3. company account

7/31/2019 3. Company Account

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Company AccountsBalance sheet and Profit and loss of a limited liability company.


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GAAPConceptual Framework of Financial StatementsAccounting ConceptsRequirements of Companies Act Accounting StandardsRequirements of Income Tax Act


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Requirements of Companies ActBooks of Accounts ( Sec.209 )

1. All sums of money received and expended by thecompany

2. All Sales and Purchases of goods by the company3. All assets and liabilities of the company

4. Cost records in case of companies engaged inproduction, manufacturing , processing, miningactivities


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Requirements of Companies ActAnnual Accounts ( Sec.210 )1. A balance sheet and2. A profit and loss account at every AGM

Form and Contents1. Balance sheet to exhibit true and fair view of the state of

affairs of the company and to comply with part I of scheduleVI

2. Profit and loss account to give a true and fair view of theprofit and loss of the company and to comply with part II of schedule VI

3. Every balance sheet and Profit and loss account to complywith accounting standards


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Requirements of Companies Act

Company not complying with AS to disclose1. Deviation from AS2. Reasons for such deviation3. Financial effect


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ACCOUNTING STANDARDS

Accounting Standards BoardApplicability of ASScope of ASDetails of AS

Authority attached to AS


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Requirements of Income Tax ActI.T. Act allows both cash as well as

mercantile system of accountingCompanies Act allows only mercantilesystem of accounting


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COMPONENTS OF FINANCIAL STATEMENT

Balance Sheet

Income StatementCash Flow StatementNotes to Accounts and Accounting Policies


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Preparation of Financial statements1. To record transactions and events in the journal2. To record opening entries in the general ledger

3. To post journal entries in appropriate accounts in the general ledger

4. To balance the accounts in the general ledger

5. To prepare the trial balance

6. To pass adjustment entries

7. To prepare the revised trial balance

8. To pass closing entries to prepare financial statements


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Trial Balance

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

It tests the arithmetical accuracy of ledger balancesIt can be prepared monthly, quarterly and yearly

It is a source document for preparing financialstatement


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CLOSING ENTRIES

STEPS1. Transfer balances in revenue accounts to the Profit

& Loss account2. Transfer balances in the expense account to the

Profit & Loss account

3. Transfer balances in the Profit & Loss account toProfit & Loss Appropriation account


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Format of the Balance SheetRs Rs

Sources of Fund :Share CapitalReserves and surplusSecured loansUnsecured Loans

xxxxxxXx

xxx

Uses of Fund :Fixed assetsInvestmentsCurrent assets, loans andadvances xxLess: Current liabilities andprovisions xxNet current assets

Miscellaneous expenditureProfit and Loss account

xxxx

xx

xxXx

xxx


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Balance SheetAsset side

Items under Fixed Asset1. Land2. Building3. Plant and Machinery4. Furniture and Fixture5. Vehicles


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Balance Sheet

Investment1. Investment in govt. securities

2. Investment in shares ,debentures and bonds3. Investment in immovable properties4. Investment in the capital of partnership firms

Miscellaneous ExpenditureDebit balance in Profit and Los account


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Balance Sheet

Liabilities side:

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

Reserves and Surplus--- Capital reserves--- General reserve--- Capital redemption reserve--- Debenture redemption reserve


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Balance SheetLoan Funds

1. Secured Loans-- Term Loans-- Debentures--Working capital loans

2. Unsecured Loans-- Fixed deposits--Debentures--Security deposits


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Balance SheetCurrent Liabilities and Provisions

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

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


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PROFIT & LOSS ACCOUNTDomestic SalesExports

OthersIncome from investmentCommission received

Dividend received etc.


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PROFIT AND LOSS ACCOUNT

Expenditure

--- Materials Consumed ---Salaries, wages, bonus---Staff welfare expenses ---Power and fuel---Repairs and maintenance ---Rent, rates and taxes---Freight, transportation ---Traveling exp.---Interest ---Excise duty---Depreciation ---Provision for taxation---Extraordinary items


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PROFIT & LOSS ACCOUNT

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

Profit & Loss Appropriation Account : From the PATfollowing appropriations take place:-

1. Prov. for dividend to Pref. Shareholders2. Interim dividend3. Provision for final dividend4. Prov. for Corp. dividend tax5. Transfer to general reserve, debenture redemption reserve


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Profit & Loss Appropriation AccountMain components:

Interim dividendsProposed final dividendsReserves:

1. Capital reserve2. Revenue reserve

1. General reserve2. Specific reserve3. Secret reserve4. Reserve fund5. Sinking fund


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Reserves:Capital Reserve: Gen. created out of profit or gains of capitalnature like:

Profit on sale of fixed assets

Profit prior to incorporationSecurity premium on issue of shares or debenturesCapital profit on reissue of forfeited sharesProfits on revaluation of assets and liabilitiesProfit on redemption of debentures

This reserve can be utilized for writing off intangible assets, or preliminaryexpenses or discount on issue of shares or debentures or underwritingcommission or to meet capital losses.


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Revenue reserve: Created from profits earned in the regularcourse of business & is available for distribution as dividend.

General Reserve: It is created by appropriation of profit, without anyspecific purpose, with just an aim to provide additional working capital orto strengthen the cash resources of the business. It is also known as free

reserve and are basically utilized for meeting any unknown liability.

Secret reserve: Also known as Hidden or Internal reserve, it does notappear on the face of the balance sheet. However, under the provision of Companys Act, 1956, no company other than a banking or insurance or electric supply company is allowed to maintain a secret reserve. Nearly allbanks and finance companies create secret reserves for equalizingdividends or meeting heavy losses without disclosing the fact to theshareholders and general public.


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Reserve fund: Sum set aside out of divisible profit and retained in order toprovide for unexpected or unknown future contingencies or losses or toequalize dividends or to strengthen the financial position of the business.

Sinking Fund: It is a fund created with a specific purpose:To replace a wasting asset, e.g.., a mine; orTo replace an asset of depreciable nature; or

To renew a lease; orTo redeem or repay a long term liability, e.g., debenture or a long termloan, etc

It is formed by setting aside, yearly, a fixed sum of money for a definite period.Such sum is invested at compound interest , so that at the end of the periodthe annual amounts, with interest accumulation, will be sufficient to repaythe outstanding loan. This amount, which is set aside, is not charged toprofit and loss account but to the profit and loss appropriation account.

In case of sinking fund created for the purpose of replacing an wasting asset, theamount, which is set aside, is charged to profit and loss account.


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Specific reserves: It is created by debiting P/LAppropriation account for some specific purposes like:

Debenture redemption reserve: It is created with the specific purpose of redeeming the debentures at the end of a specified period setting aside a fixed sumfrom the profit by debiting the profit and loss appropriation account.

Dividend equalization reserve: It is created by setting aside a portion of distributable profit in good years as a provision for less prosperous years.Investment fluctuation reserve: it is usually created to provide for theloss by way of fluctuation in the value of investment. The fall in the value isprovided by debiting P/L account and crediting Investment fluctuation reserve.

Plant and machinery replacement reserve: It is created not only toprovide for annual depreciation of fixed assets to P/L account each year but also toprovide for a fund by means of investing a corresponding sum each year in giltedged securities which, if accumulated at compound interest, will help towards thereplacement of the asset at the end of its life, by realizing the specific investment.


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Format of Profit and Loss Appropriation account

Rs. Rs.

Provision for dividends to pref.shareholders

Interim dividendsProposed final dividendsProvision for Corporate dividendtaxTransfer to General reserves

Debenture redemption reserveNet balance transferred to theBalance Sheet

By balance c/dProfit and loss account


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FIXED ASSETS ACCOUNTINGMeaning and Significance of Fixed Assets

1. Fixed assets are used for production or providinggoods or services

2. They are not meant for resale in the ordinary courseof business3. They constitute a significant portion of total assets4. Proper allocation between revenue and capital

expenditure necessary to recognise and measurefixed asset


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FIXED ASSETS ACCOUNTINGCost of Fixed Assets

1. Purchase price inclusive of import duties less trade discount,rebates

2. Any directly attributable cost incurred to bring the asset toits present working condition3. Admin. and general overhead charges specifically

attributable to construction of a project4. Cost to be adjusted for exchange fluctuation5. If acquired in exchange for another asset , the cost is

recorded either at FMV or net book value of the asset givenup


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FIXED ASSETS ACCOUNTINGCost of fixed assets is affected by twofollowing factors

1. Government grants2. Borrowing costs


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FIXED ASSETS ACCOUNTINGAccounting for Govt. grants

Grants related to specific asset1. The grant is shown as a deduction from the gross

value of asset. Where the grant equals the entirecost of the asset , the asset is shown at a nominalvalue

2. A) Grants related to depreciable asset are treated asdeferred income

B) Grants related to non-depreciable asset arecredited to capital reserve


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FIXED ASSETS ACCOUNTINGBorrowing costs

Borrowing costs are interest and other costs incurred relating toborrowing of funds. Borrowing costs attributable directly tothe acquisition or construction of fixed asset are capitalised.

Conditions for capitalisation1. Borrowing costs are incurred2. Activities essential to prepare the asset for its intended use

are in progress3. Expenditure for the acquisition or construction of asset is

incurred


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DEPRECIATIONDefinition:- Depreciation is a measure of thewearing out, consumption or other loss of value of a depreciable asset arising from use,effluxion of time or obsolescence throughtechnology and market changes.

In other words depreciation is nothing but

distribution of total cost of an asset over itsuseful life.


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DEPRECIATIONSignificance

1. It represents the charge of a fair proportion of thedepreciable amount to P&L account over the usefullife of an asset.

2. Depreciable amount is the historical cost or revaluedamount of the asset less residual value.

3. It plays a significant role in determining the financialperformance of an enterprise.

4. It is charged in each accounting year.


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DEPRECIATIONDepreciable Asset means an Asset which

1. Is held by an enterprise for use in the production orsupply of goods and services.

2. Is not meant for resale in the ordinary course of business.

3. Is expected to be used during more than one

accounting period4. Has limited useful life.


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DEPRECIATIONMethods of Depreciation

1. Straight Line Method:- Under this methoddepreciation is charged equally over the usefullife of the asset.

Formula:Depreciation =Cost of asset- Estimated residual value

------------------------------------------------------Estimated useful life


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DEPRECIATION2. Written down value method:- Under this

method depreciation is charged at a fixed rate

on the reduced balance of the asset everyyear.Rate of Estimated residual

Depreciation = 1- n value---------------------------

Cost of asset


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DEPRECIATIONRequirements of Companies Act

Sec. 205 and 350 deal with depreciation1. Sec.205 states that no dividend shall be declared or paid out

of profits without providing for depreciation.2. Depreciation has to be provided

a) as provided in sec.350, orb) as arrived at by dividing 95% of the original cost of the

asset by the specified period

3. Sec.350 provides that depreciation has to be charged as perschedule XIV to the Companies Act.


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DEPRECIATIONProvisions of Income Tax Act

1. Only WDV method is recognised

2. Block of assets method is followed3. 100% dep. Is allowed if the asset is used for

180 days or more. 50% dep. if used for less

than 180days


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DEPRECIATIONConsistency Principle

It requires that a method of dep. , once adopted , shouldbe applied consistently unless

1. The statute requires the adoption of a new method.2. It is required to comply the provisions of an

accounting standard3.

The change is necessary for a more appropriatepreparation and presentation of the financialstatements.

3. company account

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