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PREPARATION OF FINAL ACCOUNTS OF
COMPANIES
Unit Structure:
1.0 Objectives
1.1 Introduction
1.2 Provisions relating to Financial Statements under the New
Companies Act
1.3 AS 1 Disclosure of Accounting policies
1.4 Adjustments in Financial statements
1.5 Preparation of financial accounts in vertical format
1.6 Vertical Financial Statement
1.7 Statement of Profit and Loss
1.0 OBJECTIVES
After studying this chapter, you will be able to understand
the nature of the financial statements;
the Provisions r elating to financial statements
Accounting Standards 1
Various adjustments with respect to the preparation of financial
statements
1.1 INTRODUCTION
One of the goals of any organisation is to publish relevant information to
various stakeholders so that the y can make informed decisions. A
stakeholder is anyone who has an interest in the company. Different
stakeholders may have monetary or non -monetary stakes. The stakes can
be direct or indirect, active or passive. The business owner and lenders
would have f inancial stakes. Non -financial stakes in the company will be
held by the government, consumers, or researchers. Users, also known as
stakeholders, are typically classified as internal or external based on
whether they are located within or outside of the c ompany.
As a result, every firm is ultimately interested in knowing the
business's end result. Because these are the final accounts prepared at
the end of the fiscal year, they are referred to as final accounts. They
ultimately serve the purpose of maintai ning records. Their goal is to
investigate the impact of various incomes and expenses over the
course of the year, as well as the resulting profit or loss. The trading munotes.in
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2 account, profit and loss account, and balance sheet are all part of the
final accounts.
1.2 PROVISIONS RELATING TO FINANCIAL
STATEMENTS UNDER THE NEW COMPANIES
ACT
According to Section 128 of the Companies Act of 2013, every company
must prepare and keep at its head office books of accounts and other
relevant books and papers and financial st atements for each year that give
a true and fair view of the company's state of affairs, including that of its
branch office or offices, if any, and explain the transactions effected both
at the registered office and its branches, and that such books must be kept
on an accrual basis and in accordance with the Companies Act of 2013.
All or any of the aforementioned books of account and other relevant
papers may be kept at such other location in India as the Board of
Directors may decide, and where such a dec ision is made, the company
shall file with the Registrar a notice in writing giving the full address of
that other location within seven days of that decision.
The corporation may store prescribed books of accounts or other relevant
papers in electronic f orm.
The books of account and other books and papers kept by the company
within India shall be open for inspection by any director during business
hours at the registered office of the company or at such other place in
India, and copies of such financial information kept outside the country
shall be kept and produced for inspection by any director subject to such
conditions as may be prescribed. All assistance that the company can
reasonably be expected to provide must be provided by the company's
executiv es and other employees to the person conducting the inspection.
1.2.1 Nature of Financial Statements
1. Section 129 of companies act 2013, provides for preparation of
financial statements.
2. Financial statements include the balance sheet, profit and loss
account/income and expenditure account, cash flow statement,
statement of changes in equity, and any accompanying explanatory
notes.
3. Section 129 replaces existing Section 210. It states that the financial
statements must give a true and fair picture o f the company's financial
situation and must adhere to the accounting standards notified under
new section 133.
4. It is also stated that financial statements must be prepared in the format
specified in new Schedule III of the Companies Act of 2013. munotes.in
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3 5. It should be noted that the provisions in the new schedule III for
preparing the balance sheet and profit and loss statement are similar to
those in the old schedule VI.
6. In addition, the new Schedule III includes detailed instructions for
preparing conso lidated financial statements, as consolidation of
subsidiary company accounts is now required under section 129.
7. It should be noted that, for the first time, a provision in the new section
129(3) states that if a company has one or more subsidiaries, t he
company and all subsidiaries must prepare a consolidated financial
statement in the form specified in the new Schedule III of the
Companies Act, 2013.
8. In addition, the firm must attach to its financial statement a separate
statement covering the sig nificant aspects of the financials of the
subsidiary companies in the form prescribed by the regulations.
9. If the firm owns a stake in an associate company or a joint venture, the
accounts of that company and the joint venture must be merged.
10. As a result, an associate company has been defined as a company with
significant influence, defined as owning 20% of the company's total
share capital or having power over business decisions under an
agreement.
11. The Central Government has the authority to e xempt any company
from any of the section's requirements.
1.2.2 Objectives of Financial Statements
Stakeholders in a company rely heavily on financial statements to
understand how it operates. They represent the company's true state of
affairs. Here are some examples of financial statement objectives:
These accounts accurately reflect the economic assets and liabilities of a
company. External stakeholders, such as investors and governments,
would not otherwise have access to this information.
They help to forecast a company's ability to generate profits. Shareholders
and investors can use this information to make financial decisions.
These assertions demonstrate a corporation's management effectiveness.
As evidenced by these statements, a corporation's profitability determines
how well it performs.
They also help readers understand the accounting practises used in these
statements. This allows for a more thorough understanding of statements.
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4
These statements also include data on the company's financia l flows.
Investors and creditors can use this information to forecast the
company's liquidity and financial needs.
Finally, they discuss the social impact of business. This is due to the
fact that it demonstrates how the company's external circumstances
impact its operations.
1.3 A S 1 – DISCLOSURE OF ACCOUNTING POLICIES
AS 1 – Disclosure of Accounting Policies
The information contained in an organization's financial statements
represents its financial status. Accounting policies can have a large impact
on profit or loss. Accounting policies vary from organisation to
organisation. Significant accounting policies must be disclosed in order for
the financial statements to be accessible. In some cases, the disclosure is
required by law. In recent years, Indi an organisations have begun to
provide a clear explanation of their accounting policies in their annual
reports to shareholders.
Many organisations include their accounting standards in the notes to their
financial statements, but the disclosures are inco nsistent. In other words,
in some cases, the disclosure is included in the accounting, whereas in
others, it is provided as supplemental information. This standard's goal is
to improve financial statement understanding by establishing the practise
of discl osing major accounting policies followed and how they are
communicated in financial statements. Transparency would also make
comparing the financial statements of different organisations easier.
Nature of Accounting Policies
Accounting policies refer to ac counting principles and the techniques used
by a company to put these principles into practise in the preparation of
financial statements. There is no universal set of accounting policies that
applies in all circumstances. Because of the variety of context s in which
organisations operate, alternative accounting concepts are permissible.
The selection of appropriate accounting principles requires considerable
judgement on the part of the organization's management.
In recent years, the numerous standards of the Institute of Chartered
Accountants of India, combined with the efforts of the Government and
other regulatory authorities, have reduced the number of permissible
alternatives, particularly for corporates. While future efforts in this area
are likely to reduce the number even further, the availability of alternative
accounting principles is unlikely to be completely eliminated given the
variety of scenarios that organisations face. munotes.in
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5 Areas in which differing Accounting Policies are possible
The following a re examples of areas in which different accounting policies
may be adopted by organisations.
1. Methods of depreciation, depletion and amortisation
2. Treatment of expenditure during construction
3. Conversion or translation of foreign currency items
4. Valuation of i nventories
5. Treatment of goodwill
6. Valuation of investments
7. Treatment of retirement benefits
8. Recognition of profit on long -term contracts
9. Valuation of fixed assets
10. Treatment of contingent liabilities
The above list of examples is not exhaustive.
Considerati ons in the Selection of Accounting Policies
The primary concern in the adoption of accounting policies by an
organisation is that the financial statements provide a true and fair
representation of the financial situation for the period. The following are
the primary considerations that guide the selection and application of
accounting policies for this purpose:
Prudence: Because future events are unpredictable, earnings are not
anticipated but recognised only when they are earned, which is not always
in cas h. Nonetheless, despite the fact that the amount cannot be
determined with certainty and is only an estimate, provision is made for all
known liabilities and losses.
Substance Over Form: In financial statements, the accounting
treatment and presentation of transactions and events should be guided by
their substance rather than their legal form.
Materiality: All "material" facts, that is, items about which financial
statements should be disclosed, should be disclosed.
Disclosure of Accounting Policies
The pr imary concern in the adoption of accounting policies by an
organisation is that the financial statements provide a true and fair
representation of the financial situation for the period. The following are
the primary considerations that guide the selection and application of
accounting policies for this purpose:
Prudence: Because future events are unpredictable, earnings are not
anticipated but recognised only when they are earned, which is not always
in cash. Nonetheless, despite the fact that the amount cannot be
determined with certainty and is only an estimate, provision is made for all
known liabilities and losses. munotes.in
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6 Substance Over Form: In financial statements, the accounting treatment
and presentation of transactions and events should be guided by thei r
substance rather than their legal form.
Materiality: All "material" facts, that is, items about which financial
statements should be disclosed, should be disclosed.
If an accounting policy change is implemented that has no significant
impact on the fin ancial statements for the current period but is likely to
have a significant impact in subsequent periods, the fact of the change
must be appropriately declared in the period in which the change is
implemented. Accounting rule or change disclosure is not a remedy for
incorrect or inappropriate accounting treatment of items.
Remember the following:
All key accounting policies used in the preparation and presentation of
financial statements must be disclosed.
The disclosure should be included in the financia l statements, ideally
all at one place.
Any accounting policy change that has a significant impact on the
current period or is expected to have a significant impact on
subsequent periods should be declared. If accounting policies change
and have a signific ant impact on the current period, the amount by
which any item in the financial statements is impacted should be
declared to the extent that it can be computed. Where such a figure
cannot be determined, either completely or partially, the fact should be
stated.
If financial statements are prepared using the basic accounting
assumptions of Going Concern, Consistency, and Accrual, specific
disclosure is not required. If an important accounting principle is not
followed, a fact must be revealed.
1.4 ADJUSTM ENTS IN PREPARATION OF
FINANCIAL STATEMENTS
The accrual concept of accounting, which states that all income earned
during an accounting period should be recorded regardless of whether it
has been paid or not, is where it all really begins. Similarly, regar dless of
the actual payment, all expenses incurred over time should be
documented. This is the main reason for final accounting adjustments. If
such adjustments in the compilation of financial statements are
overlooked, the numbers shown by the company in their final accounts
will not be precise and true. Any necessary adjusting entries are reflected
in the published journal entries.
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7 Need for Adjustments:
Adjustments are done to:
1. To record the unrecorded transactions.
2. To provide for anticipated loss es.
3. To rectify the located errors.
4. To present fair and unbiased presentation of assets and liabilities.
Important Point to be Noted while passing adjustment entries:
The CGST and SGST will be levied on the sums if they are
connected to an intra -state tra nsaction.
If the sums are connected to an interstate transaction, IGST will
be levied on them.
List of Adjustments in Final Accounts
1. Closing Stock
2. Depreciation
3. Outstanding expenses and income
4. Prepaid expenses and Pre received income
5. Propose d Dividend and Unclaimed Dividend
6. Provision for Tax and Advance Tax
7. Bill of exchange (Endorsement, Honour, Dishonour)
8. Capital Expenditure included in Revenue expenditure and vice versa eg -
purchase of furniture included in purchases
9. Unrecorded Sales and Purchases
10. Good sold on sale or return basis
11. Managerial remuneration on Net Profit before tax
12. Transfer to Reserves
13. Bad debt and Provision for bad debts
14. Calls in Arrears
15. Loss by fire (Partly and fully insured goods)
16. Good s distributed as free samples.
17. Any other adjustments as per the prevailing accounting standard.
Note: Adjustments would appear outside the trial balance.
1. Closing Stock
The closing stock is the inventory that was held at the end of the fiscal yea r.
We keep an actual account called Closing Stock to obtain information on
closing stock. It provides information on the value of unsold stock at the end
of the fiscal period. Closing stock is valued by physically verifying it and
valuing it at cost or mar ket price, whichever is lower.
Because closing stock is determined by physical verification, which takes
time to bring up the value, the closing stock usually does not appear in the
Trial Balance when the accounts are finalised. As a result, it appears as part
of the adjustment entry, which must be completed before Final Accounts are
prepared. munotes.in
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8 If the closing stock is shown in the trial balance, it means that the closing
stock adjustment has already been made, and it will be shown as a current
asset in the balance sheet. The following accounting treatment is used in the
preparation of the accounts:
1st
Effect Assets Current
Assets Inventories
2nd
Effect Revenue
Statement Expenses (c) Changes in inventories of
finished goods, work -in-progress
and stock -in-trade
Journal Entry for Adjustment of Closing Stock in Final Accounts
Closing Stock A/C Dr
To Trading A/C
(Recording ending inventory)
Closing stock is valued at cost or market, whichever is less.
2. Depreciation:
Depreciation occurs whe n the value of an asset decreases due to wear and
tear or the passage of time. The amount of depreciation represents the
business's operating expenses. If depreciation is not accounted for, the
period's net profit will be overstated. Even on the Balance Sh eet, the asset
value should not be shown at its true value.
The double effect of depreciation is:
1. Depreciation is shown on the debit side of Profit and Loss Account.
2. The amount of depreciation is deducted from the concerned asset, in the
asset side of the Balance Sheet.
A. When Provision for Depreciation is Not Maintained
Journal Entry When Provision is Not Maintained
Depreciation A/C Dr
To Asset A/C
(Charging depreciation on fixed asset)
Profit and Loss A/C Dr
To Depreciation A/C
(Depreciation charged transferred to Profit & Loss A/C)
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9 B. When Provision for Depreciation is Maintained
Journal Entry When Provision is Maintained
Depreciation A/C Dr
To Provision for Depreciation A/C
(Being provision for depreciation made)
Step 2
Profit and Loss A/C Dr
To Depreciation A/C
(Depreciation charged transferred to Profit & Loss A/C)
3. Outstanding expenses and income
A. Outstanding Expenses
An expense that has been incurred but has not been paid within the current
fiscal year, such as salary, rent, interest, and so on. Adjustments in final
accounts are made to minimise overstating earnings. Outstanding rent,
salary, wages, interest, and so forth.
It is not generally included in the Trial Balance but is provided as
addit ional information following the trial balance.
If it is included in the Trial Balance, it signifies that the expense has
already been adjusted and is thus solely presented as a liability on the
Balance Sheet.
If it is given after the Trial Balance (as an a djustment), it must be
accounted for as an expense for the current fiscal year and thus debited
to the Trading and Profit and Loss Account by adding it to the existing
amount of the respective expense. Furthermore, because such an item
is payable by the en tity, it is recorded as a liability in the Balance
Sheet by making the following adjustment:
Expenses A/c …Dr.
Input CGST A/c …Dr.
Input SGST A/c …Dr. or Input IGST A/c …Dr
To Outstanding Expenses A/c (Being unpaid expenses now recorded
in the books
B. Accrued Income or Outstanding Income
These expenses are sometimes known as income generated but not yet
received. Accrued income is income that the company has already earned
but has not yet received. Examples include accumulated rent, commission
due but no t received, and so forth. munotes.in
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10 Journal Entry for Adjustment of Accrued Income in Final Accounts
Accrued Income A/C Dr
To Income A/C
To Output CGST A/C
To Output SGST A/C
To Output IGST A/C
(Recording income earn ed but not received)
Treatment of Accrued Income Adjustment in Financial Statements
Trading Account: No effect
Profit & Loss Account: Show on the credit side (Add to respective
income)
Balance Sheet: Show on the assets side (usually under the head curr ent
assets)
4. Prepaid expenses and Pre -received income
A. Pre-paid Expenses
These are also known as expenses paid in advance. Prepaid expenses are
those paid in advance for a benefit that has not yet been obtained.
It is critical to record profits near the conclusion of an accounting year to
avoid understating them. Prepaid rent, prepaid interest, prepaid insurance,
and so forth are examples.
Journal Entry for Adjustment of Prepaid Expenses in Final Accounts
Prepaid Expense A/C Dr
To Ex pense A/C
(Recording expenses paid in advance, GST paid is not transferred in
Prepaid Expense A/C)
B. Pre-received Income or Income Received in Advance
It is also known as unearned income. Income received in advance is
income that the company has alread y received but has not yet earned. Rent
received in advance, commission earned in advance, and so forth.
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11 Journal Entry for Adjustment of Income Received in Advance in Final
Accounts
Income A/C Dr
To Income Received in Advance A/C
To Output CGST A/C
To Output SGST A/C
(Recording income received but not earned)
Treatment of Income Received in Advance in Financial Statements
Trading Account: No effect
Profit & Loss Account: Show on the credit side (Subtract from the
respectiveincome)
Balance Sheet: Show on the liability side (usually under the head
current liabilities)
5. Proposed Dividend and Unclaimed Dividend
Dividends :
A dividend is a share of profits and retained earnings that a company pays
out to its shareholders. When a company generates a profit and
accumulates retained earnings, those earnings can be either reinvested in
the business or paid out to sh areholders as a dividend. The annual
dividend per share divided by the share price is the dividend yield .
Legal Provisions regarding Dividend
A company may pay dividends from any or all of the three following
sources:
(i) Profits of the current year
(ii) Undistributed profits of previous years after providing for depreciation
as per Schedule II of the Companies Act, 2013
(iii) Out of both or
(iv) Moneys provided by the Central or any State Government for the
payment of dividends in pursuance of a guarantee given by the
government concerned.
Proposed Dividend:
According to Amended Accounting Standard 4 read with Schedule 3 of
the Companies Act 2013, propo sed dividends should only be shown as a
footnote to the balance sheet.
Proposed Dividend accounting treatment and presentation in the final
Financial Statement shall be as follows:
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12 Accounting Data Entry: No accounting entry should be made for the
Board o f Directors' recommendation of the final Dividend if it is made
after the Financial Statement's closing date.
Profit and Loss Account Treatment: The proposed dividend may have
no effect on the company's profit and loss statement. The effect of such
divide nd, however, shall be taken in the fiscal year in which it is actually
declared by shareholders in the Annual General Meeting.
Presentation in the Balance sheet: Dividend proposed by the Board of
Directors for the financial year, 2020 -21 is not a liabilit y till it has been
approved by the shareholders in the ensuing Annual General Meeting.
Interim Dividend
Though dividends can only be declared by a shareholder resolution, if the
company's articles allow, the Directors can declare an interim dividend
betwe en two annual general meetings. When an interim dividend is paid,
the payment will be recorded as follows:
Interim Dividend A/c Dr.
To Bank A/c
The interim dividend paid during a year will appear in the Company's
Trial Balance as of the end of the accou nting period and will be
transferred to the debit side of the profit and loss appropriation a/c as an
item of profit appropriation.
Unclaimed Dividend
If a dividend is transferred to the Dividend Account but not claimed by the
shareholder within 30 days o f its declaration, the Company must transfer
the unpaid amount to the 'Unpaid Dividend Account' within 37 days of its
declaration. The company must transfer any amount transferred under
subsection (1) to the Unpaid Dividend Account within ninety days. Any
money transferred to a company's Unpaid Dividend Account in
accordance with this section that remains unpaid or unclaimed for seven
years (7 years and 37 days from the date of dividend declaration) from the
date of such transfer shall be transferred by the company, along with any
interest accrued.
6. Provision for Tax and Advance Tax
A. Provision for Income Tax:
The tax that the company expects to pay in the current year is calculated
by making adjustments to the company's net income by temporary and
perm anent differences, which are then multiplied by the applicable tax
rate.
Income Tax Provision Formula = Income Earned Before Tax * Tax Rate
Profit drives the creation of this provision. This is the entry below the line.
After deducting necessary items fro m gross profit (for example,
depreciation recorded in books of accounts and allowable under income
tax rules), taxable income is calculated. On that taxable profit, we must munotes.in
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13 make provision for income tax at the applicable rate. The accounting entry
will be as follows:
Profit & Loss A/C DR (provision for income tax)
To Provision for Income Tax A/C
This provision being a liability, showed at “Capital & Liability” side of
Balance Sheet in the bracket of “Other Liabilities”.
B. Advance Income Tax:
Advance tax refers to the payment of taxes in advance. In other words,
"pay as you go." Advance tax is payable during the fiscal year if the tax
payable is INR 10,000 or more (section 208). If the following conditions
are met, the provisions of the advance tax do not apply to an individual
resident in India (section 207) –
1. The resident individual has no income chargeable under the heading
'Profit and gain of business or profession'; and
2. The resident individual is 60 years of age or older at any time during the
previous year. It should be noted that advance tax applies to all taxpayers;
however, if the resident individual meets the above two conditions, he is
exempt from making an advance tax payment.
As per Income Tax Act, we have to pay advance income tax and that is
showed at “Property & Assets” side of Balance Sheet in the bracket of
“Other Assets”.
Accounting entry will be as under
: Advance Income Tax paid A/C Dr
To Bank A/C
In case of self -assessment tax also this entry is passed but the narration
will be for self -assessment.
7. Bill of exchange (Endorsement, Honour, Dishonour)
Meaning of Bill of Exchange
According to the Negotiable Instruments Act 1881, a bill of exchange is
defined as “an instrument in writing containing an unconditional order,
signed by the maker, directing a certain person to pay a certain sum of
money only to, or to the order of a certain person or to the bearer of the
instrument”.
ENDORSEMENT OF BILL OF EXCHANGE:
"The person receiving the b ill of exchange becomes the endorsee when the
bill's holder signs the bill's reverse with the intention of transferring the
property it contains (the right to receive money from the acceptor).
"Endorsement" is the process through which a bill is moved from one
person to another for the payment of debts. munotes.in
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14 Endorsement of the bill refers to the process by which the creator or holder
of the bill transfers the title of the bill in aid of his or her creditors. The
person transferring the title is known as the "End orser," while the person
receiving the bill is known as the "Endorsee." Signing at the back of the bill
constitutes an endorsement.
Journal Entries in the Books of Endorser and Endorsee:
When a bill of exchange is endorsed the following journal entries are
made in the books of endorser and endorsee as the drawee will remain
unaffected.
Endorser's Journal (A) Endorsee's Journal ( B)
When a bill is endorsed:
Endorsee's A/C......XXX Bill receivable A/C...........XXX When a bill is endorsed:
Bill receivabl e
A/C.........XXX
Endorser's A/C..................XXX No journal entry in the books of endorser when the bill is honoured at the date of maturity. On the due date, the bill is
presented to the acceptor
and cash is received from
him, the entry is: Cash A/C.........XXX Bill receivable
A/C..........XXX
Dishonour of Bill
A bill is considered to be dishonoured when the drawee (the person who is
obligated to pay) is unable to make the payment on the bill's maturity date. In
this case, the drawee' s obligation is reinstated. Bill dishonour can occur
through either non -acceptance or non -payment. A dishonoured bill is the
same as a bounced check.
Dishonour by Non -Payment
It is stated to be dishonoured of a bill of exchange by non -payment when the
draw ee of the bill of exchange fails to pay the bill on maturity to the drawer.
Possible causes of non -payment dishonour
Because there are insufficient funds in the drawee's account.
Because of insolvency, the drawee is unable to pay.
The drawee simply refuses to pay.
When a bill is dishonoured, any entries made at the time of receipt are
reversed.
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15 8. Capital Expenditure included in Revenue expenditure and vice
versa
a. Capital Expenditure incorrectly treated as Revenue
Expenditure :Misclassifying a capital expenditure as a revenue
expenditure has an impact on the expenditure, asset, and depreciation
accounts. The initial journal entry exaggerates expenses while
understating assets. A capital asset purchase journal entry, for example,
debits an asset account and credits cash. An erroneous revenue
expenditure journal entry debits expense while crediting cash. Because
capital assets are depreciated on a regular basis, incorrectly classifying an
asset understates the depreciation expense over time. An accountant can
correct the error by reversing the initial journal entry, booking the correct
entry, and recording any depreciation that is required.
For example, furniture purchases may be included in purchases.
b. Revenue Expenditure incorrectly treated as Capita l Expenditure
The result will be that expenses will be reduced. As a result, the profit
figure for the year will be incorrect on the income statement. The non -
current asset will be highlighted more. As a result, the non -current asset
value in the Statement of Financial Position will be incorrect. Profit for the
year will be overstated, as will non -current assets.
9. Unrecorded Sales and Purchases
a. Unrecorded Sales
Unrecorded Sales are revenues earned by an entity during an accounting
period but not recor ded during that period. The company usually records
the sales in a later accounting period, which violates the matching
principle, which states that revenues and related expenses should be
recognised in the same accounting period. Unrecorded revenue should be
accrued in the period in which it is earned, with a credit to the Accrued
Revenue account and a debit to the Accounts Receivable account. You
would then reverse this entry in the period when the customer is invoiced.
b. Unrecorded Purchases
When the p urchases remain unrecorded in a financial year, the profits are
overvalued as an expense item remains unrecorded. This affects the
profitability as well as the position of the company is not properly
reflected. The company has to now rectify it’s error by now recording the
purchases and the other effect will be the trade payables will be increased.
10. Good sold on sale or return basis
Goods sold on Sale on Approval is a business arrangement in which an
individual or company interested in purchasing a spe cific item is granted
permission to use the item for a set period of time. If the individual is
satisfied with the item at the end of that time, they agree to purchase it.
However, if the individual is dissatisfied for any reason, they have the
option to r eturn the item and are not obligated to buy it.
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16 If a potential customer approves the sale, the transaction is recorded as
credit sales; otherwise, it is not recorded. However, if the customer has not
given any approval as of the end of the fiscal year, th e goods are
considered unsold and must be included in the supplier's stock.
11. Managerial remuneration on Net Profit before tax
A company may decide to pay its management a fixed percentage of its
profits in the form of a commission. It is known as mana ger's commission,
and it can be based on earnings before or after the commission is charged.
A. Manager’s Commission Payable Before Charging the Commission
In this case, the computation is as simple as multiplying the commission
rate by the amount of net profit made by the business.
Journal Entry for Adjustment of Manager’s Commission in Final
Accounts
Profit and Loss A/C Dr
To Manager’s Commission Payable
(Recording outstanding commission payable to managers)
Treatment of Manager’s Commission in F inancial Statements
Trading Account: No effect
Profit & Loss Account: Show on the debit side as an expense
Balance Sheet: Show on the liability side (usually under the head
current liabilities)
B. Manager’s Commission Payable After Charging the
Commis sion
In this situation, the calculation is based on the net profit remaining after
deducting such a commission. The handling in the final account is the
same in both circumstances.
Calculation of Net Profit for Managerial Remuneration
The net profit show n in financial documents such as the statement of
financial performance (P&L statement) should not be used to compute
director remuneration, according to the Companies Act. The Companies
Act of 2013 now requires that net profit calculated in accordance wit h
Section 198 of the Act be considered for CSR as well. In this section, we
will discuss how to calculate net profit for managerial salary.
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17 Profit before tax as per P&L Statement xxxx
Add the following items if debited to P&L Statement before
arriv ing profit before tax
Managerial remuneration xxxx
Provision for Bad doubtful debts xxxx
Loss on sale/disposal/discarding of assets. xxxx
Loss on sale of investments xxxx
Provision for diminution in the value of investments xxxx
fixed assets written off xxxx
Fall in the value of foreign currency monetary assets xxxx
Loss on cancellation of foreign exchange contracts xxxx
Write off of investments xxxx
Provision for contingencies and unascertained liabilities xxxx
Lease premium written off xxxx
Provision for warranty spares/supplies xxxx
Infructuous project expenses written off xxxx
Provision for anticipated loss in case of contracts xxxx
Loss on sale of undertaking xxxx
Provision for wealth tax xxxx
compensation paid under VRS xxxx
Less the following if credited to P&L statement for arriving at
profit before tax: xxxx
Capital profit on sale/disposal of fixed assets (the same should be
added if the co., business comprises of buying & selling any such
property or asset) and revenue profit (di fference between original
cost and WDV should not be deducted) xxxx
Profit on sale of any undertaking or its part xxxx
Profit on buy back of shares xxxx
Profit/discount on redemption of shares or debentures xxxx munotes.in
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Financial Accounting
18 Profit on sale of investments xxxx
Comp ensation received on non -compete agreements xxxx
Write back of provision for doubtful debts xxxx
Write back of provision for doubtful advances xxxx
Appreciation in value of any investments xxxx
Compensation received on surrender of tenancy rights xxxx
Profit on sale of undertaking xxxx
Write back of provision for diminution in the value of
investments xxxx
Profit on sale of forfeited shares & shares of
subsidiary/associated companies xxxx
After computing the profit, the act's remuneration limits ca n be utilised to
establish the maximum allowable remuneration. If the actual salary
exceeds the maximum allowable remuneration, we must obtain approval
from the Central Government.
12. Transfer to Reserves
I. Section 123 (1) of the Companies Act, 2013 all ows the Board of
Directors to appropriate a portion of profits to the credit of a reserve or
reserves.
II Appropriation of a part of profit is sometimes made under law.
(a) For example, the Banking Regulation Act requires that a fixed
percentage of a bank ing company's profit be transferred to the General
Reserve before any dividend can be distributed.
(b) Transfer of a portion of profit to a reserve is also required where the
company has agreed, at the time of loan raising, that before any portion of
its profit is distributed, a specified percentage of the profit should be
credited to a reserve for loan repayment and the amount should remain
invested in a specified manner until the time for repayment arrives.
III Apart from the aforementioned appropriatio ns, it may also be
necessary to provide for losses and depreciation arrears, as well as to
exclude capital profit, as previously mentioned, in order to arrive at the
amount of divisible profit.
13. Bad debt and Provision for bad debts
A. Bad Debts
Debts c an be classified into three categories which are as under:
Bad Debts: It means which are uncollectable or irrecoverable debts. munotes.in
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19 Doubtful debts: It means which will be receivable or cannot be
ascertainable at the date of preparing the financial statements, i n simple
words those debts which are doubtful to realize.
Good debts: It means which are not bad, i.e., neither there is the
possibility of bad debts nor any doubt about its realization is known as
good debts.
Not all the debtors of a business may be abl e to pay 100% of their debts at
all the time. This may lead to a loss to the receiving business and is termed
as bad debts .
Journal Entry for Adjustment of Bad Debts i n Final Accounts
Bad Debts A/C Dr
To Debtor’s A/C
(Recording bad debts)
Step 2
Profit and Loss A/C Dr
To Bad Debts A/C
(Bad debts transferred to Profit & Loss A/C)
Treatment of Bad Debts in Financial Statements
Situation 1 – When bad d ebts are given inside the trial balance – No
Adjustment, only show in P&L
Situation 2 – When bad debts are given outside the trial balance as an
adjustment – They are called further bad debts and adjustments in final
accounts are posted.
Trading Account: No effect
Profit & Loss Account: Show on the debit side (add to bad debts
already written off)
Balance Sheet: Show on the asset side (subtract from sundry debtors)
Journal Entry for Adjustment of Further Bad Debts in Final Accounts
Bad Debts A/C Dr
To Debtor’s A/C
(Recording further bad debts)
B. Provision for Doubtful Debts
The provision for doubtful debts is the estimated amount of bad debt
that will arise from accounts receivable that have been issued but not
yet collected. It is identical to the allowance for doubtful accounts .
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Financial Accounting
20 The accounting concept of prudence and conservatism cautions that each
business should be ready to absorb all anticipated losses. Due to this, all
businesses provide for possible bad debts arising due to n on-payment by
creditors in form of provision for doubtful debts .
When Provision for Doubtful Debts does not Appear in Trial Balance
Journal Entry for Ad justment of Provision for Doubtful Debts in Final
Accounts
Profit and Loss A/C Dr
To Provision for Doubtful Debts A/C
(Recording provision for doubtful debts)
Treatment of Provision for Doubtful Debts in Financial Statements
Trading Account: No eff ect
Profit & Loss Account: Show on the debit side (calculate as % on
Debtors)
Balance Sheet: Show on the asset side (subtract from sundry debtors)
Note: Provisions do not reduce the amount due from debtors.
Provision for Discount on Debtors
Debtors are given a monetary discount as an incentive to make early
payments. In some situations, the payment may be paid in the next fiscal
year. This means that, according to the accrual accounting concept, such
discounts should be regarded as a cost in the current year. When such a
provision is made, it is referred to as a provision for discount on debtors.
Journal Entry for Adjustment of Provision for Discount on Debtors in
Final Accounts
Profit and Loss A/C Dr
To Provision for Discount on Debtors A/C
(Recordi ng provision for discount on debtors)
Treatment of Provision for Discount on Debtors in Financial Statements
Trading Account: No effect
Profit & Loss Account: Show on the debit side (calculate on good
debtors i.e. after adjusting bad debts & provision for doubtful debts)
Balance Sheet: Show on the asset side (subtract from sundry debtors)
14. Calls in Arrears
Calls in Arrears and Calls in Advance
Calls -In-Arrears
If a shareholder is unable to pay the call amount due on allotment or any
subsequent calls in accordance with the terms, the amount that becomes
due is called Calls -In-Arrears. We have the option of transferring or not
transferring the arrear amount due to allotment or calls to the Calls -in-
Arrears Account. munotes.in
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Preparation of final accounts of companies
21
Methods of Accounting Treatment of C alls-In-Arrears
Without opening Calls -in-Arrears Account
By opening Calls -in-Arrears Account
Without opening Calls -in-Arrears Account
Under this method, we credit the receipt from shareholders to the relevant
call account and various call accounts will sh ow debit balance equal to the
total unpaid amount of calls.On a subsequent date, when we receive the
amount of Calls -in-Arrears, we debit Bank Account and credit the relevant
Call Account.
15. Loss by fire (Partly and fully insured goods)
Loss by fire as well as a ccidental losses or abnormal losses occur when a
company experiences any form of loss as a result of a fire, an accident, an
earthquake, or another natural disaster.
The loss is recorded in the profit and loss account and credited to the asset
account. The stock of items may be destroyed, resulting in a drop in the
firm's gross and net profit. GST is reversed on these items because the tax
paid on them cannot be offset against the tax collected.
A. If Goods are Not Insured
Journal Entry for Abnorm al or Accidental Loss in Final Accounts (Goods
Not Insured)
Profit and Loss A/C Dr
To Trading A/C
To Input CGST A/C
To Input SGST A/C
(Recording total value of abnormal loss)
Treatment of Abnormal or Accidental Loss in Financial Statements
(Goods Not Insured)
Trading Account: Show on the credit side (with the cost of goods
destroyed)
Profit & Loss Account: Show on the debit side (with the cost of goods
destroyed)
Balance Sheet: No effect
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Financial Accounting
22 B. If Goods are Insured
Journal Entry for Abnormal or Accidental Loss in Final Accounts (Goods
Insured)
Accidental Loss A/C Dr
To Trading A/C
To Input CGST A/C
To Input SGST A/C
(Recording total value of abnormal loss)
Step 2
Insurance Claim A/C Dr
Profit and Loss A/C Dr
To Accid ental Loss A/C
(Adjusting the insurance claim received)
1. Amount of insurance claim
2. Amount of irrecoverable loss
3. Total abnormal loss
Treatment of Abnormal or Accidental Loss in Financial Statements
(Goods Insured)
Trading Account: Show on the credit side (with the cost of goods
destroyed)
Profit & Loss Account: Show on the debit side (with the cost of goods
destroyed)
Balance Sheet: No effect
16. Goods distributed as free samples :
It is very common for businesses to distribute goods as free samples. Fre e
samples are frequently used in marketing and consumer outreach
programmes. The following are the primary goals of distributing goods as
free samples:
Introducing a new product in the market
Introducing an existing product in a new market
Introducing a fe ature upgrade to an existing product
Increasing the market share of a particular product
Receiving feedback from product users
The outflow of merchandise caused by free sample distribution cannot be
recorded as a sale. This is because there is no monetary compensation for
the distribution of goods as free samples. Instead, giving away free munotes.in
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Preparation of final accounts of companies
23 samples to customers is viewed as an advertising expense. As a result, it is
charged to the advertisement expense account.
17. Any other adjustments as per the prevailin g accounting standard : As
per the companies Act 2013, in case of any clash between Accounting
standard and Companies Act, Accounting standard will prevail over the
Companies Act provision.
1.5 PREPARATION OF FINANCIAL ACCOUNTS IN
VERTICAL FORMAT SCHEDULE III OF THE
COMPANIES ACT, 2013
Introduction:
According to Section 129 of the Companies Act 2013, all the companies
registered under this Act will have to present its financial statements in
Schedule III of the Act. The Schedule III of the Companies Act 2013 has
been formulated to keep pace with the changes in the economic
philosophy leading to privatization and globalization and consequent
desired changes/reforms in the corporate financial reporting practices. It
deals with the Form of Balance sheet, Sta tement of Profit and Loss and
disclosures to be made therein and it applies uniformly to all the
companies registered under the Companies Act, 2013, for the preparation
of financial statements of an accounting year. It has several new features
like:
– A vertical format for presentation of balance sheet with classification of
Balance Sheet items into current and non -current categories. –
A vertical format of Statement of Profit and Loss with classification of
expenses based on nature
. – Elimination the c oncept of “Schedules” and such information is now to
be furnished in terms of “Notes to Accounts”. –
It does not contain any specific disclosure for items included in Schedule
VI under the head, “Miscellaneous Expenditure”.
Presentation of Balance Sheet
A Balance sheet is a statement of the financial position of an enterprise as
at a given date, which exhibits its assets, liabilities, capital, reserves and
other account balances at their respective book values
Key features of Balance Sheet
1) The Schedu le III permits only Vertical form of presentation.
2) It uses “Equity and Liabilities” and “Assets” as headings.
3) All assets and liabilities classified into current and non -current and
presented separately on the face of the Balance Sheet.
4) Number of shares held by each shareholder holding more than 5%
shares now needs to be disclosed.
5) Details pertaining to aggregate number and class of shares allotted for
consideration other than cash, bonus shares and shares bought back will munotes.in
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Financial Accounting
24 need to be disclosed only for a period of five years immediately
preceding the Balance Sheet date
6) Any debit balance in the Statement of Profit and Loss will be disclosed
under the head “Reserves and surplus.” Earlier, any debit balance in
Profit and Loss Account carried fo rward after deduction from
uncommitted reserves was required to be shown as the last item on the
asset side of the Balance Sheet
7) Specific disclosures are prescribed for Share Application money. The
application money not exceeding the capital offered for issuance and
to the extent not refundable will be shown separately on the face of the
Balance Sheet. The amount in excess of subscription or if the
requirements of minimum subscription are not met will be shown
under “Other current liabilities.”
8) The t erm “sundry debtors” has been replaced with the term “trade
receivables.” ‘Trade receivables’ are defined as dues arising only from
goods sold or services rendered in the normal course of business.
Hence, amounts due on account of other contractual obligat ions can no
longer be included in the trade receivables.
9) It requires separate disclosure of “trade receivables” outstanding for a
period exceeding six months from the date the bill/invoice is due for
payment.”
10) “Capital advances” are specifically r equired to be presented separately
under the head “Loans & advances” rather than including elsewhere.
11) Tangible assets under lease are required to be separately specified
under each class of asset. In the absence of any further clarification,
the term “under lease” should be taken to mean assets given on
operating lease in the case of lessor and assets held under finance lease
in the case of lessee.
12) Under the Schedule III, other commitments also need to be disclosed.
The format of balance sheet a s given in Part I of Schedule III of the
Companies Act 2013 is given below.
Schedule III (See section - 129) GENERAL INSTRUCTION FOR
PREPARATION OF BALANCE SHEET AND STATEMENT OF
PROFIT AND LOSS OF A COMPANY
GENERAL
INSTRUCTIONS (1) If compliance with the Act's requirements,
including Accounting Standards applicable to
companies, necessitates any change in treatment
or disclosure, including addition, amendment,
substitution, or deletion in the head or sub -head or
any changes, in the financial statement s or
statements forming part thereof, the same shall be
made, and the requirements of this Schedule shall
be modified accordingly.
(2)The disclosure requirements specified in this
Schedule supplement, rather than replace, the munotes.in
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Preparation of final accounts of companies
25 disclosure requirements specif ied in the
Accounting Standards prescribed under the
Companies Act of 2013. Unless required to be
disclosed on the face of the Financial Statements,
additional disclosures specified in the Accounting
Standards must be made in the notes to accounts
or by wa y of an additional statement. Similarly, in
addition to the requirements set out in this
Schedule, all other disclosures required by the
Companies Act must be made in the notes to
accounts.
(3) (i) Notes to accounts must include information
in addition to what is presented in the Financial
Statements, such as
a) narrative descriptions or disaggregation of items
recognised in those statements, and
b) information about items that do not qualify for
recognition in those statements.
(ii) Each item on the bala nce sheet and profit and
loss statement must be cross -referenced to any
related information in the notes to accounts. In
preparing the Financial Statements, including the
notes to accounts, a balance must be struck
between providing excessive detail that m ay not
be useful to users of financial statements and
failing to provide important information due to
excessive aggregation.
(4) (i) Depending on the company's turnover, the
figures in the Financial Statements may be
rounded off as shown below :
Turnover Rounding off
(a) less than one hundred’ crore
rupees To the nearest hundreds, thousands, lakhsormillions, or decimals thereof(b) one hundred crore rupees or
more To the nearest lakhs, millions or crores, or decimals thereof.
(ii) Once a unit of measur ement is established, it
must be used consistently in the Financial
Statements.
(5)Except in the case of the first Financial
Statements laid before the Company (after its munotes.in
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Financial Accounting
26 incorporation) the corresponding amounts
(comparatives) for the immediately preceding
reporting period for all items shown in the
Financial Statements including notes shall also be
given.
(6) For the purpose of this Schedule, the terms
used herein shall be as per the notes applicable
Accounting
Standards. Note: This section of the Schedule specifies the
minimum requirements for the Balance Sheet,
Statement of Profit and Loss (hereinafter referred
to as - Financial Statements f or the purposes of
this Schedule), and Notes. Line items, sub -line
items, and sub -totals shall be presented as an
addition or substitution on the face of the
Financial Statements when such presentation is
relevant to an understanding of the company's
finan cial position or performance, or to cater to
industry/sector -specific disclosure requirements,
or when required for compliance with
amendments to the Companies Act or under the
Accounting Standards.
1.6 VERTICAL FINANCIAL STATEMENT
ABC LIMITED
Balance Sheet As On 31st March, 2022
Particulars Note No. Figures
as at
the end
of
current
reporti
ng
period Figure
s as at
the end
of
previo
us
reporti
ng
Period
Rs. Rs.
A EQUITY AND LIABILITIES
1 Shareholders’ funds
(a) Share capital 1 XX XX
(b) R eserves and surplus 2 XX XX
(b) Money Received against share
warrants XX XX munotes.in
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Preparation of final accounts of companies
27 2 Share application money pending
allotments XX XX
3 Non-current liabilities
(a) Long -term borrowings 3 XX XX
(b) Deferred tax liabilities (net) XX XX
(c) Other Lon g Term Liabilities XX XX
(d) Long term provision XX XX
4 Current liabilities
(a) Short Term Borrowings 4 XX XX
(b) Trade payables 5 XX XX
(c) Other current liabilities 6 XX XX
(d) Short -term provisions 7 XX XX
Total XX XX
B ASSETS
1 Non-current assets
(a) Fixed Assets
(i) Property, Plant and Equipment 8 XX -
(ii) Intangible assets XX -
(iii) Capital Work in progress XX -
(iv) Intangible Assets under Development XX -
(b) Non -current investments 9 XX -
(c) Defe rred Tax Assets XX
(d) Long term loans and Advances XX
(e) Other Non -Current Assets XX
2 Current assets
(a) Current Investments 10 XX
(b) Inventories 11 XX -
(c) Trade receivables 12 XX -
(d) Cash and cash equivalents 13 XX -
(e) S hort-term loans and advances 14 XX -
(f) Other Current Assets 15 XX -
Total XX XX
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Financial Accounting
28 GENERAL INSTRUCTIONS FOR PREPARATION OF
BALANCE SHEET
1. An asset shall be classified as current when it satisfies
any of the following criteria:
a. It is expected to be re alised in, or is intended for sale or consumption
in, the company’s normal operating cycle;
b. It is held primarily for the purpose of being traded;
c. It is expected to be realised within twelve months after the reporting
date; or
d. It is cash or cash equivalent unless it is restricted from being
exchanged or used to settle a liability for at least twelve months after
the reporting date.
All other assets shall be classified as non -current.
2. The time between the acquisition of assets for processing and their
realisa tion in cash or cash equivalents is referred to as an operating
cycle. Where the normal operating cycle cannot be determined, it is
assumed to last for a period of twelve months.
3. A liability shall be classified as current when it satisfies any of the
follo wing criteria:
a. It is expected to be settled during the normal operating cycle of the
company;
b. it is held primarily for trading purposes;
c. it is due to be settled within twelve months of the reporting date; or
d. The company does not have an unconditional right to postpone
liability settlement for at least twelve months after the reporting date.
The terms of a liability that, at the option of the counterparty, could
result in its settlement through the issuance of equity instruments
have no bearing on its classi fication.
All other liabilities must be designated as non -current.
4. A receivable is classified as a "trade receivable" if the amount owed
is for goods sold or services rendered in the normal course of
business.
5. A payable is classified as a "trade payable" i f the amount due is for
goods purchased or services received in the normal course of
business.
A company shall disclose the following in the notes to accounts.
A. Share Capital
For each class of share capital (different classes of preference shares to be
treated separately):
a. The number and amount of shares authorised;
b. The number of shares issued, subscribed and fully paid, and subscribed
but not fully paid;
c. Par value per share;
d. A reconciliation of the number of shares outstanding at the beginning
and at the end of the reporting period; munotes.in
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Preparation of final accounts of companies
29 e. The rights, preferences and restrictions attaching to each class of
shares including restrictions on the distribution of dividends and the
repayment of capital;
f. Shares in respect of each class in the company held by its holdin g
company or its ultimate holding company including shares held by or
by subsidiaries or associates of the holding company or the ultimate
holding company in aggregate;
g. Shares in the company held by each share holder holding more than 5
per cent shares spe cifying the number of shares held;
h. Shares reserved for issue under options and contracts/commitments for
the sale of shares/disinvestment, including the terms and amounts;
i. For the period of five years immediately preceding the date as at which
the Balance Sheet is prepared:
A. Aggregate number and class of shares allotted as fully paid -up
pursuant to contract(s) without payment being received in cash.
B. Aggregate number and class of shares allotted as fully paid -up by way
of bonus shares.
C. Aggregate number and cl ass of shares bought back.
j. Terms of any securities convertible into equity/preference shares
issued along with the earliest date of conversion in descending order
starting from the farthest such date;
k. Calls unpaid (showing aggregate value of calls unpaid b y directors and
officers);
l. Forfeited shares (amount originally paid -up).
B. Reserves and Surplus
i. Reserves and Surplus shall be classified as:
a. Capital Reserves;
b. Capital Redemption Reserve;
c. Securities Premium Reserve;
d. Debenture Redemption Reserve;
e. Revaluati on Reserve;
f. Share Options Outstanding Account;
g. Other Reserves(specify the nature and purpose of each reserve and the
amount in respect thereof);
h. Surplus i.e., balance in Statement of Profit and Loss disclosing
allocations and appropriations such as dividen d, bonus shares and
transfer to/ from reserves, etc.;
(Additions and deductions since last balance sheet to be shown under
each of the specified heads);
ii. A reserve specifically represented by earmarked investments shall be
termed as a “fund”.
iii. The debit bal ance of the profit and loss statement must be shown as a
negative figure under the heading "Surplus." Similarly, even if the
resulting figure is negative, the balance of "Reserves and Surplus,"
after adjusting for any negative balance of surplus, shall be shown
under the heading "Reserves and Surplus."
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30 C. Long -term Borrowings
i. Long -term borrowings shall be classified as:
a. Bonds/debentures;
b. Term loans:
A. From banks.
B. From other parties.
c. Deferred payment liabilities;
d. Deposits;
e. Loans and advances from related part ies;
f. Long -term maturities of finance lease obligations;
g. Other loans and advances (specify nature).
ii. Borrowings shall further be sub -classified as secured and unsecured.
Nature of security shall be specified separately in each case.
iii. Where loans have been gua ranteed by directors or others, the
aggregate amount of such loans under each head shall be disclosed.
iv. Bonds/debentures (along with the rate of interest and particulars of
redemption or conversion, as the case may be) shall be stated in
descending order of maturity or conversion, starting from farthest
redemption or conversion date, as the case may be. Where
bonds/debentures are redeemable by instalments, the date of maturity
for this purpose must be reckoned as the date on which the first
instalment become s due.
v. Particulars of any redeemed bonds/debentures which the company has
power to reissue shall be disclosed.
vi. Terms of repayment of term loans and other loans shall be stated.
vii. Period and amount of continuing default as on the balance sheet date
in repayme nt of loans and interest, shall be specified separately in each
case.
D. Other Long -term Liabilities
Other Long -term Liabilities shall be classified as:
a. Trade payables;
b. Others.
E. Long -term provisions
The amounts shall be classified as:
a. Provision for emp loyee benefits;
b. Others (specify nature).
F. Short -term borrowings
i. Short -term borrowings shall be classified as:
a. Loans repayable on demand;
A. From banks.
B. From other parties.
b. Loans and advances from related parties; munotes.in
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Preparation of final accounts of companies
31 c. Deposits;
d. Other loans and advances (specify nature).
ii. Borrowings shall further be sub -classified as secured and unsecured.
Nature of security shall be specified separately in each case.
iii. Where loans have been guaranteed by directors or others, the
aggregate amount of such loans under each head shall be disclosed.
iv. Period and amount of default as on the balance sheet date in repayment
of loans and interest, shall be specified separately in each case.
G. Other current liabilities
The amounts shall be classified as:
a. Current maturities of long -term debt;
b. Current maturities of finance lease obligations;
c. Interest accrued but not due on borrowings;
d. Interest accrued and due on borrowings;
e. Income received in advance;
f. Unpaid dividends;
g. Application money received for allotment of securities and due for
refund and interest accrued thereon. Share application money includes
advances towards allotment of share capital. The terms and conditions
including the number of shares proposed to be issued, the amount of
premium, if any, and the period before which shares shall be allotted
shall be disclosed. It shall also be disclosed whether the company has
sufficient authorised capital to cover the share capital amount resulting
from allotment of shares out of such share application money. Further,
the period for which the sha re application money has been pending
beyond the period for allotment as mentioned in the document inviting
application for shares along with the reason for such share application
money being pending shall be disclosed. Share application money not
exceedin g the issued capital and to the extent not refundable shall be
shown under the head Equity and share application money to the
extent refundable, i.e., the amount in excess of subscription or in case
the requirements of minimum subscription are not met, sha ll be
separately shown under “Óther current liabilities”;
h. Unpaid matured deposits and interest accrued thereon;
i. Unpaid matured debentures and interest accrued thereon;
j. Other payables (specify nature).
H. Short -term provisions
The amounts shall be classifi ed as:
a. Provision for employee benefits.
b. Others (specify nature).
I. Tangible assets
i. Classification shall be given as:
a. Land;
b. Buildings; munotes.in
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Financial Accounting
32 c. Plant and Equipment;
d. Furniture and Fixtures;
e. Vehicles;
f. Office equipment;
g. Others (specify nature).
ii. Assets under lease shal l be separately specified under each class of
asset.
iii. A reconciliation of the gross and net carrying amounts of each class of
assets at the beginning and end of the reporting period showing
additions, disposals, acquisitions through business combinations an d
other adjustments and the related depreciation and impairment
losses/reversals shall be disclosed separately.
iv. Where sums have been written -off on a reduction of capital or
revaluation of assets or where sums have been added on revaluation of
assets, ever y balance sheet subsequent to date of such write -off, or
addition shall show the reduced or increased figures as applicable and
shall by way of a note also show the amount of the reduction or
increase as applicable together with the date thereof for the fi rst five
years subsequent to the date of such reduction or increase.
J. Intangible assets
i. Classification shall be given as:
a. Goodwill;
b. Brands/trademarks;
c. Computer software;
d. Mastheads and publishing titles;
e. Mining rights;
f. Copyrights, and patents and other i ntellectual property rights, services
and operating rights;
g. Recipes, formulae, models, designs and prototypes;
h. Licences and franchise;
i. Others (specify nature).
ii. A reconciliation of the gross and net carrying amounts of each class of
assets at the beginning and end of the reporting period showing
additions, disposals, acquisitions through business combinations and
other adjustments and the related amortization and impairment
losses/reversals shall be disclosed separately.
iii. Where sums have been written -off on a reduction of capital or
revaluation of assets or where sums have been added on revaluation
of assets, every balance sheet subsequent to date of such write -off, or
addition shall show the reduced or increased figures as applicable and
shall by way of a not e also show the amount of the reduction or
increase as applicable together with the date thereof for the first five
years subsequent to the date of such reduction or increase.
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33 K. Non -current investments
i. Non-current investments shall be classified as tr ade investments and
other investments and further classified as:
a. Investment property;
b. Investments in Equity Instruments;
c. Investments in preference shares;
d. Investments in Government or trust securities;
e. Investments in debentures or bonds;
f. Investments in Mut ual Funds;
g. Investments in partnership firms;
h. Other non -current investments (specify nature).
Under each classification, details shall be given of names of the bodies
corporate indicating separately whether such bodies are (i)
subsidiaries, (ii) associates, (iii) joint ventures, or (iv) controlled
special purpose entities in whom investments have been made and the
nature and extent of the investment so made in each such body
corporate (showing separately investments which are partly paid). In
regard to inves tments in the capital of partnership firms, the names of
the firms (with the names of all their partners, total capital and the
shares of each partner) shall be given.
ii. Investments carried at other than at cost should be separately stated
specifying the bas is for valuation thereof;
iii. The following shall also be disclosed:
a. Aggregate amount of quoted investments and market value thereof;
b. Aggregate amount of unquoted investments;
c. Aggregate provision for diminution in value of investments.
L. Long -term loans and advances
i. Long -term loans and advances shall be classified as:
a. Capital Advances;
b. Security Deposits;
c. Loans and advances to related parties (giving details thereof);
d. Other loans and advances (specify nature).
ii. The above shall also be separately sub -classified as:
a. Secured, considered good;
b. Unsecured, considered good;
c. Doubtful.
iii. Allowance for bad and doubtful loans and advances shall be disclosed
under the relevant heads separately.
iv. Loans and advances due by directors or other officers of the company
or any of the m either severally or jointly with any other persons or
amounts due by firms or private companies respectively in which any
director is a partner or a director or a member should be separately
stated.
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34 M. Other non -current assets
Other non -current assets shall be classified as:
i. Long -term Trade Receivables (including trade receivables on deferred
credit terms);
ii. Others (specify nature);
iii. Long -term Trade Receivables, shall be sub -classified as:
A.
i. Secured, considered good;
B. Unsecured, considered good;
C. Doubtful.
i. Allowance for bad and doubtful debts shall be disclosed under the
relevant heads separately.
ii. Debts due by directors or other officers of the company or any of them
either severally or jointly with any other person or debts due by firms
or private companie s respectively in which any director is a partner or
a director or a member should be separately stated.
N. Current Investments
i. Current investments shall be classified as:
a. Investments in Equity Instruments;
b. Investment in Preference Shares;
c. Investments in G overnment or trust securities;
d. Investments in debentures or bonds;
e. Investments in Mutual Funds;
f. Investments in partnership firms;
g. Other investments (specify nature).
Under each classification, details shall be given of names of the bodies
corporate [indic ating separately whether such bodies are: (i)
subsidiaries, (ii) associates, (iii) joint ventures, or (iv) controlled
special purpose entities] in whom investments have been made and the
nature and extent of the investment so made in each such body
corpora te (showing separately investments which are partly paid). In
regard to investments in the capital of partnership firms, the names of
the firms (with the names of all their partners, total capital and the
shares of each partner) shall be given.
ii. The followi ng shall also be disclosed:
a. The basis of valuation of individual investments;
b. Aggregate amount of quoted investments and market value thereof;
c. Aggregate amount of unquoted investments;
d. Aggregate provision made for diminution in value of investments.
O. Inv entories
i. Inventories shall be classified as:
a. Raw materials;
b. Work -in-progress;
c. Finished goods;
d. Stock -in-trade (in respect of goods acquired for trading); munotes.in
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Preparation of final accounts of companies
35 e. Stores and spares;
f. Loose tools;
g. Others (specify nature).
ii. Goods -in-transit shall be disclosed under the relevant sub -head of
inventories.
iii. Mode of valuation shall be stated.
P. Trade Receivables
i. Aggregate amount of Trade Receivables outstanding for a period
exceeding six months from the date they are due for payment should
be separately stated.
ii. Trade receivab les shall be sub -classified as:
a. Secured, considered good;
b. Unsecured, considered good;
c. Doubtful.
iii. Allowance for bad and doubtful debts shall be disclosed under the
relevant heads separately.
iv. Debts due by directors or other officers of the company or any of t hem
either severally or jointly with any other person or debts due by firms
or private companies respectively in which any director is a partner or
a director or a member should be separately stated.
Q. Cash and cash equivalents
i. Cash and cash equivalents s hall be classified as:
a. Balances with banks;
b. Cheques, drafts on hand;
c. Cash on hand;
d. Others (specify nature).
ii. Earmarked balances with banks (for example, for unpaid dividend)
shall be separately stated.
iii. Balances with banks to the extent held as margin money or security
against the borrowings, guarantees, other commitments shall be
disclosed separately.
iv. Repatriation restrictions, if any, in respect of cash and bank balances
shall be separately stated.
v. Bank deposits with more than twelve months maturity shall b e
disclosed separately.
R. Short -term loans and advances
i. Short -term loans and advances shall be classified as:
a. Loans and advances to related parties (giving details thereof);
b. Others (specify nature).
ii. The above shall also be sub -classified as:
a. Secured, con sidered good;
b. Unsecured, considered good;
c. Doubtful.
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Financial Accounting
36 iii. Allowance for bad and doubtful loans and advances shall be disclosed
under the relevant heads separately.
iv. Loans and advances due by directors or other officers of the company
or any of them either sever ally or jointly with any other person or
amounts due by firms or private companies respectively in which any
director is a partner or a director or a member shall be separately
stated.
S. Other current assets (specify nature)
This is an all -inclusive headi ng, which incorporates current assets that do
not fit into any other asset categories.
T. Contingent liabilities and commitments (to the extent not provided
for)
i. Contingent liabilities shall be classified as:
a. Claims against the company not acknowledged as debt;
b. Guarantees;
c. Other money for which the company is contingently liable.
ii. (ii) Commitments shall be classified as:
a. Estimated amount of contracts remaining to be executed on capital
account and not provided for;
b. Uncalled liability on shares and other inv estments partly paid;
c. Other commitments (specify nature).
U. The amount of dividends proposed to be distributed to equity and
preference shareholders for the period and the related amount per share
shall be disclosed separately. Arrears of fixed cumulative dividends on
preference shares shall also be disclosed separately.
V. Where in respect of an issue of securities made for a specific purpose,
the whole or part of the amount has not been used for the specific purpose
at the balance sheet date, there shal l be indicated by way of note how such
unutilised amounts have been used or invested.
W. If, in the opinion of the Board, any of the assets other than fixed assets
and non -current investments do not have a value on realisation in the
ordinary course of bu siness at least equal to the amount at which they are
stated, the
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37 1.7 STATEMENT OF PROFIT AND LOSS
Statement of Profit and Loss
ABC PRIVATE LIMITED
STATEMENT OF PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED
31st MARCH 2022
Particulars Not
e
No. Figures for the
current
reporting period Figures for the
previous
reporting period Rs. Rs.
I Revenue from operations 16 XX XX
II Other Income 17 XX XX
III Total Income (I+II) XX XX
IV Expenses
(a) Cost of mater ials consumed 18 XX XX
(b) Purchase of Stock in Trade XX XX
(c) Changes in inventories of
finished goods, work -in-
progress and stock -in-trade 19 XX XX
(d) Employee benefits
expenses 20 XX XX
(e) Finance costs 21 XX XX
(f) Depreciation and
amortisation expenses XX XX
(g) Other expenses 22 XX XX
V Total Expenses XX XX
VI Profit before exceptional and
extraordinary item and tax XX XX
VII Exceptional Items XX XX
VIII Profit before extraordi nary
item and tax XX XX
IX Extraordinary Items XX XX
X Profit before Tax XX XX
XI Tax Expense:
(a) Current tax expense XX XX
(b) Deferred tax XX XX
XII Profit / (Loss) for the period
from continuing operations XX XX
XIII Profit / (Loss) from
discontinuing operations XX XX
XIV Tax from discontinuing XX XX munotes.in
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Financial Accounting
38 operations
XV Profit/ (Loss) from
discontinuing operations XX XX
XVI (Loss) for the Period XX XX
XVII Earning per equity s hare: XX XX
(1) Basic XX XX
(2) Diluted XX XX
Salient features of the statement of Profit and Loss:
1) The name of ‘Profit and Loss Account’ has been changed to
“Statement of Profit and Loss”
2) This format of Statement of Profit and L oss does not mention any
appropriation item on its face. Further, ‘below the line’ adjustments
to be presented under “Reserves and Surplus” in the Balance Sheet.
3) Any item of income or expense which exceeds one per cent of the
revenue from operations or Rs . 100,000 (earlier 1 % of total revenue
or Rs. 5,000), whichever is higher, needs to be disclosed separately.
4) In respect of companies other than finance companies, revenue from
operations need to be disclosed separately as revenue from (a) sale of
product s, (b) sale of services and (c) other operating revenues
5) Net exchange gain/loss on foreign currency borrowings to the extent
considered as an adjustment to interest cost needs to be disclosed
separately as finance cost
6) Break -up in terms of quantitative d isclosures for significant items of
Statement of Profit and Loss, such as raw materials, stocks,
purchases and sales have been simplified and replaced with the
disclosure of “broad heads” only. The broad heads need to be
decided based on materiality and pr esentation of true and fair view
of the financial statements.
GENERAL INSTRUCTIONS FOR PREPARATION OF
STATEMENT OF PROFIT AND LOSS
i. The provisions of this Part shall apply to the income and expenditure
account referred t o in sub -clause ( ii) of clause ( 40) of section 2 in like
manner as they apply to a statement of profit and loss.
ii. (A) In respect of a company other than a finance company revenue
from operations shall disclose separately in the notes revenue from —
o Sale of p roducts;
o Sale of services;
o Other operating revenues;
o Less: munotes.in
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Preparation of final accounts of companies
39 o Excise duty.
(B) In respect of a finance company, revenue from operations shall include
revenue from —
o Interest; and
o Other financial services.
Revenue under each of the above heads shall be disclose d separately by
way of notes to accounts to the extent applicable.
iii. Finance Costs
Finance costs shall be classified as:
o Interest expense;
o Other borrowing costs;
o Applicable net gain/loss on foreign currency transactions and
translation.
iv. Other Income
Other in come shall be classified as:
o Interest Income (in case of a company other than a finance company);
o Dividend Income;
o Net gain/loss on sale of investments;
o Other non -operating income (net of expenses directly attributable to
such income).
v. Additional Informati on:
A Company shall disclose by way of notes additional information
regarding aggregate expenditure and income on the following items: —
o Employee Benefits Expense [showing separately ( i) salaries and
wages, ( ii) contribution to provident and other funds, ( iii) expense on
Employee Stock Option Scheme (ESOP) and Employee Stock
Purchase Plan (ESPP), ( iv) staff welfare expenses].
o Depreciation and amortisation expense;
o Any item of income or expenditure which exceeds one per cent of the
revenue from operations or Rs.1,00,000, whichever is higher;
o Interest Income;
o Interest expense;
o Dividend income;
o Net gain/loss on sale of investments;
o Adjustments to the carrying amount of investments;
o Net gain or loss on foreign currency transaction and translation (other
than cons idered as finance cost);
o Payments to the auditor as ( a) auditor; ( b) for taxation matters; ( c) for
company law matters; ( d) for management services; ( e) for other
services; and ( f) for reimbursement of expenses;
o In case of Companies covered under section 1 35, amount of
expenditure incurred on corporate social responsibility activities;
o Details of items of exceptional and extraordinary nature;
o Prior period items;
vi. In the case of manufacturing companies :
o Raw materials under broad heads
goods purchased under br oad heads munotes.in
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Financial Accounting
40 o In the case of trading companies, purchases in respect of goods traded
in by the company under broad heads.
o In the case of companies rendering or supplying services, gross
income derived from services rendered or supplied under broad heads.
o In th e case of a company, which falls under more than one of the
categories mentioned in ( a), (b) and ( c) above, it shall be sufficient
compliance with the requirements herein if purchases, sales and
consumption of raw material and the gross income from service s
rendered is shown under broad heads.
o In the case of other companies, gross income derived under broad
heads.
vii. In the case of all concerns having works in progress, works -in-
progress under broad heads.
viii. (a) The aggregate, if material, of any amounts set asi de or proposed to
be set aside, to reserve, but not including provisions made to meet any
specific liability, contingency or commitment known to exist at the
date as to which the balance sheet is made up.
o The aggregate, if material, of any amounts withdraw n from such
reserves.
ix. (a) The aggregate, if material, of the amounts set aside to provisions
made for meeting specific liabilities, contingencies or commitments.
(b) The aggregate, if material, of the amounts withdrawn from such
provisions, as no longer re quired.
x. Expenditure incurred on each of the following items, separately for
each item: —
o Consumption of stores and spare parts;
o Power and fuel;
o Rent;
o Repairs to buildings;
o Repairs to machinery;
o Insurance;
o Rates and taxes, excluding, taxes on income;
o Miscell aneous expenses,
xi. (a) Dividends from subsidiary companies.
Provisions for losses of subsidiary companies.
The profit and loss account shall also contain by way of a note the
following information, viz:
o Value of imports calculated on C.I.F basis by the compa ny during the
financial year in respect of —
o Raw materials;
Components and spare parts;
Capital goods;
o Expenditure in foreign currency during the financial year on account
of royalty, know -how, professional and consultation fees, interest, and
other matters ;
o Total value if all imported raw materials, spare parts and components
consumed during the financial year and the total value of all
indigenous raw materials, spare parts and components similarly
consumed and the percentage of each to the total consumptio n; munotes.in
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Preparation of final accounts of companies
41 o The amount remitted during the year in foreign currencies on account
of dividends with a specific mention of the total number of non -resident
shareholders, the total number of shares held by them on which the
dividends were due and the year to which t he dividends related;
o Earnings in foreign exchange classified under the following heads,
namely: —
o Export of goods calculated on F.O.B. basis;
Royalty, know -how, professional and consultation fees;
Interest and dividend;
Other income, indicating the nature thereof.
Exercise:
Choose the correct alternative:
1. Every Balance Sheet must comply with the requirements of _______ of
Schedule III of the Co mpanies Act, 2013.
a. Part IV b. Part III c. Part II d. Part I
2. Every Statement of Profit & Loss must co mply with the requirements of
Part II of ________of the Companies Act, 2013.
a. Schedule I b. Schedule II c. Schedule III d. Schedule IV
3. The Schedule III prescribes only the _______ format for presentation of
Financial Statements.
a. Horizontal b. Vertical c. Comparative d. T Account
4. The appropriations are to be presented under ______________ in the
Balance Sheet.
a. Reserves and
Surplus b. Long term
Provision c
. Short Term
Provision d. Share
Capital
5. An operating cycle is assumed to hav e a duration of _______.
a. 18 months b. 24 months c. 6 months d. 12 months
6. Claims not acknowledged as debts
a. is shown under
Trade
Receivables in the
balance Sheet of a
company b
. is shown
under Trade
payable in the
balance Sheet
of a company c. is shown
under
provision in
the balance
Sheet of a
company d
. is shown by
way of a
note to the
balance
sheet of a
company
under
contingent
liabilities
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Financial Accounting
42 7. Any amount payable within 12 months from the date of Balance Sheet
is called_________.
b. Loan c. Current Liabilities d. Contingent Liabilities
8. Which of the following is not an example of fixed assets?
a. plant & machinery b. building c. royalty d. patents
9. Unclaimed dividend is shown under
a. current liability b. secured loan c. provis ions d. reserves
10. The example of accounting policy is ________.
a. consistency b. going concern c. accrual d. depreciation
11. The preference capital redeemed can be aggregate of ______.
a. free reserves &
proceeds of
fresh issue of
shares b
. security
premium
and free
reserves c. secured loan
and Capital d
. Debenture
s
12. When new shares are issued at discount, proceeds of fresh issue is
the_____.
a. nominal value b. net receipt c. discount d. premium value
Correct Answer:
1 2 3 4 5 6 7 8 9 10 11 12
D c b a d d c c a d a b
Short Notes:
1. Nature of Financial Statements
2. Objectives of Financial Statements
3. Current investment.
4. Operating cycle. munotes.in
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Preparation of final accounts of companies
43
List of References: -
www.academia.edu
www.accountingcapital.com
www.accountingnotes.net
www.yourarticlelibrary.com
www.linkedin.com
www.tutorialspoint.com .
Bibliography
Financial Accounting ,
Jain S.P., Narang K.L., K alyani Publishers, Delhi.
Fundamentals of Advanced Accounting
R.S.N Pillai Bagavathi, S. Chand Chand Publications
Bibliography Glossary Further Readings Model Question
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44 2
PREPARATION OF FINAL ACCOUNTS OF
COMPANIES
Unit Structure:
2.0 Objectives
2.1 Illustration
2.2 Exercise
2.0 OBJECTIVES
After studying this chapter, you will be able to understand
Application of Various adjustments with respect to the preparation of
financial statements
Preparation of final accounts both under the vertical format as
suggested by the Revised Schedule – III
2.1 ILLUSTRATIONS
Illustration 01:
Show the presentation of the following items under appropriate notes to
accounts forming part of the Balance Sheet of Mehul Ltd. as on 31 -3-
2017:
Particulars Amount ( `) General Reserve (Opening Balance) 50,00,000
Debenture Redemption Reserve (Opening Balance) 10,00,000
Profit and Loss Account (Opening Balance) 30,00,000
Net Profit for the year (be fore Transfers and Appropriations) 40,00,000
Transfer to General Reserve 10,00,000
Transfer to Debenture Redemption Reserve 5,00,000
Proposed Equity Dividend 7,00,000
Interim Dividend paid 1,00,000
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Preparation of final accounts of companies
45 Solution 01:
Notes to Accounts of Mehul Ltd. For Y ear Ended 31 -3-2017
Particulars ` ` `
Reserves and Surplus Debenture Redemption Reserve Opening Balance 10,00,000 Transferred from P & L A/c 5,00,000 15,00,000
General Reserve Opening Balance 50,00,000 Transferred from P & L A/c 10,00 ,000 60,00,000
Profit & Loss A/c Opening Balance 30,00,000 Add: Profit during the year 40,00,000 Profit Available for Appropriation 70,00,000 Less : Allocations and Appropriations Transfer to General Reserve 10,00,000 Transfer to Deben ture Redemption Reserve 5,00,000 Dividend - Interim 1,00,000 (16,00,000) 54,00,000 1,29,00,000 Note: Proposed Equity Dividend ( ` 7,00,000) [This is to be shown only by
way of a note vide MCA / ICAI Rules]
Illustration 02:
A company has following po sition for the year ended 31 -3-2017:
Particulars `
Provision for tax (Cr.) 5,00,000
Advance payment of tax (Dr.) 4,75,000
Tax deducted at source (Dr.) 20,000
The assessment of a company is completed and tax liability is settled at
` 5,10,000. Pass journal entries. munotes.in
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Financial Accounting
46 Solution 02: No.Particulars Debit ( `) Cr. (`)
1. Profit & Loss A/c
To Provision for Tax A/c [Being entry for recording short provision for tax] Dr.10,000
10,000
2. Provision for Tax A/c
To Advance Tax A/c
To Tax Deducted at Source
To Income Tax Payable [Being entry for recording Gross Demand] Dr.5,10,000
4,75,000
20,000
15,000
Working Note:
(1) Calculation of Tax Refund/(Payable) :
Particulars ` `
Gross Demand (Tax Liability) 5,10,000
Less :
Tax Paid Advance payment for Tax
4,75,000
Tax deducted at source 20,000 (4,95,000) Tax Payable (Shown as Other Current
Liability in Balance Sheet) 15,000
(2) Calculation of Excess/(Shortage) of Tax Provisions
Gross Demand 5,10,000
Less : Provision for Tax (5,00,000) Tax Provisions (Short) 10,000
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Preparation of final accounts of companies
47 Illustration 03:
Following is the extract of the Trial Balance of Satya Ltd. as on 31 -3-
2016.
Particulars Dr. ` Cr. `
Profit and Loss Account (Opening) - 25,00,000 Advance Income Tax (2014 -15) 1,20,000 -
Provision for Income Tax (2014 -15) - 1,70,000
Advance Income Tax (2015 -16) 1,30,000 -
Additional Information:
1. Net Profit before Tax for the year ended 31 -3-2016 is ` 6,00,000.
2. Income Tax Provision to be made for the year 2015 -16 is ` 1,40,000.
3. No effect is given to Income Tax Assessment which is completed for
2014 -15, resulting ina Gross Demand of ` 1,50,000.
You are required to show, how the relevant items will appear in the
Statement of Profit and Loss of Satya Ltd. for the year ende d 31-3-2016
and also in the Balance Sheet as on 31 -3-2016.
Solution 03:
Extract of Statement of Profit & Loss for the year ended 31 -3-2016
Particulars ` `
I. Profit Before Tax 6,00,000 Less: Tax Expense (Current Year) 1,40,000
Add: Excess Prov ision for Previous Year (WN. 1) (20,000) (1,20,000)
Net Profit for the Period 4,80,000
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Financial Accounting
48 Extract of Balance Sheet as at 31 -3-2016
Particulars Note Amount (`)
I. EQUITY AND LIABILITIES 1. Shareholders’ Funds Reserves and Surplus 1 29,80,000
2. Current Liabilities a. Other Current Liabilities 2 30,000
b. Short Term Provisions 3 10,000 Notes to Accounts `
1. Reserves and Surplus Profit and Loss Account (Opening Balance) 25,00,000
Add: Net Profit 4,80,000
Total 29,80,000
2. Other Current Liabilities Income Tax Payable (WN 2) 30,000
3. Short Term Provisions Provision for Tax for 2015 -16 1,40,000
Less: Advance Tax for 2015 -16 (1,30,000)
Total (WN 3) 10,000
WN. 1: Calculation of Excess/Shortage Provi sion
Gross Demand (2014 -15) 1,50,000 Less: Provision for Tax (2014 -15) (1,70,000) Excess Provision credited to P&L A/c (20,000)
WN. 2: Income Tax Payable
Gross Demand 1,50,000 Less : Advance Tax (2014 -15) (1,20,000) Income Tax Payable 30,000
WN. 3: At the end of the year provision for tax and advance tax are netted
out and net amount is shown in the Balance Sheet.
Illustration 04: (Fixed Assets Schedule)
A company has Opening balance of ` 10,00,000 in its Tangible Assets
Account (W.D.V.). Accumulated Depreciation was `6,00,000. There was
an addition of fixed Assets of ` 5,00,000 at the beginning of the year while
there was no sale of fixed asset. munotes.in
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Preparation of final accounts of companies
49 Prepare note on Tangible Assets if the Depreciat ion is charged for the year
@ 15% on original cost.
Solution:
Note for Tangible Assets:
Particulars Gross Block Depreciation Net Block
Opening Additions Closing Opening During
Year Closing Opening Closing
Tangible
Assets
Total 16,00,000 5,00,000 21,00, 000 6,00,000 3,15,000 9,15,000 10,00,000 11,85,000
16,00,000 5,00,000 21,00,000 6,00,000 3,15,000 9,15,000 10,00,000 11,85,000
Illustration 5:
Following is the extract of the Trial Balance of Ram Ltd. as on 31st
March, 2022:
Particulars Amount ( ) Amou nt ( ) Sales 2,40,00,000
Opening Stock of Raw Material 20,00,000
Opening Stock of Finished Goods 10,00,000
Purchase of Raw Materials 54,00,000
Purchase Returns 4,00,000
Sales Returns 40,00,000
Dividend Received 10,00,000
Sundry Income 8,00, 000
Freight on Raw Material 60,000
Salaries and Wages 8,00,000
Bonus to Employees 1,60,000
Directors Remuneration 16,00,000
Depreciation on : - Plant and Machinery 10,00,000 - Furniture and Fixture 6,00,000 - Motor Vehicle 2,00,000 18,00,00 0
Interest on Loan from Bank of India 14,00,000
Repairs and Maintenance Expenses 1,60,000
Insurance Premium of Office Premises 60,000
Electricity Charges 80,000
Rent, Rates and Taxes 40,000
Audit Fees 1,00,000
Advertisement Expenses 2,40,000
Sundry Expenses 20,000
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Financial Accounting
50 Further Information:
(a) Closing inventory of Raw Material and Finished Goods were
` 10,00,000 and ` 12,00,000 respectively.
(b) Salaries and Wages due during the period were ` 1,00,000.
(c) Sundry income receiv able was ` 50,000.
(d) 50,000 is to be provided for Bad and Doubtful Debts.
(e) Advertisement expenses of ` 40,000 was prepaid.
(f) Provide for Income Tax for ` 4,00,000.
(g) Raw materials worth ` 30,000 destroyed by fire. Goods were
uninsured.
Prepare statement of Profit a nd Loss for the year ended 31st March, 2022
as per the provisions of the Companies Act, 2013. (T.Y.B.Com., Oct.
2015, April 2016, adapted)
Solution 05:
In the Books of Ram Ltd.
Profit and Loss Statement for the year ended 31st March, 2022
Particulars Note Amount (`)
1. Revenue from Operations 1 2,00,00,000 2. Other Income 2 18,50,000 I. Total Revenue 2,18,50,000 Expenses:
1. Cost of Materials Consumed 3 60,30,000 2. Decrease / (Increase) in Inventories 4 (2,00,000) 3. Employee Benefits Expense 5 10,60,000 4. Finance Costs 6 14,00,000 5. Depreciation and Amortization Expense 7 18,00,000 6. Other Expenses 8 23,40,000 II. Total Expenses 1,24,30,000 III. Profit Before Tax (I - II) 94,20,000 Tax Expense: Provision for tax for current year (4,00,000) IV. Profit/(Loss) for the Period 90,20,000
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51 Notes to Accounts
Particulars Amount Amount
1. Revenue from Operations
Sales 2,40,00,000 Less: Returns (40,00,000) Total 2,00,00,000
2. Other Income
a. Dividend Income 10,00,000 b. Sundry Income 8,00,000
Add: Income Receivable 50,000 8,50,000 Total 18,50,000
3. Cost of Materials Consumed
a. Opening Stock 20,00,000
b. Add : Purchases (Net) 54,00,000
c. Carriage Inward 60,000 74,60,000 d. Less: Purchase Returns 4,00,000
e. Less: Material lost by fire 30,000
f. Less: Closing Stock 10,00,000 (14,30,000) Total 60,30,000
4. Change in Inventories
Finished Goods
Opening Stock 10,00,000
Less : Closing Stock (12,00,000) (2,00,000) Total
5. Employee Benefits Expense
a. Salaries and Wages 8,00,000
Add: Outstanding 1,00,000 9,00,000 b. Bonus 1,60,000 Total 10,60,000 munotes.in
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Financial Accounting
52 6. Finance Costs
Interest on Bank Loans 14,00,000
7. Depreciation and Amortisation
Depreciation on
- Plant and Machinery 10,00,000
- Furniture and Fixtures 6,00,000
- Motor Vehicle 2,00,000
Total 18,00,000
8. Other Expenses
Directors Remuneration 16,00,000 Repairs and Maintenance 1,60,000 Insurance Premium 60,000 Electricity 80,000 Rent, Rates and Taxes 40,000 Audit Fees 1,00,000 Advertisement 2,40,000
Less: Pre -paid (40,000) 2,00,000 Sundry Expenses 20,000 Provision for Bad and Doubtful Debts 50,000 Loss by Fire 30,000 Total 23,40,000
Illustration 6:
Diamond Ltd. provides the following information for the year ended 31st
March, 2 022.
Particulars ` in lakhs Particulars ` in lakhs Excise Duty paid 92.50 Sale of Services 15.00
Net Loss on Sale of
Investments 2.00 Trading
Commission
Received 30.00
Rental Collection Expenses 0.50 Interest Income 10.00
Opening Stock of Materials 42.30 Dividends from
Companies 5.00 munotes.in
Page 53
Preparation of final accounts of companies
53 Opening Stock of WIP 75.00 Rental Income 7.50
Opening Stock of Finished
Goods 87.50 Gain on Foreign
Currency
Transactions and
Translation 4.00
Purchases of Materials 477.60 50 lakhs Equity
Shares of ` 10
each, ` 8 paid u p 400.00
Salaries and Wages 300.00 60 lakhs Equity
Shares of ` 10
each 600.00
Contribution to Provident
Fund 36.00 Profit and Loss
Account [1 -4-
2016] 226.00
Expense on Employee Stock
Option Scheme (ESOP) 14.00 10%, 70 lakhs
Preference Shares
of ` 10 eac h 700.00
Staff Welfare Expenses 75.00 General Reserve 80.00
Interest Expense 12.00 12% Debentures 100.00
Other Borrowing Costs
(Brokerage) 2.00 Provision for
Doubtful Debts 1.00
Buildings 200.00 Consumption of
Stores and Spares
Parts 7.00
Plant and Eq uipment 100.00 Power and Fuel 8.00
Vehicles 25.00 Rent 5.00
Furniture and Fixtures 30.00 Repairs to
Buildings 4.00
Brands 100.00 Repairs to
Machinery 3.00
Computer Software 45.00 Insurance 2.00
Prepaid Expenses 1.00 Rates and Taxes 1.00
Interim Divid end Paid 50.00 Miscellaneous
Expenses 1.00
Sundry Debtors 40.00 Payment to the Auditor 16.00 Sale of Products 1,350.00
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Financial Accounting
54 Additional Information:
(a) Closing Stocks: Materials ` 19.9 lakhs, WIP ` 100, Finished Goods
` 200 lakhs
(b) Depreciate Buildings @ 5%, Plant and Equipment @ 20%, Vehicles @
20%, Furniture and Fixtures @ 10% and Brands @ 10%, Computer
Software @ 60%.
(c) Payments to the Auditor include as Auditor ` 5 lakhs, for Taxation
Matters `4 lakhs, for Company Law Matte rs ` 3 lakhs, for Management
Services ` 2 lakhs, for Other Services ` 2 lakhs.
(d) Make a Provision for Doubtful Debts @ 10%.
(e) The director's recommended: (i) Transfer to Debenture Redemption
Reserve @ 25% of Debentures (ii) Transfer to General Reserve @ 5%.
(f) Income Tax Rate 30%.
Required: Prepare Statement of Profit and Loss for the year ended 31st
March, 2022 and a Note showing the computation of Surplus in the
Statement of Profit and Loss to be taken to the Balance Sheet (as per
Schedule III to the Companies Act, 2013) as on that date.
Solution 06:
M Ltd.
Profit and Loss Statement for the year ended 31st March, 2022
Particulars Note ` in lakhs ` in lakhs
1. Revenue From Operations 1 1,302.50 2. Other Income 2 20.00 I. Total Revenue 1,322.50 Expenses:
1. Cost of Materials Consumed 3 500.00
2. Changes in Inventories 4 (137.50)
3. Employee Benefits Expense 5 425.00
4. Finance Costs 6 10.00
5. Depreciation and Amortization Expenses 7 75.00
6. Other Expenses 8 50.00 922.50 II. Total Expenses
III. Profit Before Tax 400.00 Tax Expense @ 30% (120.00) IV. Profit/(Loss) for the Period 280.00
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Preparation of final accounts of companies
55 Notes to Accounts:
Particulars ` in lakhs ` in lakhs 1. Revenue from Operations a. From Sale of Products 1,350.00
b. From Sale of Services 15.00
c. From Other Operating Revenues [Trading
Commission] 30.00
d. Less: Excise Duty (92.50)
Total 1,302.50 2. Other Income a. Interest Income 10.00
b. Dividends from Companies 5.00
c. Net Loss on Sale of Investments (2.00)
d. Rental Income (7.5 lakhs – 0.5 lakhs Collection
Expenses) 7.00
Total 20.00 3. Cost of Materials Consumed a. Opening Stock of Materials 42.30
b. Add: Purchases of Materials 477.60
c. Less: Closing Stock of Materials (19.90)
Total 500.00 4. Change in Inventories Work in Progress Opening Stock 75.00 Less : Closing Stock (100.00) Total WIP (25.00) Finished Goods Opening Stock 87.50 Less : Closing Stock (200.00) Total FG (112.50) Total Changes in inventory (137.50) 5. Employee Benefits Expense a. Salaries and Wages 300
b. Contribution to Provident Fund 36
c. Expense on Employee Stock Option Scheme
(ESOP) 14
d. Staff Welfa re Expenses 75
Total 425 munotes.in
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Financial Accounting
56
6. Finance Costs a. Interest Expense 12.00 b. Other Borrowing Costs (Brokerage) 2.00 c. Gain on Foreign Currency Transactions and
Translation (4.00)
Total 10.00 7.Depreciation and Amortisation Expense a. B uildings [5% of `200 lakhs] 10.00 b. Plant and Equipment [20% of ` 100 lakhs] 20.00 c. Vehicles [20% of ` 25 lakhs] 5.00 d. Furniture and Fixtures [10% of `30 lakhs] 3.00 e. Brands [10% of ` 100 lakhs] 10.00 f. Computer Software [60% o f ` 45 lakhs] 27.00 Total 75.00
8. Other Expenses a. Consumption of Stores and Spare Parts 7.00
b. Power and Fuel 8.00
c. Rent 5.00
d. Repairs to Buildings 4.00
e. Repairs to Machinery 3.00
f. Insurance 2.00
g. Rates and Taxes 1.00
h. Miscellaneous Expenses 1.00
i. Provision for Doubtful Debts [(10% of `40 lakhs)
- ` 1 lakh] 3.00
j. Payments to the Auditor as: (i) Auditor 5.00 (ii) For Taxation Matters 4.00 (iii) For Company Law Matters 3.00 (iv)For Management Services 2.00 (v)For Other Services 2.00 16.00
Total 50.00
9. Surplus in the Statement of Profit and Loss
to be Taken to Balance Sheet
Opening Balance 226.00 Add : Profit for the period 280.00 Less : Transfer to General Reserve @ 5% (14.00) Less : Interi m Dividend Paid (50.00) Less : Debenture Redemption Reserve [25% of `
100 lakhs] (25.00)
Closing Balance 417.00 munotes.in
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Preparation of final accounts of companies
57 Illustration 7:
From the following ledger balances of Statistics Limited as on 31st March,
2022, you are required to prepare the Balance S heet as on 31st March,
2022 as per Schedule III of the Companies Act.
Particulars Amount ( `) Particulars Amount ( `)
Office Equipment 4,80,600 General Reserve 4,15,000
9% Debentures in
APCO Ltd. 2,45,000 Creditors for Goods 1,68,500
Loose Tools 1,63,000 Creditors for Expenses 36,000
Plant and Machinery 18,00,000 Cash Credit 75,000
Computer Software 83,250 Mortgage Loan 3,10,000
Debtors for Goods 1,90,000 8% Preference Share
Capital 5,50,000
Share Issue Expense
(unwritten off) 30,000 Equity Share Capit al 15,00,000
Stores and Spares 1,00,200 Staff Welfare Fund 85,000
Interest Accrued on
Investment 51,000 Provision for Taxation 26,550
Cash at Bank 23,000
In the books of Statistics Ltd.
Balance Sheet as on 31st March, 20 22
Particulars Note Amount ( `) I. EQUITY AND LIABILITIES 1. Shareholders’ Funds a. Share Capital – Equity Share Capital 15,00,000
– Preference Share Capital 5,50,000
b. Reserves and Surplus (General Reserve) 4,15,000
2. Non-Current Liabilities a. Long Term Borrowing s (Mortgage Loan) 3,10,000
b. Long Term Provisions (Staff Welfare Fund) 85,000
3. Current Liabilities a. Short Term Borrowings (Cash Credit) 75,000
b. Trade Payables 1 2,04,500
c. Short Term Provisions (Tax) 26,550
Total 31,66,050 munotes.in
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Financial Accounting
58
II. ASSET S 1. Non-Current Assets a. Property, Plant and Equipment - Tangible Assets 2 22,80,600
- Intangible Assets (Computer Software) 83,250
b. Other Non -Current Assets (Share Issue Expenses) 30,000
2. Current Assets a. Current Investments (9% De bentures) 2,45,000
b. Inventories 3 2,63,200
c. Trade Receivables 1,90,000
d. Cash and Cash Equivalents (Bank) 23,000
e. Other Current Assets (Interest Accrued on Investment) 51,000
Total 31,66,050
Notes to Accounts
Particulars Amount ( )
1. Trade Payables a. Creditors for Goods 1,68,500
b. Creditors for Expenses 36,000
Total 2,04,500
2. Tangible Assets a. Office Equipment 4,80,600
b. Plant and Machinery 18,00,000
Total 22,80,600
3. Inventories a. Loose Tools 1,63,000
b. Stores and Spares 1,00,200
Total 2,63,200
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Preparation of final accounts of companies
59 Illustration 8:
You are required to prepare a Balance Sheet as at 31st March, 2018, as per
Schedule III of the Companies Act, 2013, from the following information
of Gold Ltd.:
Particulars Amount ( `) Particulars Amoun t (`)
Term Loans
(Secured) 40,00,000 Investments (Non -
current) 9,00,000
Trade Payables 45,80,000 Profit for the year 32,00,000
Other Advances 14,88,000 Trade Receivables 49,00,000
Cash and Bank
Balances 38,40,000 Miscellaneous
Expenses 2,32,000
Staff Advances 2,20,000 Loan from Other
Parties 8,00,000
Provision for
Taxation 10,20,000 Provision for
Doubtful Debts 80,000
Securities Premium 19,00,000 Stores 16,00,000
Loose Tools 2,00,000 Fixed Assets (WDV) 2,26,00,000 General Reserve 62,00,000 Finished Goods 30,00,000
Capital Work -in-
Progress 8,00,000 Profit and Loss
Accoun t 2,00,000
Adjustments needed :
1. Share Capital consist of:
(a) 1,20,000 Equity Shares of ` 100 each fully paid up.
(b) 40,000, 10% Redeemable Preference Shares of ` 100 each fully paid
up.
2. Depreciate assets by ` 20,00,000.
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Financial Accounting
60 Gold Ltd.
Balance Sheet as at 31st March, 2018
Particulars Note Amount `
I. EQUITY AND LIABILITIES 1. Shareholders’ Funds 1 1,60,00,000
a. Share Capital 2 1,10,68,000
b. Reserves and Surplus 2. Non-Current Liabilities 40,00,000
Long Term Borrowings - Term Loans (Secured) 3. Current Liabilities a. Trade Payables 45,80,000
b. Other Current Liabilities 3 8,00,000
c. Short -Term Provisions (Provision for Taxation) 10,20,000
Total 3,74,68, 000
II. ASSETS 1. Non-Current Assets a. Property, Plant and Equipment 4 2,06,00,000
– Tangible Assets 8,00,000
– Capital WIP 9,00,000
b. Non-Current Investments 2. Current Assets a. Inventories 5 48,00,000
b. Trade Receivables 6 48,20,000
c. Cash and Cash Equivalents 38,40,000
d. Short Term Loans and Advances 7 17,08,000
Total 3,74,68,000
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Preparation of final accounts of companies
61
Notes to Accounts:
Particulars Amount ` Amount `
1. Share Capital Authorised, Issued, Subscribed and Called -up 1,20,000, Eq uity Shares of ` 100 each 1,20,00,000
40,000, 10% Redeemable Preference Shares of ` 100
each 40,00,000
Total 1,60,00,000 2. Reserves and Surplus a. Securities Premium Account 19,00,000
b. General Reserve 62,00,000
c. Profit and Loss Accoun t Opening Balance 2,00,000 Add: Profit of the current year 30,00,000 Less: Miscellaneous Expenditure written off (2,32,000) 29,68,000
Total 1,10,68,000 3. Other Current Liabilities Loan from Other Parties 8,00,000 4. Tangible A ssets Opening Balance 2,26,00,000 Less : Depreciation (20,00,000) Total (Closing Balance) 2,06,00,000 5. Inventories a. Finished Goods 30,00,000
b. Stores 16,00,000
c. Loose Tools 2,00,000
Total 48,00,000 6. Trade Receivables 49,00,000
Less : Provision for Doubtful Debts (80,000)
Total 48,20,000 7. Short Term Loans and Advances a. Staff Advances 2,20,000
b. Other Advances 14,88,000
Total 17,08,000
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Page 62
Financial Accounting
62 Illustration 09:
Following is the Trial Balance of Jasmeet Ltd. as on 31st March, 2017.
Particulars Dr. ` Cr. `
Land at Cost 9,00,000 Plant and Machinery at Cost 38,50,000 Debtors 4,30,000 Investments 4,80,000 Bank 1,00,000 Gross Profit 19,00,000
Sundry Expenses 1,00,000 Salaries 3,50,000 Selling Expe nses 1,50,000 Debenture Interest 1,00,000 Printing and Stationery 1,20,000 Share Issue Expenses 20,000 Advance Income Tax (for year ending
31st March, 2017) 2,00,000
Advance Income Tax (for year ending
31st March, 2016) 3,50,000
Equity Share Ca pital (Shares of ` 100
each, fully paid) 15,00,000
10% Debentures 10,00,000
Capital Redemption Reserve 6,70,000
Profit and Loss A/c 3,60,000
Securities Premium 2,00,000
Creditors 2,60,000
Provision for Depreciation on Plant and
Machinery 8,40, 000
Suspense Account 20,000
Provision for Tax (for year ending 31st
March, 2016) 4,00,000
Total 71,50,000 71,50,000
Additional Information:
1.On 31st March, 2016, the company issued bonus shares in the ratio of 1
bonus for every 3 Equity Shares held . No entry has been passed for the
same.
2.The Authorised Share Capital is 25,000 Equity Shares of ` 100 each.
3.Suspense Account of ` 20,000 represents cash received for the sale of
some part of the machinery on 1st April, 2016. The cost of the machinery
was ` 50,000 and accumulated depreciation there on being ` 40,000. munotes.in
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Preparation of final accounts of companies
63 4. Depreciation is to be provided on Plant and Machinery at 20% p.a. on
Reducing Balance Method.
5. It is the policy of the company to write off 1/5th of Share Issue
Expenses every year, up to 31st March, 2016, 4/5th of total Share Issue
Expenses was written off.
6. Debtors include ` 80,000 due for more than 6 months.
7. Provision for Taxation to be made for ` 1,20,000.
8. Income Tax Assessment for the Accounting year 2015 -16 is completed
on 27th March, 2017 resulting with a gross demand of ` 3,30,000 but no
effect has been given so far.
Prepare:
1. Profit and Loss Account for the year ended 31st March, 2017.
2. Balance Sheet as on 31st March, 2017 as per the provisions of the
Companies Act.
3. Ignore Previous year's figures.
Solution 09:
Balance Sheet of Jasmeet Ltd. as on 31st March, 2017
Particulars Note Amount ( `)
I. EQUITY AND LIABILITIES 1. Shareholders’ Funds a. Share Capital 1 20,00,000
b. Reserves and Surplus 2 11,50,000
2. Non-Current Liabilities Long Term Borrowings 3 10,00,000
3. Current Liabilities Trade Payables 2,60,000
Total 44,10,000
II. ASSETS 1. Non-Current Assets a. Property, Plant and Equipment 4 33,00,000
– Tang ible Assets 4,80,000
b. Non-Current Investments 5 80,000
c. Other Non -Current Assets 2. Current Assets a. Trade Receivables 6 4,30,000
b. Cash and Cash Equivalents 7 1,00,000
c. Other Current Assets 8 20,000
Total 44,10,000 munotes.in
Page 64
Financial Accounting
64
Profit and Loss Statement for the Year Ended 31st March, 2017
Particulars Note `
1. Revenue From Operations 9 19,00,000
2. Other Income 10 10,000
I. Total Revenue 19,10,000
Expenses: 1. Employee Benefits Expense 11 3,50,000
2. Finance Costs 12 1,00,000
3. Depreciation and Amortization Expense 6,00,000
4. Other Expenses 13 3,90,000
II. Total Expenses 14,40,000
III. Profit Before Tax 4,70,000
Provision for Tax for Current Year (1,20,000 )
Excess Provision for Tax for Last Year 70,000
IV. Profit/(Loss) for the Period 4,20,000
Notes to Account
Particulars Amount ( `) Amount ( `) 1. Share Capital Equity Share Capital Authorised Shares (Par Value per Share : `
100)
25,000 Equity Shares of ` 100 each 25,00,000
Issued, subscribed & fully paid Shares 20,000 Equity Shares of ` 100 each 20,00,000
(Of the above, 5,000 Equity shares of ` 100
each issued as Bonus Shares)
Total 20,00,000
2. Reserves and Surplus a. Capital Redemption Reserve 6,70,000 Less: Utiliz ed for Bonus Issue (5,00,000) 1,70,000
b. Securities Premium Account 2,00,000
c. Profit and Loss Account Balance in Statement of Profit & Loss A/c
b/d 3,60,000
Surplus for the year 4,20,000 7,80,000
Total 11,50,000 munotes.in
Page 65
Preparation of final accounts of companies
65
3. Long Term Borrowings 10% Debentures 10,00,000 5. Other Non -Current Assets Advance Tax 2,00,000
Less : Provision for Tax (1,20,000)
Total 80,000 6. Trade Receivables Unsecured, Considered Good - Outstanding for more than 6 months 80,000
- Others 3,50, 000
Total 4,30,000 7. Cash and Cash Equivalents Bank 1,00,000 8. Other Current Assets Tax Refund Due 20,000 9. Revenue From Operations Gross Profit 19,00,000 10. Other Income Profit on Sale of Machinery 10,000 11. Employee Benefits Expense Salaries 3,50,000 12. Finance Costs Debenture Interest 1,00,000 13. Other Expenses a. Sundry Expenses 1,00,000
b. Selling Expenses 1,50,000
c. Printing and Stationery 1,20,000
d. Share Issue Expenses w/ o 20,000
Total 3,90,000 munotes.in
Page 66
Financial Accounting
66 Schedule 04: Tangible Fixed Assets
Particulars Opening Additions Deductions Closing Total
Land 9,00,000 - - 9,00,000 9,00,000
Plant and Machinery 38,50,000 - (50,000) 38,00,000 Less: Depreciation 8,40,000 6,00,000 (40,000) (14,00,000) 24,00,000
Total 33,00,000
EXERCISE:
1. Which of the following is shown under Reserve & Surplus?
a. Calls in advance b. Calls in Arrears c. Securities premium d. bonus shares
2. Bills Receivable is shown under __________.
a. Loans & Ad vances b. Current Assets c. Current Liabilities d. Contingent Liabilities
3. Short term loan is the loan due for not more than_______.
a. 3 years b. 2 years c. 5 years d. 1 years
4. Interim Dividend is declared between _____ annual general meetings .
a. two b. three c. four d. five
5. Future bad debts are usually estimated as ____________.
a. Percentage
of Creditors b. Percentage
of Debtors c. Percentage
of Sales d. Percentage of Purchases
6. Which of the following is shown under current asse ts?
a. Goodwill b. Machinery c. Vehicles d. Loose Tools
7. Bank Balance is shown under ________.
a. Cash & Cash
Equivalents b. Other Current
Assets c. Trade
Receivable d
. Current
Investment
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Preparation of final accounts of companies
67 8. The broad heading under which balance sheet is divided under the
Schedule III are _______.
a
. Liabilities &
Assets' b. Current &
Non-current' c
. Sources of funds &
Application of
funds ' d
. Equity and
Liabilities and
Assets'
9. Preliminary Expenses are shown under
a. Other Current
Assets b
. Capital
WIP c. Loans &
Advance d
. added to Profit & Loss Account
Solution:
1 2 3 4 5 6 7 8 9
c b d a b d a d a
Unsolved Problems
Problem 1:
VK Ltd. has authorised capital of ` 20,00,000 divided in 1,00,000 equity
shares of ` 10 each, 50,000 8% Preferen ce shares of ` 10 each and
50,000 10% Convertible Preference shares of ` 10 each. The company
has issued 60,000 shares out of which 58,000 shares have been subscribed.
The company has received ` 8 per share. The company had made the final
call of ` 2 per share. It has not received the call money on 2,000 shares.
The company has fully issued its 8% Preference shares and paid up.
However only 50% of the 10% convertible shares are issued and it is
subscribed upto 95% which are fully paid up. Show detailed no te to
accounts of Share capital.
Problem 2:
A company has the following information on 31.03.2017:
Original Cost Accumulated Depreciation Furniture 10,00,000 6,00,000
Building 6,00,000 4,00,000
Vehicles 4,00,000 100000
Land 5,00,000 0
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Page 68
Financial Accounting
68 The company pr ovides depreciation on Furniture, Building and Motor Car
@ 12%, 5% and 10% respectively on original cost. The company has
purchased a new Furniture on 31.12.2018 of ` 3,00,000. During the year a
part of the land costing ` 1,00,000 was sold at cost. Show detailed note to
accounts of Fixed Assets for the year ending on 31.03.2018.
Problem 3
The following income and expenses appeared in the books of Happy Go
Lucky Ltd. involved in the business of selling computers and providing
maintenance services for the y ear ended 31.03.2022.
Particulars Amount ( `)
Purchases 8,00,000
Sales 15,00,000
Salaries 1,20,000
Wages 80,000
Opening Stock
Raw materials 35,000
Work in progress 50,000
Finished goods 60,000
Interest on debentures 30,000
Interest on cash credi t 20,000
Bonus to employees 20,000
Rent 20,000
Depreciation on Machinery 40,000
Depreciation on Furniture 20,000
Depreciation on Motor vehicles 30,000
Dividend received 30,000
Interest received 20,000
1. During the year Directors proposed dividen d @ 10% on Capital of
` 1,00,00,000.
2. Income Tax is to be provided @ 30%.
3. Closing stock as on 31.03.20 22 were as follows:
Raw Material ` 20,000
Work in progress ` 30,000
Finished goods ` 40,000
4. Salaries outstanding were ` 5,000
Prepare the income statement from the given information. munotes.in
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Preparation of final accounts of companies
69 Problem 4:
Dr. The following is the trial balance of Sling Ltd. for the year ended
31.03.2018 Cr.
Particulars Amount ( `) Particulars Amount ( `) Opening stock 30,000 Equity share capital 10,00,000
Purchase 3,00,000 12% Preference share capital 6,00,000
Wages 1,00,000 6% Debentures 4,00,000
Salaries 90,000 Sales 8,00,000
Machinery 50,000 Dividend received 50,000
Land 9,00,000 P&L A/c (01.04.2017) 1,50,000
Furniture 8,00,000 Creditors 70,000
Investment 5,00,000 Bills payable 30,000
Debtors 90,000
Rent 46,000
Interest on debentures 24,000
Cash 60,000
Bills receivable 10,000
Printing & stationery 40,000
Electricity charges 60,000
31,00,0 00 31,00,000
Additional Information:
a. The company has Authorised Share capital of ` 50,00,000 divided in
3,00,000 equity shares of ` 10 each and 2,00,000 equity share of ` 10
each.
b. Closing stock was ` 50,000.
c. The depreciation is to be provided @ 5% and 10% on Machinery and
furniture respectively.
d. Income tax to be provided at 40%.
e. Rent includes ` 6,000 paid for the upcoming year financial year.
Prepare the income statement and Balance sheet from the given
information.
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Page 70
Financial Accounting
70 Problem 5:
The foll owing is the trial balance of SS Ltd. as on 31.03.2018
Particulars Amount ( `) Particulars Amount ( `) Machinery 15,00,000 Equity Share capital 10,00,000
Land 10,00,000 9% Preference Share capital 8,00,000
Debtors 3,00,000 Sales 20,00,000
Purchases 8,00, 000 Bills Payable 2,00,000
Advance Tax 50,000 Cash credit 1,00,000
Investments 3,00,000 Unclaimed dividend 20,000
Wages 30,000 General Reserve 80,000
Salaries 1,50,000 P & L A/c 2,00,000
Rent 60,000 10% Debentures 1,00,000
Opening Stock 90,000
Interest on Debentures 10,000
Licenses and Franchise 1,80,000
Interim Dividend 30,000
45,00,000 45,00,000
Additional Information:
i The authorised capital of the company was 20,000 equity shares of
` 100 each & 8,000 9% Preference of ` 100 each.
ii Closing stock as on 31.03.2018 was ` 60,000.
iii Depreciation was to be provided on Machinery @ 10%.
iv 10% of the investments were short term in nature.
v Debentures were to be redeemed on 31.08.2018.
vi Create provision for doubtful debt @ 10%.
vii During the year ` 20,000 were transferred to General reserve.
viii Provide for Taxation @ 30%.
Prepare Income statement & Balance sheet from the given information.
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Page 71
71 3
INTERNAL RECONSTRUCTION
Unit Structure
3.0 Objectives
3.1 Introduction
3.2 Types of Construction
3.3 Alteration of Shares capital
3.4 Legal Aspects
3.5 Capital Reduction
3.6 Accounting Entries
3.7 Solved Problems
3.0 OBJECTIVES:
After studying the unit the students will be able to:
Underst and the various types of reconstruction.
Know the alternation of share capital.
Explain the procedure of reconstruction.
Understand the Accounting entries for reconstruction.
Solve the practical problems on the unit.
3.1 INTRODUCTION:
The term reconstructi on refers to reorganising a company's financial
structure and reducing the claims of both classes of shareholders and
creditors against the company. It is also known as reorganisation, and it
allows the existing company to continue. Sick companies (loss -making
companies) can be taken over by profit -making companies; however, if
huge losses exist and assets are overvalued or undervalued, the company
may reduce share capital for reconstruction. External or internal
reconstruction is possible.
3.2 TYPES OF REC ONTRUCTION:
The Company can be reconstructed internally or externally.
It means two types of reconstruction is possible: munotes.in
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Financial Accounting
72 3.2.1 External Reconstruction:
In the case of external reconstruction, a new company is formed to take
over the operations of an existing los s-making company that is in a bad
financial situation. The vendor company is liquidated, and the new
company takes over its operations.
3.2.2 Internal Reconstruction:
In the case of internal reconstruction, the company's capital structure is
reorganised in order to breathe new life into the company. It includes the
modification, reduction, and reorganisation of the company's share capital.
3.3 ALTERATION OF SHARE CAPITAL:
A limited company if authorized by its Articles of Association can alter
the capital clause of its Memorandum of Association. As per Sec. 61 of
the Companies Act 2013 a company can alter its share capital. The
alteration of share capital may be in following different ways: -
a] Increase in share capital by the issue of new shares. b]
Consolidation of shares:
Consolidation refers to conversion of shares of the smaller
denomination into shares of larger denomination e.g: 1000 equity shares
of Rs . 10 each can be consolidated into 100 shares of Rs. 100 each.
c] Subdivision of shares:
Sub division refers to conversion of shares of the larger denomination into
shares of small denomination e.g: 1000 equity shares of Rs. 100 each can
be subdivided into 10000 shares of Rs. 10 each.
d] Conversion of shares into stock:
A corporation's shares can be converted into st ock. Stocks can be
purchased in fractions, but shares cannot. Conversion of shares into stock
requires Central Government approval.
e] Surrender of shares:
In the case of a share surrender, shareholders may be required to surrender
a portion of their sharehol dings. Such a surrender may be made prior to
immediate cancellation or for distribution to some of the company's
creditors in satisfaction of their claim.
f] Cancellation of Unissued shares:
There is no need for an accounting entry to be made when a company
cancels its unissued shares. The amount of unissued shares now cancelled
will be deducted from the company's authorised share capital.
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Internal Reconstruction
73 3.4 LEGAL ASPECTS:
Internal reconstruction plans should be based on careful research and
proper asset and liability valuati on. It entails a compromise or
arrangement reached between the company and its members or creditors.
However, the following factors should be carefully considered when
developing an internal reconstruction strategy:
a] Changes in share capital in any form sho uld be considered in
accordance with the provisions of the M/A & A/A, and if necessary, the
company should amend the provisions in the M/A & A/A.
b] Within 30 days of passing a resolution, the company must notify the
Register of Companies.
c] In some cases, SEBI sanction is required.
d] A Board Resolution is required to make the change.
3.5 CAPITAL REDUCTION: (Section 66)
Reducing capital is necessary for internal reconstruction in order to cancel
any paid -up share capital that is lost during business operations and i s not
equal to the true value of the assets.
The following are some ways that a company can reduce its share capital:
a] writing off capital loss
a] Refunding Surplus paid -up capital.
b] Lowering the members' liability for uncalled capital.
Only after each of th e following conditions has been met by the company
can it reduce its share capital.
Such a reduction must be permitted by the business' A/A.
The business adopts a special resolution to lower its share capital.
The corporation gets the court's approval.Only when it is approved by the
court and registered with the Registrar of Companies will a capital
reduction take effect. The company's name may, at its option, have the
words "And Reduced" appended for the time period specified.
3.6 ACCOUNTING ENTRIES:
1] When the face value of share is changed:
Share capital A/c (o/d) Dr.
(With paid up value of old shares) To Share Capital A/c (new)
(With paid up value of new shares)
To Capital Reduction A/c (With difference) munotes.in
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Financial Accounting
74
2] When any sacrifice is made by the creditors:
Credito rs A/c (with sacrifice) Dr.
To Capital Reduction A/c
3] When there is reduction in share capital (face value of share is not
changed)
Share Capital A/c Dr.
To Capital Reduction A/c
(With the amount of reduction).
4] When the value of any asset is appreciated:
Asset A/c (increase in value) Dr.
To Capital Reduction A/c
5] When any sacrifice is made by the Debenture Holders
Debentures A/c (increase in value) Dr.
To Capital Reduction A/c
6] When shares are consolidated:
Share Capital A/c (say Rs. 10) Dr.
To Share Capital A/c (say Rs. 100)
7] When Shares are subdivided:
Share Capital A/c (say Rs. 100) Dr.
To Share Capital A/c (say Rs. 10)
8] When capital reduction is utilised for writing off fictitious assets,
losses and excess value of other assets:
Capital Reduction A/c Dr.
To P/L A/c (Dr.bal)
To Goodwill A/c
To Preliminary Expenses A/c
To Discount on Shares/Debentures A/c To Other Assets A/c
To Capital Reserve A/c (if any balance is left)
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Internal Reconstruction
75 9] When shares are converted into stock:
Share Capital A/c Dr.
To Share Stock A/c
10] When shares are surrendered:
Share Capital A/c Dr.
To Share Surrendered A/c
11] When surrendered shares are converted into preference shares:
Share Surrendered A/c Dr.
To Preference Share Capital A/c
12] When contingent liability/unrecorded liability is paid for:
Capital Reduction A/c Dr.
To Bank A/c
(Note: No entry is required for amount foregone against such liability.)
13] When recorded liability is paid for:
Liability A/c Dr.
To Bank A/c
(Note: Any profit or loss should be transferred to Capital Reduction A/c)
14] When recorded assets are disposed off:
Bank A/c Dr.
To Assets A/c
(Note: Any profit or loss on sale should be transferred to Capital Reduction
A/c)
15] When Reconstruction expenses are paid
Capital Reduction A/c Dr.
To Bank A/c
16] When an unrecorded assets is sold off:
Bank A/c Dr.
To Capital Reduction A/c
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Financial Accounting
76 17] When finance is raised by issue of shares
Bank A/c Dr.
To Share Capital A/c
18] When arrears of preference dividend are cancelled : No Entry (As it
is contigent liability)
19] When new debentures are exchanged for old debentures :
Old Debentures A/c Dr.
To New Debentures A/c
20] When arrears of preference dividend are settled by issue of deposit
certificates cash/shares:
Capital Reduction A/c Dr.
To Deposit Certificates/Cash/Share Certificate A/c
21] When the rate of preference dividend is changed:
Preference Share Capital (old) A/c Dr.
To Preference Share Capital A/c (new)
22] When surrendered shares are issued to creditors:
(a) Surrendered A/c Dr.
To Share Capital A/c
(b) Creditors A/c Dr.
To Capital Reduction A/c
Note: Profit or Loss on scheme to be transferred to capital Reduction A/c.
23] When provision for taxation, Capital Reserve, Securities Premium
is utilized:
Provision for Taxation A/c Dr.
Capital Reserve A/c Dr.
Securities Premium A/c Dr.
To Capital Reduction A/c
Capital Reduction Account
It is a no minal account prepared to debit all the losses and fictitious
assets , credit all the incomes , surrendered amount by shareholders
and appreciation of assets. Balance if any is transferred to capital
reserve. munotes.in
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Internal Reconstruction
77 Capital Reduction A/c
Particulars Rs. Particula rs Rs.
To P & L A/c (Loss written off)
To Goodwill A/c (Written off)
To Preliminary expenses A/c
(Written off)
To Discount on
Shares/Debentures (Written off)
To Assets A/c (Decrease in
value)
To Bank A/c (payment ofunrecorded liability)
To Bank A/c (payment ofReconstruction Expenses)
To Bank A/c (Refund ofDirectors Fees)
To Capital Reserve (Balancing
figure) XX
XX
XX
XX
XX
XX
XX
XX
XX By Share Capital A/c
(Amount of reduction) By Debentures A/c (Amount of Reduction)
By Creditors A/c (Amount
of Sacrif ice)
By Assets A/c (Increase invalue)
By Bank A/c (sate ofunrecorded assets) XX
XX
XX
XX
XX
XXX XXX
3.7 SOLVED PROBLEMS:
Illustration – 1
Following is the Balance sheet of M/s. Life Care Ltd. as on 31st
March, 2015.
Balance Sheet as on 31st March, 2015.
Liabilities Rs. Assets Rs.
50,000 – 8% Goodwill 1,00,000
Cumulative Preference Shares of Rs.10/ - each.
40,000 – Equity Shares
of Rs.10/ -
5,00,000 Freehold Property
Leasehold Property
Plant & Machinery
Furniture 1,50,000
2,40,000
3,00,000
1,00,000
each. 4,00,000 Stock 50,000
Security Premium 8,000 Debtors 1,00,000
9% Debentures 1,00,000 Preliminary Exp. 9,000
Accrued Debenture Profit & Loss A/c 2,07,000
Interest 6,000
Sundry Creditors 1,00,000
Bank Overdraft 1,42,000
12,56,000 12,56,000
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Financial Accounting
78 Note –
1) Preference dividend was in arrears for 2 years.
2) There was a contingent liability of Rs.50,000/ - for workmen
compensation.
Following scheme of reconstruction was approved & implemented.
a) The Preference shares were reduced to Rs.7/ - per share fully paid
& Equity Shares to Rs.4/ - per share fully paid.
b) One new Equity share of Rs.10/ - each was issued of every Rs.50/ -
gross preference dividend in arrears.
c) After reduction, both classes of shares were consolidated into Rs.10/ -
shares.
d) The balance of Secur ities Premium was utilized.
e) Plant & Machinery was written of down to Rs.2,00,000/ -.
f) Furniture was sold at Rs.85,000/ -
g) Preliminary expenses debit balance in Profit & Loss A/c, debt of
Rs.15,000/ - & obsolete stock Rs.18,000/ - were to be written off.
h) Continge nt liability for which no provision has been made was settled
at Rs.25,000/ -. However, the amount of Rs.11,000/ - was recovered
from insurance company.
i) Debenture holders agreed to Forgo principal amount by Rs.60,000/ - &
accrued debenture interest in full.
Pass journal entries and capital reduction account.
Solution :
Journal of Life Care Ltd.
Date Particulars Debit
(Rs.) Credit
(Rs.)
1. 8% Preference Share Cap. A/c ................... Dr. (50,000X10)
To 8% Preference Share Capital A/c
(50,000X7)
To Capital Reduction A/c (50,0 00X3)
(Being reduction in 8% Preference Capital.) 5,00,000
3,50,000
1,50,000
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Internal Reconstruction
79
2. 8% Preference Share Capital A/c ............... Dr. (40,000X8)
To 8% Preference Share Capital A/c
(32,000X10)
(Being consolidation of 8% Preference
Shares.) 3,20,000
3,20,000
3. Equity Share Capital A/c ............................ Dr. (40,000X10)
To Equity Share Capital A/c (40,000X4) To
Capital Reduction A/c (40,000X6)
(Being reduction in Equity Share Capital) 4,00,000
1,60,000
2,40,000
4. Equity Share Capital A/c ............................ Dr. (40,000X3)
To Equity Share Capital A/c (12,000X10)
(Being consolidation of Equity Shares.) 1,20,000
1,20,000
5. Capital Reduction A/c ................................ . Dr. To Equity Share Capital A/c
(8%X5,00,000X 3 X10)
50
(Being arrears of Preference dividend paid
by issue of Equity shares.) 24,000
24,000
6. Securit y Premium A/c ................................ . Dr. To Capital Reduction A/c (Being Security
Premium used.) 8,000
8,000
7. Bank A/c ................................ ..................... Dr. Capital Reduction A/c ................................ Dr. To Furniture A/c
(Being sale of Furniture at a loss ofRs.25,000/ -) 85,000
15,000
1,00,000 munotes.in
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Financial Accounting
80 8. Capital Reduction A/c ................................ Dr. To Bank A/c
(Being payment of contingent liability.) 25,000
25,000
9. Bank A/c ................................ .................... Dr. To Capital Reduction A/c
(Being recovery of claim from insurance
company.) 11,000
11,000
10. 9% Debentures A/c ................................ ..... Dr. Accrued Debenture interest A/c ................ Dr. To Capital Reduction A/c 60,000
6,000
66,000
11. Capital Reduction A/c ................................ Dr. To Plant & Machinery A/c (3,00,000 –
2,00,000)
To Preliminary Expenses A/c To Profit & Loss
A/c
To Sundry Debtors A/c To Stock A/c
To Capital Reserve A/c
(Being losses & Assets written off.) 3,91,000
1,00,000
9,000
2,07,000
25,000
18,000
52,000
Capital Reduction Account
Dr. Cr.
Particulars Amt. Particulars Amt.
To Equity Share Cap. A/c 24,000 By 8% Pref. Share Cap.
A/c
By Equity Share Capital
A/c
By Security Premium By
9% De bentures
By Accrued interest on
debentures
By Bank (Insurance)
(Preference Dividend) 1,50,000
To Furniture 15,000
To Plant & Machinery
A/c 1,00,000 2,40,000
To Preliminary Expenses 9,000 8,000
To Profit & Loss A/c 2,07,000 60,000
To Sundry Debtors A/c 25,000
To Stock 18,000 6,000
To Bank 25,000 11,000
(Contingent liability)
To Capital Reserve 52,000
4,55,000 4,75,000
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Internal Reconstruction
81 Illustration – 2
Following is the Balance Sheet of Satya Ltd. as on 31st March, 2015.
Balance Sheet as on 31st March 2015
Liabilities Amt. Assets Amt.
Share Capital Goodwill 3,00,000
1,50,000 Equity Shares Land & Building 2,40,000
of Rs.10/ - each fully paid 7,50,000 Equipment 2,10,000
Sundry Debtors 2,00,970
5,000 6% Preference
Shares of Rs.100/ - each
fully paid
5,00,000 Stock
Investment Cash at Bank 3,32,440
44,000
21,000
8% Debentures 3,00,000 Profit & Loss A/c 7,51,590
Bank Overdraft 1,70,000
Sundry Creditors 3,80,000
(including Rs.22,000
int. on Bank Overdraft)
21,00,000 21,00,000
Preference dividend is in arrears for Five years.
Following scheme of reconstruction was approved by the court.
1) Equity Shares be reduced to Rs.1.5/ - each of then to be consolidated
into shares of Rs.10/ - each.
2) 6% Preference shares be reduced to Rs.50/ - each & then to be
subdivided into shares of Rs.10/ - each.
3) Interest accrued but not due on 8% debentures. For half year ended
31st March 2015 has not been provided in the above Balance Sheet. The
debenture holders have agreed to received 30% of this interest in cash
immediately & provision for the balance be made in the books of account.
4) Rs.20,000/ - be paid to Preference shareholders in lieu of arrears of
Preference dividend.
5) The debenture holders have also agreed to accept equal number of 9%
debentures of Rs .60/- each in exchange of 8% debentures of Rs.100/ -
each.
6) Bank has agreed to take over 50% stock in full satisfaction of its claim
including interest. The remaining stock be revalued at Rs.80,000/ -. munotes.in
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Financial Accounting
82 7) Investment be sold for Rs.39,000/ -.
8) Tangible Fixed assets be appreciated by 15% & provision be made
for doubtful debts of Rs.18,000/ -.
Give journal entries for the above scheme of reconstruction. Prepare
Capital Reduction Account in the books of Satya Ltd. & Balance sheet of
the company after reconstruction.
Solution :
Journal of Satya Ltd.
Date Particulars Debit
(Rs.) Credit
(Rs.)
1. Equity Shares Capital A/c (5) .................... Dr. To Equity Share Capital A/c (1.50) To Capital Reduction A/c (3.5)
(Being 1,50,000 Equity Shares of Rs.5/ - each reduced to Rs.1.50 each.) 7,50,000
2,25,000
5,25,000
2. Equity Share Capital A/c (1.50) ................. Dr.
To Equity Share Capital (10)
(Being 1,50,000 Equity shares of Rs.1.50
consolidated into shares of Rs.10/ - each.) 2,25,000
2,25,000
3. 6% Preference Share Capital A/c (100) .. Dr. To 6% Preference Share Capital A/c (50)
To Capital Reduction A/c
(Being 6% Preference shares of Rs.100/ -
each reduced to shares of Rs.50/ - each.) 5,00,000
2,50,000
2,50,000
4. 6% Preference Share Capital A/c ............... Dr. To 6% Preference Shares Capital A/c
(Being 6% Preference shares of Rs.50/ - each subdivided into shares of Rs.10/ - each.) 2,50,000
2,50,000
5. Capital Reduction A/c ................................ Dr. To Bank A/c
To Interest on Debentures A/c
(Being payment of accrued interest on debentures to the extent of 30% & provided for the balance.) 12,000
3,600
8,400
6. Capital Reduction A/c ................................ Dr. To Bank A/c
(Being paid to preference share holders in
lieu of arrears of dividend.) 20,000
20,000
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Internal Reconstruction
83
7. 8% Preferences A/c (100) .......................... Dr.
To 9% Debentures A/c (60)
To Capital Reduction A/c
(Being exchanged 8% debentures by 9%
debentures.) 3,00,000
1,80,000
1,20,000
8. Bank Overdraft A/c ................................ .....Dr. Sundry Creditors A/c ................................ .. Dr. (Interest on Bank Overdraft) To Stock A/c
To Capital Reduction A/c
(Being taken over 50% of the Stock by the
bank in satisfaction of bank overdraft.) 1,70,000
22,000
1,66,220
25,780
9. Capital Reduction A/c ................................ Dr. To Stock A/c
(Being reduction in Stock.) 86,220
86,220
10. Bank A/c ................................ ..................... Dr. Capital Reduction A/c ................................ Dr. To Investment A/c
(Being sale of investment at a loss.) 39,000
5,000
44,000
11. Capital Reduction A/c ................................ Dr. To Profit & Loss A/c
To Provision for doubtful debts A/c To Capital Reserve A/c
(Being written off profit & loss account debit balance, provided for reduction redemption reserve & transferred the remaining amount to Capital Reserve Accou nt.) 8,65,040
7,51,590
18,000
95,470
12. Land & Building A/c ................................ . Dr. Equipment A/c ................................ ........... Dr. To Capital Reduction A/c
(Being appreciation in Land & Building &
Equipment.) 36,000
31,500
67,500
munotes.in
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Financial Accounting
84 Capital Reduction Account
Dr. Cr.
Particulars Amt. Particulars Amt.
To Bank A/c 3,600 By Equity Share Capital
A/c
By 6% Preference Share
Capital A/c
By 8% Debentures A/c
By Bank Overdraft &
Creditors A/c
By Land & Building A/c
By Equipments A/c
5,25,000
2,50,000
1,20,000
25,780
36,000
31,500 To Int. on debenture s 8,400
To Bank A/c 20,000
To Stock A/c 86,220
To Investment A/c 5,000
To Profit & Loss A/c 7,51,590
To Provision for doubtful
debts. 18,000
To Capital Reserve 95,470
9,88,280 9,88,280
Satya Ltd. ( And Reduced) Balance Sheet as on 1st April 2015
Particulars Notes Rs. Rs. I. EQUITY AND LIABILITIES
1. Shareholders’ Funds
a. Share Capital 1 4,75,000
b. Reserves & Surplus 2 95,470 5,70,470
2. Non-Current Liabilities
Long Term Borrowings
1,80,000
3. Current Liabilities
a. Trade Payables 3,58,000
b. Other Current Liabilities 3 8,400
Total 11,16,870 munotes.in
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Internal Reconstruction
85 II. ASSETS
1. Non current Assets
a. Fixed Assets
- i. Tangible Assets 4 5,17,500
ii. Intangible Assets 3,00,000
(Goodwill)
2. Current Asset s
a. Inventories
b. Trade Receivables
c. Cash & Cash Equivalents
5 80,000
1,82,970
36,400
2,99,370
Total 11,16,870
Notes to Accounts
Note – 1 Share Capital Number Rs.
Authorised Share Capital
Issued, Paid Up Share Capital
Equity Share Capital
Equity Shar es of Rs. 10/ - each Preference ShareCapital
6% Pref. Share of Rs. 10/ - each
22,500
25,000
2,25,000
2,50,000
4,75,000
Note – 2 Reserves & Surplus Rs. Rs.
Capital Reserve
(transf. from Capital Reduction A/c)
95,470
munotes.in
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Financial Accounting
86 Note – 3 Other Current Liabilities Rs. Rs.
Interest payable on Debentures
8,400
Note – 4 Tangible Assets Rs. Rs.
Land & Building
2,76,000
Equipments 2,41,500 5,17,500
Note – 5 Trade Receivables Rs. Rs.
S. Debtors 2,00,970
Less: Prov.for doubtful debts. 18,000 1,82,970
Illustration – 3
Following is the Balance sheet of Damyanti Ltd. as on 31st March, 2015.
Liabilities Amt. Assets Amt.
16,000 12% Preference Goodwill 90,000
Shares of Rs.10/ - each
fully paid up
1,60,000 Patents
Land & Building 50,000
1,50,000
14000 10% Preference shares ofRs.10/ -, Rs.5/ - per Plant & Machinery
Furniture Investment 3,00,000
35,000
85,000
share paid up 70,000 Sundry Debtors 3,00,000
Bills Receivables 1,20,000
munotes.in
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Internal Reconstruction
87 18,000 Equity Share of Bank 30,000
Rs.10/ - each fully paid up 1,80,000 Profit & Loss A/c 71,500 12% Debenture ofRs.100/ - each
1,70,000
11% Debentures of
Rs.100/ - each 2,80,000
Interest due on debenture
21,500
Sundry Creditors 3,50,000
12,31,500 12,31,500
The following scheme of recons truction was submitted & approved by the
court.
1) 12% Preference Shares of the Rs.10/ - each fully paid were reduced to
13% Preference Shares of Rs.10/ - each, Rs.6/ - per share paid up.
2) 10% Preference share of Rs.10/ - each, Rs.5/ - per share paid up were
reduce d to 13% Preference shares of Rs.10/ - each, Rs.4/ - per share
paid up.
3) Equity Shares of Rs.10/ - each fully paid were reduced to the
denomination of Rs.7/ - each fully paid.
4) 11% Debenture holders agreed to accept 44,800 Equity Shares of
Rs.5/ - each in full settlement of their claims.
5) Debentures holders agreed to Forgo the interest due on debentures.
6) Sundry Creditors agreed to Forgo 20% of their claims.
7) The company recovered as damages as sum of Rs.60,000/ - which was
not recorded in the books.
8) Cost of reconstru ction was paid Rs.3,000/ -.
9) Assets are to be revalued as under : Land & Buildings Rs.2,05,000/ -,
Plant & Machinery Rs.2,50,000/ -, Furniture Rs.10,000/ -, Investment
Rs.1,05,000/ -, Sundry Debtors Rs.2,77,000/ -.
10) All intangible assets & accumulated losses are to be written off.
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Financial Accounting
88 You are required to –
i) Pass journal entries in the books of Damyanti Ltd.
ii) Prepare Capital Reduction Account & Balance Sheet after
reconstruction.
Solution:
Journal of Damyanti Ltd.
Date Particulars Debit
(Rs.) Credit
(Rs.)
1. 12% Prefere nce Share Capital A/c ............. Dr. To 13% Preference Share Capital A/c To Capital Reduction A/c
(Being reduction in 12% Preference
Capital.) 1,60,000
96,000
64,000
2. 10% Preference Share Capital A/c ............. Dr. To 13% Preference Share Capital A/c To Capital Reduction A/c
(Being reduction in 13% Preference
Capital.) 70,000
56,000
14,000
3. Equity Share Capital A/c ........................... Dr. To Equity Share Capital A/c To Capital Reduction A/c
(Being reduction in Equity Share Capital.) 1,80,000
1,26,000
54,000
4. 11% Debenture A/c ................................ ... Dr.
To Equ ity Share Capital A/c To Capital Reduction A/c
(Being reduction in debentures.) 2,80,000
2,24,000
56,000
5. Interest due on Debenture A/c ................... Dr. To Capital Reduction A/c
(Being interest dues on debentures
cancelled.) 21,500
21,500
6. Creditors A/c ................................ ............. Dr.
To Capital Reduction A/c (Being Creditors dues reduced.) 70,000
70,000
7. Bank A/c ................................ .................... Dr. To Capital Reduction A/c (Being damages recovered.) 60,000
60,000
8. Capital Reduction A/c ................................ Dr. To Bank A/c
(Being costs of reconstruction paid.) 3,000
3,000 munotes.in
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Internal Reconstruction
89 9. Land & Building A/c ................................ . Dr. Investment A/c ................................ ........... Dr. To Capital Reduction A/c (Being increase in valuations.) 55,000
20,000
75,000
10. Capital Reduction A/c ................................ Dr. To Plant & Machinery A/c To Furniture A/c
To Sundry Debtors A/c 5,01,500
50,000
25,000
23,000
To Goodwill A/c 90,000
To Patents A/c 50,000
To Profit & Loss A/c 71,500
To Capital Reserve A/c 102000
Capital Reduction Account
Dr. Cr.
Particulars Amt. Particulars Amt.
To Bank A/c 3,000 By 12% Preference Share
Capital A/c
By 10% Preference Share
Capit al A/c
By Equity Share Capital
A/c
By 11% Debenture A/c
By Interest due on
debentures
By Sundry Creditors By
Bank A/c
By Land & Building A/c
By Investment A/c
To Plant & Machinery 50,000 64,000
To Furniture A/c 25,000
To Sundry Debtors A/c 23,000 14,000
To Goodwill A/c 90,000
To Patents A/c 50,000 54,000
To Profit & Loss A/c 71,500 56,000
To Capital Reserve A/c 10,2000
21,500
70,000
60,000
55,000
20,000
4,14,500 4,14,500
munotes.in
Page 90
Financial Accounting
90 Balance Sheet of Damyanti Ltd. (And Reduced ) as on 1st April, 2015
Particulars Notes Rs. Rs.
I. EQUITY AND LIABILITIES
1. Shareholders’ Funds
a. Share Capital 1 5,02,000
b. Reserves & Surplus 2 1,02,000 6,04,000
2. Non-Current Liabilities
Long Term Borrowings
3 1,70,000
3. Current Liabilities
a. Trade Payables 2,80,000
Total 10,54,000
II. ASSETS
1. Non current Assets
a. Fixed Assets
- i. Tangible Assets
b. Non -current Investments
3. Current Assets
a. Trade Receivables
b. Cash & Cash Equivalents
4
5
3,97,000
87,000
4,65,000
1,05,000
4,84,000
Total 10,54,000
munotes.in
Page 91
Internal Reconstruction
91 Notes to Accounts
Note – 1 Share Capital Number Rs.
Authorised Share Capital
Issued, Paid Up Share Capital
18,000
44,800
16,000
14,000
Equity Share Capital
Equity Shares of Rs. 7/- each
Equity Shares of Rs. 5/ - each Preference Share Capital 1,26,000
2,24,000
13 % Pref. Share of Rs. 10/ - each Rs.6/ - paid up
13 % Pref. Share of Rs. 10/ - each Rs.4/ - paid up 96,000
56,000 5,02,000
Note – 2 Reserves & Surplus Rs. Rs.
Capit al Reserve
(transf. from Capital Reduction A/c)
1,02,000
Note – 3 Long Term Borrowings Rs. Rs.
12% Debentures of Rs.100/ - each
1,70,000
Note – 4 Tangible Assets Rs. Rs.
Land & Building 2,05,000
Plant & Machinery 2,50,000
Furniture 10,000 4,65,000
Note – 5 Non -current Investments Rs. Rs.
Balance:
85,000
Add: Increase in valuations 20,000 1,05,000
munotes.in
Page 92
Financial Accounting
92 Illustration – 4
M/s. Katrina Ltd. whose Balance Sheet as at 31st March 2015 is as given
below.
Liabilities Rs. Assets Rs.
Sources of Funds
2,00,000 Equity Shares
of Rs.20/ - each Rs.10/ -
paid up
10% Preference Shares
Capital 10,000 Shares ofRs.100/ - each, Rs.50/ -
paid up
Secured Loan
9% Deb. 7,00,000
(+) O/s int. 1,00,000
20,00,000
5,00,000
8,00,000
2,10,000 Application of Sourc es
Fixed assets 15,50,000
Goodwill 50,000
Investment at cost
(Market value 1,00,000) Current Assets & Loans
& Advances
Current Assets
Stock 3,00,000 Debtors 5,00,000
B.R. 8,00,000
16,00,000
Less : Liab.
S. Creditors 2,00,000
Profit & Loss A/c
16,00,00 0
1,10,000
Loan from
ICICI Ltd.
(+) O/s Int.
1,80,000
30,000
14,00,000
4,00,000
35,10,000 35,10,000
Preference dividend is in arrears for 1 year. Following scheme of
reconstruction is approved & agreed upon
1) Preference Shareholders to giv e up their 50% of claims, dividend to be
paid in full
2) Debenture holders agree to give up their claims to receive interest in
consideration of their rate of interest being enhanced to 12%
henceforth.
3) ICICI Ltd. agree to give up 80% of their interest outstan ding in
consideration of their claim being paid off at once.
4) Sundry Creditors would like to grant a discount 20% if they were to be
paid off immediately. munotes.in
Page 93
Internal Reconstruction
93 5) Balance of Profit & Loss A/c, Goodwill & 50% of the total sundry
debtors to by written off.
6) Fixed Asse ts to be written down by Rs.50,000/ -.
7) Investment to be reflected at their market value.
8) Cost of reconstruction is Rs.50,000/ -.
9) To the extent required Equity Shareholders suffers on reduction of
their rights.
10) The Equity shareholder bring in necessary as against their partly paid
shares to leave working capital at Rs.30,000/ -.
Pass necessary journal entries in the books of the company assuming that
scheme has been put through fully & prepare the Balance Sheet after
reconstruction. Ignore narration.
Solution:
In the books of Ms. Katrina Ltd.
Date Particulars Debit (Rs.) Credit
(Rs.)
Dec.
31 Preference Share Capital A/c ................ Dr.
To Preference Shareholders A/c To Capital Reduction A/c 5,00,000
2,50,000
1. 2,50,000
2. Capital Reduction A/c ........................... Dr. To Preference Share holders A/c 50,000
50,000
3. 9% Debenture A/c ................................ . Dr. Interest o/s on debenture A/c ................. Dr. To 12% Debentures A/c To Capital Reduction A/c 7,00,000
1,00,000
7,00,000
1,00,000
4. ICICI Loan A/c ................................ ..... Dr.
Outstanding interest A/c ....................... Dr.
To Bank A/c
To Capital Reduction A/c 1,80,000
30,000
1,86,000
24,000
5. Capital Reduction A/c ........................... Dr. To Profit & Loss A/c To Goodwill A/c
To Investment A/c To Debtors A/c
To Fixed Assets A/c 7,65,000 4,00,000
50,000
10,000
2,50,000
50,000
To Bank (Expenses) A/c 5,000 munotes.in
Page 94
Financial Accounting
94 6. Creditors A/c................................ .......... Dr. To Bank A/c
To Capital Reduction A/c 2,00,000
1,60,000
40,000
7. Preference Shareholders A/c ................. Dr. To Bank A/c 3,00,000
3,00,000
8. Equity Share Capital A/c ....................... Dr. To Capital Reduction A/c 4,01,000
4,01,000
9. Bank A/c ................................ ............... Dr.
To Equity Share Capital A/c 6,81,000
6,81,000
Working Note:
Bank Account
Dr. Cr.
Particulars Amt. Particulars Amt.
To Equity Share Capital By Creditors A/c By
Expenses A/c
By Loan Interest A/c By
Preference Share
Capital A/c
By Closing Balance 1,60,000
A/c (Bal Figure) 6,81,000 5,000
1,86,000
3,00,000
30,000
6,81,000 6,81,000
munotes.in
Page 95
Internal Reconstruction
95 Capital Reduction Account
Dr. Cr.
Particulars Amt. Particulars Amt.
To Preference Dividend By Preference
Shareholders A/c
By Debenture Interest A/c By Interest A/c By Credit ors A/c By Equity
Share
Capital A/c
A/c 50,000 2,50,000
To Sundries A/c 7,65,000
1,00,000
24,000
40,000
4,01,000
8,15,000 8,15,000
Balance Sheet as on 1st April, 2015
Particulars Notes Rs. Rs.
I. Equity and Liabilities
1. Shareholders ’ Funds
Share Capital
2. Non-Current Liabilities
1
22,80,000
Long Term Borrowings 12% Debentures
7,00,000
Total 29,80,000
II. Assets
1. Non current Assets
a. Tangible Assets 15,00,000
b. Non Current Investments 1,00,000
2. Current Assets
Inventories
Trade Receivables
Cash & Cash equivalents 2 3,00,000
10,50,000
30,000
13,80,000
Total 29,80,000
munotes.in
Page 96
Financial Accounting
96 Notes to Accounts
Note – 1 Share Capital Number Rs.
Authorised Share Capital
Issued, Paid Up Share Capital
Equity Share Capital
200000 Equity Shares of Rs. 20, Rs.11.4 paid up 200000 22,80,000
22,80,000
Note – 2 Trade Receivables Rs. Rs.
Debtors
Bills Receivables 2,50,000
8,00,000 10,50,000
10,50,000
Illustration 5
The Balan ce Sheet of Three Idiots Ltd. as at 31st March 2015 was as under
Liabilities Rs. Assets Rs.
10,000 Equity Shares of Goodwill 1,00,000
Rs.50/ - each fully paid 5,00,000 Other Assets 8,00,000
10%, 50,000 Profit & Loss A/c 3,00,000
Debentures of Rs.10/ -
each 5,00,000
Interest on debenture 20,000
Sundry Creditors 1,80,000
12,00,000 12,00,000
For the purpose of reconstruction of the company, necessary resolutions
are passed on the following lines.
1) The Equity Shares are to be sub divided in to Share of Re.1/ - each &
each shareholder shall re-surrender 80% of his holding.
2) Out of the surrendered shares, 1,00,000 shares will be converted to 8%
Preference Shares of Rs.10/ - each.
3) Debentures holders will reduced their claims by Rs.2,20,000/ - & in
consideration they are to get the entire Preference Shares Capital
converted from Shares Surrendered.
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Page 97
Internal Reconstruction
97 4) Creditors claims are to be reduced to the extent of Rs.80,000/ - & in
consideration they are to received Equity Shares of Re.1/ - each, amounting
to Rs.50,0 00/- from the Shares surrendered.
5) Goodwill & profit & loss A/c (Dr.) are to be written off fully.
6) The remaining surrendered shares shall be cancelled.
You are required to give the journal entries for the above & prepare
Balance sheet of the company after reconstruction.
Journal entries in the books of Three Idiots Ltd.
Date Particulars Debit (Rs.) Credit
(Rs.)
1. Equity Share Capital A/c (50) .................. Dr.
To Equity Share Capital A/c (1)
(Being 10,000 Equity Shares of Rs.50/ - each
sub-dividend into shares of Re.1/ - each.) 5,00,000
5,00,000
2. Equity Share Capital A/c ........................ Dr.
To Share Surrendered A/c
(Being surrender of 80% of shares.) 4,00,000
4,00,000
3. Shares Surrendered A/c ........................... Dr. 1,00,000
To 8% Preference Share Capital A/c
(Being converted Rs.1,00,000/ - shares
surrendered into 80% Preference Shares
Capital.) 1,00,000
4. 10% Debentures A/c ................................ Dr.
Interest Debenture A/c ............................. Dr.
To Capital Reduction A/c
(Being reduction in the claim of debenture
holders.) 2,00,000
20,000
2,20,000
5. Share Surrendered A/c ............................ Dr.
To Equity Share Capital A/c
(Being issued to Creditors out of surrendered
Shares.) 50,000
50,000 munotes.in
Page 98
Financial Accounting
98 6. Creditors A/c ................................ .......... Dr.
To Capital Reduction A/c
(Being reduced the claim of creditors.) 80,000
80,000
7. Capital Reduction A/c .............................. Dr.
To Goodwill A/c
To Profit & Loss A/c
(Being written off Goodwill & Profit &
Loss Account debit balance.) 4,00,000
1,00,000
3,00,000
8. Shares Surrendered A/c ........................... Dr.
To Capital Reduction A/c
(Being cancelled remaining Surrendered
Shares.) 2,50,000
2,50,000
9. Capital Reduction A/c .............................. Dr.
To Capital Reserve A/c
(Being the balance on Capital Reduction
transferred to Capital Reserve.) 1,50,000
1,50,000
Capital Reduction Account
Dr. Cr.
Particulars Amt. Particulars Amt.
To Goodwill A/c 1,00,000 By 10% Debentures A/c
By Interest A/c
By Share Sur rendered A/c By Creditors A/c 2,00,000
To Profit & Loss A/c 3,00,000 20,000
To Capital Reserve A/c 1,50,000
2,50,000
80,000
5,50,000 5,50,000
munotes.in
Page 99
Internal Reconstruction
99 Three Idiots Ltd. (And reduced) Balance sheet as on 1st April , 2015
Particulars Notes Rs. Rs.
I. Equity and Liabilities
1. Shareholders’ Funds
a. Share Capital
b. Reserves and Surplus
2. Non-Current Liabilities Long Term Borrowings 10% Debentures
3. Current Liabilities
Trade Payables
1
2,50,000
2 1,50,000 4,00,000
3,00,000
1,00,000
Total 8,00, 000
II. Assets
1. Non current Assets
Tangible Assets
8,00,000
Total 8,00,000
Notes to Accounts
Note – 1 Share Capital Number Rs.
Authorised Share Capital
- -
Issued, Paid Up Share Capital
Equity Share Capital
Equity Shares of Re. 1 each Preference Shares of Rs.
10 each 150000
10000 1,50,000
1,00,000
2,50,000
Note – 2 Reserves & Surplus Rs. Rs.
Capital Reserve:
(transf. from Capital Reduction A/c)
1,50,000
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Page 100
Financial Accounting
100 Illustration 6
Following is the balance sheet of Veer Ltd. as on 31st March 2015.
Liabilities Rs. Assets Rs.
10,000 8% Cumulative Goodwill Patents
Land & Building Pant & Machinery
Investment (at cost)
Stock
Debtors : Considered
Goods
3,00,000 Considered Doubtful
70,000 90,000
Preference Shares of
Rs.100/ - each
8,000 Equity Share s ofRs.100/ - each
9% Debentures ofRs.100/ - each
10,00,000
8,00,000
7,00,000 30,000
10,00,000
4,80,000
50,000
4,80,000
(Secured on Land /
Building)
Interest payable to
debenture holders 20,000
Loan from Directors 2,00,000 3,70,000
Creditors 3,00,000 5,000
Cash
UTI Bank Overdraft 2,80,000 Preliminary Expenses
Profit & Loss A/c 95,000
7,00,000
33,00,000 33,00,000
Contingent Liabilities:
1) Claims for damages pending in the court totaling Rs.1,00,000/ -
2) Arrears of Preference dividend Rs.300000/ -.
The board of directors agreed to present the realistic picture of the state of
affairs of the company’s position & the following scheme of
reconstruction was duly approved.
1) The Preference shares were to be reduced to an equal number of fu lly
paid Preference Shares of Rs.50/ - each. Equity Share to an equal number of
fully paid Equity Shares of Rs.30/ - each.
2) All intangible assets, including patents to be written off.
3) Stock to be revalued at Rs.4,00,000/ - & debtors considered doubtful to
be written off.
4) Preference Shareholders agreed to waive half of the arrears of
dividends & to receive Equity Shares in lieu of the balance.
5) Debenture holder agreed to take over part of the security of the book
value of Rs.2,00,000/ - for Rs.2,00,000/ - in satisf action of part of their
claim & to provide further cash of Rs.1,00,000/ - after deducting arrears munotes.in
Page 101
Internal Reconstruction
101 of interest due to them on floating charge of the rest of the assets.
6) The contingent liability for claims for damage pending in the court of
law materialized to the full extent. However, the company could recover
Rs.80,000/ - from those who were responsible for such damages & settled
the rest by issuing Equity Shares.
7) The Directors agreed to convert the loan into Equity Shares. You are
required to prepare –
i) Capit al Reduction Account
ii) The Balance sheet after reconstruction
Solution:
In the books of Veer Ltd. Capital Reduction Account
Dr. Cr.
Particulars Amt. Particulars Amt.
To Goodwill A/c 90,000 By Preference Share
Capital A/c
By Equity Share
Capital A/c
To Patents 30,000 5,00,000
To Preliminary
Expenses A/c 95,000 5,60,000
To Profit & Loss A/c 7,00,000 By Cash A/c (claim
recovery)
By Land & Building A/c
(3,00,000 - 2,00,000)
To Stock 80,000 80,000
(4,80,000 - 4,00,000) 1,00,000
To Debtors 70,000
To Preference Dividend
A/c 1,50,000
To Cash A/c (damages) 80,000
To Damages A/c 20,000
To Capital Reserve A/c 60,000
12,40,000 12,40,000
munotes.in
Page 102
Financial Accounting
102 Working Note:
1) Equity Shares @ Rs.30/ - each
Nos. Amount
Original (at Reduced Value) 8,000 2,40,000
Issued against arrears of Preference
Dividend 500 15,000
Issued against claim for Damages 666.67 20,000
Loan from Directors converted 6,666.67 2,00,000
Closing Balance 15,833 4,75,000
2) Cash Account
Dr. Cr.
Particulars Amt. Particulars Amt.
To Balance b/d
To Damages Claim A/c
To Debenture holders
A/c 5,000
80,000
1,00,000 By Debenture interest
A/c
By Recovery A/c By
Balance c/d
20,000
80,000
85,000
1,85,000 1,85,000
3) It is assumed that the debenture holder brought in gross Rs.1,00,000/ -
without deducting Rs.20,000/ - for arrears of interest.
4) 9% debenture holders
Amount
Balance 7,00,000
Less : Land / Building taken over 3,00,000
Add : Further Cash brought in 4,00,000
1,00,000
Closing Balance 5,00,000
munotes.in
Page 103
Internal Reconstruction
103 Veer Ltd. (And reduced) Balanc e Sheet as on 1st April 2015
Particulars Notes Rs. Rs. I. EQUITY AND LIABILITIES
1. Shareholders’ Funds
a. Share Capital 1 9,75,000
b. Reserves & Surplus 2 60,000 10,35,000
2. Non-Current Liabilities
Long Term Borrowings 5,00,000
(Secure d 9% Debentures)
3. Current Liabilities
a. Trade Payables
b. Short -Term Liabilities (UTI Bank Overdraft) 3,00,000
2,80,000
5,80,000
Total 21,15,000
II. ASSETS
1. Non current Assets
a. Fixed Assets
- i. Tangible Assets
b. Non Current Investment 3 12,80,000
50,000
2. Current Assets
a. Inventories
b. Trade Receivables
c. Cash & Cash Equivalents
4 4,00,000
3,00,000
85,000
7,85,000
Total 21,15,000
munotes.in
Page 104
Financial Accounting
104 Notes to Accounts
Note – 1 Share Capital Number Rs.
Authorised Share Capi tal
Issued, Paid Up Share Capital
Equity Share Capital
Equity Shares of Rs. 30/ - each Preference Share Capital
8 % Pref. Share of Rs. 50/- each
15,833
10,000
4,75,000
5,00,000
9,75,000
Note – 2 Reserves & Surplus Rs. Rs.
Capital Reserv e: Balance
(transf. from Capital Reduction A/c)
60,000
Note – 3 Tangible Assets Rs. Rs.
Land & Building 10,00,000
Less: Given to Debenture holders 2,00,000 8,00,000
4,80,000
Plant & Machinery
12,80,000
Note – 4 Trade Receivables Rs. Rs.
Balance
(Unsecured, Considered Good)
3,00,000
munotes.in
Page 105
Internal Reconstruction
105 Illustration 7
Monaco Ltd. had adverse trading for past few years resulting in
accumulated losses & over valued assets. It’s Balance Sheet as on 31st
March 2015 is as follows.
Liabilities Rs. Assets Rs.
Share Capital Goodwill 60,000
(in shares of Rs.10/ - Freehold Property 70,000
each) Leasehold Property 1,50,000
50,000 Equity Share
Capital
40,000 Preference Share Capital
Securities Premium 12% Debenture
5,00,000
4,00,00 0
30,000
1,20,000 Plant Investment StockDebtors
Profit & Loss A/c 1,40,000
80,000
1,00,000
5,00,000
2,00,000
Accrued Interest 10,000
Creditors 1,10,000
Overdraft 1,30,000
13,00,000 13,00,000
Note : Preference dividend is unpaid for past three years.
The shareholders & the court approved the following scheme of
reconstruction.
1) The paid – up value of preference shares and Equity shares was to be
reduced by 50% & 85% respectively. The face value will remain
unchanged.
2) The Preference dividend for one years is to be paid by allotment of
Equity shares credited Rs.2/ - per share. The remaining amount to be
cancelled.
3) The debenture holders took over Freehold property which was
mortgaged in their favour. This property realized Rs.1,40,000/ -. The
balance amount after adjusting principal & interest was handed over to
the company.
4) The investments are sold for Rs.1,00,000/ -. munotes.in
Page 106
Financial Accounting
106 5) Obsolete Stock worth Rs.25,000/ - & irrecoverable debt worth
Rs.15,000/ - are to be written off along with goodwill & profit & loss
A/c.
6) There was a claim against company not provided to the extent of
Rs.1,00,000/ -. This was settled for Rs.83,000/ -.
7) A call @ Rs.3/ - per share on revised Equity & Preference shares was
made. This was paid by all shareholders.
8) The authorized capital was suitabl y revised from Rs.8,00,000/ - to
Rs.12,00,000/ - which was equally divided between Equity & 8%
Preference shares.
9) Remaining bank balance to be utilized to pay bank overdraft.
You are required to show journal entries & balance sheet after
implementation of the scheme.
Solution:
Journal in the books of Monaco Ltd.
Sr. No. Particulars Debit (Rs.) Credit
(Rs.)
1. 8% Preference Share Capital A/c ……Dr.
To Capital Reduction A/c
(Being reduced Preference share by
50%.) 2,00,000
2,00,000
2. Equity Share Capital A/c
Dr.
To Capital Reduction A/c
(Being 50,000 Equity shares of Rs.10/ -
each reduced by 75%.) 4,25,000
4,25,000
3. Capital Reduction A/c .......................... Dr. To Equity Share Capital A/c
(Being 10,667 Equity shares of Rs.3/ - each allotted to satisfy the arrears of preference dividend for 1 year.) 32,000
32,000
4. 12% Debenture A/c ............................... Dr. Accrued Interest on Debenture A/c … Dr.
Bank A/c................................ ................ Dr. To Freehold Property A/c
To Capital Reduction A/c 1,20,000
10,000
10,000
70,000
70,000
munotes.in
Page 107
Internal Reconstruction
107 (Being Freehold property of Rs.70,000/ -
taken by debenture holders, remaining
amount paid by the debenture holders.)
5. Bank A/c ................................ ................ Dr. To Investment A/c
To Capital Reduction A/c
(Being sold out investments at a profit ofRs.20,000/ -.) 1,00,000
80,000
20,000
6. Capital Reduction A/c
Dr.
To Stock A/c To Debtors A/c To
Goodwill A/c
To Profit & Loss A/c
(Being written off Stock, Debtors,
Goodwill & Profit and Loss debit balance
as agreed upon.) 3,00,000
25,000
15,000
60,000
2,00,000
7. Capital Reduction A/c
Dr.
To Bank A/c
(Being settled the claim.) 83,000
83,000
8. Preference Share Call A/c ..................... Dr. To 8% Preference Share Capital A/c
(Being made a call on 40,000 Preference
Share @ Rs.3/ - each.) 1,20,000
1,20,000
9. Equity Share Call A/c ........................... Dr. To Equity Share Capital A/c
(Being made a call on 66,000 Equit y
shares @ Rs.3/ - each.) 1,98,000
1,98,000
10. Bank A/c ................................ ................ Dr. To Preference Share Call A/c To Equity
Share Call A/c
(Being collected call money.) 3,18,000
1,20,000
1,98,000
11. Bank overdraft A/c ............................... Dr. To Bank A/c
(Being cleared Bank overdraft.) 1,30,000
1,30,000
12. Capital Reduction A/c
Dr.
To Capital Reserve A/c
( Being Capital Reserve account closed) 3,00,000
3,00,000
munotes.in
Page 108
Financial Accounting
108 Capital Reduction Account
Dr. Cr.
Particulars Amt. Particulars Amt.
To Equity Share Capital
A/c
To Stock A/c
32,000
25,000 By Pre ference Capital A/c By Equity Share Capital
2,00,000
To Debtors A/c To
Goodwill A/c
To Profit & Loss A/c To
Bank A/c
To Capital Reserve A/c 15,000
60,000
2,00,000
83,000
3,00,000 A/c
By 12% Debenture A/c By
Bank A/c 4,25,000
70,000
20,000
7,15,000 7,15,000
Bank Account
Dr. Cr.
Particulars Amt. Particulars Amt.
To Freehold Property By Capital Reduction A/c 83,000
A/c 10,000 By Bank overdraft A/c 1,30,000
To Investment A/c 80,000 By Balance c/d 2,15,000
To Capital Reduction
A/c 20,000
To Preference Share
Capital A/c 1,20,000
To Equity Share Capital
A/c 1,98,000
4,28,000 4,28,000
munotes.in
Page 109
Internal Reconstruction
109 Monaco Ltd. (And reduced) Balance Sheet as on 1st April, 2015
Particulars Notes Rs. Rs.
I. EQUITY AND LIABILITIES
1. Shareholders’ Funds
a. Share Capital
b. Reserves & Surplus
1
2
6,25,000
3,30,000
9,55,000
2. Current Liabilities
a. Trade Payables
1,10,000
Total 10,65,000
II. ASSETS
1. Non current Assets
a. Fixed Assets
- i. Tangible Assets 3 2,90,000
2. Current Assets
a. Inventories
b. Trade Receivables 4
5 75,000
4,85,000
c. Cash & Cash Equivalents 2,15,000 7,75,000
Total 10,65,000
Note – 1 Share Capital Number Rs.
Authorised Share Capital
Equity Share of Rs.10/ - each
8% Preference share of Rs.10/ - each 60,000
60,000 6,00,000
6,00,000
1,20,000 12,00,000
Issued, Paid Up Share Capital
Equity Share Capital
Equity Shares of Rs. 10/ - each Rs.5/ - paid up 61,000 3,05,000
Preference Share Capital
8 % Pref. Share of Rs. 10/- each
32,000
3,20,000 6,25,000
munotes.in
Page 110
Financial Accounting
110 Note – 2 Rese rves & Surplus Rs. Rs.
Security Premium: Balance 30,000
Capital Reserve:
(transf. from Capital Reduction A/c) 3,00,000 3,30,000
Note – 3 Tangible Assets Rs. Rs.
Leasehold Property 1,50,000
Plant & Machinery 1,40,000 2,90,000
Note – 4 Inventorie s Rs. Rs.
Balance 1,00,000
Less : written off -25,000
75,000
Note – 5 Trade Receivables Rs. Rs.
Balance 5,00,000
Less : written off -15,000
4,85,000
Illustration 9
The paid – up Capi tal of Fast traler Ltd. amounted to Rs.12,00,000/ -
consisting of 6,000 – 5% Cumulative Shares of Rs.100/ - each and 60,000
Equity Shares of Rs.10/ - each. The Preference dividend was in arrears for
Rs.80,000/ - (Contingent Liability)
The company incurred heav y losses continuously. Therefore, the
Directors recommended to the shareholders the following scheme of
reconstruction to provide a sum sufficient for the following purpose :
1) To write down the book value of Patents by Rs.2,00,000/ -, Plant &
Machinery by Rs.24,000/ - and Tools & Equipments by Rs.8,000/ -.
2) To write off the debit balance of Profit & Loss Account of
Rs.2,96,000/ -. munotes.in
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Internal Reconstruction
111 3) Any balance made available by the reduction of capital is to be utilized
to write off “Experiment & research expenses”
4) The scheme duly approved & authorized provided the following.
i) For every 15, 5% Preference Shares, 8 – 4% Cumulative Preference
Shares of Rs.100/ - each & 40 Equity shares of Rs.2/ - each are to be issued.
ii) For every Rs.20/ - of Cumulative Preference Divided; 2 Equity shares
of Rs.3/ - each are to be issued.
iii) For every 10 old Equity shares, 2 new Equity shares of Rs.2/ - each are
to be issued.
You are required to:
Pass journal entries in the books of the company to record the above
transactions. Prepare Capital Reduction Account.
Solution:
Journal of Fast Traler Ltd.
Dat
e Particulars Debit
(Rs.) Credit
(Rs.)
1. 5% Preference Share Capital A/c ………Dr. To4% Cumulative Preference Share
Capital A/c
To Equity Share Capital A/c To CapitalReduction A/c
(Being issued 3200, 4% Preference shares ofRs.100/ - each & 24,000 Equity Shares of 5%Preference shares Capital. 6,00,000
3,20,000
48,000
2,32,000
2. Capital Reduction A/c ................................ ... Dr. To Equity Share Capital A/c
(Being issued 6,000 Equity shares of Rs.3/-each in settlement of arrears of Preference
dividend.) 18,000
18,000
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Financial Accounting
112
3. Equity Share Capital A/c ............................... Dr. To Equity Share Capital A/c To CapitalReduction A/c
(Being issued 12,000 Equity share of Rs.2/-each to the existing Equity shareholders.) 6,00,000
24,000
5,76,000
4. Capital Reduction A/c ................................ .. Dr. To Patents A/c
To Plant & Machinery A/c To Tools & Equipment A/c To Profit & Loss A/c
To Experiment & Research Expenses A/c (Being written off Patents, Plant & Machinery,Tools & Equipments , Profit & Loss A/c, Debitbalance & Experiment & R esearch Expenses as agreed upon.) 7,96,000
2,00,000
24,000
8,000
2,96,000
2,68,000
Capital Reduction Account
Dr. Cr.
Particulars Amt. Particulars Amt.
To Equity Share Capital By 5% Preference Share
Capital A/c
By Equity Share Capital
A/c
A/c 18,000 2,32,000
To Patents A/c 2,00,000
To Plant & Machinery 5,76,000
A/c 24,000
To Tools & Equipment
A/c 8,000
To Profit & Loss A/c 2,96,000
To Experiment &
Research Expenses
A/c 2,62,000
8,08,000 8,08,000
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Internal Reconstruction
113 12.2 EXERCISES:
12.2.1 OBJECTIVE S QUESTIONS
Filling the blanks.
1) Capital Reduction is implemented per section _____ of Companies Act.
2) The scheme of Capital reduction is to be approved by .
3) Fictitious assets are to be transferred to .
4) Balance in Capital Reduction should be transferred to .
5) The payment for contingent liability should be debited to .
6) And reduced words are to be shown as in Balance sheet as per
required.
7) XYZ Ltd. has on 31st March, 2015 1,00,000 Equity shares at Rs.10/ -
each. It was decided to reduced share to Rs.6/ - each. The reduction is
.
8) The Preference shareholders agree to Forgo arrears of Preference
dividend Rs.1,00,000/ -. The amount transferred to Capital Reduction
Account is .
9) Debtors costing of Rs.56,000/ - given to Bank for bank loan of
Rs30,000/ -. The Capital reduction is debited by Rs. .
10) Provision for taxation is Rs.1,62,000/ -. The tax liability of the
company is settled at Rs.1,40,000/ - & it is paid immediately. Amount
credited to Capital Reduction is .
(Ans – 1) 100, 2) High court, 3) Capital reduction, 4) Capital Reserve,
5) Capital Reduction, 6) Company law, 7) 4,00,000, 8) Nil, 9)
26.000 10)
22,000.)
1) The capital reduction means reduction in ________ value of shares.
2) The sub division of shares does not result in ____ of capital.
3) The shareholders can surrender shares for _____ or________ .
4) _________ resolution is to be passed by shareholders for approval of
scheme or reconstruction.
5) The Fictitious debit balances are to be transferred to Account.
6) The full balance of Capital is to be debited, if value is
reduced.
7) Shareholders not approv ing scheme is called shareholders. munotes.in
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Financial Accounting
114 8) The expenses for forming & implementing scheme should be
debited to .
9) The scheme of internal reconstruction can be utilized to provide ___
for the company.
(Ans – 1) Paid -up Value, 2) Reduction, 3) Re-issue, cancellati on,
4) Special, 5) Capital Reduction, 6) Face, 7) dissenting, 8) Capital
Reduction, 10) Funds.
Match the following.
1)
Group “A” Group “B”
1) Capital Reduction
2) Fictitious Balance
3) Capital Reduction Scheme
4) Consolidation of Share
5) Subdivision of Share a) Profit& loss Ac (Dr.bal)
b) Section 100
c) No reduction of Capital
d) Internal Reconstruction
e) No Change in Capital
(Ans : 1 – b, 2 – a, 3 – d, 4 – e, 5 – c.)
2)
Group “A” Group “B”
1) Surrender of share
2) Cancellation of surrendered
shares
3) Surplus on revaluation ofassets
4) Loss on revaluation of assets
5) Credit balance in Capital
Reduction a) Credit – Capital reduction
b) Unchanged Capital
c) Transfer to Capital Reserve
d) Transfer to Capital Reduction
e) Debit Capital Reduction
(Ans : 1 – b, 2 – a, 3 – c, 4 – e, 5 – d.)
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Internal Reconstruction
115 3)
Group “A” Group “B”
1) Balance sheet after
reduction
2) Statutory Reserve
3) Expenses of Scheme
4) Reduction in paid up
value of shares
5) Reduction in face value of
debenture a) Not transferable to Capital
Reduction
b) Transfer difference to Capital
Reserve
c) Cancel present capital, raise newcapital & difference to reduction
d) Indicate, & reduced
E) Debit capital reduction account
(Ans – 1 – d, 2 – a, 3 – e, 4 – b, 5 – c.)
True or False.
1) Capital Reduction & Internal reconstruction is synonym. – True
2) Consolidation of shares result in profit for a company. – False
3) Sub – division of shares result in gain for a company. – False
4) Provision for unrecorded liability indicates loss to a company. – True
5) Accounting for Internal & External reconstruction is in identical
manner. – False
6) Authorised Share Capital is to be reduced to the extent of Capital
Reduction. – False
7) Cancellation of contingent liability is treated as profit to the company.
– False
8) Re – classification of surrendered shares should not be accounted.
– True
9) The requirements of schedule VI is to be complied while preparing
account after internal reconstruction. – True
10) Internal reconstruction scheme cannot be prepared to cover capital
reconstruction. – False
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Financial Accounting
116 12.2.2 PROBLEMS FOR PRACTICE
1) Following is the balance sheet of Vinayak Ltd. as on 31st Marc h, 2015.
Liabilities Rs. Assets Rs.
60,000 10% Goodwill 2,00,000
Cumulative Preference
Share of
Rs.10/ - each fully paid up
6,00,000 Land & Building
Plant & Machinery
Stock 19,50,000
70,000
4,00,000
1,50,000 Equity share Trade Debtors 2,88,000
of Rs.10/ - each, fully
paid up
Loans Creditors
15,00,000
2,22,000
7,50,000 Bank Balance Profit &
Loss A/c 1,26,000
38,000
30,72,000 30,72,000
Note: Preference dividend was in arrears Rs.1,20,000/ -. The Board of
Directors of the company decided upon the following scheme of
reconstruction, which was approved by all concerned.
1) Paid up value of Equity shares shall be reduced to Rs.5/ - per share,
face value being Rs.10/ -.
2) Preference shares are to be converted into 13% debentures of Rs.100/ -
each with regard to their 20% of dues (including arrears of Preference
dividend) & for the balance (including dividend arrears) prefrence,
shares of Rs.10/ - each (Rs.5/ - paid up shall be issued.)
3) All Equity shareholders agreed to pay the balance amount, making
shares full paid up.
4) The Plant & Machinery was revalue at Rs.1,00,000/ -.
5) The value of Stock was reduced by Rs.50,000/ -.
6) Land & Building shall be written down to Rs.16,50,000/ -.
7) Creditors agreed to Forgo their claims by 50%.
8) Loans was fully settled for Rs.2,00,000/ -.
9) Goodwill, debit balance of profit & loss Account shall be written off.
10) Cost of reconstruction of Rs.2,000/ - was paid. Above resolution was
carried out
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Internal Reconstruction
117 You are required to:
i) Pass journal entries in the books of the company.
ii) Prepare Capital Reduction Account
iii) Prepare Balance sheet after reconstruction
(Ans : Capital Reserve – Rs.2,000/ -, Tally – 30,43,000/ -)
2) The ledger balance of ZEE TV Ltd. include Building Rs.6,10,000/ -,
Furniture Rs.2,00,000/ -, Computer Rs.3,00,000/ -, Debtors Rs.3,00,000/ -,
Preliminary Expe nses Rs.20,000/ -, Cash at Bank Rs.80,000/ -, Bills
Receivable Rs.2,50,000/ -, Stock Rs.40,000/ -, 8% Preference Share Capital
– 2,000 shares Rs.100/ - each, Equity Share Capital – 80,000 shares of
Rs.10/ - each, ‘A’ 10% Debentures Rs.4,00,000/ -, ‘B’ 12% Debentu re
Rs.5,00,000/ -, Outstanding Interest for one year on Debentures
Rs.1,00,000/ -.
Creditors Rs.4,00,000/ -, Bills Payable Rs.50,000/ -, Outstanding Audit
Fees Rs.50,000/ -, Profit & Loss Account
The company has incurred heavy losses. The following scheme of
reconstruction is agreed upon.
1) 8% Preference shares are to be reduced by Rs.20/ - per share, Equity
shares be reduced by Rs.5/ - per share.
2) To settle the claim of holders of ‘A’ 10% Debenture by issue of new
11% Debenture of Rs.2,00,000/ -, ‘A’ Debenture holder s agree to forgo
their interest.
3) To settle the claim of holders of ‘B’ 12% Debenture by issue of new
13% Debenture of Rs.5,00,000/ - outstanding Debenture interest on ‘B’
12% Debenture holders be paid.
4) To write off Fictitious assets & debit balance of Profi t & Loss
Account.
5) Director refund Rs.60,000/ - fees previously received by them.
6) Computer was to be written down by Rs.20,000/ -.
You are required to show :
a) Journal entries to record the above transactions in books of ZEE Ltd.
b) Balance sheet before reconstru ction
c) Balance sheet after reconstruction.
Assume that all the formalities are duly complied.
(Ans : Balance sheet before reconstruction Tally – Rs.25,00,000/ -,
Balance sheet after reconstruction Tally – Rs.17,60,000/ -, Capital
Reduction – Rs.7,40,000/ -.)
munotes.in
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118 4
BUY BACK OF EQUITY SHARES
Unit Structure
4.0 Objectives
4.1 Introduction
4.2 Difference between Buy Back and Redemption of Shares
4.3 Guidelines for Buy back
4.4 Journal Entries for Buy Back of Equity Shares
4.0 OBJECTIVES:
After studying the unit the st udents will able to:
Distinguish between Redemption of Preference shares and buy back of
Equityshares.
Understand the need and objectives of Buy Back.
Explain the Legal provision for Buy Back.
To prepare the balance sheet post buyback
4.1 INTRODUCTION:
Whe n any company buys back its shares from the existing shareholders it
is called as buy back of equity shares. Usually shares are bought back at a
price higher than its market price.
Buyback is done in order to reduce the number of shares outstanding
thereb y increasing the share in dividend per share.
4.2 DIFFERENCE BETWEEN BUY BACK AND
REDEMPTION OF SHARES: -
Buy back is associated with Equity shares whereas redemption is
related to Preference Shares and Debentures.
Equity is a permanent capital of the comp any and has no maturity term
therefore it cannot be redeemed on the other hand preference shares
and debt instruments are issued with a fixed maturity term therefore
they are redeemed on maturity.
Company cannot buy back its entire equity capital but a co mpany has
to redeem the entire amount of preference capital and debt capital on
its maturity date.
Company has to follow the guidelines of SEBI and section 68 in
buying back its Equity shares but the provisions of 68 are not munotes.in
Page 119
Buy Back o f Equity Shares
119 applicable for redemption of Pr eference shares or other Debt
Instruments.
Buyback of equity shares results in consolidation of capital but
redemption of preference shares and debt instruments results in
cancellation of such capital.
Following are the reasons for buy back: -
To increase the dividend per share -
Due to decrease in number of shares outstanding after buy back the
share in dividend per share increases. Thus the company is able to give
better returns to its equity shareholders.
Optimum utilization of capital -
Buyback is done using free reserves of the company. Company having
sufficient amount of free reserves can only opt for buy back of equity.
Company utilizes free reserves to pay off equity shareholders which
helps in optimum utilization of funds and mobilization of the id le
funds.
Improve the EPS Ratio -
Buy back leads to decrease in number of outstanding shares which
further leads to improvement in companies Earnings per Share.
To enhance the consolidation of stake in the company -
Decrease in number of outstanding shares of a company also leads to
consolidation in the stake of company which gives better returns to the
remaining shareholders.
To support the share price -
If a company’s share is underperforming in the market than buyback
of share may help the company in im proving its ratios and return to
equity shareholders which in turn will attract the attention of investors
thereby improving its market price.
To improve the ratios of the company -
Buyback helps the company to improve its return on equity, return of
capit al employed and net worth of the company. Improvement in the
ratios depicts a positive image of the company in the eyes of investors
and also helps in improving its performance in the market.
Advantages of Buyback: -
Improves the EPS Ratio -
Buy back leads t o decrease in number of outstanding shares which
further leads to improvement in companies Earnings per Share.
munotes.in
Page 120
Financial Accounting
120 Mode of Internal Reconstruction -
It is one of the ways a company can use to correct its capital structure
without requiring the permissions fr om the Company Law Board or
the Court.
Improves the ratios of the company -
Buyback helps the company to improve its return on equity, return of
capital employed and net worth of the company. Improvement in the
ratios depicts a positive image of the compan y in the eyes of investors
and also helps in improving its performance in the market.
Increases the dividend per share -
Due to decrease in number of shares outstanding after buy back the
share in dividend per share increases. Thus the company is able to give
better returns to its equity shareholders.
Optimum utilization of capital -
Buyback is done using free reserves of the company. Company having
sufficient amount of free reserves can only opt for buy back of equity.
Company utilizes free reserves to pa y off equity shareholders which
helps in optimum utilization of funds and mobilization of the idle
funds.
Acts as a booster -
If a company’s share is underperforming in the market than buyback
of share may help the company in improving its ratios and retur n to
equity shareholders which in turn will attract the attention of investors
thereby boosting its market price.
Disadvantages of Buyback: -
Fake Picture of a company -
Buyback of share helps in boosting some ratios like EPS, Return on
Investments and Retur n on Equity but this improvement in the ratio is
because of the decline in number of outstanding equity shares and not
because of the increase in profits of the company thus it depicts a fake
picture to the investors of the company.
Reduces the retained e arnings of the company -
Company has to use its free reserves for the purpose of buy back of
shares therefore company pays off its equity shareholders from its
retained earnings thereby reducing the funds of the company.
Miss the opportunity -
Company may m iss some of the immediate market opportunities, even
though if they are more profitable and revenue generating projects, due
to lack of funds.
munotes.in
Page 121
Buy Back o f Equity Shares
121 Methods of Buy Back: -
Equity shares can be bought back at either Par, Premium or Discount.
Whenever company buys back the equity shares at a price higher than
its face value it is called as buy back at premium.
When such buy back is done at a price equal to face value it is called
as buy back at par and
When such buy back is done at a price less than the face value of
shares it is called as buy back at discount.
4.3 GUIDELINES FOR BUY BACK: -
Provisions of Section 68:
Articles of Association -
Articles of Association of the company should authorize such buy
back of shares.
Special Resolution -
Company willing to buy back up to 25 % of aggregate capital and reserves
should pass a special resolution in shareholders meeting of the company.
Board Resolution -
For buy back of shares up to 10% of Paid up capital and free reserves a
company needs the approval from its b oard of directors.
Fully Paid Shares -
Only fully paid equity shares can be brought back.
Twelve Months -
The company should complete the process of buyback within a period of
twelve months from the date of passing of special resolution.
Maximum amount of Buy Back -
The amount to be paid in case of buy back of shares shouldnot exceed
25% of Paid up capital + Free reserves of the company
Maximum Number of shares -
The number of shares to be brought back by the company in any financial
year should not exceed 25% of it paid capital.
Debt -Equity ratio -
Post buy back Debt -Equity ratio should not exceed 2: 1
Issue of same class of shares -
A company cannot issue the same class of shares which it has brought
back with in a period of six months from the date of c ompletion of the
buyback process. munotes.in
Page 122
Financial Accounting
122
Destroy the shares -
Once the buyback process is complete the company should physically
destroy the shares brought back by it.
Capital Redemption Reserve -
A company should transfer a sum equal to capital value of shares b ought
back minus the capital value of new issue of shares to the Capital
Redemption Reserve Account.
Use of C.R.R -
Company shall use the balance in Capital Redemption Reserve Account
only for the purpose of issue of Bonus Shares.
4.4 JOURNAL ENTRIES FOR B UY BACK OF EQUITY
SHARES: -
Date Particulars l/f Debit Credit Conversion of Partly paid shares into fully
paid:
Share final call A/c Dr
To Share Capital A/c
Cash / Bank A/c Dr
To Share final call A/c
×××
×××
×××
×××
New Issue of Shares:
At par
Cash / Bank A/c Dr
To Share capital A/c
At Premium
Cash / Bank A/c Dr
To Share capital A/c
To Securities P remium A/c
At Discount
Cash / Bank A/c Dr
Discount on Issue of Shares A/c Dr
To Share capital A/c
×××
×××
×××
×××
×××
×××
×××
×××
Sale of Investments :
At Profit
Cash / Bank A/c
Dr
To Investments A/c
To Profit & Loss A/c
At Loss
Cash / Bank A/c
×××
×××
×××
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Page 123
Buy Back o f Equity Shares
123 Dr
Profit & Loss A/c
Dr
To Investments A/c ×××
×××
Tran sfer to CRR:
Free Reserves A/c
Dr
To Capital Redemption Reserve A/c
×××
×××
Buy back of shares:
At par
Equity Share capital A/c
Dr
To Equity Shareholders A/c
At Premium
Equity Share capital A/c
Dr
Premium on Buyback A/c
Dr
To Equity Shareholders A/c
At Discount
Equity Share capital A/c
Dr
To Equity Shareholders A/c
To Securities Premium A /c
×××
×××
×××
×××
×××
×××
×××
×××
Payment to Equity Shareholders:
Equity Shareholders A/c
Dr
To Cash / Bank A/c
×××
×××
Closing Premium on Redemption A/c:
Securities Premium A/c
Dr
To Premium on Redemption A/c
×××
×××
Examples of Free Reserves:
Profit & Loss Account
General Reserve
Securities Premium
Sinking Fund
Dividend Equalization Reserve
munotes.in
Page 124
Financial Accounting
124 Other Reserves not available for Buy -back:
Revaluation Reserve
Capit al Redemption Reserve
Debenture Redemption Reserve
Forfeited Shares Account
Capital Reserve
Statutory Reserve
Practical Sums
Illustration 1:
Amit &Co. Ltd., wishes to buy back 10,000 Equity Shares of ` 10 each.
For this purpose the company decided to issue equivalent amount of new
preference shares of `10 each. Assume that the company complies with
the buy -back conditions.
Solution:
Journal Entries in the books of Amit & Company Limited for the year
ended___.
Particulars Debit ` Credit `
Bank Account …………… ………..….Dr.
To Preference Share Capital A/c
[Being 10,000 Preference shares issued at par] 1,00,000
1,00,000 Equity Share Capital A/c…………………Dr.
To Equity Shareholders A/c
[Being Equity Shares due for buy -back] 1,00,000
1,00,000 Equity Shareholders A/ c………………….Dr.
To Bank A/c
[Being satisfied the claim of Equity Shareholders] 1,00,000
1,00,000
Note: - Transfer to C.R.R = 0.
The entire amount of buyback is supported by way of new issue of Equity
Shares.
Illustration 2:
Maruti Ltd., furnishes the fol lowing summarized Balance Sheet as at 31st
March, 2021. munotes.in
Page 125
Buy Back o f Equity Shares
125 Particulars ` In ‘000’ ` In ‘000’ Equity & Liabilities:
Issued & Subscribed Capital -
5,00,000 Equity shares of ` 10 each fully paid Reserves & Surplus:
Capital Reserve
Revenue Reserve
Securities Prem ium
Profit & Loss Account
Non-Current Liabilities - 10% Debentures
Current Liabilities & Provisions
TOTAL
Assets:
Fixed Assets
Non-Current Investments
Current Assets, Loans & Advances
(including Cash & Bank balance)
TOTAL
20
8,000
1,000
2,500
5,750
6,210
5,000
5,000
11,520
400
40
16,960
16,960
The company passed a resolution to buy back 20% of its equity capital at a
premium of ` 5 per share. For this purpose, it sold its investments of
`30,00,000 for `35,00,000.
munotes.in
Page 126
Financial Accounting
126 Solution:
Date Particulars Debit
`
In
‘000’ Credit
`
In
‘000’
1. Bank A/c………………………….Dr
To Investment A/c
To Profit & Loss A/c
[Being Sale of Investment at Profit] 3,500
3,000
500
2. Equity Share Capital A/c…………..Dr
Premium on Buy back A/c…………Dr
To Equity Shar eholders A/c
[Being the amount due on Buy back of 20%
Equity Capital] 1,000
500
1,500
4. Securities Premium A/c……………Dr
To Premium on Buy back A/c
[Being Premium on buyback written off with
the balance in Securities Premium] 500
500
4. Revenue Reserv e A/c………………Dr
To Capital Redemption Reserve A/c
[Being transfer to C.R.R to the extent of buy
back] 1,000
1,000
5. Equity Shareholders A/c ……….......Dr
To Bank A/c
[Being Payment made for the buyback of
Equity] 1,500
1,500
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Buy Back o f Equity Shares
127 Particulars ` In ‘00 0’ ` In ‘000’ Equity & Liabilities:
Issued & Subscribed Capital -
4,00,000 Equity shares of 10 each fully paid Reserves & Surplus:
Capital Reserve
Revenue Reserve
Securities Premium
Profit & Loss Account
Capital Redemption Reserve
Non-Current Liabilities - 10% Debentures
Current Liabilities & Provisions
TOTAL
Assets:
Fixed Assets
Non-Current Investments
Current Assets, Loans & Advances
(including Cash & Bank balance)
TOTAL
20
7,000
500
3,000
1,000
5,750
3,210
7,000
4,000
12,520
400
40
15,96 0
15,960
munotes.in
Page 128
Financial Accounting
128 Illustration 3:
Following is the summarized Balance sheet of Vishal Ltd. As at 31st
March, 2021.
Liabilities Amount
` Assets Amount
`
4,00,000 Equity Shares of ` 10 each
50,000 11.5% Preference Shares of
` 10 each
Revenue Reserve
Profit & Loss Account
Securities Premium
Creditors 40,00,000
5,00,000
4,50,000
7,00,000
1,50,000
15,00,000 Fixed
Assets
Stock
Debtors
Bank 40,00,000
10,00,000
6,00,000
7,00,000
TOTAL 73,00,000 TOTAL 73,00,000
The company bought back 1,00,000 Equity Shar es at par after complying
with the legal formalities.
Solution:
Journal Entries in the books of Vishal Ltd. For the year ended 31st March,
2021.
Particulars Debit ` Credit `
Equity Share Capital A/c …………..Dr
To Equity Shareholders A/c
[ Being Equity sha res due for buy back at par] 10,00,000
10,00,000 Revenue Reserve A/c………………Dr
Profit & Loss A/c…………………..Dr
To Capital Redemption Reserve A/c
[Being transfer to C.R.R to the extent of buy
back] 4,50,000
5,50,000
10,00,000 Equity shareholders A/c……………D r
To Bank A/c
[Being payment made to the Equity Shareholders] 10,00,000
10,00,000 munotes.in
Page 129
Buy Back o f Equity Shares
129 Illustration 4:
The summarized Balance sheet of Uma Ltd., shows the following balances
as at 31st March, 2022.
Amt. `.
1,00,000 Equity Shares of ` 10 each ( `8 Paid up) 8,00,000
Securities Premium 50,000
General Reserve 1,00,000
Capital Redemption Reserve 1,00,000
Profit & Loss Account 1,50,000
The company decided to purchase 20,000 Equity shares at 10% Discount
out of the reserv e. The Company made a final call for the purpose of
buyback and call money was duly received. The company incurred `
5,000 worth of buyback expenses. Check if the company’s decision is
within the frame work of section 68 and pass necessary journal entries in
the books of the company.
Solution:
Journal Entries in the books of Uma Ltd., for the year ended 31st March,
2022.
Particulars Debit ` Credit `
Equity Share Final Call A/c…………….Dr
To Equity Share Capital A/c
[Being Final Call made for ` 2 per share] 2,00,000
2,00,000
Bank A/c………………………………..Dr
To Equity Share Final Call A/c
[Being Final Call money received] 2,00,000
2,00,000
Equity Share Capital A/c……………….Dr
To Discount on Buyback A/c
To Equity Shareholders A/c 2,00,000
20,000
1,80,000
Disco unt on Buyback A/c………………Dr
To Capital Reserve A/c
[Being transfer of balance in Discount A/c] 1,00,000
1,00,000
General Reserve A/c……………………Dr 1,00,000 munotes.in
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Financial Accounting
130 Profit & Loss A/c……………………….Dr
To Capital Redemption Reserve A/c
[Being transfer of Buyback amount to C.R.R. A/c] 1,00,000
2,00,000
Equity Shareholders A/c………………..Dr
To Bank A/c
[Being payment made for buyback of Equity share] 1,80,000
1,80,000
Buyback Expenses A/c………………….Dr
To Bank A/c
[Being Buyback expenses incurred & paid] 5,000
5,000
Wor king Notes:
1. Maximum Number of Shares that can be bought back Under Section 68:
25 % of No. of Equity Shares outstanding in the market
= 1,00,000 *25%
= 25,000 shares
Since company decided to buyback 20,000 Equity shares, this condition is
fulfilled b y the company.
2. Maximum Amount Payable on Buy back= 25% of Capital + Reserves
Equity Capital - 10,00,000
Securities Premium - 50,000
General Reserve - 1,00,000
Profit & Loss A/c - 1,50,000
TOTAL Own Fund = 13,00,000
25% = `3,25,000.
Since Company is pa ying `. 1,80,000. The amount paid by the company
on buyback is within the range of section 68.
4. Post Buy Back Debt Equity Ratio should not exceed 2:1:
Since the company does not have any Debt Capital nor does it issues any
debt instrument during buyback therefore there is no question of
exceeding the Debt –Equity Ratio.
Therefore buyback is completely within the limits of Section 68. munotes.in
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Buy Back o f Equity Shares
131 Illustration 5:
The Balance sheet of Asians Ltd. As at 31.0 4.21 was as follows:
Liabilities Amount ` Assets Amount ` Equity shares of Rs.10 each Securities Premium
General Reserve
Profit & Loss A/c
Debenture
Current Liabilities 6,00,000
1,45,000
1,00,000
1,50,000
7,00,000
1,05,000 Fixed Assets
Investments
Current assets 10,00,000 4,00,000
4,00,000
TOTAL 18,00,000 TOTAL 18,00,000
Calculate the maximum number of number of shares to be bought back
and the offer price to be paid on buy back. Assuming that the buyback is
done pass necessary journal entries in the books of the company.
Solution:
Particulars Debit ` Credit ` Equity Share Capital A/c…………..Dr
Premium on Buy back A/c…………Dr
To Equity Shareholders A/c
[Being the amount due on Buy back of 20% Equity
Capital] 1,50,000
98,750
2,48,750 Securities Premium A/c……………Dr
To Premium on Buy back A/c
[Being Premium on buyback written off with the
balance in Securities Premium] 98,750
98,750 Profit & Loss A/c…………………..Dr
To Capital Redemption Reserve A/c
[Being transfer to C.R.R to the extent of buy back] 1,50,000
1,50,000 Equity Shareholders A/c ………....... Dr
To Bank A/c
[Being Payment made for the buyback of Equity] 2,48,750
2,48,750
munotes.in
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Financial Accounting
132 Working Note:
1.Maximum No. of Shares that can be bought back:
25% of Equity Shares outstanding in the Market
= 25% of 60,000
= 15,000 Shares.
2. Maximum Amount to b e paid for buy back:
25% of Own Fund
Equity Capital 6,00,000
Securities Premium 1,45,000
General Reserve 1,00,000
Profit & Loss A/c 1,50,000
Total Own Fund 9,95,000
25% of 9,95,000 = 2,48,750
4. Post Buyback Debt –Equity Ratio :
Debt 7,00,000
Therefore minimum Own Fund Post Buy back Should be at least half of
Debt i.e ` 3,50,000
Amount available for buy back = 9,95,000 – 3,50,000 = 6,45,000/ -
4. Determination of Offer Price:
Total amount payable on buyback shall be Minimum o f working not
no. 2 and 3 above
= ` 2,48,750
Offer price per share = Amount Payable on Buyback /Maximum no. of
Shares to be bought back
= 2,48,750 / 15,000
= ` 16.58/ - per share
Illustration 6:
Zoomba Ltd. resolved to buy back 3,00,000 fully paid e quity shares of `10
each at `13 per share. For the purpose, it issued 10,000 13% preference
shares of `100 each at par, the total sum being payable with applications.
The company uses ` 9,50,000 of its balance in Securities Premium
Account apart from its a dequate balance in General Reserve Account to
fulfill the legal requirements regarding buy -back. munotes.in
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Buy Back o f Equity Shares
133 Pass journal entries for all the transactions involved in the buy -back.
Solution:
Journal Entries in the books of Zoomba Ltd., for the year ended 31st
March, _ ___.
Particulars Debit ` Credit `
Bank A/c………………………….......Dr
To 13% Preference Share Capital A/c
[Being issue of Preference shares at par] 10,00,000
10,00,000
Equity Share Capital A/c……………..Dr
Premium on Buy back A/c……………Dr
To Equity Shareholders A/ c
[Being the amount due on Buy back of
20% Equity Capital] 30,00,000
9,00,000
39,00,000
Securities Premium A/c……………….Dr
To Premium on Buy back A/c
[Being Premium on buyback written off
with the balance in Securities Premium] 9,00,000
9,00,000
General Reserve A/c…………………..Dr
To Capital Redemption Reserve A/c
[Being transfer to C.R.R to the extent of
buy back] 20,00,000
20,00,000
Equity Shareholders A/c ………...........Dr
To Bank A/c
[Being Payment made for the buyback of
Equity] 39,00,000
39,00,000
Working Note:
1. Transfer to Capital Redemption Reserve A/c.
= Capital Value of Buy back - Capital value of New Issue of Shares
= 30,00,000 – 10,00,000
= 20,00,000 munotes.in
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Financial Accounting
134 Illustration 7:
Sanjivani Ltd., a private company, had issued capital of ` 40 lakh divided
into equity shares of ` 10 each. The balance in the Security Premium
Account was ` 2 lakh and General Reserve ` 6 lakh. The company
decided to buy -back 1,00,000 shares of ` 10 each at ` 8 per share. The
company had issued 50,000, 10% Prefere nce Shares ` 10 each 3 months
back for the purpose of buy -back of equity shares. Record the transaction
in the Journal of the company.
Solution:
Journal Entries in the books of Sanjivani Ltd., for the year ended 31st
March, ____.
Particulars Debit ` Credit `
Bank A/c………………………….......Dr
To 10% Preference Share Capital A/c
[Being issue of Preference shares at par] 5,00,000
5,00,000
Equity Share Capital A/c……………..Dr
To Discount on buy back A/c ………Dr
To Equity Shareholders A/c
[Being the amount due on Buy back of Equity
Capital at discount] 10,00,000
1,00,000
9,00,000
Discount on buy back A/c …………….Dr
To Capital Reserve A/c
[Being Discount on buyback written off] 1,00,000
1,00,000
General Reserve A/c…………………..Dr
To Capital Redemption Reserve A/c
[Being transfer to C.R.R to the extent of buy
back] 5,00,000
5,00,000
Equity Shareholders A/c ………...........Dr
To Bank A/c
[Being Payment made for the buyback of
Equity] 9,00,000
9,00,000
munotes.in
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Buy Back o f Equity Shares
135 Working Note:
1. Transfer to Capital Redemption Reserve A/c.
= Capital Value of Buy back - Capital value of New Issue of Shares
= 10,00,000 – 5,00,000
= 5,00,000
Illustration 8:
Sea Ltd., furnishes the following summarized Balance Sheet as at 31st
March, 2021.
Particulars Amount ` Amount `
Equity & L iabilities:
3,50,000 Equity shares of ` 10 each
2,000 12% Preference Shares of `100 each Reserves & Surplus:
Capital Reserve
Revenue Reserve
Securities Premium
Profit & Loss Account
Current Liabilities & Provisions
35,00,000
2,00,000
5,00,000
35,00,000
20,00,000
30,00,000
14,00,000
TOTAL 1,41,00,000 Assets:
Fixed Assets
Investments
Current Assets
95,00,000
31,00,000
15,00,000
TOTAL 1,41,00,000
The company passed a resolution to buy back 20% of its equity capital @
`. 40 per share.
In accordanc e to support this buyback, company sold all its investments
for ` 25,00,000.
You are required to pass necessary journal entries in the books of the
company also prepare the Vertical Balance Sheet post buyback. munotes.in
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Financial Accounting
136 Solution:
Journal Entries in the books of Sea Ltd., for the year ended 31st March,
2021.
Particulars Debit ` Credit `
Bank A/c………………………….......Dr
Profit & Loss A/c……………………..Dr
To Investment A/c
[Being sale of investment at loss] 25,00,000
6,00,000
31,00,000
Equity Share Capital A/c……………..Dr
Premium on Buy back A/c……………Dr
To Equity Shareholders A/c
[Being the amount due on Buy back of 20%
Equity Capital] 7,00,000
21,00,000
28,00,000
Securities Premium A/c……………….Dr
Profit & Loss A/c……………………...Dr
To Premium on Buy back A/c
[Being Premium on buyback written off] 20,00,000
1,00,000
21,00,000
Profit & Loss A/c……………………...Dr
To Capital Redemption Reserve A/c
[Being transfer to C.R.R to the extent of buy
back] 7,00,000
7,00,000
Equity Shareholders A/c ………...........Dr
To Bank A/c
[Bein g Payment made for the buyback of
Equity] 28,00,000
28,00,000
munotes.in
Page 137
Buy Back o f Equity Shares
137 Post buyback Balance sheet of Sea Ltd., as at 31st March, 2021.
Particulars Amount ` Amount `
Equity & Liabilities:
2,80,000 Equity shares of ` 10 each
2,000 12% Preference Shares of `100 each Reserves & Surplus:
Capital Reserve
Revenue Reserve
Securities Premium
Profit & Loss Account
Capital Redemption Reserve
Current Liabilities & Provisions
28,00,000
2,00,000
5,00,000
35,00,000
NIL
16,00,000
7,00,000
14,00,000
TOTAL 1,07,00,000 Assets:
Fixed Assets
Investments
Current Assets
95,00,000
NIL
12,00,000
TOTAL 1,07,00,000
I. SELF -PRACTICE
Illustration 1:
The Balance sheet of Ram Ltd. as at 31 -3-2022 is as follows.
Liabilities Amount ` Assets Amount `
SHARE CAPITAL:
Equity shares of Rs.10 each
RESERVES & SURPLUS:
Securities Premium
General Reserve
Profit and loss account
SECURED LOANS:
Debentures
CURRENT LIABILITIES &
PROVISIONS:
50,00,000
5,00,000
25,00,000
20,00,000
40,00,000
50,00,000 Fixed Assets Investments
Current
assets 80,00,000
50,00,000
60,00,000
TOTAL 1,90,00,000 TOTAL 1,90,00,000
Keeping in view all the legal requirements, ascertain the maximum no. of
equity shares that 0 Victory Ltd. can buy back if price settled is Rs.20 per
share. A ssume that the buy -back is carried out actually at the legally munotes.in
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Financial Accounting
138 permissible terms, record the entries in the journal of Victory Ltd. and
prepare its balance sheet thereafter.
Illustration 2:
The summarized Balance Sheet of Somnath Ltd. As on 1st March 2021 is
as Follows: -
Particulars Amount `
Equity & Liabilities:
6,00,000 Equity shares of Rs. 10Each Fully Paid
Securities Premium
Profit and Loss Account
13% Debentures
Creditors
60,00,000
4,00,000
20,00,000
18,00,000
20,00,000
TOTAL 1,22,00,000
Assets :
Fixed Assets
Investments
Current Assets
70,00,000
25,00,000
27,00,000
TOTAL 1,22,00,000
Ascertain the maximum number of equity shares the company can
buyback at the maximum possible price under the law as on 31st March,
2021. Assuming the buyback is actually carried out, record the journal
entries in the books of Somnath Ltd. Also prepare Notes to accounts with
respect to share Capital and Reserve & Surplus as they would appear in
Notes to accounts Forming part of the Balance Sheet of Somnath Ltd. As
on 31st March, 2021.
munotes.in
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Buy Back o f Equity Shares
139 Illustration 3:
The Balance sheet of Green Tea Ltd. as on 31 -3-2022 is as follows:
Liabilities Amount ` Assets Amount ` SHARE CAPITAL:
Equity shares of Rs.10 each
Preference Shares of Rs.100
each.
RESERVES & SURPLUS:
Securiti es Premium A/c
General Reserve
Profit and Loss account
SECURED LOANS:
Debentures
CURRENT LIABILITIES:
Current liabilities Provisions
4,00,000
1,00,000
1,50,000
1,00,000
1,00,000
7,00,000
2,00,000 FIXED ASSETS:
Net block
Investments
CUR RENT
ASSETS:
Current Assets
9,00,000
2,00,000
6,50,000
TOTAL 17,50,000 TOTAL 17,50,000
Keeping in view all the legal requirements, ascertain the maximum no of
equity shares that Green Tea Ltd can buy back @ Rs.25 per share, being
the current marke t price. Assume that the buy -back is carried out actually
on the changed terms and accordingly record the entries in the journal of
GreenTea Ltd and prepare its balance sheet thereafter.
II. Multiple Choice Questions
i. Equity share capital (Rs.10) Rs.10, 00 ,000
General reserve Rs.12, 00,000
Profit and loss account Rs. 1, 00,000
Securities premium Rs. 2, 00,000
The maximum buyback is ________.
a) Rs.45, 00,000
b) Rs. 6, 25,000
c) Rs.5, 50,000
d) Rs.3, 00,000
Answer: Rs. 6, 25,000 munotes.in
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Financial Accounting
140 ii. Company can buy back________.
a) Preference shares
b) Equity shares
c) Debentures
d) Capital
Answer: Equity shares
iii. Buyback of shares can be out of________.
a) Profits only
b) Proceeds of fresh issue only
c) Capital profit only
d) Free reserve or securities Premium for proceeds of shares
Answer: Free reserve or securities Premium for proceeds of shares
iv. Which of the following is a free reserve for the purpose of buyback
of shares?
a) workmen compensation fund
b) capital redemption reserve
c) debenture redemption reserve
d) forfeited shar es account
Answer: forfeited shares account
v. In case of equity shares are brought back out of to reserve, amount
equal to face value of equity shares bought back should be
transferred to________.
a) general reserve account
b) development rebate reserve
c) sinkin g fund account
d) capital redemption reserve account
Answer: capital redemption reserve account
III. State Whether True or False
i. The buyback of equity shares should be authorized by Articles of
Association.
ii. Buyback of equity shares can be made out of proceeds of an earlier
issue of preference shares.
iii. Partly paid equity shares can be bought back.
iv. Buy back of shares increases the Earnings per Share of the company.
v. Due to buyback of shares there is reduction in the share capital.
munotes.in
Page 141
141 5
INVESTMENT ACCOUNTING
(W.R.T ACCOUNTING STANDARD -13)
Unit structure
5.0 Objectives
5.1 Introduction
5.2 Types of Investments
5.3 Terms used in Investment Accounting
5.4 Journal Entries
5.5 Investment Account
5.6 Summary
5.7 Exercise
5.8 Objectiv e Questions – Test your Understanding
5.0 OBJECTIVES
After studying this module , the student will be able to –
Understand the different types of Investment
Calculate cost of acquisition on purchase of investment and ascertain
profit/loss on sale of inve stment
Understand the quotation prices – cum-interest and ex - interest price
Prepare and maintain Investment ledger in columnar form.
This module will help learner
1) Unders tand the various terms used in Investment A ccounting
2) Prepare working notes – calculate accrued interest and determine
profit/loss on sale
3) Pass journal entries in the books of investor
4) Post t ransactions in investment a/c – to be prepared in columnar format
The student will learn and understand the meaning of the various terms
used in investment accounting – short term investment, long term
investment, cost of investment , net receipts on sale of investment, profit
or loss on sale of investment , ex - interest and cum - interest quotations ,
carrying cost of investment, w eighted average method, Bonus shares and
right shares received . munotes.in
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Financial Accounting
142 Expected outcomes –
The student will remember and understand the different types of
Investments
The student will learn to apply the provisions of AS -13 in accounting for
Investments
The st udent will learn to analyze the impact of Investment related
transactions on the Profit and loss a/c
The student will be able to evaluate the different Investment options
relating to purchase and sale of Investments
With the above knowledge, the student should feel empowered to suggest
investment options to others and make the appropriate investment
decisions
5.1 INTRODUCTION
Investment is an asset which is made with the expectation of appreciation
and getting returns. The surplus financial resources ar e profitably
channelized and invested based on an individual’s risk appetite. The
factors which influence the investment decision making are -
Liquidity
Security
Profitability
AS-13 defines Investments as assets held for earning income by way of
dividends, interest and rentals for capital appreciation or for other benefit
to the investor.
5.2 TYPES OF INVESTMENTS
AS-13 classifies investments as under
Government and Trust Securities issued by Government and local
authorities
Bonds and Debentures issued b y companies
Shares issued by Companies
Deposits with Companies or Banks
Immoveable property
Others - jewellery, Insurance policies
munotes.in
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Investment Accounting
143 On the basis of period of Holding - Long term and current investments
Current Investments is an investment readily rea lizable and intended to be
held for not more than one year from the date on which such investment is
made. Current investments are also known as short term investments.
Long term investments are investments other than short term investment.
On the basis of nature of Return -Variable earning securities and fixed
earning securities
Variable earning securities refer to securities on which return varies from
period to period .For example Investment in Equity shares. Dividend on
Equity shares is variable in nat ure.
Fixed earning securities refer to the securities on which the rate of return
is fixed and it is payable on a certain date. For example - Investment in
10% Debentures interest payable on 1st November and 1 st May every
year. Investment in Bonds also fal l under this category.
5.3 TERMS USED IN INVESTMENT ACCOUNTING
a)Cost of investment –
`Cost of Investment’ includes purchase price and acquisition charges
which refers to the expenses related to the purchase of Investments like
brokerage, commission, fee s, stamp duty .
Cost of Investment Purchase Price xxxx
Add Brokerage xxxx
Add Fees/commission xxxx
Add Stamp duty xxxx
Total cost of Investment xxxx
Brokerage is always calculated on the quotation price whether cum -
interest or ex - interest
b) Disposal of investment - cost of investment sold
When an Investment is sold off, the profit /loss has to be co mputed. The
net sale proceeds are compared with carrying a mount to ascertain profit/
loss.
Net proceeds= Gross proceeds - expenses related to sales
Net Proceeds xxx
Less carrying amount of investment sold xxx
PROFIT/LOSS munotes.in
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Financial Accounting
144 c) Carrying amount of Investment
Carrying amount means the value at which Investments are ca rried in the
books of accounts and shown in Final accounts. It is the book value of
Investments.
Long Term Invest ments should be carried in the financial statements at
cost.
Current Investments are carried in the financial statements at the lower of
cost and fair value,
d) Cum - interest and ex - interest quotations
Cum -Interest and ex - interest are quotation terms us ed in purchase or sale
of Investments (Debentures)
Cum - interest refers to cumulative or inclusive of interest
Ex-interest refers to exclusive or without interest.
e) Calculation of cost and accrued interest
Step 1 – Calculate the period between the da te of last interest paid and the
date of purchase of securities For example ---- interest is payable on 1
April and 1 October every year . On 1 June, 600 12% debentures of fv Rs
100 were purchased. In the above case the last interest was paid on 1
April. Accrued interest is to be calculated for two months ---April and
May
Step 2 —Calculate accrued interest using the formula -
Rate of Interest x period (months) /12 months x Face value of securities
12/100 x2/12 x (600xRs 100) =60000x2/12x12/100=1200
Step 3 –Calculate cost - (cum interest price x no. of securities) - accrued
interest as per step 2
f) Weighted Average cost –to ascertain profit/loss
AS-13 prescribes weighted average method. When investments are
purchased at different dates at different rates o r cost and a part of
Investment is sold, weighed average method is used to calculate the cost
of such investment sold.
41200 shares purchased at different dates at a total cost of Rs 534400 out
of which 1000 shares are sold .The cost of 1000 shares sold is calculated
as under
1000x534400/41200= 12971
The cost of investment sold is compared with selling price to compute
profit/loss on sale of investment. munotes.in
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Investment Accounting
145 g) Rights shares
It is an issue of shares in which the existing shareholders have a pre -
emptive right to subscribe for the new shares. The existing shareholder has
a right to exercise the option to buy or sell to third parties. The rights
shares are to be recorded on the debit side of Investment a/c in the
Nominal value column and cost recorded in the cap ital column .
h) Sale of entitlement rights -
The shareholder may decide to sell the right shares or part of right shares.
As per AS -13, profit on sale of right entitlement is directly credited to
Profit and loss a/c
i) Bonus shares –
Issue of Bonus share s is called conversion of profit into share capital or
capitalisation of profits. Bonus shares are issued to existing shareholders
free of cost. Bonus shares could be issued only as fully paid new shares.
The bonus shares issued are to be recorded on the d ebit side of investment
account and entered in the Nominal value column only.
For example –On 1st August 2018, one Equity share was issued as bonus
for every six shares held by the shareholders. On 1st April 2018, Mr.Rajat
had an opening balance of 50,000 shares and on 1st June2018 he purchased
10,000 additional shares. Thus he had a total of 60,000 shares
(50000+10000) and is entitled to 60000/6 =10,000 bonus shares. The
nominal value of 10000 shares received as bonus is to be recorded in the
debit side o f Investment a/c in face value or nominal value column only.
As it is free of cost, no amount will be entered in the cost column.
Explain the difference between Ex - interest and Cum - interest
transactions in Investment accounting giving suitable examples
Cum - Interest and Ex - Interest Price
Cum - interest means ‘with ‘or ‘cumulative of interest’. Ex interest means
‘without’ or ‘exclusive of interest’.
Cum interest (inclusive of interest) price covers the cost of investment and
interest accrued up to the date of purchase. When interest becomes due, it
would be the right of the buyer to claim it.
Ex interest (exclusive of interest) price covers only the cost of the
investments and the buyer is liable to pay additional amount as int erest
accrued up to the date of purchase of investments. Note - In case of
Government securities and debentures, the price quoted is Ex -interest
unless otherwise specified. In case of non - government securities and
debentures, it is cum - interest unless ot herwise specified.
Accounting in the books - Cum - interest purchase – Investment
account will be debited with the cost only and interest account will be munotes.in
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Financial Accounting
146 debited with accrued interest (from the date of last interest paid to the date
of purchase). Bank acc ount will be credited with quotation price.
Example On 1st April 2015 , 2000 12% debentures of Rs 100 each @Rs 98
cum- interest were purchased. Interest is payable half - yearly on 30 June
and 31 December . Accounts are closed on 31st December.
Journal entry –
Debentures a/c Dr 190,000
Accrued interest a/c Dr 6,000
To Bank a/c 196,000
(Being debentures purchased cum - interest)
Note - Here accrued interest is calculated on 2,00,000@12% for 3 months
(April, May, June)
(200,000x12% x3/12=6,000) The cum interest price (2000x98=196000)
includes this interest amount and hence cost is 196000 -6000=190000
Accounting in the books – Ex- interest purchase – Investment account
is debited with quotation price (plus brokerage) .Interest account is debited
with accrued interest and the bank account is credited with quotation price
plus a ccrued interest.
Example - On 31st March 2014 Rs 1,00,000 6% Government bonds ( face
value Rs 100 each) were purchased at Rs 95 ex - interest. Interest is
payable on 30th June and 31st December every year.
Journal entry would be -
6% Government Bonds a /c Dr 95,000
Accrued interest a/c Dr 1,500
To Bank a/c 96,500
(Being 6% Bo nds purchased at Rs 95 ex - interest)
In the above example, the interest is worked out for 3 months January,
February and March (100000x6%x3/12=1,500)
This interest amount is not included in quotation price (1000 bonds @Rs
95 ex interest) and hence th e cost is 95000+ 1500= 96,500
munotes.in
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Investment Accounting
147 In the case of sale of investments Ex interest or cum interest
Journal entry
Ex - interest sales Cum - interest sales
Bank a/c Dr ( ex interest price +
interest accrued)
To Investment a/c ( ex -interest
price)
To Interes t ( Accrued interest) Bank a/c Dr ( cum - interest price)
To Inve stment a/c (cum interest
price –accrued interest) To In terest a/c ( Accrued interest) In case of Cum - interest sale or ex - interest sales, the Profit or loss on sale
is calculated as net sale price less weighted average cost
5.4 JOURNAL ENTRIES
JOURNAL ENTRIES IN THE BOOKS OF THE BUYER – purchase –
sales – cum interest – ex interest
Cum –interest purchase Investment a/c dr (cost)
Interest a/c dr (accrued interest)
To bank a/c (cum - interest price)
On 1 Apri l 2018, 2000 12% debentures of Rs 100 each were purchased
at Rs 98 cum interest interest is payable on 30 June and 31 Dec .
Face value of debentures purchased - 2000 deb x Rs 100=200000
Cum interest price at Rs 98 = 2000 debx Rs 98= 196000
Accrued inte rest for three months - 12/100x200000x3/12= 6000
Cost of debentures= cum interest price -accrued interest = 196000 -
6000=190000
Journal entry 12% debentures a/c dr 190000
Accrued interest a/c dr 6000
To bank 196000
Ex interest purchase Investment a/c dr (ex interest price)
Interest a/c dr (accrued inter est)
To bank (ex interest price+ accrued interest)
On 31st March 2014, Rs 100,000 6% Govt bonds (face value Rs 100
each) were purchased at Rs 95 ex interest . Interest is payable on 30 June
and 31 Decembe r every year. Pass journal entries munotes.in
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Financial Accounting
148 1000 6% Govt bonds of rs 100 each 100000 face value
Ex interest price 1000x rs 95=95000
Accrued interest for three months =6/100x100000x3/12=1500
Note always calculate interest on face value of investments
Journa l entry - 6% Govt bonds a/c dr 95000
Accrued Interest a/c dr 1500
To Bank 96500
Bank a/c dr 6000
To interest a/c 6000 (6/100 x100000 interest amount )
Cum interest sales -
Bank a/c dr (cum interest price)
To investment a/c (cum interest price - accrued interest)
To interest (accrued interest)
On 1st April 2017, X Ltd had Rs 100000 6% Govt bonds at Rs 94 each
(face value R s 100) Interest is payable on 31 March and 30 September.
The company sold Rs 30,000 bonds at Rs 95 cum -interest on 1st June 2017
Working note l ast interest was paid in March accrued interest will be for
April, May 2 months
6/100x 30000x2/12= 300 acc rued interest
Rs 30000 bonds were sold 300 bonds of fv rs 100 each sold at rs 95
cum interest on 1 June 2017
Sale cum interest 300 bonds at 95=300x95= 28500
Less accrued interest 300
Cost 28200
Journal entry Ban k a/c dr 28500
To 6% Govt bonds 28200
To accrued interest 300
Ex- interest sales –
Bank a/c dr (ex interest price +accrued interest)
To investment (ex - interest price)
To interest (accrued interest) munotes.in
Page 149
Investment Accounting
149 On 1st April 2018, Y Ltd had Rs 100000 6% Govt bonds at Rs 94 each
(face value Rs 100) In terest is payable on 31 March and 30 September.
The company sold Rs 30,000 bonds at Rs 95 cum -interest on 1st June
2018.
Ex interest price 300 bonds x 95
28500
Add accrued interest for 2 m onths 6/100x30000x2/12
300
Total
28800
Bank a/c dr 28800
To 6% Govt bo nds 28500
To accrued interest 300
Important points to be noted -
Any brokerage on sale of investments should be deducted from sale
proceeds
As per AS -13, weighted average cost is to be use d for ascertaining profit
or loss on sale of investment.
Carrying amount of investments – at cost or fair value (market value)
whichever is lower
In case investments are purchased at different dates at different costs and
some part of investment is sold, the carrying amount of investment sold
should be ascertained by using FIFO or weighted average method. AS- 13
prescribes weighted average method
5.5 INVESTMENT ACCOUNT
The Investment ledger shows the details of investment. Investment
Account is prepared in columnar form showing details of face value or
nominal value of investment, the income (interest/ dividend) and the last
column showing the capital/cost column on both the debit side and credit
side of the account.
munotes.in
Page 150
Financial Accounting
150 Proforma of Investment account -10% Debentures
Date Part NV Income Cost Date Part NV Income Cost 1 /4/20 To
bal Xxx xxx xxx By
bank xxx xxx xxx
To
Bank Xxx xxx xxx By
p&l ---- ----- xxx
To
p&l ------- ------- xxx By
bank ---- xxx ---
31/3/21 To
p&l ------- xxx ---- 31/3/21 By
bal ---- xxx ---
31/3/21 By
bal ---- ---- xxx
31/3/21 By
p&l ---- ----- xx
Xxx xxx xxx xxx xxx xxx
NV- Nominal value or face value of Investments
Income – Incase investmen ts are in bonds/ debentures it is interest, in case
of investment in shares it refers to dividend
The following transactions are recorded on the debit side of Investment
Account
Opening balance of Investments – Purchase of Investments –Bonus sh ares
and rights shares issued ( in case of Investment in shares )-Profit on sale of
Investment –Transfer of Interest/ dividend to Profit and loss a/c at the end
of the year.
The following transactions are recorded on the credit side of Investment
a/c
Sale of Investments –Loss on sale -interest received - Accrued inter est at
the end of the year – closing balance of investments at the end of the year.
Loss on valuation transferred to P&L a/c –
Solved Problems -
1)On 1st January 2013, 1,000 -12 percent Debentures of Rs 100 each of
Shiva Ltd. were held as investment by Mr Dharmesh at a cost of Rs
91,000. Interest is payable on 31st December .
On 1st April 2013, Rs 20,000 of such debentures were purchased by
Dharmesh at Rs 98 cum -Interest.
On 1st September 2013, Rs 30,000 of such debentures were sold at Rs 96
ex-Interest.
On 1st December 2013, Rs 50,000 of such debentures were sold at Rs 99
cum-interest.
Interest is received on due date. munotes.in
Page 151
Investment Accounting
151 Prepare investment account for 12 percent debentures of Shiva Ltd. in the
books of Mr Dharmesh valuing closing stock as on 31st December 201 3
applying AS -13. The debentures were quoted at Rs 93 on 31st December
2013
In the books Mr Dharmesh
Investment in 12 percent Debentures of Shiva Ltd a/c
Date Particulars W/N
no NV Int Cost Date Particulars WN
no NV
Int Cost
2013
Jan 1
April1 Sept 1
Dec
31
To
balance
b/d
To bank
a/c
To P & L
a/c
[profit]
To P & L
a/c
[bal.fig]
2
4 100,000
20,000
-
-
-
600
-
12100
91000
19,000
1300
- 2013
Sep
1
Dec
1
Dec
1
Dec
31
Dec
31
By bank
a/c
By bank
a/c
By P & L
a/c
[Loss]
By bank
a/c
[interest]
By bal c/d
3
5
6
7
30000
50000
-
-
40000
2400
5500
-
4800
-
28800
44000
1833
-
36667
120,000 12700 111,300 120000 12700 111300
W/N: 1 : Cost str ucture
Particulars Units Nominal value Cost
Opening balance 1000 100,000 91,000
Add: Purchase 200 20000 19,000
Less: Sale 1200
[300] 120000
[30000] 110,000
[27500]
Less: S ale 900
500 90,000
[50000] 82,500
[45,833]
400 40,000 36,667
2] Cum Interes t purchase price [200 X 98] 19600
Less: Interest [20000 X 12/100 X 3/12] [600]
Cost 19000
3] Interest on ex -interest sales price
30,000 X 12/100 X 8/12 2400
4] Profit/Loss on ex -interest sale
Sale price 28800
Less: Weighted average cost [27500]
Profit 1300
5] Sale pric e [cum - interest] [500 X 99] 49500
Less: Inter est [50000 X 12/100 X 11/12] [5500]
Proceeds [cost] 44000 munotes.in
Page 152
Financial Accounting
152
6] Profit/Loss on sale
Sales price 44000
Less: weighted average cost [45833]
Loss 1833
7] Interest on due date
40,000 X 12/100 X 12/12 4800
8] Valuation of stock
Cost price [closing balance] 36,667
Market price [400 X 93] 37,200
Therefore, valuation at co st as per AS 13; cost or market price which ever
is less.
2)Mr. Ram Nene held on 1-1-2013 Rs 60,000 of 12 percent Government
securities [Tax Free] of Rs 100 each of Rs 56,500.
On 1-6-2013 , he purchased a further of Rs 40,000 of the security at Rs 97
cum-interest .
On 31 -7-2013 Rs 50,000 of the securi ty was sold at Rs 94 ex-interest .
On 1 -12-2013 Rs 20,000 of the security was again sold at Rs 96 cum -
interest.
Interest on the security was paid each year on 31st March and 30th
September and was credited by the bank on 3rd April and 4th October
respective ly. The price of the security on 31/12/2013 was Rs 96.
Mr Nene closes his books on 31st December each year.
Draw investment account in the books of Mr. Nene.
In the books of Mr Ram Nene
Investment a/c in 12 % Government Securities a/c [ Due Date: 31st Marc h
and 30th September ]
Date Particulars WN NV Int Cost Date Particulars WN NV Int Cost
1-1-
2013
1-6-
2013
31-
12-
13 To
balance
b/d
To bank
a/c
To P & L
a/c
[bal.fig] 2
4 60,000
40,000
100000 1800
800
7300
9900 56,500
38,000
94500 3-4-13
31-7-13 31-7-13 4/10/13 1/12/13 1/12/13 31/12/13 By bank
[Int on
Due date]
By bank
[500 X 94]
By P & L
a/c
[Loss]
By bank
[Int on due
date]
By bank
By P & L
a/c
[Loss]
By bal c/d 3
5
6
7
8
9
-
50000
-
-
20000
-
30,000 100000
3600
2000
-
3000
400
-
900
9900 -
47000
250
-
18800
100
28350
94500
munotes.in
Page 153
Investment Accounting
153 Working notes 1] Cost Structure
Particulars Units Nominal value Cost
Opening balance
Add: Purchase 600
400 60,000
40,000 56,500
38,000
Less: S ales 1000
[500] 100,000
[50000] 94,500
47,250
Less: S ales 500
200 50000
[20000] 47,250
[18900]
300 30000 28,350
2] Outstanding Interest on Opening Balance [Oct/Nov/Dec]
60,000 X 12/100 X 3/12 1800
3] Interest on due -date [31st March] : 60,000 X 12% X 6/12
3600
4] Cum Interest purchase price [400 X 97] 38,800
Less: Interest [40000 X 12/100 X 2/12] [April/May]
[800]
Cost (38800 -800) 38,000
5] Interest on ex -interest sale [50000 X 12/100 X 4 /12]
2000
6] Profit/Loss on ex -interest sale
Sales price [500 X 94] 47,000
Less: Weighted average cost
[50000 X 94500/100,000] [47,250]
Loss 250
7] Interest on due date [30th Sept] 50,000 X 12/100 X 6/12
3,000
8] Cum Inte rest sales price [200 X 96] 19,200
Less: Interest [20000 X 12/100 X 2/12] [Oct/Nov]
[400]
Sales price (19200 -400) 18,800
9] Profit/Loss on Cum Interest sales
Sales price 18800 munotes.in
Page 154
Financial Accounting
154 Less: Weighted average cost [18900]
[47250 X 20000/50000]
Loss 100
10] Accrued Interest on closing balance
30000 X 12% X 3/12 [Oct/Nov/Dec] 900
11] Valuation of closing balance
Cost value [as per closing balance] 28350
Market value [300 X 96] 28,800
Valuation of securities is cost value or market value, whichever is less as
per AS -13
Therefore, valuation of securities is as per cost value Rs 28350
3)Miss Bhagawati entered into the following transactions of purchas e and
sales of 12 percent Debentures of Rs 100 each of Mansi Ltd. Interest is
payable on 30th June and 31st December every year. Transactions are as
under:
Date No of
Debentures Terms
1-04-2012
1-06-2012
1-09-2012
1-12-2012
1-02-2013 800
300
700
400
900 Opening balance at the cost of Rs 76,000
Sold at Rs 105 each cum -interest
Purchased at Rs 98 each Ex -Interest
Purchased at Rs 108 each Cum -Interest
Sold at Rs 97 each Ex -Interest
Prepare Investment Account of 12 percent debentures in the books of
Bhagaw ati for the year ended 31st March, 2013 . The market value on 31st
March, 2013 was Rs 67,500 of the said investment. Apply As -13.
Solution:
In the books of Miss Bhagawati
Investment on 12 % Debentures in Mansi Ltd account [Due date: 30th
June and 31st December]
munotes.in
Page 155
Investment Accounting
155
In the books of Miss Bhagawati
Investment on 12 % Debentures in Mansi Ltd account [Due date: 30th
June and 31st December]
Date Particulars W/n NV Int Cost Date Particulars W/n NV Int Cost 1-4-12
1 Jun
1 Sept
1 Dec
2013
31 M ar To balance b/d
To P & L a/c
[profit]
To bank a/c
[700 X 98]
To bank a/c
To P & L a/c
[bal.fig] 2
4
6
7 80000
-
70000
40000 2400
-
1400
2000
11300 76000
1500
68600
41200 1-6-12 30 Jun
31 Dec
1-2-13
1 Feb
2013
31
March
2013 By bank a/c By bank a/c
[Int on due
date]
By bank a/c
[Int on due
date]
By bank a/c
[900 X 97]
By P & L a/c
[Loss]
By P & L a/c
[Loss on
valuation]
By balance
c/d 3 5
8
9
10
11
12 30000
-
90000
-
70000 1500 3000
9600
900
-
2100 30,000
-
87300
1181
1319
67500
190000 17100 187300 190000 17100 187300
Working Note s:
1] Cost Structure:
Particulars Units Nominal value Cost
Opening balance
Less: Sales 800
[300] 80,000
[30,000] 76,000
[28500]
Add: Purchase 500
700 50000
70000 47,500
68600
Add: Purchase 1200
400 120000
40000 116,100
41200
Less: Sale 1600
[900] 160000
[90000] 157300
[88481]
700 70000 68819
2] Outstanding Interest on Opening balance [Jan/Feb/Mar]
80,000 X 12% X 3/12 2400
3] Cum Inter est Sales price [300 X 105] 31500
Less: Interest [3 0000 X 12% X 5/12] [Jan - May] [1500]
Sales price 30,000 munotes.in
Page 156
Financial Accounting
156 4] Profit/Loss on sales
Sales price 30,000
Less: Weighted Ave rage cost [30000 X76000/80000] [28500]
Profit 1500
5] Interest on Due date [30th June]
50,000 X 12% X 6/12 3000
6] Intere st on ex -interest purchase [July/Aug]
70000 X 12% X 2/12 1400
7] Cum Intere st purchase price [400 X 108] 43,200
Less: Interest [40000 X 12% X 5/1 2] [Jul - Nov] [2000]
Cost 41200
8] Interest on due date [31st Dec]
160000 X 12% X 6/12 9600
9] Interest on ex - interest s ales [90000 X 12% X 1/12] [Jan] 900
10] Profit/Loss on sales
Sales price 87300
Less: Weighted averag e cost [157300 X 90000/160000] 88481
Loss 1181
11] Valuation of securities
Cost value [From the cost structur e] 68,819
Market value [given] 67,500
Loss on valuation [68819 – 67500] Rs 1319
12] Accrued Interest on closing balance [Jan/Feb/Mar]
70000 X 12% X 3/12 2100
4) On 1st April, 2012, 200; 6 percent Debentures of Rs 100 each of
Excellent Ltd. were held as investment by Mr. Tushar at a cost of Rs
18,200.
Excellent Ltd. pays interest on 1st May and 1st November every year.
The following other transactions were entered by him during the year
ended 31st March, 2013 in regard to these Debentures.
munotes.in
Page 157
Investment Accounting
157 Date No Of Debentures Transaction Rate
1st April, 2012
1st Oct, 2012
1st Dec, 2012
1st Feb, 2013 100
100
200
100 Sale
Purchase
Purchase
Sale Rs 98 cum interest
Rs 104 ex -Interest
Rs 97 cum -Interest
Rs 97 ex -interest
You are required to prepare invest ment in 6 percent Debentures in
Excellent Ltd. account for the year ended 31st March, 2013 as it would
appear in the books of Mr Tushar (Apply AS 13)
In the books of Mr Tushar
Investment in 6 percent Debentures in Excellent Ltd. a/c [ Due date: 1st
May and 1st Nov]
Date Particulars W/n N
V Int Cost Date Particulars W/
n NV Int Cost
2012
1st
April
1st Oct
1st Dec
2013
31st
Mar
To balance
b/d
To P & L
a/c
To bank
[100 X
104]
To bank
To P & L
a/c [bal.fig] 2
4
6
8
20
00
0
-
10,
00
0
20,
00
0 500
250
100
1200 18200
450
10,400
19300 2012
1st
April
1st
May
1st Nov
2013
1st Feb
31st
Mar By bank
By bank
[Int on due
date]
By bank
[Int on due
date]
By bank
[100 X 97]
By balance
c/d 3
5
7
9 10,000
-
-
10000
30,000 250
300
600
150
750 9550
-
-
9700
29,100
50,
00
0 2050 48,350 50,000 2050 48,350
Working Notes:
Jan Feb Mar April May June Jul Aug Sep Oct Nov Dec
1] Cost Structure:
Particulars Units Nominal value Cost
Opening Balance
Less: Sales 200
[100] 20000
[10000] 18200
[9100]
Add: Purchase 100
100 10000
10000 9100
10400
Add: Purchase 200
200 20000
20000 19,500
19,300
Less: sale 400
[100] 40000
[10000] 38,800
[9700]
300 30000 29,100
munotes.in
Page 158
Financial Accounting
158 2] Outstanding Interest on Opening balance [Nov - Mar]
20,000 X 6% X 5/ 12 500
3] Cum Int erest sales price [98 X 100] 9800
Less: Interest [10000 X 6% X 5/12] [250]
Cost 9550
4] Calculation of Profit/Loss on cum Interest sales
Sales price 9550
Less: Weighted avera ge cost [10,000 X 18200/20000] [9100]
Profi t 450
5] Interest on Due date [1st May]
10,000 X 6% X 6/12 300
6] Interest on ex – Interest purchase
10,000 X 6% X 5/12 250
7] Interest on due date [1st Nov]
20,000 X 6% X 6/12 600
8] Cum Inter est Purchase price [200 X 97] 19400
Less: Intere st [20000 X 6% X 1/12] [Nov] [100]
Cost 19300
9] Interest on ex Interest sale
10000 X 6% X 3/12 [Nov - Jan] 150
10] Calculation of profit/Loss
Sales price 9700
Less: Weighted average cost [10000 X 38800/40000] [9700]
Profit/Los s Nil
11] Calculation of Accrued Interest on closing balance
30,000 X 6% X 5/12 750
munotes.in
Page 159
Investment Accounting
159 5. The following transactions of Miss Naina took place during the year
ended 31 -3-2014
Date Transactions
12-4-2013 Purchased 1,00,000 Equity Shares of Rs 10 each in “ABC”
Ltd for Rs 50,00,000
15-5-2013 ABC Ltd made a bonus issue of 3 equity shares for every 2
shares held
30-6-2013 Naina sold 1,25,000 Bonus shares for Rs 20 each
Prepare Equity Shares in ABC Ltd account in the books of Miss Naina for
the yea r ended 31-3-2015.
Solution:
In the books of Miss Naina
Investment a/c in Equity shares of ABC Ltd
Date Particulars w/n N.V Cost Date Particulars w/n N.V Cost
12-4-
13
15-5-
13 To bank a/c
To Bonus
shares
2 1000,000
1500,000 5000,000
- 30-6-
13
31-3-
14 By b ank
a/c
By balance
c/d 1250,000
1250,000 2500,000
2500,000
2500,000 5000,000 2500,000 5000,000
Working note:
1] Cost structure
Particulars Units Nominal value Cost
Purchases
Add: Bonus
shares 100,000
150,000 10,00,000
15,00,000 50,00,000
Nil
Less: sales 250,000
[125,000] 2500,000
[1250,000] 50,00,000
[2500,000]
125,000 1250,000 2500,000
munotes.in
Page 160
Financial Accounting
160 2] Calculation of Bonus shares
3 Bonus shares : 2 equity shares held
? : 100,000
[100,000 X 3/2] 150,000 Bonus shares of Rs 10 each= Rs 1500,000
3] Calculation of Profit/Loss on sale
Sales price 2500,000
Less: Weighted average cost 2500,000
[1250,000 X 5000,000/2500,000]
Profit/Loss NIL
6) Universal Plastics Traders acquired 5,000 shares of Maruti Ltd. at Rs
80.40 each on 15th July, 2012. On 1st December, 2012 Maruti Ltd. issued
Right Shares in the ratio of 2:5 at Rs 98 per share. Universal Plastics
Traders exercised their option for 50 percent of Right shares and applied
for the same. On 20th March, 2013 Universal Plastics Trader s sold 1600
shares of Maruti Ltd at Rs 99.50 per share.
Calculate Profit/Loss on sale of shares on 20th March 2013.
In the books of Universal Traders
Investment in Equity shares of Maru ti Ltd.
Date Particulars W/N Cost Date Particulars W/N Cost
2012
15th
Jul
1st
Dec
2013
20th
Mar
To bank a/c
To bank a/c
To P & L a/c
[Profit]
4,02,000
98,000
25,867 2013
20th
Mar
31st
Mar By bank a/c
By balance
c/d 159,200
3,66,667
5,25,867 5,25,867
Working note:
1] Cost structure
Particulars Units Cost
Purchase
Add: Right shares 5,000
1,000 4,02,000
98,000
Less: sales 6,000
[1600] 5,00,000
[133,333]
4,400 366,667
munotes.in
Page 161
Investment Accounting
161 2] Right shares
Ratio given:
5 equity sha res held : 2 right shares
5000 : ? [5000 X 2/5] 2000 right shares
[2000 X 50% = 1000 right shares at Rs 98 each = Rs 98,000]
3] Calculation of Profit/Loss on sale of 1600 equity shares
Sales price [1600 X 99.50] 159,200
Less: Weighted Average cost [1600 X 500,000/6,000] [133,333]
Profit 25,867
4) On 1/4/2010 Aditya had 50,000 equity shares in T Ltd. The face value
of the shares were Rs 10 each but their book value was Rs 24 per share.
On 2 -6-2010, Aditya purchased 10,000 equity shares in T Ltd at a
premium of Rs 6 per share.
On 1 -7-2010, the directors of T Ltd. issued bonus shares at the rate of one
share for every three shares held.
On 1 -1-2011, Aditya purchased 5000 right shares in T ltd of Rs 10 each at
Rs 15 per share.
On 31-1-2011, he sold 20,000 equity shares in T Ltd of Rs 10 each at Rs
30 per share. Show investment account as it would appear in the books of
Aditya for the year ended 31 -3-2011
Solution:
In the books of Aditya
Investment a/c in Equity shares of T Ltd for the year ended 31 -3-2011
Date Particulars WN NV Cost Date Particulars WN NV Cost
1/4/10
2/6/10
1/7/10
1/1/11
31/1/11 To
balance
b/d
To bank
a/c
To Bonus
shares
To bank
a/c
To P & L
a/c
[Profit]
2 500,000
100,000
200,000
50,000 1200000
160,000
-
---------
75,000
262,353 31/1/11
31/3/11 By bank
a/c
By
balance
c/d 200,000
650,000 600,000
10,97,353
850,000 16,97,353 850,000 16,97,353
munotes.in
Page 162
Financial Accounting
162 Working note:
1. Cost structure
Particulars Units Nominal value Cost
Opening balance
Add: Purchase 50,000
10,000 500,000
100,000 12,00,000
1,60,000
Add: Bonus
shares 60,000
20,000 600,000
200,000 13,60,000
-
Add: Right
shares 80,000
5,000 800,000
50,000 13,60,000
75,000
Less: Sales 85,000
[20,000] 850,000
[200,000] 14,35,000
[337,647]
65,000 650,000 10,97,353
2] Calculation of Bonus shares
3 equity shares held : 1 Bonus share
60,000 : [60000 X 1/3] 20,000 Bonus shares of Rs
10 each = Rs 200,000
3] Calculation of Profit/Loss
Sales price 600,000
Less: weighted average cost [200 ,000 X 1435000/850000] [337,647]
Profit 262,353
8. On 1st April, 2012 Sundar held 25,000 fully paid equity shares of Rs 10
each in X Ltd, at book value of Rs 15 per share. On 20th June , 2012 he
purchased another lot of 5,000 shares of the company at Rs 16 per share.
Afterwards X Ltd. announced a bonus issue and right issue, the following
being the terms:
Bonus issue in the ratio of 1:6 [record date 16 -8-2012]
Right issue in the ratio of 3:7 [record date 31 -8-2012]
The rights shares were issued at Rs 15 per share and the full amount was
payable by 30th September, 2012. Shareholders were entitled to transfer
their rights in full or in part. Accordingly, Sundar sold one third of this
entitlement to another person for a consideration of Rs 2 per share on 5th
September, 2012. After becoming ex -rights, the market price of the shares
was Rs 15. munotes.in
Page 163
Investment Accounting
163 Dividends for the year ended 31st March, 2012 at 20 percent were
declared by X Ltd. and received by Sunda r on 31st October, 2012.
Dividends for shares acquired by Sund ar on 20th June, 2012 were
adjusted against the cost of purchase . On 15th November, 2012 Sunda r
sold 25,000 shares at Rs 15 per share.
You are required to prepare Investment in equity shares in X Ltd account
in the books of Sundar.
In the books of Sundar
Investment in equity shares of X Ltd account
Date Particulars W
N NV Dividend Cost Date Particulars WN NV Dividend Cost
2012
1-4
20-6
16-8
30/9
15-
11
2013
31-3
To bal b/d
To c/bank
To Bonus
shares
To c/bank
To P & L
a/c
To P & L
a/c
[bal.fig]
2
3
5
250000
50000
50,000
100000
-
50,000
375000
80,000
-
150,000
44,444 2012
31-
10
15-
11
2013
31-3
By c/bank
By c/bank
By bal c/d
4
250000
200000
50,000
10,000
375000
264,444
450000 50,000 649,444 450,000 50,000 649,444
Working note
1] cost structure
Particulars Units Nominal value Cost
Opening balance
Add: Purchase 25000
5000 250000
50,000 375000
80,000
Add: Bonus
shares 30000
5000 300,000
50,000 455,000
-
Add: Right
shares 35000
10,000 350,000
100,000 455,000
1,50,000
Less:
Adjustment
against cost 45,000 450,000 6,05,000
[10,000]
Less: sale 45,000
[25,000] 450,000
[250,000] 5,95,000
[3,30,556]
20,000 200,000 264,444
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Financial Accounting
164 2] Calculation of Bonus shar es
1 bonus shares : 6 equity shares
? : 30,000 equity shares
[30000 X 1/6] 5000 bonus shares of Rs 10 each Rs 50,000
3] Calculation of Right shares
3 Right shares : 7 equity shares
? : 35,000 equity shares
[35000 X 3/7] 15,000 right shares of Rs 10 issu ed at Rs 15 per share
He sold 1/3 of the right shares [15000 X 1/3] = 5000 shares were sold
Therefore, he retained [15000 – 5000] 10,000 right shares of Rs 10 issued
at Rs 15 = Rs 150,000
4] Calculation of Dividend
Opening balance [25000 shares] 250,000 X 20% = Rs 50,000
Purchase on 20th June [5000 shares] 50,000 X 20% = Rs 10,000
5] Calculation of Profit/Loss
Sales price 375,000
Less: weighted average cost [250000 X 595000/450000] 330,556
Profit 44,444
9) On 1st April 2012, Mr Vinay had 40,0 00 Equity shares of Rs 10 each of
Spectrum Ltd. purchased at a cost of Rs 15 per share.
On 1st May 2012, he purchased 10,000 equity share of Satyam Ltd [face
value Rs 10 each] at Rs 25 per share. On the same day he also pu rchased
20000 Equity shares of S pectrum Ltd. at Rs 12 each.
On 1st July, 2012 he sol d 2000 equity shares of Satyam L td at 22 pe r
share. Board of directors of Spectrum L td announced right shares of equity
shares in ratio of one share for every three shares held at Rs 20 each, full
amount w as payable by 31st August 2012. Shareholders were allowed to
renounce their right either in part or full to the outsiders. Mr Vinay
renounced 40 percent of his rights at Rs 5 per share and subscribed for the
balance. On 1st December 2012 Mr Vi nay sold 5000 equity shares of
Spectrum L td and 2000 equity shares of Satyam Ltd at Rs 30 and Rs 27
per share respectively.
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Investment Accounting
165 You are required to prepare:
1. Investment in equity shares of S pectrum Ltd a/c and
2. Investment in Equity shares of Satyam Ltd a/c in the books of Mr
Vinay for the year ended 31st March 2013
In the books of Mr Vinay
Investment in equity shares of S pectrum Ltd a/c
Date Particulars WN NV Cost Date Particulars WN NV Cost
1-4-
12
1-5-
12
31-8-
12
1-12-
12 To balance
b/d
To bank
To bank
To P & L a/c
4
5 400,000
200,000
120,000
- 600000
240000
240000
75,000 1-12-12
31-3-13 By bank
By bal c/d
1 50000
670,000 150,000
10,05,000
720,000 1155000 720,000 1155000
Investment in Equity shares of Satyam Ltd a/c
Date Particulars WN NV Cost Date Particulars WN NV Cost
1-5-12
1-12-12 To bank a/c
To P & L a/c
6 100000
- 250000
4,000 1-7-12
1-7-12
1-12-12
31-3-13 By bank
By P&L
By bank
By bal c/d
3
2 20000
-
20000
60,000 44,000
6,000
54,000
150,000
100,000 254000 100,000 254000
Working notes
1] Cost structure [ Spectrum ltd]
Particulars Units Nominal value Cost
Opening balance
Add: Purchase 40000
20000 400,000
200,000 600,000
240,000
Add: Right
shares 60,000
12,000 600,000
120,000 8,40,000
2,40,000
Less: sales 72,000
[5000] 7,20,000
[50,000] 10,80,000
[75,000]
67,000 670,000 10,05,000
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Financial Accounting
166 2] Cost structure [Satyam Ltd]
Particulars Units Nominal value Cost
Purchase
Less: sales 10,000
2000 100,000
20,000 250,000
50,000
Less: sales 8,000
2,000 80,000
20,000 200,000
50,000
6,000 60,000 150,000
3] Profit/Loss on sale of 2000 shares of Satyam ltd
Sales price 44,000
Less: weighted average cost [20000 X 250000/100000] 50,000
Loss 6000
4] Calculation of Right shares
1 Right share : 3 equity shares held
? : 60,000 equity shares
[60000 X 1/3] 20,000 right shares of Rs 10 each issued at Rs 20 each
[20000 X 60%] 12000 right shares of Rs 10 at Rs 20 [Subscribed]
5] Calculation of Profit/Loss on sale of 5000 shares of Spectrum ltd
Sales price 150,000
Less: weighted average cost [50 000 X 1080 000/720,000] 75,000
Profit 75,000
6] Calculation of Profit/Loss on sale of 2000 shares of Satyam Ltd
Sales price 54,000
Less: Weighted average cost [20000 X 200,000/80,000] 50,000
Profit 4,000
7) Mr Arvind entered into following transactions of purchase and sale of
Equity shares of Aspi Ltd. The shares have paid up value of Rs 10 per
share
Date No of shares Terms
01-01-12
15-03-12
20-05-12
25-07-12
20-12-12
01-02-13 600
900
1000
2500
1500
1000 Buy at Rs 20 per share
Buy at Rs 25 per share
Buy at Rs 22 per share
Bonus shares received
Sale at Rs 22 per share
Sale at Rs 24 per share
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Investment Accounting
167 Additional Information:
1. On 15th September, 2012, dividend at Rs 3 per share was received
for the year e nded 31st March, 2012
2. On 12th November 2012, the company made a rights issue of equity
shares in the ratio of one share for five shares held on payment of Rs
20 per share. He subscribed to 60% of the shares and renounced the
remaining shares on receipt of premium of Rs 3 per share.
3. Shares are to be valued on weighted average cost basis.
You are required to prepare Investment Account for the years ended 31-3-
2012 and 31 -3-2013.
Solution:
In the books of Mr Arvind
Investment in equity shares of Aspi Ltd accou nt
Date Particulars WN NV Dividend Cost Date Particulars WN NV Dividend Cost 1-1-12 15-3-12 To bank To bank 6000
9000 12,000
22,500 2012
31-3
By bal c/d
15000
34500
15000 34500 15000 34500 1-4-12 20-5-12 25-7-12 12-11-12 20-12-12 1-02-13 31-3-13
To bal b/d
To bank
To bonus
Shares
To bank
To P & L
a/c
To P & L
a/c
To P & L
a/c
3
4 15000
10000
25000
6000
4500 34500
22,000
Nil
12000
15455
12304 2012
15-9
20-
12
2013
1-02
31/3
By bank
By bank
By bank
By bal c/d
2
15000
10000
31000
4500
3000
33,000
24000
36259
56000 4500 96259 56000 4500 96259
Working notes
1] Cost structure
Particulars Units Nominal value Cost
Purchase
Add: Purchase 600
900 6000
9000 12000
22500
Add: Purchase 1500
1000 15,000
10,000 34,500
22,000
Add: Bonus
shares 2500
2500 25000
25000 56,500
-
5000 50,000 56,500 munotes.in
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Financial Accounting
168 Less: Pre -
acquisition
dividend [3000]
Add: Right
shares 5000
600 50,000
6000 53,500
12,000
Less: sale 5600
[1500] 56000
[15000] 65,500
[17545]
Less: sale 4100
[1000] 41000
[10000] 47955
[11696]
3100 31000 36259
2] Calculation of Dividend
On 31st March 2012 : Mr Arvind had 1500 equity shares : Dividend = 1500
X 3 = Rs 4500
Remaining shares [2500 – 1500] 1000 shares purchased on 20 -5-2012,
Dividend = 1000 X 3 = Rs 3000
3] Calculation of Right shares
1 right share : 5 equity share s held
? : 5000 equity shares
[5000 X 1/5 = 1000 right shares of Rs 10 each issued at Rs 20]
Mr Arvind subscribed for 60% shares [1000 X 60%] = 600 right shares of
Rs 10 each at R s 20
4] Calculation of profit/loss
Sales price 33,000
Less: Weighted average cost [15000 X 65500/56000] [17,545]
Profit 15,455
5] Calculation of profit/loss
Sales price 24000
Less: weighted average price [10000 X 47955/41000] [11696]
Profit 12304
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Investment Accounting
169 5.6 SUMMARY
Investments are the assets held for earning income by way of dividend
or interest
As per AS -13, there are different types of investments. Investments
may be classified as long term and current investment, fixed income
bearing securities and variable income bearing securities
Cost of investment includes cost of purchase and all related acquisition
charges like brokerage /commission, stamp duty.
Interest is always calculated on the face value of investment
Investments ma y be purchased or sold on cum - interest quotation price
or ex - interest quotation price
Brokerage is calculated on the purchase or sale of Investments.
Brokerage is always calculated on the quotation price whether cum -
interest or ex - interest. Any broker age on purchase of Investments is
to be added to purchase price and in case of sale of investments, it
should be deducted from sale proceeds
Carrying amount of investments – at cost or fair value (market value)
whichever is lower.
Investments held as l ong term is valued at cost at the end of the year
As per AS -13, weighted average cost is to be used for ascertaining
profit or loss on sale of investment.
In case investments are purchased at different dates at different costs
and some part of investment is sold, the carrying amount of investment
sold should be ascertained by using FIFO or weighted average method.
AS 13 prescribes weighted average method
Profit/ loss on sale of investment is to be calculated and transferred to
P&L A/C
5.7 EXERCISES
1) On 1st April 2016 Mr. Manish holds 10,000 Equity Shares of Rs. 10
each in Glenmark Ltd., at cost price of Rs.15 each. On 1st August he Sold
3,000 shares at cost price of Rs. 18 each. On 30th September Company has
announced a bonus issue of two shares for ev ery seven shares held as on
30th September. On 10th January 2017 he purchased Right issue announced
by Company of one shares for every three held as on 10th January 2017 at
the rate of Rs. 18 each. On 21st February 2017 he purchased 2,500
additional shares of the same Company at cost price of Rs. 20 each.
Prepare Equity Shares in Glenmark L td A/c in the books of Mr. Manish
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Financial Accounting
170 2) Mr. Yash holds 10,000 – 10% Bonds of Rs. 10 each in NIVEA Ltd. as
on 1st April, 2016 at a cost of Rs. 130 000. Transactions for the year are as
follow:
Date Particulars Quantity Rate Quotation
01/05/2016 Purchased 3000 12 Ex Interest
01/09/2016 Purchased 6000 15 Cum Interest
01/01/2017 Sold 5000 13 Ex Interest
01/03/2017 Purchased 1000 16 Ex Interest
Interest is payable half yea rly on 30th June and 31st December every year .
The Accounting year ends on 31st March. Prepare 10% Bonds Account
for the year ending 31/03/2017.
3) On 1st April 2016 Mr. Rajesh holds 20,000 Equity Shares of Rs. 10
each in Hindustan Unilev er Ltd., at total cost of Rs. 300 000. On 1st July he
purchased 4,000 additional shares of the same Company at total cost of
Rs. 64,000. On 1st October Company has annou nced a bonus issue of one
share for every six shares held as on that date. On 1st January 2017 he
purchas ed Right issue, announced by Company of two shares for every
five held as on that date at the rate of Rs. 12 each. On 31st January 2017 he
purchased 2,000 additional shares of the same Company at total cost of
Rs. 36,000. On 1st February 2017 he sold 1000 shares for Rs. 20 each.
Prepare Equity Shares in Hindustan Unilever Ltd. in the books of Mr.
Rajesh.
4)Mr. Shivam holds 1,000 – 10% Debentures of Rs. 100 each in Tech
Mahindra Ltd. as on 1st April, 2016 at a cost of Rs. 1,20,000. Interest is
payable half y early on 30th September and 31st March every year.
Transactions for the year are as follow:
Date Particulars Quantity Rate Quotation
30/6/2016 Purchased 500 102 Cum Interest
1/10/2016 Purchased 500 97 Ex Interest
31/12/2016 Sold 700 110 Cum Interest
1/2/2017 Sold 300 98 Ex Interest
1/3/2017 Purchased 200 105 Cum Interest
The Accounting year ends on 31st March. Prepare 10% Debenture
Account for the year ending 31/03/2017. munotes.in
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Investment Accounting
171 5) Mr. Bharat holds 20,000 – 12% Bonds of Rs. 10 each in NIPPO India
Ltd. as on 1st April, 2016 at a cost of Rs. 300 000. Transactions for the year
are as follow:
Date Particulars Quantity Rate Quotation
01/05/2016 Purchased 4000 20 Cum Interest
01/09/2016 Purchased 5000 22 Cum Interest
01/01/2017 Sold 6000 24 Ex Interest
01/03 /2017 Purchased 2000 21 Cum Interest
Interest is payable half yearly on 30th June and 31st December every year.
The Accounting year ends on 31st March. Prepare 12% Bonds Account for
the year ending 31/03/2017
6) On 1st January 2013, 1,500 -12 percent Debentures of Rs 100 each of
Shikha Ltd. were held as investment by Mr Saroj at a cost of Rs 145,000.
Interest is payable on 30th June and 31st December .
On 1st April 2013, Rs 30,000 of such debentures were purchased by Saroj
at Rs 98 cum -Interest.
On 1st September 2013, Rs 50,000 of such debentures were sold at Rs 96
ex-Interest.
On 1st December 2013, Rs 80,000 of such debentures were sold at Rs 99
cum-interest.
Interest is received on due date.
Prepare investment account for 12 percent debentures of Shikha Ltd. in the
books of Mr Saroj valuing closing stock as on 31st December 2013
applying AS -13. The debentures were quoted at Rs 93 on 31st December
2013.
5.8 OBJECTIVE QUESTIONS –TEST YOUR
UNDERSTANDING
MATCH THE GROUPS
GROUP A GROUP B
1) Debentures A) AS-13
2) IInvestment a/c B) Securities with fixed income
3) SShares C) Held for not more than one year
4) CCost of investment D) No fixed income
5) CCurrent investment E) Weighted average method
Answer -1-B 2 -A 3 - D 4 - E 5-C munotes.in
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Financial Accounting
172 Group A Group B
1) Investment for over 12
months A) Current investment
2) Investment to be traded B) Face value
3) Cum -interest price C) No cost shares
4) Interest calculation D) Long term
5) Bonus shares E) Includes interest
6) Ex- interest price F) Without or exclusive of interest
Answer -1-D 2 -A 3 -E 4 -B 5 -
C 6 -F
1) Rights shares A) Is transferred to p&l a/c
2) Interest is calculated B) are valued at cost or MV whichever is less
3) Profit on sale of investment C) Credited to p&l a/c
4) Current investment D) On face value of securities
5) Sale of rights sha res E )Is debited to p&l a/c
6) loss on sale of investment F) increase fv of investment
7) bonus shares issued G) issued to existing shareholders
8)AS -13
H)deals with accounting for investment
I) AS -14
J) Cost of investment
Ans-1-G 2 -D 3 -A 4 -B 5 -C 6-E 7 -F 8-H
GROUP A GROUP B 1) Current investment
A) Investments held for less than 12
months
2) Long term investment
B) Investments held for more than 12
months
3) Variable income bearing
securities
C) Equity shares
4) Fair value
D) includes purchase price and
brokerage
5) Acquisition c ost E)value at which asset could be
exchanged
1-A 2 -B 3 - C 4 - E 5 -D
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Investment Accounting
173 1)Personal investment accounting a) debit side face value/ nominal
value column
2)Equity shares b) fixed income bearing security
3)Government bonds c) debit side nominal value and
capital/cost column
4) ex - interest price d) exclusive of interest
5)Cum - interest price of investment e) AS 13
6) Bonus shares received f) variable income bearin g
securities
7) Rights shares g) includes interest
h) liquidity
1-e 2 - f 3 - b 4 - d 5 -g 6 -a 7-c
MULTIPLE CHOICE QUESTIONS
1) Accounting for investments is specified in ______
A)AS-14 B)AS-11 C)AS-13 D)AS-2 ANS AS-13
2) Long term investments are shown in balance sheet at ______
A) Market value B) cost C) average cost
D) cost or market value whichever is lower
ANS - COST
3) Short term investments are shown in balance sheet at ______
A) Market value B) cost C) average cost
D) cost or market value whichever i s lower
ANS –COST OR MARKET VALUE WHICHEVER IS LOWER
4) The cost of Investment sold is to be calculated as per ______________
A) method FIFO B) LIFO C) Weighted Average
D) simple average
ANS WEIGHTED AVE RAGE
5) Loss on sale of Investment is
A) Debited to Investment a/c B) debited to Profit and loss a/c
C) credited to P&LA/C ignored
ANS -DEBITED TO PROFIT AND LOSS A/C
5) Cost of Investment includes _____________
A) Purchase price B) stamp duty C) brokerage D) all of the
above
ANS –ALL OF THE ABOVE
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Financial Accounting
174 6) Interests on bonds is to be calculated on
A) Cost B) face value C) number of bonds D) market value
ANS FACE VALUE
7) Bonus shares received increases
A) Nom inal value of shares held B) cost of shares sold C) market
value of shares held D) None of the above
ANS – NOMINAL VALUE OF SHARES HELD
STATE WHETHER THE FOLLOWING STATEMENTS ARE
TRUE OR FALSE
1) Cost of Investment includes expenses incid ental to purchase like
brokerage, stamp duty and Taxes TRUE
2) In the case of Bonus issue, only nominal value is entered in nominal
value column of the Investment account TRUE
3) Sale of Right shares is credited to Investment a/c - FALSE
4) Cu m- interest price excludes interest accrued – FALSE
5) Investments held for more than 12 months are long term investments –
TRUE
6) Current Investments are valued at cost - FALSE
7) Interest is always calculated on face value of securities – TRUE
8) Equity shares is a fixed income bearing security - FALSE
NUMERICAL OBJECTIVE QUESTIONS –
1)The purchase price of investment is Rs 100000 brokerage 15000
stamp duty 10000 what is the acquisition cost of investment?
Ans -Cost o f investment is purchase price 100000
Plus brokerage 15000
Plus stamp duty 10000
Total cost 125000
2)1000 shares were purchased at Rs 120 per share and brokerage was
paid at 2% .what is the cost of acquisition ?
Ans 1000 shares x Rs 120=120000 brokerage at
2%=2/100x120000=2400 total cost of acquisition is
120000+2400=122400
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Investment Accounting
175 3) Mr.Rajat pur chased 2000 shares of Excel Ltd @Rs 95 and paid
brokerage @2% and stamp duty Rs 20000. Out of these shares, 1000
shares are sold out @Rs 110 and brokerage @2% .Calculate cost of
Investment sold and the resulting profit/loss.
2000 shares purchased @ Rs 95 =190000 add 2% brokerage
2/100x190000=3800 add stamp duty 20000 total cost of acquisition =
190000+3800+20000=213800
1000 shares sold @Rs 110=110000 less b rokerage @2%
2/100x110000=2200 net sale proceeds 110000 -2200= 107800
Cost of acquisition of 2000 sh ares =213800
Cost of acquisition of 1000 shares= 213800/2= 106900
Cost of 1000 shares 106900 sale proceeds of 1000 shares 107800
therefore profit on sale is 107800 -106900= Rs 900
4) X purchased 1000 10% debentures of RS 100 each on 1 April 2015 at
96 cum- interest the previous interest date being 31 December 201 5.
Compute cost of Investment
Total amount payable 1000 x Rs 96= 96000
Less Interest included in the above for 3 months January February and
March
100000x10%x3/12=100000x10/100x3/12=2500
Cost of Investment = 96000 -2500=93500
5.9 EXERCISES – problems for practice
1) On 1st April 2014, Mr. Manish has 50,000 Equity Shares of P Ltd . at a
book value of Rs 15 per share (face value Rs. 10 each )He provides you
the following information -
i) On 20 J une 2014 he purch ased another 10000 shares of P L td at Rs 16
per share
ii) On 1 August 2014, P L td issued one Equity bonus share for every six
shares held by the shareholders.
iii) On 31 Oc tober 2014, the Directors of P L td announced a rights issue
which entitled the holders to subscribe to three shares for every seven
shares at Rs 15 per share. Shareholders can transfer their rights in full or in
part.
Manish sold 1/3 rd of entitlement to Umang for a consideration of Rs 2 per
share and subscribe the rest on 5 November 201 5.
You are requ ired to prepare investment a/c in the books of Manish for the
year ending 31 March 2015 munotes.in
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Financial Accounting
176 (Ans Bonus shares 10000 shares rights sold 10000 shares at Rs 2 per
share=20000 rights subscribed 20000 shares at Rs 15 per
share=300 000 closing balance 31 March 2015 90000 shares Rs
1210000)
2) Following transactions appear in the books of Mr Joshi for 12%
Government bonds of Rs 100 each. Transactions during the year
ended 31 March 2016 are as follows - On 1st April 2015, opening
balance o f 2400 bonds at a cost of Rs 228000
Date
Particulars
Quantity
Rate
Quotation
01/06/2015 sold 900 105 Cum
Interest
01/09/2015 Purchased 2100 98 Ex- Interest
01/12/2015 Purchased 1200 108 cum Interest
01/02/2016 sold 2700 97 Ex Interest
Interest is payable half yearly on 30th June and 31st December every year.
The Accounting year ends on 31st March. Prepare 12% Bonds Account for
the year ending 31/03/2016.Market value of the above investment as on 31
March 2016 was Rs 203456
(Ans- Interest t ransferred to P&L as on 31 March 2016 Rs 33900
Balance as on 31/3/16 NV 210000 cost 203456 1/6/2015 Profit on
sale 4500 1/2/2016 Loss on sale 3544 Interest accrued on 31 March
2016 Rs 6300)
3) On 1st April 2016 Mr. Rajesh holds 20,000 Equity Share s of Rs. 10
each in Hindustan Unilever Ltd., at total cost of Rs. 300 000. On 1st July he
purchased 4,000 additional shares of the same Company at total cost of
Rs. 64,000. On 1st October Company has announced a bonus issue of one
shares for every six share s held as on that date. On 1st January 2017 he
purchased Right issue, announced by Company of two shares for every
five held as on that date at the rate of Rs. 12 each. On 31st January 2017 he
purchased 2,000 additional shares of the same Company at total cost of
Rs. 36,000. On 1st February 2017 he sold 1000 shares for Rs. 20 each.
Prepare Equity Shares in Hindustan Unilever Ltd. in the books of Mr.
Rajesh.
(Ans- profit on sale 7029 balance as on 31 March 2017 40200 shares
at Rs 521429 )
4)Mr. Shivam holds 1,000 – 10% Debentures of Rs. 100 each in Tech
Mahindra Ltd. as on 1st April, 2016 at a cost of Rs. 1,20,000. Interest is
payable half yearly on 30th September and 31st March every year.
Transactions for the year are as follow: munotes.in
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Investment Accounting
177 Date Particulars Quantity Rate Quotation
30/6/2016 Purchased 500 102 Cum Interest
1/10/2016 Purchased 500 97 Ex Interest
31/12/2016 Sold 700 110 Cum Interest
1/2/2017 Sold 300 98 Ex Interest
1/3/2017 Purchased 200 105 Cum Interest
The Accounting year ends on 31st March. Prep are 10% Debenture
Account for the year ending 31/03/2017.
(Ans –loss on sale 31 -12-2016 Rs 1138 and loss on sale 1/2/2017 Rs
3337 closing balance as on 31/3/17 face value 120000 cost 129292
interest transferred to P&L a/c 14167 )
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Page 178
178 6
ETHICAL BEHAVIOUR AND
IMPLICATIONS FOR ACCOUNTANTS
Unit Structure
6.1 Introduction
6.2 Meaning of Ethical Behaviour
6.3 Financial Reports & Link between Law Corporate Governance and
Corporate Social Responsibility
6.4 Accounting Behavior in Accounting Pr ofession
6.5 Implications of Ethical Valuesfor Principles V. Rule Based
Approaches to Accounting Standards
6.6 Principal Based Approach and Ethics
6.7 Ifac Code of Ethics for Professional Accountants
6.8 Ethics in Accounting Work Environment
6.9 Implicatio ns of Unethical Behaviour in for Financial Reports
6.10 Company Code of Ethics
6.11 Increasing Role of Whistle Blowing
6.12 Students Need t o Learn Ethics
Learning outcome
The main purpose of this chapter is for the students to have an awareness
of the need for ethical behaviour by accountant and to complement the
various accounting and audit standards issued by the governing bodies.
By the end of this chapter, the pupils should be able to:
● discuss the meaning of ethical behaviour;
● understand why accountants need to apply a high level of ethical
behaviour to their regular, routine as well as additional activities;
● appreciate how approaches to standard setting, laws and cultures
influen ce our ethical standards;
● describe the various techniques to facilitate whistle -blowing when there
are genuine breaches of appropriate legal and moral standards.
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Ethical Behaviour and
Implications for Acc ountants
179 6.1 INTRODUCTION
During the past few decades, multiple financial reporting scandals around
the globe have brought the issue of ethics in accounting into the forefront.
Individuals in an organization irrespective of their position have their own
ethical guidelines which may vary from person to person. Thus these
scandals took place due to the m alicious intentions of few such employees,
entrepreneurs and accountants that led to the collapse of the organisations
and the investor’s wealth being wiped out tremendously.
The fraudulent activities, in the financial set -up, occur when accountants
and ma nagers along with few other stake holders[like creditors/
debtors/banks etc.] do not adhere to the standards of earnings management
ethics. In such cases, managers and accountants alter financial
information. This alteration usually entails the representat ion of
predetermined results in the financial statements, which gives different
results than the actual ones ususlly a better one .
Hence to promote integrity among their employees and gain trust from key
stakeholders, such as investors and consumers every stakeholder of the
company should maintain and follow standards of acceptable behavior. As
a result following ethics are vital for an organization. The domain that
deals with moral ideologies that govern a person's behaviour or the
conducting of an activit yis called as ethics. Ethics in accounting are
concerned with how to make good and moral choices in regard to the
preparation, presentation and disclosure of financial information.
6.2 MEANING OF ETHICAL BEHAVIOUR
An ethical behavior is the application of moral principles in a given
situation. It means to behave according to the moral standards set by the
society which we live in or working as per the rules or standards set by
the organization.
Ethical behaviour is characterized by the qualities of honesty , fairness and
equity in interpersonal, professional and academic relationships and in
every facet of work life . Ethical behaviour respects the dignity, diversity
and rights of the stakeholders in the company as well as the society or
country at large.
It evaluates the moral implications of actions being taken on each of the
previously mentioned contexts. An ethical behavior is essential for a
company to function properly. Individuals who behave unethically will
normally lose other people’s confidence an d their unethical behavior when
revealed may attract punitive action or dismissal .
On the other hand, ethical behavio urs can also be evidenced in work
relationships. Colleagues should maintain an ethical standard between
each other to ensure a healthy work environment. This behavior is
evidenced by certain values and principles maintained within the
relationships, such as integrity, transparency, honesty or fairness. These munotes.in
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Financial Accounting
180 are ethical standards that should be respected between the parties to
maintain an eth ical environment.
6.3 FINANCIAL REPORTS & LINK BETWEEN LAW,
CORPORATE GOVERNANCE AND CORPORATE
SOCIAL RESPONSIBILITY
6.3.1 Concepts Of Law, Corporate Governance And Corporate Social
Responsibility
Corporate governance is the combination of rules, processes or laws by
which businesses are operated, regulated or controlled . The term
encompasses the internal and external factors that affect the interests of a
company's stakeholders, including shareholders, customers, suppliers,
government regulators and manage ment.
Corporate Law includes the rules, practices and regulations that govern
the formation as well as the operation of corporate firms. In India
currently The Companies Act 2013 and the amendments made
subsequently are applicable.
Corporate social respon sibility (CSR) is a self -regulating business model
that helps a company be socially accountable —to itself, its stakeholders,
and the public. India became the first country that legislated and made
companies adopt and undertake CSR activities . Also the co rporates are
required to mandatorily report CSR initiatives under the new Companies
Act 2013. Thus now companies with a particular turnover, networth, and
net profit are required to spend 2% of their average net profit on corporate
social responsibility [S ection 135 of the Companies Act, 2013].
Financial statements (or financial reports ) are formal records of the
financial activities and position of a business , person, or other entity.
According to S. 2(40) of the companies act 2013 financial statement in
relation to a company, includes —
(i) a balance sheet as at the end of the financial year;
(ii) a profit and loss account, or in case of a company carrying on any
activity not for profit , an income and expenditure account for the
financial year;
(iii) cash flow stateme nt for the financial year; and (iv) any explanatory
note annexed to, or forming part of, any document referred to in
sub-clause (i) to sub -clause
(iv) However, the financial statement, with respect to one person
company, small company and dormant company (S. 4 55) may not
include cash flow statement.
6.3.2 Relationship Of Company Law, Corporate Governance And
Corporate Social Responsibility
Financial statements are the statements that present an actual view of the
financial performance through the profits and as set &liabilities of an
organization at the end of a financial year. It represents a formal record munotes.in
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181 of financial transactions taking place in an organization. These
statements help the users of the information in determining the financial
position, liquidit y and performance of the organization. The financial
statements provide enormous information about a company's revenue,
expenses, profitability, debt position , and the ability to meet its short -term
and long -term financial obligations.
Corporate law provi des pertinent information about the formation and the
activities of corporations , while corporate governance regulates the
balancing of interests among a business's different stakeholders.
Corporate law and governance therefore directly shapes what busines ses
do and how they do it.
The Companies Act 2013 introduced a new Section on Corporate Social
Responsibility (CSR), Section 135, making CSR mandatory for all
companies operating in India. The companies should use CSR to integrate
economic, environmental a nd social objectives with the company’s
operations and its growth. 2% CSR spending would be computed as 2%
of the average net profits made by a company during the preceding three
financial years.It not only promotes sustainable development of the
company’s products in the market but also help in reducing the problems
faced by the society.
Hence the financial report help in decision making as well as presents the
financial wellbeing of the companies as per the provisions laid down in
the company act, the gov ernance along with CSR facilitates the
companies to focus on the ethical practices in the business and the
responsiveness of an organisation to its stakeholders and the environment
in which it operates.
6.4 ACCOUNTING BEHAVIOR IN ACCOUNTING
PROFESSION
6.4.1 TYPES OF ACCOUNTANTS
The accountant’s competency has two dimensions – technical proficiency
and ethical sensibility.
Technical Proficiencyis the abilityto apply the technical knowledge and
skills required in the specialist and professional job role and
responsibilities in order to achieve the expected outputs.
Ethical sensitivity is defined as an “attention to the ethical values involved
in a conflict -laden situation and a self -awareness of one’s own role and
responsibility in a situation.
Assuming this: a given accountant may be technically proficient or not
and may be ethically sensible or not. Based on these 2 aspects we get the
following four types of accountants based on the degree to which the
accountant is technically proficient and ethically sens ible.
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182 Consider the diagram below, the Y axis reflects the holding [+] or lack [ -]
of technical proficiency and theX axis the holding [+] or lack [ -] of ethical
sensibility of the accountants
1.The Catastrophic Accountant
2.The Humane Accountant
3.The Pretentious Accountant
4.The Righteous Accountant
These types are elaborated here under:
The Catastrophic Accountant is an accountant who lacks both technical
and ethical competence. If such an accountant enters the practice, he o r
she is surely the opposite of what accounting education aims to produce.
Such an accountant is neither able nor willing to act in accordance with
accounting standards.
The Humane Accountant is characterized by ethical sensibility, but lacks
technical co mpetence. Such an accountant is essentially well meaning, but
has a knowledge problem, in the sense that he or she is not able to act in
accordance with standards. This problem can be overcome by increasing
the accountant’s knowledge and skill in applying the accounting standards.
The pretentious Accountant is characterized by being technically
proficient while not being ethically sensible. This means that he knows the
standards well enough to use them well, but he is willing and able to
exploit loopholes t o benefit himself or those whom he favors. Such
accountants are in a narrow sense competent, but they have a motivation
problem, in the sense that they do not place the common good ahead of
Technically
proficient
Ethically sensible -
+
+ - Righteous
Accountant Pretentious
Accountant Humane
Accountant
Catastrophic
accountant
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183 their own self - interest. This is a problem that can be addressed either by
strengthening the moral character of the accountant, or by putting control
measures in place that will hinder him from acting unethically.
The Righteous Accountant is characterized by being technically proficient
and ethically sensible. This mea ns that he or she integrates technical and
ethical knowledge in accounting decisions. Such an accountant will follow
standards and act to promote the common good.
6.4.2 TYPES OF ACCOUNTING FRAUDS
Fraudulent Financial Reporting
Most accounting scandals ove r the last two decades have centered on
fraudulent financial reporting. Fraudulent financial reporting is the
misstatement of the financial statements by company management.
Usually, this is carried out with the intent of misleading investors and
maintaini ng the company's share price.
While the effects of misleading financial reporting may boost the
company's stock price in the short -term, there are almost always ill effects
in the long run. This short -term focus on company finances is sometimes
known as "m yopic management."
Misappropriation of Assets
On an individual employee level, the most common ethical issue in
accounting is the misappropriation of assets. Misappropriation of assets is
the use of company assets for any other purpose than company interes ts.
Otherwise known as stealing or embezzlement, misappropriation of assets
can occur at nearly any level of the company and to nearly any degree.
For example, a director may charge a family dinner to the company as a
business promotion expense. At the sam e time, an administrative
employee may take home office supplies for personal use. In both cases,
misappropriation of assets has occurred.
Disclosure Violations
Disclosure violations are errors of ethical omission. It usually pertains to
the failure to dis close information to investors that could change their
decisions about investing in the company. Company executives must walk
a fine line; it is important for management to protect the company's
proprietary information. However, if this information relates to a
significant event, it may not be ethical to keep this information from the
investors.
Unethical accounting practices are usually motivated by management
pressure, bonus incentives, greed, and more. However, these actions
typically result in short -term gains, but long -term negative consequences.
Thus they are neither desireable nor acceptable to any stakeholder of an
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184 6.4.3 DESIRED BEHAVIOUR BY THE ACCOUNTANTS
A professional accountant thus shall comply with the principle of
professional behavi or, which requires an accountant to comply with
relevant laws and regulations and avoid any conduct that the accountant
knows or should know might discredit the profession.To attend theabove -
mentionedchallenges along with issues of harmonization of account ing
practice and to improve the quality of financial reporting, accountants are
needed to look beyond accounting decisions -making.
The good financial performance of the company depends, largely on, the
proper estimation, analysis and use that the accounta nt made of financial
information. In the most successful way the accountants have to handle
administrative decision -making, these accounting professionals have to
check and produce specific reports, they must be able to prepare, analyze
and interpret all t he financial information of the company and thus there
collaborate with the process of decision -making by management.
6.5 IMPLICATIONS OF ETHICAL VALUESFOR
PRINCIPLES V. RULE BASED APPROACHES TO
ACCOUNTING STANDARDS
Accounting standardsplays a vital role in financial accounting and
reporting in order for investors to make good decisions. Rules -based
accounting is generally a list of detailed rules that must be followed whena
concern is preparing its financial statements. Principle based standards are
deriv ed from a conceptual framework that provides for broad ‘principles’
to be adopted within standards and also requires professional and
managerial judgment in relevance to particular transactions and events.
Principles -based accounting standards are based o n an abstractoutline.
Such standards require a clear hierarchy of predominant concepts,
principles that reflect these concepts and limited further guidance. The
principles -based deliver a comprehensive way in preparing the financial
statement yet has the f lexibility to overcome any situations.
The main differences between accounting standards developed under a
principles -based approach and existing accounting standards are
(1) the principles would apply more broadly than under existing standards,
thereby providing few, if any, exceptions to the principles and
(2) there would be less interpretive and implementation guidance for
applying the standards.
Principle based approach are anticipated to help and protect the long term
interests of the investors and other stakeholders and will help the
management team of the companies to make an appropriate professional
judgement in selecting and applying the most suitable accounting policies.
Six high -quality characteristics of principles -based accounting standard
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185 needs for clarity and transparency, consistency with a clear Conceptual
Framework, based on a defined scope that addresses a broad area of
accounting, written in a clear and understand able language and use of
appropriate judgment. The principles -based tend to have more
professional judgement and to give a true and fair view of the financial
results.
The fundamental advantage of principles -based accounting is that its
broad guidelines ca n be practical for a variety of circumstances. Precise
requirements can sometimes compel managers to manipulate the
statements to fit what is compulsory.
6.6 PRINCIPAL BASED APPROACH AND ETHICS
There are five fundamental principles in the code of ethics, a nd these are
pillars uponwhich the code is built. A professional accountant shall
comply with the followingfundamental principles:
1. Integrity - Integrity means to be straightforward, trustworthy , gracious
and honest in all professionaland business rela tionships. Honesty and
transparency are important virtues in allprofessional practice. Acting with
integrity means staying true to the values of theprofession and not
attempting to mislead the client.
Eg. Ms. Radhika was facing problem in timely completion of a project.
Her colleague Mr. Shyam noticed that and offered some useful tips that
enabled her to complete it. Later, at the team meeting, Radhika told
everyone that she could not have done it without him and thanked him for
his help.
This illustration displays Radhika’s Integrity at workplace of being honest
and giving due credit to the colleague.
2. Objectivity - Objectivity means not allowing bias, conflict of interest or
undue influence of any person, agency or organisation to override
professional o r business judgments. Objectivity is absolutely desirable and
clearly displayed in the code of ethics for accountants so that equal
treatment is steered out. Objective decision making means acting in a
manner that does not unduly prioritize some stakeholde rs over others
unless there is a valid reason to do so.
Eg. Mr. Prince, an accountant, of Balloons &Gifts Ltd that is trying to get
financing for an extra plant expansion, but the company's bank wants to
see a copy of its financial statements before it wil lprovide a loan to the
company. Mr. Prince provides the link of the previous statements on the
companies website and a memorandum statement with due permission
from his seniors for the current period to the bank without any window
dressing creation. Mr. Pr ince is thus very objective in his work.
3. Professional competence and due care - Professional competence and
due care means maintaining professional knowledge and skill at the level
required to ensure that a client or employer receives competent munotes.in
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186 professio nal services based on current developments in practice,
legislation, and techniques. This principle advocates acting diligently and
in accordance with applicable technical and professional standards. A
cornerstone of any professional relationship is the ex pectation that the
professional will act in line with the bestavailable knowledge and practice
of the profession.
Eg. Mr. Emperor regularly attends seminars and conferences in his
company as well as in many professional organisations thereby enhancing
personal competence through Continuing Professional Development
shows his efforts to stay competent in his job role.
4. Confidentiality - All accountants and auditors should respect the
confidentiality of the information acquired as a result of professional an d
business relationships and not disclose any such information to third
parties without proper and specific authority (unless there is a legal or
professional right or duty to disclose). Nor should the accountant use the
information for personal advantage for himself or for third parties. The
duty to maintain confidentiality is very strict, but there are exceptions in
cases where the client releases the accountant from confidentiality or in
cases where regulatory bodies compel the accountant in order to dis close
confidential information.
Eg. Mrs Queen has marked confidential information clearly while
preparing a project report for a sensitive project and ensured that
additional paper copies were duly shredded . This reflects her quality of
maintaining confi dentiality in her work.
6. Professional behaviour - Professional behavior is expected of
accountants. This means complying withrelevant laws and regulations and
avoiding any action that discredits the profession. This principle directly
relates to the condu ct of the accountant, and has a compliancedimension as
well as a reputational dimension. Thus, it deals with the responsibilityfor
acting in accordance with the laws and regulations that govern and act in
a manner that is compatible with maintaining there putation and legitimacy
of the accountancy profession in the eyes of the generalpublic.
Eg A colleague Mr King treats you in a aggressive manner, you should
not resort to the same type of behavior or be vindictive towards him
show your high level of pro fessional behaviour.
6.7 INTERNATIONAL FEDERATIONOF
ACCOUNTANTS ( IFAC) CODE OF ETHICS FOR
PROFESSIONAL ACCOUNTANTS
A professional accountant is required to comply with the following
fundamental principles: [these principles have been elaborated in 6.6
hence summed up here]
(a) Integrity - A professional accountant should be straightforward and
honest in all professional and business relationships. munotes.in
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187
(b) Objectivity A professional accountant should not allow bias, conflict
of interest or undue influence of others to override professional or
business judgments.
(c) Professional Competence and Due Care - A professional accountant
has a unending duty to maintain professional knowledge and skill and
also act meticulously and in accordance with applicable technical and
professional standards when providing professional services.
(d) Confidentiality - A professional accountant should respect the
confidentiality of information acquired during the course of work and
maintain secrecy unless otherwise called for revelation by an y law
(e) Professional Behavior - A professional accountant should comply with
relevant laws and regulations and should avoid any action that
discredits the profession.
Compliance with the fundamental principles may potentially be
threatened by a broad range o f circumstances. Many threats fall into
the following categories:
(a) Self-interest threats , which may occur as a result of the financial
or other interests of a professional accountant or of an immediate
or close family member;
Eg Mr Somin promotes his clie nt ABC Ltd consciously to get a
job for his son in the firm ABC Ltd is a self interest threat.
(b) Self-review threats , which may occur when a previous judgment
needs to be re -evaluated by the professional accountant responsible
for that judgment;
Eg. Mr Ro yal an accountant has not appropriately evaluated the
results of the current year but has given his opinion based on
previous judgments made is an illustration of self review threat.
(c) Advocacy threats , which may occur when a professional
accountant pro motes a position or opinion to the point that
subsequent objectivity may be compromised;
Eg Mr. Yash acts as an advocate for a client in a dispute with third
parties irrespective of the merit of the case reflects advocacy threat.
(d) Familiarity threats , which may occur when, because of a close
relationship, a professional accountant becomes too sympathetic to
the interests of others;
Eg. Ms Rashi a professional accountant accepted gifts and preferential
treatment from a client, the value was not trivial or inconsequential.
This was because of having a long association with the client she munotes.in
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188 violated the code of conduct and accepted the gifts that were of a high
value. This is an example of a familiarity threat.
(f) Intimidation threats , which may occur when a professional
accountant may be deterred from acting objectively by threats that may
be actual or perceived.
Eg. Mr. Shyam an accountant is deterred from acting objectively
because of actual or perceived time pressures by the management.
This is an intimi dation threat. However in this case it is very much
possible that the management takes a holistic view and extends the
time for the completion of the work depending of its crucial nature.
Alternatively, an employee Mr. Prince may be threatened of removal
from his job by his supervisor Mr. King incase an assignment is not
completed as desired by him. This also reflects an intimidation threat.
As these threats are presents in the function ing of the organisations,
suitable precautionary measures must also b e laid in the systems to
avoid such circumstances. Safeguards that may eliminate or reduce
such threats to an acceptable level fall into two broad categories:
(a) Safeguards created by the profession, legislation or regulation; and
(b) Safeguards in the work environment.
Safeguards created by the profession, legislation or regulation include,
but are not restricted to:
• Educational, training and experience requirements for entry into the
profession.
• Continuing professional development requirements.
• Corporate governance regulations.
• Professional standards.
• Professional or regulatory monitoring and disciplinary procedures
• External review by a legally empowered third party of the reports,
returns, communications or information produced by a professional
accountant.
Ethical Conflict Resolution
In evaluating compliance with the fundamental principles, a
professional accountant may be required to resolve a conflict in the
application of fundamental principles
When initiating either a formal or informal conflict resolution process,
a professional accountant should consider the following, either
individually or together with others, as part of the resolution process: munotes.in
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189 (a) Relevant facts;
(b) Ethical issues involved;
(c) Fundamental principles r elated to the matter in question;
(d) Established internal procedures; and
(e) Alternative courses of action.
Having considered these issues, a professional accountant should
determine the suitable course of action that is consistent with the
fundamenta l principles acknowledged. The professional accountant
should also evaluate the consequences of each possible course of
action. If the matter remains unanswered, the professional accountant
should consult with other appropriate persons within the firm i.e.
authorized personnel or by employing a proficient expert for help in
addressing or solving the problem.
Where a matter involves a conflict with, or within, an organization, a
professional accountant should also consider referring with those
charged with g overnance of the organization, such as the board of
directors or the audit committee. It may be in the best interests of the
professional accountant to document the severity of the issue and
details of any discussions held or decisions taken, regarding th at issue.
If a noteworthy conflict cannot be resolved, a professional accountant
may wish to obtain professional advice from the relevant professional
body or legal advisors, and thereby obtain guidance on ethical issues
without breaching confidentiality. For example, a professional
accountant may have encountered a fraud, the reporting of which
could breach the professional accountant’s responsibility to respect
confidentiality. The professional accountant should consider obtaining
legal advice to determi ne whether there is a requirement to report.
If, after exhausting all relevant possibilities, the ethical conflict
remains unresolved, a professional accountant should, where possible,
refuse to remain associated with the matter creating the conflict.
The professional accountant may determine that, in the circumstances,
it is appropriate to withdraw from the engagement team or specific
assignment, or to resign altogether from the engagement, the firm or
the employing organization.
6.8 ETHICS IN ACCOUNTING WORK ENVIRONMENT
Accountants deal with the financial details of the organizations. Such
power involves the potential and possibility of exploitation of such
information for self -gain or to deceive the interest of any or all the
stakeholders. As a result Accounting ethics are of paramount importance
so that falsification or manipulations of records as well as other challenges
are avoided. munotes.in
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190 Ethical codes are thus the fundamental principles that accounting
professionals choose to abide by to enhance their pr ofession, maintain
public trust, and demonstrate honesty and fairness.
Accounting Decision -making doesn’t always come down to “yes” or “no.”
The fine line between the two is subject to interpretation and will make up
the bulk of the encounters that an acco untant faces during his or her
career.
Ethics in accounting includes both strict adherence to guidelines and
careful assessment of unique situations where professional judgment is
necessary. Understanding the ethical frameworks for independence,
integrity, confidentiality and professional competence can guide decision -
making and help preserve the reputation of the field.
6.9 IMPLICATIONS OF UNETHICAL BEHAVIOUR IN
FINANCIAL REPORTS
The financial statements are used by investors, market analysts, creditors
and many stakeholders to evaluate a company's financial health and
earnings potential. It aids them in decision making. Accounting rules,
standards and regulations are very crucial in preparing a correct statement .
Incase unethical practices have crept in th ese statements, the basic
objective of providing a true and fair picture to the readers is completely
hampered.
Lack of personal and professional ethics can lead to negative financial
results. Also, the company have raised risky loans putting the firms in a
perilous position. The consequences of which for the company may be
financial losses, l egal wrangling from aggrieved clients, investors, or
others affected by the activities, prosecution and penalties to name a few.
For employees in a such an organisatio n employment growth will be
hindered considerably. The firms may even shred employees, reduce pay
or increments in an attempt to stay afloat. The employees found engaged
in such unethical activities may face faced fines and penalties, loss of jobs
or be implicated in law suits. It may as well result in jail sentences. Thus
such employees may even be posed with a threat of potential
employability with the spread of such an information.
6.10 COMPANY CODE OF ETHICS
A code of ethics in business is a set of gu iding principles intended to
ensure that abusiness and its employees act with honesty and integrity in
all facets of its day -to-day operations. It also promotes all stakeholders to
engage only in acts that promote a benefit to society.
A company code of c onduct is a document prepared by a company in
which it sets out a set of principles that it commits itself to follow, or
requires its employees to file. Writing a great code of conduct requires a
thorough understanding of the company, its culture and visio n. But no munotes.in
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191 matter the company, all great codes of conduct share certain
characteristics.
These characteristics are
Beneficence that means the act of doing good to others, concern for
well-being and safety of clients.
Non maleficence refers to refraining fr om causing intentional harm to
clients or depriving or deceiving them from their dues.
Autonomy/Confidentiality -Autonomy is the basis for informed
consent, truth -telling, and confidentiality means keeping an
information discreet.
To respect client's rights and opinions.
To do Social Justice by providing services in a fair and equitable
manner.
To ensure and maintain systems such that Procedural Justice is
automatically served.
To preserve Veracity or reliability in all activities in the organisation
To sus tain Loyalty and fidelity by all the stakeholders always.
A great code of conduct is hence:
Written for the reader. It is easy to understand and doesn’t include
any technical or legal jargon.
Comprehensive. It covers all important details that may impact t he
daily lives of employees and answers common questions that arise.
Supported by leadership. It has been acknowledged and approved by
the company’s senior management team. This is often demonstrated in
the form of a foreword written by the Chairman or CEO or President
or any other authority.
Accessible. It is available to all employees, current investors and
potential investors.
Visually appealing. It follows a style that is clean and reflective of the
organization.
munotes.in
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192 An extract of the code of conduct o f HUL is represented below:
Retrieved
from: https://assets.unilever.com/files/92ui5egz/production/ccbf4bf ab375b
742b988600d47af917cab792a79.pdf/code -of-conduct -tcm1255 -469194 -
en.pdf
6.11 INCREASING ROLE OF WHISTLE BLOWING
Whistleblowing is the term used when a person passes on information
concerning any wrongdoing in an organization or agency etc. The person
is generally closely allied with the organisation, often an employee, but
also sometimes a supplier or a customer. They become a whistleblower
when they observe behaviour or actions that they believe to be
misconduct, illegal and not in line with the comp any's Code of Conduct,
and report that suspicion as a whistleblowing matter.
Organisational whistleblowing: This is a preventive tool for organisations
to reduce the risks of malpractice and irregularities. Empowering
employees and other relevant stakehold ers to blow the whistle increases
the chances of managers obtaining information on irregularities that
should be acted upon at an early stage. Organisations that take their Code
of Conduct seriously will therefore put in place mechanisms to enable
organisa tional whistleblowing, such as a secure corporate whistleblowing
system or hotline and a whistleblowing policy or guidelines.
Public whistleblowing: In organisations where trust is lowor compliance
mechanisms are not in place, or there is no possibility to be an anonymous
whistleblower, the person may be more inclined to blow the whistle
publicly. This may include reporting to the police, media or through online
social channels, which of course brings a greater risk of reputational munotes.in
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193 damage for organisations. In some instances, though, there is a duty to
blow the whistle to a professional body or regulator.
Whistle blowing thus generally includes the following
a criminal offence, e.g. fraud or corruption
a person's health and safety is in danger
risk or actual damage to the environment
a miscarriage of justice
serious forms of discrimination or harassment
the company is breaking the law, e.g. does not have the right
insurance
there is suspicion that someone is covering up wrongdoing
In order to mandate the impl ementation of whistleblowing systems,
and to set up adequate and appropriate whistleblowing channels to
better manage issues internally and to ensure compliance various nodal
agencies have been very proactive in setting upof suitable structures.
According ly the Government of India enacted Whistle Blowers
Protection Act, 2011 to promote disclosure of information about any
corruption or other misconduct .
It was renamed as Whistle Blowers Protection Act, 2014 by the
second schedule of the Repealing and Ame nding Act, 2015 which
provides a mechanism to investigate alleged corruption and misuse of
power by public servants and also protect anyone who exposes alleged
wrongdoing in government bodies, projects and offices. The
wrongdoing might take the form of fra ud, corruption or
mismanagement. The Act will also ensure punishment for false or
frivolous complaints.
The Act was approved by the Cabinet of India as part of a drive to
eliminate corruption in the country's bureaucracy. The Act seeks to
protect whistle b lowers, i.e. persons making a public interest
disclosure related to an act of corruption, misuse of power, or criminal
offense by a public servant.
6.12 STUDENTS NEED TO LEARN ETHICS
1. Studying ethics can deepen the reflection on the accounting
problems or i ssue faced. The study of ethics helps the accountant
to look at the accounting problem critically and to evaluate the
actions or choicesand rationalize or them.As a result in depth
understanding is possible. munotes.in
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194 2. Ethics is anticipated to assist in making better judgments, think
logically and reasonably and to handle such issues with greater
clarity.
3. The increased emphasis on ethical education exposes students to
ethical dilemmas that will allow them to develop their own ethical
decision -making process. This exp osure arms students with the skills
and knowledge needed for them to make ethical decisions in their own
careers.
4. Ethical studies and discussions not only expose students to contrasting
ethical opinions, they also provide an opportunity to understand the
reasons behind the differences. As a result, students are able to expand
their understanding of ethics, sometimes even changing their own
values and ethical decision -making process.
5. Case studies and articles presenting ethical scenarios introduce
students to both precise and improper ethical decisions and allow them
to learn personally the intricacy of ethics. Such instructional methods
can “demonstratethe students what first -rate reasoning about ethics
actually looks like.
6. Skills related to ethical decisi on-making, such as critical thinking and
leadership, are regarded as top attributes in problem solving and task
completion.
7. The development of ethical decision -making skills gives students an
opportunity to leverage a competitive advantage into a great jo b and
prepares them to become future business leaders.
Self appraisal
MCQ
1. _____________ “is the ability to do the right thing, at the right
time, for the company
a. Practical wisdom
b. Ethical language and practice
c. professional ethics
d. Unethical accounting p ractices
2. _________ is a person, who could be an employee of a company,
or a government agency, disclosing information to the public or
some higher authority about any wrongdoing, which could be in
the form of fraud, corruption, etc.
a. A whistleblower
b. Students
c. Ministers
d. Corporators munotes.in
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Ethical Behaviour and
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195 3. An auditor qualifies his opinion about a director's embezzlement in
return for a gain of Rs 50000. This is__________
a. Self-interest threats
b.Self -review threats
c.Advocacy threats
d. Intimidation threats.
4. If a company fails to comply with the CSR obligations, the penalty
levied is not less than __________
a. Rs 20000
b. Rs 30000
c. Rs 50000
d. Rs 75000
5. _______________ is a self -interest threat.
a. Auditor has a close family member who is a director or officer of the
client.
b. Potential employment with the client
c. Acting as the client’s advocate in a legal proceeding.
d. When the auditor was previously a director or officer of the
assurance client.
6. The fraudulent activities, in the financial set -up, do not occur when
accountants a nd managers do not adhere to____________
a. Ethics
b. A. S.
c. Concepts
d. Conventions
7. Accountants should respect the confidentiality of information acquired
as a result of professional and business relationships and not disclose any
such information t o third parties without proper and specific
authority____________
a. Integrity
b. Objectivity
c. Professional competence and due care
d. Confidentiality
8. ___________ is to be straightforward and honest in all professional and
business relationships.
a. Integrity
b. Objectivity
c. Professional competence and due care
d.Confidentiality
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Financial Accounting
196 9. ______________ in accounting are concerned with how to make good
and moral choices in regard to the preparation, presentation and disclosure
of financial informati on.
a. Ethics
b. Accounting Standards
c. Concepts
d. Conventions
10. _________ refer to threats that a financial or other interest will
inappropriately influence the professional accountant’s judgment or
behavior.
a. Self-interest threats
b. Self -review threats
c. Advocacy threats
d. Familiarity threats
True or false
1. Ethical education exposes students to ethical dilemmas
2. Whistle blowing is information concerning any wrongdoing in a
Company.
3. A company code of conduct is a document prepared by a company’s
shareholders.
4. Advocacy threatoccurs when a previous judgment needs to be re -
evaluated and used.
5. Competency means complying with relevant laws and regulations
and avoiding any action that discredits the profession.
6. Maintaining professional knowledge and s kill at the level required
refers to professionalism.
7. Misappropriation of assets is the use of company assets for any other
purpose than company interests.
8. Ethical behaviour is characterized by the qualities of honesty and
fairness.
9. Corporates are required to mandatorily report CSR initiatives under
the new Companies Act 2013.
10. Financial statements are formal records of the financial activities
and position of an entity.
Answers True:1, 2,7,8,9,10
False:3, 4,5,6
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Ethical Behaviour and
Implications for Acc ountants
197 CASE STUDY
1. A marketing personnel has just returned to work after taking
special leave to care for her elderly dependent parents. For
financial reasons she needs to work full -time. She has been
having difficulties with her domestic home care arrangements,
causing her to miss a number of team meeti ngs (which usually
take place at the beginning of each day) and to leave work
early. She is very competent in her work but her absences are
putting pressure on her and her overworked colleagues. You
are her manager, and you are aware that the flow of work
through the practice is coming under pressure. Discuss
ANS: TYPES OF ACCOUNTANT - The junior member is stated
to be very competent in her work so she is a VIRTUOUS
ACCOUNTANT who will follow standards and act to promote the
common good.
FUNDAMENTAL PRINCIPLE S
Professional competence and due care - Although competent in
her work but her absences are putting pressure on her and her
overworked colleagues. This may result in pressure upon the
colleagues which may result in all of them not being able to act
diligen tly and in accordance with applicable technical and
professional standards i.e. due care may not be taken in completion
of the work.
Professional behaviour - Till now all the team members
arecomplying with relevant laws and regulations and avoiding any
action that discredits the profession but they are overworked
creating pressures on them.
THREATS
1. Self -interest threats - As a result of this any of the team
member may try to take advantage of the situation and negotiate
with the management for a higher sal ary/ remuneration or
promotion or any other favour in any form.
2. Self-review threats - Due to lack of time and overworking all
the team members including this staff member may base their
decisions on previous judgements and not current scenario
resulting in self review threats.
3. Familiarity threats - As all the team members are aware of the
staff’s domestic situation they face familiarity threat that may
occur through helping her all the time.
4. Intimidation threats .- All the team members may be deterre d
from acting objectively because of actual pressures of work
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Financial Accounting
198 TYPES OF FRAUDS -
1. Unethical practices -Due to tremendous work pressure, the
team members may unavoidably get into unethical practices due to
greed, frustration, s tress or any other human factor.
2. Misappropriation of assets -If the self interest threats of the
employees are not resolved, they may use the company assets for
any other purpose than company interests to make a gain for
themselves.
3.disclosure violati on & fradulent reporting -If on a continuous
basis all the threats exists then employee frustrations may lead
them to not disclose properly or report fraudulently all the
requisites. This may be deliberately done so that the company is
affected either mone tarily or its goodwill/ branding/ public image
is not maintained at the same previous level ( revenge seeking
option by the employees).
Conclusion
Although the employee is competent but as the pressures of work
has created multiple threats on the organis ation which may result
in an ethical problem, it has to be resolved at the earliest.
Accordingly, the junior employee may be asked and given time to
settle the domestic issues in the most appropriate manner. Other
provisions like work from home, staggered timings etc can be
looked into however despite all these if still the problem persists
then she may be moved to a department where work can be done
individually and not in teams.
The team members till the time the problem is not fully arrested
should all be motivated enough to overcome all the threats that
have been discussed above and maintain the fundamental
principles.
TRY YOURSELF [HINTS GIVEN]
2. Ms. Priti is one of three partners in a firm of accountants. Five
years ago the firm was appointed as extern al accountants to a
young, successful and fast -growing LLP, engaged to prepare
year end accounts and tax returns. The business had started
trading with a handful of employees but now has a workforce of
200, while still remaining below the size of LLP requi ring a
statutory audit. Due to her close relationship with the directors
of the company and several of its staff, she became aware that
staff purchases of goods manufactured by the company are
authorised by production managers, and then processed outside
the accounting system. The proceeds from these sales are used
to fund the firm’s Diwali party. munotes.in
Page 199
Ethical Behaviour and
Implications for Acc ountants
199 Hints A.to prepare year end accounts and tax returns - accountant +
Auditor - identify type of accountant
B. remaining below the size of LLPrequiring a statutory au dit- audited
reports are not to be published] - FUNDAMENTAL PRINCIPLES
c. to your close relationship with the directors of the company, aware that
staff purchases – threats, FUNDAMENTAL PRINCIPLES
d. processed outside the accounting system, proceeds from th ese sales are
used to outside the org. - TYPES OF FRAUDS
3. Mr. Samir cleared his CA final exam in his attempt. Owing to his
meritorious background he landed a job immediately with Kabir &
Shyam enterprises as General Manager - Finance. At the same tim e
he has decided to take certificate of practice to commence with his
practice. In the light of the above statement,
1. identify the type of account he is
2. The threats that he poses to Kabir & Shyam enterprises
3. The fundamental code of ethics that he needs to follow.
HINTS: 1.Virtuous Accountant
2. self interest threat
3. refer 6.6
Theoretical questions
1.Write a brief note on ethical behaviour
2. Explain the link between law corporate governance and corporate
social responsibility
3. Write a shor t note on accounting behavior in the accounting profession
4. Briefly discuss the implications of ethical valuesfor principles v. rule
based approaches to accounting standards
6. Explain IFAC code of ethics for professional accountants
6. Briefly discuss the increasing role of whistle blowing
7. Why do students need to learn ethics?
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