SYBAF (FA)-Financial Accounting (Special Accounting Areas – IV)-munotes

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PREPARATION OF FINAL ACCOUNTS OF
COMPANIES - I

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 stateme nts
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 Provisio ns relating 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 they 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 ha ve financial 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 t he company.
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 munotes.in

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2 Financial Accounting (Special Accounting Areas – IV) purpose of mai ntaining 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 account, profit and loss account, and
balance sheet are all part of the final accoun ts.
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 financia l statements 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 m ust 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 decision 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 electron ic form.

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 financ ial 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
executives 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 pict ure of 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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Preparation of Final
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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 consolidated 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 subsidiari es, the
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 th e significant 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 exempt 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 corporati on'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 Financial Accounting (Special Accounting Areas – IV)  These statements also include data on the company's fin ancial 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 circumstan ces
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 im pact
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, Indian 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 inconsistent. 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 disclosing 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 accounting 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 co ntexts 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 standard s 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 like ly 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 follow ing are 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 inventories
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.
Conside rations 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 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.
 Substance Over Form: In financial statements, the accounting
treatment and presentatio n 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 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 selec tion 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 munotes.in

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6 Financial Accounting (Special Accounting Areas – IV) in cash. Nonetheless, despite the fact that the amo unt 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.

If an accounting policy change is implemented that has no significant
impact on the financial 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 n ot 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 fin ancial 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 si gnificant 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 ADJUSTMENTS 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 , regardless 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 comp any in their final accounts
will not be precise and true. Any necessary adjusting entries are reflected
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7 Need for Adjustments:
Adjustments are done to:
1. To record the unrecorded transactions.
2. To provide for anticipated lo sses.
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 t ransaction.
 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. Proposed Dividend an d 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. Goods 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 year.
We keep an actual account called Closing Stock to obtai n 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 market price, whichever is lower.

Because closing stock is d etermined 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 bef ore Final Accounts are
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8 Financial Accounting (Special Accounting Areas – IV) 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 Fi nal 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 when 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 Sheet, 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)

B. When Provision for Depreciation is Maintained

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9 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. Adjustm ents 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
additional information following the trial balance.

 If it is in cluded 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 adjustment), it must be
accounted for as an expense for th e 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 entity, 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 so metimes 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 not received, and so forth. munotes.in

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10 Financial Accounting (Special Accounting Areas – IV) 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 earned but not received)

Treatment of Accrued Income Adjust ment 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 current
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 understati ng 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 Expense 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 already received but has not yet earned. Rent
received in advan ce, commission earned in advance, and so forth.

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
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11 (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 (us ually under the head
current liabilities)

5. Proposed Dividend and Unclaimed Dividend
Dividends:
A dividend is a share of profits and retained ear nings 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 shareholders as a dividend. The annual
dividend per share divide d 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
sourc es:
(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
paymen t 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, proposed dividends should only be shown as a
footnote to the balanc e sheet.

Proposed Dividend accounting treatment and presentation in the final
Financial Statement shall be as follows:

Accounting Data Entry: No accounting entry should be made for the
Board of Directors' recommendation of the final Dividend if it is mad e
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
dividend, 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 liability till it has been
approved by the shareholders in the ensuing Annual General Meeting. munotes.in

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12 Financial Accounting (Special Accounting Areas – IV) 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
between two annual general meetings. When an interim dividend is pai d,
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 accounting period and will be
transferred to the debit side of the p rofit 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 of 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 T ax 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
permanent 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 from 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
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 advanc e. 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 munotes.in

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13 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, direc ting 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 bill of exchange becomes the endorsee when the
bill's holder si gns 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.
Endorsement o f 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 "Endorser," while the person
receiving the bill is known as the "E ndorsee." 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.

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14 Financial Accounting (Special Accounting Areas – IV) 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 receivable
A/C.........XXX
Endorser's A/C..................XX X 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
drawee 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.

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 exp enditure, 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 en try 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.

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b. Revenue Expenditure incorrectly treated as Capital 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 recorded 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 purchases remain unrecorded in a financial year, the profits ar e
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 t rade 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 specific item is granted
permission to use the item for a set per iod 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 return the item and are not obligated to buy it.

If a potentia l 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, the goods are
considered unsold and must be included in the supp lier'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 manager's commission,
and it can be based on earnings before or aft er 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 munotes.in

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16 Financial Accounting (Special Accounting Areas – IV) Profit and Loss A/C Dr
To Manager’s Commission Payable
(Recording outstanding commission payable to managers)

Treatment of Manager’s Commission in Financial Statements
 Trading Account: No effect
 Profit & Loss A ccount: 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 Commission
In this situation, the calculation is based on the net pr ofit 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 shown in financial documents such as the statement of
financial per formance (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 with
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.

Profit before tax as per P&L Statement xxxx
Add the following items if debited to P&L Statement before
arriving profit before tax
Managerial remuneration xxxx
Provision for B ad 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 munotes.in

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Preparation of Final
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17 Lease premium written off xxxx
Provision for warranty spares/supplies xxxx
Infructuous project expen ses 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 (difference 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
Profit on sale of investments xxxx
Compensation received on non -compete agreements xxxx
Write back of provi sion 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 dimi nution 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 can be utilised to
establish the maximum allowable remuneration. If the actual salary munotes.in

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18 Financial Accounting (Special Accounting Areas – IV) 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 allows 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 banking 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 appropriations, it may also be
necessary to provide for losses and depreciation a rrears, 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 can be classified into three categories which are as under:
 Bad Debts: It means which are uncollectable or irrecoverable debts.
 Doubtful debts: It means which will be receivable or cannot be
ascertainable at the date of preparing the financial statements, in 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 able 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 in Final Accounts
Bad Debts A/C Dr
To Debtor’s A/C
(Recordin g bad debts)


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Preparation of Final
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19 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 debts 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 ba d 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 .

The accounting c oncept 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 non -payment by
creditors in form of provision for doubtful debts .

When Provision for Doubtful Debts does not Appear in Trial Balance
Journal Entry for Adjustment of Provision for Doubtful Debts in Final
Accounts
Profit a nd 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 effect
 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. munotes.in

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20 Financial Accounting (Special Accounting Areas – IV) 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 provisio n 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
(Recording provision for discount on debtors)

Treatment of Provision for D iscount 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.

Methods of Accounting Treatment of Calls -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 show debit balance equal to the
total unpaid amount of calls.On a subs equent 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 accidental losses or abnormal losses occur when a
company ex periences 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 t he
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. munotes.in

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21 A. If Goods are Not Insured
Journal Entry for Abnormal or Accidental Loss in Final Accounts (Goods
Not Insured)
Profit a nd 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 cos t of goods
destroyed)
 Profit & Loss Account: Show on the debit side (with the cost of goods
destroyed)
 Balance Sheet: No effect

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 Accidental Loss A/C

(Adjusting the insurance claim received)
1. Amount of insura nce claim
2. Amount of irrecoverable loss
3. Total abnormal loss


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22 Financial Accounting (Special Accounting Areas – IV) 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 d ebit 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. Free
samples are frequently used in marketing and consumer outreach
program mes. 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 feature upgrade to an existing product
 Increasing the market share of a pa rticular 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, giv ing away free
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 prevailing accounting standard:
As per the companies Act 2013, in case of any cla sh 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, Statement of Profit and Loss and
disclosures to be made therein and it appl ies 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:
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Preparation of Final
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23 – 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 concept of “Schedules” and such information is now to
be furnished in ter ms 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 enterpri se 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 Schedule III permits only Vertical form of presentation.

2) It uses “Equity and Li abilities” 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 disc losed.

5) Details pertaining to aggregate number and class of shares allotted for
consideration other than cash, bonus shares and shares bought back
will need to be disclosed only for a period of five years immediately
preceding the Balance Sheet date

6) Any d ebit 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 forward after deduction from
uncommitted reserves was required to be shown as the last i tem 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 term “sundry debtors” has been replaced with the term “trade
receivables.” ‘Trade receivabl es’ 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 obligations 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 required to be presented separately
under the head “Loans & advances” rather than including else where. munotes.in

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24 Financial Accounting (Special Accounting Areas – IV) 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 ass ets 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 as 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 chang e in treatment
or disclosure, including addition, amendment,
substitution, or deletion in the head or sub -head or
any changes, in the financial statements or
statements forming part thereof, the same shall be
made, and the requirements of this Schedule sha ll
be modified accordingly.
(2)The disclosure requirements specified in this
Schedule supplement, rather than replace, the
disclosure requirements specified in the
Accounting Standards prescribed under the
Companies Act of 2013. Unless required to be
discl osed on the face of the Financial Statements,
additional disclosures specified in the Accounting
Standards must be made in the notes to accounts
or by way 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 balance sheet and profit and munotes.in

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25 loss statement must be cross -referenced to any
related information in the note s to accounts. In
preparing the Financial Statements, including the
notes to accounts, a balance must be struck
between providing excessive detail that may 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 measurement is established, it
must be used consistently in the Financial
Statements.
(5)Except in the case o f the first Financial
Statements laid before the Company (after its
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 for the purposes of
this Schedule), and Notes. Line items, sub -line
items, and sub -totals shall be prese nted as an
addition or substitution on the face of the
Financial Statements when such presentation is
relevant to an understanding of the company's
financial position or performance, or to cater to munotes.in

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26 Financial Accounting (Special Accounting Areas – IV) 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) Reserves and surplus 2 XX XX
(b) Money Received against share
warrants XX XX
2 Share application mon ey pending
allotments XX XX
3 Non-current liabilities
(a) Long -term borrowings 3 XX XX
(b) Deferred tax liabilities (net) XX XX
(c) Other Long Term Liabilities XX XX
(d) Long term provision XX XX
4 Current liabilities
(a) Short Term B orrowings 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) Intangi ble assets XX -
(iii) Capital Work in progress XX - munotes.in

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27 (iv) Intangible Assets under Development XX -
(b) Non -current investments 9 XX -
(c) Deferred 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) Short -term loans and advances 14 XX -
(f) Other Current Assets 15 XX -
Total XX XX

GENERAL INSTRU CTIONS 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 realised in, or is intended for sale or consumption
in, the company’s normal operating cycle;
b. It is held p rimarily 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 af ter
the reporting date.
All other assets shall be classified as non -current.
2. The time between the acquisition of assets for processing and their
realisation 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
following 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 li ability that, at the option of the counterparty, could
result in its settlement through the issuance of equity instruments
have no bearing on its classification.


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28 Financial Accounting (Special Accounting Areas – IV) All other liabilities must be designated as non -current.
4. A receivable is classified as a "t rade 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" if the amount due is for
goods purchased or services received in the normal course of
business.
A comp any 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, subscrib ed 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;
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 holding
company or its ultimate holding company including shares held by or
by subsidiaries or associates o f 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 specifying 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 contrac t(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 class of shares bought back.
j. Terms of any securities convertible into equity/preference shares
issued a long with the earliest date of conversion in descending order
starting from the farthest such date;
k. Calls unpaid (showing aggregate value of calls unpaid by 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;
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29 e. Revaluation 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 dividend, bonus shares and
transfer to/ from reserves, etc.;
(Additions and deductions since last balance s heet 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 balance 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."

C. Long -term Borrowings
i. Long -term borrowings shall b e 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 parties;
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 guaranteed 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. Wh ere
bonds/debentures are redeemable by instalments, the date of maturity
for this purpose must be reckoned as the date on which the first
instalment becomes due.
v. Particulars of any redeemed bonds/debentures which the company has
power to reissue shall be d isclosed.
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 repayment of loans and interest, shall be specified separately in each
case.


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30 Financial Accounting (Special Accounting Areas – IV) D. Other Long -term Liabiliti es
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 employee benefits;
b. Others (specify nature).

F. Short -term borrowings
i. Short -term borrowings shall be cl assified as:
a. Loans repayable on demand;
A. From banks.
B. From other parties.
b. Loans and advances from related parties;
c. Deposits;
d. Other loans and advances (specify nature).
ii. Borrowings shall further be sub -classified as secured and unsecured.
Nature of security sh all 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 in terest, 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. Interes t 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 capi tal. 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 author ised capital to cover the share capital amount resulting
from allotment of shares out of such share application money. Further,
the period for which the share application money has been pending
beyond the period for allotment as mentioned in the document i nviting
application for shares along with the reason for such share application
money being pending shall be disclosed. Share application money not
exceeding the issued capital and to the extent not refundable shall be munotes.in

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31 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, shall be
separately shown under “Óther current liabilities”;
h. Unpaid matured deposits and interest accru ed thereon;
i. Unpaid matured debentures and interest accrued thereon;
j. Other payables (specify nature).

H. Short -term provisions
The amounts shall be classified as:
a. Provision for employee benefits.
b. Others (specify nature).
I. Tangible assets
i. Classification s hall be given as:
a. Land;
b. Buildings;
c. Plant and Equipment;
d. Furniture and Fixtures;
e. Vehicles;
f. Office equipment;
g. Others (specify nature).
ii. Assets under lease shall 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 and
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, every balance sheet subsequent to date of such write -off, or
addition shall show the reduced or increase d 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 first five
years subsequent to the date of such reduction or increase.

J. Intangible assets
i. Classific ation 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 intellectual property rights, services
and operating rights;
g. Recipes, formulae, models, designs and p rototypes; munotes.in

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32 Financial Accounting (Special Accounting Areas – IV) 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 combinat ions 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 asset s, 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 note 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.
K. Non -current investments
i. Non-current investments shall be classified as trade investments and
other investments and further classified as:
a. Investment property;
b. Investments in Equ ity Instruments;
c. Investments in preference shares;
d. Investments in Government or trust securities;
e. Investments in debentures or bonds;
f. Investments in Mutual 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 an d the
nature and extent of the investment so made in each such body
corporate (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. Investments carried at other than at cost should be separately stated
specifying the basis 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);
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Preparation of Final
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33 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 them either severally or jointly with any other persons or
amounts due by firms or private companies respec tively in which any
director is a partner or a director or a member should be separately
stated.
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 companies 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 Government 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 [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 investments in
the capital of partn ership firms, the names of the firms (with the names of
all their partners, total capital and the shares of each partner) shall be
given.
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34 Financial Accounting (Special Accounting Areas – IV) ii. The following shall also be disclosed:
a. The basis of valuation of individual investments;
b. Aggregate amount of quoted i nvestments and market value thereof;
c. Aggregate amount of unquoted investments;
d. Aggregate provision made for diminution in value of investments.
O. Inventories
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);
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 receivables 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 them
either severally or jointly with any other person or debts due by firms
or private companies respectiv ely 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 shall 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. Repatriat ion restrictions, if any, in respect of cash and bank balances
shall be separately stated.
v. Bank deposits with more than twelve months maturity shall be
disclosed separately. munotes.in

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Preparation of Final
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35 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, considered good;
b. Unsecured, considered good;
c. Doubtful.

iii. Allowance for bad and doubtful loans and advances sha ll 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 severally or jointly with any other person or
amounts due by firms or private companies respectively in which a ny
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 heading, which incorporates current assets that do
not fit into any other asset categories.

T. Contingent liab ilities 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 cla ssified as:
a. Estimated amount of contracts remaining to be executed on capital
account and not provided for;
b. Uncalled liability on shares and other investments partly paid;
c. Other commitments (specify nature).
U. The amount of dividends proposed to be distri buted 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 se curities 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 shall be indicated by way of note how such
unutilised amounts have been used or invested.

W. If, in the opini on 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 business at least equal to the amount at which they are
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36 Financial Accounting (Special Accounting Areas – IV) 1.7 STATEMENT OF PROFIT AND LOSS

State ment of Profit and Loss

ABC PRIVATE LIMITED
STATEMENT OF PROFIT AND LOSS ACCOUNT FOR THE YEAR
ENDED 31st MARCH 2022
Particulars Note No. Figures for
the current
reporting
period Figures for
the previous
reporting
period
Rs. Rs.
I Reve nue from operations 16 XX XX
II Other Income 17 XX XX
III Total Income (I+II) XX XX
IV Expenses
(a) Cost of materials
consumed 18 XX XX
(b) Purchase of Stock in
Trade XX XX
(c) Changes in inventories
of finished g oods, 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 XX XX munotes.in

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Preparation of Final
Accounts o f Companies - I
37 extraordinary item and
tax
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
operations XX XX
XV Profit/ (Loss) from
discontinuing operations XX XX
XVI (Loss) for the Period XX XX
XVII Earning per equity
share: 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 Loss 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 re spect of companies other than finance companies, revenue from
operations need to be disclosed separately as revenue from (a) sale of
products, (b) sale of services and (c) other operating revenues
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38 Financial Accounting (Special Accounting Areas – IV) 5) Net exchange gain/loss on foreign currency borrowings to t he extent
considered as an adjustment to interest cost needs to be disclosed
separately as finance cost

6) Break -up in terms of quantitative disclosures 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 presentation of true and fair view of the financial
statements.

GENERAL INSTRUCT IONS FORPREPARATION OF
STATEMENT OF PROFIT AND LOSS
i. The provisions of this Part shall apply to the income and expenditure
account referred to 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 products;
o Sale of services;
o Other operating revenues;
o Less:
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 disclosed separately by
way of notes to accounts to the extent applicable.
iii. Finance Costs
Finance costs shall be classified a s:
o Interest expense;
o Other borrowing costs;
o Applicable net gain/loss on foreign currency transactions and
translation.
iv. Other Income
Other income 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 Information:
A Company shall disclose by way of notes additional information
regarding aggregate expenditure and income on t he following items: — munotes.in

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Preparation of Final
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39 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 expe nses].
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 inve stments;
o Adjustments to the carrying amount of investments;
o Net gain or loss on foreign currency transaction and translation (other
than considered as finance cost);
o Payments to the auditor as ( a) auditor; ( b) for taxation matters; ( c) for
company law matt ers; ( d) for management services; ( e) for other
services; and ( f) for reimbursement of expenses;
o In case of Companies covered under section 135, amount of
expenditure incurred on corporate social responsibility activities;
o Details of items of exceptional a nd extraordinary nature;
o Prior period items;

vi. In the case of manufacturing companies:
o Raw materials under broad heads
 goods purchased under broad heads
o In the case of trading companies, purchases in respect of goods traded
in by the company under broad hea ds.
o In the case of companies rendering or supplying services, gross
income derived from services rendered or supplied under broad heads.
o In the case of a company, which falls under more than one of the
categories mentioned in ( a), (b) and ( c) above, it sha ll be sufficient
compliance with the requirements herein if purchases, sales and
consumption of raw material and the gross income from services
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 aside or proposed to
be set aside, to reserve, but not including provisions made to meet any
specific liability, con tingency 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 withdrawn from such
reserves.
ix. (a) The aggregate, if material, of the amounts set aside to provisions
made for meeting spe cific liabilities, contingencies or commitments.
(b) The aggregate, if material, of the amounts withdrawn from such
provisions, as no longer required. munotes.in

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40 Financial Accounting (Special Accounting Areas – IV) 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 Miscellaneous expenses,
xi. (a) Dividends from subsidiary companies.
 Provisions for losses of subsidiary companies.
 The prof it 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 company 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 th e total value of all
indigenous raw materials, spare parts and components similarly
consumed and the percentage of each to the total consumption;
o The amount remitted during the year in foreign currencies on account
of dividends with a specific mention of t he 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 the 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 Companies Act, 2013.
a. Part IV b. Part III c. Part II d. Part I

2. Every Statement of Profit & Loss must comply with the requirements of
Part II of ________of the Companies Act, 2013.
a. Schedule I b. Schedule II c. Schedule III d. Schedule IV
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Preparation of Final
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41 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 have a duration of _______.
a. 18 months b. 24 months c. 6 months d. 12 months

6. Claims not acknowledged as deb ts
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

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. provisions 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
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42 Financial Accounting (Special Accounting Areas – IV) 12. When new shares are issued at di scount, 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 St atements
3. Current investment.
4. Operating cycle.
List of References: -
 www.academia.edu
 www.accountingcapital.com
 www.accountingnotes.net
 www.yourarticlelibrary.com
 www.linked in.com
 www.tutorialspoint.com .
Bibliography
 Financial Accounting ,
Jain S.P., Narang K.L., Kalyani Publishers, Delhi.
 Fundamentals of Advanced Accounting
R.S.N Pillai Bagavathi, S. Chand Chand
Publications
Bibli ography Glossary Further Readings Model Question




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43 2

PREPARATION OF FINAL ACCOUNTS OF
COMPANIES - II

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 par t 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 yea r (before 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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44 Financial Accounting (Special Accounting Areas – IV) Solution 01:
Notes to Accounts of Mehul Ltd. For Year 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 Debenture 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 followi ng position 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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Preparation of Final
Accounts o f Companies - II
45 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 Dedu cted 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 pay ment 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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46 Financial Accounting (Special Accounting Areas – IV) 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 yea r ended 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: Exces s Provision for Previous Year (WN. 1) (20,000) (1,20,000)
Net Profit for the Period 4,80,000
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 munotes.in

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Preparation of Final
Accounts o f Companies - II
47 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 Provis ion
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.
Prepare note on Tangible Assets if the Depreciati on 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 21,00,0 00 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
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48 Financial Accounting (Special Accounting Areas – IV) Illustration 5:
Following is the extract of the Trial Balance of Ram Ltd. as on 31st
March, 2022:
Particulars Amount ( ) Amoun t () 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 8,00,0 00
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 18,00,000
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

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 receiva ble 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. munotes.in

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Preparation of Final
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49 (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
Notes to Accounts
Particulars Amount Amount
1. Revenue f rom 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 munotes.in

Page 50

50 Financial Accounting (Special Accounting Areas – IV) 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
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 munotes.in

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Preparation of Final
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51 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, 20 22.
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
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 up 400.00
Salaries and Wages 300.00 60 lakhs Equity
Shares of ` 10
each 600.00
Contribution to Provident 36.00 Profit and Loss
Account [1 -4-226.00 munotes.in

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52 Financial Accounting (Special Accounting Areas – IV) Fund 2016]
Expense on Employee Stock
Option Scheme (ESOP) 14.00 10%, 70 lakhs
Preference Shares
of ` 10 each 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 Equ ipment 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 Divide nd Paid 50.00 Miscellaneous
Expenses 1.00
Sundry Debtors 40.00 Payment to the Auditor 16.00 Sale of Products 1,350.00
Additional Information:
(a) Closing Stocks: Materials ` 19.9 lakhs, WIP ` 100, Finished Goods
` 200 lakhs
(b) Deprec iate 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 Matters ` 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%. munotes.in

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Preparation of Final
Accounts o f Companies - II
53 (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 o n 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
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 Compan ies 5.00
c. Net Loss on Sale of Investments (2.00)
d. Rental Income (7.5 lakhs – 0.5 lakhs Collection 7.00 munotes.in

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54 Financial Accounting (Special Accounting Areas – IV) Expenses)
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 Welfare Expenses 75
Total 425
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. Buildings [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% of ` 45 lakhs] 27.00 Total 75.00 munotes.in

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Preparation of Final
Accounts o f Companies - II
55
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 : Interim Dividend Paid (50.00) Less : Debenture Redemption Reserve [25% of `
100 lakhs] (25.00)
Closing Balance 417.00

Illustration 7:
From the following ledger balances of Statistics Limited as on 31st March,
2022, you are required to prepare the Balance Sheet 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 munotes.in

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56 Financial Accounting (Special Accounting Areas – IV)
Debtors for Goods 1,90,000 8% Preference Share
Capital 5,50,000
Share Issue Expense
(unwritten off) 30,000 Equity Share Capital 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 LIABILI TIES 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 Borrowings (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
II. ASSETS 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% Debentures) 2,45,000
b. Inventories 3 2,63,200 munotes.in

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Preparation of Final
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57 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. Credito rs 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

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 Amount ( `)
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 Ot her
Parties 8,00,000 munotes.in

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58 Financial Accounting (Special Accounting Areas – IV) 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.
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-Curren t Assets a. Property, Plant and Equipment 4 2,06,00,000
– Tangible Assets 8,00,000 munotes.in

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Preparation of Final
Accounts o f Companies - II
59 – 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 Equivale nts 38,40,000
d. Short Term Loans and Advances 7 17,08,000
Total 3,74,68,000

Notes to Accounts:
Particulars Amount ` Amount `
1. Share Capital Authorised, Issued, Subscribed and Called -up 1,20,000, Equity 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 Account Opening Balance 2,00,000 Add: Profi t 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 Assets 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 munotes.in

Page 60

60 Financial Accounting (Special Accounting Areas – IV) 6. Trade Receivables 49,00,000
Less : Provision for Doubtful De bts (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

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 Expenses 1,50,000 Debenture Interest 1,00,00 0 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 Capital (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 f or Tax (for year ending 31st
March, 2016) 4,00,000
Total 71,50,000 71,50,000 munotes.in

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Preparation of Final
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61 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 o n being
` 40,000.
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, upto 31st March, 2016, 4/5th of total Share Issue
Expense s 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 Borrowin gs 3 10,00,000
3. Current Liabilities Trade Payables 2,60,000
Total 44,10,000 munotes.in

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62 Financial Accounting (Special Accounting Areas – IV)
II. ASSETS 1. Non-Current Assets a. Property, Plant and Equipment 4 33,00,000
– Tangible Assets 4,80,000
b. Non-Current Investments 5 80,00 0
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

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 munotes.in

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Preparation of Final
Accounts o f Companies - II
63
(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: Utilized for Bonus Issue (5,00,000) 1,70,000
b. Securities Premiu m 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
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 munotes.in

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64 Financial Accounting (Special Accounting Areas – IV)

Schedule 04: Tangible Fixed Ass ets
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 & Advances b. Current Assets c. Current Liabilities d. Contin gent 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 11. Employee Benefits Expense Salaries 3,50,000 12. Fi nance 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

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Preparation of Final
Accounts o f Companies - II
65 5. Future bad debts ar e 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 assets?
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

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

Solut ion:
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% Preference 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 note to
accounts of Share capital. munotes.in

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66 Financial Accounting (Special Accounting Areas – IV) 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

The company provides 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 year 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 credit 20,000
Bonus to employees 20,000
Rent 20,000
Depreciati on on Machinery 40,000
Depreciation on Furniture 20,000
Depreciation on Motor vehicles 30,000
Dividend received 30,000
Interest received 20,000

munotes.in

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Preparation of Final
Accounts o f Companies - II
67 1. During the year Directors proposed dividend @ 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.
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

31,00,000 31,00,000


munotes.in

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68 Financial Accounting (Special Accounting Areas – IV) Additional Information:
a. The company has Authorised S hare 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 provide d 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.
Problem 5:
The following is the trial balance of SS Ltd. as on 31.03.2018
Particulars Amount ( `) Particul ars 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 Divide nd 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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69 Module II
3
REDEMPTION OF PREFERENCE
SHARES
Unit Structure
3.0 Objective
3.1 Introduction
3.2 Accounting Procedure
3.3 Questions
3.0 OBJECTIVE
After studying this unit students will be able to:
 Know the Concept of Redemption and purpose of issuingredee mable
Preference Shares.
 Understand various provision of the Companies Act
regardingredemption of Preference Shares.
 Know the sources of redemption including divisible profits
andproceeds of fresh issue of shares
 Understand the concept of Premium on Redemp tion &
CapitalRedemption Reserve.
 Know to prepare Capital Redemption Reserve Account and use.
 Know the Methods of redemption of Preference Shares
 Understand the Accounting procedure of redemption of Preference
Shares.
 Prepare the Balance Sheet (Schedule II I) of the Company after
redemption of Preference Shares.
3.1 INTRODUCTION
As studied in the earlier chapter, a share is the part of the amount of the
capital of a company. The preference shares are the one’s which have a
fixed rate of dividend and enjoy prefe rential rights of repayment at the
time of winding up of the company. munotes.in

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70 Financial Accounting (Special Accounting Areas – IV) 55 of the Companies Act 2013 has laid down various provisions in respect
of the issue and redemption of the preference shares which has been
briefed as under :
1) With the commencement of the Co. Act 2013 the Companies that are
limited by shares shall issue only redeemable preference shares.
2) Such companies may issue redeemable preference shares for a period
of 20 years only.
3) However if the company is undertaking infrastructure pr ojects then
such shares may be issued for a period exceeding 20 years subject to
certain laid down conditions for issue as well as redemption.
4) The redemption of the preference shares may be carried out by either
i) Proceeds of fresh issue of shares
ii) Divisible profits of the company.
5) Only fully paid shares can be redeemed.
6) In case the redemption is out of profits, a sum equal to the nominal
value (NV) of the shares redeemed must be transferred to the Capital
Redemption Reserve (CRR)
7) The r edemption may be carried out at par or premium. In case of the
premium on redemption, it may be provided out of the security
premium A/c. However as per S. 133, the companies that are required
to use divisible profits itself for providing the premium on
redemption of the preference shares.
8) The redemption require the consent of three fourth of the preference
share holders.
9) Incase there are untraceable share holders or the company is unable to
redeem the preference shares or pay the dividends, then th e company
upon the approval of the tribunal may issue further redeemable
preference shares to a matching amount.
10) Also for the dissenting shareholders, such redeemable shares may be
issue. However such issue of shares under this section does not deem
an increase in the share capital of the company.
11) The balance generated through the CRR may be after the redemption
used for the issuance of bonus shares.
3.2 ACCOUNTING PROCEDURE
1) Making final calls incase the shares are partly paid.
Calls on Prefere nce share A/c or
To Preference Capital A/c munotes.in

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Redemption o f
Preference Shares
71 2) Receiving money on the call
Bank A/c Dr
To calls on Preference share A/c
3) Share forfeiture on non payment
i) Preference Capital A/c Dr.
To Share forfeiture A/c
(Reduction of the shares that ar e to be forfeited)
ii) Share forfeiture A/c Dr
To Capital Reserve
(Share forfeiture balance transferred)
4) Create the claim of the Preference share holders.
Preference Capital A/c Dr.
Premium on Redemption A/c Dr.
To Preference Share holders A/c
(Premium on Redemption will appear only if the shares are redeemed
at a premium).
5) Sale of assets to fund redemption Bank A/c Dr.
Profit & Loss A/c Dr.
To Assets A/c
To Profit & Loss A/c
(Depending on the gain or loss an the sale value of the asset, Profit and
Loss A/c will be either debited or credited)
6) Issue of shares
Bank A/c Dr.
To Equity Capital A/c
To Security premium A/c
(Where shares are issued at a premium)
7) Payment to preference share holders
Preference share Hold ers A/c Dr.
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72 Financial Accounting (Special Accounting Areas – IV) 8) A mortising the premium on redumption
Profit and Loss A/c Dr.
To Premium on Redemption A/c
9) Creating the CRR
Profit and Loss A/c Dr.
General Reserve A/c Dr.
To CRR A/c
10) Declaration of Bonus
Bonus to Equ ity share holder A/c Dr.
To Equity Capital A/c
11) Capitalising the reserves for Bonus
CRR A/c / Profit & Loss / General Reserves A/c Dr.
To Bonus to Equity share capital A/c
Study Note : (A) Bonus
For the purpose of calculation of bonus shares, the following steps are to
be followed.
1) Calculate the number of equity share = originally in the B/s + Fresh
issue made.
2) Look upon the ratio given Eg : 1 bonus for 5 shares held.
3) Calculate the bonus : (for 20,000 equity shares)
Eg : Held Bonus
5 1
20,000 2
Bonus = 20,00015 40000 shares
Refer Q. No. - 4 & 5 in this chapter)
B) Divisible Profits :
The profits which can be distributed to the shareholders or may be used
for any business purpose by the company are call ed as divisible profits.
These include - Profit and Loss A/c, General Reserve, Investment
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Redemption o f
Preference Shares
73 Also specifically created funds like sinking Fund, Workmen
Compensation Fund may be treated as divisible profits s ubject to the
deduction of the liability in respect of that particular fund.
II) Practical Questions :
Redemption fully out of new issue.
Q.1 Salman Ltd. has 50,000 8% Preference shares of `100 each fully paid.
On 31/12/18, the Company decided to redeem the preference shares at
10% premium. For funding the redemption the Company issued 5,00,000
equity shares of `10 each issued at `12 are. The issue was fully subscribed
and the redemption was duly carried out Journalise the transactions in the
books of th e Company.
Ans. Journal of Salman Ltd.
1) 8% Preference Capital A/c Dr. 50,00,000
Premium on Redeem A/c Dr. 5,00,000
To Preference Shar e Holders A/c 55,00,000
(Being the claim of Preference Share holders created)
2) Bank A/c Dr. 60,00000
To Eq uity Capital A/c 50,00,000
To Security Premium A/c 10,00,000
(Being equity shares issued at a premium of `2/ share)
3) Profit and Loss A/c Dr 5,00,000
To premium on Redeem A/c 5,00,000
(Being premium on redeem W/off)
4) Preference share holde rs A/c Dr. 55,00,000
To Bank A/c 55,00,000
(Being the claim of the preference shares holders settled)
Redemption fully out of the profits
Q.2 The following balances are extracted from the books of Katrina Ltd. as
on 31/3/18
5,000 10% Preference Sh ares `100 each 5,00,000
General Reserve A/c 2,80,000
Profit & Loss A/c 3,00,000 munotes.in

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74 Financial Accounting (Special Accounting Areas – IV) The Company decided to redeem at far the preference shares fully out of
the available reserves on 1/4/18. Journalise the above transactions.
Ans. Journal of Katri na Ltd.
1) 10% Preference share capital A/c Dr. 5,00,000
To Preference share holder A/c 5,00,000
(Being the claim of the preference share holders created)
2) Profit and Loss A/c Dr 3,00,000
General Reserve A/c Dr. 2,00,000
To Capital Redeem Res erve A/c 5,00,000
(Being CRR created for the redemption of preference share capital)
3) Preference share holders A/c Dr. 5,00,000
To Bank A/c 5,00,000
(Being Preference share holders claim settled)
Redemption partly out of the fresh issue and pa rtly out of profits.
Q.3 Shahrukh Ltd. has 6000 9% Preference shares of `100 each
redeemable at 5% premium. To fund the redemption, the Co. issued
30,000 equity share of `10 each at 10% premium. The divisible
profits of the firm included.
General Reser ve `2,00,000
Profit & Loss A/c `2,00,000
Journalise the transactions.
Ans. Journal of Sharukh Ltd.
1) 9% Preference Capital A/c Dr. 6,00,000
Premium on Redeem A/c Dr. 30,000
To Preference share holders A/c 6,30,000
(Being Preference share hol ders claim created)
2) Bank A/c Dr 3,30,000
To Equity Capital A/c 3,00,000
To Security Premium A/c 30,000
(Being equity shares issued at a premium)

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Redemption o f
Preference Shares
75 3) Profit and Loss A/c Dr 2,00,000
General Reserve A/c Dr 1,00,000
To CRR A/c 3,00,000
(Being CRR created for redemption of Preference shares) (Balance
Amount)
4) General Reserves A/c Dr. 30,000
To Premium on Redeem 30,000
(Being premium on Redeem w/off)
5) Preference share holders A/c Dr. 6,30,000
To Bank A/c 6,30,000
(Being p reference share holders claim settled)
Redemption then bonus - declaration
Q.4 Ranveer Ltd.’s Balance sheet as on 31/12/2018 is as follows
10% Preference Capital 2,50,000 Bank 1,75,000
Equity capital 5,00,000 Investments 2,00,000
General Reserve 2,00,000 Stock 2,75,000
Profit & Loss A/c 4,00,000 Debtors 3,00,000
11% Debentures 2,00,000 Land & Building 4,00,000
Creditors 2,00,000 Equipments 4,00,000
17,50,000 17,50,000

On the above date, the Company decided to redeem the preference shares
at 10% premium. For this purpose, the Co. sold 50% of the investments at
20% Profit and issued 1200 equity share of `100 each at part. The issue
was fully subscribed and the redemption was carried out.
Post redemption the company insured bonus @ 1 share for 10 shares held
by the owners.
Journalise all the above transactions.
Ans. Journal of Ranveer Ltd.
1) 10% Preference Capital A/c Dr. 2,50,000
Premium on Redeem A/c Dr. 25,000
To preference share holder A/c 2,75,000
(Being the claim of pref erence share holders created) munotes.in

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76 Financial Accounting (Special Accounting Areas – IV) 2) Bank A/c Dr. 1,20,000
To Investment A/c 1,00,000
To Profit & Loss A/c 20,000
(Being investments sold at a gain, WN1)
3) Bank A/c Dr. 1,20,000
To Investment A/c 1,20,000
To Profit & Loss A/c 20,000
(Being equity share issued at par)
4) Profit and Loss A/c Dr. 1,30,000
To CRR A/c 1,30,000
(Being CRR created for redemption)
5) Profit and Loss A/c Dr. 25,000
To Premium on Redeem A/c 25,000
(Being premium on redeem w/off)
6) Preference sha re holders A/c Dr. 2,75,000
To Bank A/c 2,75,000
(Being preference share holders paid)
7) CRR A/c Dr 51,200
Bonus to Equity share Holders 51,200
(Being bonus shares declared)
8) Bonus to Equity share holder A/c Dr. 51,200
To Equity Capital A/c 51,200
(Being bonus shares declared)
WN1 - Calculate of sale value of investments MC of investment =
2,00,000
Extent of investment sold = 50% = 1,00,000
Profit = 20% = 20,000 Sale value = 1,00,000 + 20,000 = 1,20,000
WN2 - Calculation of Bonus shares
Total no. of equity share = (before bonus) munotes.in

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Redemption o f
Preference Shares
77 Originally issued + Fresh issue
= 50,000 + 1200
= 51,200
Held Bonus
10 1
51200 ?
Bonus = 51200 110 5120 shares of `10 each
Redemption with untraceable pr eference shareholders and Balance sheet.
(Comprehensive question)
5) Balance sheet of Adira Ltd. as on 31/3/18 is as follows :
9% Preference share of
`100 each 4,00,000 Fixed Assets 16,00,000
Equity share of `100
each 8,00,000 Investments (M.V. -
2,00,000) 1,60,000
Security Premium 24,000 Stock 2,80,000
General Reserve 2,40,000 Debtors 2,80,000
Profit & Loss A/c 1,04,000 Bank 80,000
Current Liabilities 8,32,000
24,00,000 24,00,000

Adjustments :
1) The Company decided to redeem all the p reference shares at 10%
premium.
2) The Company decided to use 2,00,000 from general reserve & 50,000
from Profit & Loss to fund the redemption. The balance was arranged
from the fresh issue of equity shares at 20% premium.
3) The company has arranged fo r a temporary overdraft facility from the
bank in case of shortage of funds.
4) The redemption was carried out on 1/4/18 except for 2 shareholders
shares.
5) Post redemption, the company declared a bonus @ 1 share for 25
shares held.
Journalise the abov e transaction in the books of Adira Ltd. and also
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78 Financial Accounting (Special Accounting Areas – IV) WN1
Calculation of extent of issue of equity share
NV of pr eference share to be redeemed 4,00,000
Premium @ 10% 40,000
Redemption value 4,40,000
(-) Divisible Prof its used (given)
General Reserve 2,00,000
Profit & Loss 50,000 (2,50,000)
(-) Premium W/off through Profit & Loss (40,000)
Extent of equity shares funding 1,50,000
NV of equity shares = `100 each
IP = 20% Premium = 100+ 20% = 120
No. of eq uity shares = 1,50,0001250120 shares
WN2
Actual Payment made to PSH
No. of preference shares = 4,00,000 / 100 = 4,000
Redeem value = 4,40,000
Redeem value / share = 110
No. of share unpaid = 500
Amount unpaid = 500 x 110 = 55,000
 Amount paid = 4,40,000 - 55,000
= 3,85,000
WN3
Calculation of Bonus
Total no. of Equity shares = 8000 + 1250
= 9250
Bonus Held
1 25
2 9250
Bonus = 9250 137025shares x `100 each
Journal of Adira Ltd.
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Redemption o f
Preference Shares
79 1) 9% preference Capital A/c Dr. 4,00,000
Premium on Redeem A/c Dr 40,000
To PSH A/c 4,40,000
(Being the claim of PSH created)
2) General Reserve A/c Dr. 2,00,000
Profit & Loss A/c Dr 50,000
To CR RA/C 2,50,000
(Being CRR created for redemption of preference share)
3) Profit and Loss A/c Dr. 40,000
To Premium on Redeem A/c 40,000
(Being the premium on redemption amountised through profit and loss
A/c)
4) Bank A/c Dr 1,50,000
To Equity Capit al A/c 1,25,000
To security premium A/c 25,000
(Being equity shares issued at a premium)
5) PSH A/c Dr. 4,40,000
To Bank A/c 85,000
(Being PSH Claim settled) 55,000
6) CRR A/c Dr. 37,000
To Bonus to ESH A/c 37,000
(Being bonus declared)
7) Bonus to ESH A/c Dr . 37,000
To Equity Capital A/c 37,000
(Being bonus shares issued)
Balance sheet of Adira Ltd. as on 1/4/2018
Capital & Liabilities
1 Shareholders funds
a Share Capital 1 9,62,000
b Reserves & Surplus 2 3,16,000 munotes.in

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80 Financial Accounting (Special Accounting Areas – IV) 2 Non Cur rent Liabilities Nil
3 Current Liabilities 3 10,42,000
Total 23,20,000
Assets
1 Non Current Assets 4 17,60,000
2 Current assets 5 5,60,000
Total 23,20,000
Note 1 : Share Capital
9620 Equity Share of `100 each 9,62,000
(Out of th ese 370 shares were issued as bonus shares so no consideration
has been received)
Note 2 : Reserves & Surplus
Security Premium 99,000
(24000 + 25000)
(RR (250 -37) 2,13,000
General Reserves (240 - 200) 40,000
Profit and Loss A/c (104 - 50 - 40) 14,000
3,16,000
Note 3 : Current Liabilities
Current Liabilities 8,32,000
UnclaimPSH balance 55,000
Bank O/D 1,55,000
10,42,000
Note 4 : Non CA
Fixed Assets 16,00,000
Non Current Assets 1,60,000
(M.V. - 2,00,000) 17,60,000
Note 5 : CA
Stock 2,80,000
Debtors 2,80,000
5,60,000 munotes.in

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Redemption o f
Preference Shares
81 WN4 : Calculation of Bank balance
Opening balance 80,000
+ Fresh issue 1,50,000
- Payment to PSH (3,85,000)
Bank O/D 1,55,000
3.3 QUEST IONS
I) True or False.
1) Preference shareholders are also known ordinary shareholders.
2) Partly paid preference shares can not be redeemed
3) Redeemable preference shares can be issued only if authorized by the
Company’s Articles of Association.
4) Dividends of a preference share are directly paid to the preference
shareholders every year.
5) Redemption of preference shares results in the resolution of the issued
capital always.
(Ans : True - 2, 3, False - 1, 4, 5)
II) Fill in the blanks.
1) Workmen Compe nsation Fund is a _______________ profit.
2) Capital Redemption Reserve may be used for issuing _________
shares.
3) Preference shareholders have ___________ rights of repayment at the
time of winding up.
4) A company limited by shares can issue prefere nce shares for
__________ years.
5) Bonus issue helps in ______________ the profits.
(1-divisible, 2 -bonus, 3 -preferential, 4 -20, 5 - capitalizing utilizing)
Questions for self Test
1) Ranbir Ltd. has 1,00,000 9% Preference shares of `10 each fully paid.
The company decided to redeem these preference shares at 10% premium.
The board of directors decided to redeem the shares on 31/3/18 by raising
funds through the issue of 10,000 equity share of `100 each at 20%
premium. The issue was fully subscribed and t he redemption was carried
out. Journalise the above transactions in the books of Ranbir Ltd.
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82 Financial Accounting (Special Accounting Areas – IV) 2) Sara Ltd. provided the following information
10% preference share of `100 each 8,00,000
General Reserve 4,00,000
Profit & Loss A/c 5,00,000
The di rectors decided to redeem the preference shares at 10% premium by
using the profits. The company carried out the redemption as decided at
par. Journalise the above transactions in the books of the company.
3) Taimur Ltd. provides the following information to you
12% Preference share of `10 each 10,00,000
General Reserve 3,00,000
Profit & Loss A/c 4,00,000
The preference shares were due for redemption on 1/1/2019 at 10%
premium. For the redemption the company issued 70,000 equity share of
`10 each at par. The balance funds were utilized from the divisible profits.
Journalise the above transactions in the books of the company.
4) Following is the Balance sheet of Rishi Ltd. as on 31/3/18
Equity share of `10
each 4,00,000 Fixed assets 6,00,0 00
9% Preference share of
`100 each 2,00,000 Bank 2,00,000
General Reserve 1,00,000 Other current assets 2,40,000
Profit & Loss A/c 1,00,000
Creditors 2,40,000
10,40,000 10,40,000

The Board of Directors decided to redeem the preference shar es at 10%
premium. The Company issued 10,000 equity share of `10 each at 10%
premium. The balance was funded through the profits.
Post redemption the company declared a bonus of share for 5 shares held.
Journalise the above transactions and also prepare the Balance sheet.
5) The Balance sheet of Twinkle Ltd. as on 31/3/19 is as follows :
Equity share of `100 each 15,00,000
10% preference share of `100 each 6,00,000
Profit & Loss A/c 6,00,000
Current Liabilities 5,00,000 munotes.in

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Redemption o f
Preference Shares
83 32,00,000
Fixed Assets 10,00,000
Investments 5,00,000
Bank 3,00,000
Other Current assets 14,00,000
32,00,000
On the 1st April the Company
1) Redeemed the preference shares at 20% premium
2) Realised 50% of the investments at 10% profits.
3) Issued 5,000 equity share of `100 each at 10% premium.
4) The Company redeemed the preference share except 10 preference
share holders holding 1000 shares who were untraceable.
5) The Company issued 1 bonus share for every 10 shares held.
Journalise the above transactions and prepare the Balance sheet.

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84 Module III
4
REDEMPTION OF DEBENTURES
Unit Structure:
4.0 Objective
4.1 Introduction
4.2 Provisions Of Section 71 (1) And (4) Of The Companies Act, 2013

4.3 The Methods Of Writing Off Discount/ Loss On Issue Of
Debentures

4.4 Methods Of Writing Off Discount/Loss Issue Of Debentures
4.5 Summary
4.6 Exercise
4.0 OBJECTIVE
The objective of the unit is to enable the students to understand the
accounting treating for regarding the redemption of debentures in
accordance with the provisions the Companies Act, 2013
4.1 INTRODUCTION
Redemption of debentures means to repay the debenture holders the
amount paid by them to the company towards the debentures issued by the
company. It is repayment of the debenture liability to debenture holders.
In simple words , redemption of debentures implies repayment of
debenture capital.
The redemption of debentures depends upon the type of debentures issued
by the company and the terms of redemption. A company can issue two
type of debentures viz. Redeemable and Irredeemab le. Redeemable
debentures are redeemable after a specific period, as per the terms and
conditions. Irredeemable debentures are paid at the time of winding up of
the company.
4.2 PROVISIONS OF SECTION 71 (1) AND (4) OF THE
COMPANIES ACT, 2013
Sec. 71(1) of the Companies Act 2013 provides that a company may issue
debentures with an option to convert such debentures into shares either
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Redemption of Debentures
85 Conversion of debentures must be approved by a special resolution passed
at a gene ral meeting. A company may issue either fully convertible or
partly convertible debentures.
Rule 18(7) of the Companies (Share Capital and Debentures) Rules
2014provides that in case of partly convertible debentures, D.R.R. shall be
created in respect of N on-convertible portion of the debenture issue.
D.R.R. is not required in the case of fully convertible debentures.
Sec. 71(4) of the Companies Act,2013 together with The Companies
(Share Capital and Debentures) Rules, 2014 requires a company to create
a De benture Redemption Reserve A/c (DRR A/c) out of profits of the
company available for payment of dividend and the amount credited to
such account shall be used only for the redemption of Debentures.
4.3 THE METHODS OF WRITING OFF DISCOUNT/
LOSS ON ISSUE OF DEBENTURES

When debentures are issued at a price less than their nominal/face value,
then the debentures are said to be issued at a discount .

If debentures are redeemed at a price greater than their nominal/face value,
they are said to be redeemable at a premium. Such premium though
payable on redemption, must be provided as a liability at the time of issue
itself. Such premium payable on redemption is a capital loss for the
company.

There is no legal obligation to write off discount/loss on issue of
debentures. Since discount/loss on issue of debentures is a capital loss for
the company, it should be written off as early as possible. The
discount/loss on issue of debentures shown in the balance sheet until
written off. The amount of discount/loss writt en off is shown on debit side
of Profit and Loss Account under the head, ‘Other Expenses” and the
amount not written off is shown in the Balance Sheet under the head,
“Other Non -Current Assets”
The following are the two methods by which the amount of disco unt/loss
on issue of debentures can be written off:

1. Fixed Instalment Method
When debentures are redeemed in lump sum at the end of a certain period,
total discount/loss is spread equally over the period over which the
debentures will be redeemed. In this method, the amount of discount to be
written over every year is a fixed amount.
Discount/loss written off= Total Discount
No. of years

2. Fluctuating Instalment Method
When debentures are to be redeemed in instalments, the total amount of
discount/loss on issue of debentures should be written off in the ratio in munotes.in

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86 Financial Accounting (Special Accounting Areas – IV) which the amount of debentures has been used each year. In this method,
the amount of discount reduces every year.
The discount/loss on issue of debentures being a capital loss can be written
off a gainst capital profit / capital reserve. As per Section 52 of the
Companies Act 2013, securities premium can be used to write off discount
on issue of debentures.

4.4 METHODS OF WRITING OFF DISCOUNT/LOSS
ISSUE OF DEBENTURES

Journal entry to write off Dis count/Loss on issue of debentures:
Securities Premium A/cDr.
Profit and Loss/General Reserve A/cDr.
To Discount/Loss on issue of Debentures A/c
Illustration 1:
On 1st January, 2015, HK Ltd. issued 5,000 15% debentures of `100 each
at a discount of 10% rede emable at a premium of 10%.
Show Loss on Issue of Debentures A/c if:
1. Such debentures are redeemable after four years.
2. Such debentures are redeemable by equal annual drawings in 4
years.
HK Ltd. follows calendar year as its accounting year.
Solution:
1. Such debentures are redeemable after four years.
a. Total amount of discount = 10% of `10,00,000 = `1,00,000
b. Amount of premium on redemption = 10% of `10,00,000 = `1,00,000
Total Loss (a+b) = `2,00,000
Term of Debenture = 4 years
Amount of loss to be written off = `2,00,000 / 4 years = `50,000
In the books of HK Ltd.




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Redemption of Debentures
87 Loss on Issue of Debentures A/c
Date Particulars ` Date Particulars `
1-1-2015 To 15%
debentures a/c 2,00,000 31-12-2015 By P&L a/c
By Balance c/d 50,000
1,50,000
Total 2,00,000 Total 2,00,00 0
1-1-2016 To Balance b/d 1,50,000 31-12-2016 By P&L a/c
By Balance c/d 50,000
1,00,000
Total 1,50,000 Total 1,50,000
1-1-2017 To Balance b/d 1,00,000 31-12-2017 By P&L a/c
By Balance c/d 50,000
50,000
Total 1,00,000 Total 1,00,000
1-1-2108 To Bal ance b/d 50,000 31-12-2018 By P&L a/c 50,000
Total 50,000 Total 50,000

2. Such debentures are redeemable by equal annual drawings in 4 years.
FV of debentures redeemed each year `10,00,000 = `2,50,000
Discount/Loss to be written off each year
Year ended FV of debentures used Ratio Loss to be written off
31-12-2015
31-12-2016
31-12-2017
31-12-2018 `10,00,000
`7,50,000 (10,00,00 -2,50,000)
`5,00,000 (7,50,00 -2,50,000)
`2,50,000 (5,00,00 -2,50,000) 4
3
2
1 `2,00,000 x 4/10 = `80,000
`2,00,000 x 3/10 = `60,000
`2,00,000 x 2/10 = `40,000
`2,00,000 x 1/10 = `20,000
Total 10 `2,00,000

In the books of HK Ltd.
Loss on Issue of Debentures A/c
Date Particulars ` Date Particulars `
1-1-2015 To 15%
debentures a/c 2,00,000 31-12-2015 By P&L a/c
By Balan ce c/d 80,000
1,20,000
Total 2,00,000 Total 2,00,000
1-1-2016 To Balance b/d 1,20,000 31-12-2016 By P&L a/c
By Balance c/d 60,000
60,000
Total 1,20,000 Total 1,20,000 munotes.in

Page 88

88 Financial Accounting (Special Accounting Areas – IV) 1-1-2017 To Balance b/d 60,000 31-12-2017 By P&L a/c
By Balance c/d 40,000
20,000
Total 60,000 Total 60,000
1-1-2108 To Balance b/d 20,000 31-12-2018 By P&L a/c 20,000
Total 20,000 Total 20,000

Illustration 2:
On 1st April, 2015, R Ltd. issued 50,000, 7% debentures of `100 each at a
discount of 6% redeemable at par as follows:
Year End Face value of debentures to be redeemed
1
2
3
4 10%
20%
30%
40%

Calculate the amount of discount to be written off each year assuming that
the company close its accounts on 31st March each year.
Solution:
Amount of discount = 6% of 50,000 debe ntures x `100 = `3,00,000
Discount to be written off each year
Year
ending
31-3 FV of debentures used ` Ratio Loss to be written off
2016
2017
2018
2019 `50,00,000
`45,00,000 (50,00,000 -10% of
50,00,000)
`35,00,000(45,00,000 -20% of
50,00,000)
`20,00,000 (35,00,000 -30% of
50,00,000) 10
9

7

4 `3,00,000 x 10/30 = `1,00,000
`3,00,000 x 9/30 = `90,000

`3,00,000 x 7/30 = `70,000

`3,00,000 x 4/30 = `40,000
Total 30 `3,00,000

In the books of R Ltd.
Loss on Issue of Debentures A/c
Date Particul ars ` Date Particulars `
1-1-2015 To 7%
debentures
a/c 3,00,000 31-12-2015 By P&L a/c
By Balance c/d 1,00,000
2,00,000
Total 3,00,000 Total 3,00,000
1-1-2016 To Balance
b/d 2,00,000 31-12-2016 By P&L a/c
By Balance c/d 90,000
1,10,000
Total 2,00,000 Total 2,00,000 munotes.in

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Redemption of Debentures
89 1-1-2017 To Balance
b/d 1,10,000 31-12-2017 By P&L a/c
By Balance c/d 70,000
40,000
Total 1,10,000 Total 1,10,000
1-1-2108 To Balance
b/d 40,000 31-12-2018 By P&L a/c 40,000
Total 40,000 Total 40,000

A. Terms of issue of debentures
There are no legal restrictions on the terms of issue of debentures. The
debentures can be issue at par, premium or discount.

This topic has been dealt in Introduction to Companies Account

B. Methods of redemption of debentures
The different methods of redem ption of debentures are:
1. By drawing lots in instalments: In this case debentures are redeemed
by annual or periodic drawings within a specific period.

2. In lump sum: In this method debentures are redeemed in one lump
sum after a specific period of time from the date of issue.

3. By purchase of own debentures in the open market: In this case,
the company purchases its own debentures for immediate cancellation
or for investment.

4. By conversion: In this case debentures are redeemed by converting
them into equity shares or into preference shares or converting into a
new class of debentures.
SOURCES OF REDEMPTION
1. Redemption out of Capital
In this method, debentures are redeemed out of capital of the company.
The debenture holders are paid out of cash or bank acc ount and not out of
profits, hence, it is termed as redemption out of capital. Since the
redemption is not out of profits, the entry regarding transfer of profits to
Debenture Redemption Reserve account is not passed. As a result, balance
of profits is not reduced by the amount utilised for redemption of
debenture. As per the SEBI Guidelines, redemption of debentures wholly
out of capital is not possible. Redemption out of capital is done when the
debentures are for a period of less than 18 months or profit s are not
enough for creation of Debentures Redemption Reserve.

The Government has put a restriction on this method by requiring every
company to create Debentures Redemption Reserve.


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90 Financial Accounting (Special Accounting Areas – IV) Illustration 3:
On 1st April, 2015, ITI Ltd. issued 8,000 6% debentures of `100 each at
10% discount, redeemable at a premium of 5% at the end of the 4th year.

Pass Journal entries. Ignore the treatment of loss on issue of debenture and
interest.

Solution:
Journal Entries in the books of ITI Ltd.

Date Particulars Debit (`) Credit ( `)
1-4-2015 Bank A/c Dr.
Discount on issue of debentures
A/c Dr.
Loss on issue of debentures A/c Dr.
To 6% Debentures A/c
To Premium on redemption of
debentures A/c
(Being 8,000 6% debentures issued
at a 10% discount, redeemable at
5% premium ) 7,20,000
80,000
40,000


8,00,000
40,000
31-3-2019 6% Debentures A/c Dr.
Premium on redemption of
debentures A/c Dr.
To6% Debentureholders A/c
(Being amount due to
debentureholders on redemption) 8,00,000
40,000

8,40,000
31-3-2019 6% Debentureholder s A/c Dr.
To Bank A/c
(Being debentureholders paid off) 8,40,000
8,40,000

2. Redemption out of Profits
In this method, debentures are redeemed out of profit earned. Profits are
utilised for redemption of debentures. The following are the two methods
by which debentures can be redeemed out of profits.
A. Creating Debenture Redemption Reserve &B. Creating Sinking Fund
A. Creating Debenture Redemption Reserve (DRR)
In this method, amount is appropriated from Profits and Loss
Appropriation Account and it is t ransferred to Debenture Redemption
Reserve Account before redemption. This reduces the profit available for
distribution as dividend.
As per Sec. 71(4) of the Companies Act,2013 a company shall create a
Debenture Redemption Reserve A/c out of profits of th e company munotes.in

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Redemption of Debentures
91 available for payment of dividend and the amount credited to such account
shall not be utilised except for the redemption of Debentures.
Rule 18(7) The Companies (Share Capital and Debentures) Rules, 2014
requires that an amount equal to atleast 25% of nominal value of
debentures must be transferred to DRR by the company before
commencement of redemption of debentures. The company can transfer at
its option, more than 25% to DRR account.
As per Rule 18(7) the following categories of companies are exempted
from creating a DRR A/c:
1. All India Financial Institutes regulated by the RBI
2. Debentures placed publicly and privately by Banking Companies
3. Debentures placed privately by Non - banking and other Financial
institutions (NBFC)
4. Fully convertible debent ures

As per SEBI it is not mandatory to create DRR in case of:
1. Debentures maturing in 18 months or less
2. For Infrastructure Companies.
Further every company requiring to create DRR a/c, shall before 30th April
of each year deposit or invest atleast 15% of the face value of debentures
maturing during the year ending on 31st March next, in any one or more of
the following:
1. In deposit with any scheduled bank free from charge or lien.
2. In unencumbered securities of the central or any of the state
government.
3. In unencumbered securities mentioned under section 20 (a) to (d) and
(ee) of the Indian Trust Act 1882
4. In unencumbered bonds issued by any other company which is notified
under section 20 (f) of the Indian Trust Act 1882
Illustration 4:
Zebra Ltd. issued on 1st April 2016, 10,000 8% debentures of `100 each
redeemable by draw of lots as under:
1. During the year ending on 31st March,2018 – 15%
2. During the year ending on 31st March, 2019 – 20%
3. During the year ending on 31st March, 2020 – 25%
4. During the year ending o n 31st March, 2021 – 15%
5. During the year ending on 31st March, 2022 – 25%

What is the minimum deposit or investment Zebra Ltd. should make as per
the Companies Act, 2013 before debentures are redeemed? Also state
when the investment should be made. State the minimum amount to be
transferred to Debenture Redemption Reserve A/c as per Companies Act,
2013
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92 Financial Accounting (Special Accounting Areas – IV) Solution:
Date of
Redemption Date of
Investments Nominal
value of
debentures
maturing Minimum
depositor
investment Minimum
amount to
be
transferred
to DRR A /c
31st March,
2018 On or before
30th April,
2017 15% of
`10,00,000
=
`1,50,000 15% of
`1,50,000
=`22,500 25% of
`1,50,000
=`37,500
31st March,
2019 On or before
30th April,
2018 20% of
`10,00,000
=
`2,00,000 15% of
`2,00,000
=`30,000 25% of
`2,00,000
=`50,000
31st March,
2020 On or before
30th April,
2019 25% of
`10,00,000
=
`2,50,000 15% of
`2,50,000
=`37,500 25% of
`2,50,000
=`62,500
31st March,
2021 On or before
30th April,
2020 15% of
`10,00,000
=
`1,50,000 15% of
`1,50,000
=`22,500 25% of
`1,50,00 0
=`37,500
31st March,
2022 On or before
30th April,
2021 25% of
`10,00,000
=
`2,50,000 15% of
`2,50,000
=`37,500 25% of
`2,50,000
=`62,500

Illustration 5:
Prakash Ltd. issued 4,000 8% debentures of `100 each on 1st April, 2015
at a discount of 10%, red eemable at a premium of 10% out of profits. Give
journal entries both at the time of issue and redemption of debentures if:
a) the debentures are redeemable in lump sum at the end of 4th year from
the date of issue and
b) the Company has decided to create a Deb enture Redemption Reserve,
every year.
(Ignore the treatment of loss on issue of debenture and interest. March
31stis the accounting year of Prakash Ltd)










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Redemption of Debentures
93 Solution:

Journal Entries in the books of Prakash Ltd.

Date Particulars Debit ( `) Credit ( `)
1-4-2015 Bank A/c Dr.
Discount on issue of debentures A/c
Dr.
Loss on issue of debentures A/c Dr.
To 8% Debentures A/c
To Premium on redemption of
debentures A/c
(Being 4,000 8% debentures issued at
a 10% discount, redeemable at 10%
premium) 3,60,000
40,000
40,000


4,00,000
40,000
31-3-2016 Profit & Loss Appropriation A/c Dr.
To Debenture Redemption Reserve
A/c
(Being transfer of profits equal to
25% of the nominal value of
debentures issued) 1,00,000
1,00,000
31-3-2017 Profit & Loss Appropriation A/c Dr.
To Debenture Redemption Reserve
A/c
(Being transfer of profits equal to
25% of the nominal value of
debentures issued) 1,00,000
1,00,000
31-3-2018 Profit & Loss Appropriation A/c Dr.
To Debenture Redemption Reserve
A/c
(Being transfer of profits equal t o
25% of the nominal value of
debentures issued) 1,00,000
1,00,000
29-4-2018 Debenture Redemption Investment
A/c Dr.
To Bank A/c
(Being investment made @ 15% of
the nominal value of debentures to be
redeemed) 60,000
60,000
31-3-2019 Profit & Loss Appro priation A/c Dr.
To Debenture Redemption Reserve
A/c
(Being transfer of profits equal to
25% of the nominal value of
debentures issued) 1,00,000
1,00,000 munotes.in

Page 94

94 Financial Accounting (Special Accounting Areas – IV) 31-3-2019 Bank A/c Dr.
To Debenture Redemption
Investment A/c
(Being Investments encashed) 60,000
60,000
31-3-2019 8% Debentures A/c Dr. Premium on
redemption of debentures A/c Dr.
To 8% Debentureholders A/c
(Being amount due to debenture
holders on redemption) 4,00,000
40,000

4,40,000
31-3-2019 8% Debentureholders A/c Dr.
To Bank A/c
(Being debentu reholders paid off) 4,40,000
4,40,000
31-3-2019 Debenture Redemption Reserve A/c
Dr.
To General Reserve A/c
(Being transfer of balance in DRR a/c
to general reserve a/c on redemption
of debentures) 4,00,000
4,00,000

Illustration 6:
Kajal Ltd. has 12 ,000, 9% debentures of `100 each due for redemption in
four equal instalments starting from 31st March, 2016. On that date the
Debenture Redemption Reserve Account has a balance of `70,000. Record
necessary journal entries in the books of the Company.

Solution:

Journal Entries in the books of Kajal Ltd.

Date Particulars Debit ( `) Credit ( `)
30-4-2015 Debenture Redemption Investment A/c
Dr.
To Bank A/c
(Being investment made @ 15% of the
nominal value of debentures to be on
31st March 2016) 45,000
45,00 0
31-3-2016 Bank A/c Dr.
To Debenture Redemption Investment
A/c
(Being Investments encashed) 45,000
45,000
31-3-2016 Profit & Loss Appropriation A/c Dr.
To Debenture Redemption Reserve A/c
(Being transfer of profits to DRR A/c,
25% `3,00,000 = `75,000 – `70,000) 5,000
5,000 munotes.in

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Redemption of Debentures
95
31-3-2016 9% Debentures A/c Dr.
To 9% Debenture holders A/c
(Being 1/4th amount due to debenture
holders on redemption) 300,000

3,00,000
31-3-2016 9% Debenture holders A/c Dr.
To Bank A/c
(Being 1/4thdebentureholders paid off) 3,00,000
3,00,000
30-4-2016 Debenture Redemption Investment A/c
Dr.
To Bank A/c
(Being investment made @ 15% of the
nominal value of debentures to be
redeemed on 31st March 2017)) 45,000
45,000
31-3-2017 Bank A/c Dr.
To Debenture Redemption Investment
A/c (Being investments encashed) 45,000
45,000
31-3-2017 Profit & Loss Appropriation A/c Dr.
To Debenture Redemption Reserve A/c
(Being transfer of profits to DRR A/c
@ 25% of the nominal value of
debentures to be redeemed) 75,000
75,000
31-3-2017 9% Deb entures A/c Dr.
To 9% Debentureholders A/c
(Being 1/4th amount due to
debentureholders on redemption) 300,000

3,00,000
31-3-2017 9% Debentureholders A/c Dr.
To Bank A/c
(Being 1/4thdebentureholders paid off) 3,00,000
3,00,000
30-4-2017 Debenture Redem ption Investment A/c
Dr.
To Bank A/c
(Being investment made @ 15% of the
nominal value of debentures to be on
31st March 2018) 45,000
45,000
31-3-2018 Bank A/c Dr.
To Debenture Redemption Investment
A/c (Being investments encashed) 45,000
45,000
31-3-2018 Profit & Loss Appropriation A/c Dr.
To Debenture Redemption Reserve A/c
(Being transfer of profits to DRR A/c
@ 25% of the nominal value of
debentures to be redeemed) 75,000
75,000 munotes.in

Page 96

96 Financial Accounting (Special Accounting Areas – IV) 31-3-2018 9% Debentures A/c Dr.
To 9% Debentureholders A/c
(Being 1/4th amount due to
debentureholders on redemption) 300,000

3,00,000
31-3-2018 9% Debentureholders A/c Dr.
To Bank A/c
(Being 1/4thdebentureholders paid off) 3,00,000
3,00,000
30-4-2018 Debenture Redemption Investment A/c
Dr.
To Bank A/c
(Being investmen t made @ 15% of the
nominal value of debentures to be on
31st March 2019) 45,000
45,000
31-3-2019 Bank A/c Dr.
To Debenture Redemption Investment
A/c
(Being investments encashed) 45,000
45,000
31-3-2019 Profit & Loss Appropriation A/c Dr.
To Debentur e Redemption Reserve A/c
(Being transfer of profits to DRR A/c
@ 25% of the nominal value of
debentures to be redeemed) 75,000
75,000
31-3-2019 9% Debentures A/c Dr.
To 9% Debenture holders A/c
(Being 1/4th amount due to debenture
holders on redemption) 300,000

3,00,000
31-3-2019 9% Debenture holders A/c Dr.
To Bank A/c
(Being 1/4thdebentureholders paid off) 3,00,000
3,00,000
31-3-2019 Debenture Redemption Reserve A/c
Dr.
To General Reserve A/c
(Being transfer of balance in DRR a/c
to general reserve a/c on redemption of
debentures) 3,00,000
3,00,000

Illustration 7:
Raman Ltd. issued 21,000, 7% debentures of `100 each on 1st October,
2011 redeemable in three equal annual instalments starting from 31st
March, 2015. The Board of directors decides to transfer to Debenture
Redemption Reserve A/c `50,000 and `4,00,000 on 31st March, 2012 and
2013 respectively and the balance required on 31st March, 2014. Ignore
payment of interest. Investments as required by law are made by the
Company in bank fixed depo sits. Pass necessary journal entries. munotes.in

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Redemption of Debentures
97 Solution:

Journal Entries in the books of Raman Ltd .

Date Particulars Debit ( `) Credit ( `) 1-9-2011 Bank A/c Dr.
To 7% Debentures A/c
(Being 21,000 7% debentures issued at
par) 21,00,000

21,00,000
31-3-2012 Profit & Loss Appropriation A/c Dr.
To Debenture Redemption Reserve A/c
(Being transfer of profits to DRR A/c) 50,000
50,000
31-3-2013 Profit & Loss A/c Dr.
To Debenture Redemption Reserve A/c
(Being transfer of profits to DRR A/c) 4,00,000
4,00,000
31-3-2014 Profit & Loss Appropriation A/c Dr.
To Debenture Redemption Reserve A/c
(Being transfer of balance required
profits to DRR A/c, 25% of `21,00,000
– `50,000 -`4,00,000) 75,000
75,000
30-4-2014 Debenture Redemption Investment A/c
Dr.
To Bank A/c
(Being investment made @ 15% of
`7,00,000 ) 1,05,000
1,05,000
31-3-2015 Bank A/c Dr.
To Debenture Redemption Investment
A/c
(Being Investments encashed) 1,05,000
1,05,000
31-3-2015 7% Debentures A/c Dr.
To 7% Debentureholders A/c
(Being 1st instalment due to
debentureholders on redemption,
`21,00,000/3) 7,00,000

7,00,000
31-3-2015 7% Debentureholders A/c Dr.
To Bank A/c
(Being 1st instalment paid to
debentureholders) 7,00,000
7,00,000
30-4-2015 Debenture Redemption Investment A/c
Dr.
To Bank A/c
(Being investment made @ 15% of
`7,00,000 ) 1,05,000
1,05,000 munotes.in

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98 Financial Accounting (Special Accounting Areas – IV)
31-3-2016 Bank A/c Dr.
To Debenture Redemption Investment
A/c (Being Investments encashed) 1,05,000
1,05,000
31-3-2016 7% Debentures A/c Dr.
To 7% Debentureholders A/c
(Being 2nd instalment due to
debentureholders on redemption) 7,00,000

7,00,000
31-3-2016 7% Debentureholders A/c Dr.
To Bank A/c (Being 2ndinstalment paid
to debentureholders) 7,00,000
7,00,000
30-4-2016 Debenture Redemption Investment A/c
Dr.
To Bank A/c
(Being investment made @ 15% of
`7,00,000 ) 1,05,000
1,05,000
31-3-2017 Bank A/c Dr.
To Debenture Redemption Investment
A/c
(Being Investments encashed) 1,05,000
1,05,000
31-3-2017 7% Debentures A/c Dr.
To 7% Debentureholders A/c
(Being 1st instalment due to
debentureholders on redemption) 7,00,000

7,00,000
31-3-2017 7% Debentureholders A/c Dr.
To Bank A/c
(Being 1st instalment paid to
debentureholders) 7,00,000
7,00,000
31-3-2017 Debenture Redemption Reserve A/c
Dr.
To General Reserve A/c
(Being trf. of balance in DRR a /c to
general reserve a/c on redemption of
debentures) 5,25,000
5,25,000

Illustration 8:
Apple Ltd. issued 9,000, 6% debentures of `100 each on 1st November,
2011 redeemable at a premium of 7% as under:
On 31st March, 2017 3,000 debentures
On 31st March, 2018 3,000 debentures
On 31st March, 2019 3,000 debentures

The Board of directors decides to transfer to the required amount to
Debenture Redemption Reserve A/c in four equal annual instalments
starting with 31st March, 201 4. Ignore entries for pay ment of interest and munotes.in

Page 99

Redemption of Debentures
99 write off of loss on issue of debentures. Investments as required by law are
made by the Company in bank fixed deposits. Pass necessary journal
entries.

Solution:
Journal Entries in the books of Apple Ltd.

Date Particulars Debit (`) Credit ( `)
1-11-2011 Bank A/c Dr.
Loss on issue of debentures A/c Dr.
To 6% Debentures A/c
To Premium on redemption of
debentures A/c
(Being 9,000 6% debentures issued
at a par, redeemable at 7%
premium) 9,00,000
63,000


9,00,000
63,000

31-3-2013 Profit & Loss Appropriation A/c
Dr.
To Debenture Redemption Reserve
A/c
(Being transfer of 1st instalment of
profits to DRR A/c, 25% of
9,00,000 = 2,25,000/4) 56,250
56,250
31-3-2014 Profit & Loss Appropriation A/c
Dr.
To Debenture Redemption Reserve
A/c
(Being transfer of 2nd instalment of
profits to DRR A/c) 56,250
56,250
31-3-2015 Profit & Loss Appropriation A/c
Dr. To Debenture Redemption
Reserve A/c (Being transfer of 3rd
instalment of profits to DRR A/c) 56,250
56,250
31-3-2016 Profit & Loss Appropriation A/c
Dr.
To Debenture Redemption Reserve
A/c
(Being transfer of 4th instalment of
profits to DRR A/c) 56,250
56,250
30-4-2016 Debenture Redemption Investment
A/c Dr.
To Bank A/c
(Being investment made @ 15% of
`3,00,000 ) 45,000
45,000 munotes.in

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100 Financial Accounting (Special Accounting Areas – IV)
31-3-2017 Bank A/c Dr. To Debenture
Redemption Investment A/c
(Being Investments encashed) 45,000
45,000
31-3-2017 6% Debentures A/c Dr.
Premium on redemption of
debentures A/c Dr.
To 6% Debentureholders A/c
(Being 1st instalment due to
debentureholders on r edemption) 3,00,000
21,000


3,21,000
31-3-2017 6% Debentureholders A/c Dr.
To Bank A/c
(Being 1st instalment paid to
debentureholders) 3,21,000
3,21,000
30-4-2017 Debenture Redemption Investment
A/c Dr.
To Bank A/c
(Being investment made @ 15% of
`3,00,000 ) 45,000
45,000
31-3-2018 Bank A/c Dr.
To Debenture Redemption
Investment A/c
(Being Investments encashed) 45,000
45,000
31-3-2018 6% Debentures A/c Dr.
Premium on redemption of
debentures A/c Dr.
To 6% Debentureholders A/c
(Being 2nd instalment d ue to
debentureholders on redemption) 3,00,000
21,000


3,21,000
31-3-2018 6% Debentureholders A/c Dr.
To Bank A/c
(Being 1st instalment paid to
debentureholders) 3,21,000
3,21,000
30-4-2018 Debenture Redemption Investment
A/c Dr.
To Bank A/c (Being in vestment
made @ 15% of `3,00,000 ) 45,000
45,000
31-3-2019 Bank A/c Dr.
To Debenture Redemption
Investment A/c
(Being Investments encashed) 45,000
45,000 munotes.in

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Redemption of Debentures
101
31-3-2019 6% Debentures A/c Dr.
Premium on redemption of
debentures A/c Dr.
To 6% Debentureholders A/c
(Being 1st instalment due to
debentureholderson redemption) 3,00,000
21,000


3,21,000
31-3-2019 6% Debentureholders A/c Dr.
To Bank A/c
(Being 3rd instalment paid to
debentureholders) 3,21,000
3,21,000
31-3-2019 Debenture Redemption Reserve A/c
Dr.
To General Reserve A/c
(Being transfer of balance in DRR
a/c to general reserve a/c on
redemption of debentures) 2,25,000
2,25,000

Illustration 9:
Mala Ltd. has a balance of `25,00,000 in the Profit & Loss A/c. The
company decided to redeem fully out of profits `25,00,000 10%
debentures which were issued on 1st April, 2015. These debentures are
redeemable at a premium of 10% on 30th June, 2019. Interest is payable
annually on 31st December every year when the accounts are closed. The
company has a bala nce of `6,25,000 in DRR A/c. Journalise the
transaction during the year of redemption.

Solution:
Journal entries in the books of Mala Ltd.

30-4-2019 Debenture Redemption Investment
A/c Dr.
To Bank A/c
(Being investment made @ 15% of
`25,00,000 ) 3,75,000
3,75,000
30-6-2019 Bank A/c Dr.
To Debenture Redemption
Investment A/c
(Being investments encashed) 3,75,000
3,75,000
30-6-2019 Debenture Interest A/c Dr.
To 10% Debentureholders A/c
(Being half year debenture interest
due, `25,00,000 x 10/100 x 6/12
months ) 1,25,000
1,25,000 munotes.in

Page 102

102 Financial Accounting (Special Accounting Areas – IV)
30-6-2019 10% Debentures A/c Dr.
Premium on redemption of
debentures A/c Dr.
To 10% Debentureholders A/c
(Being amount due to
debentureholders on redemption) 25,00,000 2,50,000


27,50,000 30-6-2019 10% Debentureholders A/c Dr.
To Bank A/c
(Being debentureholders paid along
with interest) 28,75,000
28,75,000 30-6-2019 Debenture Redemption Reserve A/c
Dr.
To General Reserve A/c
(Being transfer of balance in DRR
a/c to general reserve a/c on
redemption of debentures) 6,25,000
6,25,000
30-6-2019 Profit & Loss A/c Dr.
To Debenture Interest A/c
To Premium on redemption of
debentures A/c
(Being debenture interest &
premium on redemption of
debentures transferred to P&L A/c) 3,75,000
1,25,000
2,50,000

Note: premium on redempti on of debentures is transferred to P&L A/c on
the assumption that it was not written off in the earlier year.
B. Creating Sinking Fund
This method is known as Sinking Fund (SF) Method / Debenture
Redemption Fund (DRF) Method. In this method a fixed amount is kept
aside or appropriated out of profits every year and invested outside the
business by creating a sinking fund or debenture redemption fund. This
fixed amount is also known as Annual Instalment towards sinking fund.
Out of the fund the company either purchases investments or takes an
insurance policy.
The sinking fund may be cumulative or non - cumulative. In case of
Cumulative SF, the income from the investment/policy is added back to
the fund and reinvested. In case on non -cumulative SF, the income f rom
investment/policy is credited to Sinking Fund account.
In the year of redemption, the investments are sold or the policy is
surrendered in order to obtain money required to pay off the debenture
holders. Any profit or loss on sale of investments is tr ansferred to Sinking
Fund Account. After redemption of the debentures the balance if any in
the Sinking Fund Account is transferred to General Reserve Account. munotes.in

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Redemption of Debentures
103 The amount to be kept aside/appropriated depends on the rate of interest to
be received and the terms of redemption. There are mathematical tables
available for this purpose. These are called Annuity Tables. The annual
amount set aside or appropriation required is calculated as follows:
Amount to be kept aside/appropriated = Amount of redemption x fa ctor in
annuity table
Model Journal Entries:
I. 1st Year Amount
1. For making yearly appropriations
Profit & Loss Appropriation A/c Dr.
To Sinking Fund A/c
Annual Instalment 2. For making investment
Sinking Fund Investments A/c Dr.
To Bank A/c
Annual Ins talment II. 2nd Year Onwards
1. For interest received in SF Investments
Bank A/c Dr.
To Sinking Fund A/c
Interest received
on Investments
2. For making yearly appropriations
Profit & Loss Appropriation A/c Dr.
To Sinking Fund A/c
Annual Instalment 3. For making investment
Sinking Fund Investments A/c Dr.
To Bank A/c Annual Instalment
+Interest
III. Year of Redemption
1. For interest received in Sinking Fund
Investments Bank A/c Dr.
To Sinking Fund A/c
Interest received
on Investments
2. For making yearly appropriations
Profit & Loss Appropriation A/c Dr.
To Sinking Fund A/c
Annual Instalment No investments are made in the year of
redemption
3. When Sinking Fund Investments are sold
a. At par
Bank A/c Dr.
To Sinking Fund Investments A/c
Selling price of
Investments munotes.in

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104 Financial Accounting (Special Accounting Areas – IV)
b. At Profit
Bank A/c Dr.
To Sinking Fund Investments A/c
To Sinking Fund A/c
Selling price
Cost Price
Profit
c. At Loss
Bank A/c Dr.
Sinking Fund A/c Dr.
To Sinking Fund Investments A/c
Selling price
Loss
Cost Price
4. Sinking fund balance transferred to General
Reserve
Sinking Fund A/c Dr.
To General Reserve A/c
Balance in
Sinking Fund A/c

Illustration 10:
CIT Ltd. issued 1,100 6% debentures of `100 each at par on 1stApril, 2016
redeemable at par. The Company decided to set asid e every year a sum of
`34,893 to be invested @ 5% outside the business. The investments were
sold at `71,580 at the end of the third year and the debentures were
redeemed. Give journal entries. Also prepare Sinking Fund Account and
Sinking Fund Investments Account. Ignore interest on debentures.
Solution:
Journal Entries in the books of CIT Ltd.

Date Particulars Debit ( `) Credit ( `)
1-4-2016 Bank A/c Dr.
To 6% Debentures A/c
(Being 1,100 6% debentures `100
each issued at par, redeemable at par) 1,10,000
1,10,000
31-3-2017 Profit & Loss Appropriation A/c Dr.
To Sinking Fund A/c
(Being amount appropriated out of
profits and transferred to SF A/c) 34,893
34,893
31-3-2017 Sinking Fund Investment A/c Dr.
To Bank A/c
(Being amount invested out of SF
A/c) 34,893
34,893
31-3-2018 Bank A/c Dr.
To Sinking Fund A/c
(Being interest received on SF
investments @ 5% on `34,893) 1,745
1,745 munotes.in

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Redemption of Debentures
105 31-3-2018 Profit & Loss Appropriation A/c Dr.
To Sinking Fund A/c
(Being amount appropriated out of
profits and transferred t o SF A/c) 34,893
34,893
31-3-2018 Sinking Fund Investment A/c Dr.
To Bank A/c
(Being amount invested out of SF
A/c + interest) 36,638
36,638
31-3-2019 Bank A/c Dr.
To Sinking Fund A/c
(Being interest received on SF
investments @ 5% on `71,531 ) 3,577
3,577
31-3-2019 Profit & Loss Appropriation A/c Dr.
To Sinking Fund A/c
(Being amount appropriated out of
profits and transferred to SF A/c) 34,893
34,893
31-3-2019 Bank A/c Dr.
To Sinking Fund Investment A/c
To Sinking Fund A/c
(Being SF investments sold at a
profit) 71,580
71,531
49
31-3-2019 6% Debentures A/c Dr.
To 6% Debentureholders A/c
(Being amount due to
debentureholders on redemption) 1,10,000

1,10,000
31-3-2019 6% Debentureholders A/c Dr.
To Bank A/c
(Being 1/4thdebentureholders paid
off) 1,10,000
1,10,000
31-3-2019 Sinking Fund A/c Dr.
To General Reserve A/c
(Being transfer of balance in SF a/c
to general reserve a/c on redemption
of debentures) 1,10,050
1,10,050






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106 Financial Accounting (Special Accounting Areas – IV) In the books of CIT Ltd.
Sinking Fund A/c
Date Particulars ` Date Particulars `
31-3-2017 To Balance c/d 34,893 31-3-2017 By P&L Appr.
a/c 34,893 Total 34,893 Total 34,893 31-3-2018 To Balance c/d 71,531 01-4-2017 31-3-2018 31-3-2018 By Balance b/d
By Bank A/c
By P&L Appr.
a/c 34,893 1,745
34,893 Total 71,531 Total 71,531 31-3-2019 To General
Reserve A/c 1,10,050 01-4-2018 31-3-2019 31-3-2019 31-3-2019 By Balance b/d
By Bank A/c
By P&L Appr.
a/c
By Bank A/c 71,531
3,577
34,893
49
Total 1,10,050 Total 1,10,050
Sinking Fund Investment A/c
Date Particulars ` Date Particulars `
31-3-2017 To Bank A/c 34,893 31-3-
2017 By Balance
c/d 34,893
Total 34,893 Total 34,893
01-4-2017
31-3-2018 To Balance b/d
To Bank A/c 34,893
36,638 31-3-
2018 By Balance
c/d
71,531
Total 71,531 Total 71,531
01-4-2018
31-3-2019 To B alance b/d
To Sinking
Fund A/c
(Profit) 71,531
49 31-3-
2019 By Bank A/c 71,580

Total 71,580 Total 71,580




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Redemption of Debentures
107 Illustration 11:
On 31st March, 2019 the following balance stood in the books of Jani Ltd.
8% Second Mortgage Debenture Stock ` 4,00,000
Income received on Sinking Fund
Investments
` 14,500
Discount on issue of Debentures ` 25,000
Sinking Fund ` 3,65,500
Sinking Fund Investments:
` 80,000, 6% SD Loans ` 76,000
` 90,000, 7% ND Bonds ` 1,00,000
` 70,000, 8% PD Loans ` 70,000
`1,80,000 8½% CD Securities ` 1,85,000
On the same day the investments were sold: the 5% SD Loans at 90; the
6% ND Bonds at par; the 7% PD at 115 and the 7½% CD at 120. On
1stApril, 2019 the debentures of `3,00,000 were redeemed at a premium of
2½%. On the ve ry same day, the 8% MD Loans of `1,00,000 were
purchased at a premium of 3%.
Annual contribution for redemption was `50,000. Ignore interest.
Prepare the following accounts:
i. Debenture Stock;
ii. Sinking Fund;
iii. Sinking Fund Investments
iv. General Reserve
Solution:
In the books of Jani Ltd.
8% Debentures Stock A/c
Particulars ` Particulars `
To Bank a/c
To Balance c/d 3,00,000
1,00,000 By Balance b/d 4,00,000

Total 4,00,000 Total 4,00,000

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108 Financial Accounting (Special Accounting Areas – IV) Sinking Fund A/c
Particulars ` Particulars `
To discount on issue of
debe ntures a/c( `25,000x3/4)
To Premium on redemption of
debentures
To General Reserve a/c
To Balance c/d 18,750

7,500
3,00,000
1,31,250 By Balance
b/d
By Income on
SFI
By P&L Appr.
By SFI a/c 3,65,500
14,500
50,000
27,500
Total 4,57,500 Total 4,57,500

Sinking Fund Investments A/c
Particulars ` Particulars `
To Balance b/d
To Sinking Fund a/c (profit on
sale of invests)
To Bank a/c 4,31,000
27,500
1,03,000 By Bank a/c
(Sale of
Invests)
By Balance c/d 4,58,500

1,03,000
Total 5,61,500 Total 5,61,500

Gener al Reserve A/c
Particulars ` Particulars `
To Balance c/d 3,00,000 By Sinking
Fund a/c 3,00,000
Total 3,00,000 Total 3,00,000

Working Note:
1. Calculation of selling price & profit or loss on sale of investments

Investments Selling Price
(A) ` Cost Price
(B) ` Profit/(Loss) (A-B) `
6% SD
Loans 72,000
`80,000 x 90/100 76,000 (4000)
7% ND
Bonds 90,000
`90,000 at par 1,00,000 (10,000)
8% PD
Loans 80,500
`70,000 x 115/100 70,000 10,500
8½% CD
Securities 2,16,000
`1,80,000 x 120/100 1,85,000 31,000
Total 4,58,500 4,31,000 27,500 munotes.in

Page 109

Redemption of Debentures
109 2. Since only `3,00,000 nominal value of debentures are redeemed, only
proportionate amount of discount on issue of debentures is written off
and amount equal to nominal value of debentures redeemed is
transferred from sinking fund acco unt to general reserve account.

4. Redemption by Conversion
Redemption by conversion means redeeming the debentures by converting
them into new class of shares or even issuing new class of debentures. The
new shares or debentures issued by way of convers ion may be issued at
par or at a premium after complying the relevant provisions of the
Companies Act. The conversion may be made at a discount on the market
price of shares or at premium on the face value of shares. Debenture
Redemption Reserve is not to be created for redemption of fully
convertible debentures.
Sec. 71(1) of the Companies Act 2013 provides that a company may issue
debentures with an option to convert such debentures into shares either
wholly or partly at the time of redemption.
Conversion of debentures must be approved by a special resolution passed
at a general meeting. A company may issue either fully convertible or
partly convertible debentures.
Illustration 12:
Alpha Limited issued 5,000 8% debentures of `100 each redeemable on
31st December, 2018 at a premium of 5%.
The Company offered three options to debenture holders as under:
i. 7% preference shares of `10 at `12
ii. 9% debentures of `100 at par
iii. Redemption in cash (assume redemption out of capital only)
The options were accepted as under
i. Option by holders of 1500 Debentures
ii. Option by holders of 1500 Debentures
iii. Option by holders of 2000 Debentures
The redemption was carried over by the Company. Show the Journal
entries.



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110 Financial Accounting (Special Accounting Areas – IV) Solution:
Options i ii ii
NV of debentures
redeemed
(Options accepted x
`100)+ Premium on
redemption 5% `1,50,000
(1,500 x 100)
`7,500 `1,50,000
(1,500 x 100)
`7,500 `2,00,000
(2,000 x 100)
`10,000
Total amount due on
redemption `1,57,500 `1,57,500 `2,10,000
Number of Preference
shares & debentures
issued on conversion
= Total amount due/
Issue price 13,125 shares

1,57,500/12 1,575
debentures
1,57,500/100 Redemption in
cash
7% Pref.sh
capital 13,125 x `10
Securities Premium
13,125 x `2 `1,31,250
`26,250
9% Debentures at par
1,575 x `100 `1,57,500
Journal Entries in the books of Alpha Ltd.

Sr. No. Particulars Debit ( `) Credit ( `)
1. 8% Debentures A/c Dr. Premium
on redemption of debentures a/c
Dr. To 8% Debentureholders A/c
(Being amount due to
debentureholders on redemption
against option i) 1,50,000
7,500

1,57,500
2. 8% Debentureholders A/c
To 7% Preference Share Capital
A/c, To Securities Premium A/c
(Being 1,500 8% debentures
converted into 13,125 7%
preference shares of `10 each
issued at premium of `2 per
share) 1,57,500
1,31,250
26,250
4. 8% Debent ures A/c Dr.
Premium on redemption of
debentures a/c Dr.
To 8% Debentureholders A/c
(Being amount due to
debentureholders on redemption
against option ii) 1,50,000
7,500

1,57,500 munotes.in

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Redemption of Debentures
111 4. 8% Debentureholders A/c
To 9% Debentures A/c
(Being 1,500 8% debenture s
converted into 1,5759%
debentures of `100 each issued at
par) 1,57,500
1,57,500

5. 8% Debentures A/c Dr.
Premium on redemption of
debentures a/c Dr.
To 8% Debentureholders A/c
(Being amount due to
debentureholders on redemption
against option iii) 2,00,000
10,000

2,10,000
6. 8% Debentureholders A/c
To Bank A/c
(Being 2,000 8% debentures paid
in cash) 2,10,000
2,10,000

7. Securities Premium A/c Dr.
To Premium on redemption of
debentures a/c (Being premium
on redemption of debentures
written off) 25,000
25,000

Note: Premium on redemption of debentures is written off on the
assumption that it was not written off in the earlier year.
Illustration 13:
Tony Limited gave notice of its intention to redeem its 7% debentures
amounting to `4,00,000 of `100 each at `102 and offered the debenture
holders the following three options, to apply the redemption money to
subscribe for:
a) 5% cumulative preference shares of `20 each at `22.50 per share.
b) 7% debentures at `96 and
c) to have their holdings redeemed for ca sh
i.Debenture holders for `1,71,000 accepted the proposal (a)
ii.Debenture holders for `1,44,000 accepted the proposal (b)
iii.Remaining debenture holders accepted the proposal (c) (assume
redemption out of profits only)
Pass the necessary journal entries to recor d the above transactions in the
books of the Company. Ignore entry pertaining to minimum required
investments.
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Page 112

112 Financial Accounting (Special Accounting Areas – IV) Solution:
Options i ii ii
NV of debentures
redeemed
+ Premium on
redemption 2% `1,71,000
`3,420 `1,44,000
`2,880 *`85,000
`1,700
Total amount due on
redemption `1,74,420 `1,46,880 `86,700
Number of
Preference shares &
debentures issued on
conversion
= Total amount due/
Issue price 7,752 shares

1,74,420/22.5 1,530
debentures
1,46,880/96 Redemption in
cash
5% Pref.sh
capital7,752 x `20
Secur ities Premium
7,752 x `2.50 `1,55,040
`19,380
7% Debentures at
`96
1,530 x `100 `1,53,000

`4,00,000 – `1,71,000 – `1,44,000 = * `85,000
Journal Entries in the books of Tony Ltd.

Sr. No. Particulars Debit ( `) Credit ( `)
1. 7% Debentures A/c Dr.
Prem ium on redemption of
debentures a/c Dr.
To 7% Debentureholders A/c
(Being amount due to
debentureholders on redemption
against option i) 1,71,000
3,420

1,74,420
2. 8% Debentureholders A/c
To 5% cumulative preference
Share Capital a/c
To Securities Prem ium A/c
(Being 7% debentures of NV
`1,71,000 converted into 7,7525%
cumulative preference shares of
`20 each issued at premium of
`2.50 per share) 1,74,420
1,55,040
19,380 munotes.in

Page 113

Redemption of Debentures
113
4. 7% Debentures A/c Dr.
Premium on redemption of
debentures a/c Dr.
To 7% Debent ureholders A/c
(Being amount due to
debentureholders on redemption
against option ii) 1,44,000
2,880

1,46,880
4. 7% Debentureholders A/c
Discount on issue of debentures
A/c Dr.
To 6% Debentures (New) A/c
(Being 7% debentures of NV
`1,44,000 converted i nto 1,530
new 6% debentures of `100 each
issued at `96 per debenture) 1,46,880
6,120

1,53,000

5. 7% Debentures A/c Dr.
Premium on redemption of
debentures a/c Dr.
To 7% Debentureholders A/c
(Being amount due to
debentureholders on redemption
against op tion iii) 85,000
1,700

86,700
6. 7% Debentureholders A/c
To Bank A/c
(Being balance 7% debentures
paid in cash) 86,700
86,700

7. Securities Premium A/c Dr.
To Premium on redemption of
debentures a/c (Being prem on
redemption of deb written off) 8,000
8,000
8. Profit & Loss Appropriation A/c
Dr.
To Debenture Redemption Reserve
A/c
(Being transfer of profits equal to
25% of the nominal value of
debentures redeemed in cash, 25%
of 85,000) 21,250
21,250
9. Debenture Redemption Reserve
A/c Dr.
To G eneral Reserve A/c
(Being transfer of balance in DRR
a/c to general reserve a/c on
redemption of debentures in cash) 21,250
21,250
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Page 114

114 Financial Accounting (Special Accounting Areas – IV) Note: Premium on redemption of debentures is written off on the
assumption that it was not written off in the earlier year .
4.5 SUMMARY
1. Repayment of the amount due to the Debenture holders on an agreed
date is called redemption of debentures.

2. Debenture can be redeemed at par, premium or discount

3. The redemption of debentures depend upon the type of debentures
issued by the company and the terms of redemption.

4. Discount/loss on issue of debentures is a capital loss for the company
and it should be written off as early as possible

5. There are different methods of redemption of debentures

6. Debentures can be redeemed out of capit al, profits and by conversion
by complying the provisions of Companies Act, 2013
4.6 EXERCISE
1. Explain the accounting treatment for write off of discount/loss on issue
of debentures?

2. Explain the methods of write off of discount/loss on issue of
debentures ?

3. Explain the different methods of redemption of debentures?

4. What are the provisions of the Companies Act, 2013 regarding
redemption of debentures by creating Debenture Redemption Reserve?

5. Write Short Notes on:
i. Sources of Redemption of debentures
ii. Method s of Redemption of debentures
iii. Redemption by Conversion
iv. Debenture Redemption Reserve
v. Sinking Fund Method
vi. Redemption out of Capital
vii. Write off of discount/loss on issue of debentures
viii. Redemption out of profits

6. State whether the following statements are True or False
I. Conversion of debentures must be approved by a special
resolution passed at a general meeting.
II. A company can issue only fully convertible debentures.
III. In case of partly convertible debentures, D.R.R. shall be created
in respect of Non -convertibl e portion of the debenture issue.
IV. D.R.R. is not required in the case of fully convertible debentures
V. D.R.R. can be created out of non -divisible profits munotes.in

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Redemption of Debentures
115 VI. Discount/loss on issue of debentures is a capital loss for the
company.
VII. When debentures are redeemed out of capital, the entry
regarding transfer of profits to Debenture Redemption Reserve
account is not passed.
VIII. As per the SEBI Guidelines, redemption of debentures wholly
out of capital is not possible.
IX. As per SEBI it is not mandatory to create DRR in case of
debentures maturing in 18 months or less
X. As per SEBI it is mandatory to create DRR for Infrastructure
Companies.
XI. As per Rule 18(7), All India Financial Institutes regulated by the
RBI is exempted from creating a DRR A/c
XII. As per Rule 18(7), banking compan ies are compulsorily
required to create DRR A/c, when redeeming debentures.
XIII. As per Companies Act, 2013, every company requiring to create
DRR a/c, is required to deposit or invest atleast 10% of the face
value of debentures being redeemed.
XIV. On redemption of debentures, the balance in sinking fund
account is transferred to P&L A/c.
XV. In case of redemption by conversion debentures can be
converted into equity shares only.

7. Fill in the blanks choosing correct alternative
1. Company requiring to create DRR a/c, are r equired to deposit or
invest atleast ______ of the face value of debentures being
redeemed. (10%/15%)

2. On redemption of debentures, the balance in DRR account is
transferred to ________account (P & L /General Reserve)

3. As per SEBI it is not mandatory to c reate DRR in case of debentures
maturing in ______18 months. (18/15)

4. Discount/loss on issue of debentures is a ________loss for the
company. (Capital/Revenue)

5. Conversion of debentures must be approved by a
________resolution passed at a general meeting.
(Special/Ordinary)

6. D.R.R. can be created out of ______profits. (Divisible/Non -
divisible)






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Page 116

116 Financial Accounting (Special Accounting Areas – IV) 8. Match the Columns

Column A Column B
1. Creation of DRR a. Capital Loss
2. Discountissue of
debenres b. Creation of DRR not
mandatory
3. Balance in Sinking fund
A/c c. Requires s pecial resolution
4. Conversion of debentures d. Transferred to general
reserve A/c
5. Infrastructure Companies e. From divisible profits

9. Z Ltd. issued `10,00,000 7% debentures at 15% discount. Debentures
are to be redeemed in the following manner:
Year End 2 3 4 5
FV of
Debentures ( `) 1,00,000 2,00,000 3,00,000 4,00,000

Give discount on issue of debentures account for five years
10. Amar Ltd. issued 15,000, 9% debentures of `100 each on 1st
November, 2011 redeemable at a premium of 8% as under:
On 31st March, 2017 5,000 debentures
On 31st March, 2018 5,000 debentures
On 31st March, 2019 5,000 debentures

The Board of directors decides to transfer to the required amount to
Debenture Redemption Reserve A/c in four equal annual instalments
starting with 31st March, 2014. Ignore payment of interest. Investments as
required by law are made by the Company in bank fixed deposits. Pass
necessary journal entries.

11. On 1st April, 2016, King Ltd. issued ` 20,00,000 7% debentures of
`100 each at par redeemable at a pr emium of 5%. The terms of issue
was that 60% of the debentures are to be redeemed at the end of 2nd
year and the balance at the end of 3rd year. The Board of directors
decides to transfer to the minimum required amount to Debenture
Redemption Reserve A/c a t the end of first year. Ignore entries
pertaining to payment of interest and loss on issue of debentures.
Pass necessary journal entries.

12. Rani Ltd. has a balance of `20,00,000 in the Profit & Loss A/c. The
company decided to redeem fully out of profits `20,00,000 10%
debentures which were issued on 1st April, 2015. These debentures are
redeemable at a premium of 5% on 30th June, 2019. Interest is payable munotes.in

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Redemption of Debentures
117 annually on 31st December every year when the accounts are closed.
The company has a balance of `5,00, 000 in DRR A/c. Journalise the
transaction during the year of redemption.
13. On 1st January, 2014 Sagar Ltd. issued 60,000 10% redeemable
debentures of `100 each at 5% discount, redeemable at 10% premium
on 31st December 2018. The amount is to be invested in 10% PR
Bonds. Amount of annual appropriation is fixed at `8,00,000. Pass
necessary Journal Entries and show Sinking Fund Account and
Sinking Fund Investments Account for first 5 years.
14. Idea Ltd. issued on 1st April, 2015, 4,000 7% redeemable debentures
of `100 each at par redeemable at a premium of 10% at the end of the
4th years. The company decided to set up a sinking fund for the
redemption of debentures setting aside necessary amount every year
and investing it in investments carrying interest @ 12% p .a. The
sinking fund factor for 4 years @ 12% was `0.20964. On 31st March,
2019, the sinking fund investments were sold for `3,15,000.
You are required to show the necessary ledger accounts in the books of
Idea Ltd.
(Hint: Annual Appropriation = 4,40,000 x 0.20964 = `92,242)
15. Tetron Ltd gave notice of its intention to redeem its outstanding
`12,00,000 – 7% debentures at `103 and offered the holders the
following options: -
a) 10% Preference shares of `20 each at `25
b) 9% debentures at `96 and
c) To have their holdi ngs redeemed for cash
i. The holders of `3,60,000 debentures accepted the proposal (a)
ii. The holders of `4,80,000 debentures accepted the proposal (b)
iii. The remaining debenture holders accepted the proposal (c) (assume
redemption out of capital only)
Pass journal entries in the books of Tetron Ltd.
16. Adarsh Limited issued 10,000 6% debentures of `100 each redeemable
on 31st December, 2018 at a premium of 5%.
The Company offered three options to debenture holders as under:
a. 7% preference shares of `10 at `12
b. 8% debent ures of `100 at par
c. Redemption in cash (assume redemption out of profits only)
The options were accepted as under munotes.in

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118 Financial Accounting (Special Accounting Areas – IV) a. Option by holders of 3,000 Debentures
b. Option by holders of 3,000 Debentures
c. Option by holders of 4,000 Debentures
The redemption was carried o ver by the Company. Show the Journal
entries ignoring entry for minimum required investments.
17. B Ltd gave notice of its intention to redeem its outstanding `4,00,000
– 8% debentures at `105 (nominal value `100) and offered the holders
the following options: -
a. 11% Preference shares of `40 each at `50
b. 9% debentures at `100 (at par) and
c. To have their holdings redeemed for cash (assume redemption out
of profits only)
i. The holders of `1,40,000 debentures accepted the proposal (a)
ii. The holders of `1,60,000 debentures accepted the proposal (b)
iii. The remaining debenture holders accepted the proposal (c)
Pass journal entries in the books of B Ltd.
Answers:
6. True :i, iii, iv, v, vii, viii, ix, xi
False : ii, vi, x, xii, xiii, xiv, xv
7. i.15%, ii.General Reserve, iii. 18, iv. Capital, v. Special,
vi. Divisible.
8. 1- e, 2-a, 3- d, 4-c, 5-b


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119 Module IV
5
ASCERTAINMENT AND TREATMENT OF
PROFIT PRIOR TO INCORPORATION
Unit Structure
5.0 Objectives
5.1 Introduction
5.2 Computation of Profit Before Incorporation
5.3 Solved Problems
5.0 OBJECTIVES
After studying the unit, the students will be able to:
 Understanding the concept of Profit prior to incorporation
 Understanding the accounting treatment of Profit prior to and Post
incorporation.
 Understanding the basis of allocation of various items of Income and
Expenses in Pre and Post incorporation periods
 Calculating the Profit/Loss for pre and post incorporation periods
separately.
5.1 INTRODUCTION
Prior means before and post means after. Profit prior to incorporation
refers to the profit before incorporation. For computing the profit before
incorporation, the profit and loss account is to be prepared in a columnar
form to arrive at profit earned before and after incorporation separately.
Alternatively, a statement in columnar form showing the results in the pre/
post incorporation period may be p repared.
5.1.1 Concept -
The profit earned before incorporation cannot be treated as a business
profit and hence is not available for distribution as dividend to the
shareholders .It is a capital profit and should be transferred to Capital
Reserve. The pro fit earned after incorporation is available for
appropriations.
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120 Financial Accounting (Special Accounting Areas – IV) 5.1.2 Utilisation of Profit prior to incorporation -
1. For writing off fixed assets acquired
2. For writing off goodwill, if any
3. For paying interest to vendors, if any on the value of purchase
consideration
4. For writing off preliminary expenses.
5.2 COMPUTATION OF PROFIT BEFORE
INCORPORATION
Step -1 Calculate the Time ratio and Sales ratio -
 Time ratio refers to the number of months in the accounting period
before incorporation and after incorporation .
 Sales ratio refers to the sales in the pre incorporation and post
incorporation periods.
 For example - The accounting period is from 1 -4-2010 to 31 -3-2011(12
months) and the date of incorporation is 1 -7-2010 .In this case the
accounting period can be di vided into two distinct periods - 1-4-2010 to
1-7-2010 (3 months before incorporation) and 1 -7-2010 to 31 -3-2011(9
months after incorporation) Time ratio is 3 months : 9 months or 1:3.
 Sales during the pre incorporation period is Rs. 150000 and the total
sales during the entire accounting year is Rs. 900000 This means that
the sales in the post incorporation period is 750000(900000 -150000).
Thus the sales ratio is 150000:750000 or 1: 5.
Step -2 Prepare profit and loss account in a columnar format and
allocate the expenses profit and incomes on a suitable basis
 If the gross profit is given in the problem, allocate the gross profit in the
sales ratio calculated in step 1.
 If the gross profit is not given, then find out the gross profit by
preparing trading accoun t as is normally done in final accounts.
 The gross profit can also be worked out by using the formula Gross
profit =Sales - Cost of Goods Sold.
Step 3 - Allocate all items appearing on the debit side of Profit and loss
account and credit side of Profit and L oss a/c on suitable basis.
Generally the expenses are allocated in the following manner -
 All fixed expenses, period costs, administration expenses, general
expenses in time ratio.
 All selling and distribution expenses, variable expenses in sales ratio
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Ascertainment and
Treatment of Profit Prior
to Incorporation
121 Step 4- There are some items of expenditure and income which are
not to be allocated.
 They pertain wholly to the pre incorporation period - for example -
Partners salaries, interest on partners’ capitals.
 Similarly expenses like preliminary expenses, directors fees , interest
on debentures are to be shown in post incorporation only.
 Incomes like share transfer fees will appear on the credit side in the
post incorporation column only.
 However, if specific information is given about a particular item of
expense , it must be considered while allocating the expense. For
example - bad debts are generally allocated on sales ratio but if there is
an additional information about bad debts that bad debts relate to sales
effected in the pre -incorporation period, then in s uch case bad debts
should not be allocated on sales ratio but it should be shown only in
the pre - incorporation column on the debit side of profit and loss
account.
Profit and Loss account
For the year ended 31st March 2018
Dr. Cr
Particulars Basis Pre Post Particula
rs Basis Pre Post
To Salary Time xx xx By Gross
Profit Sales xx xx
To Rent Time xx xx By Share
transfer
fees Post - xx
To Discount Sales xx xx
To Directors
fees Post --- xx
To Partners
salary Pre xx ---
To
Advertisement Sales xx xx
To Commission Sales xx xx
To Capital
reserve xx
To net profit xx
Total xx xx Total xx xx munotes.in

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122 Financial Accounting (Special Accounting Areas – IV) Alternatively the details of profit before and after incorporation may be
presented in a statement format as under -
Statement of Profit and loss account for the year ended 31st March 2018
Particulars Basis Pre-
incorporation Post
incorporation Incomes Gross Profit Sales
ratio xxxxx xxxxx
Less Expenses
Salaries Time
ratio xxxxx xxxxx
Advertisement Sales
Ratio xxxx xxxx
Directors fees Post ------- xxxx
Debenture Interest Post ------- xxxx
Capital Reserve (Balancing
figure) xxxxxxx
Profit and Loss account
(Balancing figure ) xxxxx
Total xxxxx xxxxx

Step -5 Balance the Profit and loss account and find out profit/loss.
 Profit in the pre - incorporation period - is to be transferred to Capital
Reserve account.
 Loss in the pre - incorporation period - debited to Goodwill account.
 Profit in the post - incorporation period - Transferred to Profit and loss
appropriation account.
Check your progress
Calculate time ratio and sales ratio from the following information -
The company was incorporated on 1st June 2015 for the purpose of
purchasing an established business as from 1st April 201 5. The books of
account for the year ended 31st March 2016 showed the total sales for the
year as Rs 3,21,040 and sales from 1st April to 1st June as Rs 80,260. The
gross profit for the year was Rs 41,280
Calculation of TIME RATIO
Acco unting period –
Date of incorporation -
Pre incorporation period — munotes.in

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Ascertainment and
Treatment of Profit Prior
to Incorporation
123 Post incorporation period –
TIME RATIO -
Calculation of SALES RATIO
Total sales during the year –
Sales in the pre incorporation period –
Sales in the post incorporation period –
SALES RA TIO
(Answer - TR-1:5, SR -1:3)
5.3 SOLVED PROBLEMS
Illustration 1
Calculate Time ratio and Sales Ratio from the following information -
A limited company was registered on 1st January 2016 to take over a
business as on 1st October 201 5. The books of accoun ts are closed on 30th
September 2016. The certificate of commencement of business was
obtained on 1st February 2016. The turnover (sales) for the year ending
30th Sept 2016 was Rs 3,00,000 of which Rs 50,000 related to the period
from 1st Oct 2015 to 1st January 2016. (Answer: TR 1:3 SR 1:5 )
The Trading account showed a total gross profit of Rs 1,20,000 . How will
the gross profit be allocated?
Illustration 2 -
Calculate Time Ratio and Sales Ratio fr om the following information.
A limited company was in corporated on 1st July 2017 to take over a
business as on 1st January 2017 and the company follows calendar year.
The books of accounts were closed on 31st December 2017 and the
monthly sales effected from 1st Jan to 31st December 2017 were as
follows -
January, February, March and April - Rs 50,000 each month May, June
Rs 75,000 each month and Sales from July to December was uniform at
Rs 1,00,000 each month
Solution:
Time Ratio:
Accounting period – 1 January to 31st December 2017
Date of Incorporatio n 1st July 2017
Pre incorporation period – 1st January to 30th June 2017 – 6 months
Post Incorporation - 1st July to 31st December 2017 – 6 months
Time Ratio 1:1
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124 Financial Accounting (Special Accounting Areas – IV) Sales Ratio
Sales in pre incorporation period January to June -
50,000+50,000+50,000+50, 000+75,000+75,000 = 3,50,000
Sales in the post incorporation period July to December -
1,00,000+1,00,000+1,00,000+1,00,000+1,00,000+1,00,000= 6,00,000
Sales Ratio – 3,50,000 : 6,00,000 or 7:12
Illustration 3
Big Co. Ltd took over the business of Small &Sons , a firm w.e.f. 1 -4-
2007. The company was registered on 1 -11-2007. Profit and loss account
for the year ended 31 -3-2008 was as under -
Particulars Amt(Rs.) Particulars Amt(Rs.)
To Salaries 2,40,000 By Gross profit b/d 12,60,000
To Rent and rates 1,80,000
To Printing and
stationery 96,000
To Audit fees 30,000
To Sundry expenses 24,000
To Carriage outward 90,000
To Advertising 63,000
To Electricity charges 72,000
To Commission on
sales 1,08,000
To Debenture interest 28,000
To Depre ciation 42,000
To Interest on purchase
consideration 27,000
To Net profit c/f 2,60,000
12,60,000 12,60,000

Additional information:
1. Sales for each of the months July, August, September, January,
February and March were twice the sales for each of the months April,
May, June, October, November and December.
2. Depreciation shown above includes depreciation on furniture worth
Rs. 2,40,000 @ 10% and on delivery van worth Rs.90,000 @ 20%.
Both these assets were taken over from Small and sons. munotes.in

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Ascertainment and
Treatment of Profit Prior
to Incorporation
125 3. Big Co. L td. settled Purchase consideration on 1st January,2008
4. Audit fees are payable for the whole year.
Prepare Profit and Loss account for the year ended 31st March, 2008
showing profits for pre - incorporation and post incorporation periods
separately.
(Univers ity of Mumbai - October 2009)
Solution: --
WN - Time ratio -
Pre- incorporation period - 1-4-2007 to 1 -11-2007( 7 months)
Post- incorporation period - 1-11-2007 to 31 -3-2008( 5 months)
Time ratio - 7:5
Sales ratio -
Let monthly sales be -1
Pre-incorporation peri od- 1+1+1+2+2+2+1=10
Post- incorporation period -1+1+2+2+2=8
Sales Ratio - 10:8 or 5:4
Interest on purchase consideration -
(payable for 9 months from April to December)
Pre-incorporation - 1-4-2007 to 1 -11-2007 (7 months)
Post- incorporation - 1-11-2007 to 31 -12-2007(2 months)
Specific ratio - 7:2
Depreciation on assets - Furniture - 240000x10%= 24,000
Delivery van - 90,000x 20%= 18,000

Total Depreciation (24,000+ 18,000) = 42,000 in Time Ratio 7:5

Profit and Loss account for the year ended 31st March, 2008

Dr. Cr
Particulars Basis Pre Post Particulars Basis Pre Post
To Salaries Time 1,40,000 1,00,000 By Gross
profit Sales 7,00,000 5,60,00
0
To Rent and
taxes Time 1,05,000 75,000
To Printing
&Stationery Time 56,000 40,000
To Audit fees Time 17,500 12,500 munotes.in

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126 Financial Accounting (Special Accounting Areas – IV)
To Sundry
expenses Time 14,000 10,000
To Carriage
outward Sales 50,000 40,000
To
Advertising Sales 35,000 28,000
To Electricity
charges Time 42,000 30,000
To
Commission
on sales Sales 60,000 48,000

To Debenture
interest Post ---------- 28,000
To
Depreciation Time 24,500 17,500
To Interest on
purchase
consideration 7:2 21,000 6,000
To Capital
Reserve ( bal
fig) 1,35,000 -----------
To Ne t Profit
( bal fig) ----------- 1,25,000
Total 7,00,000 5,60,000 Total 7,00,000 5,60,000

Note: Alternatively the depreciation on Delivery van may be allocated in
sales ratio also. The working note on depreciation will be as follows –
Depreci ation on Furniture in Time ratio ( Rs 24,000 in Time ratio) and
Depreciation on delivery van in sales ratio ( Rs 18,000 in sales ratio).
In such case the answer will change and profit before incorporation would
be Rs 1,35,500 which will be transferred to capital reserve and the profit
after incorporation would be Rs 1,24,500
Illustration 4
M/s Abani Offshore Ltd took over a running business with effect from 1st
April, 2018. The company was incorporated on 1st September, 2018. The
summarized Profit and L oss Account for the year ended 31st March,2019
is as under:



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Ascertainment and
Treatment of Profit Prior
to Incorporation
127 Particulars Rs. Particulars Rs.
To Printing and
Stationery
To Salaries
To Directors fees
To Selling expenses
To Debenture
Interest
To Auditors Fees
To Rent and taxes
To Office Expenses
To B ad Debts
To Preliminary
Expenses
To Net Profit

2,40,000

39,00,000
5,00,000
24,30,000

5,80,000

1,00,000
9,60,000

6,00,000

12,00,000

10,00,000
66,90,000
1,82,00,000
========== By Gross Profit
By Interest on
Fixed Deposit





1,70,00,000
12,00,000














1,82,00,000
==========
Additional Information:
1. It is ascertained that monthly sales from October 2018 to March 2019
was twice the average of the monthly turnover from April 2018 to
September 2018.
2. Out of bad debts Rs. 2,00,000 relate to debt s created prior to
incorporation. Remaining bad debts are out of sales affected
throughout the year.
3. Rent is doubled from 1st December, 2018.
4. Salaries include salary of three employees at equal monthly
remuneration. However one of them was appointed as man ager from
1st January, 2019. His salary was doubled from that date.
5. Vendors were entitled to 40% of the profit earned in Pre -incorporation
period.
6. Interest on Fixed Deposit was received for the entire year.
Prepare the Statement of Profit and Loss in colum nar form, showing
distinctly the allocation of profits between pre incorporation and post
incorporation periods, indicating the basis of allocation.


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128 Financial Accounting (Special Accounting Areas – IV) Solution:
Working Notes –
Time Ratio 5:7
Sales Ratio 5: 13
Basis for Allocating Rent 5:11
Salaries 15:24 or 5:8
Bad Debts Rs. 12,00,000
Rs 2,00,000 in pre incorporation (given)
Balance bad debts Rs 10,00,000 to be divided in Sales Ratio:
Pre incorporation: 2, 77,778
Post Incorporation: 7, 22,222
Total Pre Incorporation Bad Debts Amount:
2,00,000 + 2,77,778 = 477778
Post Incorporation Bad Debts=722222
Statement of Profit And Loss
For The Year Ended 31ST March 2019
Pre-
Incorporation Post-
Incorporation
INCOMES
Gross profit (SR) 47,22,222 122,77,778
Interest on FD (TR) + 5,00,000 + 7,00,000
Total Income (A) 52,22,222 129,77,778
EXPENSES
Printing and Stationery (TR) 1,00,000 1,40,000
Salaries (5:8) 15,00,000 24,00,000
Directors Fees
(Post) ------------- 5,00,000
Selling Expenses (SR) 6,75,000 17,55,000
Deben ture Interest (Post) -------------- 5,80,000
Auditors fees (TR) 41,667 58,333
Rent and Taxes (5:11) 3,00,000 6,60,000
Office Expenses (TR) 2,50,000 3,50,000
Bad Debts (WN) 4,77,778 7,22,222
Preliminary expenses (Post) ------------ 10,00,000
Total expenses (B) 33,44,445 81,65,555
Capital Reserve (A -B) (bal.fig) 18,77,777
Net Profit (A -B) (bal.fig) 48,12,223 munotes.in

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Ascertainment and
Treatment of Profit Prior
to Incorporation
129 Illustration 5:
Avenue Ltd was incorporated on 1st August, 2017 to acquire the business
of Shah and Bros from 1st April, 2017. The company received the
certificate of commencement of business on 1st October, 2017.
The agreement also provided that vendors are entitled to 60% of Profits
(or Loss, if any) for the period upto 1st August, 2017.
The following Profit & Loss Account for the year ended 31st March, 2018
is presented as under:
Particulars Rs. Particulars Rs.
To Office Salaries
To Bad Debts
To Depreciation
To Office rent
To Commission on
Sales
To Debenture
Interest
To Directors Fees
To Interest on
Purchase
Cons ideration
To Net Profit 36,00,000
5,00,000
18,00,000
9,00,000
15,00,000

8,00,000

8,00,000

6,00,000

35,00,000
1,40,00,000 By Gross Profit
By Profit on
sale of
Investment
1,20,00,000
20,00,000











1,40,00,000

You obtained the following addi tional information :
(a) Monthly Sales for October, 2017 to March, 2018 is 150% of
monthly sales for April, 2017 to September, 2017.
(b) Office rent was increased from Rs. 50,000 per month to Rs.
1,00,000 per month effective from 1st October, 2017.
(c) Investment was sold on 1st November, 2017.
(d) Bad debts were in respect of sales affected two years ago.
(e) Consideration to Vendors was paid on 1st October, 2017.
Prepare the Statement of Profit and Loss in columnar form, showing
distinctly the allocation of profits between pre incorporation and post
incorporation periods, indicating the basis of allocation.
Working notes -
Time Ratio 1:2
Sales Ratio 4:11 munotes.in

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130 Financial Accounting (Special Accounting Areas – IV) Interest on Purchase Consideration 4: 2 or 2:1
Interest is paid for 6 months from April to Septe mber.
(April, May, June, July) 4 months pre incorporation period
While (August and September) 2 months post incorporation period.
Office rent Pre Post
50,000x4 months 2,00,000
50,000x2 months 1,00,000
1,00,000x6 months 6,00,000
Total office ren t 2,00,000 7,00,000
Statement of Profit and Loss
For the year ended 31st March 2018
Pre-
Incorporation Post-
Incorporation
Incomes
Gross Profit (SR) 32,00,000 88,00,000
Profit on Investment (Post) -------------- +20,00,000
Total Income (A) 32,00,000 1,08,00,000
Expenses
Office Salaries(TR) 12,00,000 24,00,000
Bad Debts(Pre) 5,00,000 ----------
Depreciation (TR) 6,00,000 12,00,000
Office Rent(WN) 2,00,000 7,00,000
Commission on Sales (SR) 4,00,000 11,00,000
Debenture Interest(Po st) ------------ 8,00,000
Directors Fees( Post) ------------- 8,00,000
Interest on Purchase consideration
(2:1) 4,00,000 2,00,000
Total Expenses (B) 33,00,000 72,00,000
Loss(A -B)
Less Vendors share 60%
Loss transferred to Goodwill 1,00,000
(60,000)
40,000
Net Profit (A -B)
36,00,000

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Ascertainment and
Treatment of Profit Prior
to Incorporation
131 Illustration 6
Kalpana Limited was registered on 1st February 2013 to acquire the
business of M/s. XYZ as on 1st October 2012. The accounts of the
company for the period ended 30th September 2013 disclosed the
following facts:
1) The turnover for the whole period 1st October 2012 to 30th
September 2013 was Rs. 2,40,000 of which 40,000 related to the
period from 1st October 2012 to 1st February 2013
2) The trading account showed a gross profit of Rs. 96,000
3) The following items appeared in the Profit and Loss Account:
a. Directors Fees – Rs. 1,500
b. Auditors fees – Rs. 750
c. Rent, rates and Taxes – Rs. 4,800
d. Bad debts (of which Rs. 700 related to book debts created before 1st
February 2013) – Rs. 2000
e. Salaries – Rs. 12,000
f. Interes t on Debentures – Rs. 6,000
g. Depreciation – Rs. 3,600
h. Preliminary expenses – Rs. 2,400
i. General Expenses – Rs. 1,800
j. Commission on sales – Rs. 3,600
k. Printing and Stationery – Rs. 2,400
l. Advertising – Rs. 4,200
m. Traveller’s salaries – Rs. 8,400
n. Interest to Vend or at 10% p.a. on Rs. 1,00,000 from 1st October
2012 to 31st May 2013 – Rs. 6,667

Prepare a statement showing profits earned by the company prior to
incorporation and after incorporation clearly indicating the basis of
allocation of expenses. Assume Audit fees is for the entire year.
Solution -
WN 1
Time ratio – 1:2
Sales Ratio 1: 5
Total Turnover for the accounting periods = Rs 2,40,000
Sales in the pre incorporation period (OCT - FEB) = Rs. 40,000
Therefore Sales in post incorporation period = R s. 2, 00,000
Therefore SR 1: 5
WN2
Interest to Vendor
10% on 1,00,000 for 8 months – Rs 6666.66
Rounded off to Rs 6667
Out of which from 1st October 2012 to 1st February 2013 – munotes.in

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132 Financial Accounting (Special Accounting Areas – IV) 4 months will be pre incorporation.
From 1st Feb 2013 to 31st May 2013 -
4 months will be post incorporation.
Thus the amount will be allocated in the ratio 4: 4 or equally among the
pre and post incorporation periods.
Statement showing Profit and loss
For the year ended 30th September 2013.
Particulars Basis Pre-
Incorporation Post-
Incorporation
Debit Credit Debit Credit
Gross Profit –SR Turnover 16,000 80,000
Expenses
Directors fees Post 1,500
Auditors fees –TR 1:2 250 500
Rent , Rates 1:2 1600 3200
Bad Debts Given 700 1300
Salaries 1:2 4000 8000
Debenture Interest Post 6000
Depreciation 1:2 1200 2400
Preliminary expenses Post 2400
General expenses 1:2 600 1200
Commission on sales 1:5 600 3000
Printing and Stationery 1:2 800 1600
Advertisin g 1:5 700 3500
Travellers Salary 1:5 1400 7000
Interest to vendor 4:4 3333 3334
Total of expenses 15183 44934
Capital Reserve (Bal.
fig) 817
Net Profit (Bal Fig) 35066
Total 16,000 16,000 80000 80,000


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Ascertainment and
Treatment of Profit Prior
to Incorporation
133 Illustration 7
Sunder am Brothers was taken over by Sunderam Ltd on 1st May 2017.
However the company was incorporated on 1st February 2018. The
following was the Profit and Loss a/c for the period from 1st May 2017 to
31st March 2018.
To Salaries 72,000 By Gross Profit 7,00,000
To Rent( Net) 39,000 By Discount 7,000
To Delivery van
expenses 14,000
To General Expenses 22,000
To Advertisement
expenses 3,50,000
To Bad debts written
off 14,000
To Debenture Interest 70,000
To Directors meeting
fees 10,000
To Preliminary
expenses 4,000
To Net profit c/d 1,12,000
Total 7,07,000 Total 7,07,000

You are informed that –
a) Salaries in pre - incorporation and post - incorporation period were Rs
6,000 p.m and Rs 9,000 p.m respectively.

b) Gross profit percentage is fixed. Average monthly turnover is nine
times in May, October and November 2017 as compared to average
monthly turnover of remaining months .

c) Audit fees Rs 4,400 is to be provided for the abo ve period.

d) Rent on the debit side is after subtracting rent received at Rs 4,000 p.m
from 1st December 2017.

You are requested to prepare Statement of Profit and Loss in columnar
form apportioning various incomes and expenses on suitable basis in the
pre and post incorporation period from 1st May 2017 to 31st March 2018.
(Mumbai University April 2010)

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134 Financial Accounting (Special Accounting Areas – IV) Solution:
Working notes1:
Pre incorporation period 1st May 2017 to 1 Feb 2018 = 9 months post incorporation 1st Feb. 2018 to 31st Mar. 2018 = 2 months
Time ratio (TR ) 9:2 and
Sales ratio (SR) 33:2
WN-2 Salaries
Pre incorporation Rs 6,000x 9 months = 54,000
Post incorporation Rs 9,000x 2 months = 18,000
WN- 3 Rent received
Pre incorporation 4000 x 2 months = 8,000
Post incorporation 4,000 x 2 months= 8,000
WN-4 Rent paid
Pre incorporation 5,000x 9 months =45,000 post incorporation 5,000x 2
months =10,000
WN-4 Audit fees to be allocated in the Time ratio 9:2
In the books of Sunderam Ltd –
Profit and Loss a/c
For the period 1st May 2017 to 31st March 2018 Dr. Cr.
Particulars Pre Post Particulars Pre Post
To Salaries –WN1 54,000 18,000 By Gross
Profit -SR 6,60,000 40,000
To Rent –WN 3 45,000 10,000 By Rent
received 8,000 8,000
To Delivery van
expenses –SR 13,200 800 By Discount –
SR 6,600 400
To General
Expenses –TR 18,000 4,000 By Net Loss (Bal. Fig) 90,000
To Advertisement
expens es - SR 3,30,000 20,000
To Bad debts
written off – SR 13,200 800
To Debenture
Interest - Post 70,000
To Directors
meeting fees - Post 10,000
To Preliminary
expenses –Post 4,000
To Audit - TR 3,600 800
To Capital Reserve (Bal Fig) 1,97,600
6,74,600 1,38,400 6,74,600 1,38,400
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Ascertainment and
Treatment of Profit Prior
to Incorporation
135 Illustration 8
Abhishekh Ltd was incorporated on 1st August 2017 to take over a running
partnership business with effect from 1st April 2017. Following are the
details of Income and Ex penses for the year ended 31st March 2018

Particulars Amt Rs Amt Rs
Gross Profit 19,20,000
Less Expenses
Directors Fees 98,000
Rent 1,71,000
Bad debts 24,000
Salaries 3,66,000
Interest on Debentures 45,000
Depreciation 1,32,000
Preliminary expenses written off 87,000
General Expenses 98,400
Commission on Sales 72,000
Printing and Stationery 1,86,000
Advertisement Expenses 2,41,000
Audit Fees 1,17,200
Carriage Outward 1,45,600
Electricity charges 88,800
Insurance Premium 48,000
Net Profit NIL
19,20,000 19,20,000

Additional information -
a) Rent is paid on the basis of floor space occupied .Floor space occupied
was doubled in the post incorporation period

b) Sales for each month of December 2017 to Marc h 2018 were double
the monthly sales of April 2017 to November 2017.

c) Audit fees is for entire year

d) Bad debts Rs 4,000 is in respect of sales effected two years ago.

e) Mr Anil was a working partner in the firm entitled to a remuneration
of Rs 24,000 per m onth From 1st August 2017, he was made the munotes.in

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136 Financial Accounting (Special Accounting Areas – IV) Managing Director of the company and was entitled to salary Rs
30,000 per month. The remaining salary is to two clerks employed
during the period from 1st July 2017 to 31November 2017.

Prepare a statement showin g profits in the pre and post incorporation
period separately.
Solution:
WN 1 -
Time ratio - TR 4: 8 or 1: 2
Sales Ratio - SR 4:12 or 1: 3
WN-2
Bad debts total 24,000 to be allocated as under
Pre Post
Given 4,000
Balance Rs. 20,000 in SR 5,000 15,000
TOTAL 9,000 15,000
WN-3
Rent to be allocated on the basis of floor space which was doubled in post
incorporation ratio is 1:4
WN-4
Salary to Anil as partner
24,000 x 4 months= 96,000 in pre incorporation
Salary to Anil as Managing director –
30,000 x 8 months = 2,40,000 in post incorporation
Balance salary
3,66,000 – (96000+240000) = 30,000 to be paid to clerks from 1st July
2017 to 30th November in 1: 4 ratio
Statement Showing Pre and Post Incorporation Profit/ Loss
For The Year Ended 31st March 2018
Particulars Basis Pre Post
Gross Profit SR(1:3) 4,80,000 14,40,000
Less Expenses
Directors fees POST 98,000
Rent WN 2 ( 1:4 ) 34,200 1,36,800
Bad debts WN 1 9,000 15,000
Salary --- Anil WN 3 96,000 2,40,000
Clerks WN 3 ( 1:4 ) 6,000 24,000 munotes.in

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Ascertainment and
Treatment of Profit Prior
to Incorporation
137 Interest on Debentures POST 45,000
Depreciation TR (1:2) 44,000 88,000
Preliminary expenses
written off POST 87,000
General expenses TR(1:2) 32,800 65,600
Commission on sales SR 18,000 54,000
Printing and stationery TR 62,000 1,24,000
Advertising expenses SR 60,250 1,80,750
Auditors fees TR 39,066 78,134
Carriage outward SR 36,400 1,09, 200
Electricity charges TR 29,600 59,200
Insurance premium TR 16,000 32,000
Total expenses 4,83,316 14,36,684
Loss transferred to
Goodwill (Bal. Fig) 3,316
Net Profit ( Bal. Fig) 3,316

5.4 EXERCISE
Practical Problems
1. A limited company wa s incorporated on 1st July 2018 to take over
business as a going concern as from 1stApril 2018. The profit and loss
a/c was drawn as on 31st December 2018. Calculate Time ratio.
(Answer: Time Ratio -3: 6 or 1:2)
2. A limited company was incorporated on 1st April 2018 to take over
business with effect from 1st January 2018.The company prepared its
Profit and Loss account for the year ended 31st March 2019.The
company was able to double the average monthly sales from 1st April
2018. Calculate Time Ratio and Sales Ratio.
(Answer: Time Ratio 3: 12 or 1: 4 Sales Ratio 3: 24 or 1: 8)
3. A limited company took over the business of a partnership firm with
effect from 1st January 2018. The company was registered on 1st
August, 2018. Details of Income and expenses for the year ended 31st
December 2018 is as under –
Particulars Amt ( Rs) Amt ( Rs)
Gross Profit
Less Expenses
Salaries
Rates and Insurance
Printing and Stationery

7,20,000
5,40,000
2,88,000 37,80,000



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138 Financial Accounting (Special Accounting Areas – IV) Audit Fees
Directors Fees
Carriage Outward
Advertising
Electricity charges
Commission on sa les
Debenture Interest
Depreciation
Interest on Purchase consideration 90,000
72,000
2,70,000
1,89,000
2,16,000
3,24,000
84,000
1,26,000
81,000







30,00,000
NET PROFIT 7,80,000

Additional Information -
1) Sales for each of the months April, May, June, October, November and
December were twice the sales for each of the months January,
February, March, July, August and September.
2) The purchase consideration was settled on 1st November 2018.
3) Audit fees are payable for the entire year .Calculate the profits for Pre
and post incorporation periods separately.
(Answer – Time Ratio 7: 5 Sales Ratio 5:4)
(Hints - Rs 81,000 Interest on Purchase consideration to be allocated in 7:
3 Ratio. Amount in pre inc orporation Rs 56,700 and in post incorporation
Rs 24,300 Final answer Profit prior to incorporation transferred to Capital
Reserve Rs 453300 and Profit post incorporation Rs 326700)
4. RJ Ltd was incorporated on 1st August 2017 to acquire business as on
1st April 2017. The first accounts were closed on 31st March 20118.
The following items appeared in the Profit and Loss Account .
Profit and Loss A/c for the year ended 31st March 2018
Dr Cr
Particulars Amt (Rs) Particulars Amt (Rs)
To Directors Fees 49,000 By Gross Profit 9,60,000
To Rent 85,500
To Bad Debts 12,000
To Salaries 1,83,000
To Interest on
Debentures 24,000
To Depreciation 66,000
To Preliminary
expenses 42,000 munotes.in

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Ascertainment and
Treatment of Profit Prior
to Incorporation
139 To General Expenses 49,200
To Commission on
Sales 36,000
To Printing and
Stationery 93,000
To Advertising 1,20,000
To Audit Fees 58,600
To Carriage Outward 72,800
To Electricity charges 44,400
To Insurance Premium 24,000
Total 9,60,000 Total 9,60,000

Additional Information -
1) Rent is paid on the basis of floor space occupied. The floor space was
doubled in the post incorporation period.
2) Sales for each month of December 2017 to March 2018 were double
the monthly sales of April to November 2017.

3) Bad Debts Rs 2,000 were in respect of sales effected two years ago.

4) Mr Amit was working partner in the firm entitled to a remuneration @
Rs 12,000 p.m from 1st August 2017. He was Managing Director of a
company entitled to salary @Rs 15,000 p.m . The remaining sal ary is
to two clerks employed during the period 1st July to 30th November
2017.You are required to prepare Statement of Profit and Loss for the
year ended 31st March 2018 and show the Pre and post incorporation
profit or Loss .

(Answer: Time Ratio 1:2 Sa les Ratio 1: 3 Pre incorporation loss Rs 1658
Post Incorporation Profit Rs 1658)
(Hints -
 Bad debts Rs 12,000 Rs 2000 old bad debts to be shown in pre
incorporation and balance (12000 -2000=10,000) to be allocated in the
sales ratio 1: 3 Allocation of Bad debts in -Pre incorporation period (
2000+ 2500) 4500 and Post incorporation 7500.

 Rent to be allocated in 4: 16 ratio

 Salaries a) Amit pre incorporation 12000x4 months =48,000 post
incorporation From August2017 to March 2018 8 months @ 15,000
per month 15000x8= 1,20,000 Total Salary as per P&L a/c Rs
1,83,000 Total salary to Amit ( 48000+ 120000) 1,68,000 Therefore
balance amount to clerks for 5 months July to November is 183000 -
168000=15000

b) For clerks pre incorporation 1 month Rs 3000 and post incorporation
for 4 months August to November 2017 3000x4 =12,000) munotes.in

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140 Financial Accounting (Special Accounting Areas – IV) Objective Questions
5. Match the Columns -

GROUP A GROUP B
1) Sales related expenses
2) Time related expenses
3) Share transfer fees
4) Debenture Interest
5) Partners Salaries
6) Pre- incorporation pr ofit
7) Post incorporation profit a) Transferred to Profit and loss Appropriation account
b) Transferred to Capital Reserve
c) Shown in debit side pre incorporation
column only
d) Shown in debit side post incorporation
column only
e) Shown in credit side pre i ncorporation
column only
f) Shown in credit side post
incorporation column only
g) Allocated in time ratio
h) Allocated in Sales ratio
(Answers 1 -h 2-g 3 -f 4-d 5 -c 6 -b 7 -a)

GROUP A GROUP B
1) Gross Profit
2) Audit Fees
3) Profit prior to
incorporatio n
4) Profit post incorporation
5) Loss prior to
incorporation
6) Dividing point for pre and
post incorporation
7) Preliminary expenses a) is revenue profit
b) Transferred to Goodwill account
c) Date of incorporation
d) is not available for dividend
e) Allocated in Sales Ratio
f) Alloca ted in Time ratio
g) Shown in pre incorporation only
h) Transferred to General Reserve
i) Shown in post incorporation

(Answers - 1— e 2 — f 3 — d 4 — a 5 — b 6 — c 7 — i)

6. State whether the following statements are True or False

1) The fixed expenses are normally to be allocated in Time ratio - True

2) The variable expenses are normally to be allocated in sales ratio - True

3) Gross profit is to be alloca ted in Sales ratio - True

4) Directors fees are to be allocated equally in the Pre and Post
incorporation periods –False

5) The Profit before incorporation is to be transferred to General Reserve
– False
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Page 141

Ascertainment and
Treatment of Profit Prior
to Incorporation
141 6) The Profit after corporation is a revenue Profit - True

7) While computing pre and post incorporation profits, Audit fees are
allocated on Time basis – True

8) Profit prior to incorporation is available for payment of dividend –
False

9) Loss prior to incorporation is debited to Goodwill account - True

10) Prelimina ry expenses should be debited to pre -incorporation period -
False

7. Multiple Choice Questions
1) While calculating profit prior to incorporation, the fixed expenses are
to be allocated _____
a) in Sales ratio b) in Time ratio
c) equally d) none of the above

2) While calculating profit prior to incorporation, the variable expenses
are to be allocated _____
a) in Sales ratio b) in Time ratio
c) equally d) none of the above

3) While calculating profit prior to incorporation, the D irectors fees are to
be ______
a) allocated in sales ratio b) shown as pre incorporation expense
c) shown as post incorporation expenses d) ignored

4) While calculating profit prior to incorporation, the partners salaries
are to be _______
a) allocate d in sales ratio b) shown as pre incorporation expense
c) shown as post incorporation expenses d) ignored

5) The profit prior to incorporation is transferred to _________
a) Capital Reserve b) General Reserve
c) Securities Premium d) Goodwil l

6) The share transfer fees are _______
a) to be shown on the credit side of P&L A/c in the pre -
incorporation column
b) to be allocated equally
c) to be shown on the debit side of P&L A/c in the pre -
incorporation column
d) to be shown on the c redit side of P&L A/c in the post -
incorporation column
(Answer: 1 - b, 2- a, 3- c, 4- b, 5- a, 6- d.) munotes.in

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142 Financial Accounting (Special Accounting Areas – IV) 8. Short Numerical Objective Questions –
1) Kalpana Limited was registered on 1st February 2013 to acquire the
business of M/s. XYZ as on 1st October 2012. T he accounts of the
company for the period ended 30th September 2013 disclosed the
following facts:
a) The turnover for the whole period 1st October 2012 to 30th September
2013 was Rs. 2,40,000 of which 40,000 related to the period from 1st
October 2012 to 1st February 2013
b) The Trading account showed a Gross profit of Rs. 96,000
Calculate Time Ratio and Sales Ratio. State how the Gross profit will
be allocated between the pre and post incorporation periods.
(Answer - Time ratio 4:8 or 1:2 Sales Ratio 1: 5 Gros s profit Rs
96,000 to be allocated in Sales Ratio Pre incorporation amount Rs
16,000 post incorporation Rs 80,000)
2) Friendship Ltd was incorporated on 1st April 2017 to take over
business of the partnership firm with effect from 1st January 2017. The
compan y prepared its Profit and Loss a/c for the year ended 31st March
2018 . The company was able to double the average monthly sales from
1st April 2017. Calculate Time ratio and Sales ratio
(Answer Time Ratio 3:12 or 1:4 Sales Ratio 3:24 or 1:8)
3) Indo-Japan L td was incorporated on 1st May 2018 to take over a
business as a going concern from 1st January of the same year. The
total turnover for the year ended 31st December was Rs 2,00,000
namely Rs 60,000 for the first period upto 1st May and Rs 1,40,000for
the remaining period. Calculate Time Ratio and Sales Ratio
(Answer Time ratio 4: 8 or 1:2 and Sales ratio 6:14 or 3: 7)


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143 6
FOREIGN BRANCH
Unit Structure
6.1 Introduction
6.2 Rules for Conversion
6.3 Branch Accounting
6.4 Solved Problems
6.5 Exercise
6.1 INTRODUCTION
A Foreign branch usually maintains a complete set of books under double
entry principles. So, the accounting principl es of a Forei gn Branch will be
the same as those applying to an Inland Branch. Before a Trial Balance of
the Foreign Branch is incorporated in the
H. O. books, it has to be converted home currency.
6.2 RULES FOR CONVERSION
In case of fluctuating rates of exchange, the following rules for
conversion are applied:
No Nature of Account Exchange Rate Applicable
1. Fixed Assets Rates ruling at the time they
were acquired.
2. Fixed Liabilities Rates ruling as on the date of
the Trial Balance.
3. Current A ssets & Rates ruling as on the date of
Liabilities the Trial Balance.
4. Remittance sent by the At the actual rates at which
branch they were made.
6. Goods received from H. At the rate ruling on the date of
O. as well as goods dispatch or the date of receipt.
returned to H. O.
6. The Nominal A/c’s Average rate ruling during the
(except next two) accounting period.
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144 Financial Accounting (Special Accounting Areas – IV) 7. Depreciation on Fixed
Assets Rate of conversion applicable in
case of the particular asset
concerned [as indicated in (a)
above].
8. Opening and Closing
stocks Rates ruling of on the opening
and closing dates respectively.
9. Balance in H. O. A/c Value at which the Branch A/c
appears in H. O. books on the date.
6.3 BRANCH ACCOUNTING (FOREIGN BRANCH)
FOREIGN BRANCHES
When a branch is established abroad it is called as a Foreign Branch. The
accounting arrangements for a foreign branch are exactly the same as for
any independent branch up to the Trial Balance. But in this case accounts
are maintained in foreign currency to corr espond with t he local conditions
the main problem which the Head Office has to face is the restatement of
accounts one currency into another. In order to incorporate the Trial
Balance of a foreign branch in the books of the head office it must be
translate d (using appr opriate exchange rates) into the currency of the Head
Office.
Rules for conversion of Branch Trial Balance when Exchange Rates
are ‘Stable’
Exchange rate is said to be stable, when it does not vary to a great extent
from time to time. In this situation, a fixed exchange rate can be used to
convert the branch Trial Balance into the currency of the Head Office with
the exception of (a) Remittances, and (b) Head office Current Account.
a. Remittances: These are converted at the actual rates at which they
were made.
b. Head Office Current Account: The actual figures shown for the Branch
Current Account in the books of the Head Office (after taking into
consideration in-transit items).
When the foreign branch Trial Balance is converted into local currency, a
new Trial Balance takes birth known as “Difference on Exchange
Account” is opened to make the Trial Balance agree.
Closing of Difference on Exchange Account
i. For debit entry on trial balance
Profit and Loss Account Dr. OR
Exchange Reserve Account Dr. (if any) munotes.in

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Foreign Branch
145 Sr. Heads of L. F. Currency Dr. $ Cr. $ Rate of ExchangRupees No. AccountDr. Rs. Cr. Rs. To Difference on Exchange Account
ii. For credit entry on trial balance
Difference on Exchange Account Dr. To Exchange Reserve Account Big
Differences)
(If the difference is very small, it can credited to Profit & Loss
account)
The format of the new Trial Balance of the branch is generally
drawn up as follows:
Foreign Branch Converted Trial Balance as at 31st December, 2006

6.4 SOLVED PROBLEMS
Q.1 ABC Ltd. has a branch in New York as on 31st March 2011 the
trial balance of the branch was as follows:
Particu lars Dr. $ Cr. $
Head office account - 8,500
Goods from head office 44,000 -
Furniture 9,000 -
Bank Balance 1,250 -
Cash 250 -
Rent 1,200 -
Outstanding Expenses - 800
Sundry debtors 3,150 -
Sales - 61,000
Stock – 1.4.2010 8,500 -
Salaries 2,800 -
Insurance 150
70,300 70,300

The branch account in head office shows debit balance Rs. 2,14,500 and
goods sent to branch credit balance of Rs. 13,12,500.
Depreciation furniture @ 10% p.a.
Stock at branch 31st March 2011 was $ 7,500 Furniture was pur chased in munotes.in

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146 Financial Accounting (Special Accounting Areas – IV) 1997 when 1$ = Rs. 20 Exchange Rates were:
On 1.4.2010 1$= Rs. 28
On 31.3.2011 1$= Rs. 30
Average rate 1$= Rs. 29
You are required to prepare branch trial balance by converting in rupees
and prepare branch trading and profit and loss a/c for the year ended
31.3.2011 and balance sheet as on that date.
Solution:
Converted Trial Balance as on 31st March 2011 In the Books of Branch
Sr.
no. Particulars Dr. ($) Cr. ($) Rate Dr. ($) Cr. (Rs)
1 Head office 8,500 Actua
l - 214,500
account
2 Sales 61,000 29 - 1,769,000
3 Goods from 44,000 - Actua
l 1,312,500
Head Office
4 Stock on 1-4- 8,500 - 28 238,000
10
5 Furniture 9,000 - 20 180,000
6 Cash in box 250 - 30 7,500
7 Bank 1,250 - 30 37,500
Balance
8 Salaries 2,800 - 29 81,200
9 Rent 1,200 - 29 34,800
10 Insurance 150 - 29 4,350
11 Outstanding - 800 29 24,000
expenses
12 Sundry 3,150 - 30 94,500 -
debtors
13 Difference in - - 30 17,150 -
Exchange
70,300 70,300 2,007,500 2,007,500
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Foreign Branch
147 In the books of Branch, Trading & Loss a/c for the year ended 31st
March 2011
Particulars Dr. Amt Particulars Cr. Amt
To Opening stock 238,000 By Sales 1,769,000
a/c
To Goods from H. 1,312,500 By Closing stock 226.000
O.
To Rent 34,800

To Gross profit c/d
408,700
1,994,000 1,994,000

To Salaries
81,200
By Gross profit b/d
408.700
To Insurance 4,350
To Depreciation 18,000
To Diff. in 17,150
exchange
To Net profit c/d 288,000
408.700 408.700

Balance sheet as on 31st March 2011
Liabilities Amt Assets Amt
Head office 2,14,500 Furniture 1,80,000
a/c
Add: Net 2,88,000 5,02,500 Less: 18,000 1,62,000
profit Depreciation
Cash in box 7,500
Outstanding 24,000 Bank 37,500
expenses balance
Sundr y 94,500
debtors
Closing 2,25,000
Stock
5,26,500 5,26,500 munotes.in

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148 Financial Accounting (Special Accounting Areas – IV) Q.2 The following balance appeared in the books of Surat branch of firm
in London as on 31st December 2010.
Particular Dr. Rs. Cr. Rs. Particular Dr. Rs. Cr. Rs.
Sales - 225,000 Stock as 25,200 -
on 1st Jan
2008
Debtors 78,000 - Purchases 150,000 -
Bills 20,800 - Wages/sal 9,600 -
Receivable aries
Head Office - 66,400 Rent, 7,200 -
account Rates,
Taxes
Cash at Axis 57,980 - Furniture 9,820 18,200
Bank
Miscellaneous
Exp 3,000 - Bills
payable 52,000
Creditors
361,600 361,600

Stock on 31st December 2010 was Rs. 65,000. Surat branch a/c in the
books of London head office showed a debit balance of Rs. 2.680 on 1st
December 2010.
Furn iture was pur chased from a remittance of Rs. 350 received from
London H. O. which exactly covered the cost of the item.
The rates of exchange were:
31.12.2009 Rs. 28/1 pound
31.12.2010 Rs. 26/1 pound
The average rate for 2008 may be taken at Rs. 24 per 1 pound.
Prepare the trading and p&I account and balance sheet of Surat branch in
the books of London H. O. assuming the branch operations to be integral
to the main operation.Solution: munotes.in

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Foreign Branch
149 Converted Trail Balance as on 31st Dec. 2010
Sr.
No. Particulars Rs. Rs. Rate Pound Pound
1 Stock as on 25,200 - 28 900 -
1.1.10
2 Purchases 1,50,000 - 24 6,250 -
3 Sales - 2,25,000 24 - 9,375
4 Debtors 78,000 - 26 3,000 -
5 Creditors - 52,000 26 - 2,000
6 Bills receivable 20,800 - 26 800 -
7 Bills payable - 18,200 26 - 700
8 Wages/Salaries 9,600 - 24 400 -
9 Rent, rates, 7,200 - 24 300 -
taxes
10 Miscellaneous 3,000 - 26 115 -
exp
11 Furniture 9,820 - - 350 -
12 Cash at Axit 57,980 - 26 2,230 -
Bank
13 Head office a/c - 66,400 - 2,680
14 Diff. in - - 410 -
exchange
14,755 14,755

Trading and profit n Loss a/c for the year ending 31.12.2010
Particular Amt Particular Amt
To opening stock a/c 900 By sales 9,375
To purchases 6,250 By closing stock 2,500
To wages/salar ies 400
To gross profit c/d 4,325
11,875 11,875
By gross profit b/d 4,325
To rent, rates and taxes 300
To difference in exchange 410
To N. P. c/d 3,615
4,325 4,325
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150 Financial Accounting (Special Accounting Areas – IV) Balance sheet as on 31st Dec 2010
Liabilities Amt Assets Amt
Head office a/c 2,680 Debtors 3,000
Add: N. P 3,615 6,295 Bills Receivable 800
Furniture 350
Creditors 2,000 Cash at Axis bank 2,230
Bills payable 700 Closing Stock 2,500
Miscellaneous Exp 115
8,995 8,995

Q.3 Kaun Banga Koredpati Computers Ltd. has head off ice at Mumbai
and Branch at California. The branch submits the following trial
balance as on 31st Mar. 2011.
Particulars Dr. US $ Cr. US $ Assets Dr. US $ Cr. Us $ Head office
a/c - 11,606 Salaries 71,130 -
Goods
received Office rent 44,31 6 -
From H.O. 12,725 Taxes &
insurance 13,655 -
Purchases &
sales 5,06,323 7,87,777 Debtors and 1,17,117 -
Stock
(1.4.10) 13,100 creditors 37,119 1,57,617
Plant &
machinery 27,650 Printing &
stationary 16,303 -
Furniture &
fixtures 18,220 Postage &
telegrams 14,784 -
Cash in
hand 3,233 Freight 14,784 -
Cost at bank 60,180 conveyance 1,145 -

1. The branch a/c in H. O. showed a debit balance of Rs. 5,11,100 and
goods sent to branch a/c showed a credit balance of Rs. 5,66,60 0.
2. Plant & ma chinery was acquired when US$ Rs. 46. furniture was
acquired by branch on 1st Jan’11 when Rs. 100 were equivalent to US
$ 2.50 H. O. office charges depreciation on plant & machinery @20%
p.a. & on furniture & fixture @10% munotes.in

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Foreign Branch
151 p.a. The closing stock as on 31st Mar’11 at branch was US $
16,550. The exchange rates were as under 1st Apr.’10 US $
38.50 31st Mar’11 US $ 2.50 Aug US $ 44 convert the branch trial balance
into rupees & prepare profit & loss a/c for the year ended 31st Mar’11
prepare balance sheet of Cal ifornia branch of Kaun Banega Karodpati Ltd.
as on 31st Mar’11 the foreign operation is in the nature of an integral
operation.
Solution:
Converted Trial Balance for the year ending 31st Mar’11
Particulars Dr. ($) Cr. ($) Rate Dr. ` Cr. `
Head office a/c - 11606 Actual 511100
Goods received
from H. O. 12725 Actual 566600
Purchases
sales & 506323 787777 44 22278212 34662188
Stock (1.4.10) 13100 38.50 504350
Plant
Machinery & 27650 46 1271900
Furn & fixtures 18220 40 728800
Salari es 71130 44 3129720
Office rent 44316 44 1949904
Taxes
insurance & 13655 44 600820
Drs/ & creditors 117117 157617 40 4684680 6304680
Priting
creditors & 37119 44 1633236
Printing
stationery & 37119 44 717332
Postage
telegram & 16303 44 650496
Freight 14784 44 50380
Conveyance 1145 44 129320
Cash in hand 3233 40
Diff.
exchanges in 2407200
Cash at bank 60180 40 175018
Diff in exchange 41477968 41477968
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Page 152

152 Financial Accounting (Special Accounting Areas – IV) In the books of branch Trading and Profit & Loss a/c for year ende d
31st Mar’11
Particulars Amt Particulars Amt
To opening 5,04,350 By sales 34662188
stock
To purchases 2,22,78,212 6,62,000
To goods 5,66,600 By closing
from H. O. stock (16550 x
40)
To gross 1,19,75,026
profit c/d
35324188 353241 88
To salari es 31,29,720 By gross profit 1,19,75,026
b/d
To office rent 19,49,904
To taxes
& 6,00,820
insurance
To printing & 16,33,236
stationery
To postage & 7,17,332
telegram
To freight 650496
To 50380
conveyance
To 327260
depreciation
To diff
in 1,75,018
exchange
To net profit 27,40,860
c/d
1,19,75,026 1,19,75,026



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Page 153

Foreign Branch
153 Balance sheet as on 31st Mar’11
Liabilities Amt Amt Assets Amt Amt
Head office
a/c 5,11,100 Plant

& mach. 12,71,900
(+) Net
profit 2740860 3251960 (-)

&
fixtures 2,54,380 10,17,520 (-) depn 728800 6,55,920
creditors 63,04,680 Debtors 72,880 46,84,680 Cash in
hand 1,29,320
Cash at
bank 24,07,200 Closing
stock 6,62,000
9556640 9556640

Q.5 XY Ltd has a branch in New York. At the end of each year (Dec’ 31)
a trial balance sent by the branch in dollar currency is converted into rupee
currency at the head office. (Bhopal)
The following trial balance for the year has been compiled at the branch
as on 31st Dec.’10
Particulars Dr. $ Cr. $
Bill receivable 2,500 -
Sundry debtors 3,800 -
Sundry creditors - 1,100
Purchases 1,3,500 -
Sales - 22,800
Furniture & fixtures 1,340 -
Stock (1st Jan’10) 2,000 -
Establishment expenses 2,000 -
Salaries 1,400 -
Rent, rates & taxes 400 -
Sundry expenses 1,450 -
Depreciation on furniture & fixtures 128 - munotes.in

Page 154

154 Financial Accounting (Special Accounting Areas – IV) Remittances to H. O. 1,502 -
Head office account - 6,920
Cash on hand & at bank 800
30,820 30,820

The stock in hand on Dec 31st ’10 was $ 2,500 th e rates of exchange
were: -
Dec 31’09 to June 30’10 1 $ = 34 July 1st ’10 to 31st Dec ’10
1$ = 36.
In the Bhopal books the balance of New York branch a/c & of the
remittances from New York branch a/c appear as 1,78,847 & Rs. 37,068
respectively. The origina l furniture & fixture were bought when the rate of
exchange was $ 1 = Rs. 30. Convest the above trail balance into rupee
currency & prepare the final a/c of the branch.
Solution:
Converted trial bal. as on 31st Dec.’10 in bks of brch
Particulars Dr. $ Cr.$ Rate Dr.` Cr.`
Bills receivable 2500 36 90,000
Sundry debtors 3,800 36 1,36,800
Sundry
creditors 1100 36 39,600
Purchases

& sales 13500 22800 35 472500 798000
Furn & fixtures 1340 30 40,200
Stock 1st Jan
2010 2000 34 68,000
Establishment
expenses 2000 35 70,000
Salaries 1400 35 49,000
Rent, rates &
taxes 400 35 14,000
Sundry
expenses 1450 35 50,750
Dep. On furn &
fixture 128 30 3840 munotes.in

Page 155

Foreign Branch
155 Remittance to
H. O. 1502 Actual 37068
H O. account 6920 Actual 178847
Cash on hand &
at bank 800 36 28800
Diff in
exchange 44511
1060958 1060958

In the books of XY Ltd Co. Trading & Profit and Loss a/c for the year
ending 31st Dec’10
Particulars ` Particulars ` To opening stock 68,000 By sales 7,98,000
To purchases 4,72,500 By closing stock
($2500x 36) 90,000
To gross profit b/d 3,47,500
8,88,000 8,88,000
To establishment exps 70,000 By gross profit b/d 3,47,500
To salaries 49,000 By diff. in exchange 44511
To rent rates & taxes 14,000
To sundry expenses 50,750
To Dep on furniture 3,840
To net profit c/d 2,04,421
3,92,011 3,92,011

Balance sheet as on 31st Dec’10
Liabilities ` ` Assets ` H. O. current 1,78,847 fixture 40,200
a/c
(+) net profit 2,04,421
383268 Bills receivable 90,000
(-) remittance 37068 346200 Sundry debtors 1,36,800 Sundry 39,600 cash in hand & 28800
creditors at bank
Closing stock 90,00
3,85,800 3,85,800 munotes.in

Page 156

156 Financial Accounting (Special Accounting Areas – IV) 6.5 EXERCISE
Q.1 White Coller Ltd have branch in Canada. On 31st December 2010 the
trial balance of the branch was as given below.
Particulars Dr. $ Cr. $
Stock as on 1.1.2010 7,500 -
Head office account - 9,000
Sales - 81,000
Goods from head office a/c 45,000 -
Furniture's and fixtures 10,000 -
Owing for expenses - -
Rent 1,000 -
Taxes. Insurance et c 250 -
Salaries 13,000 -
Sundry debtors 12,250 -
Cash in hand 1,050 -
Cash in bank 950 1,000
91,000 91,000

The branch account in the head office showed a debit balance of Rs.
1,12,500 and goods sent to branch account a credit balance of Rs.
8,07,5 00.
Furniture and fixtures are acquired on 1.1.2010. 1 pound = Rs. 16. Provide
depreciation @ 10% p.a.
The exchange rates were:> January 1 pound = Rs. 17.50
December 1 pound = Rs. 18.50
Average 1 pound = Rs. 18.00
The stock at branch on 31st December 2010 were valued a t 4500 pounds.
Prepare Trading, P & L A/c Balance Sheet of Canada branch account for
the year ended 31.12.2010
Q.2 Zenith Computers Ltd. has H. O. at Mumbai and branch at Boston U.
S. A. The branch submits the following trail branch as on 31st March
2011.

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Page 157

Foreign Branch
157 Particular Dr. $ Cr. $
H. O. account - 12,707
Goods received from H. O. 11,600 -
Purchases and sales 387,516 610,416
Stock as on 1.4.2010 14,316 -
Plant & Machinery 34,120 -
Furniture and fixtures 16,316 --
Cash at bank 3,816 -
Cash in hand 1,314 -
Salaries 68,016 -
Office rent 42,340 -
Taxes and insurance 11,672 -
Debtors and creditors 125,430 127,977
Printing and stationary 12,148 -
Postage and telegram 11,010 -
Courier charges 6,316 -
Internet charges 2,718 -
Legal expenses 2,452 -
751,1 00 751,100

The branch account in head office showed a debit balance or Rs.
5,84,222 and goods sent to branch account showed a credit balance of Rs.
5,56,800. Plant & Machinery was acquired by the branch as on 31st
December 2010, when 1US $ = Rs. 4 6. Furn iture & fixtures were acquired
by the Boston branch on 30th June 2010 when Rs. 100 was equal to US $
2.50. H. O. provides depreciation on the P&M @ 25 % p.a. and on
furniture and fixture @ 10% p.a.
The Boston branch reported closing stock of U S$ 15,350 on 31st March
2002. The exchange rates were at under.
1.4.2010 US $ 1 = 43.50
31.3.2011 Rs. 100 = US $ 2.00
Average US $ 1 = 46.50
Convert the branch trial balance into rupees and prepare branch profit and
loss a/c for the year ended 31st March 2 011. also you are required to
prepare balance sheet of Boston branch Zenith Computers Ltd. as on 31st
March 2011. munotes.in

Page 158

158 Financial Accounting (Special Accounting Areas – IV) Q.3 GHCL & Co. has head office at New York (U.S.A.) and branch at
Mumbai (India). Mumbai branch furnishes you with its trail
balance as on 31st March 2011 and the additional information given
thereafter.
Particulars Dr.
Rs. Cr.
Rs. Particulars Dr.
Rs. Cr.
Rs.
Stock on 300 - Rent, rates & 360 -
1.4.2004 taxes
Purchases and 800 1,200 Sundry 160 -
sales charges
Sundry debtors 400 - Compute rs 240 -
Sundry - 300 Bank balance 420 -
creditors
Bills of 120 240 New York - 1,620
exchange office a/c
Wages and 560 -
salaries
3,360 3,360

Additional Information:
1. Computers were acquired from a remittance of US $ 6,000 received
from New York head office and paid to the suppliers. Depreciate
computers at 60% for the year.
2. Unsold stock of Mumbai branch was worth Rs. 4,20,000 on 31st
march 2011.
3. The rates of exchange may be taken as follows:
a. On 1.4.2010 @ Rs. 40 per US $
b. On 31.3.2011 @ 42 per US $
c. Average exchange rate for the year @ Rs. 41 per US $
d. Conversion in $ shall be made upto two decimal accuracy.
You are asked to prepare in US $ the revenue statement of the year ended
31st March 2011 and the balance sheet as on that date of Mumbai branch
as would appear in the book of New York head office of GHCL & Co.
You are informed that Mumbai branch account showed a debit balance of
US $ 39,609.18 on 31.03.2011 in New York books and there were no
items pending reconcilia tion. The for eign operation is in the nature of an
integral operation. munotes.in

Page 159

Foreign Branch
159 Q.4 The foll. Balance appeared in the books of PQR Branch of the firm
in Sydney on 31st Dec. 2010.
Particulars Dr. Rs. Cr. Rs. Particular s Dr. Rs. Cr. Rs.
Stock as on 50,400 Wages & 19,200
1st Jan ‘10 salaries
Purchases 3,00,000 Rent rates 14,400
& taxes
Debtors 1,56,000 Miscellan
e 6,000
ous exp
Bills 41,600 Furniture 19,640
receivable & fitting
Sales 4,50,000 Cash at 1,15,960
bank
Creditors 1,04,000 Head 1,32,800
office a/c
Bills payable 36,400
7,23,200 7,23,200

1. Stock as on 31st Dec’10 was Rs. 1,43,000 PQR Branch a/c in the
books of Sydney head office showed Dr. balance on £5,360 on 31st
Dec’10.
2. Furniture which exactly were pur chased from a remittance of £ 700
received from Sydney head office which exactly covered the cost of
item.
3. The rates of exchange were: 31st Dec’ 09 Rs. 28 per £, 31st Dec’10 Rs.
26 per £. Average rate for year 2010 may be taken at Rs. 24 per £.
4. Prepare tra ding profit a nd loss a/c and balance sheet of PQR branch in
the books of Sydney head office assuming branch operation to be
integral to the main operations.
Q.5 KBK Ltd has a branch in Sydney, Australia at the end of 31st Mar
2011 the foll. ledger of the Sydne y office.




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Page 160

160 Financial Accounting (Special Accounting Areas – IV) Sydney (Australia Dollars thousand)
Particulars Dr.
A$ Cr.
A$ Particulars Dr. A$ Cr.
A$
Plant & machinery 200 - Goods sent to 5
(cost) branch
Prov. For plant Wages & salaries 45
& machinery - 130 Rent 12
Debtors / creditors 60 30 Office expenses 18
Stock (1.4.10) 20 Commission 100
receipts
Cash/bank balance 10 Branch H. O.
Purchases/sales 20 123 Current a/c 7
390 390

Theory Question
1. What is Foreign Branch Accounting.
2. Short note on Conversion of Foreign Branch Trial Balance.


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