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1 1
VALUATION OF GOODWILL AND
SHARES
Unit Structure :
1.1 Meaning
1.2 Concept
1.3 Types of value Goodwill
1.4 Valuation of Shares
1.5 Needs and Purpose
1.6 Factors
1.7 Methods
1.8 Solved Example
1.9 Unsolved Example
1.10 MCQ
1.1 MEANING OF GOODWIL L
Goodwill is an intangible but not fictitious assets that means it has some
realisable value. From the accountant’s point of view, goodwill, in the
sense of attracting custom, has little significance unless it has a saleable
value. To the accountant, ther efore, goodwill may be said to be that
element arising from the reputation, connection, or other advantages
possessed by a business which enables it to earn greater profits than the
return normally to be expected on the capital represented by the net
tangi ble assets employed in the business. In considering the return
normally to be expected, regard must be had to the nature of the business,
the risks involved, fair management remuneration and any other relevant
circumstances.
The goodwill possessed by a firm may be due, inter alia, to the following:
(a) The location of the business premises. The nature of the firm’s
products or the reputation of its service.
(b) The possession of favourable contracts, complete or partial monopoly,
etc.
(c) The personal reputation of the promoters.
(d) The possession of efficient and contented employees. munotes.in
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Financial Accounting
2 (e) The possession of trademarks, patents or a well known business name.
(f) The continuance of advertising campaigns.
(g) The maintenance of the quality of the firm’s product, and
development of the business with changing conditions.
The need for evaluating goodwill may arise in the following cases:
(a) When the business or when the company is to be sold to another
company or when the company is to be amalgamated with another
company;
(b) When, stock exchange quotations not being available, shares have to
be valued for taxation purposes, gift tax, etc.;
(c) When a large block of shares, so as to enable the holder to exercise
control over the company concerned, has to be bought or sold; and
When the company has previo usly written off goodwill and wants its
written back.
In valuation of goodwill, consideration of the following factors will
have a bearing:
(a) Nature of the industry, its history and the risks to which it is subject to.
(b) Prospects of the industry in the future .
(c) The company’s history – its past performance and its record of past
profits and dividends.
(d) The basis of valuation of assets of the company and their value.
(e) The ratio of liabilities to capital.
(f) The nature of management and the chance for its continuation.
(g) Capital structure or gearing.
(h) Size, location and reputation of the company’s products.
(i) The incidence of taxation.
(j) The number of shareholders.
(k) Yield on shares of companies engaged in the same industry, which
are listed in the Stock Exchanges.
(l) Composition of purchasers of the products of the company.
(m) Size of block of shares offered for sale since for large blocks very few
buyers would be available and that has a depressing effect on the
valuation. Question of control, however, may become important, when
large blocks of shares are involved.
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Valuation of Goodwill and Shares
3 (n) The major factor of valuation of goodwill is the profits of the
company. One who pays for goodwill looks to the future profit. The
profits that are expected to be earned in future are extremely important
for valuation of g oodwill. The following are the important factors that
have a bearing on future profits.
(i) Personal skill in management.
(ii) Nature of business.
(iii) Favourable location.
(iv) Access to supplies.
(v) Patents and trademarks protection.
(vi) Exceptionally favourable contracts and
(vii) Capital requirements and arrangement of capital.
(o) Estimation of the profits expected to be earned by the firm and the
amount of capital employed to earn such profits, are to be computed
carefully.
(p) Market reputation which the company and its management enjoys.
(q) Returns expected by investors in the industry to which the firm or
company belongs.
1.2 CONCEPT OF GOODWILL
When one company buys another company, the purchasing company may
pay more for the acquired company than the fair market value of its net
identifiab le assets (tangible assets plus identifiable intangibles, net of any
liabilities assumed by the purchaser). The amount by which the purchase
price exceeds the fair value of the net identifiable assets is recorded as an
asset of the acquiring company. Altho ugh sometimes reported on the
balance sheet with a descriptive title such as “excess of acquisition cost
over net assets acquired”, the amount is customarily called goodwill.
Goodwill arises only as part of a purchase transaction. In most cases, this
is a transaction in which one company acquires all the assets of another
company for some consideration other than an exchange of common
stock. The buying company is willing to pay more than the fair value
of the identifiable assets because the acquired company has a strong
management team, a favorable reputation in the marketplace, superior
production methods, or other unidentifiable intangibles.
The acquisition cost of the identifiable assets acquired is their fair market
value at the time of acquisition. Usua lly, these values are determined by
appraisal, but in some cases, the net book value of these assets is accepted
as being their fair value. If there is evidence that the fair market value
differs from net book value, either higher or lower, the market value
governs. munotes.in
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Financial Accounting
4 Illustration 1: Company X acquires all the assets of company Y, giving
Company Y Rs. 15 lakhs cash. Company Y has cash Rs. 50,000
accounts receivable that are believed to have a realizable value of
Rs. 60,000, and other identifiable assets that are estimated to have a
current market value of Rs. 11 lakhs.
Particulars Rs. Rs. Total purchase price 15,00,000 Less: Cash acquired 50,000 Accounts receivable 60,000 Other identifiable assets (estimated) 11,00,000 12,10,000 Goodwill 2,90,00 0
This extra amount of Rs. 2,90,000 paid over an above, Net worth Rs.
12,10,000 is goodwill, which is a capital loss for purchasing company and
to be shown on assets side of Balance Sheet. This entire amount will be
written off against revenue profit, i.e., Profit and Loss Ac count over period
of time.
1.3 TYPES OF VALUING GOODWILL
There are basically two types of valuing goodwill: (a) Simple profit
method and (b) Super profit method.
(a) Simple Profit Method: Goodwill is generally valued on the basis of
a certain number of years’ purchase of the average business profits of the
past few years. While calculating average profits for the purposes of
valuation of goodwill, certain adjustments are made. Some of the
adjustments are as follows:
Trading Profit/B usiness Profit/Recurring Profit/ Normal Profit (of past
year)
Particulars 1st
Year 2nd
Year 3rd
Year
Net Profit before Adjustment and Tax
Less: Non-trading Income (i.e., Income
from Investment/Asset)
Less: Non-recurring Income (i.e., Profit
on Sale of Investment/Asset)
Add: Non-recurring Loss (i.e., Loss on
Sale of Investment/Asset)
Trading Profit after Adjustment and
before Tax. xx
(xx)
(xx)
xx xx
(xx)
(xx)
xx xx
(xx)
(xx)
xx
xxx xxx xxx
Calculation of Average profit: Total profit of past yearsa) Simple Average Profit =Total number of past years munotes.in
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Valuation of Goodwill and Shares
5 b) Weighted Average profit:
Years Trading
Profit (a) Weight (b) Product (a × b)
2014 xx 1 xx
2015 xx 2 xx
2016 xx 3 xx
6 xxx
Total ProfitWeighted Average Profit Total Weight
Notes: If past profits are in increasing trend, then calculate Average
Profit by weighted average method or otherwise simple average method.
Calculation of FMP (Future Maintainable Profit):
(a) All actual expenses and losses not likely to occur in the future are
added back to profits.
(b) All actual income and gain not likely to occur in the future are
deducted from profits.
(c) All profits likely to come in the future are added and all expenses
likely to come in future are deducted.
Particulars Rs. Simple/Weighted Average Profit before Tax XX
Add: Expenses incurred in past not to be incurred
in future (i.e., Rent paid in past not payable in
future) XX
Less: Expenses not incurred in past to be incurred
in future
(i.e., Rent not paid in past payable in future) (XX)
Less: Notional management Remuneration (XX)
Future maintainable profit before tax XXX
Less: Tax (If rate is not given , assume 50%) (XX)
Future maintainable profit after tax XXX
After adjusting profit in the light of future possibilities, average profit are
estimated and then the value of goodwill is estimated.
This met hod is a simple one and has nothing to recommend s ince goodwill
is attached to profits over and above what one can earn by starting a new
business and not to total profits.
It ignores the amount of capital employed. for earning the profit.
However, it is u sual to adopt this method for valuing the goodwill of the
practice of a professional person such as a chartered accountant or a
doctor.
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Financial Accounting
6 Calculation of Capital Employed and Average Capital Employed
Particulars Rs. Rs. Tangible Trading Assets (at
agreed/ adjustment value) (except: intangible,
non-trading/ fictitious assets):
Plant and Machinery xx
Land and Building xx
Furniture and Fixtures xx
Stock xx
Cash/Bank xx xxx
Less: External Liability (at agreed/adjustment
value) (except: capital and reserves and
surplus):
Loans xx
Debentures xx
Cred itors xx
O/s Expenses, etc. xx xxx
Capital Employed xxx
Opening Capital Employed Closing Capital EmployedAverage Capital Employed 2
1 Average Capital Employed = Closing Capit al employed [ of current year's profit + 2OR
Current year's dividend
1 Average Capital Employed = Opening Capital employed [ of current year's profit + 2
CurrOR
ent year's dividend
(b) Super Profit Method: The future maintainable profits of the firm are
compared with the normal profits for the firm. Normal earnings of a
business can be judged only in the light of normal rate of earning and
the capital employed in the business. Hence, this method of valuing
goodwill would require the following information:
(i) A normal rate of return for representative firms in the industry.
(ii) The fair value of capital employed.
The normal rate of earning is that rate of return which investors in general
expect on their investments in the particular type of industry. Normal rate
of return dep ends upon the risk attached to the investment, bank rate,
market, need, inflation and the period of investment.
Normal Rate of Returns (NRR)
It is the rate at which profit is earned by normal business under normal
circumstances or from similar course of bu siness. Normal Rate of Returns
means rate of profit on c apital employed which is normally earned by
others in a similar type of business. It will always be given in the problem
in form of percentages. munotes.in
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Valuation of Goodwill and Shares
7 Or
Dividend per shareNRR = Rate of Risk + Rate of Returns or × 100 Market price per share
As the capital employed may be expressed as aggregate of share capital
and reser ves less the amount of non -trading assets such as investments, the
capital employed may also be ascertained by adding up the present values
of trading assets and deducting all liabilities. Super profi t is the simple
difference between future maintainable operating profit and normal profit.
Illustration 2:
Rishi Computers Ltd. gives you the following summarised balance sheet
as at 31st December, 2014.
Liabilities Rs. Assets Rs. Rs. Preference Share
Capital
Equity Share
Capital
Reserves and
surplus
Long -term Loans
Current Liabilities
and Provisions
5,00,000
20,00,000
25,00,000
27,00,000
15,00,000 Fixed Assets:
Cost
Depreciation
Capital
Work -in-
progress
Investment
(10%)
Current
Assets
Underwriti ng
Commission 50,00,000 (30,00,000 ) 20,00,000 40,00,000 5,00,000 25,00, 000 2,00,000
92,00,000 92,00,000
The company earned a profit of Rs. 18,00,000 before tax in 2014. The
capital work -in-progress represents additional plant equal to the capacity
of the present plant; if immediately operational there being no diffi culty in
sales. With effect from 1st January, 2015, two additional Works Managers
are being appointed at Rs. 1,00,000 p.a. Ascertain the future maintainable
profit and the c apital employed, assuming the present replacement cost of
fixed assets is Rs. 1,00,00,0 00 and the annual rate of depreciation is 10%
on original cost.
Solution:
Normal Profit: Suppose investors are satisfied with a 18% return. In
the above example, the normal profit will be Rs. 11,34,000, i.e., 18% of
Rs. 63 lakhs.
The following are some items which generally require adjustment in
arriving at the average of the past earnings:
1. Exclusion of material non -recurring items such as loss of exceptional
nature th rough strikes, fires, floods and theft, etc., profit or loss of any
isolated transaction not b eing part of the business of the company. munotes.in
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Financial Accounting
8 2. Exclusion of income and profits and losses from non-trading assets.
3. Exclusion of any capital profit or loss or receipt o r expense included in
the profit and loss account.
4. Adjustments for any matters suggested by no tes, appended to the
accounts or by qualifications in the Auditor’s Report, such as provision
for taxation and gratuities, bad debts, under or over provision for
depreciation, inconsistency in valuation of stock, etc.
5. Depreciation is an important item that calls for careful review. The
valuer may adopt book depreciation provided he is satisfied that the
value was realistic and the method was suitable for the nature of the
company and they were consistently applied from year to year. But
imbalances do arise in cases where consistently written down value
method was in use and heavy expenditure in the recent past has been
made in rehabilitating or expanding fixed asset s, since the depreciation
charges would be unfairly heavy and would prejudice the seller. Unde r
such circumstances, it would be desirable to readjust depreciation
suitably as to bring a more equitable charge in the profits meant for
averaging.
Another impo rtant factor comes up for consideration in averaging past
profits and that is the trend of pro fits earned. It is imperative that
estimation of maintainable profits be based on the only available record,
i.e., the record of past earnings, but indiscrete use of past results may lead
to an entirely fallacious and unrealistic result.
Where the profits of a company are widely fluctuating from year to year,
an average fails to aid future projection. In such cases, a study of the
whole history of the company and o f earnings of a fairly long period may
be necessary. If the profits of a company do not show a regular trend
upward or downward, an average of the cycle can usefully be employed
for projection of future earnings.
In some companies, profits may record a dis tinct rising or falling trend
from year; in these circumstances, a simple average falls to consider a
significant factor, namely, trend in earnings.
The shares of a company which record a clear upward trend of past profits
would certainly be more valuable than those of a company whose trend of
past earnings indicates a downtrend. In such cases, a weighted average
giving more weight to the recent years than to the past is appropriate.
A simple way of weighing is to multiply the profits by the respective
numb er of the years arranged chronologically so that the largest weight is
associated with the mos t recent past year and the least for the remotest.
Future Profitability Projections: Project is more a matter of intelligent
guesswork since it is essentially an estimation of what will happen in the
risky and uncertain future. The average profit earned by a company in the
past could be normally taken as the average profit that would be
maintainable by it in the future, if the future is considered basically as a munotes.in
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Valuation of Goodwill and Shares
9 continuation of the past. If future performance is viewed as departing
significantly from the past, then appropriate adjustments will be called for
before accepting the past average profit as the future maintainable profit of
the company.
There are three met hods of calculating goodwill based on super profit. The
methods and formulae are as follows:
Purchase of Super Profit Method: Goodwill, as per this method, is
Super Profit multiplied by a certain number of years. Under this method,
an important point to no te is that the number of years of purchase as
goodwill will differ from industry to industry a nd from firm to firm.
Theoretically, the number of years is to be determined with reference to the
probability of a new business catching up with an old business. Suppose it
is estimated that in two years’ time a business, if started now will be
earning about the same profits as an old business is earning now, goodwill
will be equivalent to two times the super profits. In the example given
above, goodwill will be Rs. 12.12 lakhs, i.e., Rs. 6.06 lakhs × 2 years.
Annuity Method of Super Profit: Goodwill, in this case, is the
discounted value of the total amount calculated as per purchase method.
The idea behind super profits methods is that the amount paid for goodw ill
will be recouped during the coming few years. But, in this case, there is a
heavy loss of intere st. Hence, properly speaking what should be paid now
is only the present value of super profits paid annually at the proper rate
of interest. Tables show th at the present value 18% of Re. 1 received
annually two years is 1.566. In the above example, the va lue of goodwill
under this method will be 1.3 × Rs. 6.06 lakhs or Rs. 9.49 lakhs.
Capitalisation of Super Profit Method: This method tries to find out the
amount of capital needed for earning the super profit.
The formula is:
Super Profit= × 100NRR
In above example, Goodwill will be: 6.06 lakhs × 100= 18
= Rs. 33.67 lakhs
Given in the Problems:
(a) Information of old firms assets and liabilities.
(b) Information regarding past or profit.
(c) Adjustment valuation of goodwill.
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Financial Accounting
10 Required to Prepare:
Valuation of good will by different methods.
Steps, Method and Formula for Calculation of Goodwill:
I. Goodwill by purchase of average profit method:
(a) Find out average trading profit.
(b) Find out the number of years purchase (it will always be given in
problem).
(c) Goodwill = Number of year of purchase × Average trading profit.
II. Goodwill by purchase of future maintainable profit method:
(a) Find out future maintainable profit.
(b) Numbe r of year purchase (given in problem).
(c) Goodwill = Number of years of purchase × Future mainta inable profit.
III. Goodwill by capitalisation of future maintainable profit method:
(a) Find out future maintainable profit.
(b) Find out capitalised value of future maintaina ble profit
EMPCapitalisation Value of Future Maintainable Profit = × 100NRR
(c) Calculate Capital Employed.
(d) Goodwill = Capitalised Value of FMP – Capital Employed
IV. Goodwill by purchase of super profit method:
(a) Find out average trading profit.
(b) Find out future maintainable profit.
(c) Find out capital employed.
(d) Find out Normal Rate Return (always given in the problem in terms
of %).
(e) Find out number of year of purchase (given in the problem).
(f) Find out normal profit: Capital Employed NRRNormal Profit = 100
(g) Find out super profit:
(h) Super profit = Future mainta inable profit – Normal profit munotes.in
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Valuation of Goodwill and Shares
11 (i) Goodwill = Number of year purchase × Super profit
V. Goodwill by capitalisation of super profit method:
Calculate super profit as discussed above. Super Profit × 100Goodwill = NRR
VI. Goodwill by present value of super profit method:
(a) Calculate super profit as discussed above.
(b) Goodwill = Annuity Rate × Super Profit
Note: Annuit y Rate will always be given in the problem.
Illustration 3: X agreed to purchase the business of Y on 30th June,
2016. Profits earned by Y for the three preceding years were as below:
Year ending Rs. 31/12/2013 82,000
31/12/2014 80,000
31/12/2015 84,000
The profit for the year 2014 includes an abnormal income of Rs. 3,000.
The profit for the year 2015 is after writing off a loss due to theft of Rs.
4,000. At present, the assets of the business are not insured. X wants to
take a comprehensive policy and has a scertained that an annual premium
of Rs. 400 would have to be paid. X would like to manage the business
whole time and this would involve giving up the present job in which he is
drawing Rs. 2,000 per month. If X manages the business, the employment
of the man ager who is looking after the business for a salary of Rs. 1,500
per month can be terminated and X will draw a salary of Rs. 2,000 per
month from the business. Calculate the goodwill if both the parties have
agreed to value it at 2 year’s purchase of average profits.
Particulars Rs. Rs. Profit for the year 2013 82,000 Profit for the year 2014 80,000 Less: Abnormal Income (3,000 ) 77,000 Profi t for the year 2015 84,000 Add: Loss due to theft 4,000 88,000 2,47,000 Average Profits (2,47,000/3) 82,333.33 Less: Expenses to be paid-up future
Insurance Premium 400 X’s salary (2,000 × 12) 24,000 (24,400) 57,933.33 Add: Manager’s salary (1,500 × 12) 18,000.00 Expected average annual profits 75,933.33 munotes.in
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Financial Accounting
12 Goodwill = Expected average annual profits × Number of years of purchase
= Rs. (75,933.33 × 2) = Rs. 1,51,866.66
Illustration 4: P is negotiating with M for the purchase of the latter’s
business. It was decided to value goodwill according to the super profit
method. M has been running the business only for the three years and
hence P would like to attach weights for the profits of the three years in
such a way that the mos t recent profits would be assigned a higher weight
than the other year’s profits. The profits of the past three years are as
follows:
Year Rs. 2013 36,000
2014 40,000
2015 38,000
Calculate the annual average profits.
Solution: Since P would like to a ttach a higher weightage to the profits of
2001, one method of weighting would be:
Year Weight
2013 1
2014 2
2015 3
The weight ed average annual profits of the business may be calculated as
follows:
Year Profits (Rs. ) Weights Product
(Rs. )
2013 36,000 1 36,000 2014 40,000 2 80,000 2015 38,000 3 1,14,000 6 2,30,000 Total ProductWeighted Average Annual Profits = Total Weight2,30,000
6
Average Annual Profits = 38,333
Illustration 5: The following partic ulars are available in the books of
Bharti Telecom.
(a) Capital employed Rs. 1,50,000
(b) Trading profit after tax
2012 Rs. 1,12,200
2013 Rs. 1,15,000
2014 Rs. 1,02,000 (loss) 2015 Rs. 1,21,000
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Valuation of Goodwill and Shares
13 (c) Market rate of interest on investment 8%.
(d) Rate of risk return on capital invested in business 2%.
(e) Remuneration from alternative employment of the proprietor (if
not engaged in business Rs. 13,600 p.a.).
You are required to compute the value of goodwill on the basis of 3
years’ purchase of super profits of the business calculated on the average
profit of the last four years.
Solution:
(a) Calculation of Average Profits:
Year Rs. 2012 1,12,200
2013 1,15,000
2014 (1,02,000)
2015 1,21,000
2,46,200
2,46,200Average Profit = 61,5504
(a) Calculation of Super Profits:
Particulars Rs. Average Profits 61,550 Less: Remuneration 13,600 47,950 Less: Normal Profit @ 10% Capital employed × NRR (8% + 2%) on Rs. 1,50,000 (1,50,000 × 10%) 15,000 32,950 Goodwill = 3year's purchase of super profits = 3 × 32,950
= 98,850
Illustration 6: From the following information given by Tata Telecom,
calcu late the value of goodwill:
(a) Average capital employed Rs. 12,00,000.
(b) Company declares 15% dividend on the shares of Rs. 20 each fully
paid which is quoted in the market at Rs. 25.
(c) Net trading profit of the firm (after tax) for the past 3 years Rs. 2,15,200,
Rs. 1,81, 400 and Rs. 2,25,000. munotes.in
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Financial Accounting
14 You are required to compute the value of goodwill on the basis of 5
years’ purchase of super profits of the business calculated on the average
profit of the last three years.
Particulars Rs. 1st Year 2,15,200 2nd Year 1,81,400 3rdYear 2,25,000 6,21,600
6, 21,600Average Profit = 2,07, 2003
Calculation of super profit:
Particulars Rs. Average Trading Profit 2,07,200 Less: Normal profit @ 12% on Rs. 12,00,000 (1,44,000 ) Super Profit 63,200 Goodwill = 5 year's purchase of super profits = 5 × 63,200
= 3,16,000
Working Notes:
Dividend per share = 15% of Rs. 20 = Rs. 3
Dividend per share (DPS) 3Rate of return on capital = × 100 = × 100 = 12%Market price per share (MPS) 25
Illustration 7: From the following information, ascertain the value of
goodwill of Micro Computers Ltd. under super profit method.
Balance Sheet as on 31st March, 2014
Liabilities Rs. Assets Rs. Paid-up Capital
(5,000 share of 100 each
fully paid) 5,00, 000 Goodwill at Cost 50,000 Bank Overdraft 1,16,700 Land and Building
(at Cost) 2,20,000 Sundry Creditors 1,81,000 Plant and
Machinery (at cost) 2,00,000 Provision for Taxation 39,000 Stock in Trade 3,00,000 Profit and Loss
Appropriation A/c 1,13,300 Bad Debts 1,80,000 9,50,000 9,50,000 munotes.in
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Valuation of Goodwill and Shares
15 The company commenced operations in 1995 with a paid -up capital of Rs.
5,00,000. Profits for recent years (after taxation) have been as follows:
Year ended 31st
March Rs. 2010 40,000 (loss)
2011 88,000
2012 1,03,300
2013 1,16,000
2014 1,30,000
The loss in 2010 occurred due to a prolonged strike.
The income tax paid so far has been at the average rate of 40%. Dividends
were distributed at the rate of 10% on the paid -up capital in 2011 and 2012
and at the rat e of 15% in 2013 and 2014. The market price of shares is
ruling at Rs. 125 at the end of the year ended 31st March, 2009.
Solution: Valuation of Goodwill of Micro Computers Ltd. Particulars Rs. Rs. Capital Employed:
Land and Building (at Cost )
Plant and Machinery (at Cost )
Stock in Trade
Sundry Debtors
Less: Sundry Liabilities
Bank Overdraft
Sundry Creditors Provision for Taxation
Capital employed at the end of the year
Add back
Dividend paid for the year
Less: Half of the profits
Average capita l employed Rate of Return
Average Dividends for the last 4 years at 10 15 10 151 12 %2 4
Market price of shares on 31st March = Rs. 125
Normal Rate of Return = 12. 5125 2,20,000 2,00,000 3,00,000 1,80,000 9,00,000
1,16,700
1,81,000
39,000 3,36,700 5,63,300
75,000
(65,000 ) 10,000 5,73,300
It may be more appropriate to relate the normal rate of return to the
dividend paid in the last two years since price is related to dividen d
expected in fu ture and for that, the most recent experience is relevant.
In that case, the normal rate of return will be:
Normal Profit on Average Capital employed: munotes.in
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Financial Accounting
16 at 10% on Rs. 5,73,300 57,330
at 12% on Rs. 5,73,300 68,796
Future Maintainable Profits – Weighted Average
Year Profits Rs. Weights Product Rs. 2011 88,000 1 88,000 2012 1,03,000 2 2,06,000 2013 1,16,000 3 3,48,000 2014 1,30,000 4 5,20,000 10 11,62,000
Super Profits
Particulars Normal Rate
12% (Rs. ) Normal Rate
10% (Rs. )
Average maintainable profits 1,16,200 1,16,200
Normal profit on capital
employed 68,796 57,330
Super Profit 47,404 58,870
Goodwill at 5 years’ purchase of
Super Profits 2,37,020 2,94,350
Goodwill at 3 years’ purchase 1,42,212 1,76,610
Three to five y ears’ purchase of super profits can be taken as fair value
of goodwill. Thus, depending on the assumptions regarding the normal
rate of return and the number of years’ purchase, goodwill may range
between Rs. 1,42,212 and Rs. 2,94,350.
Illustration 8: The follo wing is the balance sheet of HCL Ltd. as on
March 31, 2015.
Liabilities Rs. Assets Rs. 40,000 Equity Shares
of Rs. 10 each 4,00,000 Goodwill 40,000 10% Debenture 1,20,000 Land and
Building 2,00,000 Profit & Loss
Balance a s on
01/04/14 40,00 0 Plant and
Machi nery 2,90,000 Add: Profit for the
year before Investment 1,00,000 providing for taxes 1,60,000 2,00,000 Stock 80,000 Sundry Creditors 80,000 Debtors 90,000 Provision for Tax 40,000 Cash and
Bank 40,000 8,40,000 8,40,000 munotes.in
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Valuation of Goodwill and Shares
17 Profit includes Rs. 10,000 which is the income from investments. The
present market value of the assets are:
Particulars Rs. Land and Building 2,50,000
Plant and Machinery 3,50,000
Investment 1,50,000
Current assets (book value).
Normal return on capita l employed in this type of business is 10%.
Adjustment of depreciation is not required for valuation of goodwill.
Calculate the value of goodwill on the basis of 3 years’ purchase of super
profit of the company.
Solution: Average Trading Capital Employed
Particulars Rs. Land and Building 2,50,000 Plant and Machinery 3,50,000 Stock 80,000 Debtors 90,000 Cash and Bank 40,000 Less: Current Liabilities 8,10,000 Sundry Creditors Rs. 80,000 Provision for Taxation Rs. 40,000 (1,20,000) Capital Employed 6,90,000 Less: Half of current year’s profit (37,500) Average Capital Employed 6,52,500
Working Notes:
The half of current year’s profit is calculated as below:
Particulars Rs. Profit for the year
Less: Non-trading income
Less: Income tax (assume 50%) Current year’s
profit
75000375002
1,60,000 10,000 1,50,000 75,000 75,000
NRRNormal Profit = Average Capital Employee100106,52,000100
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Financial Accounting
18 = 65200
Super Profit = Average profit - Normal profit
= 75000 -Gooodwill = Super profit - No of years purchase
9800 3
Illustration 9: Following is the Balance sheet of A Limited as on 31st
March, 2014:
Liabilities Rs. Assets Rs. Rs. Share Capital Goodwill 1,25,000 5,000 share of Rs. 100 each 5,00,000 Land and
Building (at
cost) 1,80,000 Reserve Fund 1,50,000 Less:
Depreciation (36,000 ) 1,44,000 Workmen
Compensation Fund 25,000 Plant and
machinery (at
cost) 2,40,000 Workmen Profit
Sharing Fund 45,000 Less:
Depreciation (40,000 ) 2,00,000 Profit and Loss
Account 1,50,000 Investment for
replacement of
plant 1,00,000 Creditors 2,30,000 & machinery Other Liabilities 1,00,000 Books Debts 3,60,000 Less: R.D.D . (30,000 ) 3,30,000 Stock 2,00,000 Cash at Bank 75,000 Preliminary
expense 26,000 12,00,000 12,00,000
Further Information:
(i) A Ltd. had been carrying on business for the past several years. The
company is to be taken over by another company and for this purpose,
you are required to value Goodwill by “Capitalisation of maintainable
profits method”. For this purpose, following additional information is
available.
(a) The profit earned by the company for t he past three years were as
under:
Year ende d 31st March, 2012 Rs. 3,10,000
Year ended 31st March, 2013 Rs. 2,73,000
Year ended 31st March, 2014 Rs. 2,90,000 munotes.in
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Valuation of Goodwill and Shares
19 The profits given are profits before tax, which was 50% throughout.
(b) The new company expects to carry on business with its own board of
directors, without any addition.
The directors’ fees paid by A Ltd. to its directors amounted to Rs.
9,000 per year, no more payable in future.
(c) The new company expects a large increase in volume of business and
therefore, will have to pay extra rent of Rs. 12,000 per year.
(d) As on 31st March, 2015, land and buildings were worth Rs. 3,00,000,
whereas plant and machinery were worth only Rs. 1,80,000. There is
sufficient provision for doubtful debts. There is no fluctuation in the
value of investment and stock.
(e) Liability under work men compensation fund was only Rs. 5,000.
(f) The expected rate of return on similar business may be taken at 12%.
You are required to value Goodwill according to above instructions. All
your workings should form part of your answer. (Take average capital
emplo yed, the same as closing employed for your calculations.)
Total profit (past year)Simple Average = Total Number of years3,10,000 2,73,000 2,90,0003
= Rs. 2,91,000
Particulars Rs. Simple Average Profit 2,91,000 Add: Directors’ fees not required in future 9,000 Less: Extra rent payable in future (12,000) FMP before tax 2,88,000 Less: Tax @ 50% (1,44,000) FMP after tax 1,44,000
1. Calculation of Capital Employed:
Particulars Rs. Rs. Tangible Trading Asset (at Averag e Value):
Land and Building
Plant and Machinery
Investment
Debtor
Stock
Cash at Bank
Less: External Liabilities: 3,00,000 1,80,000 1,00,000 3,30,000 2,00,000 75,000 11,85,000 munotes.in
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Financial Accounting
20 Workmen Compensation Fund
Workmen Profit Sharing Fund
Creditors
Other Liability
Capital E mployed 5,000 45,000 2,30,000 1,00,000 (3,80,000) 8,05,000
3. NRR = 12% (Given)
4. Number of years’ purchase = 3 years (Given)
5. Calculation for capitalised value of FMP:
FMPCapitalised Value of FMP =NRR
1,44,00012
= Rs. 12,00,000
6. Calculation of Goodwill by c apitalised of FMP Method:
Goodwill = Capitalised value of FMP – Capital Employed
= 12,00,000 – 8,05,000
= Rs. 3,95,000
Illustration 10: From the following Balance sheet of Prosperous Ltd. as at
31st Dec. 2015 and further informa tion, value goodwill at five -year
purchase of super profit based on average profit of last three years.
Liabilities Rs. Rs. Assets Rs. Rs. Share Capital: Fixed Assets:
Equity Capital 1,50,000 Goodwill 20,000 Preference
Capital 50,000 2,00,000 Machinery 2,10,000 Reserves and
Surplus: Land and
Building 1,20,000 General Reserves 2,60,000 Furniture 60,000 Profit and Loss
Account 15,000 2,75,000 Vehicles 90,000 5,00,000 Secured Loan 1,25,000 Stocks 55,000 Current
Liabilities: Debtors 1,00,000 Sundry Creditors 60,000 Cash and Bank
Balance 25,000 1,80,000 Bills Payable 30,000 Misc.
Expenditure 20,000 Outstanding Exp 10,000 1,00,000
7,00,000 7,00,000 munotes.in
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Valuation of Goodwill and Shares
21 (a) Profit (before tax)
For 2015 Rs. 1,11,000
For 2014 Rs. 1,05,000
For 2013 Rs. 99,000
(b) Machinery costing Rs. 10,000 purchased on 31st December,
2015 was wrongly charged to revenue.
(c) Normal return in similar business is 10% of the average net tangible
capital employed.
(d) Machinery, land and buildings have appreciated by 10% and 20%
respectiv ely. Furniture and vehicles have depreciated by 5% and
10% respectively. Outstanding expenses were up by Rs. 3,750.
(e) Provision for tax – 50%.
(f) Ignore additional depreciation effect on revalued figures of Assets.
Solution: Calculation of Average Profit
Year Profit Weight Product
2013 99,000 1 99,000 2014 1,05,000 2 2,10,000 2015 1,11,000 +
10,000 3 3,63,00 0 6 6,72,000 Total of product1. Weighted Average Profit = Total of weight6,72,000
6
1,12,000
2. Calculation of FMP:
Average profit before.tax
1,12,000
Less: Tax @ 50% (5,60,000)
FMP after tax 56,000
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Financial Accounting
22 3. Calculation of Capital Emplo yeyed:
Particulars Rs. Rs. Tangible Trading Assets (at value): Machinery [2,10,000 + 10,000 + 22,000] 2,42,000 Land and Building 1,44,000 Furniture 57,000 Vehicles 81,000 Stock 55,000 Debtors 1,00,000 Cash and Bank 25,000 7,04,000 Less: Sundry Creditors 60,000 Bills Payable 30,000 O/s Expe nses 13,750 Secured Loan (1,25,000) (2,28,750) Capital Employed 4,75,250
4. NRR = 10% (Given)
5. Normal years’ purchase = 5 years (Given)
6. Calculation of Normal Profits: NRRNormal profit = Capital Employed × 100104,75, 250100
= Rs. 47,525
7. Calculati on of super profits:
Super Profit = FMP – Normal Profit
= 56,000 – 47,525
= Rs. 8,475
8. Calculation for Goodwill by purchased super profit method:
Goodwill = Number of years’ purchase × Super Profit
= 5 × 8,475
= Rs. 42,375
1.4 VALUATION OF SHARES
In the case of shares quoted in the recognised Stock Exchanges, the
prices quoted in the Stock Exchanges are generally taken as the basis of
valuation of those shares. However, the Stock Exchange price s are munotes.in
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Valuation of Goodwill and Shares
23 determined generally on the demand supply position of the shares and
on business cycle. The London Stock Exchange opines that the Stock
Exchange may be linked to a scientifi c recording instrument which
registers not its own actions and options but th e actions and options of
private institutional investors all over the country/world. These actions
and options are the result of fear, guess work, intelligent or otherwise,
good o r bad investment policy and many other consideration. The
quotations what res ult definitely do not represent valuation of a company
by reference to its assets and its earning potential. Therefore, the
accountants are called upon to value the shares by foll owing the other
methods.
The value of share of a company depends on so many factors such as:
1. Nature of business.
2. Economic policies of the government.
3. Demand and supply of shares.
4. Rate of dividend paid.
5. Yield of other related shares in the stock exchange, etc.
6. Net worth of the company.
7. Earning capacity.
8. Quoted price of the shares in the stock market.
9. Profits made over a number of years.
10. Dividend paid on the shares over a number of years.
11. Prospects of growth, enhanced earning per share, etc.
1.5 NEED AND PURP OSE OF VALUATION OF SHARES
The need for valuation of shares may be felt by any co mpany in the
following circumstances:
1. For assessment of Wealth Tax, Estate Duty, Gift Tax, etc.
2. Amalgamations, Absorptions etc.
3. For converting one class of shares to another class.
4. Advancing loans on the security of shares.
5. Compensating the shareholder s on acquisition of shares by the
Government under a scheme of nationalisation.
6. Acquisition of interest of dissenting shareholder under the
reconstruction scheme, etc.
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Financial Accounting
24 1.6 FACTORS INFLUENCING VALUATION
The valuation of shares of a company is based, inter alia, on the following
factors:
1. Current stock market price of the shares.
2. Profits earned and dividend paid over the years.
3. Availability of reserves and future prospects of the comp any.
4. Realizable value of the net assets of the company.
5. Current and deferred liabilities for the company.
6. Age and status of plant and machinery of the company.
7. Net worth.of the company.
8. Record of efficiency, integrity and honesty of Board of Directors
and other managerial personnel of the company.
9. Quality of top and middle manageme nt of the company and their
professional competence.
10. Record of performance of the company in financial terms.
1.7 METHODS OF VALUATION OF SHARES
Certain methods have come to be re cognized for valuation of shares of a
company, viz., (1) Open market price; (2) Stock exchange quotation;
(3) Net assets basis; (4) Earning per share method; (5) Yield or return
method; (6) Net worth method; (7) Break -up value etc.
IDEAL VALUATION METHOD
The various methods of valuation of shares of a company as mentioned
above have their individual merits and demerits. Therefore, it has been
universally recognized that while valuing the shares of a company, it is
advisable not to depend upon any single method but to resort to a
combination of three well recognized methods, viz., market value
method, yield or return on investment method and net assets value
method for arriving at a fair and reasonable shares exchange ratio. While
doing this, due weightage sh ould be given to each method based on the
company’s performance and future prospects.
INTRINSIC VALUE METHOD
This method is also called as Assets backing method, Real value
method, Balance Sheet method or Break -up value methods. Under this
method, the net assets of the company including goodwill and non-
trading assets are divided by the number of shares issued to arrive at the
value of each share. munotes.in
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Valuation of Goodwill and Shares
25 If the market value of the assets is available, the same is to be considered
and in the absence of such informa tion, the book values of the assets
shall be taken as the market value. While arriving at the net assets, the
fictitious assets such as preliminary expenses, the debit balance in the
Profit and Loss A/c should not be considered. The liabilities payable to
the third parties and to the preference shareholders is to be deducted
from t he total asset to arrive at the net assets. The funds relating to
equity shareholders such as General Reserve, Profit and Loss Account,
Balance of Debenture Redemption Fund, Divid end Equalisation
Reserve, Contingency Reserve, etc. should not be deducted.
Illustration 11: From the information given below and the balance sheet
of Cipla Limited on 31st December, 2015, find the value of share by
Intrinsic value method.
Balance Sheet
Particulars Rs. Particulars Rs. 1000, 8% Preferential
Shares of 100 each fully
paid 1,00,000 Buildin gs 70,000
4,000 Equity shares ofRs. 100 fully paid 4,00,000 Furniture 3,000
Reserves 1,50,000 Stock (Market value) 4,50,000 Profit and Loss Account 5,10,000 Investment at cost 3,35,000 (Face valueRs. 4,00,000)
Credit ors 48,000 Debtors 2,80,000 Bank
Preliminary Exp 60,000 10,000 12,08,000 12,08,000
Building is now worth of Rs. 3,50,000 and the Preferential shareholders
are having prefere nce as to capital.
Solution: Valuation of Equity Share (Intrinsic Value Method)
Particulars Rs. Building 3,50,000
Furniture 3,000
Stock 4,50,000
Investment 3,35,000
Debtors 2,80,000
Bank 60,000
Total Assets 14,78,000
Less: Creditors (48,000)
Net Assets 14,30,000
Less: Preference Share Capital (1,00,000)
Asset s Available for equity shareholders 13,30,000 munotes.in
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Financial Accounting
26 Net assets available to Equity ShareholdersValue of equity share = No. of Equity Shares
13,30,000
4,000
= Rs. 332,5 Intrinsic value of each equity shares = Rs. 332.50
Yield Method
The valuation of shares under the Yield method may be done under two
categories:
(a) Return on Capital Employed Method: This methods is applied for
the purpose of valuation of the shares of majority shareholding. A
big investor is more interested in what the company earns a nd not
simply in what the company distributes. Even if the company does
not distribute 100% of its earning among its shareholders, it, as a
matter of fact, strengthens the financial position of the c ompany. The
value of the share under this method is calcu lated by the formula.
Return of Capital EmployedPaid - up value of sharesNormal Rate of Return
(b) Valuation on the Basis of Dividend: This method is more suitable
for valuation of small block of shares. The method of calculation is:
Expected Rate of DividendPaid - up value of sharesNormal Rate of Dividend
NORMAL RATE OF DIVIDEND
Illustration 12: The following particulars are available in respect of
Goodluck Limited.
a) Capital 450, 6% preference shares of Rs. 100 each fully paid and
4,500 equity shares Rs. 10 each fully paid.
b) External liabilities: Rs. 7,500.
c) Reserves and Surplus: Rs. 35,000.
d) The average expected profit (after taxation) earned by the company Rs.
8,500.
e) The normal profit earned on the market value of equity shares (full
paid) of the same type of companies is 9%.
f) 10% of the profit after tax is transferred to reserves.
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Valuation of Goodwill and Shares
27 Calculate the intrinsic value per equity share and value per equity share
according to dividend yield basis.
Assume that out of total assets, assets worth of Rs. 350 are fictitious.
Solution:
Intrinsic Value of Shares
Particulars Rs. 6% Preference Shar e Capital (450 × 10) 45,000 Equity Shares (4,500 × 10) 45,000 Reserves and Surplus 3,500 External Liabilities 7,500 Total Liabilities 1,01,000 As Total Liabilities = Tota1 Assets,
Tota1 Assets 1,01,000 Less: Fictitious A ssets (350) Externa l Liabilities (7,500) Preference Shares (45,000) 52,850 Net Assets Available for Equity Shareholders 48,150 Net assets Available for sharefolderInstrinsic Value of Share = Number of Equity Shares
48,150 = 4,500
Yield Basic = 10 ,70
Profit Available to Equity Shareholders
Particulars Rs. Average Profit after Taxation 8,500 Transfer to General Reserves (10%) (850) 7,650 Less: Preference Dividend (60% of 45,000) 2,700 Profit Available to Equity Shareholders (4,950)
4,9501045,00010%Rate of dividend
Rate of Dividend Value of Equity Share = Paid - up value of shareNormal Rate
11109
= Rs. 12.22
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Financial Accounting
28 Illustration 13: The capital structure of company as on 31st March, 2015
was as under:
Equity Share Capital 5,00,000 11% Preference Share Capital 3,00,000 12% Secured Debentures 4,00,000 Reserves 3,00,000
The company on an average earns a profit of Rs. 4,00,000 annual ly before
deduction of interest on Debentures and Income Tax, which works out to
45%. The normal return on equity shares on companies similarly placed is
15% provided.
(a) The profit after tax covered the fixed interest and fixed dividends at
least four times.
(b) Equity capital and reserves are 150% of debentures and preference
capital.
(c) Yield on shares is calculated at 60% of profits distributed and 5% on
undistributed profits.
The company is regularly paying an equity dividend of 18%. Ascertain
the value of equit y share of the company.
Solution:
Particulars Rs. Average Profit of the companies before Interest and Tax 4,00,000 Less: Debenture interest (12% of 4,00,000) (48,000 ) Profit after interest but before tax 3,52,000 Less: Tax @ 45% (1,58,400 ) Profit after Interest and Tax 1,93,600
Evaluation of Conditions given in the question:
(a) Profit after tax whether covers fixed interest and fixed dividend at
least four times. Profit after tax.
= 4,00,000 – 1,58,400 = 2,41,600 Fixed interest and fixed divide nd interest.
Interest 48,000
Fixed dividend 11% of 3,00,000 33,000
81,000
2, 41,600
81,0002.9827 times Fixed interest and dividend coverage is 2.98 times only and is less
than the prescrib ed 4 times.
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Valuation of Goodwill and Shares
29 (b) Whether equity capital and reserves are of 150% of preference share
capital and debentures.
Particulars Rs. Particulars Rs. Equity share Reserves 5,00,000
3,00,000 Preference share
Debentures 3,00,000
4,00,000
8,00,000 7,00,0 00
8,00,000Ratio 100 = 114.28%7,00,000
Ratio is less than the Prescribed Ratio of 150%
1.8 SOLVED PROBLEMS
Illustration 1 From the following particulars, find out the value of
goodwill as per
Annuity method.
Capital employed Rs.3,00,000
Normal Rate of Return 3 .10%
Present value of R e.1 for 5 years at 10% at 3.78
Normal profit for 5 years
Year Rs.
1 30,000
2 32,000
3 34,000
4 36,000
5 38,000
Non-recurring income Rs.1,600
Non-recurring expenses Rs.1,000
Solution
Valuation of Goodwill 30,000 32,000 34,000 36,000 38,000Average Profit5
1,70,000
5
Rs.34,000
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Financial Accounting
30 Rs. Average Profit 34,000 Less: Non -Recurring income 1,600 32,000 Add: Non -recurring Expenses 1,000 Average Profit 33,400
Normal Profit = Capital Employed Normal Rate of Return
= Rs.3,00,000 10/100 = Rs.30,000
Super Profit = Average Profit 3 Normal Profit
= 33,400 - 30,000 = Rs. 3,400
Goodwill = Super profit Reference to Present value table
= 3,400 3.78 = Rs.12,852
Illustration 02 The following particulars are available in respect of
Goodluck Limited
(a) Capital 450, 6% preference shares of Rs. 100 each fully paid an d
4,500 equity shares Rs. 10 each fully paid.
(b) External liabilities: Rs. 7,500.
(c) Reserves and Surplus: Rs. 35,000.
(d) The average expected profit (after taxation) earned by the company
Rs. 8,500. 111111
(e) The normal profit earned on the market value of equity shares
(full paid) of the same type of companies is 9%.
(f) 10% of the profit after tax is transferred to reserves.
Calculate the intrinsic value per equity share and value per equity share
according to dividend yield basis.
Assume that out of total assets, assets worth of Rs. 350 are fictitious.
Solution:
Intrinsic Value of Shares
Particulars Rs. 6% Preference Share Capital (450 × 10) 45,000 Equity Shares (4,500 × 10) 45,000 Reserves and Surplus 3,500 External Liabilit ies 7,500 Total Liabi lities 1,01,000 As Total Liabilities = Tota1 Assets,
Tota1 Assets 1,01,000 Less: Fictitious Assets (350) munotes.in
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Valuation of Goodwill and Shares
31 External Liabilities (7,500) Preference Shares (45,000) 52,850 Net Assets Available for EquityShareholders 48,150 Net Assets Available for Equity ShareholderIntrinsic Value of Share =Number of Equity Shares
48,150
4,500Yield Basic 10.70
Profit Available to Equity Shareholders
4,9501045,000Rate of dividend
Rate of DividendValue of Equity Share = × paid - up value ofShare Normal Rate
11
9
= Rs. 12.22
Illustration 03: The balance sheet of a partnership was as follows:
Particulars Rs. Rs. Particulars Rs. Capital
Accounts: Goodwill 1,000 A 50,000 Plant 70,000 B 30,000 Furniture 3,000 C 20,000 1,00,000 Stock in trade 45,000 Current
Accounts: Sundry debtors 28,000 A 8,000 Prepayments 10,000 B 7,000 Bank balance 19,000 C 10,000 25,000
Sundry
Creditors 51,000
1,76,000 1,76,000 Particulars Rs. Average Profit after Taxation 8,500 Transfer to General Reserves (10%) (850) 7,650 Less: Preference Dividend (60% of 45,000) 2,700 Profit Available to Equity Share holders (4,950) munotes.in
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Financial Accounting
32 It was proposed to form a company to acquire the business for the
purpose of the acquisitions.
The assets were revalued as follows:
Plant of Rs. 60,000; Furniture Rs. 4,000; Stock Rs. 25,000; Pre -
payment Nil. It was ascertained t hat the profits before charging
anything in respect of the partners, for the past five years been as
follows Rs. 25,000, Rs. 29,000, Rs. 33,000, Rs. 35,000 and Rs.
33,000. Included in these profits were non-recurring items, averaging Rs.
1,500. But f rom the nature of the business, casual non -recurring items
were fo und to arise every year and promoters agreed that a figure of Rs.
1,200 should be allowed as profit from this source.
Similar business paid a dividend of 8% p.a. on their ordinary share and
partners who would be directors of the company were worth
remunerati on of: A – Rs. 4,000; B – Rs. 5,000 and C – Rs. 6,000 p.a.
Five years’ purchase of the adjusted super profits on annuity basis was the
agreed price for goodwill; the super profit being taken on the value of the
goodwill. Ignore taxation. Annuity rate for Re. 1 @ 8% is 3.75.
Solution:
Calculation of average profit: 25,000 + 29,000 + 33,000 + 35,000 + 33,000Simple Average =5
= 31,000
Less: Non-recurring items [1,500 – 1,200] 300
Average Profit 30,700
2. Calculation of FMP:
Average profit before tax 30,700
Less: Managerial Remuneration (4,000 + 5,000 + 6,000) (15,000)
FMP 15,700
3. Calculation of capital Employed:
Particulars Rs. Rs. Tangible Trading Assets:
Plant
Furniture
Stock
Debtors
Pre-payments
Bank
Less: External Liabilities:
Sundry Credito rs
Capital Employed 60,000 4,000 42,000 25,000 Nil 19,000 1,50,000 (51,000) 99,000 munotes.in
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Valuation of Goodwill and Shares
33
4. Calculation of NRR = 8%
5. Number of years’ purchase = 5 years
6. Calculation of Normal Profit: NRRNormal Profit = Capital Employed 1008
100
= Rs. 7,920
7. Calculation of Super Profit:
Super Profit = FMP – Normal Profit
= 15,700 – 7,920
= Rs. 7,780
8. Calculation of Goodwi ll by purchase of super profit method:
Goodwill = Normal of years’ purchase × Super Profit
= 5 × 7,780
= Rs. 38,900
9. Calculation of Goodwill by Annuity method of Super Profit:
Goodwill = Annuity Rate × Super Profit
= 3.75 × 7,780
Goodwill = Rs. 29,175
Illustration 04: From the following information supplied to y ou,
ascertain the value of Goodwill of Anamika Ltd. which is carrying
business as retail trader under the capitalisation of profit method.
Balance sheet as on Mar ch 31, 2015
Particulars Rs. Particulars Rs. Paid-up Capital Goodwill at cost 50,000 5,000 Equit y Shares of Rs. 100 each fully paid 5,00,000 Land and Buildingsat cost 2,20,000 Profit and Loss
Appropriation A/c 1,13,300 Plant and Machinery cost 2,00, 000 Bank Overdraft 1,16,700 Stock in Trade 3,00,000 Provision for Taxation 39,000 Book Debt (–)Provi sions for baddebts 1,80,000 Sundry Creditors 1,81,000
9,50,000 9,50,000
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Financial Accounting
34 The company commenced operations in 1985 with a paid-up capital of
Rs. 5,00,000. Profit for recent years (after taxation) have been as follows:
Year ending March, 31 Rs.
2011 (Loss) 40,000 2012 88,000 2013 1,03,000 2014 1,16,000 2015 1,30,000
(a) The loss in 2011 occurred due to prolonged strike.
(b) The income tax paid so far has been at the average rate of 40%, but
it is likely to be 50% now onwards.
(c) Dividend were distributed at the rate of 10% at the end of the year
ending March 31, 2015.
(d) The market price of shares is ruling at Rs. 125 at the end of the year
ending March, 31, 2015.
(e) Profit till 2015 had been ascertained after debiting Rs. 40,000 as
remuneration to the managing director. The Government has approved
a remuneration of Rs. 60,000 with effect from April 1, 2015.
(f) The company has been able to secure a contra ct for supply of
materials at advantageous prices. The advantage has been valued at
Rs. 40,000 p.a. for the next five years.
Illustration 5: The balance sheet of a partnership was as follows:
Particulars Rs. Rs. Particulars Rs. Capital Accounts: Goodwill 1,000 A 50,000 Plant 70,000 B 30,000 Furniture 3,000 C 20,000 1,00,000 Stock in trade 45,000 Current Accounts: Sundry debtors 28,000 A 8,000 Prepayments 10,000 B 7,000 Bank balance 19,000 C 10,000 25,000
Sundry Creditors 51,000
1,76,000 1,76,000
It was proposed to form a company to acquire the business for the
purpose of the acquisitions.
The assets revalued as follows:
Plant of Rs. 60,000; Furniture Rs. 4,000; Stock Rs. 25,000; Pre -
payment Nil. It was ascertained that the profits before charging
anything in respect of the partners, for the past five years been as
follow Rs. 25,000, Rs. 29,000, Rs. 33,000, Rs. 35,000 and Rs.
33,000. Included in these profits were non-recurring items, averaging
Rs. 1,500. But from the nature of the business, casual non -recurring munotes.in
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Valuation of Goodwill and Shares
35 items were found to arise every year and promoters agreed that a figure
of Rs. 1,200 should be allowed as profit from this source.
Similar business paid a dividend of 8% p.a. on their ordinary share and
partner s who would be directors of the company were worth
remuneration of: A – Rs. 4,000; B – Rs. 5,000 and C – Rs. 6,000 p.a.
Five years’ purchase of the adjusted sup er profits on annuity basis was
the agreed price for goodwill; the super profit being ta ken o n the value
of the goodwill. Ignore taxation. Annuity rate for Re. 1 @ 8% is 3.75.
Five years’ purchase of the adjusted super profits on annuity basis was
the agre ed price for goodwill; the super profit being taken on the value
of the goodwill. Ignore taxation. Annuity rate for Re. 1 @ 8% is 3.75.
Solution:
1. Calculation of average profit: 25,000 + 29,000 + 33,000 + 35,000 + 33,000Simple Average5
= 31,000
Less: Non-recurring items [1,500 – 1,200] 300
Average Profit 30,700
2. Calculation of FMP:
Average profit before tax 30,700
Less: Managerial Remuneration (4,000 + 5,000 + 6,000) (15,000)
FMP 15,700
3. Calculation of capital Employed:
4. Calculation of NRR = 8% Particulars ` `
Tangible Trading Assets:
Plant
Furniture
Stock
Debtors
Pre-payments
Bank
Less: External Liabili ties:
Sundry
Creditors
Capital Employed
60,000
4,000
42,000
25,000
Nil
19,000 1,50,000
(51,000)
99,000 munotes.in
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Financial Accounting
36 5. Number of years’ purchase = 5 years
6. Calculation of Normal Profit: NRRNormal Profit = Capital Employed 1008
100
= Rs. 7,920
7. Calculation of Super Profit:
Super Profit = FMP – Normal Profit
= 15,700 – 7,920
= Rs. 7,780
8. Calculation of Goodwill by purchase of super profit method:
Goodwill = Normal of years’ purchase × Super Profit
= 5 × 7,780
= Rs. 38,900
9. Calculation of Goodwill by Annuity method of Super Profit:
Goodwill = Annuity Rate × Super Profit
= 3.75 × 7,780
Goodwill = Rs. 29,175
Illustration 6: ALTO agreed to purchase business of A. For that
purpose, goodwill is to be valued at three years’ purchase of the weighted
average of previous 4 years adjusted profits.
The profits for the year ending 31/12/2012 to 31/12/2015 were as under:
Year ending 2012 Rs. 20,200
Year ending 2013 Rs. 24,800
Year ending 2014 Rs. 25,000
Year ending 2015 Rs. 30,000
Following additional information is available:
a) On 01/09/2014, major repair expenditure to plant and machinery for
6,000 was charged to revenue. That was agreed to be capitalized for
goodwill, su bject to 10% p.a. depreciation on diminishing balance
method to be calculated.
b) The closing stock for the year ending 31/12/2013 was overvalued by
Rs. 2,400.
c) In order to cover cost of management, an annual ch arge of Rs. 4,800 munotes.in
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Valuation of Goodwill and Shares
37 should be made for valuation of Goodwill.
Compute value of goodwill.
Solution:
Calculation of Trading profit:
Particulars 2012 (Rs. ) 2013 (Rs. ) 2014 (Rs. ) 2015 (Rs. ) Profit before adjustment
Add: P/M [capital
Expenses charged 20,200
–24,800
–25,000
6,00030,000
–
as Reve nue Exp]
Less: Depreciation
10% on above P/M
For (4 & 12 month)
Less: Closing
Stock overvalued
Add: Opening
Stock overvalued
Less: Cost of
Management
Adjusted Profit –
(4,800)–(2,400)
(4,800)(200)
2,400
(4,80 0)W.D.V. method
(580)
(6,000 – 200 × 10%)–(4,800)
15,400 17,600 28,400 24,620
Year Profit Weights Product 2012 15,400 1 15,400 2013 17,600 2 35,200 2014 28,400 3 85,200 2015 24,620 4 98,480 10 2,34,280 2,34,280Weighted Average Profit10 Rs. 23,428
Calculation for Goodwill by purchase of Weig hted Average method:
Goodwill = Number of years’ purchase × Weighted Average Profit
= 3 × 23,428
= Rs. 70,284
Illustration 7: L, M and N are partners sharing profit and losses in the
ratio of 4:3:3 respectively. Th e firm clos es its account on 31st Decemb er,
every year. On 31st March, 2015, N died and it was decided to calculate
the amount of the goodwill to be paid to the heirs of Mr. N. According to
the partnership agreement, Goodwill was to be valued at the three -year
purcha se of average super profits o f the three years upto the death after munotes.in
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Financial Accounting
38 deducting 17.5% interest on capital employed and paying a reasonable
remuneration of Rs. 30,000 per annum to each partner. Average capital
employed in the business was Rs. 2,00,000.
The profits of the earlier years before charging interest on capital
employed were as follows:
Year Rs.
2012 1,47,000
2013 1,59,000
2014 2,23,000
The profits for the year ending 31st December, 2015 were Rs. 1,31,000.
Profits may be considered to have bee n earned uniformly for all t he years
including 2015. Calculate the amount of goodwill to be paid to the heirs of
Mr. N.
Solution:
1.
2. Calculation for Average Profit: 11,34,000Weighted Average Profit6 Rs. 1,89,000
3. Calculation for FMP:
Weighted Average present 1,89,000
Less: Managerial Remuneration (30,000 × 3) (90,000)
FMP 99,000
4. Calculation for Capital Employed = Rs. 2,00,000
5. Calculation of NRR = Rs. 17.5%
NRRCalculation for Normal Profit = Capital Employed × 10017.5
100
= Rs. 35,000
6. Calculation for super profit:
Super Profit = FMP – Normal Profit
= 99,000 – 35,000
= 64,000
7. Calculation of Goodwill by purchase of super profit.
Goodwill = Number of years purchase × super profit
= 3 × 64,000
= Rs. 1,92,000
3Goodwill to be paid to legal heirs of N 1 ,92,00010
Year Profit Weight Total Product
2012 1,47,000 1 1,47,000
2013 1,59,000 2 3,18,000 2014 2,23,000 3 6,69,000 6 11,34,000 munotes.in
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Valuation of Goodwill and Shares
39 Illustration 8: The average net profit was (before adjustment) Rs.
2,07,000. It included investment income Rs. 2,000. The cost (also
present value) of investment was Rs. 50,000. Expenses amounting to
Rs. 3,000 p.a. are likely to be discontinued in future. 50 paise in rupee
may be taken as average annual taxation. 6% represented a fair
commercial return. The average capital employed was Rs. 13,50,000
but upon valuation obtained, the actual was valued Rs. 14,50,000.
(a) Assuming seven years’ purchase of super profit, what is the value of
goodwill?
(b) What will be the value of goodwill under capitalisation method?
Solution:
1. Calculation of Average Profit:
Average profit (befor e adjustment) 2,07,000
Less: Investment income (2,000)
Average profit (after adjustment) 2,05,000
2. Calculation of Future Maintainable Profit:
Average profit (before adjustment) 2,05,000
Add: Expenses likely to be discontinued in
future 3,000
Future maintainable profit before tax 2,08,000
Less: Tax @ 50% (1,04,000)
Future maintainable profit after tax 1,04,000
3. Calculation for Capital Employed:
As given 14,50,000
Less: Investment (50,000)
Actual Capital Employed 14,00,000
4. NRR = 6% (Given)
5. Normal of years’ purchase = 7 years (Given)
6. Calculation of Normal Profit: NRRNormal Profit = Capital × 1006100
= Rs. 84,000
7. Calculation of Super Profit:
Super profit = 1,04,000 – 84,000
= Rs. 20,000
8. Calculation of Goodwill by purchase of super profit method:
Goodwi ll = No. of years × Super Profit
= 7 × 20,000
= Rs. 1,40,000 munotes.in
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Financial Accounting
40 9. Goodwill by capitalisation of super profit:
Super ProfitGoodwill =100
20,000
6
= Rs. 3,33,333
Illustration 9: A company desirous of selling its business to another
company has earned an average profit in past Rs. 1,50,000 per annum.
It is considered that such average profit fairly represents the profit likely
to be earned in the future except that:
(a) Director’s fee s Rs. 10,000 charged against such profit will not be
payable by th e purchasing company whose existing board can cope
up with additional work without additional fees.
Rent at Rs. 20,000 p.a. which has been paid by the existing company will
not be charged in the future.
The value of the tangible assets of the existing compan y at the
proposed date of sale was
Rs. 19,00,000 and was considered that reasonable return on capital
invested, for the type of company was 8%.
Calculate the value of Goodwill at 3 years’ purchase of super profits.
Solution:
1. Calculation of Average Profit: Rs. 1,50,000 (Given)
2. Calculation of future maintainable profit:
Average profit 1,50,000
Add: Director’s fees not required in future 10,000
Add: Rent not payable in future 20,000
Future maintainable profit 91,600
3. Calculation of capital employed: Rs. 19,00,000 (Given)
4. Calculation of NRR: 8% (Given)
5. Calculation of number of years’ purchase: 3 years (Given)
Calculation of Normal Profit: munotes.in
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Valuation of Goodwill and Shares
41 NRRNormal Profit = Capital Employed × 10019,00,000 8
100
i) Calculation of Super Profit:
Super Profit = FMP – Normal Profit
= 1,80,000 – 1,52,000
= Rs. 28,000
ii) Calculation of Goodwill by purchase of super profit method:
Goodwill = Super profit × Number of years’ purchase
= 28,000 × 3
= Rs. 84,000
1.9 UNSOLVED PROBLEMS
1. From the following information, ascertain the value of goodwill of
Micro Computers Ltd. under super profit method.
Balance Sheet as on 31st March, 2014
Liabilities Rs. Assets Rs. Paid-up Capital (5,00 0 share of 100 each fully 5,00,000 Goodwill at Cost 50,000 paid) Bank Overdraft 1,16,7 00 Land and Building at cost 2,20,000 Sundry Creditors 1,81,000 Plant and Machinery at cost 2,00,000 Provision for Taxation 39,000 Stock in Trade 3,00,000 Profit and Loss Appropriation A/c 1,13,300 Bad Debts 1,80,000 9,50,000 9,50,000
The company c ommenced operations in 1995 with a paid -up capital of
Rs. 5,00,000. Profits for recent years (after taxation) have been as
follows:
Year ended 31st March Rs. 2010 40,00 0 (loss)
2011 88,000
2012 1,03,300
2013 1,16,000
2014 1,30,000 munotes.in
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Financial Accounting
42 The loss in 2010 occur red due to a prolonged strike.
The income tax paid so far has been at the average rate of 40%. Dividends
were distributed at the rate of 10% on the paid -up cap ital in 2011 and 2012
and at the rate of 15% in 2013 and 2014. The market price of share is
rulin g at Rs. 125 at the end of the year ended 31st March, 2009.
2. Super Profits: Purchase + Capitalisation)
i. From the following information calculate value of the go odwill by
(a) Super Profit Method and
ii. (i) Average capital employed in the business 6,00,000.
iii. () Net trading profits of the firm for the past three years were
1.07,600, 90,700 and 1,12,500. (ii) Rate of Interest expected from
capital having regard to the ri sk inv olved 12 per cent. (iv) Fair
Remuneration to the partners for their services 12,000 per annum.
iv. (v) Sundry assets of the firm 7,54,762 Current liabilities 31,329.
Note: Take 8 years' purchase of super profits as value of Goodwill
3. The net profits of a Compan y, after providing for taxation, for the
past five years are Rs. 42,000; Rs. 47,000; Rs. 45,00 0; Rs. 39,000
and Rs. 47,000. The capital employed in the business is Rs. 4,
00,000 on which a reasonable rate of return of 10% is expected.
Calculate the g oodwil l under:
(a) Capitalisation of Average Profit Method and
(b) Capitalisation of Super Profit Me thod.
4. Ram runs a chemist shop. His net assets on 31st December 2004
amount to Rs. 20, 00,000. After paying a rent of Rs. 20,000 a year
and salary of Rs. 20, 000 to the chemist, he earns a profit of Rs.
1,50,000. His landlord, who happens to be an expert che mist, is
interested in purchasing the shop 12% is considered to be a
reasonable return on capital employed. What can Ram expect as
payment for goodwill?
5. Sumana, S uparna and Aparna are partners in a firm. They share profits
and losses in the ratio of 3: 2: 1. The partnership deed provides that, on
the retirement of a partner, Goodwill shall be calculated on the basis of
5 years’ purchase of the average net pro fits o f the preceding 8 years.
Aparna retires from the business on 31.12.1993. The net profits for t he
last 8 years are as follows: 1996 Rs. 6,000; 1997 Rs. 12,000; 1998 Rs.
20,000; 1999 Rs. 16,000; 2000 Rs. 25,000; 2001 Rs. 30,000; 2002 Rs.
36,000; 2003 R s. 31, 000. Compute the Goodwill of the firm which is
payable to Aparna.
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Valuation of Goodwill and Shares
43 1.10 MCQ’s
1. Which of the foll owing methods are used for the valuation of
goodwill?
a. Super profit method
b. Weighted profit method
c. Average profit method
d. All of the above
Answer: d
2. What is th e prim ary purpose for the valuation of shares?
a. To advance a loan against the security of shares
b. For purchase of shares by employees where they can retain these
shares till the period of their employment
c. To purchase a block of shares to acquire control in t he com pany
d. All of the above
Answer: d
3. Which of the following factors is not affecting the goodwill of a
company?
a. The location of a company’s customers
b. The nature of business
c. The efficiency of a company’s management
d. None of the above
Answer: a
4. The formula for c alculating goodwill under the simple average profit
method is ________.
a. Goodwill = Super profi t * Annuity factor
b. Goodwill = Super profit * No. of years purchase
c. Goodwill = Average profit * No. of years purchase
d. Goodwill = Weighted average profit * No . of y ears purchase
Answer: c munotes.in
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Financial Accounting
44 5. The market value method for the valuation of a share is preferred
____ _____.
a. When the shares are not listed
b. When there is a valuation for a division within the company
c. When the shares of a company are frequently traded in a st ock
exchange that has nationwide trading
d. None of the above
Answer: c
6. The amount that is treated as g oodwill by a firm is paid for
obtaining _______.
a. Present benefit
b. Future benefit
c. Both a and b
d. None of the above
Answer: b
7. The formula for valuation of equi ty share s is __________
multiplied by the price -earnings ratio.
a. Interest per share
b. Bonus per share
c. Earnings per share
d. None of the above
Answer: c
8. The shares appear at _________ in the balance sheet of a
company.
a. Paid-up value
b. Market price
c. Adjusted market v alue
d. None of the above
Answer: a
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Valuation of Goodwill and Shares
45 9. Which of the following is not essential to calculate the yield valu e
per share?
a. Super profit
b. Paid-up value
c. Normal return rate
d. Expected return rate
Answer: a
10. For any organization , goodwill is _______.
a. A valuable asset
b. A non -current asset
c. An intangible asset
d. All of the above
Answer: d
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46 2 FINAL ACCOUNTS OF BANKING
COMPANIES
Unit Structure:
2.1 Introduction
2.2 Accounting System
2.3 Books required by bank
2.4 Format
2.5 Format
2.6 Guidelines
2.7 Branch adjustment or inter
2.8 Classification of bank advanc es and its provisioning
2.9 Solved Problems
2.10 Unsolved Problems
2.11 MCQ
2.1 INTRODUCTION
A bank is a financial institution which deals with money and credit. It
accepts deposits and lends money to those who are in need of it. It helps to
transfe r money from one place to another. Banker is a person or company
carrying on the business of receiving money and collecting drafts for
customers subject to the obligation of honouring the cheques drawn upon
him from time to time by customers up to the am ount available on their
customers.
Banking. According to Banking Regulation Act, 1949. Section 5 Banking
is defined as “the accepting, for the purpose of lending or investment, of
deposits of money from the public repayable on demand or otherwise and
withd raw able by cheque, draft, order or otherwise
Section 6 of the Act states that in addition to the business of banking, a
banking company may engage in any one or more of the following
businesses:
The borrowing, raising, or taking up of money
i. The lending or advancing of money either upon or without security
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Final Ac counts of
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47 ii. The drawing, making, accepting, discounting, buying, selling,
collecting and dealing in b bills of exchange, hundies, promissory
notes, coupons, drafts, bills of lading, railway receipts, warrants,
debentures, certificates, scrip and other instruments, and securities
whether transferable or negotiable or not.
iii. The granting and issuing of letter of credit, travellers cheques and
circular notes
iv. On receiving of all kinds of bonds, scrip’s or valuables on deposit or
for safe custody or otherwise.
v. The buying, selling and dealing in bullion
vi. The collecting and transmitting of money and securities
vii. Contracting for public and private loans and negotiating and issuing
the same
viii. Carrying on and transacting every kind of guarantees and indemnity
business
ix. Undertaking and executing trusts, etc…
Classification of Bank Advances.
a. Bills purchased and discounted – It is the advances given to
customers on the security of bills, pronote etc. The amount after
deducting the discount from the amount of the bill is credited in the
customer’s account.
b. Loans – A loan is an advance of a fixed amount give to a customer for
a specified period. Interest is charged on the whole amount loaned.
c. Cash credit – It is a form secured advance by a bank. Under this
arrangement the bank allows a fixed limit within which the customers
can withdraw on the bank. Interest is charged on the amount actually
withdrawn.
d. Overdraft – Under this arrangement, the bank agrees to allow its
customers to overdraw from his current account up to a certain limit
either with or without security.
2.2 ACCOUNTING SYSTEM
The accounting system of a banking company is different from that of a
trading or manufacturing enterprise. A bank has large number of
custo mers whose accounts are to be maintained in such a way so that these
should be kept up to date and checked regularly. The following are the
main features of a bank’s accounting system are as follows:
1) Entries in the personal ledgers are made directly from t he vouchers
2) From such entries in the personal ledgers each day summary sheets munotes.in
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Financial Accounting
48 in total are prepared which are posted to the control accounts in the
general ledger.
3) The general ledger’s trial balance is extracted and agreed every day.
4) All entries in the per sonal ledgers and summary sheets are checked by
persons other than those who have recorded entries. It helps in
detection of mistakes.
5) A trial balance of detailed personal ledgers is prepared periodically
and gets agreed with the general ledger control ac counts.
6) Two vouchers are prepared for every transaction not involving cash.
2.3 BOOKS REQUIRED BY BANK
1. Receiving Cashier’s Counter Cash Book.
2. Paying Cashier’s Counter Cash Book.
3. Current Accounts Ledger.
4. Saving Bank Accounts Ledger.
5. Fixed Deposit Accounts Ledger.
6. Investment ledger.
7. Bills Discounted and Purchased Ledger.
8. Loan Ledger.
9. Cash Credit Ledger.
10. Customers’ Acceptances, endorsements and Guarantee Ledger.
11. Recurring Deposits Accounts Ledger, etc. The principal books of
accounts are
1. Cash Book
2. General Ledg er
Slip system of posting - Slip system of posting is made from slips
prepared inside the organisation itself or from slips filled in by its
customers. So entries are not made in the books of original entry or
subsidiary books, but posting of entries is d one from slips. In a banking
company, the main slips are pay - in -slips, withdrawal slips and cheques
and all these slips are filled in by clients of the bank. These slips serve the
basis of entry in the ledgers.
Final Accounts of Banks
As per Section 29 , a banking company incorporated in India, is required
to prepare, at the end of each accounting year, a Balance sheet and
profit and Loss Account as on the last working day of the year.
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Final Ac counts of
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49 Profit and Loss Account
A banking company is required to prepare its Profit and Loss Account
according to Form B in the Third Schedule to the Banking Regulation
Act, 1949. Form B is given as follows:
2.4 FORMAT
Form B
FORM OF PROFIT & LOSS ACCOUNT FOR THE YEAR ENDED
31ST MARCH (000s omitted)
Schedule
No Year
ended
31.3..
(CurrentY
ear ) Year ended 31.3. (PreviousY
ear)
I. Income Interest earned
II. Other income
Total
Expenditure
Interest expended
Operating expenses
Provisions and contingencies
Total 13
14
15
16
III. Profit/ Los s
Net profit / loss for the
year(I ‐II) Profit/loss brought
forward
Total
IV. Appropriations
Transfer to statutory reserves
Transfer to other reserves
Transfer to government/ Proposed
Dividend
Balance carried over to B/S
Total
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Financial Accounting
50 SCHEDULE 13 – INTEREST EARNED (000s omitted)
Year ended 31.3..(Current Year ) Year ended 31.3.(Previous Year)
Interest/ discount on advances/bills
Income on investments Interest on balances with Reserve Bank of India and other inter ‐bank funds
Others
Total
SCHEDULE 15 – INTEREST EXPENDED (000s omitted)
Year ended
31.3..(Current Year ) Year ended
31.3.(Previous Year)
Interest on deposits
Interest on Reserve Bank of India/ inter ‐
bank borrowings
Others
Total
SCHEDULE – 16 OPE RATI NG EXPENSES (000s omitted)
Year
ended
(Current
year) Year ended
(Previous
Year)
i. Payments to and provisions for employees
ii. Rent, taxes and lighting
iii. Printing and stationary
iv. Advertisement and publicity
v. Depreciation on bank’s property
vi. Directors’ fees, all owan ces and expenses
vii. Auditor’s fees, allowances and expenses
(including branch auditors) viii. Law charges
ix. Postages, telegrams, telephones, etc
x. Repairs and maintenance
xi. Insurance
xii. Other expenditure
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51 2.5 FORMAT
Balance Sheet
The Balance Sheet of Banking Co mpan y is prepared according to Form A
in Third Schedule. Form A is reproduced as follows:
FORM OF BALANCE SHEET
BALANCE SHEET OF …… (here enter name of the banking company)
as on 31st March (Year) (000s omitted)
Schedule No As on
(Current
Year ) As on
(Prev ious
Year)
Capital & Liabilities
Capital 1
Reserves & Surplus Deposits
Borrowings
Other Liabilities and Provisions 2
3
4
5
Total
Assets
Cash and balances with RBI
6
Balances with banks & money
at call and 7
short notice
Investments
Advances
Fixed Assets Other Assets 8
9
10
11
Total
Contingent liabilities 12
Bills for collection
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52 2.6 GUIDELINES OF THE RESERVE BANK OF INDIA
FOR THE PREPARATION OF FINAL ACCOUNTS
OF BANKING COMP ANIE S
Statutory Reserve Ratio
Section 17 of Banking Regulation Act of 1949 deals with the term
statutory reserve. Therefore, every banking company to create a reserve
fund before any dividend is declared, a sum equal to 25% of the net profit
of each year.
Cash Reserve Ratio (CRR)
As per Section 42(i) of RBI Act 1934, every scheduled bank shall
maintain with the RBI equal to at least 3% of its time and demand
liabilities (i.e., deposits received for fixed periods as well as of its
demand liabilities) as cash reserve. It is called Cash Reserve Ratio. The
Act empowers RBI to prescribe cash reserve of scheduled banks ranging
from 3% to 15%. Presently Cash Reserve Ratio is 4%.
Statutory Liquidity Ratio (SLR)
As per Section 24 of the Banking Regulation Act19 49 every commercial
bank is required to maintain not less than 25% of its total time and demand
liabilities in liquid assets in the form of cash, gold, and unencumbered
Government securities and other securities within India. It is called
SLR. At prese nt the norm of SLR is 21.5 %.
Rebate on Bills Discounted/ Unexpired Discount
Rebate on bills discounted is the interest received in advance and
represents unearned discounts for those bills which will mature after the
close of the financial year. Rebate on bills discounted for the current year
is debited to discount account. In the Profit and Loss account this item is
deducted from Interest earned, schedule No.13 and in Balance sheet it is
shown on the liability side under the head other liabilities a nd provisions
schedule No.5. If it is given as a ledger balance, it is shown under
schedule No.5 only.
Interest and discount A/c
Dr To Rebate on bills discounted.
If rebate on bills discounted is given in trial balance, it should e taken to
Balan ce sheet under “Other Liabilities and Provisions”. If it is given
under adjustments, it should be deducted from “Interest and Discount”
in Profit and loss Account and should be taken to Balance sheet under
“Other Liabilities and Pro visions”. At the commencement of next
accounting year it is transferred to Interest and Discount Account by
reversing the above entry.
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53 2.7 BRANCH ADJUSTMENTS OR INTER - OFFICE
ADJUSTMENTS
Banks usually have a network of branches spread over different places.
Various transactions take place between head office and branches and also
between branches themselves. The head office will record this transactions
after advises are received from branches. Unless advises are received such
items will remain unadjus ted under the heading Branch Adjustments. If
such entries may remain unadjusted in the head office of the bank at the
close of the financial year, such entries are recorded in the balance sheet.
If it is a debit balance, it is comes under the Schedul e No. 11 of asset side
and if it is a credit balance, it comes under the schedule No.5 of liability
side.
Clean bill
These are the bills to which no documents such as bill of lading, insurance
policy etc are attached.
Discounting of bills
Discounting of bill means making the payment of the bill before the
maturity date of the bill. B ills for Collection. These are the drafts and bills
drawn by sellers of goods on the purchasers of goods and sent to the bank
for collection. If some bills are left uncollect ed at the end of the year, they
are shown under the head Bills for collection.
Money at call and Short Notice
This item appears on the assets side of a bank Balance sheet and
represents temporary loans to bill brokers, stock brokers and other banks.
If the loan is given for one day, it is called “money at call” and if the loan
cannot be called back on demand and will require at least a notice of three
days for calling back, it is called “money at short notice”. The rate of
interest on which money is lent fluctuates every day.
Non-banking Assets
These are the temporary assets acquired by the bank for granting loans and
advances. Eg. Immovable properties, stock, title deeds etc. Such assets
are acquired by a bank from defaulters in satisfaction of their outstanding
to the bank. In short, the asset acquired in satisfaction of the claim of the
bank is called Non -banking assets. It showed under the schedule No. 11
Other assets. Such assets acquired should be disposed of within a period
of seven years fr om the date of their acquisition.
Interest on doubtful debts treated in a bank
When loan advanced become bad and doubtful, interest due on such loan
is not credited to P/L Account. Instead, interest suspense account is
credited. Unlike interest account, in terest suspense account is not credited
to P/L Account. If any portion of interest suspense is realised in munotes.in
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Financial Accounting
54 subsequent year, then that portion will be credited to interest account
and subsequently credited to P/L Account.
Items of Contingent liabiliti es in the case of Banking Company
Contingent liabilities are liabilities of the bank, which may or may not
arise in future. The liabilities are
a. Liability for partly paid investments.
b. Liability on account of forward exchange contract.
c. Guarantees given to customers.
d. Acceptances, endorsements and other obligations.
e. Claims against the bank not acknowledged as debt. Non Performing
Assets (NPA)
An asset becomes non performing asset when it ceases to generate income
for the bank as per the terms of contract. A n on performing asset is
defined as a credit facility in respect of which interest/instalment remains
“past due” for a period of 90 days.
2.8 CLASSIFICATION OF BANK ADVANCES AND ITS
PROVISIONING (ASSET CLASSIFICATION )
Banks are required to classify advances into four categories which are
given below –
a. Standard assets – It consists of all performing assets and advances
backed by Government guarantees irrespective of liability. It is also
called performing assets.
Standard assets are those assets which do not d isclose any problem and
which do not carry more than the normal risk attached to the business.
A general provision of a minimum of .40 % of total standard assets
should be made.
b. Substandard assets – These are the assets which are classified as Non
Performi ng Assets for a period not exceeding two years. These assets
indicate the possibility of loss in realising them. There is no certainty
to recover them in full. A general provision of 15% of the total
outstanding is made for these type assets.
c. Doubtful a ssets – An asset which has remained NPA for a period
exceeding two years should be treated as doubtful. 100 percent of the
extent to which the advance is not covered by the realisable value of
the security to which the bank has a valid recourse and the realisable
value is estimated on a realistic basis. In regard to the secured portion,
provision may be made on the following basis, at the rates ranging
from 25 percent to 100 percent of the secured portion depending upon munotes.in
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55 the period for which the asset ha s remained doubtful: The provision is
made on the following basis -
Doubtful 1 - Up to one year – 25% Doubtful 2 – One to three years –
40 % Doubtful 3 – More than three years - 100%
d. Loss assets - These are assets which are considered to be
uncollectable. Where the loss on assets has been identified by bank
or internal auditor or the RBI inspector but the amount has not been
written off wholly or partially is known as loss assets. It is also called
Bad assets. A provision of 100% of the outstanding shou ld be provid
2.9 SOLVED PROBLEM
Problem 1:
Prepare a profit and loss account of ABC bank LTD for the year 31.3.2018
from the following
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56 Solution:
Problem 2:
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57 Solution :
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58 Problem 3:
The following financial data extracted from the books of Mysore bank
Limited as on 31.3.2019 :
Solution:
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59 Schedule 13 :
Interest Earned Rs. Schedule 15 : Interest
Expended Rs.
Interest on Loan 51800 Interest paid on Fixed
Deposits 55000 Interest on Cash
Credits 44600 Interest paid on
savings Bank Deposits 13600 Interest on
Overdrafts 30800 68600 Discount on Bills
Discounted 29200 Less : Rebate on
Bills Discounted 9800 Schedule 16 :
Operating Expenses Rs. Interest on Current
Accounts 8400 Salaries and
Allowances 10800 155000 Rent and Taxed 3600 Director’s Fees 600 Scheduled 14 :
Other Income Rs. Auditor’s Fees 200 Commission
received 1600 Postage and Telegram 300 Locker rent 200 Printing & Stationary 600 1800 Transfer Fees 100 Depreciation on Bank
Property 1000 Sundry charges 400 17600
Problem 4:
From the following information, prepare a Profit and Loss Account of
Adarsha Bank Limited for the period ending 31.3.2017 along with
necessary schedules.
Particulars Rs. In
‘000 Particulars Rs. In
‘000
Interest on Lo ans, Cash
Credit and Overdraft 31628 Advertisement and
publicity 87 Income on Investment 11810 Depreciation on Bank’s
property 297 Interest on Balances
with RBI 4243 Director’s fees,
allowances and
expenses 7 Commission, Exchange
and Brokerage 2907 Auditor’s fees and
expenses 41 munotes.in
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60 Profit on Sale of
investments 114 Low charges 22 Interest on Deposites 31404 Postage, telegram,
telephone etc. 312 Interest on RBI
Borrowing 3361 Repairs and
maintenance 91 Payment to and
Provision for
employees 9717 Insurance 915 Rent, taxes and lighting 955 Printing and stationary 213 Other experditure 884 Balance of Profit/ Loss
b/f 1524
Supplementary Information :
i) Make a provision for (including surcharge) at 51.75%
ii) Every year the bank transfer 25% of profits t o statutory Reserve and
5% profit to Revenue Reserve.
iii) Dividend amounting to Rs. 2,00,000 for the ended 31.3.2017 is
proposed by board of Directors.
Solution:
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61
Problem 5:
The following balances have been taken from the books of Indian Banking
Corpor aion on 31st March, 2017
` `
Paid up Capital 10,00,000 Furniture 20,000 Local Bills Discounted 9,00,000 Fixed Deposits 20,00,000 Reserve Fund 3,85,000 Profit and Loss
Account -balance (Cr.) 1,10,000 Loans, Advances 14,00,000 Stamps on hand 5,000 Unpaid dividend 5,000 Cash Balance 2,50,000 Overdrafts 23,00,000 Cash Balance with
other Banks 6,50,000 Current and Savings
Deposits 25,00,000 Investments (Cost) 4,75,000
The directors of the bank have instructed that the investment should be
shown i n the Balance Sheet.
The authorised capital of the was `12,00,000 in `10 shares.
Prepare the Balance Sheet of the Bank, as on 31st March, 2017. munotes.in
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62
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63
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64 Problem no. 6:
Solution :
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65
Problem 7:
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66 Solution :
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67 Problem 8:
Solution :
Profit a nd Loss Account for the year ended 31.3…..
Particulars Schedule No. Rs.
I) Income Income earned 13 7,90,000 Other income 14 1,30,000 Total 9,20,000 II) Expenditure Interest expended 15 3,50,000 Operation expenses 16 2,00,000 Provisions and Co ntingencies 20000 Total 5,70,000 III) Profit/ Loss munotes.in
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68 Net Profit/ Loss for the year (I -II) 3,50,000 Profit/ Loss (*) brought forward 0 Total 3,50,000 IV) Appropriations Transfer to Statutory Reserves 87500 Taxation Reserve 6000 Balance c arried over to Balance Sheet 2,02,500 Total 3,50,000
Schedule 13:Interest
Earned Rs. Schedule 16:
Operating Expenses Rs.
Interest and discount 8,00,000 Salaries to the s taff 1,50,000 Less Rebate on Bills
discounted -10000 Audit Fees 10,000 7,90,000 Directors Fees 8,000 Schedule 14 : Other
income Rs Depreciation on
Bank’s property 13,000 Rent 60,000 Printing and
Stationary 8,000 Commission 70,000 Postage 6,000 1,30,000 Rent 5,000 Schedule 15 : Interest
Expended Rs. 2,00,000 Intere st On Deposits 3,00,000 2,00,000 Interest paid on
borrowings 50,000 Provision for Bad
debts 20000 3,50,000
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69
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70 Problem 9:
The following is the Trial Balance extracted from the books of Vysya
Bank. You are required to prepare profit & Loss account and balance sheet
as on 31.03.2014 after taking into consideration the adjustments given
below :
Solution :
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71
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72
2.10 UNSOLVED PROBLEMS
Problem 1:
The following financial data extracted from the books of mysore bank
limited as on 31 .3.2019
Particulars Rs.
Interest on fixed deposits 55000 Rebate on bills discounted 9800 Interest on loans 51800 commission 1600 Depreciation on bank property 1000 Discount on bills discounted 29200 Interest on cash credit 44600 Directors’ fee s 600 Postage and telegram 300 Printing and stationery 600 Rant and taxes 3600 Interest on overdraft 30800 Sundry expenses 400 Interest on savings bank deposits 13600 munotes.in
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73 Problem 2:
From the following information prepare profit and loss account of yes
bank Ltd. For the year ended 31 -3-2019
Particulars Rs. In crores
Interest on loans 2590 Interest on fixed deposits 2750 commission 82 Rebate on bills discounted 490 Salaries and allowances 540 Discount on bills discounted 1850 Interest on cash credit 2230 Depreciation on bank’s property 400 Rent and rates 180 Interest on overdraft 1540 Director’s fees 30 Audit fees 50 Interest on savings deposits 680 Postage 14 Printing and stationery 29 Sundry expenses 15
Problem 3:
Prepare a profit and loss account of ABC bank Ltd of the year ended
31.3.2018 from the following
Particulars Rs. Rs.
Interest on fixed deposits 162410 Rebate on bills discounted 29000 Interest on loans 45000 Commission charged to customers 62500 Establishment 15000 Discount on bills discounted 89000 Interest on cash credit 24000 Amount charged against current accounts 71500 Directors’ Fees 10000 Audit Fees 20000 Postage and telegram 2000 Printing and stationery 4000 Rent and taxes 22500 Interest on overdraft 71000 Sundry charges 1500 Interest on savings bank deposits munotes.in
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74 Problem 4:
Prepare a profit and loss account of ABC bank Ltd of the year ended
31.3.2018 from the following
Particulars Rs. Rs.
Interest on fixed deposits 162410 Rebate on bills discounted 29000 Interest on loans 45000 Commission charged to customers 62500 Establishment 15000 Discount on bills discounted 89000 Interest on cash credit 24000 Amount charged against current
accounts 71500 Director s’ Fees 10000 Audit Fees 20000 Postage and telegram 2000 Printing and stationery 4000 Rent and taxes 22500 Interest on overdraft 71000 Sundry charges 1500 Interest on savings bank deposits
Problem 5:
Prepare a profit and loss account of ABC bank Ltd of the year ended
31.3.2018 from the following
Particulars Rs. Rs.
Interest on fixed deposits 162410 Rebate on bills discounted 29000 Interest on loans 45000 Commission charged to customers 62500 Establishment 15000 Discount on bills discounted 89000 Interest on cash credit 24000 Amount charged against current
accounts 71500 Directors’ Fees 10000 Audit Fees 20000 Postage and telegram 2000 munotes.in
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75 Printing and stationery 4000 Rent and taxes 22500 Interest on overdraft 71000 Sundry charges 1500 Interest on savings bank deposits
2.11 MCQ’s
1. Banks prepare the accounts for
a. Calander year
b. Financial year
c. Cooperative year
d. Diwali year
Answer: Financial year
2. As per sec. 17 of the banking regulation act every bank has to transfer
of profit to statutory reserve fund account:
a. 10%
b. 15%
c. 20%
d. 25%
Answer:25%
3. Banks show the provision for income -tax under the head:
a. Contingency accounts
b. Contingent liabilities
c. Other liabilities and provisions
d. Borrowing
Answer: other liabilities an d provision
4. The heading other assets does not include:
a. Silver
b. Interest accrued
c. Inter -office adjustment (Dr.)
d. Gold
Answer: Gold
5. Income from standard asset is to be recognised on ?
a. Cash basics
b. Accrual basics
Answers: Accrual basics munotes.in
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76 6. Sub-standard asse t in one which has been classified as NPA for a
period not exceeding:
a. 1 year
b. 2 year
c. 3 year
d. 4 year
Answer: 1 year
7. Doubtfull asset is one which has remained in the sub -standard category
for:
a. 12 months
b. 18 months
c. 24 months
d. 48 months
Answer: 12 months
8. Whe n income is to be recognised on cash basic, a distinction should be
made between:
a. Performing and non -performing asset
b. Banking and non -banking asset
c. Monetary and non -monetary asset
d. Current and non -current asset
Answer: performing and non -performing
9. Provision created against loose asset and unsecured doubtfull dept is:
a. 10%
b. 20%
c. 30%
d. 100%
Answer: 100%
10. Provision is created for sub -standard asset:
a. 10%
b. 15%
c. 20%
d. 30%
Answer: 15%
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77 3
ACCOUNTING FOR LIMITED
LIABILITYPARTNERSHIP (LLP)
Unit Structure :
3.1 Introduction
3.2 Features
3.3 Distinction between LLP and Paternship
3.4 Incorporation o f Limited Liability Paternship
3.5 Registered Office o f LLP
3.6 Name o f LLP
3.7 LLP Agreement
3.8 Alteration o f LLP Agreement
3.9 Partners a nd Designated Partners
3.10 Disqualification o f a Designated Partner
3.11 Winding up b y Tribunal
3.12 Solved Problem
3.13 Unsolv ed Problem
3.14 MCQ
3.1 INTRODUCTION
Governed by LLP Act 2008, The Act came into force for most of its
part on 31/03/2009, followed by its rules on 01/04/2009 and the
registration of first LLP on 02/04/2009
It came as a result of the recommendations made by several expert
committees like Bhatt Committee of 1972, Naik Committee of 1992,
Abid Hussain Committee of 1997, Gupta Committee of 2001, Naresh
Chandra Committee of 2003 and the JJ Irani Committee of 2005.
3.2 FEATURES
Corporate vehicle with a flexibil ity of a partnership More suitable for
service industry, and small and mid - size enterprises
Separate legal entity munotes.in
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78 Perpetual succession The mutual rights and duties of partners of an
LLP is governed by the agreement and if the agreement is silent, it
shall be governed by the provisions of the proposed legislation
Limited liability, no partner would be liable on account of the
independent or unauthorized acts of other partners or their misconduct;
Every LLP shall have at least two partners and shall also hav e at least
two individuals as Designated Partners, of whom at least one shall
be resident in India.
Audit becomes mandatory for those companies whose contribution
exceeds 25 lakhs or annual turnover exceeds 40 lakhs. A
statement of accounts and solvency sh all be filed by every LLP with
the Registrar every year
The Central Government has power to investigate the affairs of an
LLP, if required, by appointment of competent inspector for the
purpose;
A partnership firm, a private company and an unlisted public company
may convert themselves to LLP in accordance with provisions of the
proposed legislation
3.3 DISTINCTION BETWEEN LLP AND PATERNSHIP:
LLP is a separate legal entity, it can sue and can be sued
Limited Liability
Perpetual succession
Registration becom es compulsory when it comes to LLP
Maximum limit on members is not specified
Registration is much easier when it comes to an LLP
LLP agreement is like the MOA & AOA
Change in name/registered office address is simple in LLP
No mandatory time period for meet ings
Mostly ownership and management be in the hands of the same person
when it comes to an LLP
In case of a company, no individual director can conduct the business
of the company but in an LLP, each partner has the authority to do so
unless expressly prohibited by the partnership term
Remuneration to Directors is regulated in companies munotes.in
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79 No restriction on borrowing powers
The LLP can choose to maintain the accounts on cash basis/accrual
basis whereas under the Companies Act, accrual method is
compulsory.
Audit becomes compulsory for companies from day one
Cost audit is not mandatory for an LLP
CS appointment is not mandatory; However, the annual return of an
LLP in Form 11 is to be certified as ‘true and correct’ by a Company
Secretary in practice.
3.4 INCORPORATION OF LIMITED LIABILITY
PATERNSHIP
To be discussed using the e-form FiLLiP
Any person who makes a false statement during the registration
process shall be punishable with imprisonment for a term which may
extend to two years and with fine which s hall not be less than ten
thousand rupees but which may extend to five lakh rupees.
Subject to prior compliance with the requirements of section 11(1) of
the Act, section 12(1) mandates the Registrar to register the
incorporation document and issue a certificate of incorporation within
14 days.
3.5 REGISTERED OFFICE OF LLP
Notice of change of registered office to be filed with the Registrar within
30 days from the date of the change in LLP -Form 15 prescribed under
Rule 17 of the LLP Rules 2009 along with the prescribed fees.
List of documents required to attached with LLP Form 15:
Consent letter of all DP’s
Consent letter of all Secured Creditors
Copy of Board Resolution
Copy of Advertisement – Daily newspaper published in English and in
the principle langu age of the District where the registered office is
situated (only if from one state to another)
Proof of New Registered Office Address (If Rented then Rent
Agreement, Utility Bill in the name of Owner & NOC)
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80 3.6 NAME OF LLP
1. Every limited liability partne rship shall have either the words “limited
liability partnership” or the acronym “LLP” as the last words of its
name.
2. Naming guidelines are similar to Companies
3. Name can be reserved through RUN -LLP, one resubmission for 15
days is allowed, to be filed with the following enclosures
a) Certified copy of consent of all partners involved for the name
change;
b) Copy of the existing LLP agreement;
c) Trademark copy or a copy of the registration certificate; Once the
name is approved, form LLP-5 has to be filed within 30 days.
After the partners get the new certificate of registration, a supplementary
agreement needs to be laid out
3.7 LLP AGREEMENT
The mutual rights and duties of the partners of a limited liability
partnership, and the mutual rights and duties of a limite d liability
partnership and its partners, shall be governed by the limited liability
partnership agreement between the partners, or between the limited
liability partnership and its partners. – Section 23
To be filed with the registrar within 30 days from incorporation in
form 3
3.8 ALTERATION OF LLP AGREEMENT
To be filed within 30 days from the date of amendment in form 3 along
with the following documents
a) Initial LLP Agreement
b) Supplementary/ Altered agreement
c) Optional attachments if any
3.9 P ARTNERS AND D ESIGNATED PARTNERS
Any person can be a ‘partner’
Every LLP shall have at least two designated partners who are
individuals and at least one of them shall be a resident in India.
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81 in case of a limited liability partnership in which all the partners are
body corporates, at least two partners shall nominate their respective
individuals who are to act as "designated partners" and one of the
nominees shall be a resident of India. Vide Circular No. 2/2016 dated
15th January 2016,
WHO CANNOT BECOME A PARTNER:
He has been found to be of unsound mind by a Court of
competent jurisdiction and the finding is in force;
he is an undischarged insolvent; or
he has applied to be adjudicated as an insolvent and his application is
pending.
HUF or its Karta cannot become partne r or designated partner in LLP
3.10 DISQUALIF ICATION OF A DESIGNATED
PARTNER
Has at any time within the preceding five years been adjudged
insolvent; or
Suspends, or has at any time within the preceding five years suspended
payment to his creditors and has not at any time within the preceding
five years made, a composition with them;
has been convicted by a Court for any offence involving moral
turpitude and sentenced in respect thereof to imprisonment for not less
than six months; or
has been convicted by a Court for an offence involving section 30 of
the Act.
LIABILITIES OF DESIGNATED PARTNER:
The designated partner would be liable to all penalties imposed on the
LLP for the contravention of the provisions of the Act and as such the
designated partner wo uld be required to pay all the monetary fines
imposed on the LLP. There is no provision in the Act providing for the
reimbursement of such monetary penalties to him by the LLP.
OBLIGATION OF PARTNER:
All partners, are agents of the LLP, but not of other partners.
LLP shall not be liable for the omissions/mistakes of its partners if
that partner is not properly authorized to carry on that activity
Liabilities of the LLP shall be met only with the properties of the LLP
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82 LLP FOR THE PROFESSIONALS:
To insulate them from third party claims against professional
negligence or deficiency
Cross section of the professional may come together under a banner
Solution under one roof for clients
Helps to grow in heavy competition
VALUATION OF CAPITAL CONTRIBUTION:
If othe r than cash is given as contribution, it shall be valued by a
practicing Chartered Accountant or by a practicing Cost Accountant or
by approved valuer from the panel maintained by the Central
Government.
FOREIGN LIMITED LIABILITY PATERNSHIP:
Should file wi thin 30 days of establishing a place of business in India
to the respective Registrar in Form 27 – Form 27 to be discussed
using the e - form
FDI in LLP
INVESTIGATION OF THE AFFAIRS OF LIMITED LIABILITY
PATERNSHIP (SECTION 43):
As per Section 43, the Centr al Government may appoint one or more
competent persons as inspectors to investigate
if not less than one-fifth of the total number of partners of the limited
liability partnership make an application along with supporting
evidence and security amount as may be prescribed; or
if the limited liability partnership makes an application that the affairs
of the limited liability partnership ought to be investigated; or if, in the
opinion of the Central Government, there are circumstances
suggesting —
a) that the business of the limited liability partnership is being or
has been conducted with an intent to defraud its creditors, partners or
any other person, or otherwise for a fraudulent or unlawful purpose, or
in a manner oppressive or unfairly prejudicial to some or any of
its partners, or that the limited liability partnership was formed for
any fraudulent or unlawful purpose; or
b) that the affairs of the limited liability partnership are not being
conducted in accordance with the provisions of this Act; or
c) that, on receipt of a report of the Registrar or any other investigating or
regulatory agency, there are sufficient reasons that the affairs of the
limited liability partnership ought to be investigated. munotes.in
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83
ANNUAL COMPLIANCES OF LLP:
Annual returns are filed in Form 1 1 - within 60 days of the closure of
the financial year (i.e.,3oth May every year). In case the annual
turnover of the LLP crosses Rs 5 crores or the Capital contribution
from Partners exceeds more than Rs 50 Lakhs the Annual return
should be accompanied by a Certificate from Practising Company
Secretary.
Statement of Solvency in Form 8 – before 30th of October every year
– Penalty Rs.100 per day
CONVERSION OF COMPANY INTO LLP:
Any existing private company or existing unlisted public company can
be converte d into LLP by complying with the Provisions of clause 58
and Schedule III and IV of the LLP Act.
Form 18 needs to be filed with the registrar along with Form 2 for such
conversion after getting the name approved
Once approved file form 3 From 18 to have the following attachments
Statement of shareholders.
Incorporation Documents & Subscribers Statements in Form 2 filed
electronically.
Statement of Assets and Liabilities of the company duly certified as
true
List of all the Secured creditors along with their consent to the
conversion.
Approval of the governing council (In case of professional private
limited companies)
NOC from Income Tax authorities and Copy of
acknowledgement of latest income tax return.
Approval from any other body/authority as may be required.
Particulars of pending proceedings from any court/Tribunal etc.
An LLP can be converted into a Pvt. Ltd. company as per the
provisions contained in Section 366 of the Companies Act, 2013,
Prerequisites for conversion
an LLP must have at least 7 partners (however as per Companies
Amendment Act, 2017 LLP with 2 partners can be convert into
Company), munotes.in
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Financial Accounting
84 approval from all the partners is required,
advertisement in newspaper is to be done in a local and a national
newspaper, Apply for name and file form URC-1
STRIKE OFF:
In case of an existing LLP which is not carrying on any business or
operation for a period of one year or more make an application in form
24 on voluntary basis
STRIKE OFF BY ROC SUO MOTU: - Same as it is
applicable to a company – 2 Conti nuous years
RESTORATION OF THE LLP:
Application to be made to NCLT in form NCLT -9 by any one of
the following persons
1. LLP
2. Partner or
3. Creditor
Copy of the application to be sent to the concern ROC get their opinion
also
3.11 WINDING UP BY TRIBUNAL
A limite d liability partnership may be wound up by the Tribunal —
if the limited liability partnership decides that limited liability
partnership be wound up by the Tribunal;
if, for a period of more than six months, the number of partners of the
limited liability partnership is reduced below two;
if the limited liability partnership is unable to pay its debts;
if the limited liability partnership has acted against the interests of the
sovereignty and integrity of India, the security of the State or public
order;
if the limited liability partnership has made a default in filing with the
Registrar the Statement of Account and Solvency or annual return for
any five consecutive financial years; or
if the Tribunal is of the opinion that it is just and equitable that the limited
liability partnership be wound up.
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85 3.12 SOLVED PR OBLEM
Q1 Ramesh & Mahesh are Partners sharing Profits & losses 2:1 Follow ing
is the Trial Balance an on 31-03-2015
Particular Dr Cr
Land and Building
Machinery
Salary and Wages
Cash at Bank
Cash in hand
Motor Van
Office Expenses
Ramesh's Capital
Mahesh's Capital
Carriage
Purchases
Return outward
Sales
Return inward
Bad debts
Debtors
Creditors
Rent
Bills Payable
Travelling Expenses
Stock (1 -4-2014)
Insurance
Discount
Advertisement
Furniture
Total 55000 40000 21000 40000 1100 20000 1000 2000 220000 2000 1000 32800 1100 7000 30000 1500 8000 12000 20000 518500 116000 62000 5500 280000 20000 35000 518500
Adjustments:
1. On 31 -3-2015 the cost price of closing stock was Rs 41000 and its
market price was Rs 42000
2. Goods worth Rs 5000 taken over by Ramesh for personal use were not
entered in the books of accounts.
3. Goods worth Rs 5000 were destroyed by fire and Insurance Co agreed
to pay 4,000 in full settlement of the clai m
4. Outstan ding expenses Rent 100 and Salary Rs 500
5. Provide depreciation 10% on machinery and 5% on furniture
6. Provide Rs 800 for Reserve for doubtful debts on debtor
You are required to prepare Trading and Profit and Loss Account for the
year ending 31-3-2015 and the Balance Sheet as on that date after considering the
abov adjustments munotes.in
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86 SOL : -
Statement of Income & Expenditure of Ramesh & Mahesh LLP For the
period from 1 -04-2014 to 31 -03-2015
Particular Amt Amt Amt I INCOME
1.Turnover Gross 280000 Less: Re turns Inward (2000 ) 278000 2.Other Income (specify) Goods lost by Fire 5000 Goods taken by Partner 5000 3. Increase/(Decrease) in Stocks Closing Stocks 41000 Less: Opening Stocks (30000 ) 11000 TOTAL INCOME 299000 II EXPENSE S Purchases Gross 220000 Less: Returns Outward (5500) 214500 2. Personnel Expenses Salaries & Wages 21000 Add: Outstanding 500 21500 3. Administrative Expenses Office Expenses 1000 Rent 1100 Add: Outstanding 100 1200 Gener al Expens es 4. Insurance 1500 5.Selling Expenses Carriage 5000 Bad Debts 1000 Travelling 7000 Discount 8000 Advertisement 12000 6. Depreciation Machinery (10% of 40,000) 4000 Furniture (5% of 20,000) 1000 5000 7. Interest NIL 8. Interest Other Expenses (to specify) Reserve for D. D. 800 Loss by Fire (5,000 - 4,000) 1000 TOTAL EXPENSES 279500 III. Profit/(Loss) before Taxes 19500 IV. Provision for Tax NIL V. Profit/(Loss) after Tax VI.Profit/(Loss) transfer red to Partners'
Account 19500 Ramesh (2/3) 13000 Mahesh (1/3) 6500 Profit transferred to Reserves and Surplus 19500
NIL
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87 Particular Amt. Amt.
I.CONTRIBUTION AND LIABILITIES
1. Partners Funds
(a) Contribution
Ramesh :
Balance b/d 116000
Add Net Profit 13000
129000 Less Goods taken (5000) 124000 Mahesh: Balance b/d 62000 Add: Net Profit 6500 68500 (b) Reserves and Surplus NIL 192500 2. Liabilities (a) Secured Loans NIL (b) Unsecured L oans NIL (c) Short term Borrowings NIL (d) Creditors/Trade Payables NIL Sundry Creditors 20000 Bills Payable 35000 Salary Outstanding 500 Rent Outstanding 100 55600 (e) Other Liabilities (to specify) NIL (f) Provisions NIL 5560 0 TOTAL 248100 II.ASSETS (a) Fixed Assets Land & Building 55000 Motor Vans 2000 Machinery 40000 Less: Depreciation (4000) 36000 Furniture 20000 Less: Depreciation (1000) 19000 130000 (b) Investments NIL (c)Loans and Advances Insura nce Claim Receivable 4000 (d) Inventories 41000 (e)Debtors/Trade Receivables Debtors 32800 Less Reserve for D.D. (800) 32000 (f) Cash and Cash Equivalents Cash in Hand 1100 Cash at Bank 40000 41000 (g) Other Assets (to spec ify) NIL TOTAL 248100
munotes.in
Page 88
Financial Accounting
88 Statement of Assets & Liabilities of Ramesh & Mahesh LLP 31.03.2015
Problem no 2
From the following trial balance of x co a limited liability partnership and
the other information given below prepare the statement of income and
expen diture for the year ending 31.03.2016 and the statement of assets and liabilities as on 31.03.2016
No Name of Accounts dr Cr
1 Partner contribution 1000000 2 General reserve 120000 3 Mortga ge loan from bank on building 80000 4 Unsecured loan 60000 5 Trade payable 84000 6 Turnover (sale) 2460000 7 Excise duty on turnover 60000 8 Interest from bank & on investment 30000 9 Opening stock (on 1.04.2015) 200000 10 Purchases 1310000 11 Purchases returns 30000 12 Salaries and wages 364000 13 Rent and rates 148000 14 Printing and stationery 6000 15 Postage and telephone charges 12000 16 Light charges 24000 17 Advertisement 20000 18 Carriage on sales 8000 19 Interest on loans 58000 20 Building 600000 21 Furniture and fitting 240000 22 Investments in govt securities 140000 23 Trade receivable 160000 24 Cash in hand 94000 25 Cash at bank 420000 3864000 3864000
Other information
A. closing stock on 31 .03.2016 was valued at RS 250000
B. unpaid salaries and wages were RS 4000 and outstanding interest
amounted to RS 12000
C. Depreciate building by 5% and furniture and fittings by 10%
D. make provision for bad and doubtful debts at RS 10000
E. make provision for income tax RS 80000 munotes.in
Page 89
Accounting For Limited
Liabilitypartnership
(LLP)
89 Sol
Statement of Income & Expenditure
For the year ending 31.03.2016
Particular RS RS 1 Income: A] Turnover (Sale) 2460000 B] Less : Excise Duty 60000 2400000 C] Other Income : Interest From Bank And Investments 30000 D] Incre ase In Closing Stock (I.E. Closing Stock) 250000 - 200000 Opening Stock) 50000 Gross Income 2480000 2 Expenses: A] Purchases 1310000 Less: Returns 30000 1280000 B] Personal Expenses; Salaries & Wages 364000 Add: U npaid Amount 4000 368000 C] Administrative Expenses; Rent & Rates 148000 Printing & Stationary 6000 Postage & Telephone Charges 12000 Light Charges 24000 190000 D] Selling Expenses Advertisement 20000 Carriage On Sales 8000 28000 E] Depreciation On: Building (I.E. 5% On 600000) 30000 Furniture & Fitting (I.E. 10%) 24000 54000 F] Interest On Loans 58000 Add: Outstanding 12000 70000 G] Other Expenses: Provision For Bad & D oubtful Debts 10000 Profit Before Tax 480000 munotes.in
Page 90
Financial Accounting
90 H] Provision For Income Tax 80000 Profit After Tax 400000 I] Profit Taken To Statement Of Asset And
Liabilities 400000 Balance
Statement of assets and liabili ties
Of X & co LLP as 31.03.2016
Particular RS RS
1] contribution & Liabilities
A] Partners funds As per last Balance sheet 1000000 B] general reserve As par last balance sheet 120000 Profit during the year 400000 2] liabilities A] secured loans From bank 80000 B] unsecured loans From others 60000 C] trade payables 84000 D] other liabilities Interest on loan outstanding 12000 Unpaid salary and wages 4000 16000 E] other liabilities F] provision for income tax 80000 TOTAL 1840000 ASSETS
A] Fixed Assets
Building 600000 Less: Dept (At 5%- 30000 580000 Furniture And Fittings 240000 Less : Dep. (10%) 24000 260000 B] Investment 140000 C] Loans And Advance D] Invent ories (C losing Stock) 250000 E] Trade Receivables 160000 munotes.in
Page 91
Accounting For Limited
Liabilitypartnership
(LLP)
91 Less: Provision For Bad And Doubtful Debts 10000 150000 F] Cash And Cash Equivalents Cash In Hand 94000 Cash At Bank 420000 514000 G] Other Assets Total 1840000
Q3 Mr. Andyand Mr. Ben were partners sharing profit & losses in the ratio
3:2
The following is the Trial Balance of AB (LLP) for year ended 31st March
2020.
Particulars Debit Credit
Stock on 01-04-2019 75,000
Purchase 12,50,000
Sales 21,45,000
Capital of Mr. Andy 300,0 00
Capi tal of Mr. Ben 200,000
Drawings of Mr. Andy 30,000
Drawings of Mr. Ben 20,000
Returns inwards 12,500
Returns outwar ds 15,200
Wages (Productive) 5,600
Wages (Unproductive) 3,500
Salaries 12,000
Rent, rates and taxes 4,800
Discount Allowed 2,400
Discount Received 4,200
Machinery 360,000
Buildings 850,000
Cash 4,500
Bank Overdraft 4,100
Sundry Debtors 245,000
Sundry Creditors 206,800
Total 2,875,300 2,875,300
Additional information: -
1 Outstanding Unproductive wages were Rs. 4,000
2 Prepaid rent is Rs800
3 Closing stock on 31st March 2020 was Rs. 72,000
4 Depreciate Building by 5% and Machinery by10%You are required to
prepare for the year ended 31st March 2020 munotes.in
Page 92
Financial Accounting
92 Statement of Income and Expenditure and balance sheet from the
given data
Sol :
STATEMENT OF ASSETS & LIABILITIES
Of AB (LLP) as on 31st March 2020
Particulars Sch.No. Rs. Rs.
CONTRIBUTIONS & LIABILITIES
CONTRIBUTIONS Partners fund 1 1,238,900
Reserves 2 Nil 1,238,900
LIABILITIES
Secured loa ns 3 Nil
Unsecured loans 4 Nil
Short Term Borrowings 5 4,100
Creditors & Trade Payables 6 210,800
Other Liabilities 7 Nil
Provisions 8 Nil 214900 Total 1,453,800 ASSETS Fixed Assets 9 1,131,500 Investments 10 Nil Loans & Advances 11 800 Inventories 12 72,000 Debtors &Trade Receivables 13 245,000 Cash & Cash Equivalents 14 4,500 Other Assets 15 nil Total 1,453,800
STATEMENT OF INCOME & EXPENDITURE Of AB (LLP)
for the period 1st April 2019 to 31st March 2020
Particulars Sch.No. Rs. Rs.
INCOME
Turnover 16 2,132,500 OtherIncome 17 4,200
Increase/Decrease in Stock 18 -3,000 2,133,700 EXPENSES munotes.in
Page 93
Accounting For Limited
Liabilitypartnership
(LLP)
93 Purchases & Direct Expenses 19 1,234,800 Personnel Expenses 20 25,100 Administrative Expenses 21 4,000 Selling Expenses 22 Nil Depreciation 23 78,500 Interest 24 Nil Other Expenses 25 2,400 1,344,800 Net Profit before Tax 788,900 Less: -Provision for Tax - Net Profit after Tax 788,900
Transfer to partners (PSR 3:2)
Mr.Andy's Capital a/c 473340
Mr. Ben's Capital a/c 315560 788900 Transfer to Reserves 0
Notes / Schedules to accounts
Sch.No Particulars Rs. Rs. Rs.
CONTRIBUTIONS &
LIABILITIES CONTRIBUTIONS 1 Partners fund Capital Balance of Mr. Andy 300,000 (+) Net profit of the year 473,340 (-) Drawings -
30,000 743,34 0 Capital balance of Mr Ben 200,000 Netprofit of the year 315,560 (-) Drawings -
20,000 495,560 Total Partners Fund
1,238,900 2 Reserves Nil 3 Secu red loans Nil 4 Unsecured loans Nil 5 Short Term Borrowings munotes.in
Page 94
Financial Accounting
94 Bank Overdraft 4,100 6 Creditors & Trade Payables 206,800 Outstanding wages 4,000 210,800 7 Other Liabilities Nil 8 Provisions Nil ASSETS 9 Fixed Assets Machinery 360,000 (-) Depreciation @10% 36,000 324,000 Buildings 850,000 (-) Depreciation @5% 42,500 807,500
1,131,500 10 Investments Nil 11 Loans & Advances Prepaid Rent 800 12 Inventories Closingstock 72,000 13 Debtors & Trade Receivables Sundry Debtors 245,000 14 Cash & Cash Equivalents Cash 4,500 15 Other Assets Nil Sch.No. Particulars Rs. Rs. 16 INCOME Turnover Gross Sales 2,145,000 (-) Return Inwards -
12,500 2,132,500 17 Other Income munotes.in
Page 95
Accounting For Limited
Liabilitypartnership
(LLP)
95 Discount Received 4,200 18 Increase/Decrease in Stock Closing Stock 72,000 (-) Opening Stock -
75,000 -
3,000 EXPENSES 19 Purchases & Direct Exp 1,250,000 (-) Return Outwards -
15,200 1,234,800 20 Personnel Expenses Wages (Productive) 5,600 (+) Outstanding wages 4,000 9,600 Wages (Unproductive) 3,500 Salaries 12,000 34,700 21 Administrative Expenses Rent, rates and taxes 4,800 (-) Prepaid rent 800 4,000 22 Selling Expenses Nil 23 Depreciation on machinery 36,000 on building 42,500 78,500 24 Interest Nil 25 Other Expenses Discount Allowed 2,400
munotes.in
Page 96
Financial Accounting
96 Q4 Mr. Jack and Mr. Ken were partners sharing profit & losses in the ratio:
3:2
The following is the Trial Balance of JK (LLP) foryear ended 31st March
2020.
Particulars Debit Credit ReserveFund 2,000 Bills payable 1,200 Returns Outwards 2,100 Reserve for doubtful debts 1,600 Creditors 19,400 Sales 315,000 Machinery 90000 Office Rent 2,500 Discount 3,200 Bad debts 2,150 Wages and salarie s 8,900 Investment in Debentures 6,000 Cash balance 2,400 Purchases 197,800 Bank overdraft 4,100 Capital of Mr. Jack 64,500 Capital of Mr. Ken 48,700 Opening Stock 42,500 Royalties 3,410 Loanfrom Mrs. Ken 4,500 Trademarks 12,500 Unpaid general expenses 3,210 Travelling expenses 2,150 Printing and stationery 3,500 Debtors 53,100 Drawings of Mr. Jack 22,500 Drawings of Mr. Ken 18,700 Bank Loan 5,000 471,310 471,310
Additional information: -
1 Jack to get a commission of 1% on Net sales
2 Revalue Machinery to Rs. 85,000
3 Unpaid expenses were Rs. 2,000 for Salary
4 Rent is paid for two months in advance
5 New bad debts are Rs. 1,200. Maintain RDD @5% on Debtors
6 Closing stock is valued at Rs. 38,500 whereas the cost price was Rs.
35,800 munotes.in
Page 97
Accounting For Limited
Liabilitypartnership
(LLP)
97 Sol
STATEMENT OF ASSETS & LIABI LITIES
Of JK( LLP) as on 31st March 2020
Particulars Sch.N Rs. Rs.
CONTRIBUTIONS & LIABILITIES
CONTRIBUTIONS
Partners fund 1 149,952
Reserves 2 2,000 151,952
LIABILITIES
Secured loans 3 5,000
Unsecured loans 4 4,500
Short Term Borrowings 5 4,100
Creditors & Trade Payables 6 25,810
Other Liabilities 7 0
Provisions 8 0 39,410 Total 191,362
ASSETS
Fixed Assets 9 97500 Investments 10 6000 Loans &Advances 11 357 Inventories 12 35800 Debtors &Trade Receivables 13 49305 Cash & Cash Equivalents 14 2400 Other Assets 15 0
191362
STATEMENT OF INCOME & EXPEN DITURE
Of JK (LLP) for the period 1stApril 2019 to 31st March 2020
Particulars Sch.No. Rs. Rs.
INCOME
Turnover 16 315,000
Other Income 17 -
Increase/Decrease in Stock 18 -6,700 308,300
EXPENSES
Purchases & Direct 19 199,110
Personnel Expenses 20 10,900 munotes.in
Page 98
Financial Accounting
98 Administrative Expenses 21 5,643
Selling Expenses 22 8,700
Depreciation 23 5,000
Interest 24 -
Other Expenses 25 4,145 233,498 Net Profit before Tax 74,802 Less: - Provisionfor Tax - Net Profitafter T ax 74,802 Transfer to partners (PSR 3:2) Mr. Jack's Capital a/c 44,881
Mr. Ken's Capital a/c 29,921 74,802 Transfer to Reserves -
Q5 Mr. G, Mr. H and Mr. Iwere partners sharing profit & losses in the
ratio 2:2:1 the followin g is the Trial Balance of GHI (LLP) for year ended
31st March 2020.
Particulars Debit Credit
Goodwill 22000
Patents 15000
Copyrights 8000
Salary and Wages 24500
Machinery 32800
Vehicle 12500
Cash in Hand 3300
ICICI Bank Balance (current
A/C) 6200
FD with ICICI bank 2000
Freight 200
Freight inwards 1040
Freight outwards 2100
Purchases and Sales 87240 138200 Returns 1250 2100 Billls Payable / Receivable 3920 2390 Debtors / Creditors 23820 12470 Bad debts 200
Rent, rates and taxes 2100
Mr.G's Capital 45200 Mr.H's Capital 44850 Mr.I's Capital 31200 Travelling expenses 8250
Opening Stock 11200
Discount 810 Advertisement (for 2 years) 1600
MutualFunds 8000
277220 277220 munotes.in
Page 99
Accounting For Limited
Liabilitypartnership
(LLP)
99 Additional information: -
1 Closing stock on 31st March was valued at Rs. 16,500
2 Goods worth Rs. 12,000 weresold on 27th March for which no
entry was passed in the books of accounts
3 Depreciate Vehicles by15% and Machinery by10 %
4 Unpaid expenses were Rs. 1,200 for Rent and Rs. 2,400 for Salary
5 Income from Mutual Funds was Rs. 2,000 reinvested, not
recordedin the books of accounts
6 Advertisement contr act was taken on 1st October 2019You are
required to prepare for the year ended 31stMarch 2020
Statement of Income and Expenditure & Balance sheet from the given data
Sol
STATEMENT OF ASSETS & LIABILITIES of GHI (LLP) as on
31st Marc h 2022
Particulars Sch.No. Rs. Rs. CONTRIBUTIONS & LIABILITIES CONTRIBUTIONS Partners fund 1 149,225 Reserves 2 - 149,225 LIABILITIES Secured loans 3 - Unsecured loans 4 - Short Term Borrowings 5 - Creditors &Trade Payables 6 14,860 Other Liabilities 7 - Provisions 8 - 14,860 Total liab ilities 164,085 ASSETS Fixed Assets 9 85,145 Investments 10 12,000 Loans & Advanvces 11 1,200 Inventories 12 16,500 munotes.in
Page 100
Financial Accounting
100 Debtors &Trade 13 39,740 Cash & C ash Equivalents 14 9,500 Other Assets 15 - Total assets 164,085
STATEMENT OF INCOME & EXPENDITURE of GHI (LLP) for the
period 1stApril 2019 to 31st March 2020
Particulars Sch.No. Rs. Rs. INCOME Turnover 16 148,950 Other Income 17 2,810 Increase/Decrease in Stock 18 5,300 157,060 EXPENSES Purchses & Direct Expenses 19 86,380 Personnel Expenses 20 24,500 Administrative Expenses 21 2,100 Selling Expenses 22 10,950 Depreciation 23 5,155 Interest 24 - Other Expenses 25 - 129,085 Net Profit before Tax 27,975 Less:-Provision for Tax - Net Profit after Tax 27,975 Transfer to partners (PSR Mr.G's Capital a/c 11,190 Mr,H's Capital a/c 11,190 Mr.I's Capital a/c 5,595 27,975 Transfer to Reserves -
munotes.in
Page 101
Accounting For Limited
Liabilitypartnership
(LLP)
101 NOTES / SCHEDULES TO ACCOUNTS
Particulars Sch.No. Rs. Rs. Rs. CONTRIBUTIONS &
LIABILITIES CONTRIBUTIONS Partners fund 1 Capital Balance of Mr. G 45,200 (+) Netprofit ofthe year 11,190 56,390 Capital Balance of Mr. H 44,850 (+) Netprofit ofthe year 11,190 56,040 Capital Balance of Mr. I 31,200 (+) Netprofit of the year 5,595 36,795 Reserves 2 - 149225 LIABILITIES Secured loans 3 - - Unsecured loans 4 - - Short Term Borrowings 5 - - Creditors &Trade Payables 6 Bills Payable / Receivable 2,390 Credito rs 12,470 14860 Other Liabilities 7 - Provisions 8 - ASSETS Fixed Assets 9 Goodwill 22,000 Patents 15,000 Copyrights 8,000 Machinery 32,800 (-) Depreciation @10% -
3,280 29,520 Vehicle 12,500 (-) Depreciation @15% - 85145 munotes.in
Page 102
Financial Accounting
102 1,875 10,625 Investments 10 FD with ICICI bank 2,000 Mutual Funds 8,000 (+) Income from Mutual
Funds 2,000 10,000 12000 Loans &Advances 11 Prepaid Advertising expenses 1200 Inventories 12 Closing Stock 16500 Debtors & Trade Receivables 13 Debtors 23,820 Bills Receivables 3,920 (+) Unrecorded Sales 12,000 39740 Cash & Cash Equivalents 14 Cash in Hand 3,300 Cash & Cash Equivalents 6,200 9500 Other Assets 15 0
Q6.From the fo llowing Trial Balance of Sona a nd Mona, you are required
to prepare a Trading and Pr ofit and Loss Account for the year ended 31st
March 2015 and the Balance Sheet as on that date, after taking into the
conside ration the additional information
Trial Balance as on 31st Mar 2015
Particular Dr Cr
Opening Stock
17,500
Salaries and Wages
4,600
Cash in hand
5,000
Purchases and Sales
112,600
165,000 munotes.in
Page 103
Accounting For Limited
Liabilitypartnership
(LLP)
103 Office ex penses
4,300
Productive wages
7,000
Bills receivable
4,000
Legal expenses
1,500
Bad debts 500
Works Manager's
Salary
3,000
Commission
1,500
2,400
Investments
10,000
Debtors and Creditors
20,000
10,000
Bank Overdraft
5,000
Patents
4,000
Loose Tools
3,000
Furniture
6,000
Goodwill
6,500
Interest on investment
3,600
Land and Building
25,000
Capital Accounts:
Sona
30,000
Mona
20,000
236,000
236,000
Adjustments :
1. Partners shar e Profits and Losses in their ca pital ratio.
2. The Closing Stock - Cost 20,000 Market Value 22,500
3. Sona has withdrawn goods wor th rs 600 for his perso nal use.
4. Uninsured goods worth r s 5,000 were destroyed by fire.
5. rs 225 written off as bad debts from debtors .
6. Outstanding salaries and wages rs 400,
7. Depreciation on Land and Building at 7 1/2 %
munotes.in
Page 104
Financial Accounting
104 Sol
Statement of income & Expenditure of sona & mona LLP
For the period from 1/04/2 014 to 31/03/2015
Particular Amt Amt I.INCOME 1.Turnover
165,000 2.Other Income (specify) Goods withdrawn by Sona 600 Commission 2,400 Interest on Investments 3,600 6,600 3. Increase/(Decrease) in Stocks Closing Stocks 20,000 Less Opening Stocks -
17,500 2,500 TOTAL INCOME
174,100 II.EXPENSES 1. Purchases
112,600 2. Personnel Expenses Productive Wages 7,000 Salaries & Wages 4,600 Add: Outstanding 400 Works Manager's Salary 3,000 15,000 3. Administrative Expenses Office Expenses 4,300 Legal Expenses 1,500 5,800 4. Selling Expenses Bad Debts 500 munotes.in
Page 105
Accounting For Limited
Liabilitypartnership
(LLP)
105 Add: Additional Bad Debts 225 Commission 1,500 2,225 5. Depreciation Land & Building 1,875 6. Interest Nil 7. Other Expenses (to speci fy Nil TOTAL EXPENSES 137,500 III. Profit before Taxes 36,600 IV. Provision for Tax Nil V. Profit after Tax 36,600 VI. Profit transferred to Partners'
Account Sona (3/5) 21,960 Mona (2/5) 14,640 36,600 VII Profit transferred to Reserves
and Surplus - Statement of Assets & Liabilities of Sona & Mona LLP as on 31/03/2015
Particular Amt Amt CONTRIBUTION AND
LIABILITIES Partner fund (a) Contribution Sona Balance b/d 30,000 Add: Net Profit 21,960 51,960 Less: Drawings -
600
51,360 Mona : Balance b/d 20,000 Add: Net Profit 14,640 34,640 86,000 (b) Reserves and Surplus NIL munotes.in
Page 106
Financial Accounting
106 2. Liabilities (a) Secured Loans NIL (b) Unsecured Loans NIL c)Short term Borrowings Bank Overdraft 5,000 (d)Creditors/Trade Payables Sundry Creditors
10,000 Wages Outstanding 400 10,400 (e)Other Liabilities (to specify) NIL (f) Provisions NIL 15,400 TOTAL 101,400 11. ASSETS (a)Fixed Assets - (i) Intangible Goodwill 6,500 Patents 4,000 (ii)Tangible Land & Building 25,000 Less D epreciation 1,875 23,125 Furniture 6,000 Loose Tools 3,000 42,625 (b)Investments 10,000 (c) Loans and advances NIL (d)Inventories 20,000 (e) Debtors/Trade Receivab les Debtors 20,000 Less Bad Debts 225 19,775 Bills receivables 4,000 (f) Cash and Cash Equivalents Cash in Hand 5,000 (g) Other Assets (to specify) NIL TOTAL 101,400 munotes.in
Page 107
Accounting For Limited
Liabilitypartnership
(LLP)
107 3.13 UNSOL VED PROBLEM
Q1 P and Q were partners sharing profit & losses in the ratio 3:2
respectively
The following is the Trial Balance of PQ (LLP)for year ended 31st March
2020.
Parti culars Debit Credit
Goodwill 25,000
Plant and Machinery 124,000
Bills Receivable 1,300
Carriage 400
Miscellaneous expenses 8,600
Lighting and Power 5,600
Sundry Customers 45,600
Trade expenses 2,150
Commission on sales 3,120
10% Loan from Mr. Joshi (1st October 19)
Vehicles 30,000
Salaries 6,000
Bonus to employees 1,500
Rent 4,500
Discount 2,100 3,200
Cash balance 18,200
Bank Overdraft 5,900
Units of Mutual Funds 4,600
GOIT -Bills 2,500
Capital of P 45,000
Capital of Q 30,000
Drawings of P 5,000
Drawings of Q 6,000
Inventories 12,500
Sundry Suppl iers 42,700
Purchases 165,000
Sales 322,87
469,170 469,170
-
Additional information: -
1 Closing stock was valued at cost Rs. 22,800 and market price Rs.
28,200
2 Lightin g and Power included a deposit paid to Power board Rs. 500
3 Depr eciate fixed assets by10%
4 Income from Mutual funds not received yet Rs. 600 munotes.in
Page 108
Financial Accounting
108 5 Goods worth Rs. 4,200 purchsed on 31-03-2020 were not recorded.
6 Bills receivable include a dishonoured bill of Rs. 200You are required
to prepare for the year ended 31st March 2020
Statement of Income and Expenditure & Balance sheet from the given data
Q2 Changu and Mangu are partners sharing profits and losses equally.
From the following Trial Balance and adjustments y ou are re quired to
prepare a Trading A/c, Profit and Loss A/c f or the year ended on 31st
March, 2015 and Balance Sheet as on that d ate
Trial Balance as on 31 -03-2015
Debit Balance Amt Credit Balance Amt
Carriage
Opening Stock
Salary
Wages
Discou nt
Intere st
Motive Power
Motor Van
Bad Debts
Building
Debt ors
Cash at Bank
Machinery
Investment
Purchases
Drawings:
Changu
Mangu
Total 2000
30760
4000
1000
500
750
4500
28000
1920
34000
20000
16120
10000
12000
60250
2800
3200
213800
Capitals :
Changu
Mangu
Commissio n
Interest
Sales
Purchase Return
Sundry Creditors
Outstanding Salary
60000
40000
4000
4200
92000
3800
27400
400
213800
Adjustments:
1. Outstanding wages Rs 400.
2. Provide depreciation at 10% p.a. on Building and Motor Van.
3. Accrued i nterest o n investment Rs360.
4. Provide 5% RBDD on D ebtors
5. Stock at 31st March, 2015 was Market Value 40,000; Cost Price
50,000 munotes.in
Page 109
Accounting For Limited
Liabilitypartnership
(LLP)
109 Q3. Following is the Trial Balance of Rohit and Sweety. They share profit
and losses in the proportion 32 From the following bala nces and
adjustments, prepare Trading and Profit and Loss A/c f or the year ending
31st March 2015 and Balance Sheet on that date
Trial Balance
Particular Dr Cr
Stock on 1 -4-2014
Purchases and Sales
Drawings:
Sona
Mona
Returns
Wages:
Productiv e
Unproductive
Salaries
Rent, Rates, Insuranc e
Bad Debts
Discount
Machine ry
Building
Sundry Debtors and Creditors
Cash
Capita ls:
Rohit
Sweety
Bank overdraft 45000
112500
16500
15000
3600
5250
900
9300
5100
600
1950
22500
54300
76500
1500
370500
187500
1500
1500
45000
52500
67500
15000
370500
Adjustments
1. On 31st March 2015 the stock was valued at 28,000.
2. Outstanding productive wages 300
3. Rent. Rates and Insurance include 800 paid for one year ending on
30th June, 201 5
4. Provide for doubtful debts on debtors at 5%
5. Depreciate Building by 5% and Machinery by 10%
6. Goods worth Rs 1250 were di stributed as free samples for which no
record has been made in the books
Q4 D and R partner sharing Profits and Losses equal ly in LLP From the
following Trial Balance of the firm prepare Income Statement and balance
sheet as on 31st mar 2015 munotes.in
Page 110
Financial Accounting
110 Particular amt particular amt
Stock
Purchases
Sales Returns
Debtors
Wages
Royalties
Furniture
Machinery
Advertisement for 4 y ears
Salaries
Provident Fund Investment
Contribution to P rovident
Fund
Insurance
Cash
Drawings:
D
R 20000
130000
700
20000
6000
1000
5000
30000
4000
3000
2000
500
500
3000
3500
1500
230700 Capital Accounts:
D
R
Commission
Rent
Miscellaneous Income
Sales
Purch ase
ReturnCommission
Provident Fund
Interest on P rovident
Fund
Investment
Reserve for Doubtful
Debt s
Creditors
15000
15000
1000
1000
2000
170500
3200
300
2000
200
500
20000
230700
Adjustment
1. Closing stock price rs 25000 marke t price rs 30000
2. D has taken goods worth rs 500 for his personal loans
3. Prepaid Insura nce amounted to rs 100
4. Depreciate furniture by 15% & machinery by 20%
5. Write off rs 400 as bad debts and maintains the reserve for doubtfull
debts at 3% on debtors
Q5 Given below is the T rial Balance of M/s Jay and Vijay (LLP) on 31st
March, 2015. They divide profits and losses as 3:2 respectively.
From the following Trial Balance and additio nal information, prepare
Profit and Loss Account for the year ended 31st March, 20 15 and the
Balan ce Sheet as on that date:
Particular Dr Cr
Stock (1 -4-2014)
Purchas es and Sales
Drawings:
Jay
Vijay
Returns
Sundry Expenses
Wages
Salaries
Travelling Expenses
Advertisement
Rent, Rates and Insurance 30000
75000
11000
10000
2400
600
3500
5600
600
600
2800
125000
1000
munotes.in
Page 111
Accounting For Limited
Liabilitypartnership
(LLP)
111
Bad Debts
Discount
Interest and Commission
Building
Machinery
Furniture
Sundry Debtors and Creditors
Cash
Capitals:
Jay
Vijay
Bank Overdraft
400
1300
200
36000
15000
5000
46000
1000
247000
1000
30000
35000
45000
10000
247000
Additional Information:
1. Stock is valued at 45,000 on 31s t March, 2015
2. Outstanding expenses Rent 300: Wages 200
3. Prepaid Insurance 400.
4. Write off 1,000 for Bad Debts and provide Reser ve for Do ubtful Debts
at 5% on debtors
5. Provide de preciation Building 5%, Machinery 10% and Furniture 15%
6. Provide 5% interest on Cap ital
3.14 MCQ
1. The statement of accou nt and solvency in a Limited Liability
Partnership should be prepared __________.
a. Within four mont hs from the end of the financial year
b. Within six months from the end of the financial year
c. Within three months from the en d of the financial year
d. Within two months from the end of the financial year
Answer: b
2. The Limited Liability Partnership Act , 2008 ca me into force on
______.
a. 21st March 2009
b. 23rd March 2009
c. 31st March 2009
d. 30th March 2009
Answer: c munotes.in
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Financial Accounting
112 3. Who is the head of Cen tral Information Commission?
a. The S tate Information Commissioner
b. The Chief Information Commissioner
c. The Chief Inf ormatio n Officer
d. The Chairman of Information Commissio n
Answer: b
4. Which of the fol lowing is true about a Limited Liability Partnership?
a. A Limited Liability Partnership is not a distinct entity from its
partners
b. A Limited Liability Partnership is a legal entity separate from its
partners
c. A Limited Liability P artnership is a body corporate
d. Both b and c are correct
Answer: d
5. Dependents benef it is paid at the rate of
a. 60% of wa ges in the form of monthly payment.
b. 75% of wages in the form of monthly payment.
c. 80% of wages in the form of monthly payment.
d. 90% of wag es in the form of monthly pay ment.
Answer: d
6. In case of banker's refusal to honour the cheque inspite of sufficient
funds in customer's account, the banker is
a. liable to compensate the drawer.
b. not liable to compensa te the drawer.
c. criminally liable under section 138.
d. liable to be delisted.
Answer: d
7. A person who is employed by the sel ler to raise the price by fictitious
bids. Such person is known as
a. Puffer
b. By bidder
c. Decoy Ducks
d. All of the above
Answer: d munotes.in
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Accounting For Limited
Liabilitypartnership
(LLP)
113 8. In the absence of Partnership agreement, the Pa rtner has
a. right to avail int erest on advances paid to partnership firm.
b. right to avail interest on advances paid to partnership firm provided
there is profit.
c. has no right to avail interest on advances.
d. has right to avail interest on advances even afte r dissolution of the
firm.
Answer: a
9. Provisions of EPF & misc Prov Act 1952 are ap plicable to
Cinema/Theatre employing
a. 10 or more persons.
b. 20 or more persons.
c. 5 or more persons.
d. 15 or more perso ns.
Answe r: c
10 Publication of name and limited liabilit y is provided in section of L LP
Act 2008
a Section 24 of LLP Act 2008
b Section 22 of LLP Act 2008
c Section 21of LLP Act 2008
d Section 23 of LLP Act 2008
Correct: C
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114 4
NON -BANKING FINANCIAL COMPANIES
Unit Structure
4.1 Meaning of NBFC
4.2 Difference between NBFC and bank
4.3 Types/categories of NBFC
4.4 Incorporation of NBFC
4.5 Resolution of NBFC
4.6 MCQ
4.1 MEANING OF NBFC
A Non -Bank ing Financial Company (NBFC) is a company registered
under the Companies Act, 1956 / 2013 engaged in the business of –
a) loans and advances,
b) acquisition of shares/stocks/bonds/debentures/securities issued by
Government or local authority or other marketable securities
c) leasing,
d) hire-purchase,
e) insurance business,
f) chit business
but does not include any institution whose principal business is that of
a) agriculture activity,
b) industrial activity,
c) purchase or sale of any goods (other than securities) or providing any
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115 Meaning of Financial activity as principal business – 50-50 test for NBFC’s
A 50/50 test means that – a firm’s financial assets constitute more than 50% of the total assets;
and income from financi al assets constitute more than 50% of the gross
income.
A firm which fulfills both these criteria will be registered with the RBI
as an NBFC. If, after registration, a firm violates the 50/50 criteria then
RBI has the authority to penaliz e the NBFC.
For carrying on business as NBFC, a non-banking financial institution –
a) must obtain a certificate of registration from the Reserve Bank an d
b) must have a Net Owned Funds of Rupees 2 crore.
services and sale/purchase/construction of immovable property.
Note –
A non -banking institution which is a company and has principal
business of receiving deposits under any scheme or arrangement in
one lump sum or in installments by way of contribut ions or in any
other manner, is also a non-banking financial company.
Registration
under
Companies
Act, 2013
Registration
under section
45-IA of the
RBI Act, 1934
NBF
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116
4.2 DIFFERENCE BETWEEN NBFC AND BANK
BASIS FOR
COMPARISON
NBFC
BANK
Meaning An NBFC is a
company that provides
banking services to
people wi thout holding
a bank license. A bank is a government -
authorized financial
intermediary that aims at
providing banking services
to the general public.
Incorporated
under Companies Act 1956 Banking Regulation Act,
1949
Demand Deposit Not Accepted Accepted
Payment and
Settlement system Not a part of the
system and cannot
issue cheques drawn on
itself. An integral part of the
system.
Maintenance of
Reserve Ratios Not required Compulsory
Deposit insurance
facility Not available Available
Transaction
servic es Not provided by
NBFC. Provided by banks.
4.3 TYPES/CATEGORIES OF NBFCS –
1) Asset Finance Company (AFC) –
a) An AFC is a company which is a financial institution carrying on as its Certain categories of NBFCs which are regulated by other regulators are
exempted from the requirement of registration with RBI –
Venture Capital Fund/Merchant Banking companies/Stock broking
companies regis tered with SEBI,
Insurance Company holding a valid Certificate of Registration issued by
IRDA,
Nidhi companies,
Chit companies as defined in Section 2(b) of the Chit Funds Act, 1982,
Housing Finance Companies regulated by National Housing Bank,
Stock Excha nge or a Mutual Benefit company.
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117 principal business the financing of physical assets supporting
productive /economic activity, such as –
automobiles,
tractors,
lathe machines,
generator sets,
earth moving and material handling equipments,
moving on own power and general -purpose industrial machines.
b) Principal business for this purpose is defined as aggregate of financing
real/physical assets supporting economic activity and income arising
therefrom is not less than 60% of its total assets and total income
respectively.
2) Investment Company (IC) –
IC means any company which is a financial institution carrying on as its
princ ipal business the acquisition of securities.
3) Loan Company –
LC means any company which is a financial institution carrying on as its
principal business the providing of finance whether by making loans or
advances or otherwise for any activity othe r than its own but does not
include an Asset Finance Company.
4) Infrastructure Finance Company (IFC) –
IFC is a non -banking finance company –
a) which deploys at least 75% of its total assets in infrastructure loans,
b) has a minimum Net Owned Funds of 300 crore,
c) has a minimum credit rating of ‘A’ or equivalent) and a CRAR
(Compounded Rate of Annual Return) of 15%.
5) Systemically Important Core Investment Company (CIC -ND-SI) –
CIC-ND-SI is an NBFC carrying on the business of acquisition of shares
and securities which satisfies the following conditions: -
a) it holds not less than 90% of its Total Assets in the form of investment
in equity shares, preference shares, debt or loans in group companies;
b) its investments in the equity shares (including instruments
compulsorily convertible into equity shares within a period not
exceeding 10 years from the date of issue) in group companies
constitutes not less than 60% of its Total Assets;
c) it does not trade in its investments in shares, debt or loans in group
companie s except through block sale for the purpose of dilution or
disinvestment;
d) it does not carry on any other financial activity referred to in Section
45I(c) and 45I(f) of the RBI Act, 1934 except investment in bank munotes.in
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Financial Accounting
118 deposits, money market instruments, governme nt securities, loans to
and investments in debt issuances of group companies or guarantees
issued on behalf of group companies.
e) Its asset size is 100 crore or above and
f) It accepts public funds
6) Infrastructure Debt Fund: Non- Banking Financial Company (IDF -
NBFC) –
a) IDF-NBFC is a company registered as NBFC to facilitate the flow of
long-term debt into infrastructure projects.
b) IDF-NBFC raise resources through issue of Rupee or Dollar
denominated bonds of minimum 5-year maturity.
c) Only Infrastructure Finance Companies (IFC) can sponsor IDF -
NBFCs.
7) Non-Banking Financial Company - Micro Finance Institution
(NBFC -MFI) –
“Non -Banking Financial Company – Micro Finance Institution (NBFC -
MFI)” means a non -deposit taking NBFC (other than a company formed
and registered under section 25 of the Companies Act, 1956 or Section 8
of the Companies Act, 2013) that fulfils the following conditions:
Minimum Net Owned Funds of 5 crore. (For NBFC -MFIs registered
in the North Eastern Region of the country, the minimum NOF
requirement shall stand at 2 crore).
Not less than 85% of its net assets are in the nature of “qualifying
assets.”
Note –
1) “Net assets ” shall mean total assets other than cash and bank balances and
money market instruments
2) “Qualifying assets ” shall mean a loan which satisfies the following criteria: -
a. loan disbursed by an NBFC -MFI to a borrower with a rural household annual
income not exceeding 1,25,000 or urban and semi -urban household income
not exceeding 2,00,000;
b. loan amount does not exceed 75,000 in the first cycle and 1,25,000 in
subsequent cycles;
c. total indebtedness of the borrower does not exceed 1,25,000; Provided that
loan, if any availed towards meeting education and medical expenses shall be
excluded while arriving at the total indebtedness of a borrower.
d. tenure of the loan not to be less than 24 months for loan amount in excess of
30,000 with prepayment without penalt y;
e. loan to be extended without collateral;
f. aggregate amount of loans, given for income generation, is not less than 50
per cent of the total loans given by the MFIs;
g. loan is repayable on weekly, fortnightly or monthly installments at the choice of
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119 8) Non-Banking Financial Company – Facto rs (NBFC -Factors) –
a) NBFC -Factor is a non-deposit taking NBFC engaged in the principal
business of factoring.
b) The financial assets in the factoring business should constitute at least
50 percent of its total assets and its income derived from factoring
business should not be less than 50 percent of its gross income.
9) Mortgage Guarantee Companies –
MGC are financial institutions for which at least 90% of the business
turnover is mortgage guarantee business or at least 90% of the gross
income is from mortgage guarantee business and net owned fund is 100
crore.
10) NBFC - Non-Operative Financial Holding Company (NOFHC) –
It is a financial institution through which promoter / promoter groups will
be permitted to set up a new bank. It’s a wholly -owned Non -Operative
Financial Holding Company (NOFHC) which will hold the bank as well
as all other financial services companies regulated by RBI or other
financial sector regulators, to the extent permissible under the applicable
regulatory prescriptions.
11) Systemically importa nt non-deposit taking non-banking financial
company –
It means a non -banking financial company not accepting / holding public
deposits and having total assets of 500 crore and above as shown in the
last audited balance sheet.
4.4 INCORPORATION OF NBFCS
A) Incorporation as company –
a) Form RUN for approval of name should contain financing as the
principal activity.
b) The principal business of NBFC mentioned in the MOA, w hile
registering under the Companies Act shall be lending credit, making
investments in various types of shares and stocks, leasing, hire-
purchase, insurance business, chit business, and receiving deposits
under any scheme or arrangement.
B) Registration Proc ess with Reserve Bank of India –
a) After incorporation of the company, the NBFC must obtain
certificate of registration.
b) For obtaining certificate of registration, NBFC should have
minimum net owned fund of 2 crore rupees
c) NBFC should make an application to RBI for registration, munotes.in
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Financial Accounting
120 For your knowledge – The applicant company is required to apply online and submit
a physical copy of the application along with the necessary
documents to the Regional Office of the Reserve Bank of India.
The application can be submitted online by accessing RBI’s secured website
https://cosmos.rbi.org.in .
Certain categories of NBFCs which are regulated by other regulators are
exempted from the requirement of registration with RBI –
Venture Capital Fund/Merchant Banking companies/Stock broking companies registered with SEBI,
Insurance Company holding a valid Certificate of Registration
issued by IRDA,
Nidhi companies,
Chit companies as defined in Section 2(b) of the Chit Funds Act,
1982,
Housing Finance Companies regulated by National Housing Bank, Stock Exchange or a Mutual Benefit company. d) Registration of NBFC is done under section 45I-A of RBI Act, 1934
C) Prerequisite before applying for registration –
a) It should have minimum one director from NBFC background or
senior Bankers as full -time director in the company
b) Clean CIBIL records
c) Understanding of NBFC / Finance business
D) Conditions to be fulfilled for getting registration –
Before Granting registration to NBFC, RBI will check that the
following conditions are fulfilled –
a) NBFC is or shall be in a position to pay its present or future
depositors in full as and when their claims accrue
b) Affairs of the NBFC are not being or are not likely to be conducted
in a manner detrimental to the interest of its present or future
depositors;
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121 c) general character of the management or the proposed management of
the NBFC shall not be prejudicial to the public interest or the interests
of its depositors;
d) NBFC has adequate capital structure and earning prospects;
e) Granting registration to NBFC will be in public interest;
f) Grant of registration should not be against the financial sector of the
country;
g) Such other conditions as the RBI thinks fit.
If all the above conditions are satisfied then RBI will grant registration and
provide license to an NBFC.
E) Cancelation of a Certificate of Registration –
RBI may cancel a certificate of registration of NBFC if such NBFC –
a) ceases to carry on the business of a non -banking financial institution
in India; or
b) has failed to comply with any condition subject to which the
certificate of registration had been issue d to it; or
c) at any time fails to fulfil any of the conditions such as adequate capital
structure and earning prospects; public interest, monetary stability,
and economic growth etc. or
d) fails to comply with any direction issued by the Reserve Bank of
India under the provisions of Chapter III B of RBI Act; or
e) fails to maintain accounts as per direction or order of RBI; or
f) fails to submit or offer for inspection its books of account and other
relevant documents when so demanded by an inspecting authority of
RBI; or
g) has been prohibited from accepting deposit by an order made by the
RBI for minimum 3 months.
If any person is aggrieved by the order for cancellation of registration
given by RBI then such aggrieved person may file and appeal within 30
days to centra l government and decision of central government shall be
final.
1) Every NBFC shall create a reserve fund
2) Amount to be deposited in reserve fund = 20% of net profit every
year (Profit shall be as disclosed in the P&L Account and it should
be before payment of any dividend. Reserve Fund – Section 45-IC munotes.in
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Financial Accounting
122 Maintenance of Percentage of Assets – Section 45-IB
Power of Reserve Bank of India to Remove Directors from Office – 3) Reserve fund can only be used for such purpose as specified by RBI.
4) Whenever NBFC will withdraw any amount from reserve fund, it
shall report to the RBI within 21 days of withdrawal.
5) Period of 21 days can be extended by RBI if there is sufficient
cause.
CG has the power to exempt any NBFC from the requirements of
maintaining reserve fund.
But such exemption should be given only on the recommendation of
RBI.
A) Percentage of assets to be maintained –
Every NBFC shal l invest and maintain of continuous basis minimum 5%
and maximum 20% of the deposits outstanding at the close of business
on the last working day of the second preceding quarter.
B) Where investments should be made –
a) Investment should be made in unencumbered approved securities.
b) “Approved securities” means securities of any State Government
or of the Central Government or bonds which have full guarantee
by CG or SG.
c) “Unencumbered approved securities” includes the approved
securities kept as security by NBFC with another financial
institution for securing loan
C) Important points –
a) If the amount invested by NBFC falls below the specified rate
then such company shall be liable to pay RBI a penal interest at a
rate of 3% p.a. above the bank rate for the shortfall.
b) If the shortfall continues in the subsequent quarters, then penal
interest rate will be 5% p.a. above the bank rate for the
shortfall.
c) Penal interest should be paid within 14 days
1) If RBI thinks that it is necessary to remove director of any NBFC
(other tha n government owned
NBFC) in the public interest or in the interest of deposit holders or for any
other reason than RBI may remove such director from the office. munotes.in
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Nonbanking Financial
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123 Appointment of director in place of removed director – a) RBI may appoint a suitable person in place of director so removed.
b) Such director will hold office for maximum period of 3 years or
such further periods not exceeding three years at a time;
Supersession of Board of Directors of Non-Banking Fina ncial Company – 2) Before removing an opportunity of being heard should be given to
such director.
3) Where any order of removal is made in respect of a director of a
company , he shall cease to be a director of NBFC.
4) Once director is removed then he shall not act as director for any
NBFC for such time which will be specified by NBFC but it cannot be
more than 5 years.
5) Director removed cannot claim any compensation for the loss or
6) termination from office.
1) If RBI thinks that it is necessary to supersede board of directors of any
NBFC (other than government owned NBFC) in the public interest or
in the interest of depos it holders or for any other reason then, RBI may
supersede the BOD of such NBFC.
2) Maximum time for which BOD can be superseded = Maximum 5
years.
3) After supersession of the BOD, RBI may appoint a suitable person
as the Administrator.
4) Administrator will work as per the orders and directions of RBI.
5) Whenever RBI orders supersession of BOD of NBFC then the
chairman, managing director and other directors should vacate their
office and all the powers to manage NBFC gets transferred to RBI’s
Administrator.
RBI has the power to –
a) Regulate or prohibit the issue of any prospectus or advertisement
soliciting deposits of money from the public by NBFCs; and
b) specify the conditions for issuing prospectus or advertisements. Reserve Bank to Regulate or Prohibit Issue Of Prospectus or
Advertisement Soliciting Deposits of Money – Section 45J
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124 Power of Bank to Determine Policy and Issue Directions – Section 45JA
Power of Bank to Collect Information from Non-Bank ing Institutions
as to Deposits and to Give Directions – Section 45K
Power of Bank to Call for Information from Financial Institutions
and to Give Directions –
If RBI thinks that it is necessary in the public interest or in the interest of
deposit holders or for any other
reason then, RBI will make policies and may issue directions with to
NBFCs for aspects relating to –
income recognition,
accounting standards
provision for bad and doubtful debts,
capital adequacy,
deployment of funds, etc.
1) RBI has the power to direct anytime that every NBFC shall furnish to
RBI statements information or details relating to the deposits
received by the NBFCs.
2) The details to be called by RBI may include –
a) The amount of deposit;
b) Purpose of accepting deposit;
c) Tenure of deposits;
d) Rate of interest; etc.
3) RBI also has the power to issue directions to NBFCs for the matters
relating to –
b) The amount of deposit;
c) Purpose of accepting deposit;
d) Tenure of deposit s;
e) Rate of interest; etc.
If any NBFC fails to follow the order or directions of RBI then RBI
may prohibit the acceptance of deposits by that NBFC. munotes.in
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125 Powers and Duties of Auditors –
Power to Take Action against ditors –
Power of Bank to Prohi bit Acceptance of Deposit and Alienation of Assets –
If RBI thinks that for the purpose of enabling RBI to regulate the credit
system of the country to its advantage it is necessary to do so, RBI may –
a) Require any NBFC or all NBFCs to submit such information as
may be considered necessary by RBI and specified in the order of
RBI.
b) Give directions to and NBFC or all NBFCs relating to the conduct
of business by them.
1) It is the duty of the auditor of the NBFC to inquire whether or not
the NBFC has submitted all the necessary information to the RBI
2) Auditor shall include the report made to RBI in his report made
under Audit report prepared under Companies Act, 2013
3) RBI also has the power to conduct special audit of NBFC and the
auditor conducting special audit shall submit report to the RBI.
Remuneration of the auditor for special audit shall be fixed by RBI
and shall be borne by NBFC.
Where any auditor fails to comply with any direction given or order
made by the RBI then RBI
May remove or debar the auditor from exercising the duties as auditor
of any of the Reserve Bank regulated entities for a maximum period of
three years, at a time.
1) If any NBFC violates the provisions of any section or fails to
comply with any direction or order given by the RBI then RBI may
prohibit the NBFC from accepting any deposit.
2) If RBI thinks that it is necessary in the public interest or in the interest
of deposit holders then RBI may order to the NBFC against whom
an order for prohibition to accept deposit has already been passed
that such NBFC shall not sell, transfer or create charge or mortgage
on the property or assets of the NBFC without prior permission of
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Financial Accounting
126 RBI can also order for establishment of
Bridge institutions. Now, what is Bridge
institutions?
“Bridge Institutions” mean temporary institutional arrangement made under the scheme to preserve the conti nuity of the activities of a NBFC that are
critical to the functioning of the financial system.
Power of Reserve Bank to File Winding Up Petition – Section 45MC
Chapter IIIB OF RBI Act to Override Other Laws – 4.5 RESOLUTION OF NBFC – SECTION 45MABA
A) If RBI thinks that it is necessary in the public interest or in the interest
of deposit holders or for any other reason then, RBI will order –
a) Amalgamation of two or more NBFCs
b) recons truction of the NBFCs
c) splitting the NBFC in different units.
B) RBI may also provide for –
1) reduction of the pay and allowances of the chief executive officer,
managing director, chairman or any officer in the senior
management of the NBFC;
2) cancellation of all or some of the shares of the non-banking
financial company held by the chief executive officer, managing
director, chairman or any officer in the senior management of the
nonbanking financial company or their relatives;
3) sale of any of the assets of the NBFC.
If the RBI is satisfied that an NBFC –
is unable to pay its debt; or
has become disqualified to carry on the business of a nonbanking
financial institution; or
has been prohibited by the Reserve Bank from receiving deposit for
minimum 3 months; or
the continuance of the NBFC will be against the public interest. munotes.in
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127 Returns to be submitted by deposit taking NBFCs –
Returns to be submitted by NBFCS-ND-SI – Then RBI will file an application for winding up of such NBFC
under Companies Act.
Note –
A NBFC will deem to be unable to pay its debt if it has refused or
has failed to meet within five working days any lawful demand
made and the RBI certifies in writing that such company is unable
to pay its debt.
The provisions of this Chapter IIIB of RBI Act shall have overriding
effect on other laws
Situations Forms
Quarterly Returns on deposits in
First Schedule. NBS -1
Quarterly return on Prudential
Norms is required to be submitted
by NBFC accepting public deposits. NBS -2
Quarterly return on Liquid Assets by
deposit taking NBFC NBS -3
Annual return of critical parameters
by a rejected company holding
public deposits NBS -4
Monthly return on exposure to
capital market by deposit taking
NBFC with total assets of ` 100
crore and above. NBS -6
NBFC holding public deposits of
more than ` 20 crore or asset size of
more than ` 100 crore NBFC holding p ublic
deposits of more than ` 20
crore or asset size of more
than ` 100 crore
Note –
In addition to above returns, NBFCS should also submit –
a) Audited Balance sheet and Auditor’s Report
b) Branch Info Return munotes.in
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128
1) NBS -7 A Quarterly statement of capital funds, risk weighted assets,
risk asset ratio etc., for
NBFC -NDSI.
2) Monthly Return on Important Financial Parameters of NBFCs -ND-SI.
3) ALM returns –
a) Statement of short -term dynamic liquidity in format ALM [NBS -
ALM1] -Monthly,
b) Statement of structural liquidity in forma t ALM [NBS -ALM2] Half
yearly,
c) Statement of Interest Rate Sensitivity in format ALM -[NBS -ALM3],
Half yearly
4) Branch Info return.
4.6 MCQ’S:
1. The Life Insurance Corporation of India was established in the year:
a. 1954
b. 1958
c. 1956
d. 1950
Answer: 1956
2. As per the gui delines issued by the Reserve bank of India in June
2021, each NBFC -MFI is required to maintain not less than ______
of its net assets as qualifying assets:
a. 50%
b. 85%
c. 75%
d. 25%
Answer: 85%
3. NBFCs in India are companies that are registered under which of the
following act:
a. Companies act 2013
b. RBI act 1934
c. SEBI act 2002
d. Government of India act 1935
e. None of the above
Answer: Companies act 2013
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129 4. The Life Insurance Corporation of India was established in the year:
a. 1954
b. 1958
c. 1956
d. 1950
Answer: 1956
5. As per the guid elines issued by the Reserve bank of India in June
2021, each NBFC -MFI is required to maintain not less than ______
of its net assets as qualifying assets:
a. 50%
b. 85%
c. 75%
d. 25%
Answer: 85%
6. NBFCs in India are companies that are registered under which of the
following act:
a. Companies act 2013
b. RBI act 1934
c. SEBI act 2002
d. Government of India act 1935
e. None of the above
Answer: Companies act 2013
7. Who is the regulatory authority for Merchant banking of India
a. Securities and exchange Board of India
b. Reserve Bank of In dia
c. Union Ministry of corporate affairs
d. Union Ministry of finance
Answer Securities & Exchange Board of India
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130 5
FINAL ACCOUNTS OF INSURANCE
COMPANIES
Unit Structure :
5.1 Meaning
5.2 Preparation of Financial Statements
5.3 Schedules Forming Part o f Financial
5.4 Types of Life Insurance Policies
5.5 Explanation of items in the final accounts of Life Insurance
Company
5.6 Determination of Profit in Life Insurance Business
5.7 Reserve for Unexpired Risk
5.8 Unsolved Problems
5.9 Solved Problems
5.10 MCQ
5.1 MEANING
Insurance is a form of contract under which one party agrees in return of
a consideration to pay an agreed amount of money to another party to
compensate for a loss, damage or some uncertain event.
There are two types of insurance i.e., Life insurance and General
Insurance.
Life Insurance – under this type of insurance the corporation guarantees
to pay a certain sum of money to the policy holder on reaching a certain
age or on his death whichever is earlier. Life insurance has an element
both of protection and investment.
General Insurance – it includes all other types of insurance except life
insurance. e.g. – Fire, Marine, Accident, Theft.etc. Under this type of
insurance the insurer undertakes to indemnify the loss suffered by the
insured on happening of a certain event in consideration for a fixed
premium. Insurance Regulatory and Development Authority (IRDA)
In order to regulate the insurance business, the government set up in
1996, the Insurance Regulatory Authority (IRA). Now this authority is
known as the Insurance Regulatory and Development Authority. In
2002, the authority came with regul ations for the preparation of the
financial statement of insurance companies. munotes.in
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Final Accounts of
Insurance Companies
131 5.2 PREPARATION OF FINANCIAL STATEMENTS
Final Accounts of Life Insurance Companies
The final accounts of a life insurance company consist of (a) Revenue
Account, (b) P&L A/c and (c) Balance Sheet.
Revenue Account (Form A ‐RA)
Revenue Account is prepared as per the provisions of IRDA regulations
2002 and complies with the requirements of Schedule A as follows:
FORM A – RA
Name of the insurer
Registration No. and Date of Registration with the IRDA
Revenue Account for the yea r ended 31st March, 20….
Policyholders’ Account (Technical Account)
No. Particulars Sched ule Current
Year
(Rs.’000
) Previous
Year
(Rs.’000)
Premiums earned – net
(a) Premium 1
(b) Reinsurance ceded
(c) Reinsurance accepted
Income from investments
(a) Interest, dividends & rent –
Gross
(b) Profit on sale/redemption
of investments
(c) (Loss on sale/redemption
of investments)
(d) Transfer/ Gain on
revaluation/change in fair
value*
Other income (to be specified)
Total (A)
Commission 2
Operating Expenses related to
insurance business 3 munotes.in
Page 132
Financial Accounting
132
Provision for doubtful debts
Bad debts written off
Provision for tax
Provisions (other than
taxation)
(a) For diminution in the value
of investments (net )
(b) Others (to be specified)
Total (B)
Benefits Paid (Net) Interim
Bonuses paid 4
Change in valuation of
liability in respect of life
policies
(a) Gross**
(b) Amount ceded in
Reinsurance
(c) Amount accepted in
Reinsurance
Total (C)
Surplus (Deficit)
(D)=(A) ‐(B)‐(C)
Appropriations
Transfer to Shareholders’
Account
Transfer to Other Reserves (to
be specified) Balance
being Funds for Future
Appropriations Total (D)
Profit And Loss Account (Form A ‐PL)
The P&L A/c is prepared to calculate the overall profit of the life
insurance business. The incomes or expenses that are not related to
any particular fund are recorded in the P&L A/c.
FORM A ‐ PL
Name of the insurer Registration No. and Date of Registrat ion with
the IRDA st munotes.in
Page 133
Final Accounts of
Insurance Companies
133 Profit and Loss Account for the year ended 31 March, 20….
Shareholders’ Account (Non ‐technical Account)
No. Particulars Schedule Current
Year
(Rs.’000) Previous
Year
(Rs.’000) Amounts transferred from/to the
Policyholders Account (Te chnical
Account )
Income from investments
(a) Interest, dividends & rent –
Gross
(b) Profit on sale/redemption of
investments
(c) (Loss on sale/redemption of
investments) Other income (to be
specified)
Total (A)
Expenses other than those directly
related to the insura nce business
Bad debts written off Provision for
tax
Provisions (other than taxation)
(a) For diminution in the value of
investments (net)
(b) Provision for doubtful debts
(c) Others (to be specified) Total
(B)
Profit (Loss) before tax Provision
for taxation Appropria tions
(a) Balance at the beginning of the
year (b) Interim dividends paid
during the year (c)
Proposed final dividend
(d) Dividend Distribution Tax
(e) Transfer to Reserves/other
accounts (to be specified)
Profit carried ............... to the
Balance Sheet
Notes to Form A ‐RA and A‐PL:
(a) Premium income received from business concluded in and outside
India shall be separately disclosed. munotes.in
Page 134
Financial Accounting
134 (b) Reinsurance premiums whether on business ceded or accepted are to
be brought into account gross (i.e., before deducting commissions)
under the h ead reinsurance premiums
(c) Claims incurred shall comprise claims paid, specific claims
settlement costs wherever applicable and change in the outstanding
provisions for claims at the year‐end.
(d) Items of expenses and income in excess of one percent of the to tal
premiums (less reinsurance) or Rs.500000 whichever is higher, shall
be shown as a separate line item.
(e) Fees and expenses connected with claims shall be included in claims.
(f) Under the sub ‐head “Others” shall be included items like foreign
exchange gains o r losses and other items.
(g) Interest, dividends and rentals receivable in connection with an
investment should be stated at gross amount, the amount of income
tax deducted at source being included under “advance taxes paid
and taxes deducted at source”.
(h) Income from rent shall include only the realized rent. It shall not
include any notional rent.
Balance Sheet (Form A ‐BS)
Balance Sheet of Life Insurance Company is prepared in vertical format.
The form of Balance Sheet is as follows:
No. Particulars Schedule Current
Year
(Rs.’000) Previous
Year
(Rs.’000)
Sources of Funds
Shareholders’
Funds:
Share Capital 5
Reserves and
Surplus 6
Credit/[Debit] Fair
Value Change
Account
Sub‐Total
Borrowings
7
Policyholders’
Funds:
Credit/[Debit] Fair
Value Change munotes.in
Page 135
Final Accounts of
Insurance Companies
135 Account
Policy Liabilities
Insurance Reserves
Provision for
Linked Liabili ties
Sub‐Total
Funds for Future
Appropriations
Total
Application of
Funds
Investments
Shareholders’
Policyholders’
Assets held to
Cover 8
Linked Liabilities 8A
Loans 8B
Fixed Assets 9
Current Assets 10
Cash and Bank
Balances
Advances and
Other 11
Assets Sub ‐ Total
(A) 12
Current Liabilities
Provisions 13
Sub‐ Total (B ) 14
Net Current Assets
(C)=(A) ‐ (B)
Miscellaneous
Expenditure (to the
extent 15
not wr itten off or
adjusted) munotes.in
Page 136
Financial Accounting
136 Debit Balance in
Profit
and Loss Account
(Shareholders’
Account)
Total
5.3 SCHEDULES FORMING PART OF FINANCIAL
STATEMENTS
SCHEDULE 1 ‐ PREMIUM
No. Particulars Current Year (Rs.’000)Previous Year
(Rs.’000) First Year Premiums
Renewal Premiums Single Premiums Total
Premium
SCHEDULE 2 COMMISSION EXPENSES
Particulars Current
Year
(Rs.’000 Previous
Year
(Rs.’000
Commission paid Direct ‐ First Year
Premiums Renewal
Premiums Single Premiums
Add: Commis sion on Re ‐insurance
Accepted Less: Commission on
Re‐insurance Ceded
Net Commission
Note: The profit/commission, if any, are to be combined with the
Re‐insurance accepted or Re ‐ insurance ceded figures.
munotes.in
Page 137
Final Accounts of
Insurance Companies
137 SCHEDULE 3
OPERATING EXPENSES RELATED TO INS URAN CE
BUSINESS
No.
Particulars Current
Year
(Rs.’000 Previous
Year
(Rs.’000
Employees’ remuneration & welfare
benefits Travel, conveyance and
vehicle running expenses Training
expenses
Rents, rates & taxes Repairs
Printing & stationery Communication
expenses Legal & Professional
charges Medical fees Auditors’ fees,
expenses etc
(a) As auditor
(b) As adviser or in any other
capacity, in respect of:
(i) Taxation matters
(ii) Insurance matters
(iii) Management services; and
(c) In any other capacity
Advertisement and publicity
Interest and bank charges
Others(to be specified)
Depreciation Total
munotes.in
Page 138
Financial Accounting
138
SCHEDULE 4 – BENEFITS PAID [NET]
No.
Particulars Current
Year
(Rs.’000) Previous
Year
(Rs.’000)
Insurance Claims:
(a) Claims by Death
(b) Claims by Maturity
(c) Annuities/Pension
paym ent
(d) Other benefits, specify.
(Amount ceded in
reinsurance):
(a) Claims by Death
(b) Claims by Maturity
(c) Annuities/Pension
payment
(d) Other benefits, specify.
Amount accepted in
reinsurance:
(a) Claims by Death
(b) Claims by Maturity
(c) Annuities/Pension
payment
(d) Other benefit s, specify.
Total
Notes: (a) claims include specific claims settlement costs, wherever
applicable. (b)Legal and other fees and expenses shall also form part of
the claims cost, wherever applicable.
munotes.in
Page 139
Final Accounts of
Insurance Companies
139 SCHEDULE 5 SHARE CAPITAL
No.
Particulars Current
Year
(Rs.’000 Previous
Year
(Rs.’000
Authorised capital
Equity shares of
Rs…..each
Issued Capital
Equity shares of
Rs…..each
Subscribed Capital
Equity shares of
Rs…..each
Called ‐up Capital
Equity shares of
Rs…..each
Less: Calls unpaid
Add: Shares forfeited
(Amount originally paid
up) Less: Par value of
equity shares bought back
Less: Preliminary
Expenses
Expenses including
commission or brokerage
on underwriting or
subscription o f shares
Total
SCHEDULE 5A – PATTERN OF SHAREHOLDING [As certified by
the Management]
Shareholders Current Year Previous Year
No. of
Shares % of
Holdin No. of
Shares % of
Holdin
Promoters
*Indian
*Foreign
Others
Total
munotes.in
Page 140
Financial Accounting
140 SCHEDULE 6 – RESERVES A ND SURPLUS
No
. Particulars Current
Year
(Rs.’000 Previous
Year
(Rs.’000
. Capital Reserve
Capital Redemption Reserve Share
Premium
Revaluation Reserve General
Reserves
Less: Debit balance in P&L A/c, if
any Less: Amount utilized for buy
back. Catastroph e Reserve Other
Reserves (to be specified)
Balance of Profit in P&L A/c
Note: Additions to and deductions from the reserves shall be disclosed
under each of the specified heads.
SCHEDULE 7 – BORROWINGS
No
. Particulars Current Year
(Rs.’000) Previous Year
(Rs.’000)
1.
2.
3.
4. Debentures/Bonds Banks
Financial Institutions
Others (to be specified)
Total
SCHEDULE 8 – INVESTMENTS
No
. Particulars Current
Year
(Rs.’000) Previous
Year
(Rs.’000)
1.
2. Long –term Investments
Government securities and
Government Guaranteed Bonds
including treasury bills
Other approved securities munotes.in
Page 141
Final Accounts of
Insurance Companies
141 3. Other investments
(a) Shares (aa) Equity
(bb) Preference
(b) Mutual Funds
(c) Derivative Instruments
(d) Debentures/Bonds
(e) Other securities (to be specified)
(f) Subsidiaries
(g) Investment Prope rties – Real
Estate Investments in
Infrastructure and Social sector
Other than Approved Investments
Short –term Investments
Government securities and
Government Guaranteed Bonds
including treasury bills
Other approved securities Other
investments
(a) Shares (a a) Equity
(bb) Preference
(b) Mutual Funds
(c) Derivative Instruments
(d) Debentures/Bonds
(e) Othe r securities (to be
specified) (f) Subsidiaries
(g) Investment Properties – Real
Estate Investments in
Infrastructure and Social sector
Other than Approved Investments
Total
4.
5.
1.
2.
3.
SCHEDULE 9 – LOANS
No
. Particulars Current
Year
(Rs.’000) Previous
Year
(Rs.’000)
1. Security ‐wise Classification
Secured
(a) On mortgage of property (aa)
In India
(bb) Outside India
(b) On Shares, Bonds, Govt.
Securities, etc. munotes.in
Page 142
Financial Accounting
142 (c) Others (to be specified)
Unsecured
Total
2. Borrower ‐wise Classification
(a) Central and State
Governments
(b) Banks and Financial
Institutions
(c) Subsidiaries
(d) Companies
(e) Loans against policies
(e) Others (to be specified) Total
3. Performance ‐wise Classification
(a) Loans classified as standard
(aa) In India
(bb) Outside India
(b) Non‐standard loans less
provisions (aa) In India
(bb) Outside In dia
Total
4. Maturity ‐wise Classification
(a) Short Term
(b) Long Term Total
SCHEDULE 10 – FIXED ASSETS
Particulars Cost/Gross
Block Depreciation Net
Block
Opening
Additions Deductions Closing
Up to Last For the Year On Sales/ To Date
As at year end Previous
Year munotes.in
Page 143
Final Accounts of
Insurance Companies
143 Goodwill Intangibles
(specify) Land ‐Freehold
Leasehold Property
Buildings
Furniture & Fittings
Information Technology
Equipment Vehicles
Office Equipment
Others (Specify nature)
Total
Work in progress Grand
Total Previous Year
SCHEDULE 11 – CASH AND BANK BALANCES
No. Particulars Current
Year
(Rs.’000) Previous
Year
(Rs.’000)
1. Cash (including cheques, drafts and
stamps)
Bank Balances
(a) Deposit Accounts
(aa) Short ‐term (due within 12 months
of the date of Balance Sheet)
(bb) Others
(b) Current Accounts
(c) Others (to be specified)
Money at call and short notice
(a) With banks
(b) With other institutions Others
(to be specified)
Total
Balances with non ‐scheduled banks in
2 and 3 above
Cash and Bank Balances
1. In India
2. Outside India
Total
2.
3.
4.
munotes.in
Page 144
Financial Accounting
144 SCHEDULE 12 – ADVANCES AND OTHER ASSETS
No
. Particulars Current
Year
(Rs.’000) Previous
Year
(Rs.’000)
1. Advances
Reserve deposits with ceding
companies Application money
for investments Prepayments
Advances to Directors/Officer s
Advance tax paid and taxes
deducted at source (Net
provision for taxation)
Others (to be specified) Total
(A)
Other Assets
Income accrued on investments
Outstanding Premiums
Agents’ balances
Foreign Agencies Balances
Due from other entities carrying
on insurance business (including
reinsurers)
Due from subsidiaries/holding
company
Deposit with Reserve Bank of
India [Pursuant to se ction 7 of
Insurance Act, 1938]
Others (to be specified) Total
(B)
Total (A+B)
2.
3.
4.
5.
6.
1.
2.
3.
4.
5.
6.
7.
8.
munotes.in
Page 145
Final Accounts of
Insurance Companies
145 SCHEDULE 13 – CURRENT LIABILITIES
No
. Particulars Current
Year
(Rs.’000) Previous
Year
(Rs.’000)
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11. Agents’ balances
Balances due to other insurance
companies Deposits held on
re‐insurance ceded Premiums
received in advance
Unallocated premium Sundry
creditors
Due to subsidiaries/holding
company Claims outstanding
Annuities due
Due to Officers/Directors Others
(to be specified) Total
SCHEDULE 14 – PROVISIONS
No
. Partic ulars Current
Year Previous
Year
1. For taxation (less payments and
taxes deducted at source)
2.
3.
4. For proposed dividends
For dividend distribution tax
Others (to be specified) Total
SCHEDULE 15 – MISCELLANEOUS EXPENDITURE (To the
extent not wri tten off or adjusted)
No
. Particulars Current Year
(Rs.’000) Previ ous
Year
1. Discount allowed on issue of
shares/debentures
2. Others (to be specified)
Total
munotes.in
Page 146
Financial Accounting
146 5.4 TYPES OF LIFE INSURANCE POLICIES
1. Whole life policy - In this type of policy, th e sum assured becomes
payable to the beneficiary only on the death of the insured. The
insured has to pay the premium throughout his life.
2. Endowment policy - It is a policy which runs for a fixed period or up
to a particular age to the insured.
3. With prof it policy - In this policy, the policy holder to receive , in
addition to the sum assured , a share in the profit made by the Life
insurance Corporation.
4. Without profit pol icy - In this policy, the holder gets only the stated
sum on the maturity of the policy.
5.5 EXPLANATION OF ITEMS IN THE FINAL
ACCOUNTS OF LIFE INSURANCE COMPANY
Claims - The amount paid or payable by the insurance company to the
insured for the losses occurs or the particular event happens is called
claims. A claim is usually the expen diture of an insurance company.
Annuity - Annuity is an annual payment which a life insurance
company guarantees to pay for a lumpsum money received in the
beginning.
Surre nder value of a policy - Surrender value is the amount paid by
the insurance compan y to the insured for surrendering all claims of the
policy to the company.. Usually this amount will get after the
payment of two annual premiums.
Bonus in Reduction of Premium - Here, instead of paying bonus in
cash to the policy holders, the insura nce company deducts the amount
from the premium payable to it. The amount of bonus so adjusted in the
premium amount is called bonus in reduction of premium.
Consideration for Annuities Granted – Any lumpsum payment
received by the insurance company in lie u of granting annuity is called
consideration for annuities granted.
Reinsurance - When an insurance company undertakes a big policies
in large amount, they reduce their risks by re -insuring it with other
insurance companies. Such a process is called rei nsurance.
Double insurance - If the same subject matter is insured with more
than one insurance company, it is known as Double insurance.
Life assurance fund - It is an ac cumulated reserve fund which is
created from excess of income over expenditure in ev ery year.
Reversionary bonus - Reversionary bonus is a bonus which is paid by
the insurance company along with the maturity value of the policy. munotes.in
Page 147
Final Accounts of
Insurance Companies
147 Commission on reinsurance ceded and Commission on reinsurance
Accepted
Insurance companies earn commission from other insurance companies
for giving them business under reinsurance contract. This commission
is called commission on reinsurance ceded. If some other insurance
compani es give insurance to us, commission paid on such reinsurance
is called commission on reinsurance accepted .
5.6 DETERMINATION OF PROFIT IN LIFE
INSURANCE BUSINESS
A life policy is generally taken for a number of years. The premium
received for such long term contract cannot be treated as income for
ascertaining the profits for that yea r. The future premium may or may
not be received depends on the existence of the insured. Thus on a
particular date a liability of the corporation is to be calculated as the
premium to be received in future will generally be less than the amount
payable as claims. There is a gap between claims which are expected to
arise and premium which are expected to be received. The gap is known
as Net liability. It becomes desirable to create a reserve equal to its net
liability in order to ascertain the profit. The Life insurance business made
the valuation of net liability every year in order to ascertain the profit.
This is done by a person called Actuary. The process by which net
liability is ascertained by this person is known as actuarial valuation. The
net lia bility is compared with life assurance fund on a particular datein
order to ascertain the surplus or deficiency. This comparison is made
by preparing a Valuation Balance sheet, which is given as follows: -
Valuation Balance Sheet
Liabilities Amount Assets Amount
Net Liability as
per Actuary’s
valuation
Surplus (Bal.
Fig) Life Assurance
Fund Deficit (Bal.
Fig)
Only surplus and not deficiency will be shown in the Balance sheet.
With profit policy holders have a right to participate in the profit s of life
insurance business to the extent of 95% of true profit. The balance 5%
may be utilized for such purpose as determined by the central
government. For calculation of true profit, surplus as disclosed by the
valuation Balance sheet must be adjuste d.
Surplus as per Valuation Balance Sheet ………
Less: Actuarial expenses …….
Dividends payable to shareholders …….. munotes.in
Page 148
Financial Accounting
148 Add: Interim bonus paid ……..
Surplus ………
95% of net profit is payable as bonus to policyholders. While paying the
above b onus, interim bonus paid already has to be deducted
Final Accounts of General Insurance Companies
General insurance companies may be doing more than one business e.g.,
fire, marine etc.
Fire insurance - In this insurance, the company undertakes to
compensa te loss cause d by fire in consideration of premium received.
Marine insurance - In this insurance, in consideration of premium
recei ved, the company undertakes to compensate loss caused by marine
risks as per terms of insurance.
The final accounts of a gen eral insuranc e company consist of (a)
Revenue Account,
(b) P&L A/c and (c) Balance Sheet.
Revenue Account (Form B ‐RA)
General insurance company may be doing more than one business like
fire, marine, accidental etc. For each type of business a separate Revenue
Account is to be prepared in the prescribed form B ‐RA. The form of
Revenue Account is given below:
FORM B – RA
Name of the insurer
Registration No. and Date of Registration with the IRDA
Revenue Account for the year ended 31st March, 20….
Policyholders’ Ac count (Techni cal Account
No
. Particulars Sched ule Current
Year
(Rs.’000) Previous
Year
(Rs.’000)
1. Premiums Earned (Net) 1
2. Others (to be specified)
3. Change in Provisions for
unexpired risk
4. Interest, Dividend & Rent ‐
Gross
Total (A)
1. Claims Incurred munotes.in
Page 149
Final Accounts of
Insurance Companies
149 2. Commission
3. Operating Expenses related to
insurance business 2
4. Others (to be specified) 3
Total (B) 4
Operating Profit/ (Loss) from
Fire/ Marine/
Miscellaneous business
(C)=(A ‐B)
Appropriatio ns
Trans fer to Shareholders’
Account
Transfer to Catastrophe
Reserve
Transfer to Other Reserves (to
be specified)
Total (C)
Profit And Loss Account (Form B ‐PL)
The P&L A/c is prepared to calculate the overall profit of the general
insurance bus iness. Operating profits (or losses) of fire, marine and
miscellaneous insurance are taken in the P&L A/c. income from
investments, profit or loss on sale of investments, bad debts, provision
for doubtful debts etc. are taken in the P&L A/c.
FORM B -PL
Name of the insurer
Registration No. and Date of Registration with the IRDA
Profit and Loss Account for the year ended 31st March, 20….
Shareholders’ Account (Non ‐technical Account)
No
. Particulars Sched ule Current
Year
(Rs.’000) Previous
Year
(Rs.’000)
1. Operating Profit/ (Loss)
(a) Fire Insurance
(b) Marine Insurance
(c) Miscellaneous
Insurance munotes.in
Page 150
Financial Accounting
150 2. Income from
investments
(d) Interest, d ividends
&
rent – Gross
(e) Profit on
sale/redemption of
investments
Less: Loss on sale of
investments
3. Other income (to be
specified) Total (A)
4. Provisions (other than
taxation)
(a) For diminution in
the
value of investments
(net)
5. (b) For Doubtful Debts
(c) Others (to be
specified)
Other Expenses
(a) Expenses other than
those directly related
to the insurance
business
(b) Bad debts written
off
(c) Others (to be
specified)
Total (B)
Profit before tax
Provision
for taxation Profit after
tax
Appropriations
(f) Interim dividends
paid munotes.in
Page 151
Final Accounts of
Insurance Companies
151 during the year
(g) Proposed final
Dividend
(h) Dividend
Distribution
Tax
(i) Tran sfer to Reserves
or
other accounts (to be
specified)
Balance of Profit/Loss
brought forward fro last
Year
Balance carried
forward to
the Balance Sheet
Balance sheet FORM B – BS
Balance Sheet of Life Insurance Company is prepared in vertical
format. The form of Balance Sheet is as follows:
Name of the Insurer
Reg,N o and date of registration with IRDA
Balance Sheet as at 31st March, 20….
No
. Particulars ScheduleCurrent
Year
(Rs.’000) Previous
Year
(Rs.’000)
Source s of Funds
Shareholders’ Funds:
Share Capital
Reserves and Surplus 5
Fair Value Change Account 6
Borrowings
Total
Application of Funds 7 munotes.in
Page 152
Financial Accounting
152 Investments
Loans
Fixed Assets
Current Assets 8
Cash and Bank B alances 9
Advances and Other Assets 10
Sub‐Total (A)
Current Liabilities 11
Provisions 12
Sub‐Total (B)
Net Current Assets
(C)=(A) ‐(B) Miscellaneous
Expenditure (to the extent not
13
14
written off or adjusted)
Debit Balance in Profit and
Loss Account
Total 15
5.7 SCHEDULES FORMING PART OF FINANCIAL
STATEMENTS SCHEDULE 1 – PREMIUM
EARNED [NET]
No
. Particulars Current
Year
(Rs.’000) Previous
Year
(Rs.’000)
Premium for direct business
written Add: Premium on
reinsuran ce accepted Less:
premium on reinsurance ceded
Net Premium
Total Premium Earned (Net)
Note: Reinsurance premiums whether on business cede or accepted
are to be bought into account, before deducting commission under
the head of reinsurance premiums.
munotes.in
Page 153
Final Accounts of
Insurance Companies
153 SCH EDULE 2 – CLAIMS INCURRED [NET]
Particulars Current
Year
(Rs.’000) Previous
Year
(Rs.’000)
Claims paid Direct
Add: Reinsurance accepted Less:
Reinsurance ceded Net Claims paid
Add: Claims outstanding at the end
of the year Less: Claims outstanding
at the beginning Total Claims
Incurred
SCHEDULE 3 – COMMISSION
Particulars Current Year
(Rs.’000) Previous
Year
(Rs.’000)
Commission paid Direct
Add: Commission on Re ‐insurance
Accepted Less: Commission on
Re‐insurance Ceded
Net Commission
Note: The profit/commission, if any, are to be combined with the
Re‐insurance accepted or Re ‐ insurance ceded figures.
SCHEDULE 4 – OPERATING EXPENSES RELATED TO
INSURANCE BUSINES S
No
. Particulars Current Year
(Rs.’000) Previous
Year
(Rs.’000)
1. Employees’ remuneration &
welfare benefits
2. Managerial remuneration
3. Travel, conveyance and
vehicle running expenses
4. Rents, rates & taxes
5. Repairs
6. Printing & s tationery
Communication expenses
Legal &
7. Professional charges Medical
fees munotes.in
Page 154
Financial Accounting
154 8. Auditors’ fees, expenses etc
9. (a) As auditor
10. (b) As adviser or in any other
capacity, in respect of: (j)
Taxation matters
(ii) Insurance matters
(iii) Management services;
and
(c) In any other capacity
Advertisement and publicity
Interest &
bank charges Others(to be
specified) Depreciation
Total
Note: Items of expenses and income in excess of one percent of the
total premiums (less reinsurance) or Rs.500000 whichever is higher,
shall be shown as a separate line item.
SCHEDULE 5 – SHARE CAPITAL
No
. Particulars Current
Year
(Rs.’000) Previous
Year
(Rs.’000)
1. Authorised capital
Equity shares of
Rs…..each
Issued Capital
Equity sha res of
Rs…..each
Subscribed Capital
Equity shares of
Rs…..each
Called ‐up Capital
Equity shares of
Rs…..each
Less: Calls unpaid
Add: Equity Shares
forfeited (Amount
originally paid up) Less:
Par value of equity shares
bought back
Less: Preliminary
2.
3.
4. munotes.in
Page 155
Final Accounts of
Insurance Companies
155 Expenses
Expenses including
commission or brokerage
on underwriting or
subscription of shares
Total
Notes:
(a) Particulars of the different classes of capital should be separately
stated.
(b) The amount capitalized on account of issue of bonus shar es
should be disclosed.
(c) In case any part of the capital is held by a holding company, the
same should be separately disclosed.
SCHEDULE 5A – PATTERN OF SHAREHOLDING [As
certified by the Management]
Shareholders Current Year Previous Year
No. of
Share s % of
Holding No. of
Shares % of
Holding
Promoters
*Indian
*Foreign
Others
Total
SCHEDULE 6 – RESERVES AND SURPLUS
No
. Particulars Current Year
(Rs.’000) Previous
Year
(Rs.’000)
1. Capital Reserve
Capital Redemption Reserve
Securities Premium
General Reserves
Less: Debit balance in P&L
A/c, if any Less: Amount
utilized for buy back.
2.
3.
4.
5. munotes.in
Page 156
Financial Accounting
156 6. Catastrophe Reserve
Other Reserves (to be
specified) Balance of Profit in
P&L A/c
Total 7.
Note: Additions to and deduction s from the reserves shall be
disclosed under each of the specified heads.
SCHEDULE 7 – BORROWINGS
No
. Particulars Current Year
(Rs.’000) Previous Year
(Rs.’000)
1.
2.
3.
4. Debentures/Bonds Banks
Financial Institutions
Others (to be specified)
Total
SCHEDULE 8 – INVESTMENTS
No
. Particulars Current
Year
(Rs.’000) Previous
Year
(Rs.’000)
1.
2. Long –term Investments
Government securities and
Government Guaranteed
Bonds including treasury bills
Other approved securities
3. Other investments
(a) Shares
(aa) Equity
(bb) Preference
(b) Mutual Funds
(c) Derivative Instruments
(d) Debentures/Bonds
(e) Other securities (to be
specified) (f) Subsidiaries
(g) Investment Properties –
Real Estate munotes.in
Page 157
Final Accounts of
Insurance Companies
157
Investments in Infrastruc ture and Social sector
Other than Approved Investments
Short –term Investments
Government securities and Government Guaranteed
Bonds
4. including treasury bills
5. Other approved securities
Other investments
1. (a) Shares
(aa) Equity
2. (bb) Preference
3. (b) Mutual Funds
(c) Derivative Instruments
(d) Debentures/Bonds
(e) Other securities (to be specified) (f) Subsidiaries
(g) Investment Properties – Real Estate
Investments in Infrastructure and Social sector
Other than Approved Investments
Total
SCHEDULE 9 – LOANS
No
. Particulars Current
Year
(Rs.’000) Previous
Year
(Rs.’000)
1. Security ‐wise Classification
Secured
(a) On mortgage of property (aa)
In India
(bb) Outside India
(b) On Shares, Bonds, Govt.
Securities, etc. (c) Others (to be
specified)
Unsecured
Total
Borrower ‐wise Classification
munotes.in
Page 158
Financial Accounting
158 SCHEDULE 10 – FIXED ASSETS
Particulars Cost/ Gross
Block Depreciation Net Block
Opening
Additions Deductions Closing
Up to Last For the Year On
Sales/ AdjustmTo Date
As at
year end
Previous
Year
Goodwill Intangibles
(specify)
Land ‐Freehold
Leasehold Property
Buildings
Furniture & Fittin gs
Information
Technology
Equipment Vehicles
Office Equipment
Others (Specify
nature) Total
Work in progress
Grand Total Previous
Year
SCHEDULE 11 – CASH AND BANK BALANCES
No
. Particulars Current Year
(Rs.’000) Previous Year
(Rs.’000)
1. Cash (including cheques, drafts and
stamps) Bank
2. Balances
(a) Deposit Accounts
(aa) Short ‐term (due within 12
months)
(bb) Others
(b) Current Accounts
(c) Others (to be specified)
3. Money at call and short notice
(a) With banks
(b) With other institutions
Others (to be specified) Total
4. Balances with non ‐schedu led banks
in 2 and 3 above munotes.in
Page 159
Final Accounts of
Insurance Companies
159 SCHEDULE 12 – ADVANCES AND OTHER ASSETS
No
. Particulars Current
Year
(Rs.’000) Previous
Year
(Rs.’000)
1. Advances
Reserve deposits with ceding
companies Application money for
investments Prepayments
Advances to Directors/Of ficers
Advance tax paid and taxes
deducted at source (Net provision
for taxation)
Others (to be specified) Total (A)
Other Assets
Income accrued on investments
Outstanding Premiums
Agents’ balances
Foreign Agencies Balances
Due from other entities carrying on
insurance business (including
reinsurers)
Due from subsidiaries/holding
company
Deposit with Reserve Bank of India
[Pursuant to section 7 of Insurance
Act, 1938]
Others (to be specified) Total (B)
Total (A+B)
2.
3.
4.
5.
6.
1.
2.
3.
4.
5.
6.
7.
8.
SCHEDULE 13 – CURRENT LIABILITIES
No
. Particulars Current
Year
(Rs.’000) Previous
Year
(Rs.’000)
1.
2.
3.
4.
5.
6.
7.
8.
9.
10. Agents’ balances
Balances due to other insurance
companies Deposits held o n re‐insurance
ceded Premiums received in advance
Unallocated premium Sundry creditors
Due to subsidiaries/holding company
Claims outstanding
Due to Officers/Directors Others (to be
specified)
Total munotes.in
Page 160
Financial Accounting
160 SCHEDULE 14–PROVISIONS
No
. Particulars Current
Year
(Rs.’000) Previous
Year
(Rs.’000)
1. Reserve for Unexpired
Risk
2. For taxation (less
payments and taxes
deducted at source)
3. For proposed
dividends
4. For dividend
distribution tax
5. Others (to be
specified)
Total
SCHEDULE 15 – MISC ELLANEOUS EXPENDITURE (To the
extent not written off or adjusted)
No
. Particulars Current
Year
(Rs.’000) Previous
Year
(Rs.’000)
1. Discount allowed on issue
of shares/debentures
2. Others (to be specified)
Total
6.7 RESERVE FOR UNEXPIRED RISK
Policies in general insurance are only for one year. These can be taken
by the insured at any time during the year.. premium on such policies is
always paid in advance. There may be such policies which are issued
during the year but risks covered remain u nexpired at the accounting
year. Hence a reserve for unexpired risk is made at 50% of the net
premium in case of fire insurance and 100%of the net premium in
marine insurance is made. Opening balance for reserve for un expired
risk is added to the premium and closing balance of reserve
for unexpired risk is deducted from the premium. The net
premium should be shown in revenue account. The closing balance of
reserve for unexpired risk should be shown in the balance sheet under
the head ‘provisions’. At present reserve for unexpired risk will be
created as follows: munotes.in
Page 161
Final Accounts of
Insurance Companies
161 a. 50% of net premium for fire insurance, marine cargo business and
miscellaneous insurances.
b. 100% of net premium for marine hull business.
In addition to the above reserve, a company can maintain more
reserves. Then it is called Additional Reserve.
5.8 UNSOLVED PROBLEMS
1) From the following information as on 31st Mar 2014 prepare the
Revenue Accounts of sagar Bhima Co.Ltd engaged in Marine Insurance
Business
Particulars Direct Business Re-Insurance
I Premium Received Receivable -1st Aprl 2013
-31st Mar 2014
Premium Paid
Payable -1st Aprl 2013
-31st Mar 2014
II Claims
Paid
Payable -1st Aprl 2013
-31st Mar 2014
Received
Receivable -1st Aprl 2013
-31st Mar 2014
III Commission
On Insurance accepted
On Insurance ceded
2400000
120000
180000
1650000
95000
175000
-
-
-
150000
360000
21000
28000
240000
20000
42000
125000
13000
22000
100000
9000
12000
11000
14000
Salaries 2,60,000, Rent, Rates and Taxes 18,000; Printing and
Stationery 23,000; Indian Income Tax paid 2,45,000: Interest, Dividend
and Rent re ceived (net) 1 15,500; Income Tax Rel deducted at source
24,500; Legal Expenses (Inclusive of 20,000 in connection with the
settlement of claims) 60.000; Double Income Tax refund 12,000; Profit
on Sale of Motor car 5,000. Balance of Fund on 1st April, 2013 was
26,50,000 including Additional Reserve of 3,25.000 Additional
Reserve has to be maintained at 5% of the net premium of the year munotes.in
Page 162
Financial Accounting
162 2) Prepare revenue of Sudhir insurance engaged in Marine Insurance
Business.
Particulars Direct Business Re-Insurance
I Premi um Received Receivable -1st Aprl 2013
-31st Mar 2014
Premium Paid
Payable -1st Aprl 2013
-31st Mar 2014
II Claims
Paid
Payable -1st Aprl 2013
-31st Mar 2014
Received
Receivable -1st Aprl 2013
-31st Mar 2014
III Commission
On Insurance accepted
On Insurance ceded
360000
10000
16000
154000
78000
16000
-
-
-
96000
38000
1600
1800
24000
1000
2200
14000
1500
4200
17000
1400
1900
5600
8000
Illustration Q.3 From the following information of XYZ Marine
Insurance Co. Ltd. for the year ending 31st March 2014, find out the (i)
Net Premium Earned and (ii) Net Claims Incurred.
Particu lars Direct
Business Re-
insurance
Premium received
Premium receivable as on 1 -4-2013
Premium receivable as on 31 -3-2014
Premium paid
Premium payable as on 1 -4-2013
Premium payable as on 31 -3-2014
Claims paid
Claims payable as on 1 -4-2013
Claims payable as on 31 -3-2014
Claims received
Claims receivable as on 1 -4-2013
Claims receivable as on 31 -3-2014 92,00,000
4,59,000
3,94,000
73,00,000
94,000
1,01,000 7,86,000
37,000
33,000
6,36,000
28,000
20,000
5,80,000
16,000
12,000
2,10,000
42,000
39,000
munotes.in
Page 163
Final Accounts of
Insurance Companies
163 Illustr ation Q4 Prepare a revenue a/c respected of fire Business from
the following details of year 2017 -18
Particular amt
Reserve for unexpired risk on 1 -4-2017 @ 50%
Additional Reserve
Estimated Liability for claim intimated on 1 -4-2017
Estimated Liability fo r claim intimated on 31 -3-2018
Claims Paide
Legal Expenses
Re-insurance Recoveries (ceded)
Miscellaneous Expenses
Bad Debts
Premium Recovered
Premium on Re -insurance accepted
Premium on Re -insurance ceded
Commission of Direct Business
Commissi on on Re -insurance accepted
Commission on Re -insurance ceded
Expenses on Management
Interest, Dividend and Rent (Cr.)
Profit on Sale of Investment 1800000
360000
310000
420000
3650000
60000
310000
40000
8000
4860000
320000
430000
486000
16000
21000
900000
240000
30000
Calculate Reserve on 31st Mar 2018 to the same extent as on 1st Apr
2017
Illustration 05 From the following balances of Meghdoot General
Insurance Company. Prepare Revenue accounts and Profit and Loss
Account for the year ending 31st Decemb er, 2017 In the case of fire
insurance, increase the additional reserve by 7.5% of net premium. This
is to be provided in addition to the usual reserves.
munotes.in
Page 164
Financial Accounting
164 Particular Amt
Depreciation
Interest, dividend, etc. received
Difference in exchange (Cr.)
Fire Fund (1 January, 2017).
Marine Fund (1 January, 2017)
Bad Debts (Fire)
Bad Debts (Marine)
Auditor's Fees
Director's Fees
Share Transfer Fees
Fire Department:
Outstanding claims as on 1st January, 2017 -
Claims paid during the year
Outstanding claims as on 31 December, 2017
Marine Department:
Outstanding claims as on 1st January, 2017
Claims paid during the year
Outstanding claims as on 31 December 2017
Commission Paid:
Fire
Marine
Additional Reserve (fire) on 1st January, 2017
Miscellaneous Receipts
Premium received (including fire premium 9,00,000) 26500
48000
780
375000
1230000
4500
12000
1800
7500
6200
75000
200000
148000
60000
400000
230000
162000
135000
75000
7500
2700000
Outstanding Premium on 31st Dec 2017 for fire business rs 25000 &
for Marine business rs 48000 tax to be provided @30%
munotes.in
Page 165
Final Accounts of
Insurance Companies
165 5.9 SOLVED PROBLEMS
Illustration Q1
Perfect General Insurance Co. Ltd
Revenue Account for the year ended 31st March, 2011 Fire and Marine
Insurance Business
Particulars
Schedule Fire Current
year
(Rs.) Marine Current
year
(Rs.)
Premium earned (net) 1 4,27,500 1,40,000
Interest, Dividends and Rent
– Gross - -
Double Income Tax refund - -
Profit on sale of motor car - -
Total (A) 4,27,500 1,40,000
Claims incurred (net)
2
82,000
88,000
Commis sion 3 40,000 20,000
Operating expenses related
to Insurance 4 70,000 50,000
business
Bad debts - -
Indian and Foreign taxes - -
Total (B) 1,92,000 1,58,000
Profit from Marine
Insurance business (A-B) 2,35,500 (18,000)
Schedules form ing part of Revenue Account
Schedule - 1
Premium earned (net) Fire Current
year (Rs.) Marine Current
year (Rs.)
Premium from direct business written
(4,50,000+30,000) 4,80,000 3,50,000 Less: Premium on re-insurance ceded (25,000) (15,000) Total Premium earned (WN -3) 4,55,000 3,35,000 Less: Change in provision for unexpired risk
(2,27,500 -2,00,000) (27,500) (1,95,000) (3,35,000 -1,40,000) 4,27,500 1,40,000
Schedule – 2 82,000 88,000 Claims incurred (net) Schedule – 4 Operating Expenses related to Insurance
business 70,000 50,000 Expenses of Management (60,000+10,000) (45,000+5,000) munotes.in
Page 166
Financial Accounting
166 Form – B.P.L
Perfect General Insurance Co. Ltd.
Profit and Loss Account for the year ended 31st March, 2011
Particulars Schedule Current
year (Rs.) Previous
year (Rs.)
Operating Profit /
(Loss)
a. Fire Insurance 2,35,50 0
b. Marine Insurance (18,000)
c. Miscellaneous
Insurance -
ncome from
Investment
Interest, Dividend &
Rent – Gross 1,29,000
(1,00,000 + 19,000 +
10,000)
Other Income (To be
specified)
Total (A) 3,46,500
Provision (Other
than taxation) -
Depreciation 9,000
Other Expenses –
Director’s Fee 80,000
Total (B) 89,000
Profit Before Tax(A -
B) 2,57,500
Provision for Taxation 99,138
Profit After Tax 1,58,362 munotes.in
Page 167
Final Accounts of
Insurance Companies
167 Working Notes:
S.No. Particulars Fire (Rs.) Marine (Rs.)
Claims under policies less reinsurance
Claims paid during the year 1,00,000 80,000
1. Add: Outstanding on 31st March, 2011 10,000 15,000
1,10,000 95,000
Less: Outstanding on 1st April, 2010 (28,000) (7,000)
82,000 88,000
2.
Expenses of management
Expenses paid during the year 60,000 45,000
Add: Outstanding on 31st March, 2011 10,000 5,000
70,000 50,000
3. Premium less reinsurance
Premiums received during the year 4,50,000 3,30,000
Add: Outstanding on 31st March, 2011 30,000 20,000
4,80,000 3,50,000
Less: Reinsurance premiums (25,000) (15,000)
4,55,000 3,35,000
4. Reserve for unexpired risks is 50% of net premium for fire
insurance and 100% of net premium for marine insurance.
5. Dr. Provision for taxation account Cr.
Particulars Amount Particulars Amount
31.03.2011 To
Bank A/c 1.4.2010 By
Balance b/d 85,000
(taxes paid) 60,000 31.3.2011 By P &
L A/c (b/f) 99,138
31.03.2011 To
Balance c/d 1,24,138
1,84,1 38 1,84,138
munotes.in
Page 168
Financial Accounting
168
Illustration Q2
Form – B
Revenue A/c of Moon Shine Ltd for the year ending 31st March, 2005
Particulars Schedule
No. Current
Year
Premium Earned (Net) 1 7,60,000
Total
A 7,60,000
Claims incurred (Net) 2 12,00,000
Commission 3 62,400
Operating Expenses related
to Insurance Business 4 2,43,000
Total
B 15,05,400
Operating loss from Marine
Insurance Business (A – B) (7,45,400)
Form – B
Profit & Loss A/c for the year ending 31.03.2005
Particulars Schedule
No. Current
Year 1. Income from investments –
Interest & Dividend
2,40,000 2. Other Income –
Share Transfer fee
600
Total A: 2,40,600 3. Operating Loss – Transfer from
Revenue A/c (7,45,400) 4. Expenses Other than those related to
Insurance Business
Total B: ( 7,45,400)
Profit / Loss before Tax (5,04,800) (Less) Provision for taxation -
Profit / Loss for the year before
appropriation (5,04,800)
(Add) Balance of profit and Loss A/c
brought forward from last year 2,40,000
Balan ce carried forward to Balance Sheet (2,64,800)
munotes.in
Page 169
Final Accounts of
Insurance Companies
169 Form – B
Balance Sheet as on 31.03.2005
Particulars Schedule Current
Year
Source of Funds:
Share capital Reserves and Surplus Fair value change
A/c Borrowings
Total
Application of Funds:
Investments Loans
Fixed Assets
Current Assets:
Cash & Bank balance
Advances and other Assets
Sub Total – A
Current Liabilities
Provisions
Sub Total – B
Net Current Assets (A – B)
Misc. Exp. To the extent not written off
Debit balance in Profit & Loss A/c
Total Applic ation of Funds
5
15,00,000
6 -
- -
7 -
15,00,000
8
23,40,000
9 -
10 6,300
11 94,400
12 2,49,500
26,90,200
13 2,15,000
14 12,40,000
14,55,000
12,35,200
15 2,64,800
1500000
-
Sol Schedule – 1 (Premiu m)
Part iculars Amount
Net Premium received before adjustment for Unexpired risk
reserve 12,40,000
Less: Adjustment for change in Unexpired risk Reserve – 100% of
Net Premium
Less: Opening balance in Unexpired Risk reserve (100% x
12,40,000 – 7,60,0 00) (4,80,0 00)
Total Premium earned (Net) 7,60,000
Schedule – 2 (Claims)
Particulars Amount
Claims Paid Less Re-Insurance 10,60,000
Add: Claims outstanding at the end of the year 1,40,000
Total Claims incurred 12,00,000
Sche dule – 4 (Operating Expe nses) munotes.in
Page 170
Financial Accounting
170 Particulars Amount
Other Operating expenses 2,20,000
Dep. On Furniture 2,100
Rents, rates and taxes (Foreign Taxes on Insurance) 12,300
Other – Donations 8,600
Total 2, 43,000
Particulars Amount
Issued, Subscribed, called up and paid up capit al 1,50,000
E-share of 10 each 15,00,000
Total 15,00,000
Particulars Amount
Long term Investments
1. Government of India Securities 9,20,000
2. State Government Securities 8,80,000
3. Other Investments
a) Share (E-S) 3,60,000
b) Debentures / Bonds 1,80,000
Short term investments -
23,40,000
Schedule – 10 (Fixed Assets)
Particulars Gross Acc. Dep. Net Block
Opening Closing
Furniture and
Fittings 12,600 6,300 8,400 6,300
Total 12,600 6,300(4,200+ 8,400 6,300
2,100)
Schedule – 12 (Advances and Current Assets)
Particulars Amount
Sundry Debtors 9,200
Interest accrued but not due 8,200
Stock of Stationary 2,500
Agents Balance 1,46,400
Outstanding Premium 21,200
Advance Income Tax Paid 62,000
2,49,500
Schedule – 13 (Current Liabilities)
Particulars Amount
Sundry creditors 12,600
Claim Outstanding 1,40,000
Unclaimed Dividend 2,400
Due to Re-insurance 60,000
Total 2,15,000
munotes.in
Page 171
Final Accounts of
Insurance Companies
171 Schedule – 14 (Provision)
Particulars Amount
Reserve for unexpir ed risk for Marine
Insurance 12,40,000
Total 12,40,000
Illustration Q.3 Modern Insurance Company’s Fire insurance division
provide the following information, show the amount of claim as it
would appear in the Revenue Account for the year en ded 31st Ma rch,
2014.
Particulars Direct
Business
Re-
Insurance
Claim paid during the year
Claim received
Claim payable
- 1st April, 2013
- 31st March, 2014
Claim Receivable :
- 1st April, 2013
- 31st March, 2014
Expenses of Management (includes 38,000
Surv eyor's fee and 42,000 Legal expenses for
settlement of claims) 35,30,000
-
8,23,000
8,75,000
-
-
3,45,000 8,20,000
3,20,000
58,000
87,000
85,000
1,42,000
Solution : Modern Insurance Company (Abstract showing the amount of
claims)
Particul ars Amount Amo unt
Claims paid on Direct Business (35,30,000 + 38,000 +
42,000)
Add: Re -insurance
Add: Outstanding as on 31 -3-2014
Less: Outstanding as on 1 -4-2013
Less: Claims received from Re -insurance
Add: Outstanding as on 31 -3-2014
Less: Outstanding as on 1 -4-2013
Add: Outstanding Direct claims at the end of the year
Less: Outstanding claims at the beginning of the year
Net Claims Incurred
8,20,000
87,000
(58,000)
3,20,000
1,42,000
(85,000)
36,10,000
8,49,000
44,59,000
(3,77,000)
40,82,000
8,75,000
49,57,000
(8,23,000)
41,34,000
munotes.in
Page 172
Financial Accounting
172 Q.4 From the following information as on 31st March, 2014, prepare the
Revenue Accounts of Sagar Bhima Co. Ltd. engaged in Marine
Insurance Business:
Particulars Direct Business
(`) Re-insurance
1. Premium :
Received
Receiva ble - 1st April, 2013
-31st March, 2014
Premium paid
Payable - 1st April, 2013
-31st March, 2014
II. Claims:
Paid
Payable -1st April, 2013
-31st March, 2014
Received
Rece ivable -1st April, 2013
- 31st March, 2014
III. Commission:
On Insurance accepted
On Insurance ceded
24,00,000
1,20,000
1,80,000
--
--
--
16,50,000
95,000
1,75,000
--
--
--
1,50,000
--
3,60,000
21,000
28,000
2,40,000
20,000
42,000
1,25,0 00
13,000
22,000
1,00,000
9,000
12,000
11,000
14,000
Other expenses and income:
Salaries -Rs.2,60,000; Rent, Rates and Taxes - 18,000; Printing and
Stationery - Rs.23,000; Indian Income Tax paid - Rs.2,45,000; Interest,
Dividend and Rent received ( net) -Rs.1,15,500; Income Tax deducted at
source -24,500; Legal Expenses (Inclusive of Rs.20,000 in connection
with the settlement of claims) - 60,000; Double Income Tax refund -
Rs.12,000; Profit on Sale of Motor car Rs.5,000. Balance of Fund on 1st
April, 2013 was Rs.26,50,000 including Additional Reserve of
3,25,000/ -
Additional Reserve has to be maintained at 5% of the net premium of the
year.
Solution:
Particulars Schedule Current
year Previous
year
Premiums earned (net)
Interest, Dividends and Rent - Gross
Double Income Tax refund
Profit on sale of motor car
Total (A)
Claims incurred (net) Commission
Operating expenses related to Insurance
business Indian and Foreign taxes
Total (B)
Profit from Marine Insurance business (AB) 1
2
3
4 25,21,750
1,15,500
12,000
5,000
26,54,250
17,81,100
1,47,000
3,41,000
2,45,000
25,14,000
1,40,250
munotes.in
Page 173
Final Accounts of
Insurance Companies
173 Schedules forming part of Revenue Account
Particulars Current year Previous year
Schedule 1: Premiums earned (net)
Premiums from dir ect busines s writ ten Less:
Premium on reinsurance ceded
Total Premium earned
Less: Change in Provision for unexpired risk
(26.93,250 26,50,000)
Premium (net)
28,27,.000
2,62,000
25,65,000
(43,250)
25,21,750
Schedule 2
Claims incurred (net) [16,95,000+ 1 ,85,000 -
99000] 17,81,000
Schedule 3: Commission paid
Direct
Add Re -insurance accepted
Less reinsurance ceded 1,150,000
11,000
14,000
1,47,000
schedule 4: Operating expenses related to
insurance
business
Employees' remuneration and welfare b enefits
Rent Rate s and Taxes
Printing and Stationery
Legal and Professional charges
2,60,000
18,000
23,000
40,000
3,41,000
Illustration Q5 Prepare Revenue Account in proper form for the year
ended 31st March 2014, from the particulars related to Kr ishna Gener al
Insurance Co. for the year ended 2013 -14
Particular Related to
Direct
Business Related to
Reinsurance
Premiums:
Amount received
Receivable at the beginning
Receivable at the end
Amount paid
Payable at the beginning
Payable at the end
Claims:
Amo unt pa id
Payable at the beginning
Payable at the end
Amount recovered
Receivable at the beginning
Receivable at the end
Commission :
Amount paid
Amount received ( -)
3000000
180000
240000
1800000
60000
120000
72000
240000
24000
36000
360000
30000
42000
180000
12000
18000
120000
18000
12000
10800
14400
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Page 174
Financial Accounting
174 Additional Information:
1. Interest, dividend and rent received rs 30.000
2. Income tax in respect of above rs 6,000
3. Management expenses including rs 12.000 related to legal ex penses
regarding claims rs 1,32.000
4. Provision for income tax existing at the beginning of the year was
1.95.000, the income -tax actually paid during the year 1,68.000 and
the provision necessary at the year end 2.07.000
5. The net premium income of th e company d uring the year 2012 -13
was 24,00,000 on which reserve for unexpired risk @ 50% and
additional reserve @ 7 1/2% was created. This year, the balance to be
cared forward is 50% of net premium on reserve for unexpired risk
and 5% on additional risk
Sol
Form B RA
REVENUE ACCOUNT FOR THE YEAR ENDED 31/03/2014
Particular Schedule Amt
1. Premium earned (Net)
2. Profit/Loss on Sales / Redemption of
investment
3. Other
4. Interest, dividend and rent (Gross)
Total (A)
5. Claims incurred (Net)
6. Commission
7. Operating expenses related to insurance
business
Total (B)
Operating Profit/Loss from Insurance Business
(C) = (A - B)
Appropriation
Transfer to Shareholders Account
Transfer to Catastrophe Reserve
Trans fer to Othe r Rese rves
Total (D) 1
2
3
4
2703000
30000
2733000
1944000
68400
120000
2132400
600600
Schedules Forming part of revenue account
SCHEDULE 1 PREMIUM EARNED
Particular amt
Premium received from direct business (WN 1)
Add: Premium on reinsur ance accepted (2.40,000+ 36,000 -
24,000)
Less Premium on reinsurance ceded (3,60,000+ 42,000 -
30,000)
Net Premium
Adjustment for change in reserve for unexpired risk (WN 2)
Total Premium earned (Net) 3060000
252000
3312000
372000
2940000
237000
2703000 munotes.in
Page 175
Final Accounts of
Insurance Companies
175 SCHEDULE 2 CLAIM
Particular Amt
Claims paid (Direct)
Add: Legal expenses regarding claims
Add: Reinsurance Accepted
Less Reinsurance ceded (1,20,000+ 12,000 -18,000)
Add: Claims outstanding at the end (1,20,000+ 18,000)
Less: Claims outstan ding at the beginning (60,000 + 12.000)
Total claim incurred 1800000
12000
1812000
180000
1992000
114000
1878000
138000
72000
1944000
SCHEDULE 3 COMMISSION
Particular Amt
Commission paid (Direct)
Add: Reinsurance accepted
Less: Re -insurance ceded
Net Commission 72000
10800
82800
14400
68400
SCHEDULE 4 OPEEEERATING EXPENSES RELATED TO
INSURANCE BUSINESS
Particular amt
Expenses of Management 120000
5.10 MCQ’s
1) In case of fire insurance the provision required to make against un
expired risk is _____ _______ ____ __
a) 40
b) 50
c) 100
d) 30
2) As per IRDA regulations an insurance company is required to
prepare
a) Revenue account
b) Profit and loss account
c) Balance sheet
d) All of the others
3) Insurance commission on general insurance policy renewed during
the ye ar cann ot exceed
a) 40% of the premium
b) 5% of the premium
c) 15% of the premium
d) None of the above
munotes.in
Page 176
Financial Accounting
176 4) Outstanding premium is shown in the balance sheet of the insurance
company under
a) Current assets
b) Current liability
c) Advance
d) Other assets
5) Deposit hel d on re insurance CEDED is shown in the balance sheet of
the insurance company under
a) Loans
b) Current liability
c) Advance
d) Other assets
6) Insurance business is controlled by
a) 100%
b) 50%
c) 25%
d) 10%
7) Reserve for unexpected Risk is shown in the balance sheet of a
General I nsuranc e Company under
a) Reserve & Surplus
b) Capital
c) Misc Expenditure not written off
d) Provision.
8) Claims outstanding is shown in the balance sheet of a Insurance
company
a) Current Assets
b) Current Liabilities
c) Advance
d) Other assets
9) Claims made in respect of genera l Insurance contracts shall be
recognized on an actuarial basis
a) Every year
b) Every three year
c) Where the claims payment period exceeds four year
d) Never
10) Unallocated premium is shown in the balance sheet of an Insurance
Company under
a) Current Assets
b) Curre nt liab ilities
c) Advance
d) Other Assets
munotes.in