COMPANY

ACT 2013
PAR VE SH AG H I
Companies Act 2013
Meaning and definition of
Company
Banks are incorporated under the Banking Regulation Act, 1949

As per Section 2 (20) of the

A company is a body Companies Act, 2013, the
corporate having separate term “Company has been
legal identity having status defined as a company
separate from members incorporated under this Act
constituting it. or under any previous
company law.”
https://www.mca.gov.in/MCASearch/search_table.html
Banking regulation in India: overview (azbpartners.com)
Nature and Characteristics of a
Company:

As a natural person, a
The company is a legal For this reason, a company also enjoys
person created by a company is also called
many rights and incur
process of law other as an artificial legal
many liabilities of a
than natural birth. person. natural person.
Salient features of a company

Incorporated Separate Legal Perpetual

Association Entity Existence

Distinction
Common Seal. Limited Liability between
Ownership and
Management
Incorporated Association

An incorporated company is a separate

legal entity on its own, recognized by
the law. These corporations can be
identified with terms like 'Inc' or
'Limited' in their names.
Separate Legal Entity
The outstanding feature of
It is regarded as an entity
a company is A company before the law
separate from its
its independent corporate is a person.
members.
existence.

By incorporation under the Now the business belongs

Act, the company is vested to an institution. Thus a
with a corporate No one can say that he is company continues to
personality which is the owner of the company. exist even if the members
distinct from the members go on changing from time
who compose it. to time.
Common Seal
Common seal means the metallic
seal of a company which can be
affixed only with the approval of
the Board of directors of the
company.

It is the signature of the company

to any document on which it is
affixed and binds the company for
all obligations undertaken in the
document.
Limited Liability

The principal advantage of

doing business under
Company form of business
is Limited Liability of its
members towards the
debts of the company.
Limited Liability

The liability of the

company is limited to
the extent of the
amount not paid on the
shares held by them
Limited Liability

For Example, if a person holds shares of a company

having a nominal value of Rs.1000/- out of which it has
paid to the company only Rs.750/-, then he cannot be
called upon to pay more than balance unpaid amount
i.e. Rs.250/- in this case. However, if he has paid the
full amount on his shares, he will not be further liable
to pay, even if the company is in liquidation.
Separate Management

Members who form and

contribute to the company,
A company is an Artificial
The company is administered do not carry corporate
legal person in the eyes of
and managed by its function, rather they appoint
law, but it cannot carry its
managerial personnel their representatives as
activities on its own.
directors of the company to
conduct its activities.
Perpetual Succession

Perpetual succession means

membership and directorship of the
company keep changing but that
doesn’t affect the continuity of the
company.
SHARE CAPITAL AND
DEBENTURES
Share capital of a company
Every company limited by refers to the amount invested The share capital may be
shares must have a share in the company for it to carry altered or increased, subject
capital. to certain conditions.
out its operations.

A company’s share capital

may be divided into small
shares of different classes.
The different classes of share
capital and the rights
attached to these classes are
different
TYPES OF SHARE CAPITAL

Equity Share Capital

Preference Share Capital

What is Equity Shares?
A company issues equity shares to
raise capital at the cost of diluting its
ownership. Investors can purchase
units of equity shares to get part
ownership of the firm. By purchasing
the equity shares, investors will be
contributing towards the total capital
of the company and becoming its
shareholder.
Equity shareholders are the owners
of the company to the tune of the
shares held by them. Through equity
investing, investors benefit from
capital appreciation and dividends.
In addition to the monetary benefits,
equity holders also enjoy voting rights
in critical matters of the company.
What is Equity Shares?

The primary motive to issue equity shares

is to raise funds for expansion and growth.
Company issues equity shares to the
general public through Initial Public Offer The National Stock Exchange (NSE) and
(IPO). IPO is a primary market offering. You the Bombay Stock Exchange (BSE) are
can subscribe to the share by subscribing popular stock exchanges in India.
to the IPO. You can easily trade the stocks
upon their allotment and listing on the
stock exchange.
What is Equity Shares?

Equity shareholders receive

the profits a company
makes. Most large-cap and
well-established companies
pay dividends and bonuses
to their shareholders.
What are Preference Shares?

Preference shares or
preferred stock represent Also, in case of bankruptcy,
ownership in a company. preferred shareholders enjoy
Preference shareholders the priority to receive the
enjoy the preference over company’s assets before
common shareholders on the common shareholders.
assets and earnings.
What are Preference Shares?

Preference shareholders
A company issues
receive dividends before
preference shares to raise the equity shareholders. A
capital. This becomes part
specific type of preference
of the preference share share is eligible to receive
capital.
arrears of dividends.
What are Preference Shares?

Also, in India, you can redeem

preferred shares within 20 years of
Many long-term investors seeking
their issuance. Such share is Though preference shareholders
redeemable preference shares. On regular income prefer these
have the right to company earnings
the other hand, the Companies Act shares, as the dividends are higher
first, they do not have voting rights than what an equity shareholder
2013 doesn’t allow companies to like the equity shareholders.
gets.
issue irredeemable preference
stocks in India.
Preference shares

Preference: As the name suggests,

preference shareholders enjoy
Voting Rights: Preference Dividends Pay-outs: Preference
Following are the key features: preference over common shareholders do not have voting shareholders receive dividends on
shareholders. They have a priority
to receive dividends from the rights, like equity shareholders. specific dates.
company.

Conversion: You can easily convert

these shares to equity shares.
Some shares can be converted to
common stock after a specific
date. While some types of shares
require prior approvals and
permissions form the board of
directors to convert.
Liquidation: When a company
declares bankruptcy or liquidates, Callability: The company can
repurchase the preferred stock on
preference shareholders have the
right over the company’s assets. specified dates.
TRANSFERABILITY OF SHARES
The shares are said to be movable
The capital of a company is property and, subject to certain
divided into parts, called conditions, freely transferable, so
shares. that no shareholder is permanently
or necessarily wedded to a
company.
Section 44 of the Companies Act, 2013
enunciates the principle by providing
that the shares held by the members are
movable property and can be transferred
from one person to another in the
manner provided by the articles.
Termination by winding up

A company is a perpetual entity, which

cannot be died or dissolved except by
the procedure of law. Hence, the
company is terminated by means of
winding up.
Investor Protection

The Act includes provisions to protect the

interests of minority shareholders, enhance
transparency and disclosure requirements,
and strengthen the role of auditors in
ensuring accurate financial reporting.
Memorandum of Association

It defines the company's

A Memorandum of It is a legal document relationship with
Association (MoA) prepared during a shareholders and
represents the charter of company's formation and specifies the objectives
the company. registration process. for which the company
has been formed.
Memorandum of Association
The memorandum of The memorandum cannot
The memorandum of
association is the be altered by the company,
association is the basic
constitution of the except by fulfilling the
charter on which the
company because it conditions laid down in the
company is based and is
defines its limitations and Companies Act for specific
mandatory for a company.
the sphere of its activities. activities and situations.

It defines the scope of the

It’s a public document and
company’s activity, and all
is open to inspection by
acts beyond the scope are
those who deal with the
deemed to be ultra-vire
company.
(beyond powers).I
Purpose of Memorandum of
Association

The prospective The outsiders will

The main purpose of the shareholders know the
memorandum is to explain areas where the company
the scope of activities of will invest their money and
the company. the risk they are taking in
investing the money.
understand the limits of the
working of the company,
and their dealings with it
should remain within the
prescribed scope.
Clauses in Memorandum of
Association

Name Registered Object

clause office clause clause

Liability Capital
clause Clause
Articles of Association

These include shares, (issue

and rights attached), details
This document contains
The Articles of Association is in manner of holding the
internal detailed governing
similar to a rule book, within company meetings, the role
aspects of the company’s
a company. and powers of the directors.
organisation.
Salient features of a company
Transferability of Shares

Maintenance of Books

Periodic Audit

Right of Access to Information

TYPES OF COMPANIES

Government Foreign Private

Company Company Company

Public
Company
Government Company
According to Section 2(45) of the Companies Act, 2013,
“Government company” means any company in which not
less than fifty-one per cent of the paid-up share capital is
held by the Central Government, or by any State
Government or Governments, or partly by the Central
Government and partly by one or more State Governments,
and includes a company which is a subsidiary company of
such a Government company.
Foreign company

According to Section 2 (42) of the Companies Act, 2013, “Foreign company”

means any company or body corporate incorporated outside India which –

Has a place of business in India whether by itself or through an agent

physically or through electronic mode; and

Conducts any business activity in India in any other manner.

PRIVATE COMPANY
As per section 2(68) of companies act, 2013
"private company" means a company having
a minimum paid-up share capital of one lakh
rupees or such higher paid-up share capital
as may be prescribed and restrict any
invitation to the public to subscribe for any
securities of the company having maximum
of 200 members.
Public company
Section 2(71) of the Companies Act, 2013 defines
Public Company as a company which is not a private
company

A company which is a listed public company if it gets

unlisted continues to be a public company.
One person company

One Person Company (OPC): The Companies

Act 2013 introduced the concept of OPC, which
allows a single individual to form a company,
eliminating the need for multiple shareholders.
This provides greater flexibility and ease of
doing business for small entrepreneurs
Major companies like Amazon initially started by being OPC.
One person company

Section 2 (62) of the Companies

Act, 2013 defines “One Person
Company” as a company which
has only one person as a member
Major companies like Amazon initially started by being OPC.
One person company

Such companies are generally created when there is only

one founder/promoter for the business.

Entrepreneurs whose businesses lie in early stages prefer

to create OPCs instead of sole proprietorship business
because of the several advantages that OPCs offer.
One Person Company: Definition, Features, Formation etc.
(toppr.com)
LISTED COMPANY

The company, whose shares

As per Section 2 (52) of the
are not listed on any
Companies Act, 2013,''listed
recognised stock exchange, is
company” means a company
called ‘‘Unlisted Company’’.
which has any of its securities
An unlisted company can be a
listed on any recognised stock
public company or a private
exchange.
company.
HOLDING COMPANY

According to Section 2 (46) of the

Companies Act, 2013, “Holding company”,
in relation to one or more other companies,
means a company of which such companies
are subsidiary companies.
Subsidiary Company

Section 2(87) of the Companies Act, 2013 defines “subsidiary company” as a company in which
the holding company:

Controls the composition of the Board of Directors; or

Exercises or controls more than one-half of the total share capital either at its own or together
with one or more of its subsidiary companies.

The control over the composition of a subsidiary company’s Board of Directors means exercise of
some power to appoint or remove all or a majority of the directors of the subsidiary company.
MAINTENANCE OF BOOKS OF ACCOUNT

As per Section 128 of the Companies Act, 2013, every company shall prepare and keep at its
registered office books of account and other relevant books and papers and financial statement for
every financial year which give a true and fair view of the state of the affairs of the company,

Including that of its branch office or offices, if any, and explain the transactions effected both at the
registered office and its branches and such books shall be kept on accrual basis and according to the
double entry system of accounting

Provided further that the company may keep such books of account or other relevant papers in
electronic mode in such manner as may be prescribed.
PREPARATION OF FINANCIAL
STATEMENTS

Under Section 129 of the Companies Act, 2013, the

financial statements shall give a true and fair view
of the state of affairs of the company or companies,
comply with the notified accounting standards and
shall be in the form or forms as may be provided for
different class or classes of companies, as
prescribed in Schedule
PREPARATION OF FINANCIAL STATEMENTS

The Board of Directors of the company shall lay financial statements at every
annual general meeting of a company.

Financial Statements as per Section 2(40) of the Companies Act, 2013, include

A balance sheet as at the end of the financial year;

A profit and loss account, or in the case of a company carrying on any activity
not for profit, an income and expenditure account for the financial year;
PREPARATION OF FINANCIAL
STATEMENTS

Cash flow statement for the financial year

A statement of changes in equity, if applicable

Notes to accounts
Compliance with Accounting Standards

As per Section 129 of the Companies

Act, it is mandatory to comply with
accounting standards notified by the
Central Government from time to time.
Schedule III of the Companies Act 2013

Schedule III of the Companies Act

2013, provides the format of financial
statements of companies complying
with Accounting Standards (AS)
Schedule III of the Companies Act 2013

Schedule III of the Companies Act 2013: Schedule III to the

Companies Act, 2013 (2013 Act) provides general instructions for
presentation of financial statements of a company under both
Accounting Standards (AS) and Indian Accounting Standards (Ind AS).

Schedule III has three parts and they are as follows: provides the
format of financial statements of companies complying with
Accounting Standards (AS)
Schedule III of the Companies Act 2013

Division I is applicable to a company whose financial statements are prepared in

accordance with AS

Division II is applicable to a company whose financial statements are prepared in

accordance with Ind AS (other than Non-Banking Financial Companies (NBFCs))

Division III is applicable only to NBFCs which are required to prepare financial
statements in accordance with Ind AS.

https://wirc-icai.org/wirc-reference-manual/part5/schedule-
iii-companies-act-2013.html
Balance Sheet Format
Exceptional items : restructuring costs , legal settlements, and disposal of assets.
Extraordinary items include damage from natural disasters, such as earthquakes and hurricanes, damages caused by
fires, gains or losses from the early repayment of debt, and write-offs of intangible assets
PROFIT & LOSS ACCOUNT AMOUNT
RS
REVENUE FROM OPERATIONS
Revenue from Sale of Products
Revenue from Sale of Services
Other Income
Total Income (I)
EXPENSES
Cost of Materials Consumed
Purchases of Stock-in-Trade
Changes in inventories of finished goods, Stock-in-Trade and work-in-progress
Employee Benefits Expense
Other Expenses
Total Expenses (II)
EARNING BEFORE INTEREST, TAX, DEPRECIATION AND AMORTISATION
(EBITDA) (I-II)
PROFIT & LOSS ACCOUNT ( CONTD) AMOUNT RS

Finance Costs ( Interest)

Depreciation and Amortisation Expense
PROFIT BEFORE SHARE OF PROFIT IN ASSOCIATE AND EXCEPTIONAL ITEMS
Share of profit in Associate
PROFIT BEFORE EXCEPTIONAL ITEMS AND TAX
Exceptional items
PROFIT BEFORE TAX
Tax Expense
PROFIT AFTER TAX
Earnings per equity share
Associate Company
“Associate Company”, in relation to another Company, means a company in which
another company has a significant influence, but which is not a subsidiary
company of the company having such influence and includes a joint venture
company.

1.The expression “significant influence” means control of at least twenty percent

of total voting power, or control of or participation in business decisions under an
Agreement,

2.The expression “joint venture” means a joint Agreement whereby the parties
that have joint control of the arrangement have rights to the net assets of the
arrangement.
 EBIDTA .
1 Earnings Before Interest, Taxes, Depreciation and Amortization. This figure
measures a company's annual earnings before the subtraction of interest
payments, taxes, depreciation, and amortization.

2 Cash profits that the business from its operating activity

3 EBITDA is as a comparison measure when you are looking at a business’
performance compared to its industry peers.
4 What that enables you to do is to compare one business with another but without
the effects of;
Different capital and funding structures
Different tax environments
Different capex policies
5 EBIDTA Margin = EBIDTA/ Net Sales
65
What are Discontinued
Operations?

Discontinued operations is a term used in accounting

to refer to parts of a company’s business that have
been terminated and are no longer operational.

In accounting, discontinued operations are listed

separately on financial statements from continuing
operations.
What are Discontinued
Operations?
Discontinued operations is a term used in accounting to refer to the parts of a
company’s business that have been terminated and are no longer operational.

Often, business lines will be classified as discontinued operations if they are no

longer operational, have been removed from the company, or have been, or will be
sold in the near future.

In accounting, discontinued operations are listed separately from continuing

operations on financial statements so that external users of the statements do not
become confused and inappropriately evaluate the profitability of the company.
 ACCOUNTING STANDARDS
The accounting concepts and conventions discussed earlier were the core
elements in the theory of accounting.

These principles, however, permit a variety of alternative practices to co-

exist.

On account of this the financial results of different companies can not be

compared and evaluated unless full information is available about the
accounting methods which have been used.

68
ACCOUNTING
STANDARDS…Contd
The lack of uniformity among accounting practices have made it
difficult to compare the financial results of different companies.

It means that there should not be too much discretion to

companies and their accountants to present financial information
the way they like.

In other words, the information contained in financial statements

should conform to carefully considered standards

69
Purpose of Accounting Standards
Provide a basic Make the financial
framework for statements of one
preparing financial firm comparable with
statements the other firm

Create general sense

Make the financial
of confidence among
statements credible
the outside users of
and reliable
financial statements
70
Generally accepted accounting
principles (GAAP)

Generally accepted accounting principles

(GAAP) refer to a common set of accepted
accounting principles, standards, and
procedures that business reporting entity
must follow when it prepares and presents
its financial statements.
Generally accepted accounting
principles (GAAP)

GAAP is a combination of authoritative standards (set by policy

boards) and the commonly accepted ways of recording and
reporting accounting information.

At international level, such authoritative standards are known as

International Financial Reporting Standards (IFRS) at many places
and in India we have authoritative standards named as Accounting
Standards (ASs) and Indian Accounting Standard (Ind AS).
Generally accepted accounting
principles (GAAP)

Accounting Standards (ASs) are written policy documents

issued by the Government with the support of other
regulatory bodies e.g., Ministry of Corporate Affairs (MCA)
issuing Accounting Standards for corporates in
consultation with National Financial Reporting Authority
(NFRA) covering the following aspects of accounting
transaction or events in the financial statements:
IFRS VS IND AS
IFRS stands for International Financial Reporting Standards, It is
prepared by the IASB (International Accounting Standards Board).
It is used in around 144 countries and is regarded as one of the
most popular accounting standards.

IND AS is also known as Indian Accounting Standards or Indian

version of IFRS. Indian AS or IND AS is used in the context of Indian
companies.
Generally accepted accounting
principles (GAAP)

Presentation;
Recognition; Measurement;
and

Disclosure.
Accounting Standards deal with the
following aspects:
recognition of events and transactions in the financial statements;

measurement of these transactions and events;

presentation of these transactions and events in the financial statements in a manner that is meaningful
and understandable to the reader; and

the disclosures relating to these transactions and events to enable the public at large and the stakeholders
and the potential investors in particular, to get an insight into what these financial statements are trying to
reflect and thereby facilitating them to take prudent and informed business decisions
The following is the list of Accounting Standards with
their respective date of applicability

AS AS Title Date of applicability

No.
1 Disclosure of Accounting Policies 01/04/1993
2 Valuation of Inventories (Revised) 01/04/1999
3 Cash Flow Statement 01/04/2001
4 Contingencies and Events Occurring after the Balance Sheet Date (Revised) 01/04/1998

5 Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting 01/04/1996
Policies
7 Construction Contracts 01/04/2002
9 Revenue Recognition 01/04/1993
10 Property, Plant and Equipment (Revised) 01/04/2016
Accounting standards
11 The Effects of Changes in Foreign Exchange Rates (Revised) 01/04/2004
12 Accounting for Government Grants 01/04/1994
13 Accounting for Investments (Revised) 01/04/1995
14 Accounting for Amalgamations (Revised) 01/04/1995
15 Employee Benefits 01/04/2006
16 Borrowing Costs 01/04/2000
17 Segment Reporting 01/04/2001
18 Related Party Disclosures 01/04/2001
19 Leases 01/04/2001
20 Earnings Per Share 01/04/2001
21 Consolidated Financial Statements (Revised) 01/04/2001
22 Accounting for Taxes on Income 01/04/2006
23 Accounting for Investments in Associates in Consolidated Financial 01/04/2002
Statements
Accounting standards
01/04/2004
24 Discontinuing Operations

01/04/2002
25 Interim Financial Reporting
01/04/2003
26 Intangible Assets
01/04/2002
27 Financial Reporting of Interests in Joint Ventures
01/04/2008
28 Impairment of Assets
01/04/2004
29 Provisions, Contingent Liabilities and Contingent Assets
(Revised)
DISCLOSURE OF ACCOUNTING POLICIES (AS 1)

The purpose of Accounting Standard 1, Disclosure of Accounting Policies, is to

promote better understanding of financial statements by requiring disclosure of
significant accounting policies in orderly manner.

As explained in the preceding paragraph, such disclosures facilitate more

meaningful comparison between financial statements of different enterprises for
same accounting periods.

The standard also requires disclosure of changes in accounting policies such that
the users can compare financial statements of same enterprise for different
accounting periods.
Disclosure of Accounting Policies
To ensure proper understanding of
financial statements, it is necessary
that all significant accounting
policies adopted in the preparation
and presentation of financial
statements must be disclosed. Such
disclosure should form part of the
financial statements.
It would be helpful to the reader of
financial statements if they are all
disclosed in one place instead of
being scattered over several
statements, schedules and notes.
Any change in an accounting policy
which has a significant effect should
be disclosed.
Disclosure of Accounting Policies
The amount by which any item in the financial
statements is affected by such change
should also be disclosed to the extent it can
be calculated. Where such amount is not
ascertainable, wholly or in part, the fact
should be disclosed.
If a change is made in the accounting policies
which has no material effect on the financial
statements for the current period but is
expected to have a material effect in later
periods, the fact of such change should be
appropriately disclosed in the period in which
the change is adopted. Disclosure of
accounting policies or of the changes is not a
remedy for any wrong or inappropriate
treatment of items in the accounts.
Summary

All significant accounting

policies used in the The disclosure should
preparation and form part of the financial
presentation of financial statements, normally in
statements should be one place.
disclosed.
Summary
Any change in the accounting policies which
has a material effect in the current period or is
expected to have a material effect in later
periods should be disclosed. In case of a
change in accounting policies which has a
material effect in the current period, the
amount by which any item in the financial
statements is affected should also be
disclosed to the extent it can be calculated.
Where such amount is not ascertainable,
wholly or in part, the fact should be indicated.
Summary
If the fundamental accounting
assumptions of Going Concern,
Consistency, and Accrual are
followed in financial statements,
specific disclosure is not required.
If a fundamental accounting
assumption is not followed, the
fact should be disclosed.
GOING CONCERN
The financial statements are normally prepared on the assumption
that an enterprise will continue its operations in the foreseeable
future and neither there is intention, nor there is need to materially
curtail the scale of operations

Financial statements prepared on going concern basis recognise

among other things the need for sufficient retention of profit to
replace assets consumed in operation and for making adequate
provision for settlement of its liabilities.
Consistency

The principle of consistency refers to the practice of using same

accounting policies for similar transactions in all accounting
periods.

The consistency improves comparability of financial statements

through time. An accounting policy can be changed if the change is
required (i) by a statute (ii) by an accounting standard (iii) for more
appropriate presentation of financial statements.
Accrual basis of accounting:

Under this basis of accounting, transactions are recognised as

soon as they occur, whether or not cash or cash equivalent is
actually received or paid.

Accrual basis ensures better matching between revenue and cost

and profit/loss obtained on this basis reflects activities of the
enterprise during an accounting period, rather than cash flows
generated by it.
VALUATION OF INVENTORY AS 2

The accounting treatment for inventories is prescribed in AS 2

(Revised) ‘Valuation of Inventories’, which provides guidance for
determining the value at which inventories, are carried in the
financial statements until related revenues are recognised.

It also provides guidance on the cost formulas that are used to

assign costs to inventories and any write-down thereof to net
realisable value.
Measurement of Inventories

Inventories should be valued at lower of cost and net realisable value.

Net realisable value is the estimated selling price in the ordinary course of
business less the estimated costs of completion and the estimated costs
necessary to make the sale.

The valuation of inventory at lower of cost and net realisable value is based on the
view that no asset should be carried at a value which is in excess of the value
realisable by its sale or use.
Accounting Standard - AS 1

This standard deals with the

disclosure of significant accounting
policies followed in preparing and
presenting financial statements.
Introduction

The information presented in the financial statements of an

organisation is of its financial position. The profit or loss can be
affected to a large degree by the accounting policies followed.

The accounting policies followed vary from organisation to

organisation. It is important to disclose significant accounting
policies followed to make the financial statements
understandable. The disclosure is required by law in certain cases.
Introduction

The purpose of this standard is to promote better

understanding of financial statements by establishing
the practice of disclosure of significant accounting
policies followed and the manner in which they are
disclosed in the financial statements. Such disclosure
would also facilitate a more meaningful comparison
between financial statements of different organisations.
Fundamental Accounting
Assumptions

Certain assumptions are used in the preparation of financial statements.

They are usually not specifically stated because they are assumed to be
followed.

Disclosure is necessary only if they are not followed.

The following have been generally accepted as fundamental accounting
assumptions:
Fundamental Accounting
Assumptions

Going Concern

Consistency

Accrual
Nature of Accounting Policies

Accounting policies refer to accounting principles and the methods of applying these principles adopted by
the organisation in the preparation of their financial statements.

There is no single list of accounting policies which are applicable in all circumstances.

The different circumstances in which organisations operate make alternative accounting principles
acceptable.

The choice of the appropriate accounting principles calls for a large degree of judgement by the
management of the organisation.
Nature of Accounting Policies

The various standards of the Institute of Chartered Accountants

of India, combined with the efforts of the Government and other
regulatory agencies have reduced the number of acceptable
alternatives in recent years, particularly in case of corporates.
While continuing efforts in this regard in the future are likely to
reduce the number still further, the availability of alternative
accounting principles is not likely to be eliminated altogether
keeping in mind the different circumstances faced by the
organisations.
Areas in which different accounting
polices are possible
Methods of depreciation, depletion and amortisation

Conversion or translation of foreign currency items

Valuation of inventories

Valuation of investments

Treatment of retirement benefits

Considerations in the Selection of
Accounting Policies

The primary consideration in the selection of

accounting policies by an organisation is that the
financial statements should represent a true and
fair picture of the financial position for the period.
For this purpose, the major considerations
governing the selection and application of
accounting policies are:
 Substance
Prudence Materiality
over Form
Prudence

In view of the uncertainty of future events, profits

are not anticipated but recognised only when
earned, though not necessarily in cash. However,
provision is made for all known liabilities and losses
even though the amount cannot be determined with
certainty and represents only an estimate.
Substance over Form

The accounting treatment and

presentation of transactions and
events in financial statements should
be governed by their substance and
not merely by the legal form.
Materiality

Financial statements should disclose

all “material” items, i.e. items, the
knowledge of which might influence
the decisions of the user of the
financial statements.
Disclosure of Accounting Policies

All significant accounting policies used in the

preparation and presentation of financial
statements should be disclosed.

The disclosure should form part of the financial

statements, normally in one place.
Disclosure of Accounting Policies

Any change in the accounting policies which has a material effect in the current period or is expected
to have a material effect in later periods should be disclosed.

In case of a change in accounting policies which has a material effect in the current period, the
amount by which any item in the financial statements is affected should also be disclosed to the
extent it can be calculated.

Where such amount is not ascertainable, wholly or in part, the fact should be indicated.
Disclosure of Accounting Policies

If the fundamental accounting assumptions of Going

Concern, Consistency and Accrual are followed in
financial statements, specific disclosure is not required.

If a fundamental accounting assumption is not

followed, the fact should be disclosed.
Deferred Tax Liability
A deferred tax liability is a listing on a company's
balance sheet that records taxes that are owed but
are not due to be paid until a future date.

The liability is deferred due to a difference in timing

between when the tax was accrued and when it is
due to be paid.
Example
Company A depreciates its
assets in the straight-line
method in its Income
Statement but adopts the
diminishing balance
method in its tax reports.
It has assets worth Rs. 2 It also has generated
lakh which it depreciates revenues worth Rs. 8 lakh
at a 10% rate in its books in that year and incurred
and a 15% rate in its tax expenses of Rs. 5 lakh
statements in the excluding depreciation on
Financial Year 2019 – 20. assets.
Deferred Tax Liability Example
Particulars For Books (Rs For Tax purpose ( Rs) Difference
Revenue 8,00,000 8,00,000
Expenses 5,00,000 5,00,000
Depreciation ( on 2 lakh) 20,000 30,000 10,000
Gross Profit 2,80,000 2,70,000 10,000
Tax @25% 70,000 67,500 2,500
Net Profit 2,10,000 2,02,500 7500
Here, tax as per their books is Rs. 70,000, whereas it pays Rs. 67,500 to the tax department. This
temporary disagreement creates a deferred tax liability of Rs. 2,500 for the company which it shall
account for in a subsequent year.
What Is a Deferred Tax Asset?

Such a line-item asset can

A deferred tax asset is an
be found when a business Therefore, the
item on a company's
overpays its taxes. This overpayment becomes an
balance sheet that money will eventually be
reduces its taxable asset to the company.
returned to the business
income in the future. in the form of tax relief.
 Deferred Tax Asset
Income Statement ( As per Companies Act) Income statement ( as per Income Tax Act)

Sales 3,00,000 Sales 3,00,000

Warranty Expense (2%) 6,000 Warranty Expense 0

Taxable income 2,94,000 Taxable income 3,00,000

Tax payable 30% 88,200 Tax payable 30% 90,000

Net Income 2,05,800 Net Income 2,10,000

Say a computer manufacturing company estimates, Deferred Tax Asset Rs 1,800

based on past experience, that the percentage of
computers that will be sent back for warranty repairs in
the next year is 2% of the total production.
Deferred Tax assets

If a business incurs a loss in

a financial year, it usually is
One straightforward example entitled to use that loss in
of a deferred tax asset is order to lower its taxable
the carryover of losses. income in the following
years. In that sense, the loss
is an asset.
Diluted EPS
Lowry Locomotion earns a net profit
of $200,000, and it has 5,000,000
common shares outstanding that sell
on the open market for an average of
$12 per share. In addition, there are
300,000 options outstanding that
can be converted to Lowry’s common
stock at $10 each.
Lowry’s basic earnings per share is
$200,000 ÷ 5,000,000 common
shares, or $0.04 per share. Lowry’s
controller wants to calculate the
amount of diluted earnings per
share. To do so, he follows these
steps:
Diluted EPS
Calculate the number of shares that
would have been issued at the
market price. Thus, he multiplies the
300,000 options by the average
exercise price of $10 to arrive at a
total of $3,000,000 paid to exercise
the options by their holders.
Divide the amount paid to exercise
the options by the market price to
determine the number of shares that
could be purchased. Thus, he divides
the $3,000,000 paid to exercise the
options by the $12 average market
price to arrive at 250,000 shares
that could have been purchased with
the proceeds from the options.
Subtract the number of shares that
could have been purchased from the
number of options exercised. Thus,
he subtracts the 250,000 shares
potentially purchased from the
300,000 options to arrive at a
difference of 50,000 shares.
Diluted EPS
Add the incremental number
of shares to the shares
already outstanding. Thus,
he adds the 50,000
incremental shares to the
existing 5,000,000 to arrive
at 5,050,000 diluted shares.
Based on this information,
$200,000 Net profit ÷
the controller arrives at
5,050,000 Common shares
diluted earnings per share of
= $0.0396 Diluted earnings
$0.0396, for which the
per share
calculation is: