Amalgamation Treatment

LESSON 2
ACCOUNTING TREATMENT IN CASE OF AMALGMATION

STRUCTURE
 Objectives
 Meaning and objectives of amalgamation in the nature of merger
 Meaning and objectives of amalgamation in the nature of purchase
 Pooling of interest method for accounting treatment in case of amalgamation in the nature
of merger
 Purchase method for accounting treatment in case of amalgamation in the nature of

purchase
 Entries in the books of transferor
 Entries in the books of transferee
 Preparation of Balance Sheet post merger
 Summary
 Suggested readings
 Model questions
OBJECTIVES
After reading this lesson, you should be able to:
 Understand the meaning and objectives of amalgamation in the nature of merger, and
amalgamation in the nature of purchase.
 Learn the accounting treatment under pooling of interest method.
 Know about accounting treatment as per purchase method
 Understand entries in the books of transferor
 Learn about entries in the books of transferee.
 Understand the preparation of balance sheet post merger.
AMALGAMATION IN THE NATURE OF MERGER

As per AS-14, Amalgamation in the nature of merger is an amalgamation which satisfies all the following
conditions :
(i) Transfer of All Assets and Liabilities : All the assets and liabilities of the transferor company become,
after amalgamation, the assets and liabilities of the transferee company.
(ii) Atleast 90% of the Holders Remain the Same : Shareholders holding not less than 90% of the face value
of the equity shares of the transferor company become equity shareholders for the transferee company by virtue
of the amalgamation
(iii) Discharge of Purchase Consideration in Shares Only: The consideration for the amalgamation
receivable by those equity shareholders of the transferor company who agree to become equity shareholders of
the transferee company is discharged by the transferee company wholly by the issue of equity shares in the
transferee company. Cash may be paid in respect of any fractional shares to be issued.
(iv) Same Business to be Continued : The same business of the transferor company is intended to be carried
on, after the amalgamation, by the transferee company.
(v) No Adjustment in Book Value of Assets and Liabilities: No adjustment is intended to be made to the
book values of the assets and liabilities of the transferor company when they are incorporated in the financial
statements of the transferee company except to ensure uniformity of accounting policies.
In this type of amalgamation, there is genuine pooling of assets and liabilities of combining entities. In
addition, equity shareholders of the combining entities continue to have a proportionate share in the combined
entity. The objective of the accounting treatment of such amalgamation is to ensure that the resultant figures of
assets, liabilities, capital and reserves more or less represent the sum of the relevant figures of the amalgamating
companies.
ACCOUNTING TREATMENT
THE POOLING OF INTERESTS METHOD
This method is followed in case of an amalgamation in the nature of merger. The following are
the features of the Pooling of Interest Method:
(i) Recording of Assets and Liabilities: In this method, the assets and liabilities of the transferor
company will be taken over by the transferee company at existing carrying amounts (Book Values)
unless any adjustment is required due to different accounting policies followed by these companies.
(ii) Taking Over of Reserves: All reserves of the transferor company will be taken over by the
transferee company at existing carrying amounts and are incorporated in the financial statements of
the transferee company.
(iii) Difference between Purchase Consideration and Share Capital: In pooling of interest method,
the difference between the amount recorded as share capital issued (plus any additional consideration in
the form of cash or other assets) and the amount of share capital of Transferor Company is adjusted in
reserves.
AMALGAMATION IN THE NATURE OF PURCHASE
Amalgamation may be considered in the nature of purchase when any one or more of the five
conditions specified for amalgamation in the nature of merger is not satisfied. Suppose A Ltd.
acquires the business of B Ltd. with no intention to continue such business, it is purchase and not
merger. Similarly shareholders of B Ltd. holding 90% of the share capital do not become
shareholders of A Ltd. The amalgamation is only in the nature of purchase.
This category includes those amalgamations in which one company acquires another company
and, as a consequence, the shareholders of the company which is acquired normally do not continue
to have a proportionate share in the equity of the combined company, or the business of the company
which is acquired is not intended to be continued. Such amalgamations are amalgamations in the
nature of ‘purchase’.
ACCOUNTING TREATMENT
THE PURCHASE METHOD
This method is followed in case of an amalgamation in the nature of purchase. The following are
the features of the Purchase Method:
(i) Recording of Assets and Liabilities: The assets & liabilities of the transferor company are
incorporated at their existing carrying amounts.
(ii) Allocation of Purchase Consideration: The purchase consideration is allocated to individual
identifiable assets & liabilities on the basis of their fair values at the date of amalgamation.
(iii) Taking Over of Reserves: No reserves, other than statutory reserves, of the transferor company
are incorporated in the financial statements of the transferee company.
(iv) Taking Over of Statutory Reserves: Statutory reserves of the transferor company are
incorporated in the balance sheet of the transferee company by way of the following journal entry :
Amalgamation Adjustment Account Dr.
To Statutory Reserves (Individual names) Account
(v) Disclosure of Amalgamation Adjustment Account: The Amalgamation Adjustment Account is
disclosed as a part of Miscellaneous Expenditure in the balance sheet. When the above statutory
reserves are no longer required to be maintained by the transferee company, such reserves are eliminated
by reversing the above entry.
(vi) Difference between Purchase Consideration and Net Assets: In purchase method, any excess
of the amount of the purchase consideration over the net assets of the transferor company acquired by the
transferee company is recognized in the transferee company’s books of account as goodwill arising on
amalgamation. If the amount of the consideration is lower than the value of net assets acquired, the
difference is credited to capital reserve.
(vii) Amortization of Goodwill: The goodwill so created is amortized over its useful life. This will
be normally written off over a period of five years unless a longer period is justified.
Illustration 1
The following is the balance sheets of X Ltd. & Y Ltd. as on 31st March, 2016 :
(` in ’000)
Liabilities X Ltd. Y Ltd. Assets X Ltd. Y Ltd.

` ` ` `
Equity Shares Capital 4,000 1,500 Fixed Assets 5,500 2,365
(` 10 each) Current Assets 2,000 985
15% Preference Share Capital – 500

(` 100 each)
General Reserve 2,305 490
Statutory Reserve 195 63
Profit & Loss Account 281 177
10% Debentures – 125
Current Liabilities 719 495
7,500 3,350 7,500 3,350
On 1st April, 2016, X Ltd. takes over Y Ltd. on the following terms :
(a) X Ltd. will issue 1,75,000 equity shares of ` 10 each at par to the equity shareholders of Y Ltd.
(b) X Ltd. will issue 5,500, 12% Preference Shares of ` 100 each at par to the preference shareholders of Y
Ltd.
(c) The debentures of Y Ltd. will be converted into an equal number of 12% debentures of the same value.
You are informed that the statutory reserves of Y Ltd. are to be maintained for three more years. You are
required to show the balance sheet of X Ltd. immediately after the above mentioned scheme of amalgamation
assuming that:
1) the amalgamation is in the nature of merger
2) the amalgamation is in the nature of purchase
Solution.
a) In case of amalgamation in the nature of merger
Balance Sheet of X Ltd.
As on Ist April, 2016
Particulars Note No. Amount
`
EQUITY AND LIABILITIES

1. Shareholders’ Funds
(a) Share Capital
Equity Share Capital 5,750
12% Preference Share Capital 550
(b) Reserves and Surplus
General Reserve 2,495
Statutory Reserve 258
Profit and Loss 458
2. Non-current Liabilities
(a) Long-term Borrowings Secured
12% Debentures 125
3. Current Liabilities 1,214
10,850
ASSETS
1. Non-current Assets :
Fixed Assets 7,865
2. Current Assets 2,985
Working Notes :
` in ’000
X Ltd.’s General Reserve 2,305
Add : Y Ltd.’s General Reserve 490
2,795
Less : Difference between purchase consideration
and share capital issued
Purchase Consideration (1,750 + 550) 2,300
Less : Share Capital of Y Ltd. (1,500 + 500) 2,000 300
Balance to be shown in the Balance Sheet 2,495
(B) Purchase Consideration

Share capital issued to Equity Shareholders of Y Ltd. 1,750
Share capital issued to Preference Shareholders of Y Ltd. 550
2,300
(b) In case, the amalgamation is in the nature of purchase
Balance Sheet of X Ltd.
As on April 1, 2014
`
(a) Share Capital
12% Preference Share Capital 550
Capital Reserve 430
General Reserve 2,305
Statutory Reserve 258
Profit and Loss 281
2. Non-current Liabilities
(a) Long Term Borrowings
Secured :
12% Debentures 125
3. Current Liabilities 1,214
10,913
ASSETS
(a) Fixed Assets 7,865
(b) Other Non-Current Assets
Amalgamation Adjustment Account 63
2. Current Assets 2,985
10,913
Working Notes :
Calculation of Capital Reserve arising on Amalgamation
(A) Net Assets taken over ` (’000)
Fixed Assets 2,365

Current Assets 985
3,350
Less : Liabilities taken over :
12% Debentures 125
Current Liabilities 495 620
2,730
(B) Purchase Consideration

To Equity Shareholders of Y Ltd. 1,750
To Preference Shareholders of Y Ltd. 550
2,300
Capital Reserve = Value of Net Assets taken over – Purchase Consideration

= ` 2,730 – ` 2,300 = ` 430 (in ’000)
JOURNAL ENTRIES
Journal entries can be studied into two parts:–
(i) Books of Transferor (vendor) company
(ii) Books of Transferee (purchasing) company
BOOKS OF TRANSFEROR (VENDOR) COMPANY

After amalgamation, the books of transferor companies are required to be closed. For this purpose Realisation
account is prepared to calculate profit or loss on account of merger. This profit or loss is transferred to equity
shareholders’ account. Following entries are required to be made to close the books of the transferor company.
1. FOR TRANSFER OF ALL ASSETS:
Realisation Account Dr.
To Sundry Assets Account
The following points should be kept in mind while passing the above entry.
(a) Assets to be transferred at their book values.
(b) All assets have to be transferred.
(d) If there is a provision against an asset, such an asset is transferred to Realisation Account at gross figure
and related Provision Account is transferred on the credit side of Realisation Account by means of
another entry.
(e) Goodwill, Patents and Trademarks, etc. are also transferred to Realisation Account.
(f) Fictitious assets such as debit balance of Profit and Loss Account, Preliminary expenses, etc. will not be
transferred.
2. FOR TRANSFER OF ALL LIABILITIES:
Sundry Liabilities Accounts (Individually) Dr. With Book Values
To Realisation Account
The following points should be kept in mind while passing the above entry.
(b) Items in the nature of specific provisions or funds denoting liability are to be transferred to Realisation
Account. For example: Employees’ Provident Fund, Provision for Taxation, Pension Fund, Provision
for Bad debts, Provision for Depreciation etc.
(c) Items representing “Reserves” like Dividend Equalisation Fund, Profit and Loss Account (Credit),
Workmen Compensation/Accident Fund (if no liability exists), etc. are not to be transferred to
Realisation Account.
(d) If there is a liability for compensation to workmen, then Workmen Compensation/Accident Fund (to
the extent of liability) should be transferred to Realisation Account.
3. FOR PURCHASE CONSIDERATION DUE:
Transferee Company Dr.
To Realisation Account
(With the amount of purchase consideration)
4. FOR RECEIPT OF PURCHASE CONSIDERATION:
Shares in the Transferee Company Account Dr.
Debentures in the Transferee Company Account Dr.
Bank Account Dr.
To Transferee Company
(The shares and debentures are to be recorded at the price at which they have been received from the transferee
company)
5. FOR LIQUIDATION EXPENSES :

There can be two situations:
(a) The transferor company may have to meet the liquidation expenses. In such a case, the entry will be :
To Bank Account
(b) The transferee company may agree to reimburse the transferor company to the extent of liquidation
expenses incurred by it. In such a case, the following entries will be passed:
(i) On payment of liquidation expenses:
Transferee Company Dr.
To Bank Account
(ii) On reimbursement from the transferee company:
Bank Account Dr.
To Transferee Company
Alternatively, no entry may be passed in the books of the transferor company. However, this is not
advisable.
6. FOR MONEY DUE TO PREFERENCE SHAREHOLDERS:

Preference Share Capital Account Dr.
Realisation Account Dr. (In case preference shareholders are paid more
than their paid up capital)
To Preference Shareholders Account
(In case preference shareholders are paid less than what is due to them as per the books of the transferor
company, then this profit will be credited to Realisation account.
7. FOR PAYMENT TO PREFERENCE SHAREHOLDERS:

Preference Shareholders Account Dr.
To Bank/Shares in the Transferee Company
8. FOR TRANSFER OF PROFIT ON REALISATION:

To Equity Shareholders Account
Note: In case of loss the entry will be reversed.
9. FOR TRANSFER OF EQUITY SHARE CAPITAL, RESERVES ETC. TO EQUITY SHAREHOLDERS’

ACCOUNT :
Equity Share Capital Account Dr.
General Reserve Account Dr.
Accumulated Funds/Profits Account Dr.
To Equity Shareholders Account
10. FOR TRANSFER OF FICTITIOUS ASSETS:
Equity Shareholders Account Dr.
To Profit and Loss Account (Debit balance)
To Preliminary Expenses Account
To Expenses on Issue of Shares Account etc.
11. FOR PAYMENT TO EQUITY SHAREHOLDERS:
Equity Shareholders Account Dr.
To Shares in Transferee Company
To Bank Account
NOTE: STUDENTS MUST NOTE THAT ENTRIES IN THE BOOKS OF TRANSFEROR COMPANY ARE SAME
WHETHER AMALGMATION IS IN THE NATURE OF MERGER OR PURCHASE.
BOOKS OF TRANSFEREE (PURCHASING) COMPANY

Accounting treatment in the books of Transferee Company is regulated and governed by the mandatory
guidelines stated in AS – 14. The accounting for amalgamations in the natue of merger is done as per POOLING
OF INTEREST METHOD in the books of Transferee Company:
a)POOLING OF INTERESTS METHOD

1. PURCHASE CONSIDERATION DUE:
Business Purchase Account Dr.
To Liquidator of Transferor (Vendor) Co.
(With the amount of purchase consideration)
2. ACQUISITION OF ASSETS & LIABILITIES OF THE TRANSFEROR COMPANY :
All Sundry Assets Accounts Dr. (at their book values)
(Individually)
To All Sundry Liabilities Account (at their book values)
(Individually)
To Profit & Loss Account (at its book balance)
To All Reserves Accounts (with the book balances)
(Individually)
To Business Purchase Account (with the purchase consideration)
Note : The difference in debits and credits, if any, especially on account of net payment method
or lump sum payment method is adjusted in the reserves in the financial statements of the
transferee company.
3. PAYMENT OF PURCHASE CONSIDERATION:

Liquidator of Transferor Company Account Dr.
To Share Capital Account
To Debentures Account
To Bank Account
In case the shares have been issued at premium, the relevant premium account should be credited.
4. LIQUIDATION EXPENSES OF TRANSFEROR COMPANY BORNE BY TRANSFEREE COMPANY:

Profit & Loss Account/Reserve Account Dr.
To Bank Account
5. FORMATION EXPENSES OF THE TRANSFEREE COMPANY IF MARGER RESULTS IN THE
FORMATION OF A NEW COMPANY:
Preliminary Expenses Account Dr.
To Bank Account
(b) THE PURCHASE METHOD

Transferee company is required to pass the following entries :
1. FOR PURCHASE OF BUSINESS
Business Purchases Account Dr.
To Liquidators of Transferor Company Account
(With the purchase consideration due)
2. FOR ASSETS AND LIABILITIES TAKEN OVER
Assets Account Dr.
To Liabilities Account
To Business Purchases Account
Notes : (Assets are to be debited individually at revalued (fair) values or book values. Liabilities are also to be
credited individually at agreed values. If the credit is more then debit, the difference will be debited to Goodwill
Account. If the debit is more then the credit, the difference will be credited to Capital Reserve Account)
3.FOR PAYMENT OF PURCHASE CONSIDERATION
Liquidators of Transferor Company Account Dr.
To Securities Premium Account
To Bank Account
(In case the shares or debentures have been issued at premium, the relevant premium account should be
credited)
4. WHEN STATUTORY RESERVES SUCH AS DEVELOPMENT REBATE RESERVE, INVESTMENT
ALLOWANCE RESERVES ETC. ARE MAINTAINED :
To Statutory Reserves Account
5. FOR LIQUIDATION EXPENSES :
The entry of liquidation expenses, when payable by the transferee company, is as follows :
(i) If the transferee agrees to pay a fixed amount by way of liquidation expenses to the transferor company.
In such a case the amount of liquidation expenses will be included in the purchase consideration and no
separate entry will be required
(ii) If the transferee company agrees to reimburse the transferor company to the extent of liquidation
expenses. In such a case the amount of liquidation expenses will not be included in the amount of
purchase consideration. The following entry will be passed separately on payment of such expenses :
Goodwill / Capital Reserve Account Dr.
To Bank Account
(The amount of liquidation expenses will be debited to goodwill or capital reserve account, as obtained under
entry (2) discussed above. )
6. FORMATION EXPENSES OF THE TRANSFEREE COMPANY :
Preliminary Expenses Account Dr.
To Bank Account
7.IN CASE, THERE ARE BOTH GOODWILL AND CAPITAL RESERVE ACCOUNT, GOODWILL
MAY BE SET OFF AGAINST CAPITAL RESERVE :
Capital Reserve Account Dr. (with the amount of goodwill)
To Goodwill Account
Note : Capital Reserve Account & Goodwill Account should not appear simultaneously in the
balance sheet.
8. PAYMENT OF A LIABILITY (e.g., DEBENTURES) OF TRANSFEROR COMPANY :
Liability Account Dr.
To Bank Account
Note : In case shares/debentures are issued at a premium or discount, then the relevant premium
account or discount account should be credited or debited as the case may be.
Illustration2:
The balance sheets of X Ltd. and Y Ltd. as on 30th June, 2015 were as follows :
Liabilities X Ltd. Y Ltd. Assets X Ltd. Y Ltd.
` ` ` `
Share Capital : Goodwill – 700
5,000 Preference shares of 5,000 – Patents 2,000 –
` 1 each Land & Buildings 14,000 –
Equity shares of ` 10 each 15,000 5,000 Plant & Machinery 15,000
Investment Allowance Reserve 3,000 1,200 Motor Vehicles 1,500 2,500

General Reserve 8,000 – Furniture 700 250
Profit & Loss Account 6,000 2,000 Investments 1,100 –
Creditors 500 200 Stock 2,000 2,700
Debtors 800 1,650
Bank 400 600
37,500 8,400 37,500 8,400
A new company XY Ltd. was formed to acquire the assets & liabilities of X Ltd. & Y Ltd. The terms of
acquisition of business were as under ;
(a) XY Ltd. to have an Authorised Capital of ` 50,000 divided into 4,000 Equity shares of ` 10 each &
10,000, 12% Preferences shares of ` 1 each.
(b) Business of X Ltd. was valued at ` 40,000 and settlement was made by issue of 2,000 equity shares at `
20 each.
(c) Business of Y Ltd. was valued at ` 10,000 to be satisfied by issue of 500 equity shares at ` 20 each.
(d) XY Ltd. made a public issue of 6,000, 12% Preference shares of ` 1 each at par and 1,000 equity shares at
` 20 each.
(e) Cost of formation of XY Ltd. amounted to ` 560.
( f ) Cost of liquidation of X Ltd. amounted to ` 105 and Y Ltd. ` 54 and the same was paid by XY Ltd.
Give opening journal entries in the books of XY Ltd. and prepare the Balance Sheet assuming :
(1) The Amalgamation in the nature of Merger.
(2) The Amalgamation in the nature of Purchase.
Solution.
1. Amalgamation in the nature of Merger
Books of XY Ltd.
JOURNAL ENTRIES
Date Particulars Debit Credit
Amount Amount
` `
1. Business Purchases Account Dr. 50,000
To Liquidator of X Ltd. 40,000
To Liquidator of Y Ltd. 10,000
(Being purchase consideration due)
2. Goodwill Account Dr. 700
Patents Account Dr. 2,000
Land & Building Account Dr. 14,000
Plant & Machinery Account Dr. 15,000
Motor Vehicles Account Dr. 4,000
Furniture Account Dr. 950
Investments Account Dr. 1,100
Stock Account Dr. 4,700
Debtors Account Dr. 2,450
Bank Account Dr. 1,000
Profit & Loss Account Dr. 9,000
To Creditors Account 700
To Investment Allowance Reserve Account 4,200
To Business Purchases Account 50,000
(Being transfer of assets, liabilities reserves etc. and the
differences between purchase consideration & share capitals
of X Ltd. & Y Ltd. adjusted against Profit & Loss Account)
3. Liquidator of X Ltd. Dr. 40,000
Liquidator of Y Ltd. Dr. 10,000
To Equity Share Capital Account 25,000
To Securities Premium Account 25,000
(Being discharge of purchase consideration by issue of 2,500
equity shares of ` 10 each at ` 20 per share)
4. Profit & Loss Account Dr. 159

To Bank Account 159
(Being liquidation expenses of X Ltd. & Y Ltd. paid)
5. Preliminary Expenses Account Dr. 560
To Bank Account 560
(Being formation expenses paid)
6. Bank Account Dr. 26,000
To Equity Share Application Account 20,000
To Preference Share Application Account 6,000
(Being application money received for 1,000 equity shares of
` 10 each at ` 20 and 6,000 preference shares of ` 1 each)
7. Equity Share Application Account Dr. 20,000

Preference Share Application Account Dr. 6,000
To 12% Preference Share Capital Account 6,000
(Being allotment of equity & preference shares)
Balance Sheet of XY Ltd.
As on July 1, 2015
`
(a) Share Capital 1 41,000
Securities Premium 35,000
Investment Allowance Reserve 4,200
Profit and Loss (Debit)(9000+159) (9,159) 30,041
2. Current Liabilities
(a) Trade Payables
Sundry Creditors 700
71,741
ASSETS
(a) Fixed Assets
(i) Tangible Assets 2 33,950
(ii) Intangible Assets :
Goodwill 700
Patents : 2,000
(b) Non-current Investments 1,100
(c) Other Non-current Assets
Preliminary Expenses 560
2. Current Assets
(a) Inventories :
Stock 4,700
(b) Trade Receivables
Debtors 2,450
(c) Cash and Cash Equivalents :
Cash at Bank 26,281
71,741
Note No. 1 Share Capital
Authorised
4,000 Equity Shares of ` 10 each 40,000
10,000 12% Preferences Shares of ` 1 each 10,000
50,000
Issued, Subscribed and Paid-up Capital
6,000 12% Preference Shares of ` 1 each 6,000
41,000
Note No. 2. Tangible Assets
Land and Building 14,000
Plant and Machinery 15,000
Furniture 950
Motor Vehicles 4,000
33,950
Working Notes :
The balance in the Profit & Loss Account at the time of taking over of assets, liabilities & reserves has been
arrived as follows :
`
General Reserve :
X Ltd. 8,000
Y Ltd. NIL 8,000
Profit & Loss Account :
X Ltd. 6,000
Y Ltd. 2,000 8,000
16,000
Less :Difference in purchase consideration and share capital of transferor companies
Purchase Considerations :
X Ltd. 40,000
Y Ltd. 10,000 50,000
Less : Share Capital :
X Ltd. (15,000 + 5,000) 20,000
Y Ltd. 5,000 25,000 25,000
Profit & Loss Account to be debited (9,000)
2. When the Amalgamation is in the nature of Purchase
Books of XY Ltd.
JOURNAL ENTRIES
Date Particulars Debit Amount Credit Amount
` `
Business Purchases Account Dr. 50,000
To Liquidator of X Ltd. 40,000
To Liquidator of Y Ltd. 10,000
(Being purchase consideration due)
Patents Account Dr. 2,000
Land & Building Account Dr. 14,000
Plant & Machinery Account Dr. 15,000
Motor Vehicles Account Dr. 4,000
Furniture Account Dr. 950
Investments Account Dr. 1,100
Stock Account Dr. 4,700
Debtors Account Dr. 2,450
Goodwill Account (Balancing figure) Dr. 5,500
To Creditors Account 700
To Business Purchases Account 50,000
(Being incorporation of various assets & liabilities from X
Ltd. & Y Ltd. & balancing figure being debited to goodwill)
Amalgamation Adjustment Account Dr. 4,200
To Investment Allowance Reserve Account 4,200
(Being incorporation of investment allowance reserve)
Liquidator of X Ltd. Dr. 40,000
Liquidator of Y Ltd. Dr. 10,000
(Being discharge of purchase consideration by issue of 2,500
equity shares of ` 10 each at ` 20 per share)
Goodwill Account Dr. 159
To Bank Account 159
(Being liquidation expenses of X Ltd. & Y Ltd. paid)
Preliminary Expenses Account Dr. 560
To Bank Account 560
(Being formation expenses paid)
To Equity Share Application Account 20,000
To Preference Share Application Account 6,000
(Being application money received for 1,000 equity shares of
` 10 each at ` 20 and 6,000 preference shares of ` 1 each)
Equity Share Application Account Dr. 20,000
(Being allotment of equity shares at a premium)
Preference Share Application Account Dr. 6,000
To 12% Preference Share Capital Account 6,000
(Being allotment of preference share at par)
Balance Sheet of XY Ltd.
As on July 1, 2015
`

(a) Share Capital 1 41,000
Securities Premium 35,000
Investment Allowance Reserve 4,200 39,200
2. Current Liabilities
(a) Trade Payables
Sundry Creditors 700
80,900
ASSETS
(a) Fixed Assets
(i) Tangible Assets 2 33,950
(ii) Intangible Assets :
Goodwill 5,659
Patents 2,000
(b) Non-current Investments 1,100
(c) Other Non-current Assets
Preliminary Expenses 560
Amalgamation Adjustment Account 4,260
2. Current Assets
(a) Inventories :
Stock 4,700
(b) Trade Receivables
Debtors 2,450
(c) Cash and Cash Equivalents :
Cash at Bank 26,281
80,900
Note No. 1 Share Capital
`
Authorised
10,000 12% Preferences Shares of ` 1 each 10,000
50,000
Issued, Subscribed and Paid-up Capital
6,000 12% Preference Shares of ` 1 each 6,000
41,000
Note No. 2. Tangible Assets
Land and Building 14,000
Furniture 950
Motor Vehicles 4,000
33,950
Tutorial Note :
Students should note that if an examination problem is silent about whether the
amalgamation is in the nature of merger or in the nature of purchase, they should consider the
amalgamation in the nature of purchase, & solve the problem accordingly.
Illustration 3.
The following is the Balance Sheet of Sony Limited
Liabilities ` Assets `
Equity Share Capital : Goodwill 20,000
10,000 shares of ` 10 each 1,00,000 Fixed Assets 82,500
Profit & Loss Account 35,000 Current assets 97,500

15% Debentures 50,000
Creditors 15,000
2,00,000 2,00,000
The Bony Limited agreed to take over assets at 10% less than book value (excepting goodwill, one fixed asset
valued at ` 20,000 and cash ` 5,000 included in the balance sheet above).
The Bony Limited agreed to pay ` 30,000 for goodwill and to discharge the trade creditors and debentures.
The purchase consideration was to be discharged by the issue of 10,000 shares of ` 10 each ` 8 called up at
market value of ` 10 per share and the balance in cash. Cost of liquidation amounted to
` 2000.
You are required to (a) calculate purchase consideration (b) give journal entries to close the books of Sony
Limited and (c) give journal entries and the Balance Sheet of Bony Limited,
Solution.
Working Note :
(1) Purchase consideration : – (As per AS – 14) `
Fixed assets 82,500

Less : One fixed asset not taken over 20,000
62,500
Less : 10% of Book Value 6,250
56,250
Add : Goodwill 30,000
86,250
Current Assets 97,500
Less : Cash (Not taken over) 5,000
92,500
Less : 10% of the book value 9,250 83,250
Value of assets taken over 1,69,500
Less : liabilities taken over :
Creditors 15,000
Debentures 50,000 65,000
Purchase Consideration 1,04,500
(2) Discharge of purchase consideration :–
Total purchase consideration 1,04,500
Less : 10,000 shares ` 8 called up issued at market price of ` 10 each (10,000  10) 1,00,000
Balance payable in Cash 4,500

JOURNAL
Dr. Cr.
` `
Realisation Account Dr. 1,75,000
To Goodwill 20,000
To Fixed Assets 62,500
To Current Assets 92,500
[Being assets taken over by Bony Ltd. transferred at book
value to the realisation account]
Creditors Dr. 15,000
15% Debentures Account 50,000
To Realisation Account 65,000
[Being creditors & debentures taken over transferred to
realisation account]
Bony Ltd. Dr. 1,04,500
To Realisation Account 1,04,500
[Being Bony Ltd.’s Account debited with purchase
consideration as per agreement]
Shares in Bony Ltd. Dr. 1,00,000
Cash Account Dr. 4,500
To Bony Ltd. 1,04,500
[Being the receipt of purchase consideration]
Cash Account Dr. 20,000
To Fixed Assets 20,000
[Being amount realised on sale of fixed asset not taken over
by the purchasing company.]
Realisation Account Dr. 2,000
To Cash Account 2,000
[Being cost of liquidation charged to realisation account]
Equity Shareholders Account Dr. 7,500
To Realisation Account 7,500
[Being loss on realisation debited to equity shareholder]
Equity Share Capital Account Dr. 1,00,000
Profit and Loss Account Dr. 35,000
To Equity Shareholders Account 1,35,000
[Being equity share capital and profit as per balance sheet
credited to equity shareholder account]
Equity Shareholders Account Dr. 1,27,500
To Shares in Bony Ltd. 1,00,000
[Being equity shareholders claim satisfied by giving the cash
& shares of Bony Ltd. in final settlement]
Books of Sony Ltd.

Realisation Account
` `
To Goodwill 20,000 By 15% Debenture Account 50,000
To Fixed Assets (82,500 – 20,000) 62,500 By Creditors 15,000
To Current Assets (97,500 – 5,000) 92,500 By Bony Ltd. (Purchase Consideration) 1,04,500
To Cash (expenses) 2,000 By Equity Shareholders Account 7,500
(Loss)
1,77,000 1,77,000
Bony Limited Journal
Dr. ` Cr. `
Business Purchase Account Dr. 1,04,500
To Liquidators of Sony Ltd. 1,04,500
[Being purchase price agreed for the purchase of Sony’s
business]
Goodwill Account (B.F.) Dr. 30,000
Fixed Assets Dr. 56,250
Current Assets Dr. 83,250
To Creditors 15,000
To 15% Debentures in Sony Ltd. 50,000
To Business Purchase Account 1,04,500
[Being various assets and liabilities taken over]
Liquidators of Sony Ltd. Dr. 1,04,500
To Share Capital Account 80,000
To Share Premium Account 20,000
[Being discharge of purchase consideration by cash ` 4,500 and
10,000 shares @ ` 8 per share paid up issue @ ` 10 per share ` 2
per share credited to premium]
Illustration 4.
A Limited and B Limited carrying on similar business decided to amalgamate and for the purpose a new
company AB Limited being formed to take over assets and liabilities of both companies and it is agreed that fully
paid equity shares of ` 50 each shall be issued by the Vee Kay Limited to the value of net assets of each of the old
companies.
Balance Sheet of A Limited
as at 31st March, 2014
Share Capital (` 10 share) 75,000 Goodwill 7,500
General reserve 30,000 Land & Building 25,500

Profit & Loss 4,500 Plant & Machinery 36,000
Sundry Creditors 6,000 Stock 15,000
Bills payable 6,000 Debtors 18,000
Furniture & Fittings 7,500
Cash at Bank 12,000
1,21,500 1,21,500
Balance Sheet of B Limited
as at 31st March, 2014
Share Capital (` 10 share) 60,000 Goodwill 3,000
Bank Overdraft 12,000 Land & Building 15,000

Sundry Creditors 12,000 Plant & Machinery 24,000
Stock 11,250
Furniture & Fittings 11,250
Debtors 10,500
Cash 450
Profit & Loss Account 8,550
84,000 84,000
The following is the accepted scheme of valuation of the business of the two companies :
A Limited
(a) to provide for reserve for bad debts @ 5% on debtors.
(b) to write off ` 600 from stock, and
(c) to write off one-third from plant & machinery.
B Limited
(a) to eliminate its goodwill and profit & loss account balance.
(b) to write off bad debts to the extent of ` 1,500 and to provide reserve of 5% on the balance of the debtors ;
(c) to write down plant & machinery @ 10% ; and
(d) to write off ` 2,100 from the value of stock.
You are required to compute purchase consideration, give the opening entries in the books of AB Limited and
its present balance sheet.
Solution.
Computation of Purchase Consideration of A Ltd. and B Ltd.
A Ltd. B Ltd.
Value of Assets taken over : ` `
Goodwill 7,500 ––
Land and Building 25,500 15,000
Plant and Machinery 24,000 21,600
Furniture and Fittings 7,500 11,250
Stock 14,400 9,150
Debtors 17,100 8,550
Cash 12,000 450
1,08,000 66,000
Less : Liabilities assumed
Creditors 6,000 12,000
Bills Payable 6,000 ––
Bank overdraft –– 12,000
96,000 42,000
Books of AB Ltd.
Journal
` `
Business Purchases Account Dr. 1,38,000
To Liquidators of A Ltd. 96,000
To Liquidators of B Ltd. 42,000
[Being purchase of A Ltd. and B Ltd.’s business]
Goodwill Account Dr. 7,500
Land and building Account Dr. 40,500
Plant and Machinery Account Dr. 45,600
Furniture and Fitting Account Dr. 18,750
SUMMARY
AS – 14 divides amalgamation into two categories for accounting purposes. In the first category are
those amalgamations where there is a genuine pooling not merely of the assets and liabilities of the
amalgamating companies but also of the shareholders’ interests and of the businesses of these companies.
Such amalgamations are amalgamations which are in the nature of ‘merger’ and the accounting treatment
of such amalgamations should ensure that the resultant figures of assets, liabilities, capital and reserves
more or less represent the sum of the relevant figures of the amalgamating companies. In the second
category are those amalgamations which are in effect a mode by which one company acquires another
company and, as a consequence, the shareholders of the company which is acquired normally do not
continue to have a proportionate share in the equity of the combined company, or the business of the
company which is acquired is not intended to be continued. Such amalgamations are amalgamations in
the nature of ‘purchase’. There are two main methods of accounting for amalgamations: (a)the pooling of
interests method ; and (b) the purchase method
SUGGESTED READINGS
 R. L. Gupta and Radhaswamy, Advanced Accountancy, Volume II, Sultan Chand and Sons, New
Delhi.
 Maheshwari and Maheshwari, Advanced Accountancy, Volume II, Vikas Publishing House, New
Delhi
 Shukla, Grewal and Gupta, Advanced Accounts, Volume II, S Chand and Company, New Delhi
 Tulsian, P.C., Corporate Accounting, Tata McGraw Hill Education Pvt. Ltd., New Delhi
MODAL QUESTIONS.
1. What is the difference between amalgamation in the nature of merger and amalgamation in the
nature of purchase?
3. What do you mean by “The Pooling of Interest Method” ?
4. What do you mean by “The Purchase Method” ?
5. Distinguish between “The Pooling of Interest Method” and “The Purchase Method”
6. Given below are the balance sheets of Major Ltd. and Minor Ltd. as on 31-3-2014. Minor Ltd. was merged
with Major Ltd. as on 1-4-2014 :
Balance Sheet
as on 31-3-2014
Major Ltd. Minor Ltd.
` `
Share Capital :
Equity shares of ` 10 each 2,00,000 1,20,000
General Reserve 80,000 40,000

Profit & Loss Account 40,000 30,000
Export Profit Reserve 32,000 16,000
12% Debentures 48,000 50,000
Trade Creditors 40,000 24,000
Provision for Taxation 40,000 20,000
Proposed Dividend 48,000 24,000
5,28,000 3,24,000
Sundry Fixed Assets 2,40,000 1,60,000
Non-trade Investments 60,000 40,000
Current Assets :
Stocks 80,000 60,000
Debtors 80,000 40,000
Bank Balance 60,000 24,000
Preliminary Expenses 8,000 –
5,28,000 3,24,000
Other Information :
(1) Major Ltd. would issue sufficient number of debentures at par to the debentureholders of Minor Ltd.
(2) For every share of Minor Ltd., Major Ltd., would issue one share at a premium of ` 2 per share.
You are required to prepare the balance sheet of Major Ltd. after merger assuming it to be in the nature of
purchase.
LESSON 2
LIQUIDATOR’S FINAL STATEMENT OF ACCOUNT
STRUCTURE
 Objectives
 Liquidator’ s Final Statement of Account
 Steps in the preparation of Liquidator’ s Final Statement of Account
 Liquidator’s remuneration
 Loss to equity shareholders
 Receiver for Debentureholders
 Liability of B list of contributories
 Summary
 Model questions
OBJECTIVES
 Understand the meaning and objectives of preparing Liquidator’s Final Statement of Account
 Learn about methods of calculating liquidator’s remuneration
 Know about the appointment of Receiver for Debentureholders
 Understand about B list of contributories and how to determine their liability

In case of winding up of a company (whether compulsory or voluntary) liquidator is appointed to take
charge of all the assets of the company, realise them and distribute the proceeds among different
categories of claimants in the order specified in the Companies Act 2013. Liquidator has to prepare a
Statement of Account at the end of winding up to be submitted to the court- (in case of compulsory
winding up) and to the company (in case of voluntary winding up ). His Statement of Account is basically
a summary of cash book in which he records receipts and disbursements in a particular order.
On the receipt side of the statement, receipts from following sources are recorded:–
1. Amount realised on the sale of assets.
2. Surplus received from secured creditors.
3. Amount received from delinquent directors and other officers of the company.
4. Contributions made by the contributories.
The following is the order in which disbursement will be made by the liquidator:–
1. Secured creditors up to their claim or up to the amount realised by sale of securities held by
them, whichever is less. The creditors themselves may sell the securities, in that case, they will pay to
the liquidator any surplus after meeting their claims.
Note. Students must note that the payment to secured creditors is not shown in the liquidator’s
final statement of account. Only the surplus i.e., the excess of amount realised by sale of securities
over claim of secured creditors will be shown as a receipt irrespective of the fact whether the
security is realised by secured creditors themselves or by the liquidator. If there is any deficiency-
that is when the claims of the creditors are more than the amount realised by sale of securities, will
be added to unsecured creditors.
2. Legal charges
3. Liquidator’s remuneration
4. Cost of winding up.
5. Payment to preferential creditors.
6. Payments to debenture holders and other creditors having floating charge on the assets of the company.
7. Payment to unsecured creditors.
8. Amount paid to the preference shareholders.
9. Amount paid to the equity shareholders.
Note : Students should note that though preferential creditors are paid prior to debenture
holders & other creditors having floating charge on the assets, yet while preparing Liquidator’s
Statement of Account, payment to preferential creditors is shown after the payment to
debenture holders because preferential creditors are basically unsecured creditors.
IMPORTANT POINTS WHILE PREPARING LIQUIDATOR’S FINAL
STATEMENT OF ACCOUNT
1. INTEREST ON LIABILITIES. The amount of interest payable on loans, debentures etc. would
depend upon the fact whether the company is solvent or not. In case of a solvent company, (i.e.,
surplus is left after paying the principal sum and interest on all debts up to the commencement of
winding up) interest in payable upto the date of actual payment. But in case of insolvent company,
interest is payable only upto the date of commencement of the winding up.
2. DIVIDEND ON PREFERENCE SHARES. The treatment of dividend on preference shares can
be explained as follows :
(a) When dividend on preference shares is declared
If dividend on preference shares has been declared, it is to be paid as an outside debt and not as
an arrear of dividend.
(b) When dividend on preferences shares is not declared
When dividend on preferences shares has not been declared, then it will be treated as arrear of
preference dividend and will appear as a contingent liability as a foot note after the balance sheet. If
article of association provides then such arrears will be paid after preference share capital and equity
share capital have been paid in full and surplus is left. Further, the arrears of preference dividend are
payable only if the preference shares are cumulative ones and should be paid only upto the date of
liquidation. The question of arrears of preference dividend does not arise in case of non-cumulative
preference shares.
3. PAYMENT TO PREFERENCE SHAREHOLDERS AND EQUITY SHAREHOLDERS
WHEN EQUITY SHARES ARE PARTLY PAID UP. Equity shareholders are paid only if the
funds are still available after the settlement of all claims of the outsiders and the preference
shareholders. In case the equity shares are partly paid-up and the funds available are not sufficient to
meet the claims of the preference shareholders in full, the liquidator will have to make a call in order
to repay the preference shareholders. In some cases, some shareholders may not pay such calls. Then
if the surplus, after meeting the claims of the preference shareholders in full, is not sufficient for the
refund of equity capital in full, such surplus will be first utilised to return the share capital of those
equity shareholders who have paid the call, till their paid-up capital equals the amount paid up by the
defaulting shareholders. If there is still surplus, it will be distributed equally among all, including the
defaulting shareholders.
4. LOSS TO THE EQUITY SHAREHOLDERS. If the company has equity shares on which
different amount have been paid up, liquidator has to return equity capital in such a manner that loss
per equity share is equal.
5. LIQUIDATOR’S REMUNERATION. Liquidator usually gets commission on assets realised,
on amount paid to unsecured creditors and on amount paid to shareholders. Following points must be
remembered:
(a) Commission on cash & bank balances: In case, liquidator is entitled to remuneration as a
certain percentage of the assets realised, such realisation does not include cash in hand and bank
balances unless otherwise specified.
(b) Assets held as security by fully and partly secured creditors: If the secured creditors
themselves realise the assets held by them as security, then commission will be calculated on the
surplus received from them on these assets. On the other hand, if the assets are disposed off by the
liquidator himself, then commission will be calculated on the total realised value of assets held by
secured creditors.
(c) Commission on payment to unsecured creditors : It is to be remembered that unsecured
creditors also include preferential creditors unless specifically excluded. (i) If amount available
for unsecured creditors is sufficient to make full payment, commission can be calculated as under:–
Unsecured creditors  Rate of commission
Commission =
100
If amount available for unsecured creditors is insufficient, commission can be calculated as under :
Amount available for unsecured creditors  Rate of commission

Commission =
100  Rate of commission
(d) Commission on payment to (equity) shareholders : If commission is payable on payment to (
equity ) shareholders, commission can be calculated as under :–
Amount available before making any
payment to (equity) shareholders
Commission =  Rate of commission
100 + Rate of commission
Liquidator’s Statement of Account

of …… Co. Ltd.
Receipts ` Payments `
Assets Realised Legal charges
Cash at Bank Liquidators remuneration

Cash in hand Debentureholders and others
having
…………… floating charge on the assets of

the
…………… company
…………… Preferential Creditors
Land & Building Unsecured Creditors
Preference shareholders
Surplus from secured Equity shareholders

creditors
Calls received from

contributories
NOTE: The surplus left after paying equity share capital must be distributed
among the equity shareholders alone unless preference shareholders are
participating preference shareholders.
Illustration 1
ABC Ltd. went into liquidation with following liabilities :
(a) Secured creditors 20,000 (securities realised ` 25,000)
(b) preferential creditors ` 6,000
(c) unsecured creditors ` 30,800
Liquidation expenses ` 252. The liquidator is entitled to a remuneration of 3% on assets realised
(including securities realised) and 2% on the amount distributed to unsecured creditors except
preferential creditors. The various assets (excluding securities) realised ` 26,000.
Prepare liquidator’s final statement of Account.

Solution :
To Assets Realised 26,000 By Liquidator’s remuneration

To Surplus from secured 3% on (26,000 + 1,530
creditors 5,000 25,000) 455 1,985
(25,000 – 20,000) 2% on 22,763
By Liquidation expenses 252
By Preferential creditors 6,000
By Unsecured creditors 22,763
31,000 31,000
Working Note:–
Commission on unsecured creditors :
Balance amount after paying preferential creditors = ` 23,218
2
Commission = ` 23218  = ` 455
102
Illustration 2
XYZ Limited went into voluntary liquidation on 1st April, 2014 on which date its position was as under :
` `
Share Capital : Land, Building & Machinery 80,000
5,000 shares of ` 100 each, ` 80 Other fixed assets 2,60,000

4,00,000
per share paid
Loans (Secured by mortgage of Stock 1,05,000
Land, Building and Machinery) 1,00,000 Debtors 1,00,000
Unsecured Loan and Liabilities 2,00,000 Loans 40,000
(including Preferential dues Cash 5,000
` 10,000) Profit and Loss Account 1,10,000
7,00,000 7,00,000
Land, Building and Machinery were realised by secured creditors for ` 1,20,000. Other fixed assets
fetched ` 1,40,000. Debtors ` 20,000. Stock ` 10,000. Loans were wholly bad. The liquidator is
entitled to a fixed remuneration of ` 1,000 plus 2% of the amount paid to unsecured creditors. The
liquidator’s out-of-pocket expenses amounted to ` 1,000.
Show Liquidator’s Statement of Account.

Solution :
Liquidator’s Final Statement of Account
` `
Assets Realisations : Liquidator’s remuneration:

Cash 5,000 Fixed remuneration 1,00
0
Surplus from Securities 20,000 2% on Pref. creditors 200
(1,20,000 – 1,00,000)
Other fixed assets 1,40,000 2% on ` 1,79,216 3,58 4,784
4
Stocks 10,000 Expenses of liquidation 1,000
Preferential creditors 10,000
Debtors 20,000 Unsecured creditors 1,79,21
6
1,95,000 1,95,00
0
Tutorial Note :
Total Amount available for distribution 1,95,000

Less : Liquidator’s remuneration
Fixed 1,000
2% on Pref. Creditors 200 1,200
Expenses of liquidation 1,000

Preferential creditors 10,000 12,200
Balance available to unsecured creditors 1,82,800
2
2% on amount distributed to unsecured creditors =  ` 1,82,800 = ` 3,584
102
Illustration 3
The Balance Sheet of REC Ltd.

as on 31st Dec. 2014
` `
4,000 6% Pref. shares of ` 100 each 4,00,000 Land & Building 2,00,000
2,000 Equity shares of ` 100 each, Plant 5,00,000
` 75 paid up 1,50,000 Patents 80,000
6000 Equity shares of ` 100 each, Stock 1,10,000
` 60 paid up 3,60,000 Debtors 2,20,000
5% Debentures 2,00,000 Cash at Bank 60,000

Interest outstanding on 10,000 Profit & Loss Account 2,40,000
debentures
Creditors 2,90,000
14,10,000 14,10,000
The dividends on preference shares were in arrears for two years. Arrears are payable as per
articles. Creditors include ` 1,00,000 loan on mortgage of Land & Building. Assets realised are as under
:–
Land & Building 2,40,000
Plant 4,00,000
Patents 60,000
Stock 1,20,000
Debtors 1,60,000
The expense of liquidation amounted to ` 21,800. The liquidator is entitled to a commission of 3% on
all assets realised (except cash at Bank) and 2% on amounts distributed among unsecured creditors.
Creditors also include preferential creditors ` 30,000. All payments are made on 30th June 2015.
Prepare Liquidator’s Statement of Account.

Solution.
Liquidators statement of Account
To Assets Realised By Liquidation expenses 21,800
Cash at Bank 60,000 By Liquidator’s Remuneration
Debtors 1,60,000 3% on 9,80,000 29,400
Stock 1,20,000 2% on 30,000 600
Patents 60,000 2% on 1,60,000 3,200 33,200
Plant 4,00,000 By Debentures 2,00,00

0
Surplus from secured creditors 1,40,000 Add : Interest 10,000

Outstanding
(` 2,40,000 – ` 1,00,000) Accrued for 6 5,000 2,15,000

months
By Preferential Creditors 30,000
By Unsecured Creditors 1,60,000
By Preference 4,00,00
Shareholders 0
Add : Dividend or 2 48,000 4,48,000

years
By equity shareholders
@ 15.25 per share on
2000 shares of ` 75 paid 30,500
up
@ ` 0.25 per share on

1,500 32,000
6,000 shares of ` 60 paid
up
9,40,000 9,40,000
Note :– Calculation of amount paid to equity shareholders
2,000 Equity shares, ` 75 paid 1,50,00

0
6,000 “ “ “ “ ` 60 paid 3,60,00

0
Total amount due to Equity Shareholders 5,10,00

0
Less : Balance amount available to be borne by Equity 32,000

Shareholders
Total loss 4,78,00

0
Loss per share = 4,78,000  8,000 = `59.75
` `
Paid up Amount 75.00 60.00
Less : Loss per share 59.75 59.75
Balance amount paid 15.25 0.25
Illustration 4
Dodge Ltd. went into liquidation and following details are available :
(a) 20,000 10% Pref. Shares of ` 10 each (fully paid)
(b) 2,000 Equity Shares of ` 100 each (` 75 paid up)
(c) 1,600 Equity Shares of ` 100 each (` 60 paid up)
(d) 1,400 Equity Shares of ` 100 Each (` 50 paid up)
Assets including machinery realised ` 4,40,000. Liquidation expenses ` 15,000. The company had
borrowed a loan of ` 70,000 against mortgage of machinery which realised ` 1,00,500. Salaries for 4
clerks of 4 months @ ` 300 per month and of 4 peons for 3 months @ ` 150 per month are outstanding.
Other creditors are ` 87,400. Prepare liquidator’s statement of account.
Solution.
` `
To Assets Realised : By Liquidation Expenses 15,000

Surplus for Secured 30,500 By Preferential Creditors 6,600
Creditor
Other Assets 3,39,500 3,70,000 By Unsecured Creditors 87,400

To Share call received on 1,400 By Preference Shareholders 2,00,000
shares @ ` 1 1,400 By Equity Shareholders

48,000
On 2,000 shares @ ` 24
On 1600 shares @ ` 9 14,400
3,71,400 3,71,400
Notes :–
1. Calculation of Creditors
Preferential Unsecured
creditors creditors
Salary of Clerk (4  4  ` 300) 4,800 –
Peon (4 3 ` 150) 1,800 –
Other creditors – 87,400
6,600 87,400
Calculation of Amount paid to/Recovered from Shareholders
Paid-up Equity Capital
2,000 Equity shares of ` 75 paid-up 1,50,000
1,600 Equity Shares of ` 60 paid-up 96,000

Less : Amount available after paying Preference Shareholders 61,000
Loss to be borne by Equity Shareholders 2,55,000
` 2,55,000
Loss per share = = ` 51
5,000
` ` `
Paid up Amount 75 60 50
Less : Loss per share 51 51 51
Balance paid/recovered 24 9 (–) 1
Illustration 5
The Balance Sheet of Maan. Ltd. as on 30-9-2014 was as under :
` `
5,000 5% Pref. shares of ` 10 50,000 Property 40,000
each
10,000 equity shares of ` 10 each 1,00,000 Machinery 60,000
15% Debentures 40,000 Furniture 10,000

Creditors 89,000 Stock 71,000
Debtors 39,000
Bank Balance 9,000
Profit & Loss Balance 50,000
2,79,000 2,79,000
Preference dividends are in arrears for 2 years and as per articles, these are payable on liquidation.
All the debentures are secured against property and interest is payable on 31st March and 30th September.
Interest has been paid up to 30th September. Creditors include Rates 2,000 ; income tax 2,050 and
compensation under Industrial Dispute Act ` 1,000.
On liquidation, assets realised – Property ` 60,000 (realised by debentureholders) ; Machinery
` 42,000 ; Furniture ` 5,500 ; Stock ` 54,000 and Debtors ` 32,000. Liquidation cost ` 6,000 and
1
liquidator’s remuneration was 2 % on amount realised (including cash at bank) plus ` 2,000. Debentures
2
were paid on 31st Dec. 2014. Show liquidator’s statement.
Solution.
To Assets realised By Liquidator’s

Bank Balance 9,000 1
remuneration 2 % on 4,025
2
Stock 54,000
1,61,000
Debtors 32,000 Add : 2,000 6,025
Machinery 42,000 By Cost of liquidation 6,000
Furniture 5,500 By Preference Creditors 5,050

Surplus from securities 18,500 (2,000 + 2,050 + 1,000)
(` 60,000 – ` 41,500) By Unsecured Creditors 89,000 – 83,950
5,050
By Preference 50,000
Shareholders
Add: dividends for 2 5,000 55,000

years
By Equity Shareholders 4,975
1,61,000 1,61,000
Note : Surplus from debentureholders
Property realised 60,000
Less : Due to debenture holders ` 40,000
Interest @ 15% p.a. for 3 months ` 1,500 41,500
18,500
APPOINTMENT OF RECEIVER FOR DEBENTUREHOLDERS

Debentureholder usually carry floating charge on the assets of the company. Debenture deed may
provide that debentureholders shall have the right to appoint Receiver in the event of winding up of the
company. Under certain circumstances, other mortgagee may also have the power to appoint Receiver.
Receiver takes charge of the assets mortgaged in favour of debetureholders. He is responsible to realise
the assets and make payments priority-wise up to debentureholders. He has to hand over the surplus to
the liquidators of the company after paying debentureholders. He can recover the cost of realisation (his
expenses) and his remuneration from the assets realised.
When Receiver is appointed, two Accounts are prepared, namely, (1) Receiver’s Statement of
Account and (2) Liquidator’s Final Statement of Account.
Illustration 6
The Balance Sheet of XYZ Ltd.
as on 31.12.2014
` `
10,000 7% Preference shares of ` Buildings 50,000

1,00,000 Sundry Assets 5,29,000
10 each
10,000 Equity shares of ` 10 each 1,00,000 Preliminary expenses 10,000
5,000 Equity Shares of ` 10 each, Profits & Loss account 33,500
` 85 paid 42,500
6% Debentures 2,50,000
Loan on Mortgage 30,000
Bank overdraft 25,000
Trade creditors 55,000
Income tax payable
1996 15,000
1997 5,000 20,000
6,22,500 6,22,500
The Mortgage was secured on Building and debentures have floating charge on assets of the
company. The debentureholders appointed a receiver and a liquidator was appointed in voluntary
liquidation. Receiver realised buildings for ` 40,000. He took charge of sundry assets amounting to `
4,00,000 and sold them for ` 3,70,000. Bank overdraft was secured by a personal guarantee of directors
who discharged their obligation in full. The remaining sundry assets realised ` 1,20,000. The cost of
receiver amounted to ` 1,000 and his remuneration ` 1,250. The liquidation expenses amounted to ` 2,000
and remuneration of liquidator was ` 750. Preference dividends are in arrears for 3 years and these are
payable on winding up as per Articles only if there is surplus.

Show the accounts to be prepared by the Receiver and the Liquidator.
Solution.
Receiver’s Receipts and Payments Account
To Assets Realised : By Cost of Receiver 1,000
Sundry Assets 3,70,000 By Receiver’s Remuneration 1,250
Surplus from securities 10,000 By Preferential Creditors (tax) 20,000
(40,000 – 30,000) By Debentureholders 2,50,000
By Balance to Liquidator 1,07,750
3,80,000 3,80,000
Liquidators Statement of Account
To Surplus from Receiver 1,07,750 By Liquidator’s Remuneration 750
To Assets Realised 1,20,000 By Liquidation Expenses 2,000
By Unsecured Creditors 80,000
By Preference Shareholders 1,00,000
By Equity Shareholders
` 3.50 on 10,000 shares 35,000
` 2.00 on 5,000 share 10,000
2,27,750 2,27,750
Note :
1. Preference dividends are not payable as there is no surplus
2. Payment to Equity shareholder is as under :
10,000 Equity shares of ` 10 paid 1,00,000
5,000 Equity shares of ` 8.50 paid 42,500

Less : Amount available after payment of Preference 45,000
Shareholders
Total loss to be borne by Equity Shareholders 97,500
Loss per share = ` 97,500  15,000 = ` 650
` `
Paid up amount per share 10 8.50
Amount paid 3.50 2.00
‘B’ LIST OF CONTRIBUTORIES

Companies Act, 2013 defines the contributory as any person liable to contribute to the assets of a
company in the events of its being wound-up and includes the holder of any shares which are fully paid-
up. All the present as well as past shareholders who have ceased to be members within a year of
commencement of liquidation proceedings are contributors. Accordingly , the contributories are placed in
two lists, namely, List A which includes the present shareholders (even though fully paid-up) and List B
for the past shareholders. These contiributories are liable to pay for those debts which existed at the time
when they transferred their shares. They are not liable if all the creditors can be paid from the amount
realised on sale of assets and ‘A’ list of contributors. They shall also not be liable if present shareholders
have paid the unpaid amount on shares transferred by them. This can be explained with the help of
following illustration :
Illustration 7
Bad Luck Limited went into voluntary liquidation and the proceedings commenced on 2 July, 2014.
Certain Creditors could not receive payment out of the realisation of assets and out of the contributions
from the contributories of the ‘A’ List. The following details of share transfers are made available to you.
Name of the No. of Shares Date of the Creditors Remaining

transferor transferred transferor ceasing to unpaid and outstanding
Shareholders be a member at the time of the
transferor ceasing to be
Shareholder
`
(i) A 10,000 1 March, 2013 60,000
(ii) B 12,500 15 August, 2013 80,000
(iii) C 5,000 1 October, 2013 1,07,500
(iv) D 20,000 1 December, 2013 1,30,000
(v) E 2,500 1 April, 2014 1,50,000
All the shares were of ` 10 each of which ` 5 per share had been paid up. Ignoring other details like
liquidator’s expenses etc. you are required to work out the liability of the individual contributories listed
above.
Solution.
Statement Showing Liabilities of the Contributories (B-List)
Date Incremental Persons B C D E

Creditors
Shares 12,500 5,000 20,000 2,500

Transferred
Ratios 5 2 8 1
` ` ` ` ` `
15 August, 2013 80,000 80,000 25,000 10,000 40,000 5,000
1 October, 2013 1,07,500 27,500 – 5,000 20,000 2,500
1 December, 2013 1,30,000 22,500 – – 20,000 2,500
1 April, 2014 1,50,000 20,000 – – – 20,000
Liability on the Basis of creditors (i) 25,000 15,000 80,000 30,000
Liability on the Basis of calls-in-arrear @ ` 5 per

62,500 25,000 1,00,000 12,500
share (ii)
Actually liability lower of (i) or (ii) 25,000 15,000 80,000 12,500
Notes : A will have no liability as he has transferred his shares more than one year before the winding up
of the company.
SUMMARY
a summary of cash book in which he records receipts and disbursements in a particular order. Liquidator
usually gets commission on assets realised, on amount paid to unsecured creditors and on amount paid to
shareholders.
SUGGESTED READINGS
Delhi.
Delhi
ANSWER THE FOLLOWING QUESTIONS

1.Write a note on Liquidator’s final statement of account.
2.Give a proforma of Liquidator’s Statement of Account ?
3.What are contributories as per LIST B and how their liability is determined?
4.Write a note on Liquidator’s remuneration.
5.What is the effect of appointment of receiver for debentureholders ?
6. What important points are taken into consideration while preparing Liquidator’s Final Statement
of Account ?
7. A company went into voluntary liquidation. You are required to prepare liquidator’s final
statement of account allowing 2% remuneration on assets realised and 2% on amount distributed
among unsecured creditors other than preferential creditors.
Assets Realised : `
Land & Building 20,000

Plant & Machinery 18,650
Furniture 1,000
The liabilities were :
Unsecured creditors 32,000
Debentures 10,000
Equity share capital 5,000 shares of ` 10 each 50,000
Liquidation expenses 1,000
[Ans. Liquidator’s remuneration ` 1,143 ;
Payment to unsecured creditors ` 17,507]
8. The Veer Ltd. went into liquidation with the following liabilities :–
(1) Secured creditors 40,000 (securities realised ` 45,000)
(2) Preferential creditors ` 9,000
(3) Unsecured creditors ` 37,800
Liquidation expenses amounted to ` 752. The liquidator is entitled to a remuneration of 3% on
amount realised (including the assets realised by the fully secured creditors) and 2% on the amount
distributed to unsecured creditors except preferential creditors. Various assets (excluding securities in the
hands of fully secured creditors) realised ` 37,100
Prepare Liquidator’s final statement of Account.
[Ans. Liquidator’s remuneration ` 3,049 ; Payment to Unsecured Creditors ` 29,299]

LESSON 3
ACCOUNTS OF LIFE INSURANCE COMPANIES
STRUCTURE
 Objectives
 Meaning and objectives of insurance
 Difference between insurance and assurance
 Types of insurance contracts
 Terminology used in life insurance contracts
 Preparation of Revenue Account of life insurance companies
 Preparation of Profit and Loss Account of life insurance companies
 Preparation of Balance Sheet of life insurance companies
 Calculation of surplus by life insurance companies
 Summary
 Model questions
OBJECTIVES
 Understand the meaning and objectives of insurance.
 Learn the difference between insurance and assurance.
 Know about different types of insurance contracts.
 Understand the preparation of Revenue Account, Profit and Loss Account, and Balance Sheet of
life insurance companies
MEANING OF INSURANCE
Insurance is a contract between two parties whereby one party called the insurer or insurance
company agrees to indemnify or compensate the other party called insured against a loss arising from a
contingency covered in the contract upto some agreed limit specified in the contract. For this contract,
insured agrees to make payment called insurance premium to the insurer.
INSURANCE AND ASSURANCE
Generally speaking, ‘insurance’ and ‘assurance’ are treated as synonymous terms but there is a
technical difference between these two terms. The term ‘insurance’ is applied to a contract which
provides for the payment of compensation on the happening of certain events which may or may not
happen e.g., insurance against loss due to fire, accident etc. Assurance, on the other hand, is applied to a
contract which guarantees the payment of a certain sum, on the happening of a specified event, which is
bound to happen sooner or later, e.g., death.
TYPES OF INSURANCE CONTRACTS
Insurance contracts may be grouped into two classes viz.,
(i) Life Insurance (ii) General Insurance.
LIFE INSURANCE
In case of life insurance contract, the insurance company undertakes to pay some specified amount
(known as policy amount) to the policyholder on his attaining a specified age or to his nominee on his
death, whichever is earlier. Thus, payment of sum assured is certain in case of life insurance. That is why
Life Insurance involves elements of both protection and investment. In India, the life insurance
business was nationalised in 1956 by passing the Life Insurance Corporation of India Act, 1956. Life
insurance business is carried on by Life Insurance Corporation of India.
GENERAL INSURANCE
General insurance business includes all types of insurance contracts other than life insurance. It covers
fire insurance, marine insurance, accident insurance, cash or goods in transit insurance, consequential loss
insurance, credit insurance, fidelity insurance, third party risk insurance, workmen’s compensation
insurance etc. In case of general insurance, the insurance company, in consideration of fixed amount of
premium, undertakes to compensate the insured person in respect of the loss suffered (subject to a
maximum of policy amount) from a given contingency. If the contingency does not happen, the policy
amount is not payable to the insured person. Thus, general insurance involves only the element of
protection and not of investment.
In India, general insurance business was nationalised by passing the General Insurance Business
(Nationalisation) Act, 1972. Under the provisions of this Act, the General Insurance Corporation of India
was set up as a holding company with four subsidiary companies namely, Oriental Fire and General
Insurance Co. Limited, National Insurance Co. Limited, United India Fire and General Insurance Co.
Limited, & New India Assurance Co. Limited, to carry on general insurance business in India.
INSURANCE REGULATORY & DEVELOPMENT AUTHORITY ACT, 1999

The Government of India has promulgated “The Insurance Regulatory & Development
Authority Act, 1999” to provide for the establishment of an Authority
 to protect the interests of holders of insurance policies,
 to regulate, promote and ensure orderly of growth of the insurance industry and
 to end the monopoly of the Life Insurance Corporation of India and General
Insurance Corporation and its subsidiaries.
Insurance Regulatory & Development Authority (IRDA) has published the Insurance
Regulatory and Development Authority (Preparation of Financial Statements and Auditor’s Reports of
Insurance Companies) Regulations, 2002. As per these regulations, the insurance companies are required
to prepare the financial statements i.e. Revenue Account, Profit & Loss Account and Balance Sheet at the
year end.
The new regulations provide :
(a) An insurer carrying on life insurance business, shall comply with the requirements of
Schedule A.
(b) An insurer carrying on general insurance business, shall comply with the requirements of
Schedule B.
(c) The report of the auditors on the financial statements of every insurer and reinsurer shall be
in conformity with the requirement of Schedule C, or as near as there to as the circumstances
permit.
LIFE INSURANCE BUSINESS
TYPES OF POLICIES
A life insurance company generally issues two types of policies – Life Policies and Annuity Policies.
Life Policies are further divided into Whole Life Policies and Endowment Policies. A Whole Life Policy
is one under which the insured sum (or policy amount) becomes payable to the beneficiary only on the
death of the insured and the insured has to pay premiums throughout his life or for a fixed period.
An Endowment Policy, on the other hand, is one under which the insured sum becomes payable on the
attainment of a particular age by the insured or on his death, whichever is earlier.
Life insurance policies may also be divided into With Profit Policies and Without Profit Policies. In
case of a With Profit Policy, the assured is paid, in addition to the sum assured, a share in the profits
earned by the insurer. These profits are declared by the insurer at intervals and credited to the policy-
holder as bonus. A Without Profit Policy is one under which the policyholder does not get any share in
the profits earned by the insurer.
‘Annuity Policy’ or ‘Annuities’ is a contract where by the insurance company agrees to pay a
certain sum of money per year to the other party during the latter’s life time in return for a lump sum
amount paid in advance. The purchaser of the annuity is known as ‘Annuitant’. Amount payable by
annuitant to the insurer is known as ‘Consideration for Annuities Granted’ and the amount payable by
insurance company periodically to annuitant as ‘Annuities’.
IMPORTANT TERMS
(1) PREMIUMS
The consideration paid by the insured person to the insurer in return of the undertaking given by the
insurer is known as ‘Premium’. Life Insurance Contract is usually made for a specified number of years
e.g., 5 years, 10 years, 15 years etc. Life insurance premium is usually payable in installments on yearly,
half yearly, quarterly or monthly basis.
Life Insurance premium may be divided into First Year’s Premium and Renewal Premium. The
amount of premium payable for the first year of insurance contract is known as ‘First year’s Premium’ or
‘New Premium’. First year’s premium is recorded by the life insurance company separately.
The amount of premiums received by the life insurance company after the first year of insurance, is
known as ‘Renewal Premium’.
Single Premium: – Sometimes, in case of life insurance, the insured person or policyholder pays
only one premium once for all at the beginning and is not required to pay again in the subsequent years.
Premium payable only in the first year of insurance is known as ‘Single Premium’.
(2) CONSIDERATION FOR ANNUITIES GRANTED

A life insurance company sells not only life insurance policies but also annuities. An annuity is a
contract where by the person concerned, called ‘annuitant’, pays a lump sum amount in return of a
promise that the insurer will pay a certain sum of money each year as long as the annuitant lives or for an
agreed period. The lump sum amount paid by the annuitant to the insurer is known as ‘Consideration for
Annuities Granted’ and is an item of income for the life insurance company.
(3) CLAIMS
The term ‘claim’ refers to the amount which an insurer pays against a policy. In case of life
insurance contracts, the amount of claim becomes payable on the death of the insured person (known as
‘claim by death’) or on his attaining a specified age (known as ‘claim by maturity’ or ‘claim by
survivals’). In the books of the insurer, the ‘claims by death’ and ‘claims by maturity’ are shown
separately.
(4) SURRENDER VALUE
Sometimes, life insurance policy-holder may find himself unable to pay the premiums for the
continuation of the policy (before the date of maturity of the policy). In such a case, he may surrender his
policy for cancellation. From the date of surrender, insurer becomes free from its liability under the
contract but has to pay to the assured a certain proportion of the amount already paid by the assured by
way of premiums till the date of surrender. The amount so payable is termed as ‘Surrender Value’.
(5) RE-INSURANCE
When an insurer or insurance company has issued an insurance policy for a large amount, then
sometimes it transfers a part of the risk to another insurance company. Thus, in this case, an insured risk
is again insured and is referred to as ‘re-insurance’. Re-insurance helps in reducing the risk of the
insurance company. For the insurance company accepting the reinsurance contracts, it is treated as
‘Reinsurance Accepted’, while for the insurance company transferring the insurance business, it is
treated as ‘Reinsurance Ceded’. The latter company pays premiums to the former at normal rates and
receives commission on business ceded treated as ‘Commission on Reinsurance Ceded’. Commission
paid by insurance company accepting the reinsurance business is known as ‘Commission on Reinsurance
Accepted’.
(6) PAID UP VALUE
In case an insured person is unable to pay further premiums on his life policy, he may get it paid up.
In such a case he will not be required to pay further premiums and will get the paid up value of the policy
on the date of maturity. The paid up value payable by insurer on the date of maturity will be calculated as
follows :
Number of Premiums Paid
Paid up value = Amount of Policy  .
Total Number of Premiums Payable
(7) BONUS
In case of with-profit life policies, the policyholders receive a share of the profit earned by the
insurer. The share of profit going to the policyholders is known as ‘Bonus’ and may take any of the
following forms :
(i) Bonus in Cash : When the amount of bonus declared by the insurer on life policies is paid
in cash, it is known as ‘Bonus Paid in cash’ or ‘Bonus in Cash’.
(ii) Bonus in Reduction of Premiums : Bonus declared by an insurer on life policies and
utilised by way of reduction in the amount of premiums payable by the policyholders, is
referred to as ‘Bonus in Reduction of Premiums.
(iii) Reversionary Bonus : It is the bonus which is paid by insurer to the policyholder on the
maturity of the policy. Reversionary Bonus is included in the amount of claims paid.
FINANCIAL STATEMENTS OF LIFE INSURANCE BUSINESS
Insurance Regulatory & Development Authority (Preparation of Financial Statements and

Auditors’ Reports of Insurance Companies) Regulations, 2002 has given the following forms for the
preparation of financial statements of insurance companies carrying on Life Insurance Business.
Form A – RA – Revenue Account
Form A – PL – Profit & Loss Account
Form A – BS – Balance Sheet
The performa of these statements are given below.
FORM A – RA
Name of the Insurer:
Registration No. and Date of Registration with the IRDA
REVENUE ACCOUNT FOR THE YEAR ENDED 31ST MARCH, 20.....
Policyholder’s Account (Technical Account)
Particulars Schedule Current Previous

Year Year
(` ‘000) (` ‘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 Incomes (to be specified)
TOTAL (A)
Commission 2
Operating Expenses related to Insurance Business 3
Provisions 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) 4

Interim Bonuses Paid
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 Shareholder’s Accounts
Transfer to Other Reserves (to be specified)
Balance being Funds for Future Appropriations
TOTAL (D)
FORM A-PL
Name of the Insurer :
PROFIT & LOSS ACCOUNT FOR THE YEAR ENDED 31ST MARCH, 20...
Shareholder’s Account (Non-technical Account)

Year Year
(` ‘000) (` ‘000)
Amounts transferred from/to the Policyholders

Account (Technical Account)
Income From Investments

(a) Interest, Dividends & Rent-Gross
(b) Profit on sale/redemption of
investments
(c) (Loss on sale/redemption of
investments)
Other Incomes (to be specified)
TOTAL (A)
Expenses other than those directly related to the

Insurance business
Bad debts written of
Provisions (Other than taxation)

investments (Net)
(b) Provisions for doubtful debts
(c) Others (to be specified)
TOTAL (B)
Profit/(Loss) before tax
Provisions for Taxation
Profit/(Loss) after tax
APPROPRIATIONS
(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.
(b)Reinsurance premiums whether on business ceded or accepted are to be brought into account
gross (i.e. before deducting commissions) under the head reinsurance premiums.
(c)Claims incurred shall comprise claims paid, specific claims settlement costs wherever
applicable and change in the outstanding provision for claims at the year-end.
(d)Items of expenses and incomes in excess of one percent of the total premiums (less
reinsurance) or ` 5,00,000 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 or losses
and other items.
(g)Interest, dividends and rentals receivable in connection with an investment should be stated
as 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 realised rent. It shall not include any notional rent.
FORM A-BS
Name of the Insurer:
BALANCE SHEET AS AT 31ST MARCH, 20..........

Schedule Current Previous
year Year
(` ‘000) (` ‘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
ACCOUNT
POLICY LIABILITIES
INSURANCE RESERVES
PROVISIONS FOR LINKED LIABILITIES

Sub-Total
FUNDS FOR FUTURE APPROPRIATIONS
TOTAL
APPLICATION OF FUNDS
INVESTMENTS :
Shareholders’ 8
Policyholders’ 8A
ASSETS HELD TO COVER LINKED 8B
LIABILITIES
LOANS 9
FIXED ASSETS 10
CURRENT ASSETS :
Cash and Bank Balance 11
Advances and Other Assets 12
Sub-Total (A)
CURRENT LIABILITIES 13
PROVISIONS 14
Sub-Total (B)
NET CURRENT ASSETS (C) = (A) – (B)
MISCELLANEOUS EXPENDITURE (to the
extent not written off or adjusted) 15
DEBIT BALANCE IN PROFIT & LOSS
ACCOUNT (Shareholders’ Account)
TOTAL
CONTINGENT LIABILITIES
Particulars Current Previous

Year Year
(` ‘000) (` ‘000)
1. Partly paid-up investments

2. Claims, other than against policies, not acknowledged as
debts by the company
3. Underwriting commitments outstanding(in respect of shares
and securities)
4. Guarantees given by or on behalf of the Company
5. Statutory demands/liabilities in dispute, not provided for
6. Reinsurance obligations to the extent not provided for in
accounts
7. Others (to be specified)
TOTAL
SCHEDULES FORMING PART OF FINANCIAL STATEMENTS

SCHEDULE – 1
PREMIUM

Year Year
(` ‘000) (` ‘000)
1. First year Premiums

2. Renewal Premiums
3. Single Premiums
Total Premium
SCHEDULE –2
COMMISSION EXPENSES

Year Year
(` ‘000) (` ‘000)
Commission paid
Direct – First year premiums
– Renewal premiums
– Single premiums
Add : Commission on Re-insurance Accepted
Less : Commission on Re-insurance Ceded
Net Commission
SCHEDULE – 3
OPERATING EXPENSES RELATED TO INSURANCE BUSINESS

Year Year
(` ‘000) (` ‘000)
1. Employees’ remuneration & welfare benefits
2. Travel, conveyance and vehicle running expenses
3. Training expenses
4. Rents, rates & taxes
5. Repairs
6. Printing & Stationery
7. Communication expenses
8. Legal & professional charges
9. Medical fees
10. 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
11. Advertisement and publicity

12. Interest & Bank Charges
14. Depreciation
TOTAL
SCHEDULE – 4
BENEFITS PAID [NET]

Year Year
(` ‘000) (` ‘000)
1. Insurance Claims :
(a) Claims by Death.
(b) Claims by Maturity
(c) Annuities/Pension payment,
(d) Other benefits, specify
2. Amount ceded in reinsurance :
(a) Claims by Death,

(b) Claims by Maturity,
3. Amount accepted in reinsurance :
(a) Claims by Death,
(b) Claims by Maturity,
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.
SCHEDULE – 5
SHARE CAPITAL

Year Year
(` ‘000) (` ‘000)
1. Authorised Capital
........Equity Shares of ` ... each
2. Issued Capital
.........Equity Shares of ` ... each
3. Subscribed Capital
........ Equity Shares of ` ... each
4. Called-up Capital
Equity Shares of ` ... each
Less: Calls unpaid
Add: Shares forfieted (Amount originally paid up)
Less: Par value of Equity Shares bought back
Less : Preliminary Expenses
Expenses including commission or brokerage on

underwriting or subscription of shares
TOTAL
SCHEDULE – 6
RESERVES AND SURPLUS
Year Year
(` ‘000) (` ‘000)
1. Capital Reserve
2. Capital Redemption Reserve
3. Securities Premium
4. Revaluation Reserve
5. General Reserves
Less : Debit balance in Profit and Loss Account, If any
Less : Amount utilised for Buy-back
6. Catastrophe Reserve
7. Other reserves (to be specified)
8. Balance of profit in Profit and Loss Account
TOTAL
Note: Additions to and deduction from the reserve shall be disclosed under each of the specified heads.
SCHEDULE – 7
BORROWINGS

Year Year
(` ‘000) (` ‘000)
1. Debentures/Bonds
2. Banks
3. Financial Institutions
TOTAL
Notes : (a) The extent to which the borrowings are secured shall be separately disclosed stating the
nature of the security under each sub-head.
(b) Amounts due within 12 months from the date of Balance Sheet should be shown
separately.
SCHEDULE – 8
INVESTMENTS –SHAREHOLDERS

Year Year
(` ‘000) (` ‘000)
LONG TERM INVESTMENTS
1. Government securities and Government guaranteed

bonds including Treasury Bills
2. Other Approved Securities
3. Other Investments :
(a) Equity Shares
Preference shares
(b) Mutual Funds
(c) Derivative Instruments
(d) Debentures/Bonds
(e) Other Securities (to be specified)
(f) Subsidiaries
(g) Investment Properties–Real Estate
4. Investments in Infrastructure and Social Sector
5. Other than Approved Investments
SHORT TERM INVESTMENTS

3. Other Investments :
(a) Equity Shares
Preference shares
(b) Mutual Funds
(f) Subsidiaries
(g) Investments Properties-Real Estate
TOTAL
SCHEDULE – 8A
INVESTMENTS-POLICYHOLDERS

Year Year
(` ‘000) (` ‘000)

3. (a) Equity Shares
Preference Shares
(b) Mutual Funds
(f) Subsidiaries
(g) Investments Properties Real Estate

Preference Shares
(b) Mutual Funds
(f) Subsidiaries
TOTAL
SCHEDULE–8B
ASSETS HELD TO COVER LINKED LIABILITIES

Year Year
(` ‘000) (` ‘000)

Preference Shares
(b) Mutual Funds
(f) Subsidiaries
(g) Investments Properties Real Estate

3. (a) Shares
(aa)Equity
(bb) Preference
(b) Mutual Funds

(f) Subsidiaries
TOTAL
SCHEDULE – 9
LOANS

Year Year
(` ‘000) (` ‘000)
1. SECURITY-WISE CLASSIFICATION
Secured
(a) On Mortgage of property
(i) In India
(ii) Outside India
(b) On Shares, Bonds, Govt. Securities etc.
(c) Loans against policies
(d) Others (to be specified)
Unsecured
(a) Loans against policies
(b) Others (to be specified)
TOTAL
2. BORROWER-WISE CLASSIFICATION
(a) Central and State Government
(b) Banks and Financial Institutions
(c) Subsidiaries
(d) Companies
(e) Loans against policies
(f) Others (to be specified)
TOTAL
3. PERFORMANCE-WISE CLASSIFICATION
(a) Loans classified as standard
(i) In India
(ii) Outside India
(b) Non-standard loans less provisions
(i) In India
(ii) Outside India
TOTAL
4. MATURITY-WISE CLASSIFICATION
(a) Short Term
(b) Long Term
TOTAL
SCHEDULE – 10
FIXED ASSETS
Particulars Cost/Gross Block Depreciation Net Block

Ope Addit Dedu Closi Up to For On To As at Previo
ning ion ction ng Last the Sales Dat Year us
year Year / e end Year
Adju
stme
nts
Goodwill
Intangible
(specify)
Land-Freehold
Leasehold
Property
Buildings
Furniture &
Fittings
Information
Technology
Equipment
Vehicles
Offices
equipment
Others
(Specify nature)
TOTAL
Work in progress
Grand Total
PREVIOUS
YEAR
SCHEDULE – 11
CASH AND BANK BALANCES
Year Year
(` ‘000) (` ‘000)
1. Cash (including cheques, drafts, and stamps)
2. Bank Balances
(a) Deposit Accounts

(aa) Short-term (due within) 12 months of the date of
Balance Sheet)
(bb) Others
(b) Current Accounts
3. Money at Call and Short Notice
(a) With Banks

(b) With others Institutions
TOTAL
CASH & BANK BALANCES
1. In India
2. Outside India
TOTAL
SCHEDULE – 12
ADVANCES AND OTHER ASSETS

Year Year
(` ‘000) (` ‘000)
ADVANCES
1. Reserve deposits with ceding companies
2. Advances to ceding companies
3. Application money for investments
4. Prepayments
5. Advances to Directors/Officers
6. Advances tax paid and taxes deducted at source (Net of

provision for taxation)
TOTAL (A)
OTHER ASSETS
1. Income accrued on investments
2. Outstanding Premiums
3. Agents Balances
4. Foreign Agencies Balances
5. Due from other entities carrying on insurance business

(including reinsures)
6. Due from subsidiaries/holding company
7. Reinsurance Claims/balance receivable

8. Deposit with Reserve Bank of India [Pursuant to Section
7 of Insurance Act, 1938]
TOTAL (B)
TOTAL (A) + (B)
Notes :
(a) The items under the above heads shall not be shown net of provisions for doubtful amounts. The
amount of provision against each head should be shown separately.
(b) Sundry debtors will be shown under item 8 (Others)
SCHEDULE – 13
CURRENT LIABILITIES

Year Year
(` ‘000) (` ‘000)
1. Agent’s Balances
2. Balances due to other insurance companies
3. Advances from Treaty Companies
4. Deposits held on reinsurance ceded
5. Premiums received in advance
6. Sundry creditors
7. Due to subsidiaries/holding company
8. Claims Outstanding
9. Annuities Due
10. Due to Officers/Directors
TOTAL
SCHEDULE – 14
PROVISIONS

Year Year
(` ‘000) (` ‘000)
1. For taxation (less payments and taxes deducted at

source)
2. For proposed dividends
3. For dividend distribution tax
TOTAL
SCHEDULE – 15
MISCELLANEOUS EXPENDITURE
(To the extent not written off or adjusted)

Year Year
(` ‘000) (` ‘000)
1. Discount Allowed in issue of shares/debentures
TOTAL
Illustration 1.
From the following information, prepare Revenue Account ABC Assurance Co. Ltd. for the year
ended 31st March, 2014.
Life Assurance Fund at the beginning of the year 15,22,500
Claims paid – by death 71,000 – by death
– by maturity 35,100
Outstanding claim– at the beginning of the year 11,000
– at the end of the year 8,000
Premiums 7,06,050
Consideration for annuities granted 82,000
Annuities paid 53,450
Bonus paid in cash 2,400

Bonus in reduction of premium 900
Management expenses 31,900
Commission (Debit) 9,570
Interest, Dividends, Rents (net) 98,850
Income tax deducted at source 6,200
Surrenders 13,150
Dividend paid to shareholders 4,500
Solution.
Revenue Account of ABC Assurance Co. Limited
for the year ended 31st March, 2014
Particulars Schedule `
Premiums earned (Net) 1 7,06,050

Income from Investments :
Interest, Dividend and Rent (Gross) (` 98,850 + ` 6,200) 1,05,050
Other Income : Consideration for annuities granted 82,000

Total (A) 8,93,100
Commission 2 9,570
Operating Expenses related to Insurance Business 3 31,900
Total (B) 41,470
Benefits Paid (Net) 4 1,73,000

Total (C) 1,73,000
Surplus (D) = (A)  (B)  (C) 6,78,630
Appropriations
Balance being Funds for Future Appropriations 6,78,630
Total (D) 6,78,630
Note : Dividend paid to shareholders will be covered in Profit and Loss Account
Schedules Forming Part of Revenue Account
Schedule–1 Premiums Earned (Net) `
Premiums 7,06,050
Schedule–2 Commission
Commission Paid 9,570
Schedule –3 Operating Expenses related to Insurance

Business
Management Expenses 31,900
Schedule–4 Benefits Paid (Net)

1. Insurance Claims :
(a) Claims by Death 71,000
(b) Claims by Maturity 35,100
1,06,100
Add : Outstanding Claim at the end of the year 8,000
1,14,100
Less : Outstanding Claims at the beginning of the 11,000
year
1,03,100
(c) Annuities 53,450
(d) Surrenders 13,150
Bonus in Cash 2,400
Bonus in Reduction of Premium 900
1,73,000
Illustration 2
The following trial balance was extracted from the books of the XYZ Life Assurance
Company Ltd. as on 31st March, 2014 :
Dr. Cr.
` in crores ` in crores
Paid-up capital- 200 crore shares of ` 10 each 2,000
Life Assurance Fund as on Ist April, 2013 59,446

Bonus to policyholders 630
Premium received 3,230
Claims paid 3,940
Commission paid 186
Management expenses 646
Mortgage in India 9,844
Interest, dividend and rents 2,254
Agents’ balances 186
Investment properties-real estate 800
Investments 46,100
Loan on Company’s policies 3,472
Cash on deposit 540
Cash in hand and on current account 446
Surrenders 140
66,930 66,930
You are required to prepare the company’s revenue account for the year ended 31st March,
2014 and its balance sheet as on that date after taking the following matters also into consideration :
` in crores
(i) Claims admitted but not paid 186
(ii)Management expenses due 4
(iii) Interest accrued 386
(iv) Premiums outstanding 240
Solution :
XYZ Life Assurance Company Ltd.
Revenue Account for the year ended 31st March, 2014
Particulars Schedule Current Year
` in crores
Premiums earned-net 1 3,470

Income from Investments :
Interest, dividend and rents-gross 2,640
Total (A) 6,110
Commission 2 186
Operating Expenses related to Insurance Business 3 650
Total (B) 836
Benefits paid-net 4 4,266

Bonus to policy holders 630
Total (C) 4,896
Surplus (D) = (A) – (B) – (C) 378
Appropriations :
Funds for Future Appropriations 378
Total (D) 378
Balance Sheet as on 31st March, 2014

Schedul Current
e Year
` in crores
Sources of Funds
Shareholders’ Funds
Share Capital 5 2,000
Policyholders’ Funds:
Life Assurance Fund 59,446
Funds for Future Appropriations 378
Total 61,824
Application of Funds
Investments 8,8A 46,900
Loans 9 13,316
Current Assets :
Cash and Bank Balances 11 986
Advances and Other Assets 12 812
Sub-Total (A) 1,798
Current Liabilities : 13 190
Sub-Total (B) 190
Net Current Assets (C) = (A) – (B) 1,608
Total 61,824
SCHEDULE – 1
Premium
` in Crore
Premium Received 3,230
Add : Outstanding Premium 240
Premium 3470
SCHEDULE – 2
Commission Expenses
Commission paid 186
SCHEDULE – 3
Operating Expenses Related to Insurance Business
Management expenses paid 646
Add : Outstanding Mgt. expenses 4
Operating Expenses related to Insurance Business 650
SCHEDULE - 4
Benefits Paid (Net)
Claims :
Claims paid 3,940
Add ; Admitted but not paid 4,126

186
Surrenders 140
4,266
SCHEDULE – 5
Share Capital
Authorised Capital ?
Subscribed Capital 2,000
Called-up Capital
200 crore shares of ` 10 each, fully paid –up 2,000
SCHEDULES 8 and 8A
Investments
Sundry Investment 46,100
Investment Properties-real estate 800
46,900
SCHEDULE – 9
Loans
On mortgages in India 9,844
Loans against policies 3,472
13,316
SCHEDULE – 11
Cash and Bank Balance
Cash on deposit 540
Cash in hand and on Current account 446
986
SCHEDULE – 12
Advances and Other Assets
Other Assets
Income accrued on investments 386
Outstanding premiums 240
Agents balances 186
812
SCHEDULE – 13
Current Liabilities
Management expenses due 4
Claims outstanding 186
190
Working Note :
Interest, dividend and rents 2,254
Add : Interest accrued 386
2,640
CALCULATION OF SURPLUS BY LIFE INSURANCE COMPANIES
A Life Insurance Company can be said to have made profits if it has sufficient reserves to cover the
net liability likely to arise in future in respect of various life policies issued and annuity contracts made
and still in force. The calculation of surplus by a life insurance company is made by making a comparison
of its Life Assurance Fund and its Net Liability under various life policies and annuity contracts on some
specified date, generally at the end of every two years, three years etc. Life Insurance Corporation of
India ascertains its surplus once in two years.
The amount of Life Assurance Fund (as we already know) is ascertained by preparing the Revenue
Account. But the Net Liability of the Life Insurance Company is ascertained by an expert mathematician
known as ‘Actuary’. The excess of Life Assurance Fund over Net Liability is treated as ‘Surplus’. The
process of ascertaining the net liability of a life insurance company under various life policies and annuity
contracts is termed as ‘Valuation’ and involves the following steps :
(i) Calculate Present value of Insured Amount of Current Policies which will xxx
have to be paid in future
(ii) Deduct Present Value of Premiums in respect of current Policies which xxx
will be received in future
Net Liability xxx
The calculation of ‘Surplus’ is shown by preparing a statement known as ‘Valuation Balance Sheet’
in the following form :
Valuation Balance Sheet as at 31st March, ………
` `
To Net Liability as per Actuary’s By Life Assurance Fund as per

Balance
valuation Sheet
To Surplus By Deficiency, if any
Illustration 3
Southern India Life Assurance Co., got its valuation made once in every three years. Its life
assurance fund as on 31st March, 2014 amounted to ` 53,47,300. Its actuarial valuation on 31st March,
2014 disclosed a net liability of ` 41,00,000 under the assurance and annuity contracts. Prepare a
Valuation Balance Sheet to calculate surplus available for policyholders and shareholders.
Solution.
Valuation Balance Sheet of Southern India Life Assurance Co.
as on 31st March, 2014
` `
To Net Liability as per Acturial 41,00,000 By Balance of Life Assurance 53,47,300

valuation Fund
To Surplus 12,47,300
53,47,300 53,47,300
SUMMARY
Insurance is a contract between two parties whereby one party called the insurer or insurance company
agrees to indemnify or compensate the other party called insured against a loss arising from a contingency
covered in the contract upto some agreed limit specified in the contract. For this contract, insured agrees
to make payment called insurance premium to the insurer. Insurance contracts may be grouped into two
classes viz.(i) Life Insurance (ii) General Insurance.
In case of life insurance contract, the insurance company undertakes to pay some specified amount
(known as policy amount) to the policyholder on his attaining a specified age or to his nominee on his
death, whichever is earlier. General insurance business includes all types of insurance contracts other than
life insurance. It covers fire insurance, marine insurance, accident insurance, cash or goods in transit
insurance etc. The Government of India has promulgated “The Insurance Regulatory & Development
Authority Act, 1999” to provide for the establishment of an Authority to protect the interests of holders of
insurance policies and to regulate, promote and ensure orderly of growth of the insurance industry. The
insurance companies are required to prepare the financial statements i.e. Revenue Account, Profit & Loss
Account and Balance Sheet at the year end.
SUGGESTED READINGS
Delhi.
Delhi
1.Explain the purpose of creating reserve for unexpired risk. State its accounting
treatment.
2. Prepare (with imaginary figures) the balance sheet of an insurance company carrying on fire,
marine and miscellaneous insurance business.
3. What important points should be kept in mind in preparing the annual accounts of General
Insurance Companies ?
4. Prepare with imaginary figures the Revenue Accounts of General Insurance Companies.
5. HDFC Standard Life Insurance Co. Ltd. had a paid-up capital of ` 1,000 crore divided
into 100 crore shares of ` 10 each. Its net liability on all contracts in force as on 31st
March, 2014 was ` 9,600 crore and on 31st March, 2013, this liability was ` 8,400 crore. The
company has paid an interim bonus of ` 260 crore and 20% of the surplus is to be allocated to
shareholders, 30% to reserves and balance being carried forward. The following figures are extracted
from the books of the company for the year ended 31st March, 2014 :
` (in crore)
Premium Less Reinsurance 6,220
Interest, Dividend and Rent 3,000
Transfer Fees 16
Income tax 440
Management Expenses 700
Annuities paid 50
Commission 220
Surrenders 320
Surplus on revaluation of reversions 20
Reinsurance irrecoverable 16
Claims less reinsurance 3,800
Consideration for Annuities Granted 160
Prepare Revenue Account.

LESSON 5
ACCOUNTS OF BANKING COMPANIES

STRUCTURE
 Objectives
 Meaning and objectives of banking
 Types of business a banking company can transact
 Preparation of Balance Sheet of banking companies
 Preparation of Profit and Loss Account of banking companies
 Explanation of important terminology used in banking
 Summary
 Model questions
OBJECTIVES
 Understand the meaning and objectives of banking.

 Learn various types of businesses a banking company can transact
 Understand the preparation of Balance Sheet and Profit and Loss Account of banking
companies
INTRODUCTION
Banking Regulation Act, 1949 regulates the working of the banks in India. According to Section 5
(b) of the Act, banking means, “the acceptance for the purpose of lending or investment of deposits of
money from the public repayable on demand, order or otherwise and withdrawal by cheque, draft, order
or otherwise.”
BUSINESS IN WHICH A BANKING COMPANY MAY ENGAGE
A banking company may engage in the business as laid down the Banking Regulation Act 1949. As
per Section 6 of the Act, a banking company may engage in one or more of the following forms of business :
(i) Borrowing, raising , or taking up of money, the lending or advancing of money either upon or
with security ; the drawing, making, accepting , discounting, buying, selling, collecting and dealing in
bills of exchange, hundies, promissory notes, coupons, drafts, bills of lading, railway receipts, warrants,
debentures, certificates, scripts and other instruments, and securities whether transferable or negotiable or
not ‘ the granting and issuing of letters of credit, travelers cheques and circular notes ;
The buying , selling and dealing in bullion ; buying and selling of foreign exchange including
foreign bank notes ; the acquiring , holding, issuing on commission, underwriting and dealing in stock,
funds, shares, debentures, debenture stock, bonds, obligations, securities, and investment of all kinds ;
purchasing and selling of bonds, scripts or other form of securities on behalf of constituents or others ;
the negotiation of loans and advances ; the receiving of all kinds of bonds, scripts or valuables on deposit
or for safe custody or other wise ; the providing of safe deposit vaults, the collecting and transmitting of
money and securities ;
(ii) Contracting for public and private loans ;
(iii) Acting as agent for any government or local authority or person or persons ; carrying on agency
business ; acting as on attorney on behalf of customers;
(iv) Carrying on an transacting every kinds of guarantee and indemnity business ;
(v) Effecting , insuring, guaranteeing, underwriting , participating in managing and carrying out of
any issue, public or private or state or municipal or other leans or of shares, stock, debenture
stock of any company, corporation or association and lending of money for the purpose of any
such issue ;
(vi) Managing, selling or realising any property which may come to the possession of the company
in satisfaction of its items ;
vii) Acquiring and holding and generally dealing with any properly or right or title or interest in such
property as security for any loans or advances ;
(viii) Undertaking and executing of trusts ;
(x) Establishing or aiding in establishing the associations, institutions, trusts, funds is for the benefit
of employees or ex-employees of the company or dependents ; granting pensions and making
insurance payments ;
(xi) Acquisition, constructions, maintenance and alteration of any building or works.
(xii) Selling, improving, managing, developing, exchanging, leasing, mortgaging, disposing of any
property or right of the company ;
(xiii) Acquiring or undertaking the whole or any part of business of any person or company ;
(xiv) Doing all those things which are incidental to the advancement of business of the
company ;
(xv) Any other business which the Central Government may authorise by notification in the Official
gazette.
PREPARATION OF FINANCIAL STATEMENTS OF BANKING COMPANIES
Form ‘A’ (Third Schedule)

FORM OF BALANCE SHEET (VERTICAL FORM)
Balance Sheet of (here enter name of the Banking company)
As on 31.3… As on 31.3…
Schedul (Current year) (Previous
e year)
Capital and Liabilities
Capital 1
Reserves and Surplus 2
Deposits 3
Borrowings 4
Other liabilities and provisions 5
Total
Assets
Cash and balances with Reserve Bank of India 6
Balances with banks and money at call and short 7

notice
Investments 8
Advances 9
Fixed Assets 10
Other assets 11
Total
Contingent liabilities 12
Bills for collections

Schedule 1 – Capital
As on As on
31.3…. 31.3…
(current year) (previous
year)
I For Nationalised Banks

Capital (Fully owned by Central Government)
II For Banks Incorporated outside India
Capital
(i) (The amount brought in by banks by way of start up

capital as prescribed by RBI should be shown under
this head)
(ii) Amount of deposit kept with the RBI
Total
III For Other Banks

Authorised Capital
(…shares of ` … each)
Issued Capital
(… shares of ` … each)
Subscribed Capital
Called-up Capital
Less : Calls unpaid

Add : Forfeited shares
Schedule 2 – Reserve & Surplus

As on 31. 3… As on 31. 3…
(Current year) (Previous
year)
I Statutory Reserves
Opening Balance
Addition during the year
Deduction during the year
II Capital Reserves
Opening Balance
III Securities Premium

Opening Balance
IV Revenue and other Reserves

Opening Balance
V Balance in profit and loss account
Total (I, II, III, IV and V)
Schedule 3 – Deposits
As on 31.3 … As on 31.3 …
year)
A . I Demand Deposits
(i) From banks
(ii) From others

II Saving Bank Deposits
III Term Deposits
(i) From banks
(ii) From others
Total (I, II, III)
B. I Deposits of branches in India
II Deposits of branches outside India
Total
Schedule 4 – Borrowings
As on 31.3 … As on 31.3 …
year)
I Borrowings in India
(i) Reserve Bank of India
(ii) Other Banks
(iii) Other institutions and agencies
II Borrowings outside India
Total (I and II)
Secured borrowings in I & II above `
Schedule 5 – Other Liabilities And Provisions
As on 31.3 … As on 31.3.
(Current year) …
(Previous
year)
I Bills payable
II Inter-office adjustment (net)

III Interest accrued
IV Other (including provisions)
Total
Schedule 6 – Cash and Balances with Reserve Bank of India
As on 31.3 … As on 31.3.
(Current year) … Previous
year
I Cash in hand (including foreign currency notes)
II Balance with Reserve Bank of India
(i) In Current Account
(ii) In Other Accounts
Total (I and II)
Schedule 7 – Balance with Banks & Money at Call & Short Notice
As on 31.3 … As on 31.3. …
year)
I In India
(i) Balance with banks
(a) In Current Accounts
(b) In Other Deposit Accounts
(ii) Money at Call and Short Notice
(a) With Banks
(b) With Other Institutions
Total : (I & II)
II Outside India
(i) in Current Accounts
(ii) in other Deposit Account
(iii) Money at Call and Short Notice

Total
Grand Total : (I & II)
Schedule 8 – Investments
As on 31.3 … As on 31. 3 …
year)
I Investments in India in
(i) Government securities
(ii) Other approved securities
(iii) Shares
(iv) Debentures and Bonds
(v) Subsidiaries and/or joint ventures
(vi) Others (to be specified)
Total
II Investments outside India
(i) Government securities (including local authorities)
(ii) Subsidiaries and/or joint ventures abroad
(iii) Other investments (to be specified)
Total :
Grand Total (I & II)
Schedule 9 – Advances
As on 31.3… As on 31.3…
year)
A I Bills purchased and discounted
II Cash credits, over drafts and loans repayable to

demand
III Term Loan

Total
B I Secured by tangible assets
II Covered by Bank/ Government Guarantees
III Unsecured
Total
C I Advances in India
(i) Priority Sectors
(ii) Public Sector
(iii) Banks
(iv) Other
Total
II Advances outside India
(i) Due from banks
(ii) Due from others
(a) Bills purchased and discounted
(b) Syndicated Loans
(c) Others
Total
Grand Total (C.I & II)
Schedule 10 – Fixed Assets
As on 31.3… As on 31.3…
(Current year) (Previous year)
I Premises
At cost as on 31st March of the preceding year
Additions during the year
Deductions during year

Depreciation to date
II Other Fixed articles (including Furniture and Fixtures)

At cost as on 31st March of the preceding year
Additions during the year
Deductions during the year
Depreciation to date
Total (I & II)
Schedule 11 – Other Assets
As on 31.3… As on 31.3…
I Inter office adjustment (net)

II Interest accrued
III Tax paid in advance/tax deducted at source
IV Stationary stamps
V Non banking assets acquired in satisfaction of claims
VI Others
Total
Schedule 12 – Contingent Liabilities
As on 31.3… As on 31.3…
I Claims against the bank not acknowledged as debts
II Liability for partly paid investments
III Liability on account of outstanding forward exchange
contracts
IV Guarantees given on behalf of constituents
(a) In India
(b) Out side India

V Acceptances endorsements and other obligations
VI Other items for which the bank is contingently liable
Total
STATUTORY RESERVE
Under sec 17 of Banking Regulation Act, 1949, as revised vide circular

BOD.No.BP.BC.24/21.04.018/ 2000-2001 dated September 23, 2000 that all scheduled commercial banks
operating in India (including foreign banks) should transfer not less than 25 per cent of the ‘net profit’
(before appropriations) to a Reserve Fund known as “Statutory Reserve” with effect from the year ending
31 March 2001. Earlier this rate was 20%.
FORM B [Vertical Form]

Form of Profit and Loss Account for the year ended 31st March
(000’s omitted)
Schedule Year ended Year ended

No. 31.3… (Current 31.3… (Pervious
year) year)
I Income
Interest earned 13
Other income 14
Total
II Expenditure
Interest expended 15
Operating expenses 16
Provision and contingencies
Total
III Profit/Loss
Net profit/loss (–) for the year
Profit/loss (–) brought forward

Total
IV Appropriations
Transfer to statutory reserves
Transfer to other reserves
Transfer to Government/Proposed dividend
Balance carried over to balance sheet
Total
Schedules 13 – Interest earned
Year ended Year ended

31.3… 31.3…
(Current year) (Pervious year)
I Interest/discount on advances/bills
II Income on investments
III Interest on balance with Reserve Bank of India
IV Others
Total
Schedule 14 -Other Income

31.3… 31.3…
I Commission, exchange and brokerage
II Profit on sale of investments
Less : Loss on sale of investments
III Profit on revaluation of investments
Less : Loss on revaluation of investments
IV Profit on sale of land, building and other assets
Less : Loss on sale of land, building and other assets.

V Profit on exchange transactions
Less : Loss on exchange transactions
VI Income earned by way of dividends etc. from subsidiaries/

companies and/ or joint ventures abroad/in India
VII Miscellaneous Income
Total
Schedule 15 – Interest Expended

31.3… 31.3…
I Interest on deposits
II Interest on Reserve Bank of India/inter-bank borrowings
III Others
Total
Schedule 16 – Operating Expenses
Year ended 31.3 Year ended 31.3

I Payment to and provisions for employees
II Rent, taxes and lighting
III Printing and stationary
IV Advertisement and publicity
V Depreciations on bank’s property
VI Director’s fees, allowances and expenses.
VII Auditor’s fees and expenses (including branch auditors)
VIII Law charges
IX Postage, telegrams, telephones, etc. ;
X Repairs and maintenance
XI Insurance
XII Other expenditure
Total
PROVISIONS AND CONTINGENCIES

These include :
(i) Provisions for Bad and Doubtful Debts.
(ii) Provision for Taxation.
(iii) Provision by Transfer to Contingencies.
(iv) Provision for Diminution in the value of Investments.
NOTES ON ACCOUNTS AND DISCLOSURE OF ACCOUNTING POLICIES
As per a Circular dated 28.2.1991 of the Reserve Bank of India, the banks are to disclose the
accounting policies regarding key areas of operation along with notes on accounts in their financial
statements.
EXPLANATION TO SOME IMPORTANT TERMS
MONEY AT CALL AND SHORT NOTICE

It consists of loans (i) at call and (ii) at short notice. These are temporary loans given by one bank to
another or stock brokers. Under this arrangement, money is lent for a short period usually for 3 to 31
days. Money at call is that loan which the borrower can be called upon to repay by serving a 24 hours
notice on him. In case of money at short notice , at least three days notice has to be given for repayment.
ADVANCES
Advances include (i) loans, cash credits and over drafts (ii) bills discounted and purchased.
Loan: It is an advance made by the bank to a customer. The advance is of fixed amount which is
withdrawn in lumpsum. It may or may not be secured. A fixed rate of interest is charged by the bank on
whole of the amount whether loan amount is fully used or not.
Cash credits: It is an agreement by which a bank agrees to lend money upto a specified limit any
time customer approaches the bank. Cash credit-facility is usually granted on hypothecation or pledge of
stock.
Overdrafts : Overdraft facility is granted to these customers who have long standing honest dealings
with the bank. Under this facility bank allows a customer to over draw money from his current account up
to a specified limit.
Discounting of bills : Bank make payment of the bills before the maturity date. For this service, they
charge fixed rate of discount for the unexpired period of the bill.
Purchasing of bills: The may also purchase clean or documentary bills at the current rate of
interest.
BILLS FOR COLLECTION
This is an agency function. A bank receives a large number of bills receivable from its customers for
collection on the due dates of the bills. The bank keeps the bills with itself till maturity and on realisation,
credits the account of the clients concerned. Similarly, bills for collection include bills and drafts drawn
by the seller of goods on the buyers and sent to the bank for collection against delivery documents i.e.,
railway receipts, transport receipts, bills of lading etc. When the amount of bill is collected by the bank
from the buyer, it hands over the documents authorising the delivery of goods. The bank keeps a
systematic records of all such bills in a separate register which is called “Bills for Collection” register.
The total amount of all the bills lying with the bank for collection at the end of the year is shown
separately at the foot of the balance sheet.
ACCEPTANCES, ENDORSEMENTS AND OTHER OBLIGATIONS
A bank may accept and endorse bills on his behalf to accommodate its clients (usually in the case of
foreign bills). In order to ensure that the buyer pays for the goods purchased, the seller may ask the buyer
to get the bill accepted by the bank on behalf of the buyer. Similarly, the bill may be drawn by buyer’s
bank on the buyer and endorsed by the bank in seller’s favour. By doing this, bank becomes liable to
parties to whom bills are given or endorsed or guaranteed. Customers are also liable to the bank on whose
behalf guarantee is given.
All acceptances, endorsements and guarantees given by the bank on behalf of its customers which
have not matured on the date of preparation of bank’s balance sheet are shown as “Contingent
Liabilities” under Schedule 12.
NON-BANKING ASSETS
A Banking Company cannot acquire or deal in those assets which are not used in the ordinary
courses of banking business. But it can lend money against the security of such assets. When a customer
fails to repay his loan, bank may have to take possession of the assets/property charged in its favour. Such
assets are known as “Non-banking Assets.” These assets are shown under the head “Other Assets.” Non-
banking Assets are required to be disposed off by a bank within seven years of its acquisition. The profit
or loss on such sale shall be shown separately in the profit and loss account.
But, if a bank lends money against the security of such assets which the bank is authorised to acquire
and hold like gold, silver, securities and these assets are acquired by the bank against non-repayment of
loan, then these are not called non-banking assets.
BILLS PAYABLE
The banks facilitate remittance of funds from one place to another through bank drafts, telegraphic
transfers, traveller’s cheques, gift cheques, pay orders, circular notes, letter of credit etc. The bank issues
the instruments after receiving money from the person who intends to remit the same. The instruments
which remain outstanding on the day of preparation of final accounts are shown as “Bills Payable” under
the heading “Other Liabilities & Provisions”.
TRAVELLERS CHEQUES AND LETTERS OF CREDIT

To avoid the risk of losing cash in travel, a customer while going on a travel may take with him
travellers cheques rather than cash. The customers pays to the bank the amount for which he wants
travellers cheques to be issued. Every cheque carries the specimen signatures of the customer. Travellers
cheques can be encashed at different branches of the bank. The customer may present the unused cheques
for cancellation ; he will get back the full amount of the cheques cancelled.
A customer may request his bank to issue a Letter of Credit for which he has to deposit cash for the
required amount ; the bank issues the letter of credit, crediting Letter of Credit Account. When the bill of
exchange drawn against the letter of credit is received for payment, the amount is debited to Letters of
Credit Account.
If a bank is requested to issue travellers cheques or letter of credit in a foreign currency, the bank
collects from the customer the equivalent value in home currency and purchases immediately the amount
of the foreign currency equal to the value of travellers cheques or letter of credit issued.
BRANCH ADJUSTMENTS
This is also known as inter-office adjustments. When inter-branch transactions take place, there is a
possibility of the transaction being recorded by one branch but may not be recorded by the other branch
for non-receipt of advice or information. The “Branch Adjustment Account” in head office book either
show a debit or credit balance. If the “branch adjustments” show debit balance, it is shown in “other
assets” (Schedule 11) and if the balance is credit, it is shown in “other liabilities” (Schedule 5).
REBATE ON BILLS DISCOUNTED
This is known by various other names such as “unexpired discount”, or “Unearned discount” or
“Discount received in advance”. It is that portion of discount on bills discounted during the year which is
proportionate to the period falling in the next accounting year. When a customer gets a bill discounted,
the bank credits the discount account with the total amount of discount earned on discounted bill. If the
bill matured before the date of closing the books, the whole amount of discount becomes the income of
the bank. But if the bills falls due for payment after the date of closing the books, then the proportionated
amount of discount for the period falling in the next accounting year is called “Rebate on bills
discounted”.
The following journal entries will be passed in the books of bank in this connection :
1. When a bill is discounted with the bank
Bills Discounted Account Dr. (with full value of Bill)
To Customers Account (with net amount)
To Discount Account (with discount deducted)
2. Provision of Rebate on Bills Discounted (Unexpired Discount) at the end of the year
Discount Account Dr.
To Rebate on Bills Discounted Account
3. Reversal of Provision for Rebate on Bills Discounted at the commencement of the next
year
Rebate on Bills Discounted Account Dr.
To Discount Account
4. Transfer of Discount Income for the year
Discount Account Dr. With net discount
To Profit & Loss Account
TREATMENT OF REBATE ON BILLS DISCOUNTED
1. If it appears as a balance in the trial balance then it is only to be shown in the balance sheet
under the head “Other Liabilities & Provision”.
2. If it appears as an additional information then it is to be deducted from “interest & discount”
under the heading “Interest Earned” (Schedule 13) in Profit & Loss Account and as liability in Schedule
5.
Illustration 1
Make journal entries, show discount account and relevant items in balance sheet pertaining to the
extract from the books of Zee Bank Limited are as follows (as on 31.3.2014)
`
Bills discounted 40,35,000
Rebate on bills discounted as on 31.3.2013 25,705
Discount received 1,42,300
Bills Discounted above include the following :
Date of bill Term in Months Amount Rate of discount
1. Jan. 13, 2014 4 7,50,000 12%
2. Feb. 17, 2014 3 6,00,000 10%
3. March 6, 2014 4 4,00,000 11%
4. March 16, 2014 2 2,00,000 10%
Solution.
Statement showing calculation of Rebate on bills discounted
Date of Maturity No. of days Amount Rate of Annual Proportionate discount

Bill Date after of Bill discoun Discount
31.3.2014 t%
2014 2014 ` ` `
11,342  46 
Jan. 13 May 16 46 7,50,000 12 90,000  ` 90,000  
 365 
8,219  50 
Feb. 17 May 20 50 6,00,000 10 60,000  ` . 60,000  365 
 
12,055  100 
March 6 July 9 100 4,00,000 11 44,000  ` 44,000  
 365 
March 2,685  49 
May 19 49 2,00,000 10 20,000  ` 20,000  
 365 
16
34,301
Therefore, Rebate on bills discounted as on 31.3.2014 is ` 34,301
Journal Entries
2014
March Rebate on Bills Discounted Account Dr. 25,705
31
To Discount Account 25,705
(Being unexpired discount brought forward from the previous

year)
March Discount Account Dr. 34,301

31
To Rebate on Bills Discounted Account 34,301
(Being unexpired discount at the end of the year)
March Discount Account Dr. 1,33,704

31
To Profit and Loss Account 1,33,704
Discount Account
` `
2014 2014
March To Rebate on Bills March 31 By Sundries 1,42,300
31 Discounted (31.3.98) 34,301
To Profit and Loss 1,33,704 By Rebate on Bills 25,705

Account Discounted (1.4.97)
(B.F)
1,68,005 1,68,005
Balance Sheet of the Zee Bank Ltd. (Extract)

As on 31.3.2014
CAPITAL AND LIABILITIES Schedule `
Other Liabilities and provisions (Rebate on bills discounted) 5 34,301
Assets
Advances (Bills Discounted) 9 40,35,00

0
Illustration 2
From the following information prepare Profit and Loss Account of AMC Bank for the year ended
on 31st March, 2014.
` (’000) ` (’000)
Interest on Loans 2,590 Interest on Overdrafts 1,540
Interest on Fixed Deposits 3,170 Directors’ Fees, Allowances and
Commission 82 Expenses 30
Payment to Employees 540 Auditors’ Fees and Expenses 12
Discount on Bills Discounted 1,060 Interest on Saving Bank Deposits 680
Interest on Cash Credits 2,230 Postage, Telegrams & 14

Telephones
Rent, Taxes and Lighting 180 Printing and Stationery 29
Sundry Charges 17
Additional Information :
(i) Provide for Contingencies ` 2,00,000
(ii) Transfer ` 15,57,000 to Reserve Fund
(iii) Transfer ` 2,00,000 to Central Government.
Solution :
Profit & Loss Account

(For the year ended 31st March, 2014)
Particulars Schedule Year Ended

No. 31-3-2003
I. Income ` (’000)
Income Earned 13 7,420

Other Income 14 82
Total 7,502
II. Expenditure
Interest Expended 15 3,850
Operating Expenses 16 822
Provisions & Contingencies 200
Total 4,872
III. Profit / Loss
Net Profit for the year 2,630
Profit brought forward –
2630
IV. Appropriations :
Transfer to Statutory Reserve (25% of ` (000) 2,630) 658
Transfer to Other Reserves 1,557
Transfer to Central Government/Proposed Dividend 200
Balance carried to Balance Sheet 215
2,630
Working Notes :
SCHEDULE 13–INTEREST EARNED
` (’000)
1. Interest / Discount on Advances / Bills (1,060 + 2,590 + 2,230 + 1,540) 7,420
2. Interest on Investments –
3. Interest on Balances with RBI –
4. Others –
7,420
SCHEDULE 14–OTHER INCOME

` (’000)
Commission 82
82
SCHEDULE 15–INTEREST EXPENDED
` (’000)
1. Interest on Deposits (` 3,170 + ` 680) 3,850
3,850
SCHEDULE 16–OPERATING EXPENSES
` (’000)
I. Payment to Employees 540
II. Rent, Taxes & Lighting 180
III. Printing and Stationery 29
IV. Directors’ Fees, Allowances and Expenses 30
V. Auditors’ Fees & Expenses 12
VI. Postage, Telegrams & Telephones 14
VII. Sundry Charges 17
822
PROVISION & CONTINGENCIES
` (’000)
Provision for Contingencies 200
Illustration 3
The following ledger balances of ABC Bank Ltd. as at 31st March, 2014, are furnished to you.
Prepare the profit and Loss Account and Balance Sheet as per requirements of law :
` (’000) ` (’000)
Statutory Reserve 1,200 Cash 225
Bad Debts written off 128 Interest earned 550
Operating Expenses 182 Balance with Reserve Bank 2,030
Current Accounts 20,245 Balance with Foreign Banks 1,206
Interest Paid 160 Bills for Collection 1,500
Deposits Accounts 6,920 Borrowings from Banks 6,482
Profit and Loss Account, Balance 229 Cash Credits and Overdrafts 15,457
B/F
Bills Receivable for Customers 1,500 Investments 9,882
Discount 244 Bills Discounted 6,228
Endorsements and Guarantees 575 Premises 2,217
Commission 45 Share Capital 2,000
The following further information is furnished :
1. Rebate on Bills Discounted to be provided ` 64,000.
2. The Bank had paid an interim dividend of ` 2,00,000 during the year.
SUMMARY
Banking Regulation Act, 1949 regulates the working of the banks in India. Bank accepts deposits of
money from the public repayable on demand, order or otherwise and withdrawal by cheque, draft, order
or otherwise. The money so deposited by the public is lent for productive purposes or invested to earn a
higher rate of return. A banking company may engage in the business as laid down the Banking
Regulation Act 1949 viz. Borrowing, the lending or advancing of money, Bills of exchange, hundies,
promissory notes, coupons, drafts, bills of lading, railway receipts, the granting and issuing of letters of
credit, travelers cheques and circular notes etc. etc.
The financial statements of banking companies consist of Profit and Loss account and Balance
sheet. These statements are prepared in vertical form as per the format given in the Third Schedule of
Banking Companies Act. Under sec 17 of Banking Regulation Act, 1949, all scheduled commercial banks
operating in India (including foreign banks) are required to transfer not less than 25 per cent of the ‘net
profit’ (before appropriations) to a Reserve Fund known as “Statutory Reserve”.
SUGGESTED READINGS
 R. L. Gupta and Radhaswamy, Advanced Accountancy, Volume II, Sultan Chand and
Sons, New Delhi.
 Maheshwari and Maheshwari, Advanced Accountancy, Volume II, Vikas Publishing
House, New Delhi
 Shukla, Grewal and Gupta, Advanced Accounts, Volume II, S Chand and Company, New
Delhi
ANSWERS THE FOLLOWING QUESTIONS
1. Define banking company. Discuss various types of businesses which a banking company can
transact.
2. Explain the main provisions governing the preparation of accounts of a banking company
3. Draw a Performa of profit and loss account of a banking company.
4. Draw a Performa of Balance sheet of a banking company.
5. From the following balances prepare Profit and Loss Account of the bank as on 31.3.2014.
` `
Interest on current accounts 20,000 Rent, rates, insurance and 20,000

lighting
Interest on loans 4,00,000 Bad debts 5,000
Interest on fixed deposits 3,00,000 Salary and allowances 40,000
Interest on saving accounts 50,000 Provident fund contribution 10,000
Interest on over drafts 2,00,000 Interest on cash credits 2,00,000
Interest on borrowings from 60,000 Profit on sale of investment 6,000

banks
Dividend received 1,00,000 Depreciation on furniture 15,000
Director fee and allowances 25,000 Stationery and printing 25,000
Preliminary expenses 40,000 Postage and stamps 9,000
Auditors fee 10,000 Commission , exchange and 40,000

brokerage
Discount on Bills Discounted 3,75,000
Other information :
(a) Half of preliminary expenses are to be written off.
(b) Rebate on bills discounted (31.3.2013) ` 14,000 and ` 10,000 on 31.3.2014
(c) Provide for doubtful debts. ` 75,000
Solution.
Profit & Loss Account
for the year ending 31st March, 2014
Schedul Year ending

e 31-3-2014
Numbe (current
r year)
` (‘000)
I. Income :
Interest earned 13 1,179
Other incomes 14 146
Total 1,325
II. Expenditure :
Interest Expended 15 430
Operating Expenses 16 174
Provisions & Contingencies (` 75 + ` 5) 80
Total 684
III. Net Profit for the year 641
Profit/Loss (–) brought forward Nil
Total 641
IV. Appropriations :
Transfer to Statutory Reserve 160.25
Transfer to other Reserve –
Transfer to Government/Proposed Dividend –
Balance carried to Balance Sheet 480.75
Total 641
Schedules
Schedule 13 – Interest Earned
Year ended
31-3-2014
(current year)
` (‘ 000)
I. Interest/discount on advances/bills 1,179

II. Income on investments –
III. Interest on balance with RBI and other Inter-bank funds –
IV. Others. –
Total 1,179
Schedule 14 – Other Income
Year ended
31-3-2014
(current year)
` (‘ 000)
I. Commission, Exchange and Brokerage 40
II. Profit on sale of Investments
Less : Loss on sale of Investment 6
III. Profit on revaluation of Investments
Less : Loss on revaluation of Investments –
IV. Profit on sale of land, buildings & other assets

Less : Loss on sale of land etc. –
V. Profit on exchange transactions
Less : Loss on sale of exchange transactions –
VI. Income earned by way of dividends etc. from

subsidiaries/companies and / or joint ventures abroad/ in India 100
VII. Miscellaneous Income –
Total 146
Schedule 15 – Interest Expended
Year ended
31-3-2014
(current year)
` (‘ 000)
I. Interest on deposits (` 20 + ` 300 + ` 50) 370
II. Interest on Reserve Bank of India/ Inter-bank borrowings 60

III. Others. –
Total 430
Schedule 16 – Operating expenses
Year ended
31-3-2014
(current year)
` (‘ 000)
I. Payments to and provisions for employees 50

II. Rent, taxes and lighting 20
III. Printing and stationery 25
IV. Advertisement and publicity –
V. Depreciation on bank’s property 15
VI. Director’s fees, allowances and expenses 25
VII. Auditor’s fees and expenses (including branch auditors) 10
VIII.Law Charges –
IX. Postage, Telegrams, Telephones etc. 9
X. Repairs and Maintenance –
XI. Insurance –
XII. Other expenditure – Preliminary expenses written off 20
Total 174
Note : Column of previous year is not prepared for want of information.

LESSON 10
HOLDING COMPANY ACCOUNTS
STRUCTURE
 Objectives
 Meaning of Holding Company
 Meaning of Subsidiary Company
 Cost of Control/Goodwill
 Minority Interest
 Capital Profits/ Pre-acquisition profits
 Revenue Profits/Post-acquisition profits
 Meaning of Consolidated Balance Sheet
 Provisions of Companies Act, 2013 regarding preparation of Consolidated Balance

Sheet
 Preparation of Consolidated Balance Sheet
 Summary
 Model questions
OBJECTIVES
 Understand the meaning of holding company and subsidiary company.
 Learn about key concepts of accounting for holding companies.
 Know about the meaning of consolidated balance sheet.
 Explain how to prepare Consolidated Balance Sheet.

INTRODUCTION
Companies have to depend upon other companies for supply of raw materials, components etc. In
order to expand business, or in order to assure uninterrupted supply of inputs, or to enable marketing of
its products, the management of a company tries to acquire control on such firms supplying raw materials
and components or firms engaged in marketing the output. The company acquiring the controlling
interest in another company is called the Holding Company and the company in which the controlling
interest is acquired is called Subsidiary Company. A few important objectives of acquiring majority
control over other company are: to reduce cost, to gain financially, to achieve growth and to diversify
the activities.
KEY DEFINITIONS
 Holding company or parent company: It is the company which controls the other
company. A company is said to control the other company:
 When that company holds more than half of the share capital of the other company.
(At least 51%). A holding company may acquire more than fifty percent of the equity
shares of subsidiary company or may acquire all the shares of subsidiary company. From this
point of view there may be two types of Holding Company. These are: i) Holding company
which acquires all the equity shares of subsidiary company; or, ii) Holding company which
acquires majority of the equity shares of the subsidiary company.
 When the company control the composition of board of directors of other company.
 When the company is a subsidiary of any company which is that other company’s subsidiary.
For example Company Y is a subsidiary of Company X and Company Z is a subsidiary of
Company Y. So Company Z will also be a subsidiary of Company X.
Subsidiary company: When a company is controlled by some other company called holding
company, then the company which is being controlled is called subsidiary company. There are
two types of subsidiary companies:
(i) Wholly owned subsidiary company; and
(ii) Partly owned subsidiary company.
(i) Wholly owned subsidiary company
Where all the shares of the subsidiary company are held i.e. owned by the holding company, such
subsidiary company is termed as wholly owned subsidiary company. In such a case, all the shares of the
subsidiary company are purchased by the holding company.
(II) Partly owned subsidiary company
Where majority of the shares of the subsidiary are held i.e. owned by the holding company, such a
subsidiary is known as partly owned subsidiary company. In such a case, some of the shares of the
subsidiary are owned by persons (shareholders) other than the holding company. The interest of such
shareholders other than the interest of the holding company is termed as ‘‘Minority Interest’’.
Students must keep the above distinctions in mind because the principle of consolidation of final
accounts will vary depending on whether the subsidiary is a fully owned subsidiary or a partly
owned subsidiary.
 Group: Combination of holding and subsidiary companies together is called group.
 Consolidated financial statements: As per Indian GAAP as well as International

Accounting Standard, parent company is required to prepare its financial statements as stand
alone as well as consolidated statements. Consolidated Financial Statements are the
combined financial statements of parent and its subsidiary/ subsidiaries i.e. consolidated
financial statements are statements of group as a whole. Sub Section (3) of Section 129 of the
Companies Act, 2013 mandates every company to prepare a consolidated financial statement
for all the companies having one or more subsidiaries.
PREPARATION OF CONSOLIDATED BALANCE SHEET
Consolidation of Balance Sheet implies preparation of a single Balance Sheet by aggregating all items of
assets and liabilities, appearing in the respective Balance Sheets of both the holding company and its
subsidiary company. All assets and liabilities of the subsidiary company are added to the assets
and liabilities of the parent company.
Illustration 1: H Ltd. acquired all shares of S Ltd. on 31.03.2015 for Rs. 400000. On that date
the balance sheets of two companies were as under:
Balance sheet as on 31.03.2015
LIABILITIES H. Ltd. S. Ltd. ASSETS H. Ltd. S. Ltd.
(Rs.) (Rs.) (Rs.) (Rs.)
Share Capital 1000000 400000 Sundry assets 960000 520000
General Reserve 200000 Investments
100% shares in S.
Ltd. 400000
Non-current
liabilities
10% debentures 100000
Current liabilities 60000 120000
Total 1360000 520000 Total 1360000 520000
SOLUTION:
Consolidated Balance Sheet
LIABILITIES (Rs.) ASSETS (Rs.)
Share Capital 1000000 Sundry assets

H Ltd. 960000
S Ltd. 520000
1480000
General Reserve 200000
Non- current liabilities

Current liabilities
H Ltd. 60000
S Ltd. 120000 180000
Total 1480000 Total 1480000
Students must note that 100% shares in S. Ltd. represent sundry assets of Rs. 520000
minus the liabilities of Rs. 120000. Hence, while preparing consolidated balance sheet, the
share capital of S ltd will get cancelled against “Investment in shares of S ltd” and all other
assets and liabilities of S Ltd. Will be added to the assets and liabilities of the parent
company i.e. H.Ltd..
Cost of control/ Capital Reserve: Sometimes the holding company pays more or less than
the value of net assets of subsidiary company. In such situations, the consolidation results into
goodwill/ cost of control or capital reserve
 Cost of control/ Goodwill: It is the extra price paid over and above the value of net
assets acquired by the holding company in subsidiary company.
 Capital reserve: It is the profit derived by holding company for acquiring shares of
subsidiary company.
(Rs.) (Rs.) (Rs.) (Rs.)
100% shares in S.
Ltd. 420000
Non-current
liabilities
Total 1380000 520000 Total 1380000 520000
SOLUTION:
Share Capital 1000000 Goodwill or cost of control 20000

General Reserve 200000 Sundry assets
H Ltd. 960000
S Ltd. 520000
1480000
Current liabilities
H Ltd. 80000
S Ltd. 120000 200000
Total 1500000 Total 1500000
(Rs.) (Rs.) (Rs.) (Rs.)
100% shares in S.
Ltd. 380000
Non-current
liabilities
Total 1340000 520000 Total 1340000 520000
SOLUTION:

H Ltd. 960000
S Ltd. 520000
1480000
Capital Reserve 20000
Current liabilities
H Ltd. 40000
S Ltd. 120000 160000
Total 1480000 Total 1480000
Minority interest: In case the controlling interest of parent company in subsidiary is less
than 100%, the balancing amount is referred as minority interest and is shown in liabilities side
of consolidated balance sheet. Minority Interest means interest held by other shareholders (other than
Holding company) in the net assets of the subsidiary. It represents proportional value of assets and
liabilities belonging to shareholders outside the group. In Consolidated Balance Sheet, all assets
and liabilities of the subsidiary company are added to the assets and liabilities of the parent
company and proportional value of assets and liabilities belonging to minority shareholders is
shown as minority interest on liabilities side of consolidated balance sheet.
Capital profits/losses: These are the profits/losses lying in the balance sheet of
subsidiary company pertaining to pre-acquisition period. These are known as capital profits/
losses in the context of holding company accounts even if they otherwise are in the nature of
revenue profits. These profits/ losses are to be divided among holding and outsiders on the basis
of their shareholding proportions. Holding company’s share is adjusted in calculation of cost of
control/ capital reserve. The outsider’s share is adjusted in minority interest.
Revenue profits/losses: Post-acquisition profits/losses are known as revenue profits/ losses

in the context of consolidated balance sheet. These are earned by subsidiary after acquisition of
its shares by the holding company. These are also divided between holding company and
outsiders on basis of their shareholding proportions. Holding company’s share is added/
deducted from its profit and loss account in consolidated balance sheet. Outsiders share is
adjusted in minority interest.
Treatment of unrealized profits

Usually there will be transactions between holding company and subsidiary company involving
profits and losses. Suppose holding company buys goods costing Rs. 40000 at a price of Rs.
50000 from subsidiary company. If Holding company has sold all the goods, it does not matter
because all the profit of Rs. 10000 has bee realized. But if the goods remain unsold and are
included in the stock, the profit charged by subsidiary company remains unrealized. Thus at the
time of preparing consolidated balance sheet, a reserve equal to the unrealized profits will be
created and deducted from value of closing stock and out of profit and loss balance.
Mutual Owings
In preparing consolidated balance sheet, sums owed by holding company to its subsidiary
company and vice versa have to be eliminated. For example, if holding company owes Rs. 50000
to subsidiary company, then Rs. 50000 will be deducted from both debtors and creditors. The
same applies to bills accepted by either of them and held by the other as bills receivable in the
balance sheet. But in case these bills have been discounted or endorsed, then these will not be
eliminated.
STEPS IN CONSOLIDATION: A QUICK REVIEW
The steps followed for consolidation can be summarized as:
1)Fixed assets, except investment in subsidiary company and current assets are added on
one to one basis,
2)Liabilities, except owner’s equity including reserves and surplus are also added on one
to one basis.
3)Equity capital of subsidiary company and cost of investment in shares of subsidiary
company is eliminated
4)Goodwill/ capital reserve is calculated:
Cost of investment XXX
Less: cost of equity share acquired (XXX)
proportionate share of reserves on date of acquisition (XXX) (XXX)
Goodwill/ capital reserve = XXX
5)Group reserves are calculated by adding to parent company’s own reserve, a

proportionate share in reserves of subsidiary company after acquisition.
6)Minority interest is calculated, in case of parent company doesn’t acquire 100%
controlling interest, by adding:
i) Proportionate share capital belonging to minority shareholders
ii)Minority share in reserves as on date of consolidation.
7)Equity share capital of parent alone appears in consolidated balance sheet.
8) Mutual owings will be eliminated
Illustration 4
H Ltd. acquired 70% share of S Ltd. on 30.06.2014 for Rs. 1200000. On that date general reserve
of S Ltd. Stood at Rs. 40000.
(Rs.) (Rs.) (Rs.) (Rs.)
Share Capital 3000000 1000000 Fixed assets 1000000 800000
Reserves &Surplus Investments
General reserve 500000 50000 In govt. securities 500000
P&L 200000 50000 In S. Ltd. 1200000
Non- current Current assets 2000000 400000
liabilities
Total 4700000 1200000 Total 4700000 1200000
SOLUTION:
Consolidated Balance Sheet as on 31.03.2015
Share Capital 3000000 Goodwill 463250

Fixed assets
H Ltd. 1000000
S Ltd. 800000 1800000
General reserve 500000 In govt. securities 500000
P&L H Ltd. 200000
+70% share in S Ltd. 33250 233250
Non- current liabilities Current assets
10% debentures 600000 H. Ltd. 2000000
Minority interest 330000 S Ltd. 400000 2400000
Current liabilities
H Ltd. 400000
S Ltd. 100000 500000
Total 5163250 Total 5163250
WORKING NOTES:
1. Pre-acquisition and post acquisition profits:
Pre-acquisition period Post acquisition period Total

01.04.2014 – 30.06.2014 01.072014 – 31.03.2015
General reserve 40000 10000 50000
(given)
P&L 50000 x 3/12 = 12500 50000 x 9/12= 37500 50000
Total 52500 47500 100000

Note: It is assumed that profits are earned evenly during the year.
2. Minority interest:
30% of share capital (1000000x30/100) 300000
Add: 30% of minority interest in pre-acquisition profits (52500x30/100) 15750
Add: 30% of minority interest in post-acquisition profits (47500x30/100) 14250
330000
3. Cost of control/ goodwill:
Cost of acquisition of S Ltd. 1200000
Less: paid up value of shares acquired 700000
Less: share in pre-acquisition profits 36750 (736750)
463250
SUMMARY
The company acquiring the controlling interest in another company is called the Holding Company and
the company in which the controlling interest is acquired is called Subsidiary Company. A few important
objectives of acquiring majority control over other company are: to reduce cost, to gain financially, to
achieve growth and to diversify the activities. Combination of holding and subsidiary companies
together is called group. As per Indian GAAP as well as International Accounting Standard,
parent company is required to prepare its financial statements as stand alone as well as
consolidated statements. Consolidated Financial Statements are the combined financial
statements of parent and its subsidiary/ subsidiaries i.e. consolidated financial statements are
statements of group as a whole. Consolidation of Balance Sheet implies preparation of a single
Balance Sheet by aggregating all items of assets and liabilities, appearing in the respective Balance Sheets
of both the holding company and its subsidiary company.
SUGGESTED READINGS
Sons, New Delhi.
House, New Delhi
Delhi
1. What is a holding company?

2. Explain the advantages of creating holding company.
3. What is a subsidiary company? Explain different types of subsidiary companies.
4. What is a consolidated balance sheet and how it is prepared?
5. H Ltd. acquired all shares of S Ltd. on 31.03.2015 for Rs. 480000. On that date the
Balance sheets of two companies were as under:
(Rs.) (Rs.) (Rs.) (Rs.)
100% shares in S.
Ltd. 480000
Non-current
liabilities
Total 1440000 520000 Total 1440000 520000
6 H Ltd. acquired 60% share of S Ltd. on 30.06.2014 for Rs. 1200000. On that date
general reserve of S Ltd. Stood at Rs. 40000.
(Rs.) (Rs.) (Rs.) (Rs.)
P&L 200000 50000 In S. Ltd. 1200000
liabilities
Total 4700000 1200000 Total 4700000 1200000
LESSON 1
LIQUIDATION ACCOUNTS
STRUCTURE
 Objectives
 Meaning and methods of liquidation
 Effect of winding up order
 Settlement of liabilities at the time of winding up
 Consequences of winding up
 Preparation of Statement of Affairs
 Preparation of Deficiency/ Surplus account
 Summary
 Model questions
OBJECTIVES
 Understand the meaning and methods of liquidation
 Learn about effects and consequences of winding up
 Know about the order of settlement of liabilities at the time of winding up
 Learn how to prepare Statement of Affairs and Deficiency/ Surplus Account
MEANING
A joint stock company is created by law and it can come to an end only with the operation of
law. Liquidation is a legal process by which the affairs of the company are wound up
METHODS OF WINDING UP
Section 270 of Companies Act, 2013 provides that a company may be wound up in any of
the following ways:
A. Winding up by the Tribunal, or compulsory winding up
B. Voluntary winding up :
(i) Members’ voluntary winding up.
(ii) Creditors’ voluntary winding up.
C. Winding up subject to the supervision of court.
A. WINDING UP BY THE TRIBUNAL
Compulsory Winding up is also known as Winding up by Tribunal. Section 271 of
Companies Act, 2013 provides that a company may be wound-up by the Tribunal in following
circumstances:
(i) If the company is unable to pay its debts;

(ii) if the company has, by special resolution, resolved to be wound up by the Tribunal ;
(iii) if default is made in filing statutory report or in holding statutory meeting ;
(iv) If the company has acted against the interest of the sovereignty and integrity of India,
the security of the State, friendly relations with foreign States, public order, decency or
morality.
(v) If the Tribunal is of the opinion that affairs of the company has been conducted in a
fraudulent manner or the company was formed for fraudulent and unlawful purpose.
(vi) If the company has made a default in filing with the registrar its financial statements or
annual returns for immediately preceding five consecutive financial years; or
(vii) if the Tribunal is of the opinion that it is just and equitable that the company should be
wound up.
WHO MAY APPLY FOR WINDING UP BY TRIBUNAL
The application for winding up may be made by :
(i) the company ;
(ii) any creditor or creditors ;
(iii) any contributory or contributories ;
(iv) all or any of the parties at (i), (ii) and (iii), whether together or separately ;
(iv) the Registrar of Companies ;
(v) any person authorised by the Central Government in that behalf.
On hearing the petition, the Tribunal may dismiss it, adjourn it, make an interim order or
make a compulsory order for winding up of the company.
EFFECT OF WINDING UP ORDER

When order for winding up is passed :–
(i) Liquidator attached to the High Court becomes official liquidator ;
(ii) Suits and legal proceedings against the company stay except with the leave of the court ;
(iii) Directors cease to function ;
(iv) Employees of the company are deemed to be discharged ;
(v) Debentures and other debts become immediately payable ;
(vi) Company ceases to carry on its business.
B. VOLUNTARY WINDING UP
According to Section 304 of Companies Act, 2013 the winding up is said to be voluntary if
:
(i) the period fixed for its duration has expired or the event on the happening of which the
company is to be wound up has happened and the company has passed ordinary
resolution in the general meeting to this effect ;
(ii) the company passes a special resolution to wind up voluntarily.
There are two kinds of voluntary winding up:
1. MEMBER’S VOLUNTARY WINDING UP
A company may be wound up as members’ voluntary winding up, if a declaration of the
company’s solvency is made by its directors, or where the company has more than two directors,
by the majority of directors at Board Meeting, that they are of the opinion that the company has
no debts, or that it will be able to pay its debts in full within 3 years from the commencement of
winding up.
Section 310 of the Companies Act, 2013 provides that on the passing of the resolution for
winding up, the company must in general meeting appoint liquidator from the panel prepared by
the Central Government and fix his remuneration.
2. CREDITOR’S VOLUNTARY WINDING UP
Section 306 of Companies Act, 2013 provides that on the same day or the day following
the day of the general meeting at which the resolution for voluntary liquidation is proposed as
per Section 304, a meeting of the creditors will be held. At the creditors, meeting, the Board shall
place before the meeting in the Form as may be prescribed a statement of the position of the
company’s affairs together with a list of creditors of the company and the amounts of their
claims. The meeting will be presided by one of the directors. If the director did not turn up, the
creditors could appoint their own nominee to preside over their meeting.
Where two-thirds in value of creditors of the company are of the opinion that :
(a) it is in the interest of all parties that the company be wound up voluntarily, the company
shall be wound-up voluntarily ; or
(b) the company may not be able to pay for its debts in full from the proceeds of assets sold in
voluntary winding up and pass a resolution that it shall be in the interest of all parties if the
company is wound up by the Tribunal, the company shall within fourteen days thereafter file an
application before the Tribunal.
C. WINDING UP UNDER SUPERVISION OF COURT:
The court may under certain circumstances pass an order for continuation of voluntary
winding up subject to its supervision of the court on such terms and conditions as may deem fit.
The liquidator will continue to exercise all powers subject to any restrictions laid down by the
court.
LIQUIDATOR
A Liquidator is a person who is appointed for the purpose of realising various assets and
paying various liabilities and conducting the legal proceeding in winding up of a company. Soon
after his appointment, liquidator takes under his control all the property of the company, its
effects and actionable claims.
STEPS IN LIQUIDATION
In case of compulsory winding up by court; following steps are needed :
(i) the petitioner must file a copy of order with the Registrar within one month of the
order.
(ii) the directors and chief officers of the company must submit within 21 days of his
appointment, a statement of affairs of the company.
(iii) the liquidator must convene a meeting of the creditors of the company for determining
whether a committee of inspection should be appointed, within one month of
winding up order.
(iv) within four months of the date of winding up order, the liquidator should file a
preliminary report in the court showing (a) capital (b) particulars of assets, (c)
amount of liabilities,
(d) causes of failure of the company, and (e) whether any further enquiry is desirable.
(v) he also has to make a list of contributories and get it approved by the court.
(vi) he has to ascertain the debts due by the company and make a list of creditors.
(vii) he has to file a Statement of Liquidator’s Account atleast twice in a year.
(viii) he has to file a statement showing position of liquidation once a year.
(ix) he may declare and pay dividends to creditors.
(x) he will distribute any surplus among the shareholders.
(xi) when affairs of the company have been completely wound up, the court passes an
order that company is dissolved.
ORDER OF PAYMENT OF LIABILITIES
The liquidator shall make payments in following order :
1. Legal charges of winding up and liquidator’s remuneration.
2. Cost of expenses of winding up.
3. Preferential creditors.
4. Payment to debentureholders & others having floating charges.
5. Unsecured creditors.
6. Preference shareholders
7. Equity shareholders.
CONSEQUENCES OF WINDING UP
As to Shareholders : A shareholder is liable to pay the full amount of shares held by him.
This liability continues after winding up, but he is then described as a “Contributory” by Section
428. A contributory is every person liable to contribute to the assets of the company in the event
of its being wound up, and includes a holder of fully paid up shares and also any person alleged
to be contributory. Contributories are either present or past. Present members are included in ‘A’
List of Contributories and Past members who have sold their shares within one year prior to
winding up are included in ‘B’ list of contributories.
LIABILITY OF THE CONTRIBUTORIES
Present and past shareholders of the company may be asked to contribute towards the assets
of the company as follows:
(i) A contributory can not be asked to pay more than the unpaid amount on the shares held
by him.
(ii) A past member is not liable to contribute unless the present members have been called
upon to contribute to the fullest extent.
(iii) A past member who ceased to be a member more than a year before commencement of
winding up is not liable to contribute.
(iv) A past member is not liable in respect of a debt incurred after he ceased to be a member.
As to Creditors : A company can never be adjudged insolvent, although it may have
become insolvent in the sense that it is unable to pay its debts – Where a solvent company is to
be wound up, all claims against the company are admissible, and when they are proved, payment
is made. In the case of an insolvent company, the insolvency principles apply. A secured
creditors may either :
(i) rely on the security and ignore the liquidation; or
(ii) value his security and prove for the balance of his debt; or
(iii) give up his security and prove for the whole amount.
Unsecured creditors of an insolvent company are paid in the following order :
(i) Overriding preferential payments under Section 529 A.
(ii) Preferential payments under Section 530.
(iii) Other debts pari passu (proportionately).
PREFERENTIAL CREDITORS
Preferential creditors are the unsecured creditors who have priority of claims over
other unsecured creditors because of the preference given to them by law.
Preferential creditors are paid before making any payment to creditors secured by floating charge
or unsecured creditors.
Section 327 of the Companies Act, 2013 states that on winding up, the following debts
shall be paid in priority to all other debts :
(a) All revenues, taxes, cesses and rates due from the company to the Central or a State
Government or to a local authority due and payable within twelve months next before
the commencement of winding up.
(b) All wages or salaries of any employee in respect of services rendered to the company
and due for a period not exceeding four months within the twelve months next before
the commencement of winding up. However, the amount payable to one claimant
should not exceed ` 20,000.
(c) All accrued holiday remuneration becoming payable to any employee or in case of his
death to any other person in his right, on the termination of his employment before, or
by the effect of the winding up order.
(d) Unless the company is being wound up voluntarily for the purpose of reconstruction or
amalgamation with another company, all contributions payable during the 12 months
next before winding up, by the company as the employer of any persons under the
Employees State Insurance Act, 1948 or any other law.
(e) Unless the company is being wound up voluntarily for reconstruction or amalgamation
or where it has taken out a workman compensation insurance policy, all compensation
due under the Workmen Compensation Act, 1923 in respect of the death or disablement
of any employee of the company.
( f ) All sums due to any employee from a provident fund, a pension fund, a gratuity fund or
any other fund for the welfare of the employees, maintained by the company ; and
(g) The expenses of any investigation held in pursuance of Section 213 or 216 in so far as
they are payable by the company.
CONTINGENT LIABILITY
If a contingent liability becomes an actual liability, its amount should be included in the
category of unsecured creditors. If the amount of contingent liability is not known, a reasonable
estimate should be provided for.
SET OFF
If the company and any person owe each other, such claims can be set off. However, a
shareholder cannot set off his claim against his liability to pay calls. He must first pay call and
then rank as creditor.
COST OF LIQUIDATION
All costs, charges and expenses of liquidation are payable out of the assets of the company
prior to all other claims except secured creditors.
STATEMENT OF AFFAIRS
It is the statutory duty of directors or other chief officer of the company to submit to the
official liquidator a statement as to the affairs of the company within twenty one days from the
date of appointment of liquidator, or the date of winding up order.
The aforesaid statement of affairs must show the following particulars:
(a) the assets of the company stating separately the cash balance in hand and at bank, if any,
and the negotiable securities, if any, held by the company ;
(b) its debts and liabilities ;
(c) the names, residences and occupation of its creditors, stating separately the amount of
secured and unsecured debts. In the case of secured debts, particulars of securities given,
whether by the company or an officer thereof, their value and the dates on which they
were given ;
(d) the debts due to the company. The names, residences and occupations of the persons
from whom they are due and the amount likely to be realised ; and
(e) such further other information as may be prescribed by the Central Government or the
official liquidator my require.
Specimen of Statement of Affairs
Statement as to affairs of …… Ltd. on the …… day of …… 20…… being the date of
winding up (or order appointing Provisional Liquidator or the date directed by the Official
Liquidator, as the case may be), showing assets at estimated realisable values and liabilities
expected to rank.
Estimated
Realisable
value
Assets not specifically pledged (as per list ‘A’)

Cash in hand
Balance at Bank
Marketable Securities
……………
……………
……………
……………
Land & Building
Other Assets
Assets specifically pledged (as per list B)
a b c d
Estimated Due to Deficiency Surplus
Realisable secured ranking as carried to last
value creditors unsecured column
` ` ` `
Freehold Property
…………………
…………………
…………………
Estimated surplus from assets specifically pledged
Estimated total assets available for preferential creditors,
debentureholders and unsecured creditors
Summary of Gross Assets
Gross realisable value of assets specifically

pledged
Other assets
Gross assets
Gross Liabilities
Liabilities
Secured creditors (as per List ‘B’) to the extent to

which their claims are estimated to be covered by
assets specifically pledged (In Gross liabilities
column only )
Preferential creditors ( as per List ‘C’)
Estimated balance of assets available for
Debentureholders & others secured by a floating
charge
Debentureholders & others secured by a floating charge
(as per List “D”)
Estimated surplus / deficiency as regards
Debentureholders.
Unsecured Creditors ( as per list ‘E’)
Estimated surplus or deficiency as regards
unsecured creditors.
Issued and Called-up Capital :
……Preference shares of ` … each `… called up (as
per list ‘F’)
……Equity shares of ` … each ` … called up (as per
list G)
Estimated surplus / deficiency as regards members (as
per list ‘H’)
DEFICIENCY ACCOUNT OR SURPLUS ACCOUNT

This account is prepared to list the reasons leading to deficiency or surplus on winding up.
The official liquidator will specify a date for period covered by this account. On that date either
assets will exceed capital and liabilities i. e. there would be a reserve or there would be a deficit
or debit balance in the profit and Loss Account.
The Deficiency/Surplus Account is divided into two parts: the first part starts with the deficit
(on the given date) and contains every item that increases deficiency (or reduces surplus) such as
losses, dividends etc. The second part starts with the surplus on the given date and includes all
profits.
The difference between the first part and the second part shows surplus or deficiency. The
deficiency or surplus must be the same as shown by the Statement of Affairs as regards
members.
Specimen of Deficiency / Surplus Account
Items contributing to deficiency (or reducing surplus) `
1. Excess of capital and liabilities over assets on the …… 20… as

per Balance sheet
2. Net dividends and bonus declared during the period ……
3. Net trading losses after charging interest, depreciation and taxes

4. Losses other than trading losses written off or for which
provision has been made in the books during the same period
5. Estimated losses now written off or for which provision has

been made for purposes of preparing the statement (give
particulars or annex schedule)
6. Other items contributing to deficiency or reducing surplus
Items reducing deficiency or contributing to surplus
7. Excess of assets over capital and liabilities on …… 20… as per

Balance Sheet
8. Net trading profits for the period from the ……20… to the date
of statement
9. Profits and income other than trading profits during the same
period
10. Other items reducing deficiency / contributing to surplus
Deficiency / Surplus (as per statement of affairs)
Illustration 1
ABC Ltd. went into liquidation on 31st August 2014 and the following particulars are provided :
Equity Share Capital :
` 40,000 shares of ` 20 each ` 10 paid up 4,00,000
6% Preference Shares :
80,000 shares of ` 10 each fully paid 8,00,000
5% Ist Mortgage Debentures having floating charge 4,50,000
Fully Secured Creditors (value of securities ` 1,05,000) 90,000
Partly Secured Creditors (value of securities ` 30,000) 60,000

Preferential creditors for rent, taxes, salaries etc. 18,000
Bills Payable 4,00,000
Unsecured Creditors 2,10,000
Bank Overdraft 30,000
Bills Receivable 45,000
Bills discounted ` 1,20,000 of which ` 30,000 are bad 
Book Debts :
Good 30,000
Doubtful (estimated to produce 50%) 21,000
Bad 18,000
Land and Building (Estimated to produce ` 3,00,000) 4,50,000
Stock in Trade (Estimated to produce ` 1,20,000) 1,50,000
Machinery (Estimated to produce ` 60,000) 1,50,000
Cash in hand 3,300

Prepare Statement of Affairs of the Company.
Solution :
Statement of Affairs of Rolex Company Ltd.
(In liquidation)
As on 31st August 2014
Estimated
Realisable
Value
Assets
Assets not specifically pledged (as per List ‘A’) :
Cash 3,300
Bills Receivable 45,000
Debtors : Good 30,000
Doubtful (50% of 21,000) 10,500 40,500
Stock 1,20,000
Machinery 60,000
5,68,800
Assets Specifically Pledged (as per List ‘B’)
(a) (b) (c) (d)
Assets Estimated Due to Deficiency Surplus

Realisable Secured Ranking as carried to
value Creditors Unsecured last
Column
` ` `
`
Securities to 1,05,000 90,000  15,000

Fully
Secured
Creditors
Securities to 30,000 60,000 30,000 

Partly
Secured
Creditors
Estimated Surplus from Assets specifically Pledged 15,000
Estimated total assets available for Preferential 5,83,800

Creditors, Debentureholders, Unsecured Creditors
Summary of Gross Assets `
Gross Realisable Value of Assets Specifically Pledged 1,35,000
Other Assets 5,68,800
7,03,800
Gross
Liabilities Liabilities
1,20,000 Secured Creditors as per List B to the extent to which 

their claimes are estimated to be covered by assets
specifically pledged
18,000 Preferential Creditors (as per List ‘C’) 18,000

Estimated balance of assets available for debentures 5,65,800
secured by a floating charge and unsecured creditors
4,50,000 Debentures Secured by a floating charge (as per list 4,50,000

‘D’) 1,15,800
Estimated Surplus as regards Debentureholders
7,00,000 Unsecured Creditors as per List E `
Bank Overdraft 30,00

0
Bills Payable 4,00,

000
Unsecured Creditors 2,10,
000
Liability on Bills discounted 30,00

0
11,,88,000 Balance from Partly Secured Creditors from List 30,00 7,00,000
B 0
Deficiency as regards Unsecured Creditors 5,84,200
Issued and Called-up Capital
80,000 Preference shares (as per List F) 8,00,000
40,000 Equity shares of ` 20 each ` 10 paid up (as 4,00,000
per List G)
Deficiency (as per List ‘H’) 17,84,200
Illustration 2
The following information was extracted from the books of a limited company on 31st
March, 2014 on which date a winding up order was made :
Equity Share Capital–20,000 Shares of ` 10 each 2,00,00

0
14% Preference Share Capital–30,000 Shares of ` 10 each 3,00,00

0
Calls in arrear on Equity Shares (estimated to realise ` 2,000) 4,000
14% First Mortgage Debentures secured by a floating charge on the

whole of the assets of the company (interest paid to date) 2,00,00
0
Creditors having a mortgage on the Freehold Land and Buildings 85,000
Creditors having a second charge on Freehold Land and Buildings 90,000

Trade Creditors 2,70,00
0
Bills Discounted (of these, bills for ` 15,000 are expected to be 40,000
dishonoured)
Unclaimed Dividends 6,000
Bills Payable 10,000
Income-tax due 25,000
Salaries and Wages (for five months) 40,000
Bank Overdraft secured by a second charge on the whole of the 20,000

assets of the company
Cash in Hand 1,200
Debtors (of these ` 60,000 are good ; ` 15,000 are doubtful,

90,000
estimated to realise ` 5,000 and the rest bad)
Bills of Exchange (considered good) 35,000
Freehold Land and Buildings (estimated to realise ` 1,65,000) 1,50,00

0
Plant and Machinery (estimated to produce ` 90,000) 1,20,00

0
Fixtures and Fittings (estimated to produce ` 8,000) 12,000
Stock in trade (estimated to produce 25% less) 80,000
Patents (estimated to produce ` 45,000) 70,000
On 31st March, 2008 the company’s share capital stood at the same figures as on 31st
March, 2014 but in addition, there was General Reserve of 65,000. In 2008-09 the company
earned a profit of ` 1,43,000 but thereafter it suffered trading losses totalling in all ` 4,67,000. In
2010-11 a speculation loss of ` 91,000 was incurred. Preference dividend was paid for 2008-09
and 2009-10 and on equity shares a dividend of 15% was paid for 2008-09 only.
Excise authorities imposed a penalty of ` 1,60,000 for evasion of excise and income tax
authorities imposed a penalty of ` 60,400 for evasion of tax.
Prepare the Statement of Affairs and the Deficiency Account

Solution:
Statement of Affairs of …….. as on March 31, 2014
Particulars Estimated
Realisable
value
Assets not specifically pledged-(List A)

Cash in hand 1,200
Bills of Exchange 35,000
Trade Debtors 65,000
Unpaid Calls 2,000
Stock 60,000
Fixtures and Fittings 8,000
Patents 45,000
3,06,200
Assets Specifically Pledged (List B) :

Estimate Due to Deficienc Surplu
d secured y ranking s
Realisab creditors as carried
le value unsecure to last
d colum
n
` ` ` `
Freehold Land and 1,65,000 1,75,000 10,000 –

Buildings
Estimated surplus from assets specifically pledged –
Estimated total assets available for Preferential creditors, 3,06,200

Debentureholders secured by a floating charges and other creditors,
Summary of Gross Assets `
Gross Realisable value of assets 1,65,000

specifically pledged
Other Assets 3,06,200
4,71,200
Gross Liabilities
Liabilities
1,65,00 Secured creditors (as per list B) to the extent to which

0 their claims are estimated to be covered by assets
specifically pledged (gross liabilities only)
57,000 Preferential creditors (as per list C) 57,000
Estimated Balance of Assets available for

Debentureholders and Creditors secured by a floating 2,49,200
charge, and unsecured creators
2,00,00 Debentureholders secured by a first floating charge (as

0 per list D) 2,00,000
20,000 Bank Overdraft secured by a second floating charge20,000 2,20,000
Estimated surplus as regards Debentureholders and 29,200
other creditors secured by a floating charge
Unsecured Creditors (as per list E)
Estimated unsecured balance of claims of creditors
from List B 10,00
0
2,90,00 Trade Creditors 2,80,0

0 00
6,000 Unclaimed dividend 6,000
8,000 Outstanding Expenses 8,000
15,000 Contingent liability on bill discounted 15,00 3,19,000
0
7,61,00 Estimated Deficiency as regards creditors (being the 2,89,800

0 difference between Gross Assets and Gross Liabilities)
Issued and called up capital :
30,000 14% Preference shares of ` 10 each 3,00,0

00
fully paid (as per list F)
20,000 Equity shares of ` 10 each fully paid 1,98,0 4,98,000

00
less calls in arrear (as per list G)
Estimated Deficiency as regards members 7,87,800
List H–Deficiency Account
A. Items contributing to Deficiency : `
1. Excess of Capital and Liabilities over Assets on 1st April, 2008 as Nil
shown by the Balance Sheet.
2. Net dividends and bonuses declared during the period from 1st
April, 2008 to 31st March, 2014 1,13,400*
3. Net trading losses after charging depreciation, taxation, interest on 4,67,000
debentures, etc.
4. Losses other than trading losses written off or for which provision
has been made in the books during the same period :
Speculation Loss 91,000
Penalty imposed by Excise Authorities 1,60,00

0
Penalty imposed by Taxation Authorities 60,400 3,11,400
5. Estimated losses now written off or for which

provision has been made for the purpose of preparing
the statement :
Fixture and Fittings 4,000
Stock in Trade 20,000
Patents 25,000
Book Debts 25,000
Bills Discounted 15,000 1,19,000
6. Other items contributing to Deficiency Nil
Total (A) 10,10,800
B. Items reducing Deficiency :
7. Excess of assets over capital and liabilities i.e. reserve

on 1st April, 2008 as shown in the Balance Sheet. 65,000
8. Net trading profits (after charging depreciation,

taxation, interest on debentures, etc.) from 1st April, 1,43,000
2008 to 31st March, 2014
9. Profits and income other than trading profits during Nil
the same period
10. Other items reducing Deficiency-profit expected on

realisation of Freehold Land and Buildings 15,000
Total (B) 2,23,000
Deficiency as shown by the Statement of Affairs (A – B) 7,87,800
Notes :
(a ) Creditors having mortgage on Freehold Land and Buildings are fully secured since the
estimated value of the security is ` 1,65,000 and the creditors amount to ` 85,000,
leaving a surplus of ` 80,000 which the creditors having a second charge on the asset
will get. These creditors, amounting to ` 90,000 are partly secured.
(b) The Preferential Creditors (List C) are ` 25,000 due for income tax and four months’
salaries and wages ` 32,000 or ` 57,000 in total.
(c) Net dividend and bonus declared during the period from 1st April, 2008 to 31st March,
2014 :
Preference Dividend @ 14% for two years 84,000
Equity Dividend @ 15% on ` 1,96,000 29,400
1,13,400
SUMMARY
A joint stock company is created by law and it can come to an end only with the operation of
law. Liquidation is a legal process by which the affairs of the company are wound up. Section
270 of Companies Act, 2013 provides that a company may be wound up by the Tribunal, or
compulsory winding up, Voluntary winding up, or subject to the supervision of court. When a
company is wound up, a liquidator is appointed. A Liquidator is a person who is appointed for
the purpose of realising various assets and paying various liabilities and conducting the legal
proceeding in winding up of a company. Soon after his appointment, liquidator takes under his
control all the property of the company, its effects and actionable claims. The liquidator shall
make payments in following order : 1). Legal charges of winding up and liquidator’s
remuneration, 2) Cost of expenses of winding up, 3) Preferential creditors, 4) Payment to
debentureholders & others having floating charges, 5) Unsecured creditors, 6)Preference
shareholders, 7) Equity shareholders.
SUGGESTED READINGS
Sons, New Delhi.
House, New Delhi
Delhi
1. What are various modes of winding up of a company ?
2. How liquidator is appointed in care of compulsory winding up ? What are his rights and
duties ?
3. Is insolvency necessary condition for winding up ?
4.What is the difference between member’s voluntary winding up and creditor’s voluntary
winding up ?
5. Give a specimen of statement of affairs and deficiency / surplus Account.
6. What circumstances lead to compulsory winding up ? Who can petition for winding up
?
7. What are the effects of winding up order.
8. Who is a contributory ? When does he become liable ?
Model Questions
1. A winding up order was passed on 31st March 2014 and the following details are
furnished :
Share capital 800 shares of ` 100 each ` 75 paid-up ; Profit & Loss (Dr.) balance ` 6,000;
uncalled capital in available to meet the claims of unsecured creditors. Trading losses during the
year were ` 33,500
Assets ` Liabilities `
Bank Balance 150 Trade creditors 87,000
Stock 35,000 Secured creditors :
Machinery 38,000 First mortgage on 20,000
Building
Furniture 3,500 2nd mortgage on 7,500
Building
Book debts 28,500 Preferential claims 5,150
Buildings 35,000
Bills discounted ` 6,000 of which ` 3,000 are expected to rank. There is also a contingent
liability of ` 20,000 for damages but expected to be settled at ` 15,000. Assets are expected to
realise the following values :
Stock 20,000 ; Machinery 19,200 ; Furniture ` 3,000 ; Book Debts ` 27,300 ; Buildings `
25,000
Prepare statement of affairs as regards creditors and contributories.
[Ans. Estimated deficiency ` 1,03,000]
2. A company went into liquidation and following details are available :
Balance Sheet
` `
Capital Machinery 30,000
16,000 shares of ` 5 each 80,000 Leasehold Properties 40,000
Reserve for Bad debts 10,000 Stock 1,000

Debentures 50,000 Book debts 60,000
Bank Overdraft 18,000 Investments 6,000
Creditors 20,000 Calls in Arrears 5,000
Cash-in-hand 1,000
Profit & Loss balance 35,000
1,78,00 1,78,000
0
Machinery is valued at ` 60,000 ; Leasehold properties ` 73,000 ; Investments ` 4,000 ;

Stock ` 2,000 ; bad debts are ` 2,000 ; doubtful debts are ` 4,000 estimated to realise
` 2,000. The Bank overdraft is secured by Leasehold properties . Preferential creditors
for taxes and wages are ` 1,000. Telephone rent outstanding ` 80 Prepare Statement of
affairs to be submitted to creditors.
[Ans. Surplus ` 1,11,920]
LESSON 11
ACCOUNTS OF GENERAL INSURANCE
COMPANIES
STRUCTURE
 Objectives
 Meaning and features of general insurance contract
 Accounting principles for preparing financial statements of general insurance

companies
 Preparation of Revenue Account of general insurance companies
 Preparation of Profit and Loss Account of general insurance companies
 Preparation of Balance Sheet of general insurance companies
 Summary
 Model questions
OBJECTIVES
 Understand the meaning and features of general insurance contracts.
 Learn about accounting principles for preparing financial statements of general insurance
companies
 Know about the preparation of financial statements of general insurance companies
GENERAL INSURANCE BUSINESS

All insurance contracts other than life insurance contracts are covered under general
insurance. The main features of general insurance may be given as follows :
(i) General insurance contracts are generally made for one year or 12 months.
(ii) Insurance contracts can be made at any time during the financial year.
(iii) Premiums in respect of general insurance are paid in advance.
(iv) Unexpired amount of Premiums in respect of insurance contracts expiring during
the next financial year is carried forward in the form of a reserve or provision known as
‘Reserve for Unexpired Risks’ in order to meet out the liability arising under the
unexpired contracts during next financial year.
ACCOUNTING PRINCIPLES FOR PREPARATION OF FINANCIAL
STATEMENTS OF GENERAL INSURANCE COMPANIES
1. Accounting Standards : Financial Statements of General Insurance Companies
shall be in conformity with the Accounting Standards (AS) issued by Institute of
Chartered Accountants of India (ICAI) to the extent applicable..
2. Premium : Premium shall be recognized as income either over the contract
period or the period of risk, whichever is appropriate. Premium income not relating to
current accounting period such as unearned premium and premium received in advance,
shall be disclosed separately in financial statements.
3. Reserve for Unexpired Risk: A reserve for unexpired risk or unearned premium
(also known as technical reserves) shall be created representing that part of premium
which is attributable and to be allocated to succeeding accounting periods. The reserve
shall not be less than the limits as specified under Section 64 (ii) (b) of the Insurance
Companies Act, 1938 which as follows :
Fire and Misc. Business 50% of premium
Marine Cargo Business 50% of premium
Marine Hull Business 100% of premium
4. Unearned premium and premium received in advance: In the financial
statements, unearned premium and premium received in advance, which represents
premium received prior to the commencement of the risk shall be shown separately under
the head “Current Liabilities”.
Premium received in advance shall not be included along with the unearned
premium. They are required to be shown separately in financial statements.
5. Claim Costs : Cost of claims to an insurer comprise the claims under policies
and claims settlement costs. Claims under policies included the claims made for losses
incurred and those estimated or anticipated under the policies.
Liabilities for outstanding claims shall be taken into account in respect of direct
business as well as reinsurance business.
The change in estimated liability for outstanding claims at beginning and end of the
financial period shall be brought into account. The estimated liability for outstanding
claims shall be provided net of salvage value if its realization is sufficiently certain.
6. Catastrophe Reserve : Catastrophe Reserve means reserve which is meant for
meeting losses arising from an entirely unexpected set of events and not for any specific
known purpose. This reserve is in the nature of an amount set aside for the potential
future liability against the insurance policies in force. Catastrophe Reserve shall be
created in accordance with norms prescribed by authority.
FINANCIAL STATEMENTS OF GENERAL INSURANCE
BUSINESSES
The insurance companies carrying general insurance business are to prepare
their financial statements on the following forms :
Form B – RA – Revenue Account
Form B – PL – Profit and Loss
Account
Form B – BS – Balance Sheet
The Performa of these forms are given below :
Form BRA
REVENUE ACCOUNTS FOR THE YEAR ENDED 31ST MARCH, 20.......
Year Year
(` ‘000) (` ‘000)
1. Premiums earned (net) 1

2. Profit/Loss on sale/redemption of
Investments
4. Interest, Dividend & Rent-Gross
TOTAL (A)
1. Claims Incurred (Net) 2
2. Commission 3
3. Operating Expenses related to 4
Insurance Business
TOTAL (B)
Operating Profit/(Loss) from
Fire/Marine/
Miscellaneous Business (C) = (A) – (B)
APPROPRIATIONS
Transfer to Shareholders’ Account
Transfer to Catastrophe Reserve
Transfer to other Reserve (to be
specified)
TOTAL (C)
Note : See Notes appended at the end of Form B-PL
FORM B-PL
PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31ST MARCH, 20...
Year Year
(`‘000) (`‘000)
1. OPERATING PROFIT/(LOSS)
(a) Fire Insurance
(b) Marine Insurance
(c) Miscellaneous Insurance
2. INCOME FROM INVESTMENTS
(a) Interest, Dividend & Rent-Gross
(b) Profit on sale of investments
3. OTHER INCOME (to be specified)
TOTAL (A)
4. Provisions (other than taxation)
investments
(b) For doubtful debts
5. OTHER EXPENSES
(a) Expenses other than those related to
Insurance Business
(b) Bad debts written off
(c) other (to be specified)
TOTAL (B)
Profit before Tax

APPROPRIATIONS
(a) Interim dividend paid during the year
(b) Proposed final dividend
(c) Dividend distribution tax
(d) Transfer to any reserves or Other
Accounts (to be specified)
Balance of profit/loss brought forward
from last year
Balance carried forward to Balance Sheet
Notes : to forms B-RA and B-PL

(a) Premium income received from business concluded in and outside India
shall be separately disclosed.
(b) Reinsurance premiums whether on business ceded or accepted are to be
brought into account gross (i.e. before deducting commissions) under the head
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 total
premiums (less reinsurance) or ` 5,00,000 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 or losses and other items.
(g) Interest dividends and rentals receivable in connection with investments
should be stated as 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 realised rent. It shall not include
any notional rent.
FORM B – BS
BALANCE SHEET AS AT 31ST MARCH, 20..

Year Year
(` ‘000) (` ‘000)
SOURCES OF FUNDS
SHARE CAPITAL 5
FAIR VALUE CHANGE ACCOUNT
BORROWINGS 7
TOTAL
INVESTMENTS 8
LOANS 9
FIXED ASSETS 10
CURRENT ASSETS
Cash and Bank Balances 11
Sub-Total (A)
CURRENT LIABIITIES 13
PROVISIONS 14
Sub-Total (B)
MISCELLANEOUS EXPENDITURE (to
the extent not written off or adjusted) 15
DEBIT BALANCES IN PROFIT AND
LOSS ACCOUNT
TOTAL
Year Year
(`‘000) (`‘000)

2. Claims, other than against policies, not
acknowledged as debts by the company
3. Underwriting commitments outstanding
(in respect of shares and securities)
4. Guarantees given by or on behalf of the
Company
5. Statutory demands/liabilities in dispute,
not provided for
6. Reinsurance obligations to the extent not
provided for in accounts
TOTAL

SCHEDULE – 1
PREMIUM EARNED [NET]

Year Year
`’000 `’000
Premium from direct business

Add : Premium on reinsurance accepted
Less : Premium on reinsurance ceded
Net Premium
Adjustment for change in reserve for unexpired risks
Total Premium Earned (Net)

Note : Reinsurance premiums whether on business ceded or accepted are to be brought
into account, before deducting commission, under the head of reinsurance premiums.
SCHEDULE – 2
CLAIMS INCURRED [NET]

Year Year
(`‘000) (`‘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
Notes :
(a) Incurred But Not Reported (IBNR). Incurred But Not Enough Reported [IBNER]
claims should be included in the amount for outstanding claims.
(b) Claims include specified claims settlement cost but not expenses of management.
(c) The surveyor fees, legal and other expenses shall also form part of claims cost.
(d) Claims cost should be adjusted for estimated salvage value if there is a sufficient
certainty of its realisation.
SCHEDULE – 3
COMMISSION

Year Year
(`‘000) (`‘000)
Commission paid
Direct
Add : Re-insurance accepted
Less : Commission on re-insurance ceded
Net Commission
Notes : The profit/commission, if any, are to be combined with the re-insurance

accepted or re-insurance ceded figures.
SCHEDULE – 4

Year Year
(`‘000) (`‘000)

5. Repairs
6. Printing & stationery
7. Communication
(a) as auditor
(b) as advisor or in any other capacity, in
respect of
(iii) Management
services; and
12. Other (to be specified)
13. Depreciation
TOTAL
Note : Items of expenses and income in excess of one percent of the total premiums (less
reinsurance) or Re. 5,00,000 whichever is higher, shall be shown as a separate line item.
SCHEDULE – 5
SHARE CAPITAL
Year Year
(`‘000) (`‘000)
... Equity Shares of ` ... each
2. Issued Capital
Less : Calles unpaid

Add : Equity Shares Forfeited (Amount originally paid
up)
Less : Par value of Equity Shares bought back
Less : Preliminary Expenses :
TOTAL
Notes :
(a) Particulars of the different classes of capital should be separately stated.
(b) The amount capitalised on account of issue of bonus shares 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
SHARE CAPITAL
PATTERN OF SHAREHOLDING
[As certified by the Management]
Shareholder Current Year Previous Year
Number of % of Holding Number of % of
Shares Shares Holding
Promoters
 Indian
 Foreign
Others
TOTAL
SCHEDULE – 6
RESERVE AND SURPLUS

Year Year
(`‘000) (`‘000)
1. Capital Reserve
4. General Reserve
Less : Debit balance in Profit and Loss Account
6. Other Reserves (to be specified)
7. Balance of profit in Profit & Loss Account
TOTAL
Note : Additions to and deductions from the reserves should be disclosed under each of
the specified heads.
SCHEDULE – 7
BORROWINGS

Year Year
(`‘000) (`‘000)
1. Debentures/Bonds
2. Banks
TOTAL
Notes :
(a) The extent to which the borrowings are secured shall be separately disclosed stating
the nature of the security under each sub-head.
(b) Amounts within 12 months from the date of Balance Sheet should be shown
separately.
SCHEDULE – 8
INVESTMENTS

Year Year
(`‘000) (`‘000)

3. Other Investments
(a) Shares
(aa) Equity
(bb) Preference
(b) Mutual Funds
(d) Debentures/Bonus
(f) Subsidiaries
(g) Investment Properties-Real Estate
4. Investments in infrastructure and Social Sector

(a) Shares
(aa) Equity
(bb)Preference
(b) Mutual Funds
(f) Subsidiaries
(g) Investment Properties- Real Estate
TOTAL
Notes :
(a) Investments in subsidiary/holding companies, Joint ventures and associates shall be

separately disclosed at cost.
(i) Holding company and subsidiary shall be construed as defined in the

Companies Act, 1956.
(ii) Joint Venture is a contractual arrangement whereby two or more parties

undertake an economic activity, which is subject to joint control.
(iii) Joint control is the contractually agreed sharing of power to govern the
financial and operating policies of an economic activity to obtain benefits from
it.
(iv) Associate is an enterprise in which the company has significant influence

and which is neither a subsidiary nor a joint venture of the company.
(b) Aggregate amount of company’s investments other than listed equity securities
and derivative instruments and also the market value thereof shall be disclosed.
(c) Investments made out of Catastrophe Reserve should be shown separately.
(d) Debt securities will be considered as “held to maturity” securities and will be
measured at historical cost subject to amortisation.
(d) Investments Property means a property [land or building or part of a building or
both] held to earn rental income or for capital appreciation or for both, rather than for
use in services or for administrative purposes.
(e) Investments maturing within twelve months from balance sheet date and investments
made with the specific intention to dispose of within twelve months from balance
sheet date shall be classified as short-term investments.
SCHEDULE – 9
LOANS

Year Year
(`‘000) (`‘000)
Secured
(a) On mortgage of property
(aa) In India
(bb) Outside India
(b) On Shares, Bonds, Govt. Securities
Unsecured
TOTAL
(a) Central and State Governments
(c) Subsidiaries
(d) Industrial Undertakings
(e) Others (to be specified)
TOTAL
(aa) In India
(bb) Outside India
(b) Non-performing loans less provisions
(aa) In India
(bb) Outside India
TOTAL
(a) Short-Term
(b) Long-Term
TOTAL
Notes :
(a) Short-term loans shall include those, which are repayable within 12 months from the
date of balance sheet. Long term loans shall be the loans other than short-term loans.
(b) Provisions against non-performing loans shall be shown separately.
(c) The nature of the security in case of all long term secured loans shall be specified in
each case. Secured loans for the purpose of this schedule, means loans secured
wholly or partly against an asset of the company.
(d) Loans considered doubtful and the amount of provision created against such loans
shall be disclosed.
SCHEDULE – 10
FIXED ASSETS
Ope Additi Deduct Closi Up to For On To As at Previ

ning ons ions ng Last the Sale date year ous
Year Year s end Year
Adju
stme
nts
Goodwill
Intangible
(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
Note : Assets included in land, building and property above exclude Investment
Properties as defined in note (e) to Schedule 8.
SCHEDULE – 11

Year Year
(`‘000) (`‘000)
1. Cash (including cheques, drafts and stamps)
2. Bank Balances
(aa) Short-term (due within 12 months)
(bb) Others
(a) With Banks
(b) With other Institutions
TOTAL
Balances with non-scheduled banks included in 2

and 3 above
Note : Bank balance may include remittances in transit. If so, nature and amount should
be separately stated.
SCHEDULE – 12

Year Year
(`‘000) (`‘000)
ADVANCES
3. Prepayments
5. Advances tax paid and taxes deducted at source
(Net of provisions for taxation)
TOTAL (A)
OTHER ASSETS
3. Agents Balances
5. Due from other entities carrying on insurance

business
(including reinsurers)
6. Due from subsidiaries/holding
7. Deposit with Reserve Bank of India
[Pursuant to section 7 of Insurance Act, 1938]
TOTAL (B)
TOTAL ((A) + (B))
Notes ;
(a) The items under the above heads shall not be shown net of provisions for doubtful
amounts. The amount of provision against each head should be shown separately.
(b) The term ‘Officer’ should conform to be definition of that term as given under the
(c) Sundry Debtors will be shown under item 9 (others)
SCHEDULE – 13
CURRENT LIABILITIES

Year Year
(`‘000) (`‘000)
1. Agents Balances
3. Deposits held on re-insurance ceded
5. Unallocated Premium
6. Sundry creditors
TOTAL
SCHEDULE – 14
PROVISIONS

Year Year
(`‘000) (`‘000)
1. Reserve for Unexpired Risk
2. For taxation (less advance tax paid and taxes deducted

at source)
TOTAL
SCHEDULE – 15

Year Year
(`‘000) (`‘000)

TOTAL
Illustration 1
From the following particulars, prepare the Fire Revenue Accounts for 2015-2016 :
` in Lakhs
Claims paid 235

Legal expenses regarding claims 5
Premiums received 600
Reinsurance premiums 60
Commissions 100
Expenses of management 150
Provisions against unexpired risk on April 1, 2015 260
Claims unpaid on April 1, 2015 20
Claims unpaid on March 31, 2016 35
Solution.
Particulars Schedule ` in lakhs
Premiums earned (Net) 1 530
Total (A) 530
Claims incurred (Net) 2 255

Commission 3 100
Total (B) 505
Operating Profit from Fire Business (C) = (A) – (B) 25
Appropriations :
Transfer to Shareholders’ Account 25
Total (C) 25
SCHEDULES FORMING PART OF REVENUE ACCOUNT
Schedule – 1
Premiums Earned (Net)
` in lakhs

Less: Reinsurance Premium 60
Net Premium 540

Adjustment for change in reserve for unexpired
risks:
` in lakhs
Opening reserve 260
Closing reserve 50% of ` 540 lakh (270) (10)
Total Premium Earned (net) 530
SCHEDULE – 2
Claims Incurred (Net)
` in lakhs
Net claims paid 235

Add: Claims outstanding at the end of the year 35
Add : Legal Expenses regarding claims 5
275
Less: Claims outstanding at the beginning 20
255
SCHEDULE – 3
` in lakhs
COMMISSION
COMMISSION PAID 100
SCHEDULE – 4
OPERATING EXPENSES RELATED TO ` in lakhs
INSURANCE BUSINESS
EXPENSES OF MANAGEMENT 150
Illustration 2.
On 31st March, 2014, the books of General Insurance Co. Ltd. disclosed the
following particulars in respect of Fire business :
Claims Paid 6,40,000

Reserve for Unexpired Risks on 1.4.2013 5,20,000
Additional Reserve on 1.4.2013 1,00,000
Estimated Liability in respect of Outstanding Claims :
on 31.3.2013 70,000
on 31.3.2014 80,000
Expenses of Management (including ` 25,000 legal charges
in connection with claims) 2,60,000

Commission 1,50,000
Profit on sale of Investment 12,000
Premiums 11,20,000
Bad Debts 12,000
Re-insurance Premiums 80,000
Re-insurance Recoveries 50,000
Interest, Dividends and Rents (Gross) 72,000
Income Tax thereon 9,000
Prepare Fire Insurance Revenue Account of the Company for the year ended 31st
March, 2014. Reserve for unexpired risks to be maintained at 50% of the net premiums
and keep the additional reserve unchanged.
Solution.
General Insurance Company
Fire Insurance Revenue Account
Premiums Earned (Net) 1 10,40,000

Profit on Sale of Investments 12,000
Interest, Dividend and Rents (Gross) 72,000
Total (A) 11,24,000
Claims Incurred (Net) 2 6,25,000

Commission 3 1,50,000
Operating Expenses related to Insurance 4 2,47,000
Business
Total (B) 10,22,000
Operating Profit from Fire Business (C) = (A) – 1,02,000

(B)
Schedules Forming Part of Financial Statements

SCHEDULE 1– Premiums Earned (Net)
Particulars `
Premiums 11,20,000
Less : Reinsurance Premium 80,000
Net Premium 10,40,000

Adjustment for change in reserve for unexpired risks :
Reserve for unexpired risk at the end of the year
(50% of net premium) 5,20,000
Additional Reserve 1,00,000
6,20,000
Less : Reserve for unexpired risks at the beginning of the

year
including additional reserve : 6,20,000 NIL
(` 5,20,000 + 1,00,000)
10,40,000
SCHEDULE 2– Claims Incurred (Net)
Claims paid 6,40,000
Add : Legal Expenses regarding claims 25,000
Estimated Liability in respect of outstanding claims as on 80,000

31.3.2005
7,45,000
Less : Estimated Liability in respect of outstanding claims as 70,000

on 31.3.2004
6,75,000
Less : Reinsurance recoveries 50,000
6,25,000
SCHEDULE 3– Commission
Commission paid 1,50,000
SCHEDULE 4– Operating Expenses related to Insurance Business
Management Expenses (2,60,000 – 25,000) 2,35,000
Bad Debts 12,000
2,47,000
Illustration 3
The following figures are extracted from the books of Z Insurance Company Ltd. as
at 31.12.2014 :
` `
Claims paid less re-insurance : Additional Reserves :
Fire 80,000 Fire 1,32,000
Marine 62,000 Marine 16,000
General Reserve 1,18,000 Interest Accrued 25,000
Commission Paid : Furniture (Cost ` 18,000) 12,000
Fire 48,000 Building (Cost ` 1,25,000) 87,000
Marine 39,000 Office Equipment (Cost ` 30,000
48,000)
Share Capital 20,00,00 Cash in hand 56,000

0
(20,000 Shares of `100 each) Cash at Bank 1,04,000
Expenses of Management : Premium less re-insurance :
Fire 53,000 Fire 2,11,000
Marine 36,000 Marine 1,62,000

Reserve for Unexpired Risks : Tax deducted at source 9,000
Fire 2,04,000 Premiums Due :
Marine 1,23,000 Fire 28,000
Investment at Cost : Marine 20,000
Central Govt. Securities Claims outstanding on

1.1.2014 :
deposited with RBI 19,21,00 Fire 14,000

0
Other Central Govt. 1,23,000 Marine 2,000

Securities
State Govt. Securities 2,22,000 Dividends 20,000
Shares in Companies 2,49,000 Interest on Investments 1,00,000
Depreciation 21,000 Dues to other Insurers 43,000
Due from other Insurers 27,000 Contingency Reserve 39,000
Commission on Re-insurance Investment Reserve 47,000

ceded :
Fire 23,000 Director Fees 4,000
Marine 2,000
The following further information is also given :

(1) Claims outstanding as on 31.12.2014 are :
Fire 17,000
Marine 6,000
(2) Market value of Investments is ` 24,01,000.
(3) Increase Additional Reserve by 10% of net premium for the year for fire.
(4) Maintain reserve for unexpired risks at 50% of Premium for the year in case of
Fire insurance and 100% of premium for the year in case of Marine insurance.
Prepare Revenue Accounts, Profits and Loss Account and Balance Sheet.
Solution.
FORM B-RA
Name of the Insurer : Z Insurance Company Ltd.
Revenue Account for the year ended 31 December, 2014
Particulars Schedule Amount
Fire Marine
Insuranc Insurance
e
1. Premiums earned 1 2,88,400 1,23,000
2. Other income – –
3. Interest, Dividend and Rent  Gross – –
Total (A) 2,88,400 1,23,000
4. Claims Incurred 2 83,000 66,000
5. Commission 3 25,000 37,000
6. Operating Expenses related to 4 53,000 36,000

Insurance Business
7. Other Expenses – –
Total (B) 1,61,000 1,39,000
Fire/Marine Business (AB) 1,27,400 (16,000)
FORM B-PL
Name of the Insurance : Z Insurance Company Ltd.
Registration No. and Date of Registration with IRDA
Profit and Loss Account
for the year ended 31 December 2014
Particulars Amount
1. Operating Profit/(Loss) from 1,27,400
(a) Fire Insurance (16,000)
2. Income from Investments

(c) Interest, Dividend and Rent – Gross 1,20,000
(d) Profit on sale of investments –
3. Other Income –
Total (A) 2,31,400
4. Provisions (Other than taxation) –
5. Other Expenses 25,000
Total (B) 25,000
Profit Before Tax (A-B) 2,06,400
Less : Provision for Taxation –
Profit After Tax 2,06,400
Add : Brought forward Reserve/Surplus from the Balance Sheet –
Less : Appropriations –
Dividend paid
Balance carried forward to Balance Sheet 2,06,400
FORM B-BS
Balance Sheet
as at 31 December, 2014
Particulars Schedul `
e
Sources of Funds :
Share Capital 5 20,00,000
Reserves and Surplus 6 3,63,400
Credit /(Debit) Fair Value Change Account – (67,000)
Borrowings 7
22,96,400
Total
Application of Funds :
Investments 8 24,01,000
Loans 9 –
Fixed Assets 10 1,29,000
Current Assets
Cash and Bank Balances 11 1,60,000
Advances and Other Assets 12 1,09,000
Less : Current Liabilities 13 (66,000)
Less : Provisions 14 (4,36,600)
Miscellaneous Expenditure 15 –
22,96,400
Total
Working Notes :
1. Expenses in Profit & Loss Account
Depreciation 21,000
Director’s Fees 4,000
25,000
2. Cost of Investment 25,15,000

Less : MV of Investments (24,01,000)
FVC Account 1,14,000
Entry will be :
FVC Account Dr. 1,14,000
To Investment 1,14,000
Schedule forming Part of Financial Statements
Schedule1 Premiums earned
Fire Marine
Net Premium 2,11,000 1,62,000
Less : Adjustment for change in provision for
unexpired risks :
Fire Marine
Reserve for unexpired risks at the 1,05,50 1,62,00
end 0 0
Additional Reserve 1,53,10 16,000
0
2,58,60 1,78,00
0 0
Less : Reserve for unexpired risks
at the beginning including 3,36,00 1,39,00 (+) 77,400 (39,000)
additional reserves 0 0
2,88,400 1,23,000
Schedule2 Claims Incurred

Fire Marine
Claims paid 80,000 62,000
Less : Claims Outstanding at the beginning 14,000 2,000
66,000 60,000
Add : Claims Outstanding at the end 17,000 6,000
83,000 66,000
Schedule3 Commission
Fire Marine
Commission paid 48,000 39,000
Less : Commission on Reinsurance ceded 23,000 2,000
25,000 37,000
Schedule4 Operating Expenses

Fire Marine
Expenses of Management 53,000 36,000
Schedule5 Share Capital

Share Capital 20,00,000
Schedule6 Reserve and Surplus

General Reserve 1,18,000
Contingency Reserve 39,000
Profit & Loss Account 2,06,400
3,63,400
Schedule7 Borrowings
Nil
Schedule8 Investments
Central Government Securities deposited with RBI 19,21,000
Other Central Govt. Securities 1,23,000
State Govt. Securities 2,22,000
Shares in Companies 2,49,000
25,15,000
Less : FVC Account 1,14,000
24,01,000
Schedule9 Loans
Nil
Schedule10 Fixed Assets

Furniture 12,000
Building 87,000
Office Equipment 30,000
1,29,000
Schedule11 Cash and Bank Balances

Cash in hand 56,000
Cash at Bank 1,04,000
1,60,000
Schedule12 Other Current Assets

Due from other Insurers 27,000
Interest Accrued 25,000
Tax deducted at source 9,000
Premium Due (28,000 + 20,000) 48,000
1,09,000
Schedule13 Current Liabilities
Claim Outstanding
(17,000 + 600) 23,000
Due to others 43,000
66,000
Schedule14 Provisions
Unexpired Risk Reserve 2,67,500
4,36,600
SUMMARY
insurance. General insurance contracts are generally made for one year. Insurance contracts
can be made at any time during the financial year. Premiums in respect of general insurance
are paid in advance. Unexpired amount of Premiums in respect of insurance contracts
expiring during the next financial year is carried forward in the form of a reserve or
provision known as ‘Reserve for Unexpired Risks’ in order to meet out the liability
arising under the unexpired contracts during next financial year. The reserve shall not be
less than the limits as specified under Section 64 (ii) (b) of the Insurance Companies Act,
1938 which as follows :
The insurance companies carrying general insurance business are to prepare their
financial statements on the following forms :
Form B – PL– Profit and Loss Account
Form B – BS– Balance Sheet
SUGGESTED READINGS
 R. L. Gupta and Radhaswamy, Advanced Accountancy, Volume II, Sultan Chand
and Sons, New Delhi.
 Maheshwari and Maheshwari, Advanced Accountancy, Volume II, Vikas
Publishing House, New Delhi
 Shukla, Grewal and Gupta, Advanced Accounts, Volume II, S Chand and
Company, New Delhi
 Tulsian, P.C., Corporate Accounting, Tata McGraw Hill Education Pvt. Ltd., New
Delhi
treatment.
2. Prepare (with imaginary figures) the balance sheet of an insurance company
carrying on fire, marine and miscellaneous insurance business.
3. What important points should be kept in mind in preparing the annual accounts
of General Insurance Companies ?
4. Prepare with imaginary figures the Revenue Accounts of General Insurance
Companies.
5. On December 31, 2014 the books of Rocky Insurance Co. Ltd. contained the following
information in respect of Fire Insurance : –
` `
Reserve for unexpired Claims paid 6,10,000
risks at 31-12-2013 5,00,000 Reinsurance Premium paid 75,000
Estimated Liability in respect of Reinsurance Premium 20,000
Recovered
outstanding claims on 31-12- 65,000 Interest and Dividends 54,520
2013
Outstanding Claims on 31-12- 90,000 Income Tax on above 6,520
2014
Expenses of management Profit on Sale of Investment 21,000
(including
` 30,000 legal expenses in Commission 1,52,000
connection with claims) 2,80,000 Premiums 11,20,000

Additional Reserve
on 31-12-2013 1,00,000
Prepare Fire Insurance Revenue Account for the year 2014 reserving 50% of the Premiums
income for unexpired risk and keeping an additional reserve of ` 50,000
[Ans. Profit ` 91,020]
LESSON 2
STRUCTURE
 Objectives
 Liquidator’ s Final Statement of Account
 Steps in the preparation of Liquidator’ s Final Statement of Account
 Liquidator’s remuneration
 Loss to equity shareholders
 Receiver for Debentureholders
 Liability of B list of contributories
 Summary
 Model questions
OBJECTIVES
 Understand the meaning and objectives of preparing Liquidator’s Final Statement of Account
 Learn about methods of calculating liquidator’s remuneration
 Know about the appointment of Receiver for Debentureholders
 Understand about B list of contributories and how to determine their liability
LIQUIDATOR
A Liquidator is a person appointed by the shareholders (in voluntary winding up) for the purpose of
realising various assets and paying various liabilities and conducting the legal proceeding in winding up
of a company. The official liquidator attached to High Court becomes the liquidator of the company when
winding up order is passed by the court. He may also be appointed as provisional liquidator. As soon as
liquidator is appointed, he will take into his custody or under his control all the property of the company,
its effects and actionable claims.
DUTIES AND POWERS OF LIQUIDATOR
A liquidator has to call a meeting of the creditors to determine whether a committee of Inspection
should be appointed; file a preliminary report ; make a list of contributories ; make a list of creditors ; file
a statements showing the position in liquidation once a year ; pay dividends ; return surplus to
shareholders ; keep proper books of accounts and minutes of meetings.
He can exercise following powers:
(i) to file or defend any suit on behalf of the company ;
(ii) to carry on the business of the company ;
(iii) to sell property of the company ;
(iv) to raise any money on security of the assets of the company in case of need ;
(v) to do all such other things as may be necessary for winding up of the affairs of the company
distribution of its assets.

a summary of cash book in which he records receipts and disbursements in a particular order.
On the receipt side of the statement, receipts from following sources are recorded:–
1. Amount realised on the sale of assets.
2. Surplus received from secured creditors.
3. Amount received from delinquent directors and other officers of the company.
4. Contributions made by the contributories.
The following is the order in which disbursement will be made by the liquidator:–
1. Secured creditors up to their claim or up to the amount realised by sale of securities held by
them, whichever is less. The creditors themselves may sell the securities, in that case, they will pay to
the liquidator any surplus after meeting their claims.
Note. Students must note that the payment to secured creditors is not shown in the liquidator’s
final statement of account. Only the surplus i.e., the excess of amount realised by sale of securities
over claim of secured creditors will be shown as a receipt irrespective of the fact whether the
security is realised by secured creditors themselves or by the liquidator. If there is any deficiency-
that is when the claims of the creditors are more than the amount realised by sale of securities, will
be added to unsecured creditors.
2. Legal charges
3. Liquidator’s remuneration
4. Cost of winding up.
5. Payment to preferential creditors.
6. Payments to debenture holders and other creditors having floating charge on the assets of the company.
7. Payment to unsecured creditors.
8. Amount paid to the preference shareholders.
9. Amount paid to the equity shareholders.
Note : Students should note that though preferential creditors are paid prior to debenture
holders & other creditors having floating charge on the assets, yet while preparing Liquidator’s
Statement of Account, payment to preferential creditors is shown after the payment to
debenture holders because preferential creditors are basically unsecured creditors.
IMPORTANT POINTS WHILE PREPARING LIQUIDATOR’S FINAL

STATEMENT OF ACCOUNT
1. INTEREST ON LIABILITIES. The amount of interest payable on loans, debentures etc. would
depend upon the fact whether the company is solvent or not. In case of a solvent company, (i.e.,
surplus is left after paying the principal sum and interest on all debts up to the commencement of
winding up) interest in payable upto the date of actual payment. But in case of insolvent company,
interest is payable only upto the date of commencement of the winding up.
2. DIVIDEND ON PREFERENCE SHARES. The treatment of dividend on preference shares can
be explained as follows :
(a) When dividend on preference shares is declared
If dividend on preference shares has been declared, it is to be paid as an outside debt and not as
an arrear of dividend.
(b) When dividend on preferences shares is not declared
When dividend on preferences shares has not been declared, then it will be treated as arrear of
preference dividend and will appear as a contingent liability as a foot note after the balance sheet. If
article of association provides then such arrears will be paid after preference share capital and equity
share capital have been paid in full and surplus is left. Further, the arrears of preference dividend are
payable only if the preference shares are cumulative ones and should be paid only upto the date of
liquidation. The question of arrears of preference dividend does not arise in case of non-cumulative
preference shares.
3. PAYMENT TO PREFERENCE SHAREHOLDERS AND EQUITY SHAREHOLDERS
WHEN EQUITY SHARES ARE PARTLY PAID UP. Equity shareholders are paid only if the
funds are still available after the settlement of all claims of the outsiders and the preference
shareholders. In case the equity shares are partly paid-up and the funds available are not sufficient to
meet the claims of the preference shareholders in full, the liquidator will have to make a call in order
to repay the preference shareholders. In some cases, some shareholders may not pay such calls. Then
if the surplus, after meeting the claims of the preference shareholders in full, is not sufficient for the
refund of equity capital in full, such surplus will be first utilised to return the share capital of those
equity shareholders who have paid the call, till their paid-up capital equals the amount paid up by the
defaulting shareholders. If there is still surplus, it will be distributed equally among all, including the
defaulting shareholders.
4. LOSS TO THE EQUITY SHAREHOLDERS. If the company has equity shares on which
different amount have been paid up, liquidator has to return equity capital in such a manner that loss
per equity share is equal.
5. LIQUIDATOR’S REMUNERATION. Liquidator usually gets commission on assets realised,
on amount paid to unsecured creditors and on amount paid to shareholders. Following points must be
remembered:
(a) Commission on cash & bank balances: In case, liquidator is entitled to remuneration as a
certain percentage of the assets realised, such realisation does not include cash in hand and bank
balances unless otherwise specified.
(b) Assets held as security by fully and partly secured creditors: If the secured creditors
themselves realise the assets held by them as security, then commission will be calculated on the
surplus received from them on these assets. On the other hand, if the assets are disposed off by the
liquidator himself, then commission will be calculated on the total realised value of assets held by
secured creditors.
(c) Commission on payment to unsecured creditors : It is to be remembered that unsecured
creditors also include preferential creditors unless specifically excluded. (i) If amount available
for unsecured creditors is sufficient to make full payment, commission can be calculated as under:–
Unsecured creditors  Rate of commission
Commission =
100
If amount available for unsecured creditors is insufficient, commission can be calculated as under :
Amount available for unsecured creditors  Rate of commission

Commission =
100  Rate of commission
(d) Commission on payment to (equity) shareholders : If commission is payable on payment to (
equity ) shareholders, commission can be calculated as under :–
Amount available before making any
payment to (equity) shareholders
Commission =  Rate of commission
100 + Rate of commission

of …… Co. Ltd.
Assets Realised Legal charges
Cash at Bank Liquidators remuneration
Cash in hand Debentureholders and others

having
…………… floating charge on the assets of

the
…………… company
…………… Preferential Creditors
Land & Building Unsecured Creditors
Preference shareholders
Surplus from secured Equity shareholders

creditors
Calls received from

contributories
NOTE: The surplus left after paying equity share capital must be distributed
among the equity shareholders alone unless preference shareholders are
participating preference shareholders.
Illustration 1
ABC Ltd. went into liquidation with following liabilities :
(a) Secured creditors 20,000 (securities realised ` 25,000)
(b) preferential creditors ` 6,000
(c) unsecured creditors ` 30,800
Liquidation expenses ` 252. The liquidator is entitled to a remuneration of 3% on assets realised
(including securities realised) and 2% on the amount distributed to unsecured creditors except
preferential creditors. The various assets (excluding securities) realised ` 26,000.
Prepare liquidator’s final statement of Account.

Solution :
To Assets Realised 26,000 By Liquidator’s remuneration

To Surplus from secured 3% on (26,000 + 1,530
creditors 5,000 25,000) 455 1,985
(25,000 – 20,000) 2% on 22,763
By Liquidation expenses 252
By Preferential creditors 6,000
By Unsecured creditors 22,763
31,000 31,000
Working Note:–
Commission on unsecured creditors :
Balance amount after paying preferential creditors = ` 23,218

2
Commission = ` 23218  = ` 455
102
Illustration 2
XYZ Limited went into voluntary liquidation on 1st April, 2014 on which date its position was as under :
` `
Share Capital : Land, Building & Machinery 80,000
5,000 shares of ` 100 each, ` 80 Other fixed assets 2,60,000

4,00,000
per share paid
Loans (Secured by mortgage of Stock 1,05,000
Land, Building and Machinery) 1,00,000 Debtors 1,00,000
Unsecured Loan and Liabilities 2,00,000 Loans 40,000
(including Preferential dues Cash 5,000
` 10,000) Profit and Loss Account 1,10,000
7,00,000 7,00,000
Land, Building and Machinery were realised by secured creditors for ` 1,20,000. Other fixed assets
fetched ` 1,40,000. Debtors ` 20,000. Stock ` 10,000. Loans were wholly bad. The liquidator is
entitled to a fixed remuneration of ` 1,000 plus 2% of the amount paid to unsecured creditors. The
liquidator’s out-of-pocket expenses amounted to ` 1,000.
Show Liquidator’s Statement of Account.

Solution :
` `
Assets Realisations : Liquidator’s remuneration:

Cash 5,000 Fixed remuneration 1,000
Surplus from Securities 20,000 2% on Pref. creditors 200
(1,20,000 – 1,00,000)
Other fixed assets 1,40,000 2% on ` 1,79,216 3,584 4,784
Stocks 10,000 Expenses of liquidation 1,000
Debtors 20,000 Unsecured creditors 1,79,216
1,95,000 1,95,000
Note :
Total Amount available for distribution 1,95,000

Less : Liquidator’s remuneration
Fixed 1,000
2% on Pref. Creditors 200 1,200
Expenses of liquidation 1,000
Preferential creditors 10,000 12,200
Balance available to unsecured creditors 1,82,800
2
2% on amount distributed to unsecured creditors =  ` 1,82,800 = ` 3,584
102
Illustration 3
The Balance Sheet of REC Ltd.

as on 31st Dec. 2014
` `
4,000 6% Pref. shares of ` 100 each 4,00,000 Land & Building 2,00,000
2,000 Equity shares of ` 100 each, Plant 5,00,000
` 75 paid up 1,50,000 Patents 80,000
6000 Equity shares of ` 100 each, Stock 1,10,000

` 60 paid up 3,60,000 Debtors 2,20,000
5% Debentures 2,00,000 Cash at Bank 60,000

Interest outstanding on 10,000 Profit & Loss Account 2,40,000
debentures
Creditors 2,90,000
14,10,000 14,10,000
The dividends on preference shares were in arrears for two years. Arrears are payable as per
articles. Creditors include ` 1,00,000 loan on mortgage of Land & Building. Assets realised are as under
:–
Plant 4,00,000
Patents 60,000
Stock 1,20,000
Debtors 1,60,000
The expense of liquidation amounted to ` 21,800. The liquidator is entitled to a commission of 3% on
all assets realised (except cash at Bank) and 2% on amounts distributed among unsecured creditors.
Creditors also include preferential creditors ` 30,000. All payments are made on 30th June 2015.
Prepare Liquidator’s Statement of Account.

Solution.
To Assets Realised By Liquidation expenses 21,800
Cash at Bank 60,000 By Liquidator’s Remuneration
Debtors 1,60,000 3% on 9,80,000 29,400

Stock 1,20,000 2% on 30,000 600
Patents 60,000 2% on 1,60,000 3,200 33,200
Plant 4,00,000 By Debentures 2,00,000
Surplus from secured creditors 1,40,000 Add : Interest 10,000

Outstanding
(` 2,40,000 – ` 1,00,000) Accrued for 6 months 5,000 2,15,000
By Preferential Creditors 30,000
By Unsecured Creditors 1,60,000
By Preference 4,00,000
Shareholders
Add : Dividend or 2 48,000 4,48,000

years
By equity shareholders
@ 15.25 per share on
2000 shares of ` 75 paid 30,500
up
@ ` 0.25 per share on

1,500 32,000
6,000 shares of ` 60 paid
up
9,40,000 9,40,000
Note :– Calculation of amount paid to equity shareholders
2,000 Equity shares, ` 75 paid 1,50,00 0
6,000 Equity shares, ` 60 paid 3,60,000

Less : Balance amount available to be borne by Equity 32,000
Shareholders
Total loss 4,78,000
Loss per share = 4,78,000  8,000 = `59.75
` `
Paid up Amount 75.00 60.00
Balance amount paid 15.25 0.25
Illustration 4
Dodge Ltd. went into liquidation and following details are available :
(a) 20,000 10% Pref. Shares of ` 10 each (fully paid)
(b) 2,000 Equity Shares of ` 100 each (` 75 paid up)
(c) 1,600 Equity Shares of ` 100 each (` 60 paid up)
(d) 1,400 Equity Shares of ` 100 Each (` 50 paid up)
Assets including machinery realised ` 4,40,000. Liquidation expenses ` 15,000. The company had
borrowed a loan of ` 70,000 against mortgage of machinery which realised ` 1,00,500. Salaries for 4
clerks of 4 months @ ` 300 per month and of 4 peons for 3 months @ ` 150 per month are outstanding.
Other creditors are ` 87,400. Prepare liquidator’s statement of account.
Solution.
` `
To Assets Realised : By Liquidation Expenses 15,000

Surplus for Secured 30,500 By Preferential Creditors 6,600
Creditor
Other Assets 3,39,500 3,70,000 By Unsecured Creditors 87,400
To Share call received on 1,400 By Preference Shareholders 2,00,000
shares @ ` 1 1,400 By Equity Shareholders

48,000
On 2,000 shares @ ` 24
On 1600 shares @ ` 9 14,400
3,71,400 3,71,400
Notes :–
1. Calculation of Creditors
Preferential Unsecured
creditors creditors
Salary of Clerk (4  4  ` 300) 4,800 –
Peon (4 3 ` 150) 1,800 –
Other creditors – 87,400
6,600 87,400
Calculation of Amount paid to/Recovered from Shareholders
Paid-up Equity Capital
2,000 Equity shares of ` 75 paid-up 1,50,000
Less : Amount available after paying Preference Shareholders 61,000
Loss to be borne by Equity Shareholders 2,55,000

` 2,55,000
Loss per share = = ` 51
5,000
` ` `
Paid up Amount 75 60 50
Less : Loss per share 51 51 51
Balance paid/recovered 24 9 (–) 1
Illustration 5
The Balance Sheet of Maan. Ltd. as on 30-9-2014 was as under :
` `
5,000 5% Pref. shares of ` 10 50,000 Property 40,000
each
10,000 equity shares of ` 10 each 1,00,000 Machinery 60,000
15% Debentures 40,000 Furniture 10,000

Creditors 89,000 Stock 71,000
Debtors 39,000
Bank Balance 9,000
Profit & Loss Balance 50,000
2,79,000 2,79,000
Preference dividends are in arrears for 2 years and as per articles, these are payable on liquidation.
All the debentures are secured against property and interest is payable on 31st March and 30th September.
Interest has been paid up to 30th September. Creditors include Rates 2,000 ; income tax 2,050 and
compensation under Industrial Dispute Act ` 1,000.
On liquidation, assets realised – Property ` 60,000 (realised by debentureholders) ; Machinery
` 42,000 ; Furniture ` 5,500 ; Stock ` 54,000 and Debtors ` 32,000. Liquidation cost ` 6,000 and
1
liquidator’s remuneration was 2 % on amount realised (including cash at bank) plus ` 2,000. Debentures
2
were paid on 31st Dec. 2014. Show liquidator’s statement.

Solution.
To Assets realised By Liquidator’s

Bank Balance 9,000 1
remuneration 2 % on 4,025
2
Stock 54,000
1,61,000
Debtors 32,000 Add : 2,000 6,025
Machinery 42,000 By Cost of liquidation 6,000
Furniture 5,500 By Preference Creditors 5,050

Surplus from securities 18,500 (2,000 + 2,050 + 1,000)
(` 60,000 – ` 41,500) By Unsecured Creditors 89,000 – 83,950

5,050
By Preference 50,000
Shareholders
Add: dividends for 2 5,000 55,000

years
By Equity Shareholders 4,975
1,61,000 1,61,000
Note : Surplus from debentureholders
Property realised 60,000
Less : Due to debenture holders ` 40,000
Interest @ 15% p.a. for 3 months ` 1,500 41,500
18,500
Illustration 6. S Ltd. went into voluntary liquidation on 1st January 2014. The liquidator is to be paid
remuneration at 3% on assets realised and 2% on amount distributed to shareholders. The position of the
company on 1st January 2014 was as follows:
Cash 5,00,000
Expenses of Liquidation 9,000
Creditors (including salaries for one month ` 6,000) 68,000
5,000 6% Preference Shares of ` 30 each (Dividend paid up to Jan. 2013) 1,50,000
10,000 Equity Shares of ` 10 each ` 9 per share called and paid up 90,000
Profit and Loss Account 20,000
Under the articles of association of the company the Preference Shareholders have a right to receive
one-third of the surplus remaining after repaying the equity share capital.
Solution :
Assets realised : 5,00,000 Liquidator’s Remuneration :
3% on ` 5,00,000 ` 15,000
2% on ` 4,00,000 ` 8,000 23,000
Liquidation Expenses 9,000
Preferential Creditors 6,000
Unsecured Creditors (68,000– 62,000

6,000)
Preference Shareholders 2,09,333
Equity Shareholders 1,90,667
5,00,000 5,00,000
Working Notes
1. Calculation of Liquidator’s Remuneration on amount paid to Shareholders
`
Assets Realised 5,00,000
Less : Liquidator’s Remuneration on assets realised 15,000
Preferential Creditors 6,000
Unsecured Creditors 62,000 92,000
Amount available to pay shareholders 4,08,000
Liquidator’s Remuneration
Rate 2
= Amount available  = ` 4,08,000  = ` 8,000
100  Rate 100  2
2. Calculation of Surplus Assets Available
` `
Total Assets realised 5,00,000
Less : Payments :
Liquidator’s remuneration 23,000
Preferencial Creditors 6,000
Unsecured Creditors 62,000
Preference Shareholders (1,50,000 + 9,000) 1,59,000
Equity Shareholders 90,000 3,49,000
Surplus available for Preference Shareholders and Equity 1,51,000

Shareholders
3. Amount paid to Preference Shareholders is calculated as below :
Preference Share Capital 1,50,000
Arrears of dividend for one year 9,000
1   1  50,333
Surplus  rd of the surplus   1,51,000  
3   3
2,09,333
4. Amount paid to Equity Shareholders.
Add : 2/3rd of 1,51,000 (Surplus) 1,00,667
1, 90,667
APPOINTMENT OF RECEIVER FOR DEBENTUREHOLDERS

Debentureholder usually carry floating charge on the assets of the company. Debenture deed may
provide that debentureholders shall have the right to appoint Receiver in the event of winding up of the
company. Under certain circumstances, other mortgagee may also have the power to appoint Receiver.
Receiver takes charge of the assets mortgaged in favour of debetureholders. He is responsible to realise
the assets and make payments priority-wise up to debentureholders. He has to hand over the surplus to
the liquidators of the company after paying debentureholders. He can recover the cost of realisation (his
expenses) and his remuneration from the assets realised.
Illustration 6
The Balance Sheet of XYZ Ltd.
as on 31.12.2014
` `
10,000 7% Preference shares of ` Buildings 50,000

1,00,000 Sundry Assets 5,29,000
10 each
10,000 Equity shares of ` 10 each 1,00,000 Preliminary expenses 10,000
5,000 Equity Shares of ` 10 each, Profits & Loss account 33,500
` 85 paid 42,500
6% Debentures 2,50,000

Income tax payable
1996 15,000
1997 5,000 20,000
6,22,500 6,22,500
who discharged their obligation in full. The remaining sundry assets realised ` 1,20,000. The cost of
receiver amounted to ` 1,000 and his remuneration ` 1,250. The liquidation expenses amounted to ` 2,000
and remuneration of liquidator was ` 750. Preference dividends are in arrears for 3 years and these are
payable on winding up as per Articles only if there is surplus.

Solution.
Receiver’s Receipts and Payments Account
To Assets Realised : By Cost of Receiver 1,000
Sundry Assets 3,70,000 By Receiver’s Remuneration 1,250
Surplus from securities 10,000 By Preferential Creditors (tax) 20,000
(40,000 – 30,000) By Debentureholders 2,50,000
By Balance to Liquidator 1,07,750
3,80,000 3,80,000
Liquidators Statement of Account
To Surplus from Receiver 1,07,750 By Liquidator’s Remuneration 750

To Assets Realised 1,20,000 By Liquidation Expenses 2,000
By Unsecured Creditors 80,000
By Preference Shareholders 1,00,000
By Equity Shareholders
` 3.50 on 10,000 shares 35,000
` 2.00 on 5,000 share 10,000
2,27,750 2,27,750
Note :
1. Preference dividends are not payable as there is no surplus
2. Payment to Equity shareholder is as under :
10,000 Equity shares of ` 10 paid 1,00,000
5,000 Equity shares of ` 8.50 paid 42,500
Less : Amount available after payment of Preference 45,000

Shareholders
Total loss to be borne by Equity Shareholders 97,500
Loss per share = ` 97,500  15,000 = ` 650
` `
Paid up amount per share 10 8.50
Amount paid 3.50 2.00
‘B’ LIST OF CONTRIBUTORIES

Companies Act, 2013 defines the contributory as any person liable to contribute to the assets of a
company in the events of its being wound-up and includes the holder of any shares which are fully paid-
up. All the present as well as past shareholders who have ceased to be members within a year of
commencement of liquidation proceedings are contributors. Accordingly , the contributories are placed in
two lists, namely, List A which includes the present shareholders (even though fully paid-up) and List B
for the past shareholders. These contiributories are liable to pay for those debts which existed at the time
when they transferred their shares. They are not liable if all the creditors can be paid from the amount
realised on sale of assets and ‘A’ list of contributors. They shall also not be liable if present shareholders
have paid the unpaid amount on shares transferred by them. This can be explained with the help of
following illustration :
Illustration 7
Bad Luck Limited went into voluntary liquidation and the proceedings commenced on 2 July, 2014.
Certain Creditors could not receive payment out of the realisation of assets and out of the contributions
from the contributories of the ‘A’ List. The following details of share transfers are made available to you.
Name of the No. of Shares Date of the Creditors Remaining

transferor transferred transferor ceasing to unpaid and outstanding
Shareholders be a member at the time of the
transferor ceasing to be
Shareholder
(i) A 10,000 1 March, 2013 60,000
(ii) B 12,500 15 August, 2013 80,000
(iii) C 5,000 1 October, 2013 1,07,500
(iv) D 20,000 1 December, 2013 1,30,000
(v) E 2,500 1 April, 2014 1,50,000
All the shares were of ` 10 each of which ` 5 per share had been paid up. Ignoring other details like
liquidator’s expenses etc. you are required to work out the liability of the individual contributories listed
above.
Solution.
Statement Showing Liabilities of the Contributories (B-List)
Date Incremental Persons B C D E
Creditors
Shares 12,500 5,000 20,000 2,500

Transferred
Ratios 5 2 8 1
` ` ` ` ` `
15 August, 2013 80,000 80,000 25,000 10,000 40,000 5,000
1 October, 2013 1,07,500 27,500 – 5,000 20,000 2,500
1 December, 2013 1,30,000 22,500 – – 20,000 2,500
1 April, 2014 1,50,000 20,000 – – – 20,000
Liability on the Basis of creditors (i) 25,000 15,000 80,000 30,000
Liability on the Basis of calls-in-arrear @ ` 5 per

62,500 25,000 1,00,000 12,500
share (ii)
Actually liability lower of (i) or (ii) 25,000 15,000 80,000 12,500
Notes : A will have no liability as he has transferred his shares more than one year before the winding up
of the company.
SUMMARY
a summary of cash book in which he records receipts and disbursements in a particular order. On the
receipt side of the statement, receipts from the sale of assets, surplus received from secured creditors,
amount received from delinquent directors and other officers of the company, and contributions made by
the contributories are recorded. On the payment side, payments made for legal charges, liquidator’s
remuneration, cost of winding up, payment to preferential creditors, payments to debenture holders and
other creditors having floating charge on the assets of the company, payment to unsecured creditors, amount
paid to the preference shareholders, and amount paid to the equity shareholders are shown.
Debenture deed may provide that debentureholders shall have the right to appoint Receiver in the
event of winding up of the company. Under certain circumstances, other mortgagee may also have the
power to appoint Receiver. Receiver takes charge of the assets mortgaged in favour of debetureholders.
He is responsible to realise the assets and make payments priority-wise up to debentureholders. He has to
hand over the surplus to the liquidators of the company after paying debentureholders. He can recover the
cost of realisation (his expenses) and his remuneration from the assets realised.
SUGGESTED READINGS
Delhi.
Delhi

1.Write a note on Liquidator’s final statement of account.
2.Give a proforma of Liquidator’s Statement of Account ?
3.What are contributories as per LIST B and how their liability is determined?
4.Write a note on Liquidator’s remuneration.
5.What is the effect of appointment of receiver for debentureholders ?
6. What important points are taken into consideration while preparing Liquidator’s Final Statement
of Account ?
7. A company went into voluntary liquidation. You are required to prepare liquidator’s final
statement of account allowing 2% remuneration on assets realised and 2% on amount distributed
among unsecured creditors other than preferential creditors.
Assets Realised : `
Land & Building 20,000

Plant & Machinery 18,650
Furniture 1,000
The liabilities were :
Unsecured creditors 32,000
Debentures 10,000
Equity share capital 5,000 shares of ` 10 each 50,000
Liquidation expenses 1,000
[Ans. Liquidator’s remuneration ` 1,143 ;
Payment to unsecured creditors ` 17,507]
8. The Veer Ltd. went into liquidation with the following liabilities :–
(1) Secured creditors 40,000 (securities realised ` 45,000)
(2) Preferential creditors ` 9,000
(3) Unsecured creditors ` 37,800
Liquidation expenses amounted to ` 752. The liquidator is entitled to a remuneration of 3% on
amount realised (including the assets realised by the fully secured creditors) and 2% on the amount
distributed to unsecured creditors except preferential creditors. Various assets (excluding securities in the
hands of fully secured creditors) realised ` 37,100
Prepare Liquidator’s final statement of Account.
[Ans. Liquidator’s remuneration ` 3,049 ; Payment to Unsecured Creditors ` 29,299]
9.
The Balance Sheet of X Ltd.
as on 31.12.2016
` `
5,000 7% Preference shares of ` 10 Buildings 25,000

each 50,000 Sundry Assets 2,64,500
5,000 Equity shares of ` 10 each 50,000 Preliminary expenses 5,000
2500 Equity Shares of ` 10 each, Profits & Loss account 16750

` 85 paid 21,250
6% Debentures 125000
Income tax payable
1996 7500
1997 2500 10,000
3,11,250 3,11,250
who discharged their obligation in full. The remaining sundry assets realised ` 60,000. The cost of
receiver amounted to ` 500 and his remuneration ` 625. The liquidation expenses amounted to ` 1,000 and
remuneration of liquidator was ` 375. Preference dividends are in arrears for 3 years and these are payable
on winding up as per Articles only if there is surplus.
LESSON 11
ACCOUNTS OF GENERAL INSURANCE
COMPANIES
STRUCTURE
 Objectives
 Meaning and features of general insurance contract
 Accounting principles for preparing financial statements of general insurance

companies
 Preparation of Revenue Account of general insurance companies
 Preparation of Profit and Loss Account of general insurance companies
 Preparation of Balance Sheet of general insurance companies
 Summary
 Model questions
OBJECTIVES
 Understand the meaning and features of general insurance contracts.
 Learn about accounting principles for preparing financial statements of general insurance
companies
 Know about the preparation of financial statements of general insurance companies
 CLASSIFICATION OF IMPORTANT ACCOUNTS

 It is essential for the purpose of this chapter to have clear understanding of some
basic terms such as liabilities, trade liabilities, provisions, accumulated profits etc.
Following chart clarifies the point :
 TABLE SHOWING CLASSIFICATION OF ACCOUNTS
Trade Liabilities Provision and Accumulated profits

Liabilities Accumulated losses
1. Trade 1. Trade creditors 1. Provision for 1. Profit and Loss
creditors or depreciation Account (Cr.)
creditor
2. Bills 2. Bills Payables 2. Provision for doubtful 2. General Reserve
payables debts
3. Bank over draft 3. Preliminary expenses 3. Debenture sinking
fund
4. Debentures 4. Discount on shares and 4. Capital reserve
debentures
5. Loans 5. Profit and loss account 5. Capital redemption
(Dr.) reserve account
6. Provident fund 6. Provisions for repairs 6. Share forfeited
and renewals account
7. Pension fund 7. Securities premium
account
8. Superannuation 8. Investment
fund fluctuation
Employees profit fund
sharing fund
9. Taxation provision 9. Workmen

compensation fund
10. Unclaimed 10. Workmen accident

dividend fund
11. Outstanding 11. Insurance fund

expenses
12. Staff Security 12. Dividend equalisation

Deposit fund
13. Employee’s
Saving Account
14. Workmen’s Profit

Sharing Fund.
 If the purchasing company takes over a liability, it means such liability will appear in its
balance sheet if not payable immediately.
 If the purchasing company has agreed to pay a liability, it means :–
 (a) the liability is immediately payable, and
 (b) it is payable through the vendor company
 (c) it will not become a part of purchase consideration.
 (d) it will not appear in the balance sheet of the purchasing company.

GENERAL INSURANCE BUSINESS

insurance. The main features of general insurance may be given as follows :
(i) General insurance contracts are generally made for one year or 12 months.
(ii) Insurance contracts can be made at any time during the financial year.
(iii) Premiums in respect of general insurance are paid in advance.
(iv) Unexpired amount of Premiums in respect of insurance contracts expiring during
the next financial year is carried forward in the form of a reserve or provision known as
‘Reserve for Unexpired Risks’ in order to meet out the liability arising under the
unexpired contracts during next financial year.
ACCOUNTING PRINCIPLES FOR PREPARATION OF FINANCIAL
STATEMENTS OF GENERAL INSURANCE COMPANIES
1. Accounting Standards : Financial Statements of General Insurance Companies
shall be in conformity with the Accounting Standards (AS) issued by Institute of
Chartered Accountants of India (ICAI) to the extent applicable..
2. Premium : Premium shall be recognized as income either over the contract
period or the period of risk, whichever is appropriate. Premium income not relating to
current accounting period such as unearned premium and premium received in advance,
shall be disclosed separately in financial statements.
3. Reserve for Unexpired Risk: A reserve for unexpired risk or unearned premium
(also known as technical reserves) shall be created representing that part of premium
which is attributable and to be allocated to succeeding accounting periods. The reserve
shall not be less than the limits as specified under Section 64 (ii) (b) of the Insurance
Companies Act, 1938 which as follows :
4. Unearned premium and premium received in advance: In the financial
statements, unearned premium and premium received in advance, which represents
premium received prior to the commencement of the risk shall be shown separately under
the head “Current Liabilities”.
Premium received in advance shall not be included along with the unearned
premium. They are required to be shown separately in financial statements.
5. Claim Costs : Cost of claims to an insurer comprise the claims under policies
and claims settlement costs. Claims under policies included the claims made for losses
incurred and those estimated or anticipated under the policies.
Liabilities for outstanding claims shall be taken into account in respect of direct
business as well as reinsurance business.
The change in estimated liability for outstanding claims at beginning and end of the
financial period shall be brought into account. The estimated liability for outstanding
claims shall be provided net of salvage value if its realization is sufficiently certain.
6. Catastrophe Reserve : Catastrophe Reserve means reserve which is meant for
meeting losses arising from an entirely unexpected set of events and not for any specific
known purpose. This reserve is in the nature of an amount set aside for the potential
future liability against the insurance policies in force. Catastrophe Reserve shall be
created in accordance with norms prescribed by authority.
FINANCIAL STATEMENTS OF GENERAL INSURANCE
BUSINESSES
The insurance companies carrying general insurance business are to prepare
their financial statements on the following forms :
Form B – PL – Profit and Loss
Account
Form B – BS – Balance Sheet
The Performa of these forms are given below :
Form BRA
REVENUE ACCOUNTS FOR THE YEAR ENDED 31ST MARCH, 20.......
Year Year
(` ‘000) (` ‘000)
1. Premiums earned (net) 1

2. Profit/Loss on sale/redemption of
Investments
4. Interest, Dividend & Rent-Gross
TOTAL (A)
1. Claims Incurred (Net) 2
2. Commission 3
3. Operating Expenses related to 4
Insurance Business
TOTAL (B)
Fire/Marine/
Miscellaneous Business (C) = (A) – (B)
APPROPRIATIONS
Transfer to Shareholders’ Account
Transfer to Catastrophe Reserve
Transfer to other Reserve (to be
specified)
TOTAL (C)
Note : See Notes appended at the end of Form B-PL
FORM B-PL
PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31ST MARCH, 20...
Year Year
(`‘000) (`‘000)
1. OPERATING PROFIT/(LOSS)
(a) Fire Insurance
(c) Miscellaneous Insurance
2. INCOME FROM INVESTMENTS
(a) Interest, Dividend & Rent-Gross
(b) Profit on sale of investments
3. OTHER INCOME (to be specified)
TOTAL (A)
4. Provisions (other than taxation)
investments
(b) For doubtful debts

5. OTHER EXPENSES
(a) Expenses other than those related to
Insurance Business
(b) Bad debts written off
(c) other (to be specified)
TOTAL (B)
Profit before Tax

APPROPRIATIONS
(a) Interim dividend paid during the year
(b) Proposed final dividend
(c) Dividend distribution tax
(d) Transfer to any reserves or Other
Accounts (to be specified)
Balance of profit/loss brought forward
from last year
Balance carried forward to Balance Sheet
Notes : to forms B-RA and B-PL

(a) Premium income received from business concluded in and outside India
shall be separately disclosed.
(b) Reinsurance premiums whether on business ceded or accepted are to be
brought into account gross (i.e. before deducting commissions) under the head
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 total
premiums (less reinsurance) or ` 5,00,000 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 or losses and other items.
(g) Interest dividends and rentals receivable in connection with investments
should be stated as 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 realised rent. It shall not include
any notional rent.
FORM B – BS
BALANCE SHEET AS AT 31ST MARCH, 20..

Year Year
(` ‘000) (` ‘000)
SOURCES OF FUNDS
SHARE CAPITAL 5
FAIR VALUE CHANGE ACCOUNT
BORROWINGS 7
TOTAL
INVESTMENTS 8
LOANS 9
FIXED ASSETS 10
CURRENT ASSETS
Cash and Bank Balances 11
Sub-Total (A)
CURRENT LIABIITIES 13
PROVISIONS 14
Sub-Total (B)
MISCELLANEOUS EXPENDITURE (to
the extent not written off or adjusted) 15
DEBIT BALANCES IN PROFIT AND
LOSS ACCOUNT
TOTAL
Year Year
(`‘000) (`‘000)

2. Claims, other than against policies, not
acknowledged as debts by the company
3. Underwriting commitments outstanding
(in respect of shares and securities)
4. Guarantees given by or on behalf of the
Company
5. Statutory demands/liabilities in dispute,
not provided for
6. Reinsurance obligations to the extent not
provided for in accounts
TOTAL

SCHEDULE – 1
PREMIUM EARNED [NET]

Year Year
`’000 `’000
Premium from direct business

Add : Premium on reinsurance accepted
Less : Premium on reinsurance ceded
Net Premium
Adjustment for change in reserve for unexpired risks
Total Premium Earned (Net)
Note : Reinsurance premiums whether on business ceded or accepted are to be brought

into account, before deducting commission, under the head of reinsurance premiums.
SCHEDULE – 2
CLAIMS INCURRED [NET]

Year Year
(`‘000) (`‘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
Notes :
(a) Incurred But Not Reported (IBNR). Incurred But Not Enough Reported [IBNER]
claims should be included in the amount for outstanding claims.
(b) Claims include specified claims settlement cost but not expenses of management.
(c) The surveyor fees, legal and other expenses shall also form part of claims cost.
(d) Claims cost should be adjusted for estimated salvage value if there is a sufficient
certainty of its realisation.
SCHEDULE – 3
COMMISSION

Year Year
(`‘000) (`‘000)
Commission paid
Direct
Add : Re-insurance accepted
Less : Commission on re-insurance ceded
Net Commission
Notes : The profit/commission, if any, are to be combined with the re-insurance

accepted or re-insurance ceded figures.
SCHEDULE – 4
Year Year
(`‘000) (`‘000)

5. Repairs
6. Printing & stationery
7. Communication
(a) as auditor
(b) as advisor or in any other capacity, in
respect of
(iii) Management
services; and
12. Other (to be specified)
13. Depreciation
TOTAL
Note : Items of expenses and income in excess of one percent of the total premiums (less
reinsurance) or Re. 5,00,000 whichever is higher, shall be shown as a separate line item.
SCHEDULE – 5
SHARE CAPITAL
Year Year
(`‘000) (`‘000)
2. Issued Capital
Less : Calles unpaid

Add : Equity Shares Forfeited (Amount originally paid
up)
Less : Par value of Equity Shares bought back
Less : Preliminary Expenses :
TOTAL
Notes :
(a) Particulars of the different classes of capital should be separately stated.
(b) The amount capitalised on account of issue of bonus shares 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
SHARE CAPITAL
PATTERN OF SHAREHOLDING
[As certified by the Management]
Shareholder Current Year Previous Year
Number of % of Holding Number of % of
Shares Shares Holding
Promoters
 Indian
 Foreign
Others
TOTAL
SCHEDULE – 6
RESERVE AND SURPLUS

Year Year
(`‘000) (`‘000)
1. Capital Reserve
4. General Reserve
Less : Debit balance in Profit and Loss Account
6. Other Reserves (to be specified)
7. Balance of profit in Profit & Loss Account
TOTAL
Note : Additions to and deductions from the reserves should be disclosed under each of
the specified heads.
SCHEDULE – 7
BORROWINGS

Year Year
(`‘000) (`‘000)
1. Debentures/Bonds
2. Banks
TOTAL
Notes :
(a) The extent to which the borrowings are secured shall be separately disclosed stating
the nature of the security under each sub-head.
(b) Amounts within 12 months from the date of Balance Sheet should be shown
separately.
SCHEDULE – 8
INVESTMENTS

Year Year
(`‘000) (`‘000)

(a) Shares
(aa) Equity
(bb) Preference
(b) Mutual Funds
(d) Debentures/Bonus
(f) Subsidiaries
(g) Investment Properties-Real Estate
4. Investments in infrastructure and Social Sector

(a) Shares
(aa) Equity
(bb)Preference
(b) Mutual Funds
(f) Subsidiaries
(g) Investment Properties- Real Estate
TOTAL
Notes :
(a) Investments in subsidiary/holding companies, Joint ventures and associates shall be
separately disclosed at cost.
(i) Holding company and subsidiary shall be construed as defined in the

(ii) Joint Venture is a contractual arrangement whereby two or more parties

undertake an economic activity, which is subject to joint control.
(iii) Joint control is the contractually agreed sharing of power to govern the
financial and operating policies of an economic activity to obtain benefits from
it.
(iv) Associate is an enterprise in which the company has significant influence

and which is neither a subsidiary nor a joint venture of the company.
(b) Aggregate amount of company’s investments other than listed equity securities
and derivative instruments and also the market value thereof shall be disclosed.
(c) Investments made out of Catastrophe Reserve should be shown separately.
(d) Debt securities will be considered as “held to maturity” securities and will be
measured at historical cost subject to amortisation.
(d) Investments Property means a property [land or building or part of a building or

both] held to earn rental income or for capital appreciation or for both, rather than for
use in services or for administrative purposes.
(e) Investments maturing within twelve months from balance sheet date and investments
made with the specific intention to dispose of within twelve months from balance
sheet date shall be classified as short-term investments.
SCHEDULE – 9
LOANS

Year Year
(`‘000) (`‘000)
Secured
(a) On mortgage of property
(aa) In India
(bb) Outside India
(b) On Shares, Bonds, Govt. Securities
Unsecured
TOTAL
(a) Central and State Governments
(c) Subsidiaries
(d) Industrial Undertakings
(e) Others (to be specified)
TOTAL
(aa) In India
(bb) Outside India
(b) Non-performing loans less provisions
(aa) In India
(bb) Outside India
TOTAL
(a) Short-Term
(b) Long-Term
TOTAL
Notes :
(a) Short-term loans shall include those, which are repayable within 12 months from the
date of balance sheet. Long term loans shall be the loans other than short-term loans.
(b) Provisions against non-performing loans shall be shown separately.
(c) The nature of the security in case of all long term secured loans shall be specified in
each case. Secured loans for the purpose of this schedule, means loans secured
wholly or partly against an asset of the company.
(d) Loans considered doubtful and the amount of provision created against such loans
shall be disclosed.
SCHEDULE – 10
FIXED ASSETS
Ope Additi Deduct Closi Up to For On To As at Previ

ning ons ions ng Last the Sale date year ous
Year Year s end Year
Adju
stme
nts
Goodwill
Intangible
(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
Note : Assets included in land, building and property above exclude Investment
Properties as defined in note (e) to Schedule 8.
SCHEDULE – 11

Year Year
(`‘000) (`‘000)
1. Cash (including cheques, drafts and stamps)

2. Bank Balances
(aa) Short-term (due within 12 months)
(bb) Others
(a) With Banks
(b) With other Institutions
TOTAL
Balances with non-scheduled banks included in 2

and 3 above
Note : Bank balance may include remittances in transit. If so, nature and amount should
be separately stated.
SCHEDULE – 12

Year Year
(`‘000) (`‘000)
ADVANCES

3. Prepayments
5. Advances tax paid and taxes deducted at source
(Net of provisions for taxation)
TOTAL (A)
OTHER ASSETS
3. Agents Balances
5. Due from other entities carrying on insurance

business
(including reinsurers)
6. Due from subsidiaries/holding
7. Deposit with Reserve Bank of India
[Pursuant to section 7 of Insurance Act, 1938]
TOTAL (B)
TOTAL ((A) + (B))
Notes ;
(a) The items under the above heads shall not be shown net of provisions for doubtful
amounts. The amount of provision against each head should be shown separately.
(b) The term ‘Officer’ should conform to be definition of that term as given under the
(c) Sundry Debtors will be shown under item 9 (others)
SCHEDULE – 13
CURRENT LIABILITIES

Year Year
(`‘000) (`‘000)
1. Agents Balances
3. Deposits held on re-insurance ceded
5. Unallocated Premium
6. Sundry creditors
TOTAL
SCHEDULE – 14
PROVISIONS

Year Year
(`‘000) (`‘000)
1. Reserve for Unexpired Risk
2. For taxation (less advance tax paid and taxes deducted

at source)
TOTAL
SCHEDULE – 15

Year Year
(`‘000) (`‘000)
TOTAL
Illustration 1
From the following particulars, prepare the Fire Revenue Accounts for 2015-2016 :
` in Lakhs
Claims paid 235

Legal expenses regarding claims 5
Reinsurance premiums 60
Commissions 100
Expenses of management 150
Provisions against unexpired risk on April 1, 2015 260
Claims unpaid on April 1, 2015 20
Claims unpaid on March 31, 2016 35
Solution.
Particulars Schedule ` in lakhs
Premiums earned (Net) 1 530
Total (A) 530
Claims incurred (Net) 2 255

Commission 3 100
Total (B) 505
Operating Profit from Fire Business (C) = (A) – (B) 25
Appropriations :
Transfer to Shareholders’ Account 25
Total (C) 25
SCHEDULES FORMING PART OF REVENUE ACCOUNT
Schedule – 1
Premiums Earned (Net)
` in lakhs

Less: Reinsurance Premium 60
Net Premium 540
Adjustment for change in reserve for unexpired
risks:
` in lakhs
Opening reserve 260
Closing reserve 50% of ` 540 lakh (270) (10)
Total Premium Earned (net) 530
SCHEDULE – 2
Claims Incurred (Net)
` in lakhs
Net claims paid 235

Add: Claims outstanding at the end of the year 35
Add : Legal Expenses regarding claims 5
275
Less: Claims outstanding at the beginning 20
255
SCHEDULE – 3
` in lakhs
COMMISSION
COMMISSION PAID 100
SCHEDULE – 4
OPERATING EXPENSES RELATED TO ` in lakhs
INSURANCE BUSINESS
EXPENSES OF MANAGEMENT 150
Illustration 2.
On 31st March, 2014, the books of General Insurance Co. Ltd. disclosed the
following particulars in respect of Fire business :
Claims Paid 6,40,000

Reserve for Unexpired Risks on 1.4.2013 5,20,000
Additional Reserve on 1.4.2013 1,00,000
Estimated Liability in respect of Outstanding Claims :
on 31.3.2013 70,000
on 31.3.2014 80,000
Expenses of Management (including ` 25,000 legal charges
in connection with claims) 2,60,000

Commission 1,50,000
Profit on sale of Investment 12,000
Premiums 11,20,000
Bad Debts 12,000
Re-insurance Premiums 80,000
Re-insurance Recoveries 50,000
Interest, Dividends and Rents (Gross) 72,000
Income Tax thereon 9,000
Prepare Fire Insurance Revenue Account of the Company for the year ended 31st
March, 2014. Reserve for unexpired risks to be maintained at 50% of the net premiums
and keep the additional reserve unchanged.
Solution.
General Insurance Company
Fire Insurance Revenue Account
Premiums Earned (Net) 1 10,40,000

Profit on Sale of Investments 12,000
Interest, Dividend and Rents (Gross) 72,000
Total (A) 11,24,000
Claims Incurred (Net) 2 6,25,000

Commission 3 1,50,000
Operating Expenses related to Insurance 4 2,47,000
Business
Total (B) 10,22,000
Operating Profit from Fire Business (C) = (A) – 1,02,000

(B)
Schedules Forming Part of Financial Statements

SCHEDULE 1– Premiums Earned (Net)
Particulars `
Premiums 11,20,000
Less : Reinsurance Premium 80,000
Net Premium 10,40,000
Adjustment for change in reserve for unexpired risks :
Reserve for unexpired risk at the end of the year
(50% of net premium) 5,20,000
6,20,000
Less : Reserve for unexpired risks at the beginning of the
year
including additional reserve : 6,20,000 NIL
(` 5,20,000 + 1,00,000)
10,40,000
SCHEDULE 2– Claims Incurred (Net)
Claims paid 6,40,000
Add : Legal Expenses regarding claims 25,000
Estimated Liability in respect of outstanding claims as on 80,000

31.3.2005
7,45,000
Less : Estimated Liability in respect of outstanding claims as 70,000

on 31.3.2004
6,75,000
Less : Reinsurance recoveries 50,000
6,25,000
SCHEDULE 3– Commission
Commission paid 1,50,000
SCHEDULE 4– Operating Expenses related to Insurance Business
Management Expenses (2,60,000 – 25,000) 2,35,000
Bad Debts 12,000
2,47,000
Illustration 3
The following figures are extracted from the books of Z Insurance Company Ltd. as
at 31.12.2014 :
` `
Claims paid less re-insurance Additional Reserves :

:
Fire 80,000 Fire 1,32,000
Marine 62,000 Marine 16,000
General Reserve 1,18,000 Interest Accrued 25,000
Commission Paid : Furniture (Cost ` 18,000) 12,000
Fire 48,000 Building (Cost ` 1,25,000) 87,000
Marine 39,000 Office Equipment (Cost ` 30,000

48,000)
Share Capital 20,00,000 Cash in hand 56,000
(20,000 Shares of `100 each) Cash at Bank 1,04,000
Expenses of Management : Premium less re-insurance :

Fire 53,000 Fire 2,11,000
Marine 36,000 Marine 1,62,000
Reserve for Unexpired Risks Tax deducted at source 9,000
:
Fire 2,04,000 Premiums Due :
Marine 1,23,000 Fire 28,000
Investment at Cost : Marine 20,000
Central Govt. Securities Claims outstanding on
1.1.2014 :
deposited with RBI 19,21,000 Fire 14,000
Other Central Govt. 1,23,000 Marine 2,000
Securities
State Govt. Securities 2,22,000 Dividends 20,000
Shares in Companies 2,49,000 Interest on Investments 1,00,000
Depreciation 21,000 Dues to other Insurers 43,000
Due from other Insurers 27,000 Contingency Reserve 39,000
Commission on Re-insurance Investment Reserve 47,000
ceded :
Fire 23,000 Director Fees 4,000
Marine 2,000
The following further information is also given :
(1) Claims outstanding as on 31.12.2014 are :
Fire 17,000
Marine 6,000
(2) Market value of Investments is ` 24,01,000.
(3) Increase Additional Reserve by 10% of net premium for the year for fire.
(4) Maintain reserve for unexpired risks at 50% of Premium for the year in case of
Fire insurance and 100% of premium for the year in case of Marine insurance.
Prepare Revenue Accounts, Profits and Loss Account and Balance Sheet.
Solution.
FORM B-RA
Revenue Account for the year ended 31 December, 2014
Particulars Schedule Amount
Fire Marine
Insuranc Insurance
e
1. Premiums earned 1 2,88,400 1,23,000
2. Other income – –
3. Interest, Dividend and Rent  Gross – –
Total (A) 2,88,400 1,23,000
4. Claims Incurred 2 83,000 66,000

5. Commission 3 25,000 37,000
6. Operating Expenses related to 4 53,000 36,000

Insurance Business
7. Other Expenses – –
Total (B) 1,61,000 1,39,000
Fire/Marine Business (AB) 1,27,400 (16,000)
FORM B-PL
Name of the Insurance : Z Insurance Company Ltd.
Registration No. and Date of Registration with IRDA
Profit and Loss Account
for the year ended 31 December 2014
Particulars Amount
1. Operating Profit/(Loss) from 1,27,400
(a) Fire Insurance (16,000)
2. Income from Investments

(c) Interest, Dividend and Rent – Gross 1,20,000
(d) Profit on sale of investments –
3. Other Income –
Total (A) 2,31,400
4. Provisions (Other than taxation) –
5. Other Expenses 25,000
Total (B) 25,000
Profit Before Tax (A-B) 2,06,400
Less : Provision for Taxation –
Profit After Tax 2,06,400
Add : Brought forward Reserve/Surplus from the Balance Sheet –
Less : Appropriations –
Dividend paid
Balance carried forward to Balance Sheet 2,06,400
FORM B-BS
Balance Sheet
as at 31 December, 2014
Particulars Schedul `
e
Sources of Funds :
Share Capital 5 20,00,000
Reserves and Surplus 6 3,63,400
Credit /(Debit) Fair Value Change Account – (67,000)
Borrowings 7
22,96,400
Total
Application of Funds :
Investments 8 24,01,000
Loans 9 –
Fixed Assets 10 1,29,000
Current Assets
Cash and Bank Balances 11 1,60,000
Advances and Other Assets 12 1,09,000
Less : Current Liabilities 13 (66,000)
Less : Provisions 14 (4,36,600)
Miscellaneous Expenditure 15 –
22,96,400
Total
Working Notes :
1. Expenses in Profit & Loss Account
Depreciation 21,000
Director’s Fees 4,000
25,000
2. Cost of Investment 25,15,000

Less : MV of Investments (24,01,000)
FVC Account 1,14,000
Entry will be :
FVC Account Dr. 1,14,000
To Investment 1,14,000
Schedule forming Part of Financial Statements
Schedule1 Premiums earned
Fire Marine
Net Premium 2,11,000 1,62,000
Less : Adjustment for change in provision for
unexpired risks :
Fire Marine
Reserve for unexpired risks at the 1,05,50 1,62,00
end 0 0
Additional Reserve 1,53,10 16,000
0
2,58,60 1,78,00
0 0
Less : Reserve for unexpired risks
at the beginning including 3,36,00 1,39,00 (+) 77,400 (39,000)
additional reserves 0 0
2,88,400 1,23,000
Schedule2 Claims Incurred

Fire Marine
Claims paid 80,000 62,000
Less : Claims Outstanding at the beginning 14,000 2,000
66,000 60,000
Add : Claims Outstanding at the end 17,000 6,000
83,000 66,000
Schedule3 Commission
Fire Marine
Commission paid 48,000 39,000
Less : Commission on Reinsurance ceded 23,000 2,000
25,000 37,000
Schedule4 Operating Expenses

Fire Marine
Expenses of Management 53,000 36,000
Schedule5 Share Capital

Share Capital 20,00,000
Schedule6 Reserve and Surplus

Contingency Reserve 39,000
Profit & Loss Account 2,06,400
3,63,400
Schedule7 Borrowings
Nil
Schedule8 Investments
Central Government Securities deposited with RBI 19,21,000
Other Central Govt. Securities 1,23,000
State Govt. Securities 2,22,000
Shares in Companies 2,49,000
25,15,000
Less : FVC Account 1,14,000
24,01,000
Schedule9 Loans
Nil
Schedule10 Fixed Assets

Furniture 12,000
Building 87,000
Office Equipment 30,000
1,29,000
Schedule11 Cash and Bank Balances

Cash in hand 56,000
Cash at Bank 1,04,000
1,60,000
Schedule12 Other Current Assets

Due from other Insurers 27,000
Interest Accrued 25,000
Tax deducted at source 9,000
Premium Due (28,000 + 20,000) 48,000
1,09,000
Schedule13 Current Liabilities
Claim Outstanding
(17,000 + 600) 23,000
Due to others 43,000
66,000
Schedule14 Provisions
Unexpired Risk Reserve 2,67,500
4,36,600
SUMMARY
insurance. General insurance contracts are generally made for one year. Insurance contracts
can be made at any time during the financial year. Premiums in respect of general insurance
are paid in advance. Unexpired amount of Premiums in respect of insurance contracts
expiring during the next financial year is carried forward in the form of a reserve or
provision known as ‘Reserve for Unexpired Risks’ in order to meet out the liability
arising under the unexpired contracts during next financial year. The reserve shall not be
less than the limits as specified under Section 64 (ii) (b) of the Insurance Companies Act,
1938 which as follows :
The insurance companies carrying general insurance business are to prepare their
financial statements on the following forms :
Form B – PL– Profit and Loss Account
Form B – BS– Balance Sheet
SUGGESTED READINGS
 R. L. Gupta and Radhaswamy, Advanced Accountancy, Volume II, Sultan Chand
and Sons, New Delhi.
 Maheshwari and Maheshwari, Advanced Accountancy, Volume II, Vikas
Publishing House, New Delhi
 Shukla, Grewal and Gupta, Advanced Accounts, Volume II, S Chand and
Company, New Delhi
 Tulsian, P.C., Corporate Accounting, Tata McGraw Hill Education Pvt. Ltd., New
Delhi
treatment.
2. Prepare (with imaginary figures) the balance sheet of an insurance company
carrying on fire, marine and miscellaneous insurance business.
3. What important points should be kept in mind in preparing the annual accounts
of General Insurance Companies ?
4. Prepare with imaginary figures the Revenue Accounts of General Insurance
Companies.
5. On December 31, 2014 the books of Rocky Insurance Co. Ltd. contained the following
information in respect of Fire Insurance : –
` `
Reserve for unexpired Claims paid 6,10,000
risks at 31-12-2013 5,00,000 Reinsurance Premium paid 75,000
Estimated Liability in respect of Reinsurance Premium 20,000
Recovered
outstanding claims on 31-12- 65,000 Interest and Dividends 54,520
2013
Outstanding Claims on 31-12- 90,000 Income Tax on above 6,520
2014
Expenses of management Profit on Sale of Investment 21,000
(including
` 30,000 legal expenses in Commission 1,52,000
connection with claims) 2,80,000 Premiums 11,20,000

Additional Reserve
on 31-12-2013 1,00,000
Prepare Fire Insurance Revenue Account for the year 2014 reserving 50% of the Premiums
income for unexpired risk and keeping an additional reserve of ` 50,000
[Ans. Profit ` 91,020]

LESSON 10
HOLDING COMPANY ACCOUNTS
STRUCTURE
 Objectives
 Meaning of Holding Company
 Meaning of Subsidiary Company
 Cost of Control/Goodwill
 Minority Interest
 Capital Profits/ Pre-acquisition profits
 Revenue Profits/Post-acquisition profits
 Meaning of Consolidated Balance Sheet
 Provisions of Companies Act, 2013 regarding preparation of Consolidated Balance

Sheet
 Preparation of Consolidated Balance Sheet
 Summary
 Model questions
OBJECTIVES
 Understand the meaning of holding company and subsidiary company.
 Learn about key concepts of accounting for holding companies.
 Know about the meaning of consolidated balance sheet.
 Explain how to prepare Consolidated Balance Sheet.

INTRODUCTION
Companies have to depend upon other companies for supply of raw materials, components etc. In
order to expand business, or in order to assure uninterrupted supply of inputs, or to enable marketing of
its products, the management of a company tries to acquire control on such firms supplying raw materials
and components or firms engaged in marketing the output. The company acquiring the controlling
interest in another company is called the Holding Company and the company in which the controlling
interest is acquired is called Subsidiary Company. A few important objectives of acquiring majority
control over other company are: to reduce cost, to gain financially, to achieve growth and to diversify
the activities.
KEY DEFINITIONS
 Holding company or parent company: It is the company which controls the other company. A
company is said to control the other company:
 When that company holds more than half of the share capital of the other company. (At least
51%). A holding company may acquire more than fifty percent of the equity shares of
subsidiary company or may acquire all the shares of subsidiary company. From this point of
view there may be two types of Holding Company. These are: i) Holding company which
acquires all the equity shares of subsidiary company; or, ii) Holding company which acquires
majority of the equity shares of the subsidiary company.
 When the company control the composition of board of directors of other company.
 When the company is a subsidiary of any company which is that other company’s subsidiary.
For example Company Y is a subsidiary of Company X and Company Z is a subsidiary of
Company Y. So Company Z will also be a subsidiary of Company X.
Subsidiary company: When a company is controlled by some other company called holding company,
then the company which is being controlled is called subsidiary company. There are two types of
subsidiary companies:
(i) Wholly owned subsidiary company; and
(ii) Partly owned subsidiary company.
(i) Wholly owned subsidiary company
Where all the shares of the subsidiary company are held i.e. owned by the holding company, such
subsidiary company is termed as wholly owned subsidiary company. In such a case, all the shares of the
subsidiary company are purchased by the holding company.
(II) Partly owned subsidiary company
Where majority of the shares of the subsidiary are held i.e. owned by the holding company, such a
subsidiary is known as partly owned subsidiary company. In such a case, some of the shares of the
subsidiary are owned by persons (shareholders) other than the holding company. The interest of such
shareholders other than the interest of the holding company is termed as ‘‘Minority Interest’’.
Students must keep the above distinctions in mind because the principle of consolidation of final
accounts will vary depending on whether the subsidiary is a fully owned subsidiary or a partly
owned subsidiary.
Subsidiary also includes Associate Company as well as Joint Venture.
 Group: Combination of holding and subsidiary companies together is called group.
MERITS OR ADVANTAGES OF A HOLDING COMPANY
Following are the merits of holding companies:

Ease of formation: It is quite easy to form a holding company. The promoters can buy the shares in the
open market. There are not much legal formalities to be carried out.
Pooling of resources: The holding company can pool together its resources with subsidiary companies
easily. Thus the holding company can undertake large scale projects to increase its profitability.
Economies of large scale operations: The buying and selling of the holding company and the
subsidiaries can be centralized. It can enjoy the advantage of quantity discount and better credit terms
because of bulk purchases. It can also get better terms from buyers in case of sales. Expenses can be
minimized as a result of holding company.
Business combination without liquidation: No company needs to be liquidated because both holding
and subsidiary company operate smoothly as before. The subsidiary company is continued with its own
legal entity, reputation and goodwill. The goodwill of subsidiary company does not come to an end even
after becoming a subsidiary company, contrary to what happens in amalgamation of companies. In
amalgamation and absorption, the goodwill of the company being taken over comes to an end after
amalgamation.
Avoidance of competition: Competition between holding and subsidiary companies can be avoided if
they are in the same line of business. The feeling of cooperation between the holding company and
subsidiary company eliminates the competition between them.
Increase in efficiency of operations: The efficiency of the company can be increased due to availability
of the services of experienced experts to the subsidiary company.
Increase in goodwill: When a company’s control is taken over by a reputed company, then it also
enhances the goodwill of the subsidiary company.
Secrecy maintained: Secrecy can be maintained as the authority and decision making are centralized. It
can protect itself from adverse publicity.
Avoidance of risk: In case the subsidiaries undertake risky business and fail, the loss does not affect the
holding company. It can sell its stakes in the subsidiary company.
DEMERITS OR DISADVANTAGES OF HOLDING COMPANIES
The following are the demerits of holding companies:
Over capitalization: Since capital of holding company and its subsidiaries may be pooled together it may
result in over capitalization. Shareholders would not get a fair return on their invested capital.
Misuse of power: More than 50% of the total capital of subsidiary company is invested by the holding
company. So the remaining shareholders are in minority and there is dominance of the holding company
over the subsidiary company. As a result, there is no value of minority shareholders in making any
important decisions. Such a situation is not good for minority shareholders. The financial liability of the
members of a holding company is insignificant in comparison to their financial power. It may lead to
irresponsibility and misuse of power.
Exploitation of subsidiaries: The holding company may exploit the subsidiary companies. The
subsidiaries may be compelled to buy goods from the holding company at high prices. They might be
forced to sell their produce to the holding company at very low prices.
Manipulation: Information about subsidiaries may be used for personal gains. For example information
of the financial performance of subsidiary companies may be misused to indulge in speculative activities.
Concentration of economic power: There is concentration of economic power in the hands of those
who manage the holding company. Such concentration of economic power is harmful to the general
economic welfare.
Creation of Secret monopoly: Due to the subsidiary company remaining under the control of holding
company, there is no possibility of competition. It may lead to the creation of secret monopolies. These
secret monopolies may try to eliminate competitors and prevent entry of new firms.And it may lead to
negative effect upon the customers and society.
Chances of frauds: There are various transactions between the holding company and subsidiary
company which is known as inter-company transaction. These transactions are not shown in the
consolidated balance sheet which may be manipulated to the disadvantages of creditors and other member
of subsidiary company.
CONSOLIDATED FINANCIAL STATEMENTS
As per Indian GAAP as well as International Accounting Standard, parent company is required to
prepare its financial statements as stand alone as well as consolidated statements. Consolidated
Financial Statements are the combined financial statements of parent and its subsidiary/ subsidiaries
i.e. consolidated financial statements are statements of group as a whole. Sub Section (3) of Section
129 of the Companies Act, 2013 mandates every company to prepare a consolidated financial
statement for all the companies having one or more subsidiaries. The preparation of consolidated
financial statements is governed by Accounting Standard-21 “Consolidated Financial Statements”
SALIANT FEATURES OF ACCOUNTING STANDARD (AS) 21 IN

REGARD TO CONSOLIDATED FINANCIAL STATEMENTS
The objective of this Standard is to lay down principles and procedures for preparation and
presentation of consolidated financial statements. Consolidated financial statements are presented by
a parent (also known as holding enterprise) to provide financial information about the economic
activities of its group. These statements are intended to present financial information about a parent
and its subsidiary(ies) as a single economic entity. Consolidated Financial Statements show the
economic resources controlled by the group, the obligations of the group and results the group
achieves with its resources.
CONSOLIDATIONPROCEDURES
In preparing consolidated financial statements, the financial statements of the parent and its
subsidiaries should be combined on a line by line basis by adding together like items of assets,
liabilities, income and expenses. For this, the following steps should be taken:
(a) the cost to the parent of its investment in each subsidiary and the parent’s portion of equity of each
subsidiary, at the date on which investment in each subsidiary is made, should be eliminated;
(b) any excess of the cost to the parent of its investment in a subsidiary over the parent’s portion of
equity of the subsidiary, at the date on which investment in the subsidiary is made, should be
described as goodwill to be recognised as an asset in the consolidated financial statements;
(c) when the cost to the parent of its investment in a subsidiary is less than the parent’s portion of
equity of the subsidiary, at the date on which investment in the subsidiary is made, the difference
should be treated as a capital reserve in the consolidated financial statements;
(d) minority interests in the net income of consolidated subsidiaries for the reporting period should be
identified and adjusted against the income of the group in order to arrive at the net income attributable
to the owners of the parent; and
(e) minority interests in the net assets of consolidated subsidiaries should be identified and presented
in the consolidated balance sheet separately from liabilities and the equity of the parent’s
shareholders. Minority interests in the net assets consist of: (i) the amount of equity attributable to
minorities at the date on which investment in a subsidiary is made; and (ii) the minorities’ share of
movements in equity since the date the parent-subsidiary relationship came in existence.
(f) Intragroup balances and intragroup transactions and resulting unrealised profits should be
eliminated in full.
PREPARATION OF CONSOLIDATED BALANCE SHEET
Consolidation of Balance Sheet implies preparation of a single Balance Sheet by aggregating all items of
assets and liabilities, appearing in the respective Balance Sheets of both the holding company and its
subsidiary company. All assets and liabilities of the subsidiary company are added to the assets and
liabilities of the parent company.
Illustration 1: H Ltd. acquired all shares of S Ltd. on 31.03.2015 for Rs. 400000. On that date the
balance sheets of two companies were as under:
(Rs.) (Rs.) (Rs.) (Rs.)
100% shares in S.
Ltd. 400000
Non-current
liabilities
Total 1360000 520000 Total 1360000 520000
SOLUTION:

H Ltd. 960000
S Ltd. 520000
1480000
Non- current liabilities 100000

10% debentures
Current liabilities
H Ltd. 60000
S Ltd. 120000 180000
Total 1480000 Total 1480000
Students must note that 100% shares in S. Ltd. represent sundry assets of Rs. 520000 minus the
liabilities of Rs. 120000. Hence, while preparing consolidated balance sheet, the share capital of S
ltd will get cancelled against “Investment in shares of S ltd” and all other assets and liabilities of S
Ltd. will be added to the assets and liabilities of the parent company i.e. H.Ltd..
Cost of control/ Capital Reserve: Sometimes the holding company pays more or less than the value of
net assets of subsidiary company. In such situations, the consolidation results into goodwill/ cost of
control or capital reserve
 Cost of control/ Goodwill: It is the extra price paid over and above the value of net assets
acquired by the holding company in subsidiary company.
 Capital reserve: It is the profit derived by holding company for acquiring shares of subsidiary
company.
(Rs.) (Rs.) (Rs.) (Rs.)
100% shares in S.
Ltd. 420000
Non-current
liabilities
Total 1380000 520000 Total 1380000 520000
SOLUTION:
Share Capital 1000000 Goodwill or cost of control 20000

General Reserve 200000 Sundry assets
H Ltd. 960000
S Ltd. 520000
1480000
10% debentures
Current liabilities
H Ltd. 80000
S Ltd. 120000 200000
Total 1500000 Total 1500000
NOTE: Cost of Investment in subsidiary company=Rs. 4,20,000

Share capital = Rs. 4,00,000
Cost of control/Goodwill =Rs. 20,000
Since the holding company has paid a price more than the share capital acquired by it, the
difference is the cost incurred by it to have control over the subsidiary company, and thus
transferred to Goodwill account.
(Rs.) (Rs.) (Rs.) (Rs.)
100% shares in S.
Ltd. 380000
Non-current
liabilities
Total 1340000 520000 Total 1340000 520000
SOLUTION:

H Ltd. 960000
S Ltd. 520000
1480000
Capital Reserve 20000

10% debentures
Current liabilities
H Ltd. 40000
S Ltd. 120000 160000
Total 1480000 Total 1480000
NOTE: Cost of Investment in subsidiary company=Rs. 3,80,000

Share capital acquired = Rs. 4,00,000
Capital Reserve =Rs. 20,000
Since the company has paid a price less than the share capital acquired by it, the difference is the
profit made by the holding company, and thus transferred to capital reserve account.
Capital profits/losses: These are the profits/losses lying in the balance sheet of subsidiary company
pertaining to pre-acquisition period. These are known as capital profits/ losses in the context of holding
company accounts even if they otherwise are in the nature of revenue profits. These profits/ losses are to
be divided among holding and outsiders on the basis of their shareholding proportions. Holding
company’s share is adjusted in calculation of cost of control/ capital reserve. The outsider’s share is
adjusted in minority interest.
Revenue profits/losses: Post-acquisition profits/losses are known as revenue profits/ losses in the context
of consolidated balance sheet. These are earned by subsidiary after acquisition of its shares by the holding
company. These are also divided between holding company and outsiders on basis of their shareholding
proportions. Holding company’s share is added/ deducted from its profit and loss account in consolidated
balance sheet. Outsiders share is adjusted in minority interest.
Example: H Ltd. acquired 100% shares of S Ltd. on 30.06.2014 for Rs. 1200000. On that date general
reserve of S Ltd. Stood at Rs. 40000. Calculate Capital Profits and Revenue Profits:
(Rs.) (Rs.) (Rs.) (Rs.)
P&L 200000 50000 In S. Ltd. 1200000
liabilities
Total 4700000 1200000 Total 4700000 1200000
SOLUTION:
1. Capital Profits and Revenue Profits:
Capital Profits Revenue Profits Total

Pre-acquisition period Post acquisition period
01.04.2014 – 30.06.2014 01.072014 – 31.03.2015
(given)
P&L 50000 x 3/12 = 12500 50000 x 9/12= 37500 50000
Total 52500 47500 100000

Minority interest: In case the controlling interest of parent company in subsidiary is less than 100%, the
balancing amount is referred as minority interest and is shown in liabilities side of consolidated balance
sheet. Minority Interest means interest held by other shareholders (other than Holding company) in the net
assets of the subsidiary. It represents proportional value of assets and liabilities belonging to shareholders
outside the group. In Consolidated Balance Sheet, all assets and liabilities of the subsidiary company are
added to the assets and liabilities of the parent company and proportional value of assets and liabilities
belonging to minority shareholders is shown as minority interest on liabilities side of consolidated
balance sheet.
Example: H Ltd. acquired 70% share of S Ltd. on 30.06.2014 for Rs. 1200000. On that date general
reserve of S Ltd. Stood at Rs. 40000. Calculate Minority Interest from the following information:
(Rs.) (Rs.) (Rs.) (Rs.)
P&L 200000 50000 In S. Ltd. 1200000
liabilities
Total 4700000 1200000 Total 4700000 1200000
SOLUTION:
Calculation of Pre-acquisition and post acquisition profits:

01.04.2014 – 30.06.2014 01.072014 – 31.03.2015
(given)
P&L 50000 x 3/12 = 12500 50000 x 9/12= 37500 50000
Total 52500 47500 100000

330000
Treatment of unrealized profits
Usually there will be transactions between holding company and subsidiary company involving profits
and losses. Suppose holding company buys goods costing Rs. 40000 at a price of Rs. 50000 from
subsidiary company. If Holding company has sold all the goods, it does not matter because all the profit
of Rs. 10000 has bee realized. But if the goods remain unsold and are included in the stock, the profit
charged by subsidiary company remains unrealized. Thus at the time of preparing consolidated balance
sheet, a reserve equal to the unrealized profits will be created and deducted from value of closing stock
and out of profit and loss balance.
Mutual Owings
In preparing consolidated balance sheet, sums owed by holding company to its subsidiary company and
vice versa have to be eliminated. For example, if holding company owes Rs. 50000 to subsidiary
company, then Rs. 50000 will be deducted from both debtors and creditors. The same applies to bills
accepted by either of them and held by the other as bills receivable in the balance sheet. But in case these
bills have been discounted or endorsed, then these will not be eliminated.
STEPS IN CONSOLIDATION: A QUICK REVIEW

The steps followed for consolidation can be summarized as:
1)Fixed assets, except investment in subsidiary company and current assets are added on one to
one basis,
2)Liabilities, except owner’s equity including reserves and surplus are also added on one to one
basis.
3)Equity capital of subsidiary company and cost of investment in shares of subsidiary company is
eliminated
4)Goodwill/ capital reserve is calculated:
Cost of investment XXX
Less: cost of equity share acquired (XXX)
proportionate share of reserves on date of acquisition (XXX) (XXX)
Goodwill/ capital reserve = XXX
5)Group reserves are calculated by adding to parent company’s own reserve, a proportionate
share in reserves of subsidiary company after acquisition.
6)Minority interest is calculated, in case of parent company doesn’t acquire 100% controlling
interest, by adding:
i) Proportionate share capital belonging to minority shareholders
ii)Minority share in reserves as on date of consolidation.
7)Equity share capital of parent alone appears in consolidated balance sheet.
8) Mutual owings will be eliminated
Illustration 4
H Ltd. acquired 70% share of S Ltd. on 30.06.2014 for Rs. 1200000. On that date general reserve of S
Ltd. Stood at Rs. 40000.
(Rs.) (Rs.) (Rs.) (Rs.)
P&L 200000 50000 In S. Ltd. 1200000
liabilities
Total 4700000 1200000 Total 4700000 1200000
SOLUTION:

Fixed assets
H Ltd. 1000000
S Ltd. 800000 1800000
General reserve 500000 In govt. securities 500000
P&L H Ltd. 200000
+70% share in S Ltd. 33250 233250
Non- current liabilities 600000 Current assets
10% debentures 330000 H. Ltd. 2000000
Minority interest S Ltd. 400000 2400000
Current liabilities
H Ltd. 400000
S Ltd. 100000 500000
Total 5163250 Total 5163250
WORKING NOTES:
1.Pre-acquisition and post acquisition profits:

01.04.2014 – 30.06.2014 01.072014 – 31.03.2015
(given)
P&L 50000 x 3/12 = 12500 50000 x 9/12= 37500 50000
Total 52500 47500 100000

330000
Less: paid up value of shares acquired 700000
Less: share in pre-acquisition profits 36750 (736750)
463250
---------------
Illustration 5
On 31.03.15, the balance sheet of H Ltd. And its Subsidiary S. Ltd stood as under:
(Rs.) (Rs.) (Rs.) (Rs.)
Share Capital 800000 200000 Fixed assets 5,40000 95000
General reserve 150000 70000 In S. Ltd. 280000
Profit & Loss 90000 55000
Creditors 110000 75000 Stock 100000 150000
Debtors 30000 35000
Other Current assets 200000 120000
Total 11,50000 400000 Total 11,50,000 400000
Draw up a consolidated balance sheet after taking into consideration the following:
1) H Ltd. acquired 75% share of S Ltd. on 31.07.2014 for Rs. 280000.
2) S Ltd earned a profit of Rs. 45,000 for the year ending 31.3.15.
3) In January 2015, S Ltd. Sold goods costing Rs. 15000 for Rs. 20,000. Half of these goods were
still unsold till the date of balance sheet.
4) Creditors of H Ltd include Rs. 7000 owing by S. Ltd.

Solution:


Fixed assets
H Ltd. 540000
S Ltd. 95000 635000
Stock
Reserves &Surplus H. Ltd. 100000
General reserve S Ltd. 150000
P&L H Ltd. 90000 150000 ----------
+75% share in S Ltd. 22500 Less Unrealised profit 2500 247500
Less Unrealised profit 2500 110000 Debtors
H. Ltd. 30000
S Ltd. 35000
----------
Non- current liabilities Less Mutual owings 7000 58000
Minority interest 81250 Other current assets
H Ltd. 200000
S Ltd. 120000 320000
Current liabilities
H Ltd. 110000
S Ltd. 75000
Less Mutual owings 7000 178000
Total 1319250 Total 1319250
Working Notes:
1. Pre-acquisition and post acquisition profits:

01.04.2014 – 30.06.2014 01.072014 – 31.03.2015
General reserve 70000 70000
P&L 55000-45000=10000 45000 x 8/12= 30000 55000

45000 x 4/12 = 15000
Total 95000 30000 125000
81250
Less: paid up value of shares acquired (75%) 150000
Less: share in pre-acquisition profits (75%) 71250
58750
4. Unrealised Profit
Profit made on goods sold to H ltd. Rs. 5000
Half Profit is unrealized because half of the goods are unsold=Rs.2500
SUMMARY
The company acquiring the controlling interest in another company is called the Holding Company
and the company in which the controlling interest is acquired is called Subsidiary Company. A few
important objectives of acquiring majority control over other company are: to reduce cost, to
gain financially, to achieve growth and to diversify the activities. Combination of holding and
subsidiary companies together is called group. As per Indian GAAP as well as International
Accounting Standard, parent company is required to prepare its financial statements as stand alone as
well as consolidated statements. Consolidated Financial Statements are the combined financial
statements of parent and its subsidiary/ subsidiaries i.e. consolidated financial statements are
statements of group as a whole. Consolidation of Balance Sheet implies preparation of a single
Balance Sheet by aggregating all items of assets and liabilities, appearing in the respective Balance
Sheets of both the holding company and its subsidiary company. In preparing consolidated financial
statements, the financial statements of the parent and its subsidiaries should be combined on a line by
line basis by adding together like items of assets, liabilities, income and expenses. For this, the
following steps should be taken:
(a) the cost to the parent of its investment in each subsidiary and the parent’s portion of equity of each
subsidiary, at the date on which investment in each subsidiary is made, should be eliminated;
(b) any excess of the cost to the parent of its investment in a subsidiary over the parent’s portion of
equity of the subsidiary, at the date on which investment in the subsidiary is made, should be
described as goodwill to be recognised as an asset in the consolidated financial statements;
(c) when the cost to the parent of its investment in a subsidiary is less than the parent’s portion of
equity of the subsidiary, at the date on which investment in the subsidiary is made, the difference
should be treated as a capital reserve in the consolidated financial statements;
(d) minority interests in the net income of consolidated subsidiaries for the reporting period should be
identified and adjusted against the income of the group in order to arrive at the net income attributable
to the owners of the parent; and
(e) minority interests in the net assets of consolidated subsidiaries should be identified and presented
in the consolidated balance sheet separately from liabilities and the equity of the parent’s
shareholders. Minority interests in the net assets consist of: (i) the amount of equity attributable to
minorities at the date on which investment in a subsidiary is made; and (ii) the minorities’ share of
movements in equity since the date the parent-subsidiary relationship came in existence.
(f) Intragroup balances and intragroup transactions and resulting unrealised profits should be
eliminated in full.
SUGGESTED READINGS
Delhi.
Delhi
1. What is a holding company?

2. Explain the advantages of creating holding company.
3. What is a subsidiary company? Explain different types of subsidiary companies.
4. What is a consolidated balance sheet and how it is prepared?
5. H Ltd. acquired all shares of S Ltd. on 31.03.2015 for Rs. 480000. On that date the
Balance sheets of two companies were as under. Prepare consolidated balance sheet.
(Rs.) (Rs.) (Rs.) (Rs.)
100% shares in S.
Ltd. 480000
Non-current
liabilities
Total 1440000 520000 Total 1440000 520000
6 H Ltd. acquired 60% share of S Ltd. on 30.06.2014 for Rs. 1200000. On that date general
reserve of S Ltd. Stood at Rs. 40000. Prepare consolidated balance sheet.
(Rs.) (Rs.) (Rs.) (Rs.)
P&L 200000 50000 In S. Ltd. 1200000
liabilities
Total 4700000 1200000 Total 4700000 1200000
7. On 31.03.15, the balance sheet of H Ltd. And its Subsidiary S. Ltd stood as under:
(Rs.) (Rs.) (Rs.) (Rs.)
Share Capital 800000 200000 Fixed assets 5,40000 95000
General reserve 150000 70000 In S. Ltd. 280000
Profit & Loss 90000 55000
Creditors 110000 75000 Stock 100000 150000
Debtors 30000 35000
Other Current assets 200000 120000
Total 11,50000 400000 Total 11,50,000 400000
Draw up a consolidated balance sheet after taking into consideration the following:
1) H Ltd. acquired 70% share of S Ltd. on 31.07.2014 for Rs. 280000.
2) S Ltd earned a profit of Rs. 35,000 for the year ending 31.3.15.
3) In January 2015, S Ltd. Sold goods costing Rs. 15000 for Rs.18,000. One third of these goods
were still unsold till the date of balance sheet.
4) Creditors of H Ltd include Rs. 5000 owing by S. Ltd.

LESSON 1
AMALGMATION, ABSORPTION AND

RECONSTRUCTION (AS-14)
STRUCTURE
 Objectives
 Meaning of Amalgmation, Absorption, and Reconstruction
 Accounting Standard 14 (AS-14) ‘Accounting For Amalgmation’
 Meaning of Purchase Consideration
 Methods of calculating Purchase Consideration
 Summary
 Model questions
OBJECTIVES
 Understand the meaning of amalgmation, absorption, and reconstruction.
 Learn about the salient features of AS-14.
 Understand the meaning of Purchase Consideration.
 Know about the methods of calculating purchase consideration
INTRODUCTION
Business units combine together to deal with cut throat competition and also to derive economies of
large scale. The Companies Act permits amalgamation, absorption and reconstruction of companies.
These three terms have been explained as under:
AMALGAMATION
When two or more existing companies go into liquidation and a new company is formed to take their
business, it is called amalgamation. For example, if X Ltd. and Y Ltd. are taken over by a newly formed
company Z Ltd. it is a case of amalgamation. In case of amalgmation :
(i) two or more companies go into liquidation,
(ii) a new company is formed to take over the business of the companies going into liquidation.
ABSORPTION
The term absorption means taking over of the business of one or more companies by a company
already in existence. Thus, in case of absorption, an existing company, usually big one, takes over the
business of one or more existing companies usually small ones. For example, if X Ltd., takes over the
business of Y Ltd. it shall be a case of absorption. In case of absorption, it is evident :
(i) that one or more companies go into liquidation.
(ii) that another existing company takes over the business of company/companies going into
liquidation.
RECONSTRUCTION
The term ‘Reconstruction’ is used when a company restructures its financial position. This is usually
done when the company is highly over capitalised or has large accumulated losses which it wants to wipe
off. Reconstruction may take two forms :
(a) Internal Reconstruction : It means reduction of the capital of the company without liquidating
the company.
(b) External Reconstruction :
The term ‘External Reconstruction’ is used when one existing company goes into liquidation
and a new company is formed to buy its business. The idea behind such a reconstruction is that
substantially the same business shall be carried on by the same persons.
TABLE SHOWING RELATIVE FEATURES
Situation Amalgamation Absorption External Reconstruction

1. How may Two or more One or more One and only one
companies must be companies companies
liquidated ?
2. Whether new Yes No Yes
company is formed
The concept of amalgamation, absorption and external reconstructions as discussed above has been
modified by AS-14.
ACCOUNTING STANDARD 14 (AS-14)

ACCOUNTING FOR AMALGAMATIONS
The Institute of Chartered Accountants of India has issued Accounting Standard (AS) – 14 titled
“Accounting for Amalgamation”. This standard has been in force since accounting period beginning on
or after 1.4.1995 and is mandatory in nature. The standard deals with the procedure of accounting for
amalgamations.
DEFINITIONS
The following terms are used in this standard with the meaning specified:
(a) Amalgamation means an amalgamation pursuant to the provisions of the Companies Act, 1956,
or any other statute which may be applicable to companies.
(b) Transferor Company means the company which is amalgamated into another company.
(c) Transferee Company means the company into which a transferor company is amalgamated.
(d) Reserve means the portion of earnings, receipts or other surplus of an enterprise (whether capital
or revenue) appropriated by the management for a general or a specific purpose other than a
provision for depreciation or diminution in the value of assets or for a known liability.
(g) Consideration for the amalgamation means the aggregate of the shares and other securities
issued and the payment made in the form of cash or other assets by the transferee company to the
shareholders of the transferor company.
(h) Fair value is the amount for which an asset could be exchanged between a knowledgeable,
willing buyer and a knowledgeable, willing seller in an arm’s length transaction.
(i) Pooling of interests is a method of accounting for amalgamations the object of which is to
account for the amalgamation as if the separate businesses of the amalgamating companies were
intended to be continued by the transferee company. Accordingly, only minimal changes are
made in aggregating the individual financial statements of the amalgamating companies.
TYPES OF AMALGAMATIONS
AS – 14 divides amalgamation into two categories, for accounting purposes:
(a) Amalgamation in the nature of merger, and
(b) Amalgamation in the nature of purchase
AMALGAMATION IN THE NATURE OF MERGER
As per AS-14, Amalgamation in the nature of merger is an amalgamation which satisfies all the
following conditions :
(i) Transfer of All Assets and Liabilities : All the assets and liabilities of the transferor company
become, after amalgamation, the assets & liabilities of the transferee company.
(ii) Atleast 90% of the Holders Remain the Same : Shareholders holding not less than 90% of the
face value of the equity shares of the transferor company (other than the equity shares already held
therein, immediately before the amalgamation, by the transferee company or its subsidiaries or their
nominees) becomes equity shareholders for the transferee company by virtue of the amalgamation
(iii) Discharge of Purchase Consideration in Shares only : The consideration for the
amalgamation receivable by those equity shareholders of the transferor company who agree to become
equity shareholders of the transferee company is discharged by the transferee company wholly by the
issue of equity shares in the transferee company, except that cash may be paid in respect of any fractional
shares.
(iv) Same Business to be Continued : The business of the transferor company is intended to be
carried on, after the amalgamation, by the transferee company.
(v) No Adjustment in Book Value of Assets and Liabilities : No adjustment is intended to be
made to the book values of the assets & liabilities of the transferor company when they are incorporated
in the financial statements of the transferee company except to ensure uniformity of accounting policies.
In this type of amalgamation, there is genuine pooling of assets and liabilities of combining
entities. In addition, equity shareholders of the combining entities continue to have a proportionate share
in the combined entity. The accounting treatment of such amalgamation should ensure that the resultant
figures of assets, liabilities, capital and reserves more or less represent the sum of the relevant figures of
the amalgamating companies.
AMALGAMATION IN THE NATURE OF PURCHASE
Amalgamation may be considered in the nature of purchase when any one or more of the five
conditions specified for amalgamation in the nature of merger is not satisfied. Suppose A Ltd. acquires
the business of B Ltd. with no intention to continue such business, it is purchase and not merger.
Similarly shareholders of B Ltd. holding 90% of the share capital do not become shareholders of A Ltd.
The amalgamation is only in the nature of purchase.
METHODS OF ACCOUNTING FOR AMALGAMATIONS
There are two main methods of accounting for amalgamations:
(a) the pooling of interests method ; and
(b) the purchase method
(A) THE POOLING OF INTERESTS METHOD

This method is followed in case of an amalgamation in the nature of merger. The following are
the features of the Pooling of Interest Method:
(i) Recording of Assets and Liabilities: In this method, the assets and liabilities of the transferor
company will be taken over by the transferee company at existing carrying amounts unless any
adjustment is required due to different accounting policies followed by these companies.
(ii) Taking Over of Reserves: All reserves of the transferor company will be taken over by the
transferee company at existing carrying amounts and are incorporated in the financial statements of
the transferee company.
(iii) Difference between Purchase Consideration and Share Capital: In pooling of interest method,
the difference between the amount recorded as share capital issued (plus any additional consideration in
the form of cash or other assets) and the amount of share capital of transferor company is adjusted in
reserves.
.
(B) THE PURCHASE METHOD
This method is followed in case of an amalgamation in the nature of purchase. The following are
the features of the Purchase Method:
(i) Recording of Assets and Liabilities: The assets & liabilities of the transferor company are
incorporated at their existing carrying amounts.
(ii) Allocation of Purchase Consideration: The purchase consideration is allocated to individual
identifiable assets & liabilities on the basis of their fair values at the date of amalgamation.
(iii) Taking Over of Reserves: No reserves, other than statutory reserves, of the transferor company
are incorporated in the financial statements of the transferee company.
(iv) Taking Over of Statutory Reserves: Statutory reserves of the transferor company are
incorporated in the balance sheet of the transferee company by way of the following journal entry :
To Statutory Reserves (Individual names) Account
(v) Disclosure of Amalgamation Adjustment Account: The Amalgamation Adjustment Account is
disclosed as a part of Miscellaneous Expenditure in the balance sheet. When the above statutory
reserves are no longer required to be maintained by the transferee company, such reserves are eliminated
by reversing the above entry.
(vi) Difference between Purchase Consideration and Net Assets: In purchase method, any excess
of the amount of the purchase consideration over the net assets of the transferor company acquired by the
transferee company is recognized in the transferee company’s books of account as goodwill arising on
amalgamation. If the amount of the consideration is lower than the value of net assets acquired, the
difference is credited to capital reserve.
(vii) Amortization of Goodwill: The goodwill so created is amortized over its useful life. This will
be normally written off over a period of five years unless a longer period is justified.
PURCHASE CONSIDERATION
AS – 14 defines the term purchase consideration as the “aggregate of the shares and other
securities issued and the payment made in the form of cash or other assets by the transferee
company to the shareholders of the transferor company”. It is thus very clear that purchase
consideration does not include payments to debenture holders or any other outside liabilities which
shall be presumed to have been taken over and then discharged by transferee company. However,
where a liability has not been taken expressly by the transferee company, it will be paid by the transferor
company.
The purchase consideration essentially depends upon the fair value of its elements. In case of issue of
securities, the value fixed by the statutory authorities may be taken to be the fair value. In case of other
assets, the fair value may be determined by reference to the market value of the assets given up or in the
absence of market value, book value of the assets is considered.
The calculation of purchase consideration is, perhaps, the most important and technical aspect of
amalgamation etc. It requires a careful valuation of assets and liabilities taken over.
TREATMENT OF RESERVES ON AMALGAMATION
1) If the amalgamation is an ‘amalgamation in the nature of merger’, the identity of the reserves is
preserved and they appear in the financial statements of the transferee company in the same form in
which they appeared in the financial statements of the transferor company. Thus, for example, the
General Reserve of the transferor company becomes the General Reserve of the transferee company,
the Capital Reserve of the transferor company becomes the Capital Reserve of the transferee
company and the Revaluation Reserve of the transferor company becomes the Revaluation Reserve
of the transferee company. As a result of preserving the identity, reserves which are available for
distribution as dividend before the amalgamation would also be available for distribution as dividend
after the amalgamation. The difference between the amount recorded as share capital issued (plus
any additional consideration in the form of cash or other assets) and the amount of share capital of
the transferor company is adjusted in reserves in the financial statements of the transferee company.
2) If the amalgamation is an ‘amalgamation in the nature of purchase’, the identity of the reserves,
other than the statutory reserves is not preserved. The amount of the consideration is deducted from
the value of the net assets of the transferor company acquired by the transferee company. If the result
of the computation is negative, the difference is debited to goodwill arising on amalgamation. If the
result of the computation is positive, the difference is credited to Capital Reserve.
3) Statutory Reserves: Certain reserves may have been created by the transferor company pursuant
to the requirements of, or to avail of the benefits under, the Income-tax Act, 1961; for example,
Development Allowance Reserve, or Investment Allowance Reserve. The Act requires that the
identity of the reserves should be preserved for a specified period. Likewise, certain other reserves
may have been created in the financial statements of the transferor company in terms of the
requirements of other statutes. Though, normally, in an amalgamation in the nature of purchase, the
identity of reserves is not preserved, an exception is made in respect of reserves of the aforesaid
nature (referred to hereinafter as ‘statutory reserves’) and such reserves retain their identity in the
financial statements of the transferee company in the same form in which they appeared in the
financial statements of the transferor company, so long as their identity is required to be maintained
to comply with the relevant statute. In such cases, the statutory reserves are recorded in the financial
statements of the transferee company even after amalgamation.
TREATMENT OF GOODWILL ARISING ON AMALGAMATION

It is considered appropriate to amortise goodwill over a period not exceeding five year unless a
somewhat longer period can be justified.
BALANCE OF PROFIT AND LOSS ACCOUNT
In the case of an ‘amalgamation in the nature of merger’, the balance of the Profit and Loss Account
appearing in the financial statements of the transferor company is aggregated with the corresponding
balance appearing in the financial statements of the transferee company. Alternatively, it is
transferred to the General Reserve, if any.
In the case of an ‘amalgamation in the nature of purchase’, the balance of the Profit & Loss Account
appearing in the financial statements of the transferor company, whether debit or credit, loses its
identity, and therefore not taken in the books of transferee company.
DISCLOSURE REQUIREMENTS
i) For all amalgamations, the following disclosures are considered appropriate in the first financial
statements following the amalgamation :
(a) names and general nature of business of the amalgamating companies ;
(b) effective date of amalgamation for accounting purposes ;
(c) the method of accounting used to reflect the amalgamation ; and
(d) particulars of the scheme sanctioned under a statute.
ii) For amalgamations accounted for under the pooling of interests method, the following additional
disclosures are considered appropriate in the first financial statements following the amalgamation :
(a) description and number of shares issued, together with the percentage of each company’s equity
shares exchanged to effect the amalgamation ;
(b) the amount of any difference between the consideration and the value of net identifiable assets
acquired, and the treatment thereof.
iii) For amalgamations accounted for under the purchase method, the following additional disclosures
are considered appropriate in the first financial statements following the amalgamation :
(a) Consideration for the amalgamation and a description of the consideration paid or contingently
payable ; and
(b) the amount of any, difference between the consideration and the value of net identifiable assets
acquired and the treatment thereof including the period of amortisation of any goodwill arising
on amalgamation.
-------------------------------------------------------------------------------------------------------------------------------
PURCHASE CONSIDERATION AND METHODS OF

CALCULATING PURCHASE CONSIDERATION
AS – 14 defines the term purchase consideration as the “aggregate of the shares and other securities
shareholders of the transferor company”. It is thus very clear that purchase consideration does not
include payments to debentureholders or any other outside liabilities which shall be presumed to
have been taken over and then discharged by transferee company. However, where a liability has not been
taken expressly by the transferee company, it will be paid by the transferor company.
The purchase consideration essentially depends upon the fair value of its elements. In case of issue of
securities, the value fixed by the statutory authorities may be taken to be the fair value. In case of other
assets, the fair value may be determined by reference to the market value of the assets given up or in the
absence of market value, book value of the assets are considered.
The calculation of purchase consideration is, perhaps, the most important and technical aspect of
amalgamation etc. It requires a careful valuation of assets and liabilities taken over. There are a number of
methods to calculate purchase consideration. Before discussing the methods, it would be proper to have
clear understanding of the following terms :
(i) Taking over of business : It means that the purchasing company has agreed to take over all
assets and liabilities of the vendor company, unless stated to the contrary.
(ii) Trade liabilities: See the table showing classification of accounts.
(iii) Liabilities :– See the table showing classification of accounts.
(iv) Taking over liabilities and paying of liabilities : ‘Taking over’ of liability and ‘paying of’ a
liability are different situations.
METHODS OF CALCULATING PURCHASE CONSIDERATION

The method to be adopted for the calculation of purchase consideration depends upon the
information given in the question. The various methods are explained as below :
1. LUMP SUM PAYMENT METHOD:
The purchase consideration may be stated as a lump sum amount in the question. No calculations are
required in this case. For example, it may be provided that X Ltd. takes over the business of Y Ltd. for
` 5 lakh. The sum of ` 5 lakh is purchase consideration.
2. NET PAYMENT METHOD:

As per AS – 14, purchase consideration is primarily based on the net payment method when it states
that consideration for amalgamation means the aggregate of shares and other securities issued and
payment made in the form of cash or other assets by the transferee company to the shareholders of
transferor company. So, the payments made to debentureholders and other outside liabilities should
not be considered as part of the purchase consideration since debentures etc., of the transferor
company will be presumed to be taken over and paid by the transferee company.
Let us consider an example :
A Ltd. agreed to take over the business of the B Ltd. ; the consideration being the assumption of
trade liabilities ` 20,000 ; the redemption of the debentures of ` 5,00,000 at a premium of 10% by the issue
of debentures of A Ltd. ; the exchange of 3 fully paid shares of ` 10 each in the A Ltd. at the market price
of ` 18 per share for every two shares in B Ltd. and payment of ` 5 per share in cash to the shareholders of
B Ltd. The share capital of B Ltd. consists of 10,000 shares of ` 20 each fully paid. The purchase
consideration as per AS – 14 will be :
Payment to Shareholders : Cash (10,000  ` 5) 50,000
Payment to Shareholders in Shares of A Ltd. [10,000/2  3  ` 18] 2,70,000
3,20,000
Thus, it is clear from the above calculation that payment to debentureholders is not included due to
the fact that it will be presumed to be taken over and paid by the A Ltd. (transferee company).
EXAMPLE
A Ltd. and B Ltd. carry on business of competitive nature agreed to amalgamate and form a new
company AB Ltd. which will take over the assets and liabilities of the existing companies. On 30th June,
2014, the Balance Sheets of the two companies were as follows :
Liabilities A Ltd. B Ltd. Assets A Ltd. B Ltd.
` ` ` `
Share Capital (` 10 each) 45,000 24,000 Land and Building 31,500 18,000
General Reserve 24,000 – Plant and Machinery 7,500 4,500

Profit and Loss Account 6,000 6,000 Motor Vehicles 3,000 –
12% Debentures 4,500 18,000 Stock 18,000 23,400
Sundry Creditors 18,000 9,600 Debtors 24,600 6,300
Cash 12,900 5,400
97,500 57,600 97,500 57,600
The terms of amalgamation are as follows :
(a) Exchange of 5 shares of AB Ltd. of ` 10 each (` 7 paid up) for every 3 shares in A Ltd. and B Ltd.
(b) The discharge of debentures at a premium of 15% by the 6% debentures of AB Ltd. issued at
par.
Compute the purchase consideration under AS – 14.
Solution.
Calculation of Purchase Consideration Under AS – 14
As per AS–14, purchase considerations will not include payments to debentureholders or any other
outside liabilities which shall be presumed to have been taken over and then discharged by purchasing
(transferee) company. Therefore, under AS–14, purchase considerations will only include payment for
shareholders and hence will be calculated as follows :
A Ltd. B Ltd.
` `
Issue of Shares of AB Ltd. to discharge existing shares of A Ltd. and

B Ltd. :
A Ltd. [4,500/3  5 @ ` 7] 52,500
B Ltd. [2,400/3  5 @ ` 7] 28,000
Purchase Consideration 52,500 28,000
Important Note : Students should note that while calculating purchase consideration of the
examination problems of this chapter, we have followed guidelines prescribed in AS–14 which
have become mandatory since 1–4–1995. This implies that purchase consideration will include
payment for shareholders only and payment to debentureholders and other outside liabilities will
be presumed to have been taken over by transferee company and then discharged by it.
3. NET ASSETS OR NET WORTH METHOD:

Under this method, purchase consideration is calculated by adding the agreed value of only those
assets which have been taken over by the transferee company and deducting there from the agreed value
of only those liabilities which have been taken over by the transferee company. For example, if X Ltd.
takes over the following assets and liabilities of Y Ltd. :–
Assets/Liabilities Book value Agreed value

` `
Fixed assets 6,00,000 6,50,000
Current assets 2,00,000 1,40,000
Goodwill 50,000 10,000
Debentures 1,00,000 1,00,000
Current Liabilities 1,00,000 1,00,000
The amount of purchase consideration will be calculated as under :–
Assets taken over : Agreed

Amount
Fixed assets 6,50,000
Goodwill 10,000
Current assets 1,40,000
8,00,000
Less : Liabilities taken over :
Debentures 1,00,000
Current liabilities 1,00,000 2,00,000
Purchase consideration 6,00,000
The following points to be kept in mind while calculating purchase consideration by net assets
method :
(i) If the transferee company agrees to take over all the assets of the transferor (vendor) company, it
would mean inclusive of cash and bank balances. However the term “all assets” will not
include debit balance of profit and loss account, miscellaneous expenses not written off like
preliminary expenses, discount and other expenses on the issue of shares or debentures.
(ii) If there is any goodwill, pre-paid expenses, the same have to be included in assets taken over
unless otherwise stated.
(iii) If some assets are not taken over by the purchasing company, the same shall not be included in
the calculation of purchase consideration.
(iv) The term “liabilities” will always mean all liabilities to third parties.
(v) The accumulated profits and other free reserves will never be taken over by the purchasing
company and hence will not be deducted
(vi) The term “business taken over” implies that all assets including cash and all outside liabilities
(including debentures) are taken over by the purchasing company.
4. SHARES EXCHANGE METHOD
Under this method, purchase consideration is calculated on the basis of the value of shares of the two
companies involved. Following example illustrates the points :–
Balance Sheet of Y Ltd.
` `
20,000 Shares of ` 10 each 2,00,000 Sundry Assets 2,50,000
Current Liabilities 50,000
2,50,000 2,50,000
Now if X Ltd. takes the business of the Y Ltd. on the basis of shares of X Ltd. considered as worth
` 20 as compared to shares of Y Ltd. as worth ` 5, the total amount payable will be calculated as :
` 20,000 shares @ ` 5 i.e. ` 1,00,000. The number of shares to be issued by the X Ltd. will be 5000
shares i.e. ` 1,00,000  20.
PROBLEM OF FRACTIONAL SHARES

Issue of shares to individual shareholders my not always be possible in whole number of shares. A
company can not issue shares in fractions. Any fraction in shares is settled in cash at market value.
TUTORIAL NOTE: SOMETIME, IN A QUESTION BOTH VALUES OF ASSETS TO BE TAKEN AND

PAYMENTS TO DIFFERENT LIABILITIES ARE GIVEN. THEN, CONFUSION ARISES WHETHER TO APPLY
NET ASSETS METHOD OR NET PAYMENTS METHOD FOR CALCULATING PURCHASE CONSIDERATION. IT
IS SUGGESTED THAT IF SUFFICIENT AND FULL PAYMENTS TO BE MADE TO THE EQUITY
SHAREHOLDERS IS CLEARLY GIVEN, THEN STUDENTS SHOULD APPLY NET PAYMENT METHOD
OTHERWISE NET ASSETS METHOD SHOULD BE APPLIED.
SUMMARY
Business units combine together to deal with cut throat competition and also to derive economies of large
scale. The Companies Act permits amalgamation, absorption and reconstruction of companies. When two
or more existing companies go into liquidation and a new company is formed to take their business, it is
called amalgamation. The term absorption means taking over of the business of one or more companies
by a company already in existence. Thus, in case of absorption, an existing company, usually big one,
takes over the business of one or more existing companies usually small ones. The term ‘Reconstruction’
is used when a company restructures its financial position. This is usually done when the company is
highly over-capitalised or has large accumulated losses which it wants to wipe off. Reconstruction may
take two forms : Internal Reconstruction i.e. reduction of the capital of the company without liquidating
the company. The term ‘External Reconstruction’ is used when one existing company goes into
liquidation and a new company is formed to buy its business. The idea behind such a reconstruction is
that substantially the same business shall be carried on by the same persons.
The concept of amalgamation, absorption and external reconstructions as discussed above has
been modified by AS-14 ‘ACCOUNTING FOR AMALGAMATIONS’
AS – 14 divides amalgamation into two categories, for accounting purposes: (a) Amalgamation in the
nature of merger, and (b) Amalgamation in the nature of purchase. In the first category are those
amalgamations where there is a genuine pooling not merely of the assets and liabilities of the
amalgamating companies but also of the shareholders’ interests and of the businesses of these companies.
Such amalgamations are amalgamations which are in the nature of ‘merger’ and the accounting treatment
of such amalgamations should ensure that the resultant figures of assets, liabilities, capital and reserves
more or less represent the sum of the relevant figures of the amalgamating companies. In the second
category are those amalgamations which are in effect a mode by which one company acquires another
company and, as a consequence, the shareholders of the company which is acquired normally do not
continue to have a proportionate share in the equity of the combined company, or the business of the
company which is acquired is not intended to be continued. Such amalgamations are amalgamations in
the nature of ‘purchase’. There are two main methods of accounting for amalgamations: (a)the pooling of
interests method ; and (b) the purchase method
AS – 14 defines the term purchase consideration as the “aggregate of the shares and other securities
shareholders of the transferor company”. It is thus very clear that purchase consideration does not
include payments to debentureholders or any other outside liabilities which shall be presumed to
have been taken over and then discharged by transferee company. However, where a liability has not been
taken expressly by the transferee company, it will be paid by the transferor company. The purchase
consideration essentially depends upon the fair value of its elements. In case of issue of securities, the
value fixed by the statutory authorities may be taken to be the fair value. In case of other assets, the fair
value may be determined by reference to the market value of the assets given up or in the absence of
market value, book value of the assets are considered. The calculation of purchase consideration is,
perhaps, the most important and technical aspect of amalgamation etc. It requires a careful valuation of
assets and liabilities taken over. There are various methods to calculate purchase consideration. The
purchase consideration may be stated as a lump sum amount, or it may be the aggregate of payments
made to equity as well as preference shareholders of the transferor company. Purchase consideration can
also be calculated by adding the agreed value of only those assets which have been taken over by the
transferee company and deducting there from the agreed value of only those liabilities which have been
taken over by the transferee company. Sometimes, purchase consideration is calculated on the basis of the
value of shares of the two companies involved.
SUGGESTED READINGS
Sons, New Delhi.
House, New Delhi
Delhi
ANSWER THE FOLLOWING QUESTIONS.
1. Explain the terms ‘Amalgamation’, ‘Absorption’ and ‘Reconstruction’ and differentiate one from
the other company.
2. What is the difference between amalgamation in the nature of merger and amalgamation in the
nature of purchase ?
3. What do you mean by “The Pooling of Interest Method” ?
4. What do you mean by “The Purchase Method” ?
5. Distinguish between “The Pooling of Interest Method” and “The Purchase Method”.
6. What is Purchase Consideration? Explain the various methods of calculating purchase
consideration with the help of examples.
7. What do you understand by amalgamation as per AS-14 ?

Amalgamation Treatment

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Amalgamation Treatment

Uploaded by

Copyright:

Available Formats

LESSON 2

ACCOUNTING TREATMENT IN CASE OF AMALGMATION

 Meaning and objectives of amalgamation in the nature of merger

 Meaning and objectives of amalgamation in the nature of purchase

 Purchase method for accounting treatment in case of amalgamation in the nature of

 Entries in the books of transferor

 Entries in the books of transferee

 Preparation of Balance Sheet post merger

AMALGAMATION IN THE NATURE OF MERGER

Liabilities X Ltd. Y Ltd. Assets X Ltd. Y Ltd.

15% Preference Share Capital – 500

EQUITY AND LIABILITIES

Balance to be shown in the Balance Sheet 2,495

(B) Purchase Consideration

2. Current Assets 2,985

Fixed Assets 2,365

(B) Purchase Consideration

Capital Reserve = Value of Net Assets taken over – Purchase Consideration

BOOKS OF TRANSFEROR (VENDOR) COMPANY

5. FOR LIQUIDATION EXPENSES :

6. FOR MONEY DUE TO PREFERENCE SHAREHOLDERS:

7. FOR PAYMENT TO PREFERENCE SHAREHOLDERS:

8. FOR TRANSFER OF PROFIT ON REALISATION:

9. FOR TRANSFER OF EQUITY SHARE CAPITAL, RESERVES ETC. TO EQUITY SHAREHOLDERS’

BOOKS OF TRANSFEREE (PURCHASING) COMPANY

a)POOLING OF INTERESTS METHOD

3. PAYMENT OF PURCHASE CONSIDERATION:

4. LIQUIDATION EXPENSES OF TRANSFEROR COMPANY BORNE BY TRANSFEREE COMPANY:

(b) THE PURCHASE METHOD

Equity shares of ` 10 each 15,000 5,000 Plant & Machinery 15,000

Investment Allowance Reserve 3,000 1,200 Motor Vehicles 1,500 2,500

4. Profit & Loss Account Dr. 159

7. Equity Share Application Account Dr. 20,000

4,000 Equity Shares of ` 10 each 40,000

10,000 12% Preferences Shares of ` 1 each 10,000

Issued, Subscribed and Paid-up Capital

3,500 Equity Shares of ` 10 each 35,000

6,000 12% Preference Shares of ` 1 each 6,000

EQUITY AND LIABILITIES

4,000 Equity Shares of ` 10 each 40,000

10,000 12% Preferences Shares of ` 1 each 10,000

3,500 Equity Shares of ` 10 each 35,000

6,000 12% Preference Shares of ` 1 each 6,000

Profit & Loss Account 35,000 Current assets 97,500

Fixed assets 82,500

Balance payable in Cash 4,500

Books of Sony Ltd.

Bony Limited Journal

Share Capital (` 10 share) 75,000 Goodwill 7,500

General reserve 30,000 Land & Building 25,500

Share Capital (` 10 share) 60,000 Goodwill 3,000

Bank Overdraft 12,000 Land & Building 15,000

General Reserve 80,000 40,000

 Liquidator’ s Final Statement of Account

 Steps in the preparation of Liquidator’ s Final Statement of Account

 Loss to equity shareholders

 Receiver for Debentureholders

 Liability of B list of contributories

After reading this lesson, you should be able to:

 Know about the appointment of Receiver for Debentureholders

 Understand about B list of contributories and how to determine their liability

LIQUIDATOR’S FINAL STATEMENT OF ACCOUNT

Amount available for unsecured creditors  Rate of commission

Liquidator’s Statement of Account