MCom I Semester Corporate Final Accounts Company Study Material Notes ( Part 2 )

MCom I Semester Corporate Final Accounts Company Study Material Notes ( Part 2 ): Some Points Preparing Final Accounts Company Provision Tax Bharat Engineering Limited Profit Loss Account Ending Balance Sheet Nav Bharat Company Limited Discussion Questions Long Answer Questions Short Answer Questions :

CTET Paper Level 2 Previous Year Science Model paper II in Hindi

Some Points to be noted while preparing Final Accounts of a company

Though the principles for preparing the final accounts of a company are the same as partnership sole proprietorship concerns, some points relating to the items peculiar to a company are worth noting which are as follows:

(1) Debenture Interest: Debenture interest is a charge against profit and as such it is debited to the Front and Loss Account proper. The important point to be noted here is that interest for the full period for which the debentures have been outstanding during the accounting year has to be provided even if a part of it may not have been paid. In other words, the total amount of interest to be debited to the Profit and Loss Account will be the total of interest actually paid plus interest accrued and due plus interest accrued but not due. For example, the trial balance of a company as at 31st December 2005 show inter-alia the following items:

10% Debentures                                         Rs. 60,000

Interest on Debentures paid                          3,000

Interest is paid by the company on 31st March and 30th September. Now, interest for the full year is Rs. 6,000, but only Rs. 3,000 has been paid and the balance of Rs. 6,000 – Rs. 3,000 = Rs. 3,000 is still payable, out of which interest for the months of July, August and September amounting Rs. 1,500 is accrued and due (i.e. outstanding) and interest for October, November and December amounting to Rs. 1,500 is accrued but not due because it is due on the forthcoming 31st March. For this, the following adjustment entry is necessary to incorporate the accrued interest.

Rs.                                 Rs.

Debenture Interest Account                                   Dr.                              3,000

To Outstanding Debenture Interest Account

1,500

To Accrued Debenture Interest Account                                              1,500

Thus, in all Rs. 6,000 will be debited to profit and loss account and interest accrued and due (i.e. outstanding interest) will appear along with the 10% Debentures under the heading ‘Secured Loans’ and interest accrued but not due under the heading ‘Current Liabilities’:

(2) Interest paid during the construction of an asset : If debentures have been issued or a loan is raised for financing the construction of an asset then interest on such debentures or loan will be capitalized and will be debited to that specific asset account but after the construction of asset is over, interest will be charged against profit and loss account.

(3) Income-tax on Debenture Interest: Interest on debentures is paid after deducting income-tax thereon. The rate at which income tax is to be deducted at source depends on the Finance Act of the year under consideration. The accounting entry is :

Debenture Interest Account                                  Dr. (with the gross amount due)

To Debenture holders Account                             (with the net amount payable)

To Income-tax Payable Account                           (with the amount of tax deducted)

On payment on income-tax to the Government :

Income-tax Payable Account                                Dr.

To Bank Account

If any amount of tax deducted at source is left unpaid at the end of the accounting period, the same must be shown as a liability in the Balance Sheet under the heading “Current Liabilities”. (4) Calls-in-Arrears : This item is usually given in the trial balance and it is shown in the balance sheet as a deduction from called-up capital. Sometimes, this item is given in adjustments and only the paid-up capital is given in the trial balance. In such a case, the amount of calls-in-arrear is added to the paid-up capital to make the latter as called up capital and then deducted again.

( Part 2 ) Final Accounts

(5) Unclaimed Dividend : This represents the amount of dividend not collected by the shareholders. This item would always be found on the credit side of trial balance and is shown on the liabilities side of the balance sheet under the heading “current liabilities” But if the amount remains unpaid for a period of years from the date it became due, the same shall be transferred to Investor Education and Protection Fund.

(6) Dividend or Interest Received: This item represents income of company on investments made by in shares, debentures or bonds of other companies. This is shown on the credit side of profit and loss account. It is important to note that interest received by the company is less of tax deducted at source. Hence, in order to reflect this income properly, the amount of interest received must be first grossed up and then shown on the credit of profit and loss account. The tax deducted at source is shown on the assets side of balance sheet under the heading “Current Assets, Loans and Advances”.

(7) Income from Sinking Fund Investments : As per accounting rules, income from sinking fund

investments is credited to Sinking Fund Account but legally all incomes are to be credited to Profit and Loss Account. Hence, after crediting such income in the Profit and Loss Account, the same should be debited to P. & L. Appropriation Account together with the annual appropriation to sinking fund.

(8) Discount on Debentures or Cost of Issue of Debentures : This includes discount on issue of debentures, underwriting commission, brokerage and other expenses of issue of debentures. This item should be written off as early as possible either against any capital profit, securities premium or profit and loss account but in no case later than the date of redemption of debentures. The unwritten off balance is shown on the assets side of balance sheet under the heading “Miscellaneous Expenditure”. In an examination problem if the date of redemption is given then a proportionate amount of cost of issue of debentures should be debited to profit and loss account even if the problem is silent on this point.

(9) Forfeited Shares Account : Amount received on forfeited shares is shown as an addition to the paid up share capital on the liabilities side of balance sheet.

(10) Depreciation : Depreciation is a charge on profits and so it is debited to Profit and Loss Account. If in any year, no provision is made for depreciation, the fact that no provision has been made must be stated and the quantum of arrears of depreciation computed in accordance with Section 205 (2) of the Act (as given hereafter) is also to be stated by way of a note.

Depreciation may be provided either (i) on the written down value basis at the rates specified in Schedule XIV of the Act or (ii) on straight line basis by dividing 95% of the original cost of the asset to the company by the number of years at the end of which at least 95% of the original cost of that asset will have been provided by way of depreciation or (iii) on any other basis approved by the Central Government which has the effect of writing off by way of depreciation 95% of the original cost to the company of each such depreciable asset on the expiry of the specified period or (iv) as regards any other depreciable asset for which no rate of depreciation has been laid down by the Companies Act or any other rules made thereunder, on such basis as may be approved by the Central Government by any general order published in the Official Gazette or by any special order in any particular case.

Notes : (a) If any asset is sold, discarded, demolished or destroyed, the excess, if any, of the written down value of such asset over its sale proceeds (or its scrap value) must be written off in the financial year in which the asset is sold, discarded, demolished or destroyed. If sale proceeds or scrap value of the asset exceeds its written down value, then the excess to the extent of depreciation provided for on this asset will be the revenue profit and the same will be shown on the credit side of profit and loss account, and the remaining of the profit (which will be the excess of sale proceeds over the original cost of the asset) will be capital profit and transferred to Capital Reserve.

(b) If depreciation appears in the trial balance as a debit balance, it implies that entry for depreciation been made and hence the amount of given depreciation will be shown on the debt side profit and loss account.

(C) It any asset is acquired during the accounting period then in the absence of any instruction to me contrary, depreciation will be provided only for the period the asset was in use.

(d) Depreciation relating to past years should not be treated as charge against promits, instead it should be treated as appropriation of profits.

(e) Any change in the method of providing for depreciation should be disclosed along with the quantum of effect on the profit/loss of the company.

(11) Employees Remuneration and Benefits : These should be shown separately under the following heads :

(a) Salaries, wages and bonus including retrenchment compensation, gratuity etc. payable to employees.

(b) Contribution to provident fund, pension or other funds.

(c) Welfare expenses to the extent not adjusted from any provision or reserve.

(12) Provision for Bonus Payable: A provision for bonus is usually made in the accounts of the year in which the bonus is payable, although this bonus is paid in the following accounting year. This provision is a charge on profits. Any excess or shortfall in the provision made and actual payment in the following year should be shown in the appropriation section of Profit and Loss Account.

(13) Payments made under Voluntary Retirement Scheme : Payment made on account of voluntary retirement scheme should be treated as deferred revenue expenditure because the company is expected to gain in the form of saving in salaries and wages in the subsequent years from this expenditure. Such expenditure should be amortised over a period of five years as permitted under Income Tax Act.

(14) Political Donations : The total amount of such donations together with the name of political parties to whom such donations have been made must be shown as a separate item in the profit and loss account proper.

(15) Events occurring After the Balance Sheet Date but before approval of financial statements by competent authority, e.g., directors in the case of a company. As per AS-4 if such events relate to circumstances existing on the date of balance sheet, e.g. insolvency loss of a customer, should be accounted for in the accounts and assets and liabilities to be adjusted. But if loss arises due to entirely new events occurring after the balance sheet date, e.g., decline in the market value of investments, adjustments to the assets and liabilities are not appropriate. However, if the loss is very significant (e.g. destruction of major plant after the balance sheet date) or adjustments are statutorily required (e.g. dividend proposed after the balance sheet date), only a disclosure is required in the report of the approving authority (i.e. directors).

(16) Tax Adjustments : The following items are generally found in the question in respect of company taxation :

(a) Tax Deducted at Source

(b) Advance Payment of Tax

(c) Corporate Tax

(d) Provision for Tax

(e) Corporate Dividend Tax

(a) Tax Deducted at Source : According to Sections 193 and 194 of Income Tax Act, tax is deducted at source on salary of employees and interest on securities. In the books of paying company Salary, or interest account is debited and TDS account is credited. When this tax is paid to the Central Government, TDS account is debited and Bank account credited. If it is not paid on the date of balance sheet, it is shown in the balance Sheet under the heading “Current Liabilities”

In the books of investing company, tax deducted at source is shown on the assets side of balance sheet under the heading “Current Assets”. Next year when tax assessment of the company is complete, the tax deducted at source account is transferred to tax payable account.

(b) Advance Payment of Tax : Each assessee is liable to pay advance tax in the accounting year itself where the advance tax payable is Rs. 5,000 or more (from 1st October 1996)and this amount is adjusted against the actual liability as and when determined in the following year. The accounting entry on payment of advance tax will be as follows:

Advance Payment of Tax Account              Dr

To Bank Account

Until the actual liability of tax is determined and adjusted against this account, it will be shown on the assets side of balance sheet under the heading “Current Assets, Loans and Advances”: (B) Loans and Advances. Alternatively, it may be shown on the liabilities side as a deduction from “Provision for Taxation Account”.

(C) Corporate Tax : Income tax paid by the companies is termed as corporate tax. The amount of tax is determined in the year following the accounting year when assessment is complete and the following entry is passed :

Income Tax Account Dr.                              (with the amount of tax assessed)

To Advance Payment of Tax Account         (with the amount of advance tax paid)

To Tax Deducted at Source Account          (with the amount of T.D.S., if any)

To Bank Account                                         (with the balance, if any)

or

To Liability for Taxation Account

After the assessment is over, if the total of advance payment of tax and tax deducted at source is less than the amount of tax assessed, the balance if paid is credited to Bank Account and if it could not be paid till the end of the financial year, it is credited to ‘Liability for Taxation Account which is shown on the liabilities side of Balance Sheet under the heading Current Liabilities’. Conversely, if total of advance tax paid and tax deducted at source exceeds the amount of tax assessed, then till the refund of excess tax paid is not received from income-tax department, the balance of Advance Tax Account will be shown in the Balance Sheet under the heading ‘Loans and Advances’. When this amount is realised, the following entry is passed :

Bank Account                                 Dr.

To Advance Tax Account

(d) Provision for Tax : A company is liable to pay income tax on its profits and such tax is treated as a charge against the profits of the accounting year but the profits are assessed and actual liability for tax is determined in the following year. Hence, the liability for tax is estimated on current profits at current rates of taxation and provided for while preparing the final accounts. This provision is made against Profit and Loss Account proper, i.e. above the line and is shown under the sub-head Provisions’ on the liabilities side of Balance Sheet. The accounting entry for provision for taxation is as follows:

Profit and Loss Account                                     Dr. With the estimated amount of

To Provision for Taxation Account                       tax liability

In the following year, when the assessment is over, Income Tax Account is transferred to Provision for Taxation Account and the entry is :

Provision for Taxation Account                           Dr. To Income-Tax Account

If the amount of tax liability is more or less than the provision made last year, the difference has to headhunted through the appropriation section of the Profit and Loss Account, i.e. below the line by debiting or crediting the Provision for Taxation Account. The following entry is passed for the purpose:

Final Accounts Company

Discussion Questions

Descriptive Questions

1 Prepare in a summarized form the Balance Sheet of a company as per Companies Act, 1956 taking imaginary figures.

2. Give a specimen form of a Balance Sheet of a company according to the Companies Act, 1956. Explain each item in brief.

3. Give the specimen of the Balance Sheet of a company in vertical form as per Schedule VI of the Indian Companies Act.

4. Mention various provisions of the Companies Act for the preparation of the Profit & Loss Account.

5. Discuss the various items which are written in the Profit and Loss Appropriation Account. Explode procedure of dividend.

6. Describe the various provisions of the Companies Act for the preparation of Final Accounts of a company.

7. How are the final accounts of a company prepared ?

8. State the requirements under Schedule VI (Part I and II) of the Companies Act, 1956 in respect of: (a) Share Capital, (b) Investments, (C) Fixed Assets, (d) Turnover, (e) Managerial Remuneration (1) Contingent Liabilities, (g) Foreign Exchange Transactions.

9. Prepare a schedule of fixed assets giving information as required by law.

10. Taking imaginary figures show how ‘Debtors’ will be shown in the balance sheet of a company

11. Mention various provisions of Companies Act for preparation of Balance Sheet

Final Accounts Company

12. What do you mean by contingent liabilities? Give four examples of such liabilities. How are these liabilities shown in the Balance Sheet of a company?

13. Write a short note on Corporate Dividend Tax’.

14. What is Profit and Loss Appropriation Account ? Mention the various items shown in both sides of profit and loss appropriation account.

Final Accounts Company

Short Answer Questions

(i) A balance sheet should give a true and fair view of state of affairs. What do the words true and fair view’ imply?

(ii) State the requirements of Companies Act in respect of share capital

(iii) What particulars are to be given regarding sundry debtors in the balance sheet of a company.

(iv) Give vertical form of a company’s balance sheet.

(V) Write short note on ‘Corporate Dividend Tax’.

(vi) What do you mean by contingent liabilities? Give four examples of such liabilities.

(vii) What is Investor Education and Protection Fund ?

(viii) Write note on the tax adjustments in case of companies as a fact of final accounts.

(ix) State the order in which the following items in respect of share capital have to be stated in the balance sheet : (a) Paid up Capital (b) Calls-in-Advance (c) Subscribed Capital (d) Authorized Capital (e) Issued Capital.  (Answer: d, e, c, a, b)

( Part 2 ) Final Accounts

Objective Type Questions

State whether the following statements are ‘True’ or ‘False’:

(i) A limited company can prepare its balance sheet either in horizontal form or vertical form

(ii) The Companies Act requires that gross profit must be calculated.

(iii) The balance sheet must always be prepared first and profit and loss account later.

(iv) The profit and loss account of a company should be prepared in a prescribed form.

(V) Loose tools is an item of fixed assets.

(vi) The Companies Act requires that profit and loss appropriation account must be prepared.

(vii) Interest accrued on investments has to be shown along with investments concerned.

(viii) Investments will include immovable property if acquired for the purpose of earning rent.

Final Accounts Company