries, wages and bonus, contribution to provident fund and other funds, and workmen and staff welfare expenses, (vii) Insurance premium, (viii) Rates and taxes, excluding taxes on income, (ix) Miscellaneous expenses. If any expense item exceeds 1% of the total sales of the company or Rs. 5,000, whichever is higher, it is to be shown as a separate and distinct item.

(9) The amount in respect of interim relief to employees should be treated as an expense in the year in which it is paid under the appropriate head and is not to be treated as an advance.

(10)(a) Income from investments, distinguishing between trade investments and other investments.

(b) Other income by way of interest.

(c) The amount of income-tax deducted from the gross income is stated under (a) and (b) above.

(11) (a) Profits or losses on investments, showing distinctly profits or losses on account of membership of a partnership firm.

(b) Profits or losses, if material, in respect of transactions of an exceptional or non-recurring nature.

(c) Miscellaneous income.

(12) (a) Dividends from subsidiary companies.

(b) Provisions for losses of subsidiary companies.

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(13) The aggregate amount of the dividends paid and proposed. material, by which any items shown in the profit and loss account are affected by any change in the basis of accounting. (1) Managerial remuneration. other allowances and commission, perquisites or gratuities etc. paid or payable during the financial year to the directors, managing directors or manager. The profit and loss account shall contain or give by way of a note a statement showing the computation of net profits in accordance with Section 349 of the Act with relevant details of the calculation of commissions to managerial staff. Amounts paid to the auditor for services rendered (a) as auditor, (b) as advisor in respect of taxation matters, company law matters and management services and (c) in any other manner. for all items shown in the profit and loss account corresponding amounts for the immediately preceding financial year shall also be given.

(18) The profit and loss account of a company shall also contain by way of a note the following information:

(a) In the case of manufacturing companies, the licensed capacity, the installed capacity and the actual production.

(b) The value of imports during the financial year in respect of raw materials, components and spare parts and capital goods.

(c) Expenditure in foreign currency during the financial year on account of royalty, know-how, professional consultation fees, interest and other matters.

(d) The value of all imported and indigenous raw materials, spare parts and components consumed during the financial year and the percentage of each to the total consumption.

(e) The amounts remitted during the year in foreign currencies on account of dividends.

(1) Earnings in foreign exchange on account of

(i) export of goods,

(ii) royalty, know-how,

professional and consultation fees,

(iii) interest and dividends

(iv) other income, indicating the nature thereof.

Profit and Loss Appropriation Account

Though Companies Act does not require the preparation of a separate Profit and Loss Appropriation Account but in order to give a true and fair view of the profitability of the business, the companies usually split the Profit and Loss Account into two parts, viz. (i) Profit and Loss Account, proper and (ii) Profit and Loss Appropriation Account, a line of demarcation is drawn in between the two parts to separate the items chargeable against profits from the items of appropriation of profits. The items which are shown in the former are referred to as items appearing “above the line” and items which are shown in the latter part are referred to as items appearing “below the line”.

The Profit and Loss Account includes all income and expenditure properly attributable to the year’s working and shows the figure of net profit or net loss which is carried down to ‘below the line’ section. The Profit and Loss Appropriation Account includes all appropriations for dividends, transfer to and from reserves and income and expenditure, if material, relating to previous years and the balance of this account shows ‘surplus’ or ‘deficiency’ which is transferred to Balance Sheet.

 

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