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ESSENTIALS OF FINANCIAL ACCOUNTING BY ASISH K BHATTACHARYYA

Second Edition Chapter 8

Essentials of Financial Accounting, Second Edition — ASISH K. BHATTACHARYYA

Balance Sheet and Profit and Loss Account: General Requirements
1/8/2014

Every balance sheet of a company should give a true and fair view of the state of affairs of the company as at the end of the financial year.

It should be set out in the form as in Part I of Schedule VI to the Companies Act, 1956.

Every profit and loss account of a company should give a true and fair view of the profit or loss of the company for the financial year.
It should comply with the requirements of Part II of Schedule VI to the Companies Act, 1956.  No format has been prescribed for a profit and loss account.

Essentials of Financial Accounting, Second Edition — ASISH K. BHATTACHARYYA

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Second Edition — ASISH K. 1956 are not applicable to these companies. BHATTACHARYYA .) 1/8/2014  Insurance companies. 406 Essentials of Financial Accounting.Balance Sheet and Profit and Loss Account: General Requirements (cont. banking companies and companies engaged in the generation or supply of electricity are required to draw their financial statements in accordance with provisions in the relevant statute.  Requirements of the Companies Act.

arising due to such deviation. Second Edition — ASISH K. Essentials of Financial Accounting.  Where the profit and loss account and the balance sheet of the company do not comply with the accounting standards.Compliance with Accounting Standards 1/8/2014 Every profit and loss account and balance sheet should comply with the accounting standards issued by the Institute of Chartered Accountants of India (ICAI) and notified by the government. if any. BHATTACHARYYA 407 . such companies are required to disclose in their profit and loss accounts and balance sheets:    The deviation from the accounting standards and the reason for such deviation. and The financial effect.

Section 212 of the Act. does not require that a holding company present consolidated financial statements. requires that the following documents should be attached with the balance sheet of a holding company: a. BHATTACHARYYA 408 . inter alia. e. c. A copy of the balance sheet of the subsidiary A copy of its profit and loss account A copy of the report of its Board of Directors A copy of the report of its auditors A statement of the holding company’s interest in the subsidiary Essentials of Financial Accounting. b. 1956.Group Accounts 1/8/2014   The Companies Act. d. Second Edition — ASISH K.

) 1/8/2014  SEBI requires a holding company.Group Accounts (cont. BHATTACHARYYA . 409 Essentials of Financial Accounting. to issue consolidated financial statements. Second Edition — ASISH K. which is listed in a recognised stock exchange.

The amounts. if any. if any. The amount. Second Edition — ASISH K. BHATTACHARYYA 410 . which it recommends should be paid by way of dividend d. The report should deal with the following: The state of the company’s affairs b.Board of Directors’ Report 1/8/2014   A report by the Board of Directors of the company be attached to the balance sheet. which it proposes to carry to any reserves in the balance sheet c. affecting the financial position of the company and which have occurred between the end of the financial year of the company to which the balance sheet relates and the date of the report a. if any. Essentials of Financial Accounting. Material changes and commitments.

) 1/8/2014 The conservation of energy. iii.Board of Directors’ Report (cont. ii. the report should deal with any changes that have occurred during the financial year: e. BHATTACHARYYA . In the nature of the company’s business In the company’s subsidiaries or in the nature of business carried out by them Generally in the classes of business in which the company has an interest 411 Essentials of Financial Accounting. In addition. technology absorption and foreign exchange earnings and outgo f. i. Second Edition — ASISH K.

or adverse remark contained in the auditors’ report.Board of Directors’ Report (cont.) 1/8/2014  The Board is also bound to give in its report the fullest information and explanations on every reservation. BHATTACHARYYA . qualification. Second Edition — ASISH K. 412 Essentials of Financial Accounting.

and of the profit or loss of the company for that period. b) That the directors had selected such accounting policies and applied them consistently and made judgements and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the company at the end of the financial year. Second Edition — ASISH K.Directors’ Responsibility Statement 1/8/2014  The Board’s report shall include a Directors’ Responsibility Statement. BHATTACHARYYA . indicating therein: That in the preparation of the annual accounts. the applicable accounting standards had been followed along with proper explanation relating to material departures. a) 413 Essentials of Financial Accounting.

BHATTACHARYYA .  Directors’ Responsibility Statement is an instrument to enforce accountability of directors towards shareholders and investors.) 1/8/2014 That the directors have taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of this Act for safeguarding the assets of the company and for preventing and detecting fraud and other irregularities. c. Second Edition — ASISH K. 414 Essentials of Financial Accounting. That the directors had prepared the annual accounts on a going concern basis.Directors’ Responsibility Statement (cont. d.

BHATTACHARYYA . 415 Essentials of Financial Accounting. They have reviewed the financial statements and the cash flow statements and to the best of their knowledge and belief these statements are true. Second Edition — ASISH K.CEO/CFO Certification 1/8/2014  SEBI requires that the CEO (either the Managing Director or Manager appointed under the Companies Act) and the CFO (whole-time Finance Director or other person discharging this function) of the company shall certify to board that: a. b. There were no fraudulent or illegal transactions or transactions violative of the Company’s code of conduct.

f.CEO/CFO Certification (cont. Second Edition — ASISH K. 416 Essentials of Financial Accounting. d. They have indicated to the auditors and audit committee significant changes in accounting policies during the year. They have indicated to the auditors and audit committee instances of fraud of which they had become aware.) 1/8/2014 They accept the responsibility of internal control. e. BHATTACHARYYA . They have indicated to the auditors and audit committee significant changes in internal control during the year. c.

Essentials of Financial Accounting. 2. The section further provides that dividend can be declared or paid only out of: The profit of the company for the financial year after providing for depreciation in accordance with the provision of this section. It provides that no dividend should be paid except in cash. BHATTACHARYYA 417 . 1956. Second Edition — ASISH K.Divisible Profit 1/8/2014    Section 205 of the Companies Act. deals with dividend. The profit of the company for any previous financial year or years arrived at after providing for depreciation in accordance with this section and remaining undistributed. 1.

Money provided by the Central Government or a state government for the payment of dividend in pursuance of a guarantee given by that government. whichever is less.) 1/8/2014 3. 418 Essentials of Financial Accounting. available profit should first be utilised to: (a) provide for depreciation not provided for any previous financial year or years and (b) set off the loss incurred in any previous year or the amount provided for depreciation in that year.Divisible Profit (cont. Second Edition — ASISH K. BHATTACHARYYA .  However.

Minimum Depreciation 1/8/2014 In calculating the divisible profit.  A company may provide higher depreciation. depreciation specified in the Companies Act (schedule IX). BHATTACHARYYA .  419 Essentials of Financial Accounting. a company should provide. Second Edition — ASISH K. at the minimum.

5% but does not exceed 15% of the paid-up capital: not less than 5% of the current profits. 1/8/2014 2. 4.Dividend: Mandatory Transfer to Reserve  A company is required to transfer the following amount to the reserve: 1. 420 Essentials of Financial Accounting.5% of the current profits.5% of the current profits. 3. Where the proposed dividend exceeds 10% but does not exceed 12. BHATTACHARYYA . Where the proposed dividend exceeds 20% of the paidup capital: not less than 10% of the current profits.5% of the paid-up capital: not less than 2. Where the proposed dividend exceeds 12. Where the proposed dividend exceeds 15% but does not exceed 20% of the paid-up capital: not less than 7. Second Edition — ASISH K.

the Companies Act. permits a company to pay interest on the paid-up capital.  421 Essentials of Financial Accounting. Second Edition — ASISH K. BHATTACHARYYA .  A company can pay interest for the period of construction and also for a short period after the completion of the construction. 1956.Interest on Paid-up Capital 1/8/2014 Subject to certain conditions.

  For example. Second Edition — ASISH K. a reserve may be created for maintaining a steady rate of dividend (dividend equalisation reserve) or for redemption of debentures (sinking fund or debenture redemption fund). 422 Essentials of Financial Accounting. BHATTACHARYYA .Reserve 1/8/2014 Reserves represent retained profit.  They may be created for different purposes.

and the expression ‘revenue reserve’ should mean any reserve other than capital reserve.Revenue Reserve and Capital Reserve 1/8/2014  Capital reserve should not include any amount regarded as free for distribution through the profit and loss account. BHATTACHARYYA . 423 Essentials of Financial Accounting. Second Edition — ASISH K.

BHATTACHARYYA . Unrealised profit on sale or revaluation of fixed assets 3.Capital Reserve 1/8/2014 Only profit or loss of a capital nature should be included in the capital reserve. The excess of the value of net assets over the price paid for the acquisition of a business 5.  The following are the examples of capital profits:  1. Profit prior to incorporation 2. Profits on reissue of forfeited shares 424 Essentials of Financial Accounting. The excess of the amount realized on sale of an asset over the price paid for the acquisition of the asset 4. Second Edition — ASISH K.

BHATTACHARYYA .) 1/8/2014 6. 1956. 425 Essentials of Financial Accounting. Premiums received on issue of debentures or profits on redemption of debentures where distribution of such profits is not permitted by the Articles 7. Second Edition — ASISH K. where there has been a reduction of capital with the consent of the court  The share premium account and capital redemption reserve account should not be included in capital reserve.  These should be shown separately because the Companies Act.Capital Reserve (cont. restricts utilisation of these two reserves. The credit balance in the capital reduction account.

Reserve and Reserve Fund 1/8/2014 A reserve should be distinguished from a reserve fund.  Essentials of Financial Accounting. Second Edition — ASISH K. BHATTACHARYYA 426 . it is a reserve and not a reserve fund. a sinking fund is a reserve fund.  A reserve fund is only such reserves that are invested outside the business.  For example. general reserves or dividend equalisation reserves are not reserve funds. because the amounts allocated to these reserves are not invested outside the business.  If the retained profit is used in the business.  Capital redemption reserves. because the amount allocated to the reserve is set aside and invested outside the business.

Second Edition — ASISH K. BHATTACHARYYA .1/8/2014 END 427 Essentials of Financial Accounting.