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Final Accounts of Companies

IPCC Paper 1: AccountingChapter 2: Financial Statements of Companies

CA. Pankajj Goel1

Learning Objectives

1 Adjustments for Dividend

2 Managerial Remuneration

3 Adjustments for Taxation

4 Preparation of Final Accounts as per Revised Schedule VI 2

Adjustments for DividendConcept 13

Step 1: Propose/ Recommend Dividend in Board Meeting

Profit & Loss Appropriation A/c Dr.To Proposed DividendTo Corporate Dividend Tax

Board of Directors Recommendation

Dividend can be declared only on the recommendation of the Board of Directors of the Company.

The shareholders do not have any power to declare any dividend.

The Board of Directors after considering and approval of the financial statements of the Company, determines the rate of dividend to be declared and then recommends the same to the shareholders.

For this purpose, a Board Meeting shall be convened to pass the resolution for Rate of dividend and the amount of dividend to be paid. Book closure date for dividend purposes Date of annual general meeting Bank with which the account shall be opened for the purpose

of remittance of dividend. 5

Step 2: Proposed Dividend approved By AGM

Proposed Dividend A/c Dr To Dividend Payable A/c

Approval by the Shareholders

The dividend recommended by the Board of Directors is declared by a resolution passed at the Annual General Meeting by the shareholders.

The declaration of dividend should form part of an ordinary business item to be transacted in the notice of the Annual General Meeting.

While approving the rate of dividend at the Annual General Meeting, the shareholders have power to declare a lower rate of dividend than what is recommended by the Board but they have no power to increase the amount or the rate of dividend so recommended by the Board of Directors.

Dividend when declared becomes debt against the company 7

Step 3: Open New Bank Account Such that money is not used for any other purpose. This is like transferring from SBI to PNB

DIVIDEND BANK A/C DR TO BANKA/C

DIVIDEND

Dividend Deposited in Separate Bank A/c

1. The Company should deposit the dividend amount (including interim dividend) within 5 days of its declaration in the separate bank account opened for this purpose

2. It means that the interim dividend will have to be deposited in a bank account within 5 days of the Board Meeting whereas final dividend will have to be deposited within 5 days from the date of Annual General Meeting in which it was approved by the shareholders

3. Also Section 205 (1B) stipulates that the amount so deposited shall be used only for the purpose of payment of dividend (whether interim or final) 9

Statutory Transfer to Reserves

If the company wants to declare dividend exceeding the prescribed % then it must transfer a prescribed % to General reserve out of the profit before declaration of dividend. Such % is:

Dividend Rate Transfer to GR

0 To 10% Nil>10% To 12.5% 2.5% of Profit after Tax>12.5% To 15% 5% of Profit after Tax>15% To 20% 7.5% of Profit after TaxAbove 20% 10% of Profit after Tax

Rate of dividend is calculated on paid up capital but transfer to reserve is calculated on PAT.

Adjustment for Dividend

STEP 4- Issue of Cheque For Payment Of Dividend

DIVIDEND PAYABLE a/c DR TO DIVIDEND BANK A/C

DIVIDEND

Example 1Concept 112

Practice Manual - IPCC Group 1

The Articles of Association of S Ltd. provide the following:1. That 20% of the Net Profit of each year shall be

transferred to Reserve Fund2. That an amount equal to 10% of Equity Dividend

shall be set aside for staff bonus3. That the Balance available for distribution shall be

applied:a) In paying 14% on Cumulative Preference Sharesb) In paying 20% dividend on Equity Sharesc) One-third of the balance available as additional

dividend on Preference Shares and two-third as additional Equity Dividend 13

Practice Manual - IPCC Group 1 (Cont.)

A further condition was imposed by the articles viz. that the balance carried forward shall be equal to 12% on preference shares after making provisions (i), (ii) and (iii) mentioned above.

The company has issued 13,000, 14% cumulative participating preference shares of ` 100 each fully paid and 70,000 equity shares of ` 10 each fully paid up.

The profit for the year 2012 was ` 10,00,000 and balance brought from previous year ` 80,000.

Provide ` 31,200 for depreciation and ` 80,000 for taxation before making other appropriations.

Prepare Profit and Loss Account – below the line. As per revised Schedule VI, Statement of Profit is to be prepared upto profit for the current year only.

Working Note:

Balance of amount available for Preference and Equityshareholders and Bonus for Employees

` Credit Side 9,68,800Less: Dr. side [1,77,760 +

1,82,000+1,40,000+14,000 + 1,56,000]6,69,7602,99,040

Suppose remaining balance will be = xSuppose preference shareholders will get share from remaining balance =Equity shareholders will get share from remaining balance =Bonus to Employees =Now,

32 x = 89,71,200x = 89,71,200/32 = ` 2,80,350

Share of preference shareholders - ` 2,80,350= ` 93,450

Share of equity shareholders - ` 2,80,350 = `1,86,900

Bonus to employees - ` 2,80,350 = ` 18,690

040,99,2x 302x

Solution

Statement of Profit and Loss – (below the line) (A draft)for the year ended 2012

Particulars `a Profit 10,00,000 b Expenses:

Depreciation and amortization expense (31,200)Total expenses (31,200)

c Profit before tax 9,68,800 d Provision for tax (80,000)e Profit (Loss) for the period 8,88,800

Balance of Profit and Loss account brought forward 80,000 f Total 9,68,800g Appropriations

Transfers to Reserves (1,77,760)Proposed preference dividend (1,82,000 + 93,450) (2,75,450)Proposed equity dividend (1,40,000 + 1,86,900) (3,26,900)Bonus to employees (14,000 + 18,690) (32,690)Total (8,12,800)

h Balance carried to Balance sheet (f-g) 1,56,000

Balance of Profit and Loss account brought forward 80,000

f Total 9,68,800

g Appropriations

Transfers to Reserves (1,77,760)

Proposed preference dividend (1,82,000 + 93,450) (2,75,450)

Proposed equity dividend (1,40,000 + 1,86,900) (3,26,900)

Bonus to employees (14,000 + 18,690) (32,690)

Total (8,12,800)

h Balance carried to Balance sheet (f-g) 1,56,000

Solution - Contd:

Adjustments for Managerial RemunerationConcept 2:18

Cases of Managerial Remuneration

Effective Capital Maximum remuneration payable per month

Less than Rs.1 Crore

Rs. 1 Crore or more but less than 5 Crores

Rs. 5 Crores or more but less than 25 Crores

Rs. 25 Crores or more but less than 100 Crores

Above 100 Crores

• 75,000

• 1,00,000

• 1,25,000

• 1,50,000

• 2,00,000

Case 1: Inadequate Profits

Effective Capital

Total of• Paid -up Share Capital (excluding share application money or advances)

• Share Premium Account Balance

• Reserves and Surplus (Excluding Revaluation Reserve)

• Long Term Loans and Deposits repayable after 1 Year

Less• Investment (except investment by an investment company)

• Accumulated losses• Preliminary expenses Not written off

Effective Capital

21The LT Loans/ Deposits should be excluding working capital loans , overdrafts , interest due on loans unless funded , bank guarantee etc. and other short -term advances

Study Material-IPCC Group 1

The following extract of Balance Sheet of X Ltd. was obtained: Balance Sheet (Extract) as on 31st March, 2011

Liabilities ` Authorised capital: 20,000, 14% preference shares of ` 100 20,00,000 2,00,000 Equity shares of ` 100 each 2,00,00,000 2,20,00,000 Issued and subscribed capital: 15,000, 14% preference shares of ` 100 each fully paid 15,00,000 1,20,000 Equity shares of ` 100 each, ` 80 paid-up 96,00,000 Share suspense account 20,00,000 Reserves and surplus Capital reserves (60% is revaluation reserve) 2,50,000

Study Material-IPCC Group 1

Share suspense account represents application money received on shares, the allotment of which is not yet made.X Ltd. has been sustaining loss for the last few years. X Ltd. has only one whole-time director. Find out how much remuneration X Ltd. can pay to its managerial person as per the provisions of Part II of Schedule XIII. Would your answer differ if X Ltd. is an investment company?

Securities premium 50,000Secured loans:15% Debentures 65,00,000Unsecured loans:Public deposits 3,70,000Cash credit loan from SBI 4,65,000Current Liabilities:Sundry creditors 3,45,000Assets:Investment in shares, debentures, etc. 75,00,000Profit and Loss account 15,25,000Preliminary expenses not written off 55,000

Solution: Computation of Dffective Capital

Particulars Where X Ltd. is a non-investment Co.

Where X Ltd. is an investment Co.

15,000, 14% Preference shares 15,00,000 15,00,0001,20,000 Equity shares 96,00,000 96,00,000Capital reserves 1,00,000 1,00,000Securities premium 50,000 50,000

15% Debentures 65,00,000 65,00,000Public Deposits 3,70,000 3,70,000(A) 1,81,20,000 1,81,20,000

Solution: Computation of Dffective Capital - 2

Particulars Where X Ltd. is a non-investment Co.

Where X ltd. is an investment Co.

Investments 75,00,000Profit and Loss account (Dr. balance

15,25,000 15,25,000

Preliminary expenses not written off

55,000 55,000

(B) 90,80,000 15,80,000Effective capital (A–B) 90,40,000 1,65,40,000Monthly remuneration shall not exceed

75,000 1,00,000

Case: Adequate Profits

Overall managerial remuneration not to exceed 11% of the Net Profit of the F.Y.

But except with the previous approval of the central government the remuneration shall not exceed: If one whole time Director: 5% If More than one whole time Director: 10% If Only Part Time Directors: 3% If part time directors as well as WholeTime Directors and Managers: 11%

Managerial Remuneration- Net profit

Net profit as per P & L account xxxxAdd: ALL Provisions including reserves made in books

xxxxAdd: Managerial remuneration (if debited to P & L account)

xxxx Add: Depreciation charged in books

xxxx Less: Depreciation as per schedule XIV

xxxx Less: Actual expenditures (not debited to P&L account)

xxxxBook profit as per Schedule XIII

xxxx 28

Study Material

The following is the Profit & Loss A/c of Mudra Ltd., the year ended 31st March, 2011

To Administrative, Selling and By Balance b/d 5,72,350 distribution expenses 8,22,542 “ Balance from Trading A/c 40,25,365 ” Donation to charitable funds 25,500 “ Subsidies received from Govt. 2,32,560 ” Directors fees 66,750 “ Interest on Investments 15,643 ” Interest on debentures 31,240 “ Transfer fees 722 ” Compensation for breach of “ Profit on sale of contract 42,530 Machinery: ” Managerial remuneration 2,85,350 Amount realised 55,000 ” Depreciation on fixed assets 5,22,543 Written down value 30,000 25,000 ” Provision for Taxation 12,42,500 ” General Reserve 4,00,000 ” Investment Revaluation Reserve12,500 ” Balance c/d 14,20,185 48,71,640 48,71,640

Additional Information:(1) Original Cost of the machinery sold was ` 40,000(2) Depreciation on fixed assets as per Schedule XIV of the

Companies Act, 1956 was ` 5,75,345.You are required to comment on the managerial remuneration in the

following situations:(a) there is only one whole time director;(b) there are two whole time directors;(c) there are two whole time directors, a part time director and a

manager.

Contd:

Solution:

Calculation of net profit u/s 349 of the Companies Act, 1956

` ` Balance from Trading A/c 40,25,365 Add : Subsidies received from Government 2,32,560 Interest on investment 15,643 Transfer fees 722 Profit on sale of machinery (40,000 – 30,000) 10,000 2,58,925

42,84,290Less : Administrative, selling and distribution expenses 8,22,542

Contd:

Situation

(a)When there is only one whole time director:

Managerial remuneration = 5% of ` 27,20,383 = ` 1,36,019

(b)When there are two whole time directors :

Managerial remuneration =10% of ` 27,20,383 = ` 2,72,038

(c)When there are two whole time directors, a part time director and a manager:

Managerial remuneration = 11% of ` 27,20,383 = ` 2,99,242

Donation to charitable funds 25,500

Director’s fees 66,750

Interest on debentures 31,240

Compensation for breach of contract 42,530

Depreciation on fixed assets as per Schedule XIV 5,75,345 15,63,907

Profit u/s 349 27,20,383

Contd:

Comment : In situations (a) and (b) since managerial remuneration as per Profit and Loss

account ` 2,85,350 exceeds the maximum amount payable, the company should obtain

permission under Section 309(3) for such excess payment

Adjustment For TaxationConcept 335

Objective of this Adjustment

This adjustment deals with the treatment of Provision for taxation and advance tax while finalising the accounts

Once Tax assessment is done, then how these adjustment are dealt with

Provision for Taxation and Advance tax

Provision of tax for the yearP&L Account Dr

To Provision for Taxation Payment of Advance tax during the year

Advance Tax Account DrTo Bank Account

Example 4

The trial balance of Sona Ltd. as at 31 March 2006 shows the following terms: Provision for Taxation: 5,40,000(Cr) Advance Payment of Tax 10,50,000(Dr) —

You are also given the following information :1. Advance payment of tax includes Rs. 6,20,000 for 2004-052. Assessment for 2004-05 is completed in 2005-06 and the

actual tax liability amounts to Rs. 6,45,000 and no payment has been made so far for the same

3. For the financial year 2005-06, provision for income tax required is Rs. 7,50,000.

Make journal entries and prepare the various ledger accounts affected.

Solution

1. Profit and Loss Appropriation Account Dr. 1,05,000To Provision for Taxation Account 1,05,000(Being the additional amount for tax appropriated on completion of the assessment for 2004-05)

2. Provision for Taxation Account Dr. 6,45,000To Advance Tax Account 6,20,000To Liability for Taxation Account 25,000

(Provision for taxation adjusted against advance tax andbalance transferred to liability for taxation account)

3. Profit and Loss Account Dr. 7,50,000To Provision for Taxation Account 7,50,000

(Estimated tax liability for 2005-06 provided)

Solution: Page 2

Ledger Accounts Provision for Taxation Account

Rs. Rs. 31.03.2006 01.04.2005 Advance Tax Account 6,20,000 Balance b/d 5,40,000 Liability for Tax Account 25,000 31.03.2006 Balance c/d 7,50,000 Profit and Loss Appropriation 1,05,000 Account (Excess Amount payable) Profit and Loss Account 7,50,000 (Estimated liability for 2005-06) 13,95,000 13,95,000

Solution: Page 3

Advance Tax Account Rs. Rs. 31.03.2006 31.03.2006 Balance as per T.B. 10,50,000 Provision for Taxation Account 6,20,000 Balance c/d 4,30,000 10,50,000 10,50,000

Liability for Taxation Account Rs. Rs. 31.03.2006 31.03.2006 Balance c/d 25,000 Provision for Taxation Account 25,000

Preparation of Final Accounts-As per Revised Schedule VIConcept 4.43

Guidelines as per Revised Schedule VI

Every Balance Sheet… shall be in the form set out in Part I of Revised Schedule VI

Every Profit and Loss account… shall comply with the requirements of Part II of Revised Schedule VI

This is not applicable to Banking co., Insurance co. and companies engaged in generation and supply of electricity.

Applicability Effective from 1.4.2011 Accounting period starting on or after 1.4.2011

Framework of Revised Schedule VI

General Instructions1. Part 1

1. Form of Balance Sheet2. General Instructions for preparation of

Balance Sheet2. Part 2

1. Form of Statement of Profit and loss2. General Instructions for preparation of

Statement of Profit and Loss

Revised Schedule VI vs Old Schedule VI

For Balance sheet Only vertical format is now available

Format of Profit and Loss Account Is also available now

Part III Interpretation- containing explanation of provisions,

reserve etc. is not given now Part IV

Balance Sheet Abstract and Co’s General Business Profile is not required to be given

Rounding Off

< ` 100 croresTo the nearest hundreds, thousands, lakhs or

millions, or decimals thereof. > = ` 100 crores

To the nearest, lakhs, millions or crores, or decimals thereof.

Basic Points as per Revised Schedule VI

Form of Balance Sheet (Part 1)Particulars Note

No.Figures as at the end of the current reporting period

Figures as at the end of the previous reporting period

I. EQUITY AND LIABILITIES

(1) Shareholders’ Funds(a) share capital(b) Reserve and Surplus(c) Money received against share

warrants

(2) Share application money pending allotment 3

(3) Non-current liabilities(a) Long term borrowings(b) Deferred tax liabilities (net)(c) Other long term liabilities(d) Long term provisions

(4) Current Liabilities(a) Short term borrowings(b) Trade payables(c) Other current liabilities(d) Short term provisions

Current Liability - Definition

Criteria to be met to classify as Current Liability Expected to be settled in the co’s normal operating cycle, Due to be settled within twelve months after the reporting

date, Held primarily for the purpose of being traded or There is no unconditional right to defer settlement for at

least 12 months after the reporting date. Operating Cycle

Time between the acquisition of assets for processing and their realisation in cash or cash equivalents. If can not be identified- duration of twelve months.

All other Liabilities are classified as Non-Current Liabilities.

Form of Balance Sheet (Part 1)Particulars Note

No.Figures as at the end of the current reporting period

Figures as at the end of the previous reporting period

II. ASSETS(1) Non-current assets(a) fixed assets

(i) Tangible assets(ii) Intangible assets(iii) Capital work-in-progress(iv) Intangible assets under development

(b) Non- current investments(c) Deferred tax assets (Net)(d) Long term loans and advances(e) Other non-current assets

(2) Current assets(a) Current investments(b) Inventories(c) Trade receivables(d) Cash and cash equivalents(e) Short term loans and advances(f) Other current assets

181920

Current Assets-Definition

Criteria to be met to classify as current asset: Expected to be realise in or intended for sale or

consumption in normal operating cycle of the co., Held primarily for the purpose of trading, Expected to be realised within 12 months from the closing

date or It is cash or cash equivalent.

Operating cycle – time between the acquisition of assets for processing and their realisation in cash or cash equivalents. If can not be identified-duration of twelve months.

All other assets shall be classified as non-current. 51

Form of Statement of Profit and loss

Form of Statement of Profit and Loss - Contd:

Expenses

1. Cost of material consumed

2. Purchase of stock-in-trade

3. Changes in inventories of finished goods, Work-in-progress and stock in trade

4. Employee benefit expenses

5. Finance cost

6. Depreciation and amortisation expenses

7. Other expenses. 54

Additional Information by way of Notes

In respect of Contingent Liabilities Claims against the co not acknowledged as debts Guarantees Other moneys for which co is contingently liable

In respect of Commitments Estimated amount of contracts remaining to be

executed on capital account and not provided for Uncalled liability on shares and other investments

partly paid Other commitments

In respect of Proposed Dividend to Equity and Preference Shareholders 55

Example 5 on Concept 456

Study Material

You are required to prepare financial statements from the followingtrial balance of Haria Chemicals Ltd. for the year ended 31st March, 2012.

Haria Chemicals Ltd.Trial Balance as at 31st March, 2012

Particulars ` Particulars ` Stock 6,80,000 Equity Shares Furniture 2,00,000 Capital (Shares of ` 10 each) 25,00,000 Discount 40,000 11% Debentures 5,00,000 Loan to Directors 80,000 Bank loans 6,45,000 Advertisement 20,000 Bills payable 1,25,000 Bad debts 35,000 Creditors 1,56,000 Commission 1,20,000 Sales 42,68,000 Purchases 23,19,000 Rent received 46,000 Plant and Machinery 8,60,000 Transfer fees 10,000

Contd:

Rentals 25,000 Profit & Loss Current account 45,000 account 1,39,000 Cash 8,000 Depreciation Interest on bank loans 1,16,000 provision : Preliminary expenses 10,000 Machinery 1,46,000 Fixtures 3,00,000 Wages 9,00,000 Consumables 84,000 Freehold land 15,46,000 Tools & Equipments 2,45,000 Goodwill 2,65,000 Debtors 2,87,000 Bills receivable 1,53,000 Dealer aids 21,000 Transit insurance 30,000 Trade expenses 72,000 Distribution freight 54,000 Debenture interest 20,000

Additional information : Closing stock on 31-3-2012: ` 8,23,000.

Solution

Solution Haria chemicals Ltd.

Balance Sheet as at 31st March, 2012

Schedule Rupees as at

No. the end of

31st March 2012 (1) (2) (3)

Equity and Liabilities

(1) Shareholders’ funds : (a) Capital 1 25,00,000 (b) Reserves and Surplus 2 7,40,000

(2) Non Current Liabilities (a) Secured loans Long term borrowings 3 11,45,000

(3) Current Liabilities (a) Trade payables 4 2,81,000

Total 46,66,000

Contd:

Assets (1) Non current assets Fixed Assets : (a) Tangible assets 5 32,70,000 (2) Current assets (a) Inventories 8,23,000 (b) Trade receivables 2,87,000 (c) Cash and cash equivalents 6 53,000 (d) Short term loans and advances 7 2,33,000

(e) Other current assets 10,000

Contd:

Assets (1) Non current assets Fixed Assets : (a) Tangible assets 5 32,70,000 (2) Current assets (a) Inventories 8,23,000 (b) Trade receivables 2,87,000 (c) Cash and cash equivalents 6 53,000 (d) Short term loans and advances 7 2,33,000

Total 46,66,000

Solution

Haria Chemicals Ltd.Profit and Loss Account for the year ended 31st March, 2012

Schedule Figures as at No. the end of 31st March 2012

Revenue from operations 42,68,000 Other income 8 56,000 43,24,000 Expenses Cost of materials consumed 9 21,76,000 Manufacturing & other expenses 10 14,01,000 Interest & other financial charges 11 1,36,000 Preliminary expenses 10,000 37,23,000

Contd:

Profit before tax 6,01,000 Provision for tax — Profit after tax 6,01,000 Balance of profit and loss account brought forward 1,39,000

Balance carried to balance sheet 7,40,000

Contd:

Notes to Accounts

Share capital `

Authorised :

Equity share capital of `10 each 25,00,000

Issued and Subscribed :

Equity share capital of `10 each 25,00,000

2. Reserves and Surplus

Balance as per last balance sheet 1,39,000 Balance in profit and loss account 6,01,000

Contd:

3. Long term Borrowings11% Debentures 5,00,000 Bank loans 6,45,000

11,45,000 4 Trade payables

Creditors 1,56,000 Bills payable 1,25,000

2,81,000

Contd:

Notes to Accounts

5. Tangible Assets Gross block Depreciation Net Block Goodwill 2,65,000 2,65,000 Freehold land 15,46,000 15,46,000 Furniture 2,00,000 2,00,000 Fixtures 3,00,000 3,00,000 Plant & Machinery 8,60,000 1,46,000 7,14,000 Tools & Equipment 2,45,000 2,45,000 Total 34,16,000 1,46,000 32,70,000

Contd:

6. Cash and cash equivalents Current account balance 45,000 Cash 8,000

53,000 7. Short-term loans and Advances

Loan to directors 80,000 Bills receivable 1,53,000

2,33,000 8. Other Income

Rent received 46,000 Transfer fees 10,000

56,000

Contd:

Notes to Accounts

9. Cost of materials consumed Opening stock 6,80,000 Add: purchases 23,19,000 Less: Closing stock 8,23,000

21,76,000 10. Manufacturing and Other Expenses

Consumables 84,000 Wages 9,00,000 Bad debts 35,000 Discount 40,000 Rentals 25,000 Commission 1,20,000 Advertisement 20,000 Dealers’ aids 21,000 Transit insurance 30,000 Trade expenses 72,000 Distribution freight 54,000 14,01,000

Lesson Summary

Preparation of Final Accounts of Companies as per Revised Schedule VI

Various adjustments in regard to preparation of Final Accounts

Thank You70

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