Company Accounts

Balance sheet and Profit and loss of a limited liability company.

Forms of Business Organizations

Sole Proprietorship Partnership

Limited liability Unlimited liability Limited liability

Company

Private limited company Public limited company

Unlimited liability

Cooperative societies

GAAP

Conceptual Framework of Financial Statements Accounting Concepts Requirements of Companies Act Accounting Standards Requirements of Income Tax Act

Requirements of Companies Act

1.

2.
3. 4.

Books of Accounts ( Sec.209 ) All sums of money received and expended by the company All Sales and Purchases of goods by the company All assets and liabilities of the company Cost records in case of companies engaged in production, manufacturing , processing, mining activities

Requirements of Companies Act

1. 2.

Annual Accounts ( Sec.210 ) A balance sheet and A profit and loss account at every AGM

Form and Contents 1. Balance sheet to exhibit true and fair view of the state of affairs of the company and to comply with part I of schedule VI 2. Profit and loss account to give a true and fair view of the profit and loss of the company and to comply with part II of schedule VI 3. Every balance sheet and Profit and loss account to comply with accounting standards

Requirements of Companies Act

1. 2. 3.

Company not complying with AS to disclose Deviation from AS Reasons for such deviation Financial effect

ACCOUNTING STANDARDS

Accounting Standards Board Applicability of AS Scope of AS Details of AS Authority attached to AS

Requirements of Income Tax Act

I.T. Act allows both cash as well as mercantile system of accounting Companies Act allows only mercantile system of accounting

COMPONENTS OF FINANCIAL STATEMENT Balance Sheet Income Statement Cash Flow Statement Notes to Accounts and Accounting Policies

Preparation of Financial statements

1.

To record transactions and events in the journal To record opening entries in the general ledger To post journal entries in appropriate accounts in the general ledger To balance the accounts in the general ledger To prepare the trial balance

2.

3.

4.

5.

6.

To pass adjustment entries

To prepare the revised trial balance To pass closing entries to prepare financial statements

7.

8.

Trial Balance

Closing balances of accounts in the ledger as well as cash balance are taken

It tests the arithmetical accuracy of ledger balances It can be prepared monthly, quarterly and yearly It is a source document for preparing financial statement

CLOSING ENTRIES
1.

2.

3.

STEPS Transfer balances in revenue accounts to the Profit & Loss account Transfer balances in the expense account to the Profit & Loss account Transfer balances in the Profit & Loss account to Profit & Loss Appropriation account

Format of the Balance Sheet

Rs Rs

Sources of Fund: Share Capital Reserves and surplus Secured loans Unsecured Loans

xx xx xx Xx

Uses of Fund: Fixed assets Investments Current assets, loans and advances xx Less: Current liabilities and provisions xx Net current assets Miscellaneous expenditure Profit and Loss account

xx xx

xx xx Xx xxx

xxx

Balance Sheet
Asset side Items under Fixed Asset 1. Land 2. Building 3. Plant and Machinery 4. Furniture and Fixture 5. Vehicles

Balance Sheet

Investment
1. 2. 3. 4.

Investment in govt. securities Investment in shares ,debentures and bonds Investment in immovable properties Investment in the capital of partnership firms

Miscellaneous Expenditure Debit balance in Profit and Los account

Balance Sheet
Current Assets, Loans, and Advances: Current Assets
--- Inventories --- Sundry debtors --- Cash and bank balances

Loans and Advances

--- Advances recoverable in cash or in kind or for value to be received ---Advance income tax --- Advance deposit of sales tax and excise --- Inter-corporate deposits

Balance Sheet
Liabilities side:

Share Capital
--- Equity Share Capital --- Preference Share Capital

Reserves and Surplus

--- Capital reserves --- General reserve --- Capital redemption reserve --- Debenture redemption reserve

Balance Sheet

Loan Funds
Secured Loans
-- Term Loans -- Debentures --Working capital loans

1.

2.

Unsecured Loans
-- Fixed deposits --Debentures --Security deposits

Balance Sheet
Current Liabilities and Provisions Current Liabilities

--- Sundry Creditors --- Expenses Payable --- Advances from customers --- Unclaimed dividends --- Interest accrued but not due

Provisions
--- Provision for taxation --- proposed dividend --- provision for contingencies

PROFIT & LOSS ACCOUNT

Domestic Sales Exports Others

Income from investment Commission received Dividend received etc.

PROFIT AND LOSS ACCOUNT

Expenditure
---Salaries, wages, bonus ---Power and fuel ---Rent, rates and taxes ---Traveling exp. ---Excise duty ---Provision for taxation

--- Materials Consumed ---Staff welfare expenses ---Repairs and maintenance ---Freight, transportation ---Interest ---Depreciation ---Extraordinary items

PROFIT & LOSS ACCOUNT

Profit After Tax : It is measured as excess of revenues over expenses.

Profit & Loss Appropriation Account : From the PAT following appropriations take place:Prov. for dividend to Pref. Shareholders Interim dividend Provision for final dividend Prov. for Corp. dividend tax Transfer to general reserve, debenture redemption reserve

1. 2. 3. 4. 5.

Profit & Loss Appropriation Account

Main components: Interim dividends Proposed final dividends Reserves:
1. 2.

Capital reserve Revenue reserve

1. 2. 3. 4. 5.

General reserve Specific reserve Secret reserve Reserve fund Sinking fund

Reserves:

Capital Reserve: Gen. created out of profit or gains of capital nature like:

Profit on sale of fixed assets Profit prior to incorporation Security premium on issue of shares or debentures Capital profit on reissue of forfeited shares Profits on revaluation of assets and liabilities Profit on redemption of debentures

This reserve can be utilized for writing off intangible assets, or preliminary expenses or discount on issue of shares or debentures or underwriting commission or to meet capital losses.

Revenue reserve: Created from profits earned in the regular

course of business & is available for distribution as dividend.

General Reserve: It is created by appropriation of profit, without any

specific purpose, with just an aim to provide additional working capital or to strengthen the cash resources of the business. It is also known as free reserve and are basically utilized for meeting any unknown liability.

Secret reserve: Also known as Hidden or Internal reserve, it does not

appear on the face of the balance sheet. However, under the provision of Companys Act, 1956, no company other than a banking or insurance or electric supply company is allowed to maintain a secret reserve. Nearly all banks and finance companies create secret reserves for equalizing dividends or meeting heavy losses without disclosing the fact to the shareholders and general public.

Reserve fund: Sum set aside out of divisible profit and retained in order to provide for unexpected or unknown future contingencies or losses or to equalize dividends or to strengthen the financial position of the business.
Sinking Fund: It is a fund created with a specific purpose:
To replace a wasting asset, e.g.., a mine; or To replace an asset of depreciable nature; or To renew a lease; or To redeem or repay a long term liability, e.g., debenture or a long term loan, etc It is formed by setting aside, yearly, a fixed sum of money for a definite period. Such sum is invested at compound interest , so that at the end of the period the annual amounts, with interest accumulation, will be sufficient to repay the outstanding loan. This amount, which is set aside, is not charged to profit and loss account but to the profit and loss appropriation account. In case of sinking fund created for the purpose of replacing an wasting asset, the amount, which is set aside, is charged to profit and loss account.

Specific reserves: It is created by debiting P/L

Appropriation account for some specific purposes like:

Debenture redemption reserve: It is created with the specific purpose of

redeeming the debentures at the end of a specified period setting aside a fixed sum from the profit by debiting the profit and loss appropriation account.

Dividend equalization reserve: It is created by setting aside a portion of

distributable profit in good years as a provision for less prosperous years.

Investment fluctuation reserve: it is usually created to provide for the

loss by way of fluctuation in the value of investment. The fall in the value is provided by debiting P/L account and crediting Investment fluctuation reserve.

Plant and machinery replacement reserve: It is created not only to

provide for annual depreciation of fixed assets to P/L account each year but also to provide for a fund by means of investing a corresponding sum each year in gilt edged securities which, if accumulated at compound interest, will help towards the replacement of the asset at the end of its life, by realizing the specific investment.

Format of Profit and Loss Appropriation account

Rs.
Provision for dividends to pref. shareholders Interim dividends Proposed final dividends Provision for Corporate dividend tax Transfer to General reserves Debenture redemption reserve Net balance transferred to the Balance Sheet By balance c/d Profit and loss account

Rs.

FIXED ASSETS ACCOUNTING

1. 2. 3. 4.

Meaning and Significance of Fixed Assets Fixed assets are used for production or providing goods or services They are not meant for resale in the ordinary course of business They constitute a significant portion of total assets Proper allocation between revenue and capital expenditure necessary to recognise and measure fixed asset

FIXED ASSETS ACCOUNTING

1.

2.

3.

4. 5.

Cost of Fixed Assets Purchase price inclusive of import duties less trade discount, rebates Any directly attributable cost incurred to bring the asset to its present working condition Admin. and general overhead charges specifically attributable to construction of a project Cost to be adjusted for exchange fluctuation If acquired in exchange for another asset , the cost is recorded either at FMV or net book value of the asset given up

FIXED ASSETS ACCOUNTING

Cost of fixed assets is affected by two following factors Government grants Borrowing costs

1.
2.

FIXED ASSETS ACCOUNTING

Accounting for Govt. grants Grants related to specific asset 1. The grant is shown as a deduction from the gross value of asset. Where the grant equals the entire cost of the asset , the asset is shown at a nominal value 2. A) Grants related to depreciable asset are treated as deferred income B) Grants related to non-depreciable asset are credited to capital reserve

FIXED ASSETS ACCOUNTING

Borrowing costs Borrowing costs are interest and other costs incurred relating to borrowing of funds. Borrowing costs attributable directly to the acquisition or construction of fixed asset are capitalised. Conditions for capitalisation 1. Borrowing costs are incurred 2. Activities essential to prepare the asset for its intended use are in progress 3. Expenditure for the acquisition or construction of asset is incurred

DEPRECIATION

Definition:- Depreciation is a measure of the wearing out, consumption or other loss of value of a depreciable asset arising from use, effluxion of time or obsolescence through technology and market changes. In other words depreciation is nothing but distribution of total cost of an asset over its useful life.

DEPRECIATION
Significance 1. It represents the charge of a fair proportion of the depreciable amount to P&L account over the useful life of an asset. 2. Depreciable amount is the historical cost or revalued amount of the asset less residual value. 3. It plays a significant role in determining the financial performance of an enterprise. 4. It is charged in each accounting year.

DEPRECIATION
1.

2.

3.

4.

Depreciable Asset means an Asset which Is held by an enterprise for use in the production or supply of goods and services. Is not meant for resale in the ordinary course of business. Is expected to be used during more than one accounting period Has limited useful life.

 1.

DEPRECIATION Methods of Depreciation

Straight Line Method:- Under this method depreciation is charged equally over the useful life of the asset. Formula: Depreciation = Cost of asset- Estimated residual value -----------------------------------------------------Estimated useful life

DEPRECIATION
2. Written down value method:- Under this method depreciation is charged at a fixed rate on the reduced balance of the asset every year. Rate of Estimated residual Depreciation = 1- n value --------------------------Cost of asset

DEPRECIATION
Requirements of Companies Act Sec. 205 and 350 deal with depreciation 1. Sec.205 states that no dividend shall be declared or paid out of profits without providing for depreciation. 2. Depreciation has to be provided a) as provided in sec.350, or b) as arrived at by dividing 95% of the original cost of the asset by the specified period 3. Sec.350 provides that depreciation has to be charged as per schedule XIV to the Companies Act.

DEPRECIATION

1. 2.

3.

Provisions of Income Tax Act Only WDV method is recognised Block of assets method is followed 100% dep. Is allowed if the asset is used for 180 days or more. 50% dep. if used for less than 180days

DEPRECIATION
Consistency Principle It requires that a method of dep. , once adopted , should be applied consistently unless 1. The statute requires the adoption of a new method. 2. It is required to comply the provisions of an accounting standard 3. The change is necessary for a more appropriate preparation and presentation of the financial statements.