023E2330

1–16

ANNAMALAI UNIVERSITY
DIRECTORATE OF DISTANCE EDUCATION

Master of Commerce (M.Com.)

Third Semester

ADVANCED CORPORATE ACCOUNTING

LESSONS : 1 – 16

Copyright Reserved
(For Private Circulation Only)
 MASTER OF COMMERCE (M.Com.)
Third Semester
ADVANCED CORPORATE ACCOUNTING

Editorial Board
Members
Dr. K. Vijayarani
Dean
Faculty of Arts
Annamalai University

Dr. R. Singaravel Dr. P. Vijayan

Director Director
Directorate of Distance Education Directorate of Academic Affairs
Annamalai University Annamalai University

Dr. K. Govindarajan Dr. R. Elangovan

Professor & Head Professor & Coordinator
Department of Commerce Commerce Wing, D.D.E.
Annamalai University Annamalai University
Internals
Dr. V. Sundar Dr. T. Srinivasan
Professor Professor
Department of Commerce Department of Commerce
Annamalai University Annamalai University

Externals
Dr. P. Natarajan Dr. Ganapathi
Professor of Commerce Professor of Commerce
Pondicherry University Alagappa University
Puducherry Karaikudi
Lesson Writer
Dr. V. Selvarasu
Associate Professor
Government Arts College
(Deputed from Annamalai University)
Nammakkal.
 MASTER OF COMMERCE (M.Com.)
Third semester
ADVANCED CORPORATE ACCOUNTING
SYLLABUS
Objectives:
To make the students understand the various concepts and application of
accounting methods in corporate sector
Unit – I: Holding Companies
Holding Companies-Preparation of Consolidated balance sheet(Direct
Subsidiary company only)
Unit – II: Banking Accounts
Banking Company (New Format)- Final Accounts
Unit – III: Insurance Company Accounts
Insurance Company Accounts. Final Accounts of Life insurance-Valuation of
Balance Sheet- Balance Sheet of Fire and Marine and General Insurance.
Unit – IV: Double Accounts
Double Accounts: Final Accounts of Public Utility Undertaking (Electricity and
Railway Companies)-Replacement an Assets
Unit – V: Inflation Accounting and Human Resource Accounting
Human Resource Accounting and Social Responsibilities Accounting-
Inflation accounting –Meaning –methods of inflation accounting-CPP-
Preparation of inflation accounting.
Text Books
1. Advanced accounts-MC. Shukla, TS. Grewal, SC.Gupta. S.Chand& Company
Ltd, New Delhi.
2. Advanced Accountancy –RL.Gupta, M.Radhaswamy, Sultan Chand& Sons,
New Delhi
3. Advanced Accountancy-SN.Maheswari, SK.Maheswari, Vikas Publishing
House Pvt. New Delhi.
 ii

MASTER OF COMMERCE (M.Com.)

Third Semester
ADVANCED CORPORATE ACCOUNTING
CONTENTS

Lesson Title Page

No No
1
1 Holding Company Accounts- Introduction
12
2 Holding Company Accounts Consolidated Balance Sheet
36
3 Bank Accounts –Introduction
44
4 Bank Accounts- Profit and Loss Accounts
56
5 Bank Accounts- Balance Sheet
80
6 Insurance Company Accounts –Introduction
87
7 Accounting Principles for Life Insurance Business
96
8 Preparation of Life Insurance Accounts
129
9 Valuation of Balance Sheet
134
10 Accounting Principles of General Insurance Business
144
11 Accounts of General Insurance Company
173
12 Double Account System-Introduction
189
13 Final Accounts of Double Accounts
204
14 Human Resource Accounts
213
15 Social Responsibilities Accounts
221
16 Inflation Accounting or Price Level Changes
255
Glossary
263
Model Question Paper
277
PCP – First & Second Round :
Problems On Advanced Corporate Accounting
 LESSON – 1
HOLDING COMPANY ACCOUNTS-INTRODUCTION
OBJECTIVES
Students after studying this lesson, to know the following objectives; they are,
introduction, legal requirements of presenting holding company accounts,
preparation of consolidated balance sheet and etc,
CONTENTS
1.1 Introduction
1.2 Legal requirement to presenting accounts
1.3 Consolidated Financial Statement
1.4 Preparation of Consolidated Balance Sheet
1.5 Self Assessment Test
1.1 INTRODUCTION
Economies of Large scale production have given impetus to business
combinations. Mergers and acquisitions have become the order of the day in the
corporate world. Acquiring controlling interest in a company provides control over
its working without affecting its independent existence and identity. The ‘Holding
company’ method of business combination facilitates creation of closely linked
group of companies with interest in mutual well being. Thus, acquiring control over
other companies has become a favorite’s method to build up an industrial empire.
Meaning and Definition
Holding Company and Subsidiary Company
A holding company is one which controls one or more other companies by
means of:
(a) Holding majority shares or
(b) Controlling the composition of Board of directors or
(c) Controlling a holding company with subsidiaries.
The Indian Companies Act does not define a holding company directly, Sec.4(4)
of the Companies Act says “A company shall be deemed to be the holding company
of another, if, but only if, that other is its subsidiary”.
According to Sec.4 (1) of the Companies Act, a company is a subsidiary of
another company if, but only if.
The other company controls the composition of its board of directors or
The other company
i) Holds more than half in nominal value of its equity share capital or
ii) If it is a company formed before 1st April 1956 with both equity and
preference shareholders having the same voting rights, the other company exercises
or controls more than half of its voting power, or
iii) It is a subsidiary of any company which is that other company’s subsidiary.
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For example, if company “A is subsidiary of company ‘B’ and company ‘C’ is a
subsidiary of company ‘A’ then company ‘C’ becomes subsidiary for company ‘B’
also indirectly. Such a subsidiary may be called –subsidiary or deemed subsidiary.
1.2. LEGAL REQUIREMENTS RELATING TO PRESENTATION OF ACCOUNTS.
Sec.212 of the Companies Act lays down specifically the different aspects of
presentation of accounts by a holding company.
1. A holding company has to attach the following documents with its balance
sheet in respect of each of its subsidiaries;
a). A copy of the Balance sheet of the subsidiary;
b).A copy of the Profit & Loss account
c).A copy of the report of its board of directors
d). A copy of the report of its auditors
e). A statement of the holding company’s interest in the subsidiary as specified
in sub-section (3)
f) The statement referred to in sub-section (5) if any; and
g) The report referred to in sub-section (6) if any.
2. If the financial years of the holding company and subsidiary coincide with
each other, subsidiary company’s Balance Sheet and other document mentioned
above relating to the same financial year should be attached to the Balance Sheet of
the holding company.
If the financial years of both the companies do not coincide, the preceding
year’s Balance Sheet and other statements of the subsidiary must be attached.
However the time span between the two balance sheets should not be more than six
months.
Requirements of Schedule V1
The following items relating to the subsidiary company must be disclosed in
the holding company’s Balance Sheet as prescribed under Schedule V1.
On the assets side of the Balance Sheet
a) Under the heading of ‘Investments” - Investments in equity shares,
preference shares, debentures, etc, of the subsidiary company.
b) Under the heading ‘Loans and Advances’ and loans given to subsidiaries.
On the liabilities side of the Balance Sheet.
Under the heading ‘secured loans’
Loans and advances from subsidiaries
(b) Under the heading ‘Unsecured loans’
Loans and Advances from subsidiaries
Under the heading ‘Current liabilities and provisions’ amount due from subsidiary.
1.3 CONSOLIDATED FINANCIAL STATEMENTS
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The ‘legal’ Balance Sheet of a Holding company should contain the above
particulars. However, consolidated financial statements or ‘group accounts’ are in
addition to the legal financial statements which are to be statutorily filed with
appropriate authorities.
There is no statutory requirement for a holding company to prepare consolidated
Financial Statements. However, the Institute of Chartered accountants of India has
issued AS-21 on ‘ Consolidated Financial Statements’ which comes into effect in
respect of accounting periods commencing on or after prepare consolidated Financial
Statements can prepare and present them in accordance with the standard.
AS-21 Terms a holding company as ‘parent Company’ which has one or more
subsidiaries and a ‘Subsidiary’ as an enterprise that is controlled by another
enterprise known as ‘parent’. A ‘group’ is a parent and all its subsidiaries. AS-21
should be applied in the preparation and presentation of consolidated Financial
Statements for a group of enterprises under the control of a parent.
Consolidation of Profit and Loss account and Balance Sheet implies preparation
of a single profit and Loss account and Balance Sheet of a holding company and its
subsidiaries. This is done by aggregating all times of Incomes, Expenses, Assets,
Liabilities etc., of the holding company and its subsidiaries. Such consolidation is
already pointed out above, as per the Companies Act 1956, there is no obligation on
the part of a holding company to prepare and present ‘group accounts’ or
consolidated financial statement. However, different users of accounting information
like share holders, employees, lenders, potential investors etc., are in need of
information about the financial position and result of operations of the entire group.
Consolidated accounts fulfill such as need. Similarly, international accounting
standard. IAS-27 makes it obligatory for a holding company, if not exempted, to
present consolidated financial statements. Thus, it is apparent that irrespective of
legal requirements, consolidated financial statements are of great practical value and
are usually prepared and presented by the progressive companies.
1.4 PREPARATION OF CONSOLIDATED BALANCE SHEET
The following are the various points to be considered and followed for the
preparation of consolidated Balance Sheet of a holding company and its subsidiaries.
Basic philosophy of consolidation-Elimination of investment account
Usually a holding company shows the shares acquired in a subsidiary as an
investment on the assets side of its Balance Sheet. This shows the amount paid by
the holding company for the shares acquired in the subsidiary. But the details of
the acquisition are absent. Consolidation aims at providing full details about the
investment as a part of the Balance Sheet itself. This is done by ‘replacing’ the
investment account with the individual assets and liabilities of the subsidiary
company. These assets ad liabilities are clubbed with those of the holding company
itself to provide a complete picture.
Wholly-owned subsidiary company:
When a holding company owns all the equity shares of a subsidiary,
 4
elimination of investment account by replacing it, with the assets and liabilities of
the subsidiary is a very simple matter, as shown below:
Example: Balance Sheet as on 31.3.2021
Liabilities H Ltd. S Ltd. Assets H Ltd. S Ltd
Share capital: Sundry assets Investment: 10,000 shares of Rs.10 5,00,000 2,00,000
Shares of Rs.10 each in S Ltd
each 4,00,000 1,00,000
Sundry liabilities 2,00,000 1,00,000 1,00,000
6,00,000 2,00,000 6,00,000 2,00,000
Solution: Consolidated Balance Sheet of H Ltd. and its subsidiary S Ltd. as on 31.3.21.
Liabilities Rs. Rs. Assets Rs. Rs.
Shares capital 40,000 shares of Rs.10 each Sundry assets:
( H Ltd. only) 4,00,000 H Ltd. 5,00,000
Sundry liabilities: S Ltd. 2,00,000 7,00,000
H Ltd. 2,00,000
S Ltd 1,00,000 3,00,000
7,00,000 7,00,000
The investment account on the assets side of H Ltd. is replaced by the total
assets of S Ltd. On the assets side of the consolidated Balance Sheet and its
liabilities are sown on the liabilities side.
The effect is that the net assets of the subsidiary are shown in the holding
company’s Balance Sheet in place of the ‘Investment’.
1. Minority interest
Meaning: Usually, a holding company acquires majority equity shares in a
subsidiary, representing the controlling interest. The remaining shares may be in
the hands of the general public. Such holding of the general public in the
subsidiary company is called ‘Minority interest’.
Treatment: The minority interest is to be computed and shown on the liabilities
side of the consolidated Balance sheet as a separate item. It may be shown as the
last item of the liabilities side or along with then share capital of the holding
company. The former method is more popular.
Computation: Usually the following items constitute the minority interest:
Rs.
Face value of minority equity shares xxx
Face value of minority preference shares xxx
Minority share of capital profits xxx
xxx
Minority Share of revenue profits xxx
Minority share of bonus shares issued. xxx

Less: Minority share of capital losses xxx

Minority share of revenue losses xxx xxx

Total minority interest xxx

2. Cost of control or goodwill
Meaning: When holding company acquires majority of the shares in a
 5
subsidiary it may be forced to pay more than the face value and even the
subsidiary, it may be forced to pay more than the face value and even the book
value of such share. The demand and supply equation operates here. The demand
for the subsidiary company’s shares generated in the proves of acquiring controlling
interest in the subsidiary, ‘pushes up’ the market price of such shares. Thus, cost
of control is the ‘penalty’ or ‘excess’ paid by the holding company to acquire
‘controlling interest’ in the subsidiary company.
Treatment: The excess amount paid is usually treated as ‘goodwill’ and is
shown on the assets side of the consolidated Balance Sheet along with any goodwill
in the holding company’s Balance Sheet.
If the price paid by the holding company for shares acquired in the subsidiary
is less than ‘what is received in return’ in the form of the face value of shares
purchased and the holding company’s share of the capital profits, such difference is
a capital gain. Such capital profit can be reduced from any goodwill existing in the
Balance sheet of the holding and subsidiary companies. If the capital profit is in
excess of such goodwill or there is no goodwill in the Balance sheets, it must be
shown as ‘capital reserve’ in the liabilities side of the consolidated Balance Sheet.
Computation: The following is the usual method of ascertaining cost of control or capital
reserve.
Rs.
Amount paid for shares purchased by the holding company in the subsidiary xxx
Add: Holding company’s share of capital loss xxx
xxx
Less: Face value of shares purchased xxx
Holding company’s share of capital profits xxx
Holding company’s share of Bonus shares issued by subsidiary xxx
Holding company’s share of dividend paid out of capital profits xxx xxx
Goodwill or capital reserve xxx
Note: If the Balance is positive, it goodwill, if it s negative, it is capital profit to be treated as capital reserve.
The goodwill or capital reserve ascertained here must be merged with any goodwill
in the Balance sheets of the holding company and the subsidiary companies.
4. Revenue profits or post acquisition profits
Meaning: Profits earned by a subsidiary company after the date of acquisition
of shares by the holding company are called revenue profits or post acquisition
profits. These profits may be a part of the profit & Loss account of the subsidiary
company or they might have been transferred to reserves or proposed as dividend.
Treatment: The revenue profits have to be divided in the ratio of shares held by
the holding company and the minority in the subsidiary, generally known as
‘Holding minority ratio’. The minority share is added in computing minority
interest. The holding company’s share is added to the holding company’s profit and
Loss Account in the consolidated Balanced Sheet.
Computation: If shares are purchased by the holding company on the date of
the given Balance Sheets, revenue profits are ‘Nil’. If shares are purchased during
 6
the ‘current year’. Profits earned during the current year are assumed to be earned
uniformly and the profits proportionate to the number of months after the purchase
of shares are treated as revenue profits. If the shares were acquired at the
beginning of the current year, entire profit of the current year has to be treated as
revenue profits. If exact date of purchase of shares is not given, other details about
profits have to be seen to determine the revenue profits.
5. Revenue losses or post acquisition losses
Any loss incurred by the subsidiary company after the date of purchase of
shares by the holding company is called ‘revenue losses or post acquisition losses’.
Revenue loss has to be divided in the ‘Holding minority ratio’. Minority share
has to be subtracted while ascertaining minority interest. Holding company’s share
has to be reduced form its Profit & Loss account in the consolidated Balance Sheet.
If profits & Loss Account does not show any credit balance, the revenue loss may be
shown on the assets side of the consolidated Balance Sheet under ‘Miscellaneous
expenditure’.
6. Capital profits and Losses or pre acquisition profits & Losses
Meaning: All the accumulated profits of the subsidiary company on the date
of purchase of shares by the holding company are called ‘capital profits’ or pre
acquisition profits’. They may be in the form of capital reserve, general reserve,
reserve fund, share premium, Profit & Loss account, etc. If shares are acquired
during the current year, profit earned by the subsidiary in the months before
purchase of shares in his current year is also to be taken capital profit. Similarly
any profit on revaluation of assets or liabilities on the date of purchase of shares
has to be treated as capital profit.
All accumulated losses on the date of purchase of shares by the holding
company are termed as ‘capital losses’. Similarly, any loss incurred in the current
year before purchase of shares is also capital loss. Any loss on revaluation of assets
and liabilities at the time of purchase of shares is also to be treated as capital loss.
Treatment: Any Bonus shares issued, and dividend aid out of the capital
profits has to be subtracted and the balance of capital profit or loss has to be
divided in the ‘holding minority ratio’. Minority share of the capital profits has to be
added to the minority interest. Similarly, minority share of capital loss has to be
subtracted in the computation of minority interest.
Holding company’s share of capital profit is to be reduced while ascertaining
cost of control. This is due to the fact that accumulated profits of the subsidiary
must have influenced the price paid for the shares acquired. Based on the same
logic, holding company’s share of capital loss is added in the computation of cost of
control.
Computation: Capital profits are usually computed as follows:
 7
Rs.
General reserve, capital reserve, p & L A/c and other reserves of subsidiary on the date of xxx
purchase of shares
Less: Bonus shares issued by subsidiary from pre acquisition profits xxx
Less: Divided paid by subsidiary out of pre acquisition profits xxx xxx
xxx
Add: Subsidiary company profits during the current year before purchase of shares xxx
Add: Profit on revaluation of assets and liabilities of the subsidiary on the date of purchase xxx
Less: Loss on revaluation of assets and liabilities of subsidiary on the date of purchase xxx
xxx

7. Depreciation on Revalued Assets.

The change in the value of any fixed assets as on the date of purchase of
shares creates the problem of ‘Depreciation’. If there was appreciation on the fixed
assets due to revaluation, additional depreciation from the date of revaluation till
the Balance Sheet date has to be provided. This additional depreciation has to be
reduced from ‘Revenue profits’ because the depreciation is related to the post
acquisition period.
If there was decrease in the value of fixed assets on revaluation, the
depreciation attributable to the ‘decreased’ portion of the asset has to be calculated
and added to the revenue profits.
In the combined Balance Sheet, these, additional depreciation or ‘saving in
depreciation’ have to be adjusted in the assets concerned.
8. Bonus shares issued by subsidiary company
After the holding company acquired controlling interest, subsidiary company
may issue bonus shares out of its profits to all the shareholders. As a result,
holding company also receives the bonus shares and the face value of shares
acquired increase.
Treatment: Treatment of bonus issue by subsidiary depends on the source of
profits out of which the bonus is issued.
a). Bonus issue out of capital profits: It has no real effect on the consolidated
Balance Sheet. The amount of bonus is reduced from capital profits. The same
amount is added to the face value of shares acquired in the subsidiary. Thus, while
computing cost of control, Face value of shares held by the holding company
increases and the holding company’s share of capital profits decreases to the same
extent. (See Illustration Nos.810, 13 & 15) Minority share of the bonus is added to
the minority interest.
b). Bonus issue out of revenue profits or post acquisition profits: This type of
bonus issue has its impact on the consolidated Balance Sheet. The amount of
bonus has to be reduced from revenue profits before distributing the revenue
profits in the holding minority ratio.
Minority share of the bonus is added to the minority interest. Holding
company’s share of the bonus is subtracted in the calculation of ‘cost of control’.
 8
The net effect is that goodwill decreases to the extent of the holding company’s
share of the bonus, though the bonus is not out of the pre acquisition profits (See
Illustration No.12).
9. Dividends from subsidiary company.
Subsidiary company may declare and pay dividend to its shareholders, after
the holding company acquired shares in the subsidiary. It may be dealt with as
follows:
a).Proposed dividend: Dividend might have been proposed, but not yet paid by
the subsidiary. Such proposed dividend need not be separately treated. It should be
added to the respective revenue profits and capital profits as the case may be So,
minority share of the proposed dividend becomes a part of the minority interest.
Holding company’s share merges into the revenue and capital profits of the holding
company.
b).Capital dividend (or) Dividend paid by subsidiary out of pre-acquisition
profits: Since the amount is already received, minority share of the capital dividend
has to be ignored.
Holding company’s share of the capital dividend is credited to investment
account representing the shares in subsidiary company. The effect is that cost of
control or goodwill is reduced to that extent. Otherwise, capital reserve increases to
the extent of the dividend receive by the holding company.
Usually, when the dividend is received, holding company might have included
it in its profit & Loss account. So, the holding company’s share of the capital
dividend which was credited to its profit & Loss account should be subtracted from
Profit & Loss account in the consolidated Balance sheet.
c).Revenue dividend paid by subsidiary out of post acquisition profits: Since the
amount of dividend is already received minority share of the revenue dividend has
to be ignored.
Holding company’s share of the revenue dividend has to be credited to its
profit & Loss Account. If it was already credited to Profit & Loss account at the time
of receiving no further adjustment is required.
The revenue dividend has been reduced from the post acquisition profits before
dividing them between the holding company and the minority.
d) Composite dividend: Dividend paid by the subsidiary company may be
partly out of capital profits and partly out of revenue profits. In such a case, the
dividend has to be divided into two portions. The capital dividend portion and the
revenue dividend portion have to be deal with separately, as indicated above.
e).If there is not indication regarding the source of profits for the dividend paid
by the subsidiary; It must be assumed that the dividend amount was earned during
the period for which it was declared. Thus interim dividend must be persumed to be
out of current year’s profits. Dividend paid for previous year must be out of profits
earned before the current year.
 9
10. Preference shares in subsidiary company.
Holding company may acquire all or a part of the preference shares in
subsidiary company, apart from purchasing controlling interest in the equity
shares.
While ascertaining cost of control, amount paid by the holding company is
added to the amount paid for equity shares. Face value of preference shares
acquired is reduced. The net effect is that any difference between the amount paid
and the face value of the shares merges into the goodwill or capital reserve. Any
dividend due on the preference shares till the date of acquisition should also be
reduced in the computation for cost of control, after subtracting it from capital
profits. Dividend due on the preference shares for the post acquisition period is to
be treated like revenue dividend payable.
Minority share of the preference shares is included in the minority interest,
along with any pre acquisition dividend payable to the minority.
11. Debentures in subsidiary company
Subsidiary company may have debentures in its Balance sheet liabilities side.
They are just like any other liability to outsiders and must be shown in the
consolidated Balance sheet. However, if the holding company has purchased a part
or all of them, such debentures should be eliminated from the consolidated Balance
Sheet, just any other mutual obligation, which is explained below, separately.
12. Elimination of common transactions or mutual obligations
The holding company and the subsidiary companies may own money to each
other due to common transactions like buying and selling of goods, lending and
borrowing of money, rendering service to each other etc. All such mutual
obligations have to be eliminated from the consolidated Balance Sheet.
(a) Debtors and creditors: The debtors and creditors of holding and subsidiary
companies may include amount payable and receivable between them for purchase
and sale of goods. If it is the same amount shown by both the companies, it can be
reduced on both sides of the consolidated Balance Sheet. If there is any difference
between the amounts, it must be due to cash-in-transit or goods-in-transit. In such
a case such ‘transit’ amount should also be reduced from the side on which higher
amount is shown. The cash in transit or goods in transit has to be shown on the
assets side of the Balance Sheet as a separate item.
(b) Bills receivable and bills payable: Bills receivable and Bills payable of the
holding and subsidiary companies may include bills accepted and drawn by each
other. To the extent such bills are included in the bills receivable, they must be
eliminated. Any bills endorsed or discounted represent liability to a third party and
must be shown in the consolidated Balance Sheet.
(c) Loans payable and receivable: Loan given and taken between the holding
and subsidiary should also be eliminated from the consolidated Balance Sheet. If
any interest is taken into account by one company, but not the other, it should be
adjusted by passing entry for it. Thereafter the loan along with interest payable has
to be eliminated.
 10
(d) Owing for services rendered: If entry is already passed by both the
companies, it must be a part of outstanding expenses and creditors. It can be
subtracted from the respective items in the Balance Sheet. If no entry is passed so
far, the amount has to be reduced from revenue profits of the subsidiary company
and added to the profit & Loss account of the holding company.
13. Contingent liabilities
Transactions which may become liabilities in future are shown as contingent
liabilities. As footnotes to the Balance sheet. For example, bills endorsed to
creditors and discounted with bank, investment in partly paid shares, etc.
Any contingent liability involving a third party must continue to be shown as a
footnote to the consolidated Balance Sheet. However, any contingent liabilities
involving the holding company and its subsidiaries alone must be eliminated by not
showing them as footnotes to the balance sheet.
14. Provision for unrealized profits in stocks.
On the date of the consolidated Balance sheet, the holding company or the
subsidiary may have in its stock goods purchased from the other company which
were sold at profit. So, the stock includes the unrealized profit charged by the
seller. In the consolidated Balance sheet, provision must be made for such
unrealized profit.
There are two approaches to create such a provision.
1. Making a provision for the entire profit included in the stock. This practice
is preferred by the American Institute of Certified Public Accountants (AICFA) and
also by the C.A institute, in India a shown in AS-21
2. Providing only for the holding company’s share of such unrealized profit, on
the basis that the transaction is complete as far as minority shareholders are
concerned. The former method is followed in this book.
The unrealized profit should be reduced from the stock on the asset’s side and
from the Profit & Loss account on the liabilities side of the consolidated Balance
Sheet.
16. Abnormal losses
Holding company might have acquired the shares in the subsidiary during the
current year. Any abnormal loss which occurred is usually debited to profit & Loss
Account and to that extent the current year’s profit decreases. It is more
appropriate to adjust the abnormal loss from the pre acquisition or post acquisition
profit in the current year, depending on the date of occurrence of the abnormal
loss.
SUMMARY
The ‘Holding Company’ method of business combination facilitates creation of
closely linked group of companies with interest of mutual obligations. It shows with
interest of mutual obligations. It shows with takeover and merging of other
companies (i.e. subsidiary) payments and receipts to found with various workings.
 11
KEYWORDS
Holding Company: One which controls one or more other companies.
Subsidiary Company: Any company which is that other companies.
Minority Interest: Shares may be in the hands of General Public.
Goodwill/ Cost of Control: Excess amount paid to Holding company is goodwill
in other way cost of control.
SELF ASSESSMENT TEST
1. What is a ‘Holding Company’? When does a company become a Holding
company’?
2. Define a ‘Holding Company’.
3. What are the requirements to be fulfilled for a company to become a
‘Holding Company’?
4. Give the meaning of ‘Subsidiary company’.
REFERENCE BOOKS
1. Reddy TS, Murthy A, Corporate Accounting, Margham Publication,
Chennai – 17.
2. Shukla MC, Grewal TS, Gupta SC, Advanced Accounts, S.Chand &
Company Ltd., New Delhi.

 12
LESSON – 2
HOLDING COMPANY ACCOUNTS-CONSOLIDATED BALANCE SHEET
OBJECTIVES
Students after studying this lesson to learn more on the above lesson with the
following objectives: they are,
CONTENTS
2.1 Introduction
2.2 Steps involved in preparation of consolidated balance sheet
2.3 Assets and Liabilities of Consolidated Balance Sheet
2.4 Specimen for Consolidated Balance Sheet
2.5 Steps involved in the consolidated profit and loss account
2.6 Examples
2.7 Self Assessment Test
2.1 INTRODUCTION
In holding company accounts, some of the important steps are to be
considering at the time of preparation. In addition to the, proper proforma should
be follow strictly which is easy to find the solution. According to accounting nature
it is clearly hope to complete without error.
2.2 STEPS INVOLVED IN PREPARATION OF CONSOLIDATED BALANCE SHEET
The following steps are to be taken for preparing Consolidated Balance Sheet
(CBS):
Step 1 Computation of Holding –Minority Ratio
For preparing CBS, Holding-Minority ratio is of utmost importance. It can be
found out as explained below:
The number of shares of the subsidiary co., held by the Holding Co. should be
ascertained.
The number of shares hold by Minority shareholders in the subsidiary should
be noted.
The ratio of their respective holdings should be computed.
This ratio will be used in distribution of capital and revenue profit, capital and
revenue dividends, Bonus shares etc.
Step 2 Ascertaining pre-acquisition profits or Capital profits
P & L a/c balance and any reserve balance appearing in the Balance Sheet of
Subsidiary Co. On the date of acquisition of shares by the holding Co. are to be
considered as capital profits. They have to be calculated in a manner as explained
above in the context of calculation and treatment of various items under the head
“Capital profits and losses of Pre-acquisition profits or losses”.
 13
Step 3 Computation of Post-acquisition profits or Revenue profits
The reserves created and the profits earned by the subsidiary Co. after the
date of acquisition of shares by the holding Co. are to be taken as Revenue profits.
They have to be ascertained in a manner as explained above in the context of
calculation and treatment of various items under the head “Revenue profits or Post-
acquisition profits. and ‘Revenue losses or post acquisition losses’.
Step 4 Computation of Minority Interest
Minority Interest refers to the claim of the minority or outside shareholders in
the net assets of the subsidiary or in the share capital, reserves, profits etc., of the
subsidiary Co. It has to be ascertained in a manner as explained above in the
context of calculation and treatment under the head ‘Minority Interest’.
Step 5 Computation of goodwill/Cost of Control or capital Reserve
As the holding company invest huge sum of money in the shares of subsidiary
company. It is necessary to find out the profit or Loss on investment made before
proceeding to consolidate the Balance Sheets. If the holding Co. gets less than what
it has invested in the shares of subsidiary, the excess amount paid should be taken
as ‘Cost of control or Goodwill’. On the other hand, if the holding Co. gets more
than what it has invested in shares, the excess amount received should be taken as
‘Capital Reserve’. It has to be calculated in a manner as explained above under the
head ‘Cost of control or goodwill’.
Step 6 Calculation and Elimination of unrealized profit included in stock
The unrealized profit included in stock should be calculated and treated in the
CBS in the manner explained above the head ‘Provision for unrealized profits in
stock’.
Step 7 Elimination of Inter-company Debts
The inter-company debts have to be cancelled as explained earlier under the
head “Elimination of common transactions or mutual obligations or mutual
indebtedness.”
Step 8 Preparation of consolidated balance Sheet
After following the above mentioned seven steps, all the required information
for preparation of consolidated Balance sheet should be available. The holding
company prepares CBS mainly to show all assets and liabilities of Subsidiary Co,
along with its own assets and liabilities similar to the Balance sheet of a head office
incorporating the assets and liabilities of the branches. In CBS, the assets and
liabilities will appear as given below:
2.3 ASSETS AND LIABILITIES OF THE CBS.
1. Share Capital
In the CBS, only the share capital of the holding co. should be shown. The
share capital of Subsidiary Co, s should not be shown in the CBS, as it is partly
merged with the minority Interest and partly set-off against the holding Co’ s
investments on the shares of the subsidiary co.
 14
2. Reserves and Surplus:
The following are shown under this heading:
Share-Premium of holding company;
Net capital reserve, if any, (after the set-off of the total capital reserve against
the total goodwill)
General reserve of the holding company plus holding company’s share of the
Post-acquisition general reserve of the Subsidiary co.
Other revenue reserves of the holding co. plus the holding Co.’s share of the
other revenue reserves of the Subsidiary Co.
P & L a/c (Cr.) balance: Holding Co’ s P & L credit balance plus holding co’ s
share of the post-acquisition profits of the Subsidiary Co. minus the holding Co’ s
share of unrealized profit included in Stock and holding Co’ s share of capital
dividend previously credited to P & L A/c.
3. Secured Loans:
The following items appear under this head:
Debentures issued by the holding Co. to outsiders and debentures of the
subsidiary Co. Less Subsidiary Co’ s debentures held by the holding co.
Other secured loans of the holding Co. and other secured loans of the
Subsidiary Co. less inter-company secured loans. If any.
4. Unsecured Loans:
The following items are shown under this head: Unsecured loans of the
holding Co., plus unsecured loans of the Subsidiary Co. less inter-company secured
loans, if any.
5. Current Liabilities and Provisions:
Items under this head are as under:
Sundry creditors of the holding Co. plus Sundry creditor of the Subsidiary Co..
less inter-company creditors and debtors set-off.
Bills payable of holding Co. plus bills payable of Subsidiary Co. less bills of
exchange drawn by one company on another set-off.
Bank overdrafts of holding Co. Plus bank overdraft of Subsidiary Co.
Outstanding liabilities of holding Co. plus outstanding liabilities of Subsidiary Co.
Proposed dividend belonging to Minority shareholders.(if not already added to
minority interest)
Minority Interest.
6. Fixed Assets:
Net Goodwill, if any (after the set-off total capital reserve against total
goodwill).
Fixed assets of holding Co. plus the fixed assets of Subsidiary Co.
 15
7. Investments:
Investments of holding Co. (other than investments on the equity shares,
preference shares and debentures of the Subsidiary Co.) plus the investments of
Subsidiary Co.
8. Current Assets, Loans and Advances:
Closing Stock of holding Co. plus the Closing stock of subsidiary Co. less
unrealized profit in stock.
Stock-in transit
Sundry debtors of holding Co. plus Sundry debtors of Subsidiary Co less inter-
company debtor’s and creditors set-off.
B/R of holding Co. plus B/R of Subsidiary Co. less bills drawn by one
company on another set-off.
Accrued incomes of holding Co. plus accrued incomes of Subsidiary Co.
Prepaid expenses of holding Co. plus prepaid expenses of subsidiary co.
Cash at Bank of holding Co. plus Cash at bank of Subsidiary Co.
Cash in hand of holding Co. plus cash in hand of Subsidiary Co.
Loans (Dr.) of holding Co. plus Loans (Dr.) of Subsidiary Co. less inter
company loans set-off.
9. Miscellaneous expenditure and losses:
P & L a/c (Dr.) balance, if any, after the set-off the P & L a/c debit Balance
against P & L a/c Credit Balance or General Reserve.
The above mentionable assets and liabilities are summarized in the following
specimen Performa of Consolidated Balance Sheet.
2.4 SPECIMEN FOR CONSOLIDATED BALANCE SHEET OF HOLDING CO. AND ITS
SUBSIDIARY AS ON…..
Liabilities Rs. Rs. Assets Rs. Rs.
Share Capital: Fixed Assets
Share capital of Holding Co. xxx (i) Cost of Control /Goodwill xxx
Reserves and Surplus Add: Goodwill in B/S of Holding xxx
Co.
i) Capital Reserves of Holding Co. xxx Add: Goodwill in B/s of xxx
Subsidiary Co.
Add: Share in Pre-acquisition Reserves & Profits of xxx xxx
Subsidiary
Less: Goodwill as per Contra xxx Less: Capital Reserve as per xxx xxx
contra
xxx xxx (ii)All other fixed assets of xxx
Holding Co.
(ii) Revenue Reserves of Holding Co. xxx Add: All other fixed assets of xxx xxx
Subsidiary
Add: Share in Revenue Reserves of Subsidiary xxx xxx Investments: xxx
Investments of Holding Co.
except investment in subsidiary
iii) P & L a/c balance of Holding Co. xxx Add: Investment of subsidiary xxx xxx
Add: Share in Revenue Profits of Subsidiary Co. xxx Current Assets, Loans and xxx
 16
Liabilities Rs. Rs. Assets Rs. Rs.
Advances:
Current Assets, loans and
advances of Subsidiary Co.
xxx Less: Inter-company Debts xxx
Less: Share in unrealized Profits xxx xxx xxx
Secured Loans: Secured loans of Holding Co. xxx Less: Unrealized Profit in stock xxx xxx
Add: Secured loans of subsidiary Co. xxx xxx Miscellaneous Expenditure:
P & L a/c of Holding Co. xxx
Unsecured Loans: Unsecured Loans of Holding xxx
Co.
Add: Unsecured loans of Subsidiary Co. xxx xxx
Current liabilities and provision: xxx
Current liabilities & provisions of Holding Co.
Add: Current liabilities & provision of subsidiary Co. xxx
xxx
Less: Inter-Company Liabilities xxx xxx
(i) Minority Interest xxx
xxx xxx
Consolidated Balance Sheet provides a true and fair view of the financial
position of a group of companies. Similarly, consolidated profit & Loss account is
prepared to show the aggregate profit of the group as a whole as well as profit or
loss of each individual company in the group.
2.5 STEPS INVOLVED IN THE PREPARATION OF CONSOLIDATED PROFIT & LOSS
ACCOUNT
The following are the steps involved in the preparation of consolidated profit &
Loss account.
1. Profit & Loss account is opened in columnar form. On both sides of the
account, one column is provided for each company, open column for adjustments
and a total column.
All the usual items are shown on both sides of the account, showing the
expenses and revenues for each company in its column and the total amount of
each item in the total column.
All intercompany transactions should be eliminated in the total column details
being given in the column for adjustments.
2. Purchases and sales within the group are eliminated from both sides of the
account.
3. Interest on debentures and dividends received should also be eliminated
from both sides. Any tax on interest or dividend should not be adjusted because it
has to be paid to the government.
4. The profit or Loss of each company and the aggregate profit should be
ascertained in the usual manner, by balancing the accounts.
5. On the basis of the profits disclosed by the subsidiary company’s columns,
the following are computed and debited.
a) Minority interest is to be calculated in the subsidiary company’s profits and
 17
is to be debited to the subsidiary and also shown in the total column.
b) Holding company’s share of pre acquisition profits is computed and debited
to the subsidiary and credited to capital reserve or goodwill.
c) Any provision for unrealized profits in stock should also be calculated and
debited to the holding company or subsidiary (whenever charged the profit) and
created to stock reserve account
6. All the items debited in the above step in the columns of respective
companies are also to be shown in the total column, without recording any thing in
the adjustment column.
7. The Balance in the total column is to be shown as profit & Loss account
balance in the consolidated Balance sheet
2.6 EXAMPLES
1. The Balance Sheets of C Ltd. and D Ltd. as at 31st December, 2021 are as follows:
Liabilities C Ltd D Ltd Assets C.Ltd D.Ltd
Share capital (in shares of Rs.10each) 20,000 1,00,000 Sundry assets 1,32,500 1,38,200
General reserve 18,000 20,000 Goodwill ----- 20,000
Profit & Loss A/c 24,500 23,000 Share in
Creditors 30,000 15,200 D Ltd. at cost 1,40,000 ----
2,72,500 1,58,200 2,72,500 1,58,200
In the case of ‘D’ Ltd. profit for the year ended 31st
December 2021 is Rs.12,
000 and transfer to reserve is Rs. 5,000. The holding of C Ltd. in D Ltd. is 90%
acquired on 30th June 2021. Draft a consolidated Balance Sheet of ‘C’ Ltd. and its
subsidiary.
Solution.
Consolidated Balance Sheet of ‘C’ Ltd. and its subsidiary ‘D’ Ltd. as on 31st
December 2021
Liabilities Rs. Rs. Assets Rs. Rs.
Share capital: Goodwill 36,700
20,000 shares of Rs.10 each 2,00,000 Sundry assets
General reserve 18,000 C’ Ltd. 1,32,500
Profit & Loss A/c 24,500 D Ltd. 1,38,200 2,70,700
Add: ‘C’ Ltd’ s share of revenue profit 5,400 29,900
Creditors:
C’ Ltd. 30,000
D Ltd. 15,200 45,200
Minority interest 14,300
3,07,400 3,07,400
Working notes
1. Holding-minority ratio
C. Ltd acquired 90% of shares in D Ltd.
Minority holding in D Ltd = 10%
2. Revenue profits
Profit for the current year, given
 18

6
Profit made after June 30th or revenue profit = 12, 000 × = 6,000
12
9
Holding company‘s share = 6,000 × = 5,400
10
1
Minority’s share = 6,000 × = 600
10

3. Capital profits
General reserve of D Ltd. 20,000
Profit & Loss Account of D Ltd. 23,000
43,000
Less: Revenue profit 6,000
Capital profit 37,000
9
Holding company’s share = 37,000 × = 33,300
10
1
Minority’s share = 37,000 × = 3,700
10
Note: Since it is clearly stated that the profit of D Ltd. for the year 2021 is Rs.2, 000, it is assumed that the
transfer to reserve of Rs.5, 000 is a part of the Rs.12, 000.
4. Minority interest
10
Face value of minority shares 1, 00,000 × = 10,000
100
Add: Minority share of capital profit = 3,700
Add: Minority share of revenue profit = 600
Minority interest = 14,300
5. Cost of control or goodwill Rs.
Amount paid by C Ltd for shares purchased in D 1,40,000
Ltd
Less: Face value of shares purchased 90
1,00,000 × = 90,000
100
Less: Holding company’s share of capital profits 33,000 1,23,300
Goodwill 16,700
Add: Goodwill in D Ltd’s Balance Sheet 20,000
Goodwill to be shown in consolidated Balance 36,700
Sheet
2. On 31st March, 2021 the balance sheets of H Ltd and its subsidiary S Ltd should as follows:
Liabilities H Ltd. S. Ltd Assets H. Ltd S. Ltd.
General reserve 1,50,000 70,000 75% shares in
Profit & Loss A/c 90,000 55,000 S Ltd. (at cost) 2,80,000 -----
Creditors 1,20,000 80,000 Stock 1,05,000 1,77,000
Other current assets 2,25,000 1,28,000
11,60,000 4,50,000 11,60,000 4,05,000
Draw a consolidated Balance Sheet as at 31st March, 2021 after taking into
consideration the following information:
H Ltd. acquired the shares on 31st July, 2020.
S Ltd. earned profit of Rs.45,000 for the year ended 31st March, 2021.
 19
In January 2021 half of these goods were having as unsold in the go down of H Ltd.
Give your working notes.
Solution
Consolidated Balance sheet of H Ltd. and its subsidiary S Ltd. as on 31.3.2021
Liabilities Rs. Rs. Assets Rs. Rs.
Share capital 8,00,000 Goodwill 58,750
General reserve 1,50,000 Fixed assets:
Profit & Loss A/c 90,000 H. Ltd. 5,50,000
Add: H Ltd.’ share of revenue profits 22,500 S. Ltd. 1,00,000 6,50,000
1,12,500 Stock:
Less: Provision for unrealized profit 2,500 1,10,000 H. Ltd. 1,05,000
Creditors S. Ltd. 1,77,000
H. Ltd. 1,20,000 2,82,000
S. Ltd. 80,000 2,00,000 Less: provision for 2,500 2,79,500
unrealized profit
Minority interest 81,250 Other current assets:
H. Ltd. 2,25,000
S. Ltd 1,28,000 3,53,000
13,41,250 13,41,250
Working notes:
1. Holding-Minority Radio
H Ltd acquired 75% shares in S Ltd
Monitory holding in S Ltd. 25% Ratio = 75:25 or 3:1
2. Revenue profits of S Ltd., given .
Profit carried by S Ltd. after 31 July is
st
45,000

Revenue profit 8
= 45,000 × = 30,000
12

Holding company’s share 3

= 30,000 × = 22,500
4

Minority company’s share 1

= 30,000 × = 7,500
4
3. Capital profits
General reserve of S Ltd. on 31.3.06 70,000
Profit & Loss account of S Ltd on 31.3.06 55,000
1, 25,000
Less: Revenue profit 30,000
Capital profit 95,000
3
Holding company’s share = 95,000 × = 71,250
4
1
Minority share = 95,000 × = 23,750
4
4. Minority interest
Face value of minority shares 25
2,00,000 × = 50,000
100
 20
Add: Minority share of capital profits 37,500
Add: Minority share of revenue profits 7,500
Minority interest 81,250
5. Cost of control or goodwill
Amount paid for shares purchased by H Ltd. in S Ltd. 2,80,000

Less: Face value of shares purchased 3

2,00,000 × 1,50,000
4
Holding company’s shares of capital profits 71,250 2,21,250
Goodwill 58,750
6. Provision for unrealized profit in stock
Profit in stock of H Ltd, acquired from S Ltd.

(20,000-15,000) × 1 = 2,500
2
Provision to be created =2,500.
3. X Ltd. purchased 750 shares in Y Ltd. on 1.7.2021. The following were their Balance
Sheet on 31.12.2021
Liabilities X Ltd. Y Ltd. Assets. X Ltd. Y Ltd.
Rs. Rs. Rs. Rs.
Share capital Buildings 2,05,000 1,25,000
Shares of Rs.100 each 3,00,000 1,00,000 Stock 1,00,000 80,000
Gen-reserve on 1.1.21 1,00,000 70,000 Debtors 1,00,000 40,000
Profit & Loss A/c 1,00,000 60,000 Investment in Y Ltd. 1,00,000 ----------
Creditors 80,000 40,000 Bills receivable 40,000 45,000
Bills payable 50,000 20,000 Cash at bank 60,000 20,000
Current Account: Current Account:
X Ltd. ---- 20,000 --Y Ltd. 25,000 --------
6,30,000 3,10,000 6,30,000 3,10,000
Additional information
Bills receivable of X Ltd. include Rs.10, 000 accepted by Y Ltd.
Debtors of X Ltd. include Rs.20, 000 payable by Y Ltd.
A cheque of Rs.5,000 sent by Y Ltd. on 28th December was not yet received by
X Ltd. on 31st December 2021.
Profit and Loss A/c of Y Ltd. showed a Balance of Rs. 20,000 on. 1.1.21.
You are required to prepare a consolidated Balance Sheet of X Ltd. and Y Ltd.
as on 31.12.2021.
Solution
Consolidated Balance Sheet of X Ltd. and its subsidiary Y Ltd. As on
31.12.2021
Liabilities Rs. Rs. Assets. Rs. Rs.
Share capital: Buildings:
3,000 shares of Rs.100 each 3,00,000 X Ltd. 2,05,000
General reserve 1,00,000 Y Ltd. 1,25,000 3,30,000
Profit & Loss A/c 1,00,000 Stock
 21
Add: Holding Co.’s share of revenue profit 15,000 1,15,000 X Ltd. 1,00,000
Capital reserve 57,500 Y Ltd. 80,000 1,80,000
Creditors: X Ltd. 80,000 Debtors:
Y Ltd. 40,000 X Ltd. 1,00,000
1,20,000 Y Ltd. 40,000
Less: Mut. obligation 20,000 1,40,000
1,00,000 Less:Mut.obligatio 20,000 1,20,000
Bills payable: X Ltd. 50,000 Bills receivable:
Y Ltd. 20,000 X Ltd. 40,000
70,000 Y Ltd. 45,000
Less: Mutual obligation Current A/c X Ltd. 10,000 60,000 85,000
Less: Mutual obligation 20,000 Less:Mut.obligatio 10,000 75,000
Minority interest 20,000 ----- Cash at bank:
57,500 X Ltd. 60,000
Y Ltd 20,000 80,000
Current account
Y Ltd 25,000
Less: Cash-in-transit 5,000
20,000
Less: Mut.obligatio 20,000 -----
Cash in transit 5,000
7,90,000 7,90,000
Working notes:
1. Holding-minority ratio
1,00,000
Total share in subsidiary = 1,000
100
Less: shares purchased by X Ltd. in subsidiary = 750
Minority shares = 250
x Ratio = 750:250 = 3:1
2. Revenue profits
Profits & Loss account balance of Y Ltd. on 31.12.04 60,000
Less: Profit & Loss account balance of Y Ltd. on 1.1.04 20,000
Profit for the current year 40,000
6
Profit made by Y Ltd. after 1.7.04 or revenue profit = 40,000 × = 20,000
12
3
Holding company’s share = 20,000 × = 15,000
4
1
Minority’s share = 20,000 × = 5,000
4
3. Capital profits
General reserve of Y Ltd. on 1.1.04 = 70,000
Add: profit & Loss account of Y Ltd on 1.1.04 = 20,000
6
Current year’s capital profit. 40,000 × = 20,000
12
Capital profits 1,10,000
3
Holding company’s share = 1,10,000 × = 82,500
4
1
Minority’s share = 1,10,000 × = 27,500
4
4. Minority interest
Face value of minority’s share = 250 × 100 = 25,000
Add; Minority’s share of capital profit = = 27,500
Add: minority’s share of revenue profit = 5,000 57,500
5. Cost of control or goodwill
 22
Amount paid by X Ltd. for shares purchased in Y Ltd 1,00,000
Less: Face value of shares purchased 750 × 100 = 75,000
Holding company’s share of capital profits 82,500 1,57,500
Capital reserve to be shown in Balance sheet 57,500
4.The following are the Balance sheets of A Ltd. and B Ltd as at 31st December 2021.
Liabilities A Ltd. B Ltd. Assets. A Ltd. B. Ltd
Equity share capital, Rs.10 each 1,00,000 50,000 Sundry assets 66,250 69,100
Revenue reserves 9,000 10,000 Shares in B Ltd. at cost 70,000
P & L A/c on 1.1.21 8,500 8,000 Goodwill 10,000
Profit for the year less transfer to reserves 3,750 3,500
Creditors 15,000 7,600
1,36,250 79,100 1,36,250 79,100
Profit for the year of B Ltd. was Rs.6, 000 out of which Rs. 2,500 was
transferred to reserves. The holding of A Ltd. in B Ltd. is 90% acquired a year ago
on 31.12.2020.
Write off from sundry assets of A Ltd. Rs, 9,000. Also write off Rs. 3,100 from
the sundry assets of B Ltd. out of the current year’s profits. Draft a consolidated
Balance sheet of A Ltd. and its subsidiary.
Solution
Consolidated balance sheet of A Ltd. and its subsidiary B Ltd. as on 31.12.21.
Liabilities Rs. Rs. Assets. Rs. Rs.
Share capital: 10,000 shares of Rs.10,each 1,00,000 Goodwill 21,050
Revenue reserves 9,000 Sundry assets:
P & L A/c on 1.1.21 8,500 A Ltd. 66,250
Add: Profit for 2021 3,750 Less: Written off 9,000
A Ltd’ s share of revenue profits 2,610 57,250
14,860 B Ltd 69,100
Less: Sundry assets Less:
Written off Write-off 3,100 66,000 1,23,250
Creditors 9,000 5,860
A Ltd. 15,000
B Ltd. 7,600 22,600
Minority interest 6,840
1,44,300 1,44,300
Working notes
1. Holding-minority ratio
A Ltd’ s holding in B Ltd. given =90%
Minority holding in B Ltd = 10%
Holding minority ratio= 90:10 or 9:1
2. Revenue profits
Profit for the year, before transfer to reserve 6,000
Less: sundry assets to be written of 3,100
Revenue profit 2,900
9
Holding company’s share = 2,900 × = 2,610
10
1
Minority share = 2,900 × = 290
10
 23
3. Capital profits
Profit & Loss A/c of B Ltd. On 1.1.21 8,000
Add: Revenue reserves before current years transfer (10,000-2,500) 7,500
15,500
9
Holding company’s share = 15,500 x = 13,950
10
1
Minority share = 15,500 x = 1,550
10
4. Minority interest
10
Face value of minority shares = 50,000 × = 5,000
100
Add: Minority share of capital profits 1,550
Add: Minority share of revenue profits 290
Minority interest 6,840
5. Cost of control or goodwill
Amount paid by A Ltd. for shares purchased in B Ltd. 70,000
90
Less: Face value of shares purchased = 50,000 × = 45,000
100
Holding company’s share of capital profit = 13,950 58,950
Goodwill 11,050
Add: Goodwill in B Ltd’s Balance Sheet 10,000
Goodwill to be shown in consolidated Balance Sheet 21,050
st
5. A Ltd. acquired 1,600 ordinary shares of Rs.100 each in B Ltd. on 31 December
2021. Their summarized Balance Sheets as on that date were as under:
Liabilities A Ltd B. Ltd. Assets A Ltd. B. Ltd.
Capital: Land & Buildings 1,50,000 1,80,000
5,000 ordinary shares of 5,00,000 Plant & Machinery 2,40,000 1,09,400
Rs.100 each
2,000 ordinary shares of 2,00,000 Investment in b Ltd. at cost 3,40,000 ---
Rs.100 each
Capital reserve ----- 1,20,000 Stock 1,20,000 36,000
General reserve 2,40,000 Debtors 44,000 40,000
Profit & loss A/c 57,200 36,000 Bills receivable (including Rs,3,000 15,800 ---
from ‘B’ Ltd)
Bank overdraft 80,000 ---- Cash and bank 14,500 8,000
Bills payable (Including ----
Rs.4, 000 to A Ltd).
Creditors ---- 8,400
47,100 9,000
9,24,300 3,73,400 9,24,300 3,73,400
You are supplied the following information:
‘B’ Ltd. had made a bonus issue on 31st December 2021 of one ordinary share
for every two shares held by its shareholders. Effect has yet to be given in the
accounts for the issue
The directors are advised that Land & Buildings of B Ltd. are undervalued by
Rs.20,000 and Plant & machinery of B Ltd. over valued by Rs.10,000. These assets
have to be adjusted accordingly.
 24
Sundry creditors of ‘A’ Ltd. include Rs.12,000 due to ‘B’ Ltd.
You are required to prepare the consolidated Balance Sheet as on 31st
December 2021.
Solution
Liabilities Rs. Rs. Assets Rs. Rs.
Share capital Goodwill Land & Buildings 47,200
(5,000 ordinary shares of 5,00,000 A Ltd 1,50,000
Rs.100 each)
General reserve 2,40,000 B Ltd. 1,80,000
Profit & Loss A/c 57,200 Add: Under valuation 20,000 3,50,000
Plant & Machinery
Bank overdraft 80,000 A Ltd 2,40,000
Bills payable 8,400 B Ltd. 1,09,400
Less: Mutual obligation Creditors: 3,000 5,400 3,49,400
A Ltd 47,100 Less: Over valuation Stocks: 10,000 3,39,400
B Ltd 9,000 A Ltd. 1,20,000
56,100 B Ltd. 36,000 1,56,000
Less: Mutual obligation 12,000 44,100 Debtors:
Minority interest 73,200 A Ltd. 44,000
B Ltd. 40,000
84,000
Less: Mutual Obligation 12,000 72,000
B/R 15,800
Less: Mutual Obligation 3,000 12,800
Cash and bank: A Ltd. 14,500
B Ltd. 8,000 22,500
9,99,900 9,99,900
Working notes
1. Holding-minority ratio
Total shares in B Ltd. 2,000
Less: Shares acquired by A Ltd. 1,600
400
Minority shares
Ratio = 1,600: 400 or 4:1
2. Bonus issue not yet recorded, at one share for 2 shares held
1
= 2,00,000 × = 1,00,000
2
4
= 1,00,000 × = 80,000
5
1
Minority’s share = 1,00,000 × = 20,000
5
3. Revenue profits =Nil
Since shares are purchased on the date of the Balance Sheet.
4. Capital profits
Capital reserve of B Ltd. 1,20,000
Less: Bonus issue made 1,00,000
20,000
 25
Add: Profit & Loss A/c 36,000
Add: Under valuation in Land & Buildings 20,000
76,000
Less: over valuation of plant & Machinery 10,000
Capital profits 66,000
4
Holding company’s share = 66,000 x = 52,800
5
1
Minority’s share = 66,000 x = 13,200
5
5. Minority interest
Face value of shares held by minority shareholders(400x100) = 40,000
Add: Bonus shares issued to minority = 20,000
Minority’s share of capital profits = 13,200
Minority interest 73,200
6. Cost of control or goodwill
Amount paid by A Ltd. for shares purchased in B Ltd. 3,40,000
Less: Face value of shares purchased 1,600 x100 1,60,000
Holding company’s share of capital profits 52,800
Bonus shares 80,000 2,92,800
Goodwill 47,200
6. The following Balance sheet are presented to you Balance sheet as at 31.12.21
Liabilities A Ltd. B Ltd. Assets. A Ltd. B Ltd.
Share capital: shares of Rs.50 each 2,50,000 1,00,000 Fixed assets 1,75,000 75,000
General reserve 50,000 --- Stock-in-trade 45,000 20,000
Profit & Loss a/c 40,000 --- Debtors 30,000 15,000
6% debentures ---- 50,000 6% debentures in B Ltd. acquired at 30,000 ---
par shares in B Ltd.
Trade creditors 37,500 22,500 1,500 at Rs.40 60,000 ----
Cash at bank 37,500 12,500
Profit & Loss A/c --- 50,000
3,77,500 1,72,500 3,77,500 1,72,500
A Ltd acquired the shares on 1.4.21. The Profit & Loss account of B Ltd.
showed a debit balance of Rs.75,000 on 1.1.21. trade creditors of B Ltd. include
Rs.10,000 for goods supplied by A Ltd. on which A Ltd., made a profit of Rs.1,000.
Half of the goods were still in stock on 31.12.21. Prepare the consolidated Balance
Sheet.
Solution
Consolidated Balance sheet of A Ltd. and its subsidiary B Ltd. As on 31.12.21
Liabilities Rs. Rs. Assets Rs. Rs.
Share capital: 5,000 shares of Rs.50 each 2,50,000 Goodwill 36,563
fully paid
General reserve 50,000 Fixed assets:
Profit & Loss A/c 40,000 A Ltd. 1,75,000
Add: A Ltd’ s share of revenue profits 14,063 B Ltd 75,000 2,50,000
 26
54,063 Stock-in-trade:
Less: Provision for unrealized profit 6% 500 53,563 A Ltd 45,000
Debentures 50,000 B Ltd. 20,000
Less: Mutual Obli. 30,000 20,000 65,000
Trade creditors: Less: Provision for 500 64,500
unrealized profit
A Ltd. 37,500 Debtors:
B Ltd. 22,500 A Ltd 30,000
60,000 B Ltd. 15,000
Less: Mutual oblig 10,000 50,000 45,000
Minority interest. 12,000 Less: Mutual oblig. 10,000 35,000
Cash at bank:
A Ltd 37,500
B Ltd. 12,500 50,000
4,36,063 4,36,063
Working notes
1. Holding minority ratio
1,00,000
Total shares in subsidiary = 20,000
50
Less: shares purchased by the holding company 1,500
Minority shares 500
x Ratio = 1,500: 500 or 3:1
2. Revenue profits
Profit & Loss A/c debit balance of B Ltd. on 1.1.09 75,000
Less: Profit & Loss A/c debit balance of B Ltd. on 31.12.09 50,000
Profit for current year 25,000
9
Profit made by B Ltd. after 1.4.09 or revenue profit 25,000 x = 18,750
12
3
Holding company’s share 18.750 x = 14,063
4
1
Minority’s share 18,750 x = 4,687
4
3. Capital profit / Loss
Profit & Loss Account debit balance of B Ltd on 1.1.09 75,000
3
Less: Capital profit of current year = 25,000 x = 6,250
12
68,750
3
Holding company’s share of capital loss = 68,750 x = 51,563
4
1
Minority’s share of capital loss = 68,750 x = 17,187
4
4. Minority interest
Face value of minority’s shares = 500 × 50 25,000
Add: Minority share of revenue profits 4,687
29,687
Less: Minority share of capital loss 17,187
Minority interest 12,500
5. Cost of control or goodwill
Amount paid by A Ltd. for shares purchased in B Ltd. 60,000
Add: Holding company’s share of capital loss 51,563
1,11,563
Less: Face value of shares purchased 1,500 x 50 = 75,000
Goodwill 36,563
6.Provision for unrealized profit in stock:
 27
Profit charged by A Ltd. included in the stock.

1
Of B Ltd. = 1,000 x = 500
2
Provision to be made = 500
7. The Balance Sheets of X Ltd. and its subsidiary Y Ltd. as on 31st March, 2021 are
given below:
Liabilities X. Ltd. Y. Ltd. Assets X Ltd. Y Ltd.
Equity shares of Rs.100 each 6,00,000 2,00,000 Buildings 4,12,000 1,20,000
General reserve 3,80,000 8,000 Machinery 1,00,000 96,000
Profit and Loss A/c 3,20,000 1,44,000 Furniture 20,000 12,400
Sundry creditors 60,000 64,400 Stock 1,36,000 80,000
Investment 4,48,000 ------
Debtors 1,12,000 63,200
Cash 1,32,000 44,000
13,60,000 4,16,400 13,60,000 4,16,400

You are required to prepare consolidated Balance sheet of X Ltd. and its
subsidiary Y Ltd. as on 31st March, 2021 together with the working notes after
giving effect to the following relevant information.
X Ltd. acquired 80% equity shares in Y Ltd. on 1st July, 2020 at a cost price of
Rs.4,48,000.
In the profit & Loss account of X Ltd.- interim dividend declared by Y Ltd. on
1st July, 2021 at the rate of 10% p.a. is included.
Creditors of X Ltd. include an amount of Rs.24,000 in respect of purchase
from Y Ltd. and stock of X Ltd. also includes stock at cost price of Rs.12,000
purchased from Y Ltd. which sells the goods by adding 25% profit on the cost
price.
On 1st April, 2021 in the books of Y Ltd., Profit & Loss account credit balance
was Rs. 1.12,000 from which the company declared 10% interim dividend. During
the year 2020-21 profit of the company was constant.
Solution
Consolidated Balance Sheet of X Ltd, and its subsidiary Y Ltd. as on
31 March 2021
st

Liabilities Rs. Rs. Assets Rs. Rs.

Share capital Goodwill Buildings 1,81,600
6,000 equity shares of Rs.100 each 6,00,000 X Ltd. 4,12,000
General reserve 3,80,000 Y Ltd. 1,20,000 5,32,000
Profit & Loss A/c 3,20,000 Machinery:
Add:X Ltd.’ share of revenue profit 31,200 X Ltd. 1,00,000
3,51,200 Y Ltd 96,000 1,96,000
Less Holding Co.’s share of dividend 16,000 Furniture:
from capital profits
3,35,200 X Ltd 20,000
 28
Less: Provision for unrealized profit 2,400 3,32,800 Y Ltd. 12,400 32,400
Sundry creditors: Stock
X Ltd. 60,000 X Ltd 1,36,000
Y Ltd. 64,400 Y Ltd. 80,800
1,24,400 2,16,800
Less:Mutualobligation 24,000 1,00,400 Less: Provision for 2,400 2,14,400
unrealized profit
Minority interest 70,000
Debtors:
X Ltd 1,12,000
Y Ltd. 63,200
1,75,200
Less: Mutual obligation 24,000 1,51,200
Cash:
X Ltd 1,32,000
Y Ltd. 44,000 1,76,000
14,83,600 14,,83,600
Working notes:
1. Holding-minority ratio
X Ltd. purchased 80% of shares in Y Ltd.
Minority stake in Y Ltd. =20%
Holding minority ratio = 80: 20 or 4:1
2. Revenue profits:
Profit & Loss Account balance of Y Ltd. on 1.4.21 = 1,12,000
10
Less: 10% interim dividend declared 2,00,000 x = 20,000
100
Profit & Loss Account balance after dividend. 92,000
Profit & Loss Account balance on 31.3.22 1,44,000
Profit for current year. 52,000
9
Profit after 1st April 2021 or revenue Profit = 52,000 x = 39,000
12
4
Holding company’s share = 39,000 x = 31,200
5
1
Minority share = 39,000 x = 7,800
5

3. Capital profit
Profit & Loss A/c balance of Y Ltd. on 1.4.21 (after dividend) 92,000
Add: General reserve 8,000
3
Current years capital profit = 52,000 x = 13,000
12
Capital profits 1,13,000
4
Holding company’s share = 1,13,000 x = 90,400
5
1
Minority share = 1,13,000 x = 22,600
5
4. Interim dividend out of acquisition profits = 20,000
Holding company’s share = 20,000 x 4 = 16,000
 29
5
1
Minority share = 20,000 x = 4,000
5
5. Minority interest
20
Face value of minority shares = 2,00,000 x = 40,000
100
Add: Minority share of capital profits 22,600
Minority share of revenue profits 7,800
Minority interest 70,400
6. Cost of control or goodwill
Amount paid by X Ltd. for shares purchased in Y Ltd. 4,48,000
80
Less: Face value of shares purchased 2,00,000 x 1,60,000
100
Holding company’s share of capital profits 90,400
Holding company’s share of interim dividend 16,000 2,66,400
Goodwill 1,81,600
7. Provision for unrealized profit in stock
Stock with X Ltd., purchased from Y Ltd. 12,000
Profit included in the stock at 25% profit on cost or 20
12,000 x = 2,400
20% on sale value 100
Provision to be made = 2,400
8. The following are the Balance Sheets of H Ltd. and S Ltd. as on 31st March 2021.
Liabilities H Ltd. S Ltd. Assets H Ltd. S Ltd.
Share capital: Fixed assets 2,50,000 2,00,000
Shares of Rs.100 each 5,00,000 4,00,000
General reserve 1,00,000 1,00,000 Investment in S Ltd. 2,50,000 ---------
Profit & Loss A/c 2,00,000 1,50,000 Current assets 4,00,000 5,50,000
Current liabilities 1,00,000 1,00,000
9,00,000 7,50,000 9,00,000 7,50,000
The following further information is furnished.
1. H Ltd. acquired 2,000 shares in S Ltd. on 1.4.88 when the later’ s general
reserve and profit & Loss account were Rs.2,50,000 and Rs.1,00,000 respectively.
2. On 30.6.08, S Ltd. declared 20% dividend out of pre-acquisition profits and H
Ltd. credited the amount received to its Profit & Loss Account. 3. On 1.10.08 S Ltd.
issued bonus shares in the ratio of 3 shares for 5 shares held out of the general
reserve. H Ltd. made no entry in its books for the bonus shares received. 4. S Ltd.
owed H Ltd. Rs.50,000 on 31.3.21 on account of goods supplied on credit. However
all of those goods were already disposed off buy S Ltd. Prepare a consolidated
Balance Sheet as at 31st March 2021.
Solution
Consolidated Balance Sheet as on 31.03.2021
Liabilities Rs. Rs. Assets Rs. Rs.
Share capital: Fixed assets:
5,00 shares of Rs.100 each 5,00,000 H Ltd. 2,50,000
General reserve 1,00,000 S Ltd. 2,00,000 4,50,000
Capital reserve 2,30,000 Current assets:
 30
Profit & Loss A/c 2,00,000 H Ltd. 4,00,000
Add: H Ltd’ s share of revenue profits 80,000 S Ltd. 5,50,000
2,80,000 9,50,000
Less: H Ltd’ s share of dividend 40,000 2,40,000 Less: Mutual obligation 50,000 9,00,000
Current liabilities:
H Ltd 1,00,000
S Ltd. 1,00,000
2,00,000
Less: Mutual obligation 50,000 1,50,000
Minority interest 1,30,000
13,50,000 13,50,000

Working notes:
1. Pre bonus and post bonus capitals of S Ltd.
Capital after bonus= 4,00,000
3 3
Bonus on pre bonus capital is or on post bonus capital
5 5
Bonus = 4,00,000 x3 = 1,50,000
Pre bonus capital = 4,00,000 – 1,50,000 = 2,50,000
2. Holding-minority ratio
Total pre bonus shares in S Ltd. 2,50,000
= 2,500
100
Less: Shares purchased by H Ltd. 2,000
Minority shares 500
x Ratio = 2,000: 500=4:1
3. Capital profits
Rs. Rs.
General reserve on 1.4.88 2,50,000
Less: Bonus issue 1,50,000 1,00,000
Less: Dividend paid on 30.6.88 ( 2,50,000 × 20 /100) 50,000
Capital profit 1,50,000
4
Holding company’s share = 1,50,000 x = 1,20,000
5
1
Minority share = 1,50,000 x = 30,000
5
4. Revenue profits
Closing profit & Loss A/c 1,50,000
Less: Opening P & L A/c after dividend (1,00,000-50,000) 50,000
Profit made by subsidiary company in current year of revenue profit 1,00,000
4
Holding company’s share = 1,00,000 x = 80,000
5
1
Minority share = 1,00,000 x = 20,000
5
5. Minority interest
Face value of re bonus minority shares {2,50,000 × 1 } 50,000
 31
5
1
Add: Minority share of bonus {1,50,000 × } 30,000
5
Minority share of capital profits 30,000
Minority share of revenue profits 20,000
1,30,000
6. Cost of Current or goodwill
Amount paid for shares purchased by holding company 2,50,000
Less: Face value of shares purchased 2,000 x 100 = 2,00,000
Holding company’s share of capital profits = 1,20,000
4
Holding company’s share of bonus issue 1,50,000 x = 1,20,000
5
Holding company’s share of dividend from 4
50,000 x = 40,000 4,80,000
Pre-acquisition profits 5
Capital reserve 2,30,000
Note: Since all the goods purchased by S Ltd. from H Ltd. are disposed off, no provision for
unrealized profit is needed.
SUMMARY
With help of various steps and workings, calculate the needed information it
should be shown in the consolidated balance sheet. This balance sheet gives the
information both the holding company and subsidiary company (ie minority
interest)
KEYWORDS
Consolidated Balance Sheet: It shows holding company assets and liabilities
with subsidiary company.
Pre and post acquisition profit: Before and after the date of acquisition the
company (subsidiary) earned any amount are called Pre and Post acquisition
Profits.
SELF ASSESSMENT TEST
1. Briefly explain the methods of consolidating the Balance Sheets of a
Holding company and its subsidiaries
2. “Consolidated Final Accounts are useful but not statutory”. Explain.
3. Describe the method of Preparing “consolidated profit and Loss account’.
4. What is mean by ‘Post acquisition Profits’ in the context of Holding
company Accounts?
5. What do you understand by ‘Capital Profits’ or pre acquisition profits’?
6. Distinguish between ‘Capital Profits’ or Pre acquisition profits’?
7. Write a short note on ‘Minority Interest’.
8. H Ltd, acquired 3,000 equity shares in S Ltd. on 1st April 2021. On 31st
December 2021, the Balance Sheet of S Ltd. was as follows:
Liabilities Rs. Rs. Assets Rs. Rs.
 32
Share capital 4000 equity shares of Rs.100 each 4,00,000 Sundry assets 6,40,000
General reserve on 1.1.21 80,000
profit & Loss A/c
Balance on 1.1.21 20,000
Profit for 2021 80,000 1,00,000
Sundry creditors 60,000
6,40,000 6,40,000
Ascertain capital profits and revenue profits.
9. Calculate minority Interest from the Balance Sheet of Nirmal Ltd:
Balance Sheet of Nirmal Ltd., as on 31-12-2021
Liabilities Rs. Assets Rs.
Share capital 7,00,000 shares of Rs.2 each 14,00,000 Sundry Assets 1,00,000
General Reserve as on 1-1-21 6,00,000 Plant and Machinery 7,00,000
Creditors 3,00,000 Other assets 1,50,000
P & L A/c as on 31-12-21 2,00,000 Investment (80% of Shares) 6,50,000
25,00,000 25,00,000
Nimbus Ltd. acquired 80% of the shares at Rs.6,50,000.
10. Prepare a can consolidated Balance Sheet from the following Balance Sheets.
Liabilities H Ltd. S Ltd. Assets H Ltd. S Ltd.
Capital: Re.1 shares 1,400 1,000 Sundry assets 885 1,510
Creditors 350 190 Shares in ‘S’ Ltd 900 shares at cost 1,125 ------
P & L. A/c 260 320
2,010 1,510 2,010 1,510
the date of acquisition of shares by H Ltd. in S Ltd., the credit balance on
latter’s profit and Loss account was Rs.220. No dividends have been
declared since that date.
11. From the following summarized Balance Sheets of H Ltd. and S Ltd. as on
31.12.21 prepare a consolidated Balance Sheet of the two companies.
Liabilities H Ltd. S Ltd. Assets H Ltd. S Ltd.
Share capital: Fixed assets 18,00,000 15,75,000
Investments
Shares of Rs.10 each fully 25,00,000 12,50,000 (1,00,000 shares in S 11,00,000 --------
paid Ltd.)
Reserves 7,50,000 5,00,000 Current assets 5,65,000 3,75,000
Creditors 2,25,000 2,00,000
34,75,000 19,50,000 34,75,000 19,50,000
H Ltd. purchased the shares in S Ltd. on 1st January 2021, when reserves
in S Ltd stood at Rs.3,00,000 and in H Ltd., at Rs.4,50,000.
12. From the Balance sheets given below prepare a consolidated Balance Sheet
of A Ltd and its subsidiary company B Ltd.
Balance Sheets as at 30th June 2021
Liabilities A Ltd.Rs. B Ltd. Rs. Assets. A Ltd. B Ltd.
Share capital: Land & Buildings 6,40,000 2,00,000
Shares of Rs.10 each 25,00,000 6,00,000 Machinery 12,60,000 3,40,000
General reserve 3,60,000 1,20,000 Furniture 1,40,000 60,000
Profit & Loss A/c 2,40,000 1,80,000 40,000 shares in B Ltd. 5,00,000 --------
Trade creditors 3,50,000 1,00,000 Stock 4,10,000 2,50,000
 33
Debtors 3,80,000 1,00,000
Bank balance 1,20,000 50,000
34,50,000 10,00,000 34,50,000 10,00,000
At the date of acquisition by A Ltd. of its holding of 40,000 shares in B Ltd.
the latter company had undistributed profits and reserves amounting to
Rs.1,00,000, none of which had been distributed since then.
13. From the Balance Sheets and information given below, prepare a
consolidated Balance Sheet.
Liabilities H Ltd. S Ltd. Assets H Ltd. S Ltd.
Share capital: Sundry assets 80,000 12,000
(Rs.10 per share fully paid) 1,00,000 20,000 Stock-in trade 61,000 24,000
profit & loss A/c 40,000 12,000 Debtors 13,000 17,000
Reserves 10,000 6,000 Bills receivable Shares in S Ltd. 1,000 -----
Creditors 20,000 12,000 1,500 shares at cost 15,000 ------
Bills payable -------- 3,000
1,70,000 53,000 1,70,000 53,000
Additional information:
1. All profits of S Ltd. have been earned since the shares were acquired by
H Co. Ltd. but the reserve of Rs.6,000 was already there at the time. 2.
Bills accepted by S Co. Ltd. are all in favour of H Co. Ltd. which has
discounted Rs. 2,000 of them. 3.Sundry assets of S Co. Ltd., under valued
by Rs.2,000. 4. The stock-in-trade of h Co. includes Rs.5,000 bought from
S Co. Ltd. at a profit to the latter of 255 on cost.
14. ‘A’ Ltd. acquired 20,000 equity of Rs.10 each in ‘B’ Ltd as at 31st March
2020. The summarized Balance sheets of the two companies as at 31st
March 2021 were as follows.
Liabilities A Ltd. Rs. B Ltd. Rs.
Equity share capital (Shares ofRs.10 each) 8,00,000 2,50,000
General Reserve 3,00,000 50,000
P&L 1,00,000 2,00,000
Creditors 2,00,000 50,000
14,00,000 5,50,000
Assets
Fixed Assets 7,00,000 2,50,000
20,000 shares in B Ltd. at cost 3,00,000 ---------
Current assets 4,00,000 3,00,000
14,00,000 5,50,000
‘B’ Ltd. had a Credit Balance of Rs.50,000 in general reserve and
Rs.20,000 in P & L a/c when ‘A’ Ltd. acquired shares in ‘B’ Ltd. ‘B’ Ltd
issued bonus shares in the ratio of one for every five shares held out of the
Profits earned during 2020-21. This is not shown in the above balance
sheet of ‘B’ Ltd. Prepare a consolidated balance sheet of ‘A’ Ltd. and its
subsidiary as at 31st March 2021.
15. The Balance Sheets of X Ltd. and Y Ltd. as on 31.3.2021:
Liabilities X Ltd. Y Ltd. Assets X Ltd. Y Ltd.
Share capital Goodwill 1,00,000 50,000
(Rs.10 each 10,00,000 2,50,000 Buildings 2,00,000 1,00,000
General reserve on 1.4.21 200,000 80,000 Machinery 5,00,000 2,00,000
Sundry creditors 2,00,000 1,00,000 Stock 2,00,000 1,00,000
 34
Bills payable 50,000 30,000 Debtors 3,40,000 70,000
P & L A/c on 1.4.21 60,000 60,000 Investments 2,40,000 ----
Profit for the year 2020-21 1,50,000 50,000 Bills receivable 30,000 30,000
Cash at bank 50,000 20,000
16,60,000 5,70,000 16,60,000 5,70,000
1. X Ltd. acquired 15,000 shares of Y Ltd. for Rs. 1,90,000 on 1.4.20-21
Sundry debtors of X Ltd. include Rs.30,000 due from Y Ltd. 3. Bills
receivable of Y Ltd. include Rs.10,000 due from X Ltd. 4. The stock of Y
Ltd, includes goods purchased from X Ltd at Rs.10,000 which includes
profit charged by X Ltd. at 25% on cost. Prepare consolidated Balance
Sheet of X Ltd. and its subsidiary Y Ltd. as on 31.3.21.
16. Star Ltd. acquired the whole of the shares in Sun Ltd. as at 1st January 2021.
The Balance Sheet of both the companies on 31st December 2021 were a under.
Liabilities Star Ltd. Sun Ltd. Assets Star Ltd. Sun Ltd.
Share capital Buildings 6,00,000 2,00,000
20,000 shares of Rs.50 each 10,00,000 ------ Machinery 3,00,000 1,00,000
80,000 shares of Rs.5 each --------- 4,00,000 Stock 1,00,000 1,50,000
General reserve 3,00,000 40,000 Debtors 50,000 90,000
Profit & Loss A/c 2,00,000 1,60,000 Investments in shares of Sun Ltd. 5,00,000 ----------
Creditors 1,00,00 60,000 Cash at bank 50,000 1,20,000
16,00,000 6,60,000 16,00,000 6,60,000
The Balance of profit & Loss A/c of Sun Ltd. on 1.1.21 was Rs.80,000. Sun
Ltd paid a dividend of 10% in March 2021 for the year 2020 which was
credited by Star Ltd. to its Profit & Loss A/c. Stock of Star Ltd. includes
Rs.20,000 goods which were purchased from Sun Ltd. at a profit of 20 %
on sale value. Show consolidated Balance Sheet as on 31st December 2021.
17. Y Ltd purchased 75% of the shares in Z Ltd. on 1.1.21. The following
Balance Sheets of the companies on 31.12.21 are made available and you
are requested to prepare a consolidated Balance Sheet.
Liabilities Y Ltd. Z Ltd. Assets Y Ltd. Z Ltd.
Share capital (Rs.10 each) 2,00,000 3,00,000 Fixed assets 2,00,000 2,50,000
Reserves 3,00,000 --------- Current assets 1,80,000 1,70,000
Profit & Loss A/c 1,00,000 80,000 22,500 shares in Z Ltd. 3,00,000 ----------
Current liabilities 80,000 40,000
6,80,000 4,20,000 6,80,000 4,20,000
1. The profit & Loss A/c of Z Ltd. on 1.1.21 showed a balance of Rs.20,000.
2. It was agreed that Y Ltd. should charge Z Ltd. Rs.1,000 per month for
services rendered No entries were passed in their books for the same. 3.
Current assets of Z Ltd. include Rs.10,000 loan receivable from Y Ltd.
18. The Balance sheet of H Ltd. and S Ltd. on 31.12.21 was as under:
Liabilities H Ltd. S Ltd. Assets H Ltd. S Ltd.
Share capital (shares of Rs.100 each) 2,00,000 50,000 Land & Buildings 60,000 ----
General reserve
Profit & Loss A/c 30,000 10,000 Plant & Machinery 2,00,000 ------
Balance on 1.1.21 40,000 20,000 Stock 40,000 85,000
Profit for 2021 50,000 25,000 Sundry debtors 10,000 30,000
 35
Creditors 30,000 30,000 Cash at bank 10,000 10,000
Bank overdraft 20,000 ----- 300 shares in S 65,000 -----
Ltd. at cost
Bills payable 15,000 ----- Bills receivable ------ 10,000
3,85,000 1,35,000 3,85,000 1,35,000
Shares were acquired by H Ltd. on 1st July 2021. Bills receivable held by S
Ltd. are all accepted by H Ltd. included the debtors of S Ltd. is Rs.6,000
owed by H Ltd. in respect of goods supplied. Prepare the consolidated
Balance sheet.
REFERENCE BOOKS
1. Gupta RL, Radhasamy M, Corporate Accounting, sultan Chand & Sons,
New Delhi.
2. Pillai RSN, Bagavathi, Umas, Fundamentals of Advanced Accounting, S
Chand & Company Ltd., New Delhi.

 36
LESSON – 3
BANKING COMPANY FINAL ACCOUNTS-INTRODUCTION
OBJECTIVES
Students after completing this lesson they can able to know the following
objectives. They are; introduction, various forms of business, legal provisions and
management of Banking Companies.
CONTENTS
3.1 Introduction
3.2 Forms of Business
3.3 Legal Provisions of Banking Regulation Act
3.4 Management
3.5 Minimum Capital And Reserve
3.6 Accounts and Audit
3.7 Self Assessment Test
3.1. INTRODUCTION
Banking business in India is largely governed by the Banking Regulation Act,
1949. Section 5 (b) of the Act defines banking as “accepting, for the purpose of
lending or investment, of deposits of money from the public, repayable on demand
or otherwise and withdrawals by cheque, draft, order or otherwise”. Banking
Company means any Company which transacts the business of banking in India.
Bank is an institution which deals in money and credit. No company other than a
banking company shall use as part of its name any of the words bank, banker or
banking and no company shall carry on business of banking in India unless it uses
as part of its name at least one of such words.
Central Government it empowered to enact laws in respect of banking
companies, whereas the respective State Governments are vested with the power to
pass legislations with regard to money lending and moneylenders. Most of the State
Governments have passed their own legislations concerning money lending and
moneylenders whereas the Central Government has enacted several legislations
concerning various aspects related to banking companies. These are
1. The Companies Act, 1956.
2. The Banking Regulation Act, 1949.
3. The Bankers’ Book Evidence Act, 1891.
4. The Indian Negotiable Instruments Act, 1881.
5. The Reserve Bank of India Act, 1934.
6. The Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970.
7. The Regional Rural Banks Act, 1934.
Banking companies are governed by the Banking Regulation Act, 1949, which
 37
actually came into force on 16th March, 1949. This Act, of course, has been amended
several times. The Companies Act, 1956, however, is also applicable to banking
companies since it is not inconsistent to the provision of the Banking Regulation Act.
3.2 FORMS OF BUSINESS IN BANKING COMPANIES ENGAGE
Section 6(1) of the Banking Regulation Act, 1949, enumerates the forms of
business in which banking companies may engage.
“In addition to the business of banking, a banking company may engage in any
one or more of the following forms of business, namely;
i. The borrowing, raising, or taking up of money;
ii. The lending or advancing of money either upon or without security;
iii. The drawing, making, accepting, discounting, buying, selling, collecting
and dealing in bills of exchange, hundie, promissory notes, coupons,
drafts, bill of lading, railway receipts, warrants, debentures, certificates,
scripts and other instruments, and securities whether transferable or
negotiable or not;
iv. The granting and issuing of letters of credit, travelers cheques and circular
notes;
v. The buying, selling and dealing in bullion;
vi. The acquiring, holding, issuing on commission, underwriting and dealing
in stock, funds, shares, debentures, debenture stock, bonds, obligations,
securities, and investments of all kinds;
vii. The purchasing and selling of bonds, scripts or other forms of securities on
behalf of constituents or others;
viii. The receiving of all kinds of bonds, scripts or valuables on deposit or for
safe custody or otherwise; the providing of safe deposit vaults;
ix. The collecting and transmitting of money and securities;
x. Acting as agents for any Government or local authority or any other person
or persons; the carrying on of agency business of any description including
the clearing and forwarding of goods, giving of receipts and discharges and
otherwise acting as an attorney on behalf of customers;
xi. Contracting for public and private loans and negotiating and issuing the
same;
xii. The effecting, insuring, guaranteeing, underwriting, participating in
managing and carrying out of any issue, public or private, or State,
municipal or other loans or of shares, stock, debenture stock of any
company, corporation or association and the lending of money for the
purpose of any such issue;
xiii. Carrying on and transacting every kind of guarantee and indemnity
business;
 38
xiv. Managing, selling and realizing any property which may come into the possession
of the company in satisfaction or part satisfaction of any of its claims;
xv. Acquiring and holding and generally dealing with any property or any right,
title or interest in any such property which may form the security or part of
the security for any loans or advances or which may be connected with any
such security;
xvi. Undertaking and executing trusts;
xvii. Undertaking the administration of estates as executor; trustee or otherwise;
xviii. Establishing and supporting or aiding in the establishment and support of
associations, instructions, funds, trusts and conveniences calculated to
benefit employees or ex-employees of the company or the dependants or
connections of such persons; granting pensions and allowances and
making payments towards insurance, subscribing or to guaranteeing
money for charitable or benevolent objects or for any exhibition or for any
public general or useful object;
xix. The acquisition, construction, maintenance and alternation of any building
or works necessary or convenient for the purpose of the company;
xx. Selling, improving, managing, developing, exchanging, leasing, mortgaging,
disposing of or turning into accounts or otherwise dealing with all or any
part of the property and rights of the company;
xxi. Acquiring and undertaking he whole or any part of the business of any
person or company, when such business is of a nature enumerated or
described in this sub-section;
xxii. Doing all such other things as are incidental or conducive to the promotion
or advancement of the business of the company;
xxiii. Any other form of business which the Central Government may, be
notification in the official Gazette, specify as a form of business in which it
is painful for a banking company to engage;.
3.3 LEGAL PROVISIONS OF BANKING REGULATION ACT
Prohibition of Trading, According to Sec.8 of the Banking Regulation Act, a
banking company cannot directly or indirectly deal in buying or selling or bartering
of goods. But it may, however, buy, sell or barter the transactions relating to bills of
exchange received for collection or negotiation.
Disposal of Non-Banking Assets
Section 9 states; “Notwithstanding anything contained in Section 6, no
banking company shall hold any immovable property howsoever acquired, except
such as is required for its own use, for any period exceeding seven years from the
acquisition there of from the commencement of this Act, whichever is later, or any
extension of such period as in this Section provide, any such property shall be
disposed of within such period or extended period as the case may be.
 39
Provided that the banking company may, within the period of seven years as
aforesaid, deal or trade in any such property for the purpose of facilitating the
disposal thereof;
Provided further that the Reserve Bank may, in any particular case, extend the
aforesaid period of seven years by such period not exceeding five years where it is
satisfied that such extension would be in the interests of the depositors of the
banking company.”
Restrictions on Loans and Advances
According to Section 20 of the Banking Regulation Act, 1949, “No banking
company shall grant any loans or advances on the security of its own shares, or
enter into any commitment for granting any loan or advance to or on behalf of any
of its directors, any firm in which any of its directors is interested as partner,
manager, employee or guarantor or any company not being a subsidiary of the
banking company or a company registered under Section 25 of the Companies Act,
1956, or a Government company of which any of the directors of the banking
company is a director, managing agent, manager, employee or guarantor or in
which he holds substantial interest, or any individual in respect of whom any of it
directors is a partner or guarantor.”
Restrictions on Commission, Brokerage, etc.
“Net withstanding anything to the contrary contained in Sections 76 and 79 of
the Companies Act, 1956, a banking company shall pay out directly or indirectly by
way of commission, brokerage, discount or remuneration in any form in respect of
any shares issued by it, any amount exceeding in the aggregate two and one-half
per cent of the paid up value of the said shares.”
Prohibition of Charge on Unpaid Capital
According to Section 14, “Bo banking company shall create any charge upon
any unpaid capital of the company, and any such charge shall be invalid.”
Prohibition of Floating Charge on Assets
Section 4A stipulates that “Notwithstanding anything contained in Section 6,
no banking company shall create a floating charge on the undertaking or any
property of the company or any part thereof, unless the creation of such floating
charge is certified in writing by the Reserve Bank as not being detrimental to the
interests of the depositors of such company. Any such charge created without
obtaining the certificate of the Reserve bank shall be invalid.”
Restriction as to payment of Dividend
Section 15 states; “No banking company shall pay any dividend on its shares
until all its capitalized expenses (including preliminary expenses, organization
expenses, share-selling commission, brokerage, amounts of losses incurred in any
other items of expenditure not represented by tangible assets) have been completely
written off.”
Notwithstanding anything to the contrary contained in the sub-section referred
to above, or in the Companies Act, 1956, a banking company may pay dividends on
 40
its shares without writing off
i. The depreciation , if any, in the value of its investment in approved
securities in any case where such depreciation has not actually been
capitalized or otherwise accounted for as a loss;
ii. The depreciation, if any, in the value of its investments in shares,
debentures in any case where other than approved securities in any case
where adequate provision for such depreciation has been made to the
satisfaction of the auditor of the banking company;
iii. The bad debts, if any, in case where adequate provision for such debts has
been, made to the satisfaction of the auditor of the banking company.
3.4 MANAGEMENT
A banking company must have a whole-time chairman appointed for five years at
a time. He may become a director of a subsidiary of the banking company or of a
guarantee company registered under Section 25 of the Companies Act but cannot take
up any other appointment. The Chairman is appointed by the Board of Directors, but,
in the case of nationalized banks, he is appointed by the Central Government.
At least 51% of the directors of a banking company must be such persons as
have specialized knowledge, or practical experience, in respect of accountancy,
agriculture, rural company, banking cooperation, economics, finance, law or any
other matter which is approved by the Reserve Bank as useful to the banking
company. Directors must not be proprietors of any trading, commercial or
industrial concerns (other than small industrial concerns) and also must not have
substantial interest in, or be connected with (as employee or manager etc.) any
commercial company except a guarantee company incorporated under Section 25 of
the Companies Act and except a small scale industrial concern. The Reserve Bank
of India has the power to order the removal of a director or the chairman.
3.5 MINIMUM CAPITAL AND RESERVE
Section 11 lays down the following minimum limit of paid up capital and reserves:
a) Banking companies incorporated outside India
If it has a place of business in Mumbai
Or Kolkata or both………. Rs.20 lakhs
If it does not have a place of business
In Kolkata………… Rs. 15 lakhs
Further, every year 20% of the profits earned in India must be added to the
sums specified above.
The sum must be kept deposited with the Reserve Bank either in cash or in
the form of unencumbered approved securities.
b) Banking companies incorporated in India
i. If the places of business are in more than one state and if any place of
business is in Mumbai or Kolkate……….Rs.10 lakhs
ii. If the places of business are in more than one State but none of the places
 41
of business is in Mumbai or Kolkata………Rs.5 lakhs
iii. If the places of business are only in one State, none of the places of
business being in Mumbai or Kolkata……….Rs. 1 lakhs for principal places
plus Rs.10,000 for and Rs,25,000 for a place of business outside the
district. The total need not exceed Rs.5 lakhs or Rs.50,000 in case there is
only one place of business.
(But companies which commence business after the commencement of the
Banking Companies Amendment Act of 1962, a minimum of Rs.5 lakhs is
required)
iv. If the places of business are only in one State and if the places of business
are also in Mumbai or Kolkata…….. Rs.5 lakhs plus Rs.25,000 for each
place of business situated outside Mumbai or Kolkata. The total need not
exceed Rs. 10 Lakhs.
Banking companies carrying on business in India must see to it that:
v. The subscribed capital is not less than half the authorized capital;
vi. The paid up capital is not less than half the subscribed capital; and
vii. The capital of the company consist only of ordinary or equity shares and
such preference shares as may have been issued before Ist July, 1884.
A shareholder cannot exercise more than one per cent of the total voting rights
of the company. Chairman, managing director or chief executive of a banking
company must declare his full holdings in the capital of the company. Underwriting
commission or brokerage or discount on shares issued by a banking company
cannot exceed 2 ½ % of the paid up value of the shares. A charge on unpaid capital
cannot be created. No dividend can be declared unless expenses not represented by
tangible assets have been completely written off.
Reserve fund (Statutory Reserve)
According to section 17, “Every banking company incorporated in India shall
create a reserve fund and shall, out of the balance of profit and loss account
prepared under Section 29 and before any dividend is declared, transfer to the
reserve fund a sum equivalent to not less than twenty per cent of such profit.”
Cash Reserve Ratio
Banks are statutorily required to maintain a certain percentage of demand and
time liabilities with RBI. With effect from Ist June, 2002, all banks have been
required to keep 5% of their net time and demand liabilities in the form of each
and/or current account balance with the RBI. This percentage varies from time to
time with changes in monetary policy.
Statutory Liquidity Radio (SLR)
In addition to CRR, banks are expected to maintain 25%, with effect from 22nd
October, 1997, of their net demand and time liabilities in the form of cash, gold and
unencumbered approved securities. (This percentage was preciously as high as 37.5.
Non-compliance is penalized with the current applicable penalty rates for the shortfall
 42
with 3% over the “bank rate: -the rate at which the RBI lands to commercial banks.
Under the Banking Regulation Act, SLR may vary between 25 and 40%
3.6 ACCOUNTS AND AUDIT
Every banking company, incorporated in India, at the end of financial year
expiring a period of 12 months as then Central Government may be notification in
the Official Gazette specify, must prepare a Balance sheet and a profit and Loss
Account as on the last working day of that year or according to the Third Schedule
or as circumstances permit. At the same time, every banking company, which is
incorporated outside India, is required to prepare a Balance Sheet and also a Profit
and Loss Account relating to its branch in India also. We know that Form A of the
Third Schedule deals with form of Balance Sheet and Form B of the Third Schedule
deals with form of profit and Loss Account. It is interesting to note that a new set of
forms have been prescribed for Balance Sheet and Profit and Loss Account of the
banking company and RBI has also issued guidelines to follow the new forms with
effect from 31st March, 1992, In other words, the annual accounts for the year
ending 31st March 1992, and onwards are to be prepared in the new formats given
in the book.. According to Sec. 30 of the Banking Regulation Act, the Balance Sheet
and profit and Loss According should to Sec.30 of the Banking Regulation Act, the
Balance Sheet and profit and Loss Account should be prepared according to Sec. 29
and the same must be audited by a qualified person known as auditor. It is
needless to mention here that every banking company must take previous
permission from RBI before appointing, re-appointing or removing any auditor.RBI
can also order special audit for public interest of depositors. Moreover, every
banking company must have to furnish their copies of accounts and Balance Sheet
prepared according to Sec.29 along with the auditors’ report to the RBI and also the
Registrar of Companies within three months from the end of the accounting period.
The Government of India, in January 1991, has issued a notification to make
amendments to the Third Schedule to the said Act incorporating and considering
the recommendations of the Ghosh Committee, relating to the formats of Balance
Sheet and Profit and Loss Account since, after nationalization of commercial banks,
the old formats were not found suitable. As such, the suggestions were examined
and a fresh notification was issued on 19th December, 1991, expressing the
Government’s intentions to introduce the revised formats. Thus the RBI issued a
circular as on 6th February, 1992, to the chief executives of all commercial banks to
prepare their accounts under revised formats for the year ended 31st March, 1992,
and thereafter.
SUMMARY
Banking Company accepting public deposits and providing loan to public, by
way of this the company perform well. Banking company engage with their own
business with separate rules and regulations. The main aim of this business
providing a financial assistance to last persons live under the juridiction.
 43
KEYWORDS
Banking Business: Accepting Deposits, providing loan to customers.
Non-banking Assets: The company shall hold any immovable property.
Cash Reserve Ratio: 5% of their net time and demand liabilities in the form of
each and/ or current account balance with RBI
Statutory Liquidity Ration: Banks are maintaining the SLR to minimum 25%.
It vary 25% to 40% under banking regulation Act.
3.7 SELF-ASSESSMENT TEST
1. Give in brief the various provisions of the Banking Regulation Act, 1949,
relating to the annual accounts of a banking company?
2. How does rebate on bills discounted arise and how is it brought into
record? Explain with example.
REFERENCE BOOKS
1. Reddy TS, Murthy A, Corporate Accounting, Margham Publication,
Chennai – 17.
2. Gupta RL, Radhasamy M, Corporate Accounting, sultan Chand & Sons,
New Delhi.

 44
LESSON – 4
BANKING ACCOUNTS-PROFIT AND LOSS ACCOUNT
OBJECTIVES
Students after studying in this lesson they can able to know the following objectives,
they are, introduction, Format- B for Profit and Los Accounts of Banking Companies.
CONTENTS
4.1 Introduction
4.2 Form-B of Profit and Loss Account
4.3 Schedules
4.4 RBI instruction
4.5 Examples
4.6 Self-Assessment test
4.1 INTRODUCTION
Banking companies are required to prepare their Profit and Loss Account
according to Form B in the Third Schedule. Form B is in a summary form and the
details of various items are given in the Schedules. Form B is given below:
4.2 FORM OF PROFIT & LOSS ACCOUNT
(for the year ended 31st March) (000’s omitted)
Schedule No Year Ended Year Ended
(Current Year) (Previous Year)
I. Income
Interest earned 13
Other income 14
Total
II. Expenditure
Interest expended 15
Operating expenses 16
Provisions and contingencies
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
4.3 SCHEDULES
Schedule 13- Interest earned
Year Ended Year Ended
(Current Year) (Previous Year)
I. Interest / discount on advances / bills
II. Income on investments
III. Interest on balances with
Reserve Bank of India and other inter-bank funds
IV. Others
Total
Schedule 14- Other Income
 45
Year Ended Year Ended
(Current Year) (Previous Year)
I. Commission, exchange and brokerage
II. Profit on sale of investments
Less: Loss on sale of investments
III. Profit on revaluation of investment
Less: Loss on revaluation of investments
IV. Profit on sale of land, buildings and other assets
Less: Loss on sale of land, buildings 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
Note: Under items II to V loss figures may be shown in brackets.
Schedule 15-Interest Expended
Year Ended Year Ended
(Current Year) (Previous Year)
I. Interest on deposits
II. Interest on Reserve Bank of India / inter-bank borrowings
III. Others
Total
Schedule 16- Operating Expenses
Year Ended Year Ended
(Current Year) (Previous Year)
I. Payments to and provisions for employees
II. Rent, taxes and lighting
III. Printing and stationery
IV. Advertisement and publicity
V. Depreciation on bank’s property
VI. Directors’ fees, allowances and expenses
VII. Auditors’ fees and expenses(including branch auditors)
VIII. Legal charges
IX. Postage, telegrams, telephones etc.
X. Repairs and maintenance
XI. Insurance
XII. Other expenditure
Total

4.4 ‘RBI’S INSTRUCTION’

Item Schedule Coverage Note and instructions for compilation
Interest 13 I Interest/discount Includes interest and discount on all types of loans and
earned advances like cash credit, demand loans, overdrafts,
export loans, term loans, domestic and foreign bills
purchased and discounted on advances/bills(including
those rediscounted), overdue interest and also interest
subsidy, if any, relating and also interest subsidy, if any,
relating to such advances / bills
II Income on Includes all income derived from the investment portfolio
investments by way of interest and dividend.
 46
Item Schedule Coverage Note and instructions for compilation
III Interest on balances Includes interest on balances with Reserve Bank and
with Reserve Bank of other banks, call loans, money market placements, etc.
India and other inter-
bank funds
IV Others Includes any other interest/ discount income not
included the above
Other income 14 I Commission, Includes all remuneration on services such as
exchange and commission on collections, commission/exchange on
brokerage remittances and transfers, commission on Government
business, commission on other permitted agency
business including consultancy and other services,
brokerage, etc. on securities. It does not include foreign
exchange income.
II Profit on sale of Includes profit / Loss on sale of securities, furniture, and
investments Less : Loss buildings motor vehicle, gold, silver etc.
on sale of investments
III Profits on revaluation Only the net position should be shown If the net position
of investment Less: is a loss, the amount should be shown as a deduction.
Loss on revaluation of The net profit/loss on revaluation of assets may also be
investments shown under this item.
IV Profit on sale of land
, buildings and other
assets Less: Loss on
sale of land, buildings
and other assets.
Interest 15 V Profit on exchange Includes profit/loss on dealing in foreign exchange, all
expended transactions Less: Loss income earned by way of foreign exchange, commission
on exchange and charges on foreign exchange transactions excluding
transactions interest which will be shown under interest. Only the net
position should be shown. If the net position is a loss, it
is to be shown as a deduction.
VI Income earned by
way of dividends etc.
from subsidiaries,
companies, joint
ventures abroad / in
India
VII Miscellaneous Includes recoveries from constituents for go down rents,
income income from bank’s properties, security charges,
insurance etc., and any other miscellaneous income. In
case any item under this head exceeds one percent of
the total income, particulars may be given in the notes.
Provisions and I Interest on deposits Includes interest paid on all types of deposits including
contingencies deposits from banks and other institutions.
II Interest on Reserve Includes discount / interest on all borrowings and
Bank of India / Inter- refinance from Reserve Bank of India and other banks.
Bank borrowings
III Others Includes discount/interest on all borrowings/refinance
from financial institutions. All other payments like interest
on participation certificates, penal interest paid, etc. may
also be included here.
I Payment to and Includes staff salaries, wages allowances, bonus, other
provisions for staff benefits like provident fund, pension gratuity,
employees liveries to staff, leave fare concessions, staff welfare,
medical allowance to staff, etc.
 47
Item Schedule Coverage Note and instructions for compilation
II Rent, taxes and Includes rent paid by the banks on buildings and other
lighting municipal and other taxes paid (excluding income tax
and interest tax) electricity and other similar chargers
and levies. House rent allowance and other similar
payments to staff should appear under the head
‘Payments to and provisions for employees.’
III Printing and Includes books and forms and stationery used by the
stationery bank and other printing charges which are not incurred
by way of publicity expenditure
I Advertisement and Includes expenditure incurred by the bank for
publicity advertisement and publicity purposes including printing
charges of publicity matter
V Depreciation on Includes depreciation on bank’s own property, motor
bank’s property cars and other vehicles, furniture, electric fittings vaults,
lifts, leasehold properties, non-banking assets, etc.
VI Directors’ fees, Includes sitting fees and all other items of expenditure
allowances and incurred on behalf of directors. The daily alliance, hotel
expenses charges, conveyance charges, etc. which though in the
nature of reimbursement of expense incurred may a be
included under this head. Similar expenses of Local
Committee members may also be included under this head.
VII Auditors’ fees and Includes fees paid to the statutory auditors and branch
expenses (including auditors for professional services rendered and all
branch auditors’ fees expenses for performing their duties even though they
and expenses) may be in the nature of reimbursement of expenses. If
external auditors have been appointed by barks
themselves for internal inspections and audits and other
services, the expenses incurred in that context including
fees may not be included under this head but shown
under ‘other expenditure’.
VIII Legal charges All legal expenses and reimbursement of expenses
incurred in connection with legal services are to be
included here.
IX Postage, telegrams Includes all postal charges like stamps, telegram,
telephones, etc. telephones, teleprinter, etc.
X Repairs and Includes repairs to bank’s property, their maintenance
maintenance charges, etc.
XI Insurance Includes insurance charges on bank’s property,
insurance premier paid to Deposit Insurance & Credit
Guarantee Corporation etc. to the extent they are not
recovered from the concerned parties.
XII Other expenditure All expenses other than those not included in any of the
other heads, like licenses fees, donations, subscriptions
to papers, periodicals, entertainment expense, travel
expenses, etc. May be particular item under this head
exceeds one percent of the total income, particulars may
be given in the notes. Includes all provisions made for
bad and doubtful debts, provisions for taxation, provision
for diminution in the value of investments, transfers to
contingencies and other similar items
4.5 EXAMPLES
1. Prepare Profit and Loss Account for the year ended 31st March, 2021, of Rajesh
Bank from the following particulars: Rs. (‘000)
Interest on Loan 250
Interest on Savings A/c 150
Interest on Cash Credits 160
Interest on Fixed Deposits 190
 48
Interest on Overdrafts 70
Payment to Employees 150
Discount on Bills discounted 40
Rent, Taxes, Insurance and Lighting 5
Commission, Exchange and Brokerage 15
Auditors Fees and Expenses 10
Directors’ Fees and Expenses 20
Solution
RAJESH BANK
PROFIT AND LOSS ACCOUNT
for the year ended 31st March 2021 (‘000)
Year ended Year ended
Schedule No. st st
31 March, 2021 31 March, 2020
Rs.
I. INCOME 13 520
Interest Earned 14 15
Other Income Total 535
II. EXPENDITURE 340
Interest Expended 15 185
Operating Expenses Provisions and Contingencies 16 ---
Total 525
III. PROFIT/LOSS
Net Profit for the year 10
profit brought forward
Total 10
IV. APPROPRIATIONS
Transfer to Statutory Reserve 2
Transfer to Other Reserves ---
Transfer to Govt. /proposed Dividend ---
Balance carried over to 8
Balance Sheet --
Total 10

Working
SCHEDULE 13-INTEREST EARNED
Year ended Year ended
st st
31 March, 2021 31 March, 2020
Interest/Discount on advances/Bills Rs.
(Rs.250+Rs.160=Rs.70+Rs.40) 520
Income on Investments ---
Interest on balances with RBI and other inter bank funds
Others
Total 520

SCHEDULE 14-OTHER INCOME

Year ended Year ended
 49
st st
31 March, 2021 31 March, 2020
Rs. Rs.
I. Commission, Exchange and Brokerage 15
II. profit on Sale of Investments --
III. Profit on Revaluation of Investments --
IV. Profit on Sale of Land, Buildings and other assets --
V. Profit on Exchange Transactions --
VI. Income earned by way of Dividends etc. --
VII. Miscellaneous Income --
Total 15
SECHEDULE 15-INTEREST EXPENED
Year ended Year ended
st st
31 March, 2021 31 March, 2020
Rs.
I. Interest on Deposits (Rs.150+Rs.190) 340
II. Interest on RBI / Inter-Bank borrowings --
III. Others --
Total 340
SECHDULE 16-OPERATING EXPENSES
Year ended Year ended
st st
31 March, 2021 31 March, 2020
Rs.
Payments to Employees 150
Rent, Taxes and Lighting 5
Printing and Stationery --
Advertisement and Publicity --
Depreciation on Bank’s Property 20
Directors’ Fees 10
Auditors’ Fees --
Legal charges
Postage, Telegrams and Telephones
Repairs and Maintenance --
Insurance
Other expenditure
Total 185
2. From the following details relating to Jabalpur Bank Ltd. Find out the net profit
earned in the year ended 31st March, 2021:
Rs.(‘000)
Interest Earned 3,702
Other Incomes 455
Interest Expended 2,037
Operating Expenses 480
provisions and Contingencies 1,300
Profit Brought Forward Nil --
Transfer to Statutory Reserve 68
Transfer to Other Reserves Nil --
 50
Transfer to Proposed Dividend 100
Balance to Balance Sheet 172
Solution
JABALPUR BANK LTD.
PROFIT AND LOSS ACCOUNT
For the year ended 31st March, 2021
Schedules Year ended Year ended
st st
No. 31 March, 2021 31 March, 2020
I. Income: Rs.(‘000)
Interest Earned 13 3,702
Other Income 14 455
Total 4,157
II. Expenditure:
Interest Expended 15 2,037
Operating Expenses 16 480
Provisions and Contingencies 1,300
Total 3,817
III. Profit / Loss:
Net profit for the year 340
Profit brought forward -----
Total 340
IV. Appropriations:
Transfer to Statutory Reserve (20% of Rs.340) 68
Proposed Dividend
Balance carried over to 100
Balance Sheet 172
Total 340
3. From the following information, prepare Profit and Loss Account for the period
ended on 31st March 2021. Rs. (‘000)
Interest on Loans 300
Interest on Fixed Deposit 275
Commission 10
Exchange and brokerage 20
Salaries and Allowances 150
Discount on Bills (Gross) 152
Interest on temporary OD in Current Account 30
Interest on Cash Credit 240
Interest on savings Bank Deposit 87
Postage, Telegrams and Stamps 10
Printing and Stationery 20
Sundry Expenses 10
Rent 15
Taxes and Licenses 10
 51
Audit Fees 10
Additional information: Rebate on Bills discounted 30
Salary of managing director 30
Bad debts 40
Provision for income tax is to be made 55% (round off to the nearest thousand)
Interest of Rs. 4,000 on doubtful debts was wrongly credited to interest on
loan account
Provide Rs. 15,000 as dividend.
Solution
PROFIT AND LOSS ACCOUNT
For the year ended 31st March, 2021
Schedule No. Year Ended
st
31 March, 2021
I. INCOME: Rs. (‘000)
Interest Earned 13 688
Other Income 14 30
Total 718
II. EXPENDITURE:
Interest Expense 15 362
Operating Expenses 16 255
provisions and Contingencies --- 74
(40+55% of 61 = 73.55 or 74
Total 691
III. PROFIT/LOSS
Net profit for the year 27
Profit brought forward
Total 27
IV. APPROPRIATIONS
Transfer to Statutory Reserve (20% of 27) 5.4
Transfer to Other Reserves
Transfer to Govt./proposed Dividend 15
Balance carried over to Balance Sheet 6.6
Total 27
Workings:
SCHEDULE 13 –INTEREST EARNED
st
Year Ended 31 March, 2021
Rs(‘000)
I. Interest/Discount on advances/bills 688
(Rs.300+Rs.152+Rs.240+ Rs.30-Rs.30-Rs.4)
II. Income on Investments --
III. Interest on balances with RBI --
IV. Others --
Total 688
SCHEDULE 14-OTHER INCOME
st
Year Ended 31 March, 2021
Rs.(‘000)
I. Commission, Exchange and Brokerage (Rs.10 + 20) 30
 52
II. Profit on sale of investment --
Total 30
SCHEDULE 15-INTEREST EXPENDED
st
Year Ended 31 March, 2021
Rs.(‘000)
I. Interest on Deposits (Rs.275 + Rs.87) 362
Total 362
SCHEDULE 16-OPERATING EXPENSES
st
Year Ended 31 March, 2021
Rs.(‘000)
I. Payment to Employees 150
II. Rent, Taxes and Lighting 15
III. Printing and Stationery 20
IV. Advertisement and Publicity --
V. Depreciation on Bank’s property --
VI. Directors’ Fees and Allowances 30
VII. Audit Fees 10
VIII. Legal Chares --
IX. Postage, Telegrams and Telephone 10
X. Sundry Chares (Rs.10+Rs.10) 20
Total 255
4. From the following information, prepare the Profit and Loss Account of Indian Bank
Ltd. For the year ended 31st March, 2021:
Rs.
Interest on Loans 25,90,000
Interest on Fixed Deposits 27,50,000
Rebate on Bills Discounted 4,90,000
Commission 82,000
Establishment Charge 5,40,000
Discount on Bills Discounted (Net) 14,60,000
Interest on Cash Credit 22,30,000
Interest on Current Accounts 4,20,000
Rent and Rates 1,80,000
Interest on Overdrafts 15,40,000
Directors’ Fees 30,000
Auditors’ Fees 12,000
Interest on Savings Bank Accounts 6,80,000
Postage and Telegrams 14,000
Printing and Stationery 29,000
Sundry Charges 17,000
Bad debts to be written off amounted to
Provision for taxation may be made at 55%. 4,00,000
 53
Solution
INDIAN BANK LTD. PROFIT AND LOSS ACCOUNT
For the year ended 31st March, 2021
Schedule Year Ended
st
No. 31 March, 2021
Rs.(‘000)
Income
Interest Earned 13 74,20,000
Other Income 14 82,000
Total 75,02,000
Expenditure
Interest Expended 15 38,50,000
Operating Expenses 16 8,22,000
Provisions and Contingencies (55% of Rs.28,30,000)*
Total 62,28,500
Profit / Loss
Profit for the year 12,73,500
Profit or Loss Brought Forward
Total 12,73,500
Appropriation
Transfer to Statutory Reserve @ 20% 2,54,700
Transfer to other Reserves --
Transfer to Govt ./Proposed Dividend 10,18,800
Balance carried over to Balance Sheet --
Total 12,73,500
Working
SCHEDULE 13-INTEREST EARNED
st
Year Ended 31 March, 2021
Rs.(‘000)
I. Interest on Loans 25,90,000
II. Interest on Cash Credit 22,30,000
III. Interest on Overdrafts 15,40,000
IV. Rebates on Bills Discounted 4,90,000
V. Discount on Bills Discounted (Net) 14,60,000
Less: Unexpired Discount 4,90,000 83,10,000
Bad debts written of 4,00,000 8,90,000
Total 74,20,000
SCHEDULES 14-OTHER INCOMES
st
Year Ended 31 March, 2021
Rs.(‘000)
I. Commission, Exchange and Brokerage 82,000
Total 82,000
SCHEDULE 15-INTEREST EXPENDED
st
Year Ended 31 March, 2021
Rs.(‘000)
I. Interest on Fixed Deposit 27,50,000
II. Interest on Current Account 4,20,000
III. Interest on Savings Bank Deposit 6,80,000
Total 38,50,000
Rs 75,02,000 – (Rs.38,50,000 + Rs.8,22,000)
Rs.75,02,000 – Rs.46,72,000= Rs.28,30,000
 54
SCHEDULE 16 –OPERATING EXPENSES
st
Year Ended 31 March, 2021
Rs.(‘000)
I. Payment to and Provisions for Employees 5,40,000
II. Rent, Taxes and Lighting 1,80,000
III. Printing and Stationery 29,000
IV. Advertisement and Publicity --
V. Depreciation on Bank’s Property 30,000
VI. Director’s Fees 12,000
VII. Auditors’ Fees --
VIII. Legal Charges 14,000
IX. Postages, Telegrams and Telephones --
X. Repairs and Maintenance --
XI. Insurance 17,000
XII. Sundry Charges --
Total 8,22,000
SUMMARY
Banking Company have it is our profit and loss amount in separate form.
Which is provided by RBI, All the banks shall be follow and submit to the audit and
RBI in the same nature. It shows total income, expenditure, profit/ loss and
appropriate.
KEYWORDS
Income: Interest, income an investment, interest on balance with RBI.
Expenditure: All expenses spent by banks directly and interest expand,
operating expenses.
Appropriation: Transfer to various reserves, like, statutory and others are
shows separatly.
4.6 SELF-ASSESSMENT TEST
1. Give a perform of Profit and Loss Account of a banking company.
2. From the following ledger balances of Laxmi Bank, prepare the Profit and
Loss Account and Balance Sheet as on 31st March, 2021.
Rs.(‘000)
Share Capital:
12,500 Equity shares of Rs.100 each 1,250
Statutory Reserve 600
Current Accounts and Deposit Accounts 7,732
Profit and Loss Account (Balance) 15
Interest paid 27
Government Securities 600
Other securities 825
Shares and Stock 637
Payment to employees 74
Depreciation on premises 22
Interest, discount and commission 245
Cash in hand and with RBI 1,584
 55
Money at call and short notice 274
Bills discounted 379
Loans and advances 4,665
Bank premises and furniture 418
Non-Banking assets 337
Make a provision for rebate on Bills discounted Rs.3,000
3. From the following particulars, prepare Profit and Loss Account of Punjab
Bank Ltd. As on 31st March, 2021:
Interest on deposits 3,20,000
Discount on bills discounted 1,49,000
Interest on overdrafts 1,60,000
Rent and Taxes 20,000
Interest on cash credit 2,32,000
Bad debts to be written off 30,000
Commission (Cr.) 10,000
Interest on loans 2,49,000
Sundry charge (Dr.) 10,000
Establishment 50,000
Audit Fees, 500
Director’s fees 1,600
REFERENCE BOOKS
1. Jain SP, Navang RL, Corporate Accountancy, Sultan Chand & Sons, New
Delhi.
2. Shuklla MC, Grewal TS, Gupta SC, Advanced Accounts, S.Chand &
Company Ltd., New Delhi.

 56
LESSON – 5
BANKING ACCOUNTS-BALANCE SHEET
OBJECTIVES
Student-s after studying in this chapter they can able to know the following
objectives, they are, introduction, form –A, schedules, RBI instruction, examples,
Self assessment Test,
CONTENTS
5.1 Introduction
5.2 Format-A of Banking companies Balance Sheet
5.3 Schedules
5.4 RBI instructions
5.5 Money at Call and short notice
5.6 Advances
5.7 Acceptances, Endorsement and other Obligation
5.8 Bills for collection
5.9 Bills Payable
5.10 Bills purchased and discounted
5.11 Rebate on bills discount
5.12 Classification of Bank Advances
5.13 The Slip System of Posting
5.14 Examples
5.15 Self-Assessment Test
5.1 INTRODUCTION
The Balance Sheet of a banking company is to be prepared in From A given
in Third Schedule to the Act. Unlike the previous form, the present one is devoid of
details, the latter being shown in the schedules. RBI has given guidelines for
compiling the balance sheet. Below are given Form A, the schedules there under
and the instructions of RBI in that order.
5.2 FROM ‘A’ OF BANKING COMPANY
BALANCE SHEET The Third Schedule (See Section 29)
Balance Sheet of………..(Other enter name of the banking company)
Balance Sheet as on 31st March (Year)
Schedule As on 31.03.20… As on 31.03.20…
No. (Current Year) Rs. (Prev. year) Rs.
Capital & Liabilities
Capital 1
Reserves & surplus 2
Deposits 3
Borrowings 4
Other Liabilities and Provisions 5
Total:
 57
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 collection --
5.3 SCHEDULES
Schedule I-Capital
As on 31.03.20…….. As on 31.03.20…
(current year) Rs. (prev. Year) Rs.
For Nationalized Banks
Capital (fully owned by Central Government)
For Banks Incorporated Outside India Capital
(The amount brought in by banks by way of start-up capital as
prescribed by RBI should be shown under this head)
Amount of deposit kept with the RBI under Section 11 (2) of the
Banking Regulation Act, 1949
Total:
For Other Banks (Indian)
Authorized Capital
(…..Shares of Rs….each)
Issued Capital
(……Shares of Rs…….each)
Subscribed Capital
(……..Shares of Rs…..each)
Called-up Capital
(……….Shares of Rs….each)
Les: Call unpaid
Add: Forfeited shares
Schedule 2-Reserves & Surplus
As on 31.03.20…….. As on 31.03.20…
(current year) Rs. (prev. Year) Rs.
Statutory Reserves Opening Balance Additions during the year
Deductions during the year
Capital Reserves
Opening Balance
Additions during the year Deductions during the year
Security Premium
Opening Balance Additions during the year Deductions during
the year
Revenue and other Reserves Opening Balance
Additions during the year Deductions during the year
Balance in Profit and
Loss Account Total
(I,I,I,III,IV and V)
 58
Schedule 3-Deposits
As on 31.03.20…….. As on 31.03.20…
(current year) Rs. (prev. Year) Rs.
A.I. Demand Deposits
(i) From bank
(ii) From others
II. Savings Bank Deposits
III. Term Deposits
From banks
From others
Total:
(I,II, and III)
B. (i) Deposits of branches in India
(ii) Deposits of branches outside India
Total:

Schedule 4-Borrowings
As on 31.03.20…….. As on 31.03.20…
(current year) Rs. (prev. Year) Rs.
Borrowings in India
Reserve Bank of India
Other banks
Other intuitions and agencies
Borrowings outside India
Total (I and II)
Secured borrowings in I and II above—Rs.

Schedule 5—Other Liabilities and Provisions

As on 31.03.20…….. As on 31.03.20…
(current year) Rs. (prev. Year) Rs.
Bills payable
Inter-office adjustments (net)
Interest accrued
Others (including provisions)
Total:

Schedule 6—Cash and Balances with Reserve Bank of India

As on 31.03.20…….. As on 31.03.20…
(current year) Rs. (prev. Year) Rs.
Cash in hand (including foreign currency notes)
Balance with Reserve Bank of India
In Current Account
In Other Accounts
Total (I & II)
 59
Schedule 7-Balance with Banks & Money at Call and Short Notice
As on 31.03.20…….. As on 31.03.20…
(current year) Rs. (prev. Year) Rs.
In India
Balances with banks
In Current Accounts
In Other Deposit Accounts
Money at call and short notice
With banks
With other institutions
Total: (I & II)
Outside India
In Current Accounts
In Other Deposit Accounts
Money at call and short notice
Total
GRAND TOTAL: (I & II)
Schedule 8-Investments
As on 31.03.20…….. As on 31.03.20…
(current year) Rs. (prev. Year) Rs.
Investment in India in
Government securities
Other approved securities
Shares
Debentures and bonds
Subsidiaries and/or joint ventures
Others (to be specified)
Total
Investments Outside India in
Government securities (including local authorities)
Subsidiaries and/or joint ventures abroad
Other investments (to be specified)
Total
GRAND TOTAL ( I & II)
Schedule 9 –Advances
As on 31.03.20…….. As on 31.03.20…
(current year) Rs. (prev. Year) Rs.
A .(i) Bills purchased and discounted
ii )Cash, credits, overdrafts and loans repayable on demand
iii)Term loans
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)Others
Total
II. Advances Outside India
Due from banks
Due from others
Bills purchased and discounted
Syndicated loans
Others
Total
GRAND TOTAL (C. I & II)
 60
Schedule 10—Fixed Assets
As on 31.03.20…….. As on 31.03.20…
(current year) Rs. (prev. Year) Rs.
Premises At cost as on 31st March of the preceding year
Additions during the year Deductions during the year
Depreciation to date
Other Fixed Assets (including Furniture and Fixtures)
At cost as on 31st March of the preceding year Additions
during the year Deductions during the year Depreciations to
date.
Total (I & II)
Schedule 11—Other Assets
As on 31.03.20…….. As on 31.03.20…
(current year) Rs. (prev. Year) Rs.
Inter-office adjustments (net)
Interest accrued
Tax paid in advance / tax deducted at source
Stationery and stamps
Non-banking assets acquired in satisfaction of claims
Others*
Total
In case there is any unadjusted balance of loss, the same may be shown under
this item with appropriate footnote.
Schedule 12- Contingent Liabilities
As on 31.03.20…….. As on 31.03.20…
(current year) Rs. (prev. Year) Rs.
Claims against the bank not acknowledged as debts
Liability for partly paid investments
Liability on account of outstanding forward exchange contracts
Guarantees given on behalf of constituents (a) (a)In India
(b) Outside India
V. Acceptances, endorsements and other obligations
VI. Other items for which the bank is contingently liable
Total
D. Note containing guidelines of RBI for compilation of Financial Statements
5.4 RBI INSTRUCTION
Item Schedule Coverage Note and instructions for compilation
Capital 1 Nationalized Banks Capital The capital owned by Central Government as on
(fully owned by Central date of the Balance sheet including contribution
Government) from Government, if any, for participating in World
Bank Projects should be shown.
Banking companies (i)The amount brought in by banks by way of start-
incorporated outside India up capital as prescribed by RBI should be shown
under this head.
ii) The amount of deposit kept with RBI, under sub-
section 2 of Section 11 of the Banking Regulation
Act, 1949, should also be shown.
Other Banks (Indian) Authorized, Issued, Subscribed Called-up Capitals
Authorized Capital (….Shares should be given separately. Calls-in-arrears will be
of Rs…each)Issued Capital deducted from called-up capital while the paid-up
(…Shares) of Rs…each) value of forfeited shares should be added, thus
Subscribed Capital (… shares arriving at the paid-up capital. Where necessary,
 61
Item Schedule Coverage Note and instructions for compilation
of Rs. …each) Called-up Less: Calls unpaid Add: Forfeited shares: Paid-up
Capital (… shares of capital. Where necessary, items which can be
Rs….each) Less: Calls unpaid combined should be shown under the head, for
instance ‘Issued and Subscribed Capital’.
Add: Forfeited shares: paid-up Notes—General
capital
The changes in the above items, if any, during the
years, say, fresh contribution made by
Government, fresh issue of capital, capitalization
of reserves, etc. may be explained in the notes
Reserves and 2 I. Statutory Reserves Reserves created in terms of Section 17 or
Surplus another section of the Banking Regulation Act
must be separately disclosed.
II.Capital Reserves The expression ‘capital reserves’ shall not include
any amount regarded as free for distribution
through the profit and loss account. Surplus or
revaluation should be treated as Capital Reserves.
Surplus on translation of the financial statements
of foreign branches (which includes fixed assets
also) is not a revaluation reserve.
III.Security Premium Premium on issue of share capital may be shown
separately under this head.
IV.Revenue and other The expression ‘Revenue and other Reserve’ shall
Reserves mean any reserve other than capital reserve. This
item will include all reserves, other than those
separately classified. The expression ‘reserve’
shall not include any amount written off or retained
by way or providing for depreciation, renewals or
diminution in value of assets or retained by way of
providing for any known liability.
V.Balance of profit Includes Balance of Profit after appropriations. In
case of loss the balance may be shown as a
deduction. Note—General Movement in various
categories of reserves should be shown as
indicated in the schedule.
Deposits 3 A(I) Demand Deposits Includes all bank deposit repayable on demand
(i) from banks Includes all demand deposits of the non-banking
sectors. Credit balances in overdrafts, cash credit
accounts, deposits payable at call, overdue
deposits, inoperative current accounts matured
time deposits and cash certificates, certificate of
deposits, etc. are to be included under this
category
(ii) from others Included all savings bank deposits (including
inoperative savings bank accounts)
(II) Savings Bank deposits
(III) Terms Deposits Includes all types of bank deposits repayable after
a specified term. Includes all types of deposits of
the non-bank sector repayable after a specified
term. Fixed deposits, cumulative and recurring
deposits, annuity deposits, deposits mobilized
under various schemes, ordinary staff deposits,
foreign currency non-resident deposit accounts,
etc. are to be included under this category.
From banks The total of these two items will agree with the
total deposits.
From others Notes: General
 62
Item Schedule Coverage Note and instructions for compilation
B. (i) Deposits of branches in i.Interest payable on deposits which is accrued but
India not due should not be included but shown under
other liabilities
(ii) Deposits of branches ii.Matured time deposits and cash certificates, etc,
outside India should be treated as demand deposits.
iii.Deposits under special schemes should be
included under term deposits if they are not
payable on demand. When such deposits have
matured for payment, they should be shown under
demand deposits.
iv.Deposits from banks will include deposits from
the banking system in India, co-operative banks,
foreign banks which may or may not have a
presence in India
Borrowings 4 I Borrowings in India Includes borrowing/refinance obtained from
Reserve bank of India. Includes
borrowings/refinance obtained from Commercial
banks (including cooperative banks)
i.Reserve Bank of India Includes borrowings/refinance
ii.Other Banks obtained from Industrial Development Bank of
India, Export-Import Bank of India, National Bank
for Agriculture and Rural Development and other
institutions, agencies (including liability against
participation certificates, if any.)
iii. Other institutions and Includes borrowers of India branches abroad as
agencies well as borrowings of foreign branches.
II.Borrowings outside India This item will be shown separately.
Secured borrowings included Includes secured borrowings/refinance in India
above and outside India.
Note: General
i.The Total of I & II will agree with total borrowings
shown in the balance sheet.
ii.Inter-offer transactions should not be shown as
borrowings.
iii.Funds raised by foreign branches by way of
certificates of deposits, note, bonds, etc. should be
classified depending upon documentation, as
‘deposits’, ‘borrowings’ etc.
iv.Refinance obtained by banks from Reserve
Bank of India and various institutions are being
brought under the head ‘Borrowings’. Hence,
advances will be shown at the gross amount on
the assets side.
Other 5 I. Bills Payable Includes drafts, telegraphic transfers, traveler
Liabilities and cheques, mail transfers payable, pay slips,
Provisions bankers cheques and other miscellaneous items.
II. Inter-Office adjustments The inter-office adjustments balance of credit
(net) should be shown under this head. Only net
position of inter-office accounts, inland as well as
foreign, should be shown here.
III. Interest accrued Includes interest accrued but not due on deposits
and borrowings.
IV. Others (including Includes net provision for income tax and other
provisions) taxes like interest tax (less advance payment, tax
deducted at source, etc.) surplus aggregate in
provision account, surplus in aggregate in
 63
Item Schedule Coverage Note and instructions for compilation
provisions for depreciation in securities,
contingency funds which are not disclosed as
reserves but are actually in the nature of reserves,
proposed dividend/transfer to Government, other
liabilities which are not disclosed under any of the
major heads such as unclaimed discount,
provisions and funds kept for specified purpose,
unexpired discount, outstanding charges like rent,
conveyance, etc. Certain types of deposits like
staff security deposits, margin deposits, etc. where
the repayment is not free, should also be included
under this head.
Note: General
i.For arriving at the net balance of inter-office
adjustments, all connected inter-office accounts
should be aggregated and the net balance only will
be shown, representing mostly items in transit and
unadjusted.
ii.The interest accruing on all deposits, whether the
payment is due or not, should be treated as a
liability
iii.It is proposed to show only pure deposits under
the hear ‘deposits’ and hence all surplus
provisions for bad and doubtful debts, contingency
funds, secret reserves, etc. Which are not netted
off against the relative assets, should be brought
under the hear ‘Others (including provisions)’
Cash and 6 I. Cash in hand (including Includes cash in hand including foreign currency
Balances with foreign currency notes) notes and also of foreign branches in the case of
the Reserve II. Balance with Reserve Bank banks having such branches.
Bank of India of India in current Account
In other Accounts
Balances with 7 In India Includes all balances with banks in India (including
banks and co-operative banks).
money at call
and short
notice
I.Balance with banks Balances in current accounts and deposit
accounts should be shown separately.
A)In current accounts Includes deposits repayable with 15 days’ or less
than 15 days’ notice lent in the inter-bank call
money market.
B)In other Deposit accounts Includes balances held by foreign branches and
(ii)Money at call and short balances held by Indian branches of the banks
notice A)With banks outside India. Balance held with foreign branches
B)With other institutions by other branches of the bank should not be
II.Outside India i.Current shown under this head but should be included in
accounts ii.Deposits inter-branch accounts. The amounts held in
‘current accounts’ and ‘deposits accounts’ should
be shown separately.
iii.Money at call and short Includes deposits usually classified in foreign
notice currencies as money at call and short notice.
Investment 8 I. Investment in India Includes Central and State Government securities
Government securities and Government treasury bills. These securities
should beat the book value. However, the
difference between the book value and market
value should be given in notes to the balance
sheet.
 64
Item Schedule Coverage Note and instructions for compilation
Other approved securities Securities other than Government securities, which
Shares according to the Banking Regulation Act, 1949,
are treated as approved securities, should be
included here.
Debentures and bonds Investment in shares of companies and
corporations not included in item
Investments in (ii)should be included here Investments in
subsidiaries/joint ventures debentures and bonds of companies and
corporations not included in item (ii) should be
included here.
Others Investments in subsidiaries/joint ventures (includes
RRBs) should be included here.
II.Investment outside India Includes residual investments, if any like gold,
commercial paper and other instruments in the
nature of shares/debentures/bonds.
Government securities All foreign Government securities including
(including local authorities) securities issued by local authorities may be
classified under this head.
Subsidiaries and/or joint All investments made in the share capital of
ventures abroad subsidiaries floated outside India and/or joint
ventures abroad should be classified under this
head.
Others All other investments outside India may be shown
under this head.
Advances 9 A.i)Bills purchased and In classification under Section ‘A’, all outstanding -
discounted in India as well as outside-;less provisions made,
will be classified under three heads as indicated
and both secured and unsecured advances will be
included under these heads, including overdue
installments.
(ii)Cash credits, overdrafts and All advances or part of advances which are
loans repayable on demand secured by tangible assets may be shown here.
The item will include advances in India and outside
India.
(iii)Term Loans Advances in India and outside India to the extent
they are covered by guarantees of Indian and
foreign governments and Indian and foreign banks
and DICGC & ECGC are to be included
B.(i) Secured by tangible All advances not classified under (i) and (ii) will be
assets included here. Total of ‘A’ should tally with total of
‘B’
(ii)Covered by Advances should be broadly classified into
bank/Government Guarantee ‘Advances in India’ and ‘Advances outside India’.
(iii)Unsecured C.I. Advances in India will be further classified on the
Advances in India (i) sect oral basis as indicated. Advances to sectors
Priority sectors which for the time being are classified as property
(ii) Public sector sectors according to the instructions of the
(iii)Banks Reserve Bank are to be classified under the head
(iv)Others ‘Priority sectors’. Such advances should be
excluded from item (ii), I.e., advance to public
sector. Advances to Central and State
Governments and other Government undertakings
including Government companies and
corporations which are, according to the statutes,
to be treated as Public sector companies are to be
included in the category “Public Sector”. All
advances to the banking sector including co-
operative banks will come under the head ‘Banks’.
 65
Item Schedule Coverage Note and instructions for compilation
All the remaining advances will be included under
the head ‘Other’ and typically this category will
include non-priority advances to the private joint
and co-operative sectors.
C.II. Advances outside India Notes : General
(i) Due from banks The gross amount of advances including refinance
and rediscounts but excluding provisions made to
the satisfaction of auditors would be shown as
advances.
(ii)Due from others Term loans will be loans not repayable on demand
a.Bills purchased and Consortium advances would be shown net of
discounted share from other participating banks/institutions.
b.Syndicated loans
c.Others
Fixed Assets 10 I Premises Premises wholly or partly owned by the banking
(i)At cost as on 31st March of company for the purpose of business including
the preceding year residential premise should be shown against
(ii) Additions during the year ‘premises’. In the case of premises and other fixed
assets, the previous balance, additions thereto,
(iii)Deductions during the year deductions there from, during the year as also the
(iv)Depreciation to date total depreciation written off should be shown.
Where sums have been written off on reduction of
assets, every balance sheet after the first balance
sheet subsequent to the reduction or revaluation
should show the revised figures for a period of five
years with the date and amount of revision made.
II Other Fixed Assets Motor vehicles and all other fixed assets other
(including furniture and than premises but including furniture and fixtures
fixtures) should be shown under this head.
(i) At cost on 31st March of the
preceding year (ii)Additions
during the year
(iii)Depreciations during the
year
(iv)Depreciation to date
Other Assets 11 I.Inter-office adjustment (net)
The inter-office adjustment balance, if in debit,
should be shown under this head. Only net
position of inter-office accounts, inland as well as
foreign, should be shown here. For arriving at the
net balance of inter office adjustment accounts, all
connected inter-office accounts should be
aggregated and the net balance, if in debit, only
should be shown representing mostly items in
transit and unadjusted items.
II.Interest accrued Interest accrued but not due on investments and
advances and interest due but not collected on
investment will be the main components of this
item. As banks normally debit the borrowers’
account with interest due on the balance sheet
date, usually there may not be any amount of
interest due on advance. Only such interest as can
be realized in the ordinary course should be
shown under this head.
III.Tax paid in advance/tax The amount of tax deducted at source on
deducted at source securities, advance tax paid etc. To the extent that
these items are not set off against relative tax
provision should be shown against this item.
 66
Item Schedule Coverage Note and instructions for compilation
IV.Stationary and stamps Only exceptional items of expenditure on
stationery like bulk purchase of security paper,
loose leaf or other ledgers, etc., which are shown
as quasi-asset to be written off over a period of
time, should be shown here.
V.Non-banking assets The value should be on a realistic basis’ and cost
acquired in satisfaction of escalation should not be taken into account, as
claims these items are for internal use.
VI.Others Immovable properties/tangible assets acquired in
satisfaction of claims are to be shown under this
head. This will include items, debit items
representing addition to assets or reduction in
liabilities which have not been adjusted for
technical reasons, want of particulars, etc.
Advances given to staff by a bank as employer
and not as a banker, etc., Items which are in the
nature of expanses which are pending
adjustments should be provided for and the
provision netted against this item so that only
realizable value is shown under this head. Accrued
income other than interest may also be included
here.
Contingent 12 I. Claims against the bank not Liabilities on partly-paid shares, debentures, etc.
Liabilities acknowledged as debts Will be included in this head.
Bills for II.Liability for partly paid Outstanding forward exchange contracts may be
Collection investments included here.
III.Liability on account of Guarantees given for constituents in India and
outstanding forward exchange outside India may be shown separately.
contracts
IV.Guarantees given on behalf This item will include letters of credit and bills
of constituents (i)in India accepted by the bank on behalf of customers.
(ii)Outside India
V.Acceptances, endorsement Arrears of cumulative dividends, bills rediscounted
and other obligations under underwriting contracts, estimated amounts
of contracts remaining to be executed on capital
account and not provided for, etc. are to be
included here.
Other items for which the bank Bills and other items in the course of collection and
is contingently liable. not adjusted will be shown against this item in the
summary version only. No separate schedule is
proposed.
5.5 MONEY AT CALL AND SHORT NOTICE
This item appears the asset side of a Balance Sheet represents temporary
loans to Bill Brokers, Stock Brokers and other banks. If the loan is given for one
day, it is called “Money at Call” and if the loan cannot be called back on demand
and will require at least a notice of three days for calling back, it is called “Money at
Short Notice”. It also includes deposits repayable within 10 days or less than 15
days notice lent in the inter-bank call money market. The rate of interest on which
money is lent fluctuates everyday, depending on the demand and supply of money.
5.6 ADVANCES
Loans: A bank gives a loan to a customer by a fixed advance on a loan
account. The whole amount of the loan is withdrawn by the customer immediately
and it is repayable after a fixed period. Interest on loan account is payable on the
 67
entire amount till paid off.
Overdrafts: The customer may be allowed to overdraw his current account
with or without security if he requires temporary accommodation. This
arrangement like cash credit is advantages from the customer’s point of view as he
is required to pay interest on the actual amount used by him.
Cash Credits: Cash credit is a system of lending by which the customer’s
account is credited in the books of the banker against which cheques may be
drawn. Interest is charged only on the amount of credit availed of by the customer.
This is just like an overdraft arrangement with a difference, that is, where as there
is an existing accounts in the case of an overdraft, out a new account are opened in
the name of the customer in the case of cash credit. Cash credit may be described
as an inverse current account. In the latter case, the customer deposits money but
in the former case, the banker creates a deposit in favour of the customer. For the
banker, one is borrowing and the other is lending.
Bills discounted and purchased: The banks also give advances to their
customers by discounting their bills. Net amount after deducting the amount of
discount is creidted to the account of customer. The bank may discount the bills
with or without any security from the debtor in addition to one or more persons
already liable on the bill.
5.7 ACCEPTANCES, ENDORSEMENTS AND OTHER OBLIGATIONS
A bank has better credit status than its customer. Credit of a bank is more
acceptable than that of its customers. Therefore, a bank is often requested by its
customers to accept or endorse bill of exchange on their behalf or give a guarantee
of repayment of loans raised by its customers. To safeguard the interest of a bank,
the bank may require the customers to deposit a security for an appropriate
amount against a guarantee, or an acceptance or endorsement by the bank on
behalf of the customers. The bank usually keeps a separate register of bills
accepted and endorsed on memorandum basis together with the details of
securities deposited by customers. If the customer fails to meet the bill, the bank
will sell the security and reimburse itself. Any shortfall has to be written off as bad
debt.
5.8 BILL FOR COLLECTION
The sellers of goods draw bills and hundis on their customers and send them
to their bankers for collection against delivery documents like lorry receipts, railway
receipts, bills of loading etc. The particulars of these bills are properly recorded in a
separate book known as “Bills for Collection Register”. Bills sent for collection do
not form a transaction to the banker and hence they are not entered in any book of
accounts, until cash is actually realized from the concerned parties. On receipt of
cash, the Cash Account is debited with full amount received and the Customers’
Current Account is credited after deducting the bank’s commission.
 68
5.9 BILLS PAYABLE
Bankers provide instruments like demand drafts, telegraphic transfers, mail
transfers and traveler cheques for remitting funds from one place to another. All
such instruments which are outstanding are shown as bills payable. Bankers’
cheques are issued by banks for payments of their own and also when customers
request the same in lieu of cash.
5.10 BILLS PURCHASED AND DISCOUNTED
Customers offer to a bank bills receivable for outright purchase or discounting.
When the bank purchases or discounts the bill, the amount of the bill less discount
charge is credited to the account of the customers, the discount charged is credited
to the Discount Account and the full amount of bill is debited to Discounted Bills
Account. At the end of the year, the outstanding amount of all such bills is shown
as Bills Purchased and Discounted in Schedule 9 of the Balance Sheet.
5.11 REBATE ON BILLS DISCOUNTED
If appears in the Trial Balance, is taken to the Balance Sheet on the Liability
side. However, if adjustment has to be done after preparation of the Trial Balance in
respect of Rebate on Bills Discounted, the amount of such Rebate, i.e., unearned
Discount will be deducted from the total Discount in the Profit and Loss Account
and will also appear as a liability in the Balance Sheet.
5.12 CLASSIFICATION OF BANK ADVANCES
The most important asset for banks is “loans and advances’ comprising cash
credits and overdrafts, bills discounted and purchased and term loans. The banks
have to classify they advances as follows in order to arrive at the amount of the
provision to be made against them, into the following groups:
1. Standard assets
2. Sub-standard assets
3. Doubtful assets, and
4. Loss assets
This classification is done after taking into consideration the degree of well
defined credit worthiness and the extent of dependence on the collateral security for
realization of dues. They are discussed below:
(1).Standard Assets: Standard assets are those which do not pose any
problems and which do not carry more than normal risk attached to the business.
They are non-performing assets
(NPA). No provision is required to be made against them. However, banks have
been asked to make provision at the rate of 0.25% on their standard advances also
from the year ending 31st March, 2000.
(2) Sub-standard Assets: Sub-standard assets are those which have been
classified as NPA for a period not exceeding 18 months. In such cases, the security
available to the bank is inadequate and there is a distinct possibility that the bank
 69
will suffer some loss, if deficiencies are not corrected. Provision has to be made at
the rate of 10% of the total outstanding amount of sub-standard assets.
However, in respect of accounts where there are potential threats of recovery
on account of erosion in the value of security or non-availability of security and
existence of other factors, such as frauds committed by borrowers, it will not be
prudent for banks to classify them first as sub-standard and then as doubtful after
expiry of two years from the date the account has become NPA Such accounts
should straightway be classified as doubtful assets, or loss asset, as appropriate.
Irrespective of the period for which it has remained as NPA.
3) Doubtful Assets: Doubtful assets are those which have remained NPA for a
period exceeding 18 months. This period of two years is being reduced to 18th months
by 31st March, 2001. These assets are so weak that their collection of liquidation in
full is considered highly improbable. A loan classified as doubtful has all the
weaknesses inherent in the classified as sub-standard with the added characteristic
that the weaknesses make collection or liquidation in full, high questionable and
improbable non the basis of currently known facts, condition and values.
In order to arrive at the amount provision to be made against doubtful assets,
the unsecured portions and the secured portions of these assets have to be
considered separately. The unsecured portion has to be fully provided for, i.e.,
provision has to be made equal to 100% of the amount by which the advance is not
covered by the trainable value of the security. In addition to this provision has to be
made even against the secured portion on the following basis:
Period for which the advance Percentage of the secured portion has been
considered doubtful to be provided for
 Up to one year 20
 One Year to three years 30
 More than three years 50
(4) Loss Assets: Loans assets are those where loss has been identified by the
bank or internal or external auditors or RBI inspectors but the amount has been
written off wholly or partly. These assets are uncollectable and, therefore, they
must be written off even though there may be a remote possibility of recovery of
some amount.
Provision of 100% of the outstanding balance should be made.
5.13 THE SLIP SYSTEM OF POSTING
The function of a bank is to deal with cash. Double Entry System of Book-
keeping is adopted in Banking Companies. The slip system is popular in banks for
efficient and quick record of all transactions. This is not a separate system of
maintaining accounts but only a device to expedite the posting the personal ledger
of the customers. The day-to-day transactions of a banking company being
numerous and the accounting entries are to be completed before the completion of
 70
transactions, the slip system is quicker and speedier apart from smooth flow of
work. The main slips are Pay-in-slips, withdrawals, cheques etc. These slips are
filled in by clients of the bank. These slips serve as a basis of entry in the ledgers
which are analyzed on the basis of these slips. For instances, when a pay-in-slip is
duly filled in and given to the counter along with cash, the cashier signs on the
counterfoil which is returned to the client. The portion retained by the cashier
passes on to the concerned persons, who make enters in the concerned ledgers and
lastly go to file. Thus the slip system keeps the accounts up to date, apart from
work by avoiding subsidiary books. The slips can be passed very easily, instead of
bulky registers, from person to person.
5.14 EXAMPLES
1. The following balance stood in the books of Nava Bank Ltd. On 31st March,
2021, after the preparation of profit and Loss Account:
Rs. (‘000)
Share Capital 3,500
Reserve Fund 2,400
Fixed Deposit Account 6,650
Savings Bank Accounts 21,000
Current Accounts 56,000
Money at Call and Short Notice 2,100
Investments at Cost 21,000
Profit & Loss (Cr.) 1.4.2020 1470
Dividends for 2020 350
Land and Buildings (after depreciation up to 31.3.2021) 7,445
Cash in Hand 420
Cash with RBI 10,500
Cash with other banks 9,100
Borrowings from other banks 4,400
Bills Discounted and purchased 4,200
Sundry Creditors 210
Bills Payable 5,600
Unclaimed Dividend 210
Bills for Collection 980
Acceptances on behalf of Customers 1,400
Net profit for 2020-21. 1,680
(The profit is after deducting provisions for bad debts Rs.2,10,000, tax provision
Rs. 7,00,000 and rebate on bills discounted Rs.35,000 prepare the Balance Sheet.
Prepare the Balance Sheet.
 71
Solution
NAVA BANK LTD.
BALANCE SHEET as on 31st March 2021
Schedule Current Year Previous Year
st st
No. 31 Mar., 2021 31 Mar., 2020
Capital and Liabilities Rs.(‘000)
Share Capital 1 3,500
Reserves and Surplus 2 5,250
Deposits 3 83,650
Borrowings from other banks 4 4,400
Other Liabilities and Provisions 5 6,965
Total 1,03,765
Assets
Cash on hand and Balance with RBI 6 10,920
Balance with other banks and money at call and short notice 7 11,200
Investments at cost 8 21,000
Advances 9 53,200
Fixed Assets(Land and Buildings) 10 7,445
Other Assets 11 ---
Total 1,03,765
Contingent Liabilities 12 1,400
Bills for Collection 980
Working:
SCHEDULE 1-SHARE CAPITAL
Current year as on Previous year as on
st st
31 March 2021 31 March 2020
Rs.(‘000)
I. Paid up Capital 3,500
Total 3,500
SCHEDULE 2- RESERVES AND SURPLUS
Current year as on Previous year as on
st st
31 March 2021 31 March 2020
Statutory Reserve Rs.(‘000)
I. Additions during the year 2,450
(20% of Rs.1,680) 2,786
Capital Reserve 336
II. Securities Premium --
III. Revenue Reserves 2,464*
IV. Balance of Profit --
V. Total 5,250
Net Profit (current year) 1,680
Net Profit (Previous year) 1,470
3,150
Less: Appropriations:
Statutory Reserve 336
Dividend Paid 350 686
Surplus: 2,464
 72
SCHEDULE 3-DEPOSITS
Current year as on Previous year as on
st st
31 March 2021 31 March 2020
Rs.(‘000)
I. Fixed Deposits 6,650
II. Savings Bank Accounts 21,000
III. Current Accounts 56,000
Total 83,650
SCHEDULES 4- BORROWINGS
Current year as on Previous year as on
st st
31 March 2021 31 March 2020
Rs. (‘000)
I. Borrowings from other banks 4,400
Total 4,400
SCHEDULES 5- OTHER LIABILITIES AND PROVISIONS
Current year as on Previous year as on
st st
31 March 2021 31 March 2020
Rs.(‘000)
I. Rebate on Bills Discounted 35
II. Sundry Creditors 210
III. Bills Payable 5,600
IV. Unclaimed Dividends 210
V. Provision for Bad Debts 210
VI. provision for tax 700
VII. Total 6,965
SCHEDULES 6-CASH AND BALANCES WITH RBI
Current year as on Previous year as on
st st
31 March 2021 31 March 2020
Rs. (‘000)
I. Cash in hand 420
II. Cash with RBI 10,500
Total 10,920
SCHEDULE 7-BALANCES WITH BANKS AND MONEY AT CALLAND SHORT NOTICE
Current year as on Previous year as on
st st
31 March 2021 31 March 2020
Rs.(‘000)
I. Money with Other Banks 9,100
II. Money at Call and Short Notice 2.100
Total 11,200
SCHECULES 8-INVESTMENTS
Current year as on Previous year as on
st st
31 March 2021 31 March 2020
Rs.(‘000)
I. Investments at Cost 21,000 21,000
Total 21,000
SCHEDULE 9- ADVANCES
Current year as on Previous year as on
st st
31 March 2021 31 March 2020
Rs.(‘000)
I. Bills Discounted and Purchased 4,200
II. Loans, Overdrafts and Cash Credits 49,000
III. Term Loans --
Total 53,200
 73
SCHEDULE 10-FIXED ASSETS
Current year as on Previous year as on
st st
31 March 2021 31 March 2020
Rs.(‘000)
I. Land and Buildings 7,445 7,445
Total 7,445
SCHEDULES 11-OTHER ASSETS NIL
SCHEDULE 12-CONTINGENT LIABILITIES
Current year as on Previous year as on
st st
31 March 2021 31 March 2020
Rs.(‘000)
I. Acceptances on behalf of customers 1,400
Total 1,400

2.The following ledger balance of Mumbai Bank as at 31st March, 2021 is given
below. Prepare profit and Loss Account and Balance Sheet as per requirements of
law. (Rs.000)
Statutory Reserve 1,200
Bad Debts written off 128
Operating Expenses 182
Current Accounts 20,245
Interest paid 160
Deposit Accounts 6920
Profit and Loss A/c B.F 229
Bills Receivable for Customers 1,500
Discount 244
Enforcement and Guarantee 575
Commission 45
Cash 225
Interest Earned 550
Balance with Reserve Bank 2.030
Balance with foreign Banks 1,206
Bills for Collection 1,500
Borrowings from Banks 6,482
Cash Credits and Overdrafts 15,457
Investments 9,882
Bills Discounted 6,228
Premises 2,217
Share Capital 2,000
The following further information is furnished:
Rebate on Bills discounted to be provided of Rs.64,000.
The Bank had paid an interim dividend of Rs. 2,00,000 during the year.
 74
Solution
MUMBAI BANK
PROFIT AND LOSS ACCOUNT for the year ended 31st March, 2021
Schedule No. Year ended 31st
March, 2021
I. INCOME Rs.(‘000)
Interest Earned 13 730
Other Income 14 45
Total 775
II. EXPENDITURE
Interest Expended 15 160
Operating Expenses 16 182
Provisions and Contingencies 128
Total 470
III. PROFIT/LOSS
Net Profit for the year 305
Profit brought forward 229
Total 534
IV. APPROPRIATIONS
Transfer to Statutory Reserve 61
Transfer to Other Reserve --
Transfer to Govt./ proposed Dividend 200
Balance carried over to Balance Sheet 273
Total 534
Working
SCHEDULE 13-INTEREST EARNED
Year ended 31st
March, 2021
Rs.(‘000)
I. Interest/Discounts on Advances/Bills 9Rs.550+Rs.244-Rs.64) 730
II. Income on Investments --
III. Interest on balances with RBI and other inter-bank funds --
IV. Others --
Total 730
SCHEDULE 14-OTHER INCOME
Year ended 31st
March, 2021
Rs.(‘000)
I. Commission, Exchange and Brokerage 45
II. Lockers Rent --
III. Transfer fees --
Total 45
SCHEDULE 15-INTEREST EXPENDED
Year ended 31st
March, 2021
Rs.(‘000)
I. Interest on Deposit 160
Total 160
SCHEDULE 16-OPERATING EXPENSES
Year ended 31st
March, 2021
Rs. (‘000)
I. Operating Expenses 182
Total 182
 75
MUMBAI BANK
BALANCE SHEET
As on 31st March, 2021
Schedule No. As on 31st March.
2021Rs.(‘000)
Capital and Liabilities 1 2,000
Capital 2 1,534
Reserves and Surplus 3 27,165
Deposits 4 6,482
Borrowings from other banks 5 64
Other Liabilities and Provisions 37,245
Total
Assets 6 2,255
Cash on hand and balance with RBI
Balance with other banks and money at call and short notice 7 1,206
Investments 8 9,882
Advances 9 21,685
Fixed Assets 10 2,217
Other Assets 11 --
Total 37,245
Contingent Liabilities 12 2,075
Workings
SCHEDULES 1 –CAPITAL
As on As on
31st March, 2021 31st March, 2020
Rs.(’000)
I. Paid up Capital 2,000
Total 2,000
SCHEDULE 2- RESERVES AND SURPLUS
As on As on
st st
31 March, 2021 31 March, 2020
Rs.(‘000)
.I Statutory Reserve (Rs.1,200+Rs.61) 1,261
II. Balance in profit and Loss A/c 273
Total 1,534
SCHEDULE 3-DEPOITS
As on As on
st st
31 March, 2021 31 March, 2020
Rs.(‘000)
I. Current Accounts 20,245
II. Deposit Accounts 6,920
Total 27,165
SCHEDULE 4-BORROWINGS
As on As on
st st
31 March, 2021 31 March, 2020
Rs. (‘000)
I. Borrowings from other banks 6,482
Total 6,482
 76
SCHEDULE 5-OTHER LIABILITIES AND PROVISIONS
As on As on
st st
31 March, 2021 31 March, 2020
Rs.(‘000)
I. Inter-Office Adjustments --
II. Other Liabilities (Rebate on Bills discounted) 64
Total 64
SCHEDULE 6- CASH AND BALANCES WITH RBI
As on As on
st st
31 March, 2021 31 March, 2020
Rs.(‘000)
I. Cash in hand 225
II. Balance with RBI 2,030
Total 2,255
SCHEDULE 7-BALANCES WITH BANKS AND MONEY AT CALL AND SHORT NOTICE
As on As on
st st
31 March, 2021 31 March, 2020
Rs.(‘000)
I. Balance with Foreign Banks 1,206
Total 1,206
SCHEDULE 8-INVESTMENTS
As on As on
st st
31 March, 2021 31 March, 2020
Rs.(‘000)
I. Investments 9,882
Total 9,882
SCHEDULE 9-ADVANCES
As on As on
st st
31 March, 2021 31 March, 2020
Rs.(‘000)
I. Bills Discounted 6228
II. Cash, Credits and Overdrafts 15,457
Total 21,685
SCHEDULE 10-FIXED ASSETS
As on As on
st st
31 March, 2021 31 March, 2020
Rs.(‘000)
I. Premises 2,217
Total 2,217
SCHEDULE 11-OTHER ASSETS
-- NIL --
SCHEDULE 12-CONTINGENT LIABILITIES
As on As on
st st
31 March, 2021 31 March, 2020
Rs.(‘000)
I. Bills for Collection 1,500
II. Endorsement and Guarantees 575
Total 2,075
 77
3. On 31st December, 2021 a Bank had the following unmetered Bills:@
Date of Bill Amount Terms (months) Discount @
Rs.
th
12 October 36,500 6 7%
th
7 November 73,000 4 6.50%
st
1 December 18,250 3 6%
Solution
Amount of the No. of days up to the date Discount Total No. of days after Unearned
S. No. st
Bill of maturity Rate Discount 31 Dec., 2021 Discount
I. 36,500 182 7% 1,274 105 735
II. 73,000 120 6.50% 1,560 69 897
III. 18,250 90 6% 270 63 189
1,27,750 3,104 1,821
Journal Entry at the Time of Discounting
Rs. Rs.
Bills Discounted & Purchased Account Dr. 1,27,750
To Customer Account 1,24,646
To Discount Account 3,104
(Being Bills of Rs. 1,27,750 discounted and purchased)
Journal Entry on 31st December, 2021
Discount Account Dr. Rs. Rs.
To Rebate on Bills Discounted Account (Being unearned discount) 1,821 1,821

Workings
7 182
Rs.36,500 x x =Rs.1,274.00
100 365
105
Rs. 1,274 x = Rs.735.00
182
6.5 120
Rs. 73,000 x x = Rs.1,560.00
100 365
69
Rs. 1,560 x = Rs.897
120
6 90
Rs. 18,250 x x = Rs.270
100 365
63
Rs. 270 x = Rs.189
90
4. From the following information, find out the amount of provision to be
shown in the Profit and Loss Account of a bank:
Assets: Rs.
(in Lakhs)
Standard 8,000
Sub-standard 6,000
Doubtful: for one year 1,000
For three years 1,600
For more than three years 400
Loss Assets 1,200
 78
Solution
CALCULATION OF PROVISION
Assets Amount (Rs.(’00,000) % of Provision provision Rs(’00,000)
Standard 8,000 0.25 20
Sub-standard 6,000 10 600
Doubtful: for one year 1,000 20 200
for 3 years 1,600 30 480
for more than 400 50 200
3 years 1,200 100 1,200
Loss Assets. Total 2,700
SUMMARY
Banking Company, Balance Sheet have with separate schedules, which are
provided by RBI. The same shall be strictly followed by all commercial banks. Each
every schedule have their our contents. Schedule number one to five liabilities, and
six to twelve showed as assets.
KEYWORDS
Money at Call: Loan is given one day
Short notice: At least a notice of three days for calling back
Advances: Advances on loans, overdrafts and cash credits against on these the
banks may provide amount to customers.
Acceptances, Endorcements and other obligations: custom fail to meet the bill,
the bank will sell the security and reimburnce itself.
Standard Asset: Not pose to any problems, they are won performing assets.
5.15 SELF-ASSESSMENT TEST
1. Explain slip system of posting. What are its special features? What are its
advantage and disadvantages?
2. What are the main features of a bank’s accounting system?
3. What are non-performing assets?
4. What is ‘Statutory Reserve’? How is it created?
5. From the following figures taken from the books of Money Bank Ltd.,
prepare profit and Loss Account and Balance Sheet as on 31.12.2021:
(Rs. in ‘000)
10,000 shares of Rs.100 each, Rs, 50 paid up 500
Reserve fund investments 350
Fixed deposits 950
Savings bank deposits 3,000
Current deposits 8,000
Money at call and short notice 450
Investments 2,500
Interest accrued and paid 200
Rent 20
Salaries (including G.M.s salary Rs.24,000) 69
 79
Directors fees 6
Provident Fund contribution 5
General expenses 10
Profit and loss Account-1.1.2021 200
Bank drafts 310
Unclaimed dividends 20
Premises (after depreciation up to 31.12.2020 Rs.1,00,000) 1,200
Cash 150
Stock of stationery 10
Cash with RBI 1,400
Traveller’s cheques 500
Balance with other banks 1,600
Letters of credit 300
Borrowed from banks 800
Owing by foreign correspondents 100
Interest and discounts 700
Commission 50
Bills Discounted 600
Loans 3,000
Cash credits and overdrafts 4,000
Bills for collection 140
Acceptances on behalf of customers 200
Dividend for 2020 50
Branch adjustments (Cr) 10
Rebate on bills discounted for unexpired term is Rs.5,000. A provision for
doubtful debts amounting to Rs. 30,000 is required. Create provision for
taxation to the extent of Rs. 1,00,000. Charge 5% depreciation on premises
on original cost. Traveller’s cheques paid amounted to Rs. 20,000.
REFERNCE BOOKS
1. Shukla MC, Grewal TS,Gupta SC., Advanced Accounts, S.Chand &
Company Ltd, New Delhi.
2. Pillai RSN, Bagavathi, Umas, Fundamentals of Advanced Accounting,
S.Chand & Company Ltd, New Delhi.

 80
LESSON – 6
INSURANCE COMPANY ACCOUNTS –INTRODUCTION
OBJECTIVES
Students after studying in this lesson they can able to learn with the following
objectives. They are, introduction about insurance business, types of insurance,
regulatory authorities, format for preparing life insurance company accounts and
their explanations.
CONTENTS
6.1 Introduction
6.2 Types of insurance
6.3 Insurance Business in India
6.4 Companies carrying insurance business
6.5 Regulation of insurance business in India
6.6 Duties &Power and functions of IRDA
6.7 IRDA Regulation
6.8 Preparation of final accounts of insurance companies
6.9 Self Assessment Test
6.1 INTRODUCTION
Life is full of risk and uncertainly. Man may meet an untimely death. He may
suffer the effects of an accident, destruction of property by fire, floods earthquakes
and what not. And once any such thing happens, life for him and/or his
dependents may becomes miserable. But while one cannot do anything to prevent
such a tragedy, one can certainly do something about the loss arising from it. How?
Insurance is the answer.
Insurance is an invaluable means to provide protection against risks. It is the
nature of insurance to mitigate various sorts of risks about which people are
ignorant or careless. Insurance is an agreement between two parties whereby the
insurer undertakes to indemnify the risk of the insured on receipt of a small sum,
known as ‘Premium’. According to Justice Tindal, “Insurance is a contract through
which the insurer agrees to pay a stipulated amount to the insured on the
occurrence of an eventuality in lieu of a sum of premium”.
The person, firm or an organization which agrees to indemnify these losses for
a sum of money known as premium is called “Insurer” and the person for whom
such a risk is to be borne is called ‘Insured’. The document through which the
insurance company and the insured enter into contract is called insurance policy.
Presence of insurable interest is essential in all insurance contracts. Insured must
show that he has some pecuniary interest in it.
The contracts of insurance are ‘Uberrimae fidei’ i.e., the utmost good forth,. It
means that the proposer must disclose every such material fact known to him/her
to the insurer which may affect the insurance. In the same way the insurer should
 81
also show utmost good faith in his/her dealings with the insured.
6.2 TYPES OF INSURANCE
Insurance business can be divided into two well-marked classes, viz, i) Life
and ii) General.
I. Life Insurance
A contract of life insurance is a contract under which, in consideration of
sums of money called premium, the insurer agrees to pay a certain amount on the
death of the assured or upon the expiry of a certain fixed period, whichever is
earlier. Life policies are of various types. But their man varieties are the following.
a) Whole Life policy. under this policy, the premium continues to be paid
throughout the life –time of the assured, but the policy money becomes payable
only after his/her death.
b) Endowment Policy: It is a policy which runs for a fixed period(i.e., number
of years) Under this policy, the money is payable either at the end of a specified
number of years or upon death of the insured person whichever is earlier. It may
also be taken for the marriage of children when they attain a certain age, or for the
education of children after the death of the assured.
c) With profit Policy: Under this policy, the policyholders are entitled to
participate in the profit of the company in addition to receiving a guaranteed sum of
money on maturity.
d) Without profit policy: Under this policy, the policy holders will get only a
fixed sum of money on maturity and they are not eligible to get any share in the
profits of the company.
e) Annuity: The person taking out an annuity may pay the premium in regular
installments over a certain period or, he/she may pay it in a lump sum at one go.
After the assured reaches a certain age, the insurer will pay back the money by
monthly, quarterly, half yearly or yearly installments. An annuity provides a source
of regular income to the assured or to his/her dependents after the expiry of a
specified period.
II. General Insurance
It is a contract under which the insurer, in consideration of a certain
premium, undertakes to reimburse the insured for any loss or liability he/she may
incur on the happening of an uncertain event. In practice, all insurance other than
life are regarded as general insurance. The following are the various types of
insurance included in it.
i) Fire insurance: It is a contract of indemnity under which the insurance
company undertakes to pay the insured for the damage or loss caused to the
property insured against fire for consideration of premium. Moreover the
compensation given to the insured never exceeds the amount insured.
ii) Marine Insurance: It is a contract of insurance under which the insurer
who is also known as the underwriter agrees to indemnify the insured against the
 82
losses incidental to marine adventure. A contract of marine insurance today covers
cargo, the ship and also the freight.
iii) Accident Insurance Contracts: Under these contracts, amount of
insurance becomes payable on the happening of insured accident. Insured has to
pay premium in this case also like all other cases.
iv) Other insurance: In addition to fire, marine and accident insurance, there
are other forms of insurances also, as a musician insures his voice and a dancer
insures his/her legs etc. sometimes, the policy may also be taken for burglary,
fidelity, third party, workmen compensation, consequential loss etc.
6.3 INSURANCE BUSINESS IN INDIA:
Insurance is a federal subject in India. The primary legislation which deals
with various aspects relating to accounts and audits of insurance business are as
under:
A) The Insurance Act 1938; Insurance (Amendment) Act 2000;
B) Insurance Rules 1939
C) The companies Act 1956
D) The general insurance business (Nationalization) Act, 1972.
E) The insurance regulatory and Development authority Act,1999.
F) The Insurance Regulatory and Development authority Regulations, 2002.
The Insurance Act 1938 controls the working and the activities of companies
carrying on Insurance business. In 1956 Life Insurance business was Nationalized
and the Life Insurance Corporation Act of 1956 brought into existence the Life
Insurance Corporation (LIC) which enjoyed ‘monopoly’ over Life insurance business
in India till the year 2000.
In 1963 Marine Insurance Act was passed to regulate Marine Insurance
business. General Insurance business was also Nationalized on 13th May 1971. The
General Insurance Corporation was set up which along with its subsidiaries
controlled general insurance business in India.
The Insurance Regulatory and Development Authority Act was passed by
parliament in 1999 regulate the total Insurance business in India. The insurance
Act 1938 was also a ended by the enactment of Insurance (Amendment) Act 2000.
As a result of continued liberalization policies of the Central Government, the
Insurance business has also been opened to the Private sector.
6.4 COMPANIES CARRYING ON INSURANCE BUSINESS:
At present Life Insurance business in India is carried on by more than a dozen
companies.
Life Insurance Corporation of India (LIC) controls more than 85% of the Life
Insurance business in India. The following are the other private sector companies
carrying of life Insurance business.
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1. HDFC Standard Life Insurance Co. Ltd.,
2. ICICI prudential Life Insurance Co. Ltd.,
3. SBI Life Insurance Co. Ltd.,
4. Max Newyork Like insurance Co. Ltd.,
5. Om Kotak Mahindra Life Insurance Co., Ltd.
6. Birla sun Life Insurance Co., Ltd.
7. Tata Aig Life insurance Co., Ltd.,
8. ING Vysya Life Insurance Co., Pvt. Ltd.,
9. Allianz Bajaj Life insurance Co., Ltd.,
10. Met Life India Insurance Co., Pvt Ltd.,
11. AMP SANMAR Assurance Co., Pvt. Ltd.,
12. Aviva Life Insurance Co., India Pvt.Ltd.,
General Insurance Business is carried on by the General Insurance
Corporation of India which has become a “National Reinsurer” for General
Insurance Business and its former subsidiaries have all become independent
general insurance companies which are:
i. The Oriental Insurance Co., Ltd.
ii. The New India Assurance Co., Ltd.
iii. National Insurance Co., Ltd.
iv. United India Insurance Co., Ltd.
Since April 2000, several private general insurers have also entered the general
insurance business. The following are the important companies in the private
sector.
1. Reliance General Insurance Co., Ltd.
2. Tata AIG general Insurance Co., Ltd.
3. Bajaj Allianz general Insurance Co., Ltd.
4. ICICI Lombard general Insurance Co., Ltd.
5. Royal Sundaram Alliance Insurance Co., Ltd.
6. IFFCO TOKIO General Insurance Co., Ltd.,
7. Cholamandalam general Insurance Co., Ltd.
8. Export credit guarantee corporation Ltd.
9. HDFC- Chubb general Insurance Co. Ltd.
6.5 REGULATION OF INSURANCE BUSINESS IN INDIA:
Insurance Regulatory Authority (IRA) was set up in 1996 by the government to
regulate insurance business in India. However, it is renamed as “Insurance
Regulatory and Development Authority—IRDA” Under the IRDA Act 1999 passed by
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Parliament to regulate total insurance business in the country.
As per Section 4 of the IRDA Act. IRDA’s composition is as under:
i) A chairman
ii) Five whole-time members
iii) Four part-time members
All the above officials are to be appointed by the Government of India.
6.6 DUTIES, POWERS AND FUNCTIONS OF IRDA:
The following are the duties, power and functions of IRDA, as laid down in
Section 14 of the IRDA Act, 1999.
1. Subject to the Provisions of this Act and any other law for the time being in
force, the Authority shall have the duty to regulate, promote and ensure
orderly grow of the insurance business and re-insurance business.
2. Without prejudice to the generality of the provisions contained in
subsection(1) the powers and functions of the Authority shall include;
a. Issue to the applicant a certificate of registration, renew, modify,
withdraw, suspend or cancel such registration.
b. Protection of the interests of the policyholders in matters concerning
assigning of policy., nomination by policyholders, insurable interest,
settlement of insurance claim, surrender value of policy and other
terms and conditions of contracts of insurance;
c. Specifying requisite qualifications, code of conduct and practical
training for intermediary or insurance intermediaries and agents;
d. Specifying he code of conduct for surveyors and loss assessors;
e. Promoting efficiency in the conduct of insurance business;
f. Promoting and regulating professional organizations connected with the
insurance and reinsurance business.
g. Levying fees and other charges for carrying out the purposes of the Act.
h. Calling for information from, undertaking inspection of conducting
inquiries and investigations including Audit of the insurers,
intermediaries, insurance intermediaries and other organizations
connected with the insurance business.
i. Control and regulations of the rates, advantages, terms and conditions
that may be offered by insurers in respect of general insurance
business not so controlled and regulated by the Tariff Advisory
committee under Section 64U of the Insurance Act, 1938;
j. Specifying the form and manner in which “Books of Account” shall be
maintained and statement of Accounts shall e rendered by insurers and
other insurance intermediaries.
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k. Regulating investment of funds by insurance companies;
l. Regulating maintenance of margin of solvency.
m. Adjudication of disputes between insurers and intermediaries, or
insurance intermediaries.
6.7 IRDA REGULATIONS 2002:
IRDA has issued, through a notification in the gazette of India, regulations
which govern the preparation of Financial Statements and Auditors report of
Insurance companies.
1. An insurer carrying on Life insurance business shall comply with the
requirement of ‘Schedule ‘A
2. An insurer carrying on General Insurance business shall comply with the
requirements of Schedule B
3. The report of the Auditors of the Financial Statements of every insurer and
reinsure shall be in conformity with the requirements of ‘Schedule C’
6.8 PREPARATION OF FINAL ACCOUNTS OF INSURANCE COMPANIES
Some general points to be noted:
1. Figures in the financial statements may be rounded off to the nearest
thousands.
2. The corresponding amounts for the immediately preceding year for all
items shown in Revenue A/c, P & L A/c and Balance Sheet shall be given.
3. The Insurer is required to close Accounts on 31st March every year.
4. 4)Every Insurer is required to keep separate accounts relating to funds of
shareholders and policyholders.
5. Insurers are not allowed to invest, either directly or indirectly, their funds
outside India.
6. Every insurer shall keep a required “Solvency Margin”. The margin refers to
the excess of assets over liabilities.
SUMMARY
Insurance is an invaluable means to provide protection against the risks. The
risks may bear with make effective insurance in shortest maturity returnable
policy. In general practice of insurance life and general are very popular. Moreover
the compensation given to the insured never exceeds the amount insured by
insurer. It provides various art, at present many company engaging the insurance
business in India.
KEYWORDS
Insurer: The person agrees to indemnity these losses for a sum of money as
premium is called insurer.
Insured: The person for whom such a risk is to be borne is called insured.
Life Insurance: Which have the different types they are, whole life policy,
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Endowment policy, profit policy, without profit policy, and annuity.
General Insurance: It have the followings, Fire, Marine, Accident Insurances
and others.
6.9 SELF ASSESSMENT TEST
1. What do you understand by ‘Life Assurance Fund’?
2. What is meant by ‘Annuity’?
3. Explain the meaning of ‘Surrender value’.
4. What is the difference between ‘ Annuities’ and consideration for annuities
granted’?
5. Distinguish between Life Insurance and General Insurance.
6. Prepare Revenue Account of a Life Insurance business in prescribed form
as per the IRDA regulations and explain the items there in.
REFERENCE BOOKS
1. Jain SP, Navarg KL, Corporate Accounting, Kalyani Publishers, New Delhi.
2. Reddy TS, Murthy A, Corporate Accounting, Margham Publications,
Chennai.

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LESSON – 7
ACCOUNTING PRINCIPLES FOR LIFE INSURANCE BUSINESS
OBJECTIVES
Students after completing in this lesson they can able to learn the following
objectives, introduction, various part of accounting principles related to life
insurance business.
CONTENTS
7.1 Introduction
7.2 Part I Accounting principles for preparation of Financial Statement
7.3 Part II Disclosure forming part of Financial Statement
7.4 Part III General Instruction for preparation of financial statement
7.5 Part IV Content of Management Report
7.6 Part V Preparation of Financial Statement
7.7 Self-Assessment Test
7.1 INTRODUCTION
In general, Life insurance companies to consider the following procedure for
present their report as an account format. Some of the important part of accounting
principles to be present here to understand the further proceeds
7.2 PART -1 ACCOUNTING PRINCIPLES FOR PREPARATION OF FINANCIAL
STATEMENTS
1. Applicability of Accounting Standards
Every Balance Sheet, Revenue Account [Policyholders’ Account]., Receipts and
Payments Account [Cash Flow statement] and Profit and Loss Account
[Shareholders’ Account] of an insurer shall be in conformity with the Accounting
Standards (AS) issued by the ICAI, to the extent applicable to insurers carrying on
life insurance business, except that:
i) Accounting Standard 3 (AS-3) Cash Flow Statements—Cash Flow Statement
Shall be prepared only under the Direct Method.
ii) Accounting Standard 17 (As-17) Segment Reporting—shall apply to all insurers
irrespective of the requirements regarding listing and turnover mentioned therein.
2. Premium
Premium shall be recognized as income when due. For linked business the due
date for payment may be taken as the date when the associated units are created.
3. Acquisition Costs
Acquisition costs, if any, shall be expensed in the period in which they are
incurred. Acquisitions costs are those costs that vary with and are primarily related
to the acquisition of new and renewal insurance contracts. The most essential test
is the obligatory relationship between cost and the execution of insurance
contracts(i.e., commencement of risk).
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4. Claims Cost
The ultimate cost of claims shall comprise the policy benefit amount and
specific claims settlement costs, wherever applicable.
5. Actuarial Valuation—Liability for Life policies
The estimation of liability against life policies shall be determined by the
appointed actuary of the insurer pursuant to his annual investigation of the life
insurance business Actuarial assumptions are to be disclosed by way of notes to
the account.
The liability shall be so calculated that together with future premium
payments and investment income, the insurer can meet all future claims (including
bonus entitlements to policyholders) and expenses.
6. Procedure to determine value of investments
An insurer shall determine the values of investments in the following manner:
a).Real Estate—Investment property:
The value of investment property shall be determined at historical cost, subject
to revaluation at least once in every three years. The change in the carrying amount
of the investment property shall be taken to Revaluation Reserve.
The insurer shall assess at each balance sheet date whether any impairment
of the investment property as occurred. Gains/losses arising due to changes in the
carrying amount of real estate shall be taken to equity under ‘Revaluation Reserve’.
The ‘Profit on sale of investments’ or Loss on sale of investments’. As the case may
be, shall include accumulated changes in the carrying amount previously
recognized in equity under the heading ‘Revaluation Reserve’ in respect of a
particular property and being recycled to the relevant Revenue Account or profit
and Loss Account on sale of that property.
The bases for revaluation shall be disclosed in the notes to accounts. The
Authority may issue directions specifying the amount to be released from the
revaluation reserve for declaring bonus to the policyholders. For the removal of
doubt, it is clarified that except for the amount that is released to policyholders as
per the Authority’s direction, no other amount shall be distributed to shareholders
out of Revaluation Reserve Account.
An impairment loss shall be recognized as an expense in the Revenue/Profit
and Loss Account immediately, unless the asset is carried at re-valued amount.
Any impairment loss of a re-valued asset shall be treated as a revaluation decrease
of that asset and if the impairment loss exceeds the corresponding revaluation
reserve, such excess shall be recognized as an expense in the Revenue/Profit and
loss Account.
b) Debt Securities:
Debt securities, including government securities and redeemable preference
shares, shall be considered as “held to maturity” securities and shall be measured
at historical cost subject to amortization.
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c) Equity Securities and Derivative Instruments that are traded in active markets:
Listed equity securities and derivative instruments that are traded in active
markets shall be measured at fair value on the balance sheet date. For the purpose
of calculation of fair value, the lowest of the last quoted closing price at the stock
exchange where the securities are listed shall be taken.
The insurer shall assess on each balance sheet date whether any impairments
of listed equity security(ies)/ derivatives) instruments has occurred.
An active market shall mean a market, where the securities traded are
homogeneous, availability of willing buyers and willing sellers is normal and the
prices are publicly available.
Unrealized gains/losses arising due to changes in the fair value of listed equity
shares and derivative instruments shall be taken to equity under the head ‘Fair
Value Change Account’. The ‘Profit on sale of investments’ or Loss on sale of
investments’. As the case may be, shall include accumulated changes in the fair
value previously recognized in equity under the heading ‘Fair Value Change
Account’ in respect of a particular security and being recycled to the relevant
Revenue Account or profit and Loss Account on actual sale of that listed security.
The Authority may issue directions specifying the amount to be released from
the Fair Value Change Account for declaring bonus to the policyholders. For the
removal of doubt, it is clarified that except for the amount that is released to
policyholders as per the Authority’s prescription, no other amount shall be
distributed to shareholders out of Fair Value Change Account. Also any debit
balance in Fair Value Change Account shall be reduced from profit/free reserves
while declaring dividends.
The insurer shall assess, on each balance sheet date, whether any impairment
has occurred. An impairment loss shall be recognized as an expense in
Revenue/Profit and Loss Account to the extent of the difference between the re-
measured fair value of the security/investment and its acquisition cost as reduced
by any previous impairment loss recognized as expense in Revenue/Profit and Loss
Account. Any reversal of impairment loss, earlier recognized in Revenue/Profit and
Loss Account, shall be recognized in Revenue/Profit and Loss Account.
d) Unlisted and other than actively traded Equity Securities and Derivative Instruments:
Unlisted equity securities and derivative instruments and listed equity securities
and derivative instruments that are not regularly traded in active markets shall be
measured at historical cost. Provision shall be made for diminution in value of such
investments. The provision so made shall be reserved in subsequent periods if
estimates based on external evidence show an increase in the value of the investment
over its carrying amount. The increased carrying amount of the investment due to the
reversal of the provision shall not exceed the historical cost.
For the purposes of this regulation, a security shall be considered as being not
actively traded, if as per guidelines governing mutual funds laid down from time to
time by SEBI, such a security is classified as ‘thinly traded”.
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7. Loans
Loans shall be measured at historical cost subject to impairment provisions.
The insurer shall assess the quality of its loan assets and shall provide for
impairment. The impairment. Provision shall not be lower than the amounts
derived on the basis of guidelines prescribed from time to time by the Reserve Bank
of India that apply to companies and financial institutions.
8. Linked Business
The accounting principles used for valuation of investments are to be
consistent with principles enumerated above. A separate set of financial statement,
for each segregated fund of the linked businesses, shall be annexed. Segregated
funds represent funds maintained in accounts to meet specific investment
objectives of policyholders who bear the investment risk Investment income/gains
and losses generally accrue directly to the policyholders. The assets of each account
are segregated and are not subject to claims that arise our of any other business of
the insurer.
9. Funds for Future Appropriation
The funds for future appropriation shall be presented separately. The funds
for future appropriation represent all funds, the allocation of which, either to the
policyholders or to the shareholder, has not been determined by the end of the
financial year.
7.3 PART- II DISCLOSURES FORMING PART OF FINANCIAL STATEMENTS
A) The following shall be disclosed by way of notes to the Balance Sheet
1. Contingent Liabilities: A) Partly-paid up investments. B) Underwriting
commitments outstanding. C) Claims, other than those under policies, not
acknowledged as debts. D) Guarantees given by or on behalf of the
company. E) Statutory demands/liabilities in dispute, not provided for. F)
Reinsurance obligations to the extent not provided for in accounts. G)
Others (to specified).
2. Actuarial assumptions for valuation of liabilities for life policies in force.
3. Encumbrances to assets of the company in and outside India.
4. Commitments made and outstanding for Loans, Investments and Fixed
Assets.
5. Basis of amortization of debt securities.
6. Claims settled and remaining unpaid for a period of more than six months
as on the balance sheet date.
7. Value of contracts in relation to investments, for:
a. Purchases where deliveries are pending;
b. Sales where payments are overdue.
8. Operating expenses relating to insurance business: basis of allocation of
expenditure of various segments of business.
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9. Computation of managerial remuneration.
10. Historical costs of those investments valued on fair value basis.
11. Basis of revaluation of investment property.
B) The following accounting policies shall form an integral part of the financial statements.
1. All significant accounting policies in terms of the accounting standards
issued by the ICAI, and significant principles and policies given in Part 1 of
Accounting Any other accounting policies, followed by the insurer, shall be
stated in the manner required under Accounting Standard 1 (AS-1) issued
by the ICAI
2. Any departure from the accounting policies shall be separately disclosed
with reasons for such departure.
C) The following information shall also be disclosed:
1. Investment made in accordance with any statutory requirements should be
disclosed separately together with its amount, nature, security and any
special rights in and outside India;
2. Segregation into performing/non-performing investments for purpose of
income recognition as per the directions, if any, issued by the Authority;
3. Assets to the extent required to be deposited under local laws or otherwise
encumbered in or outside India;
4. Percentage of business sector-wise;
5. A summary of financial statements for the last five years, in the manner as
may be prescribed by the Authority;
6. Bases of allocation of investments and income thereon between
Policyholders ‘Account and Shareholders’ Account.
7. Accounting ratios as may prescribed by the Authority.
7.4 PART-III GENERAL INSTRUCTIONS FOR PREPARATION OF FINANCIAL STATEMENT
1. The corresponding amounts for the immediately preceding financial year
for all items shown in the Balance Sheet, Revenue Account, Profit and Loss
Account and Receipts and payments Accounts shall be given.
2. The figures in the financial statements may be rounded off to the nearest
thousands.
3. Interest, dividends and rentals receivable in connection with an investment
should be stated at gross amount, the amount of income tax deducted at
source should be included under ‘advance taxes paid’ and taxes deducted
at source.
4. (I) For the purpose of financial statements, unless the context otherwise
requires:
a. the expression ‘provision’ shall, subject to (II) below mean any
amount written off or retained by way of providing for depreciation,
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renewals or diminution in value of assets, or retained by way of
providing for any known liability or loss of which the amount cannot
be determined with substantial accuracy;
b. the expression ‘reserve’ shall not subject to as aforesaid, include
any amount written off or retained by way of providing for
depreciation, renewals or diminution in value of assets or retained
by way of providing for any known liability or loss;
c. the expression ‘capital reserve’ shall not include any amount
regarded as fee for distribution through the profit and loss
account; and the expression ‘revenue reserve’ shall mean any
reserve other than a capital reserve;
d. The expression “liability” shall include all liabilities in respect of
expenditure contracted for and all disputed or contingent
liabilities.
(II) Where:
e. any amount written off or retained by way of providing for
depreciation, renewals or diminutions in value of assets, or
f. any amount retained by way of providing for any known liability
or loss, is in excess of the amount which in the opinion of the
directors is reasonably necessary for the purpose, the excess shall
be treated as a reserve and not provision
5. The company shall make provisions for damages under lawsuits where the
management is of the opinion that the award may go against the insurer.
6. Extent of risk retained and re-insured shall be separately disclosed.
7. Any debit balance of the Profit and Loss Account shall be shown as
deduction from uncommitted reserves and the balance, if any, shall be
shown separately.
7.5 PART-IV CONTENTS OF MANAGEMENT REPORT
There shall be attached to the financial statements, a management report
containing, inter alia, the following duly authenticated by the management.
1. Confirmation regarding the continued validity of the registration granted by
the Authority;
2. Certification that all the dues payable to the statutory authorities has been
duly paid.
3. Confirmation to the effect that the shareholding pattern and any transfer of
shares during the year are in accordance with the statutory or regulatory
requirements;
4. Declaration that the management has not directly or indirectly invested
outside India the funds of the holders of policies issued in India;
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5. Confirmation that the required solvency margins have been maintained;
6. Certification to the effect that the values of all the assets have been
reviewed on the date of the Balance Sheet and that in his (insurer’s) belief
the assets set forth in the Balance Sheets are shown in the aggregate at
amounts not exceeding their realizable or market value under the several
headings--
i. “Loans”
ii. “Investments”
iii. “Agents balances”
iv. “Outstanding premiums”
v. “Interest, Dividends and Rents outstanding”
vi. “Interest, Dividends and Rents accruing but not due”
vii. “Amounts due from other persons or Bodies carrying on insurance
business”.
viii. “Sundry Debtors”.
ix. “Bills Receivable”.
x. “Cash “ and
xi. The several items specified under “Other Accounts”.
7. Certification to the effect that no part of the life insurance fund has been
directly or indirectly applied in contravention of the provisions of the
Insurance Act,1938 (4 of 1938) Relating to the application and investment
of the life insurance funds;
8. Disclosure with regard to the overall risk exposure and strategy adopted to
mitigate the same;
9. Operations in other countries, if any, with a separate statement giving the
management’s estimate of country risk and exposure risk and edging
strategy adopted;
10. Ageing of claims indicating the trends in average claim settlement time
during the preceding five years;
11. Certification to the effect as to how the values, as shown in the balance
sheet, of the investments and stocks and shares have been arrived at, and
how the market value thereof has been ascertained for the purpose of
comparison with the values so shown;
12. Review of asset quality and performance of investment in terms of
portfolios, i.e., separately in terms of real estate, loans, investments, etc.
13. A responsibility statement indicating therein that:
a. in the preparation of financial statements, the applicable accounting
standards, principles and policies have been followed along with proper
explanations relating to material departures, if any;
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b. the management has adopted accounting policies and applied them
consistently and made judgments 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 and of the operating profit
or loss and other profit or loss of the company for the year.
c. the management has taken proper and sufficient care for the
maintenance of adequate accounting records in accordance with the
applicable provisions of the Insurance Act 1938 (4 of 1938) /Companies
Act, 1956 (1of 1956) for safeguarding the assets of the company and for
preventing and detecting fraud and other irregularities;
d. the management has prepared the financial statements on a going
concern basis;
e. the management has ensured that an internal audit system.
Commensurate with the size and nature of the business exists and is
operating effectively.
14. A schedule of payments, which have been made to individuals, firms
companies and organizations in which Directors of the insurer are
interested.
7.6 PART—V PREPARATION OF FINANCIAL STATEMENTS
1. An insurer shall prepare the Revenue Account [policyholders’ Account]
Profit and Loss Account [shareholders’ Account] and the Balance Sheet in
From A-RA, Form A-PL and Form A-BS, as prescribed in this Part, or as
near thereto as the circumstances permit.
Provided that an insurer shall prepare Revenue Account and Balance Sheet
for the under mentioned businesses separately and to that extent the
application of As 17 shall stand modified:
a. a)participating policies and Non-participating policies;
b. i) Linked business [As defined in regulation 2(i) of the IRDA
[Registration of Indian Insurance Companies) Regulations, 2000)
ii) Non-Linked business separately for Ordinary Life, General Annuity,
Pensions and Health Insurance;
c. Business within India and business outside India.
2. An insurer shall prepare separate Receipts and Payments Account in
accordance with the Direct Method prescribed in As-3 “Cash Flow
Statement” issued by the ICAI.
SUMMARY
Insurance business have their own certain principles, the life insurance is also
not excepted. The principles of life insurance, is maximum of self explanatory
technical terms. And it also have different part which are provided by insurance
companies Act 1956.
 95
KEYWORDS
Accounting Standard 13 (AS-13): It shall be prepared only under the direct
method.
Accounting Standard 17 (AS-17): It is called Segment report.
Premium: For linked business the due date for payment may be taken as the
date when the associated units are created.
Claims Cost: Ultimate cost of claims shall comprise the policy benefit amount.
Linked business: A separate set of financial statement, for each segregated
fund maintained in accounts to meet.
7.7 SELF-ASSESSMENT TEST
1. What do you mean financial statement?
2. How can prepare the financial statement in life insurance business?
3. What are the steps for the disclosure for financial statement in life
insurance accounts?
REFERENCE BOOKS
1. Shukla MC, Grewal TS, Gupta SC, Advanced Accounts, S. Chand &
Company Ltd, New Delhi.
2. Gupta RL, Radhasamy M, Corporate Accounting, Sultan Chand & Sons,
New Delhi.

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LESSON – 8
PREPARATION OF LIFE INSURANCE ACCOUNTS
OBJECTIVES
Students after completing in this lesson they can able to know the following
objectives, various books of accounts, and different forms of accounts and their
respective explanations.
CONTENTS
8.1. Introduction
8.2. Books of Accounts
8.3. Preparation of Final Accounts
8.4. Revenue Accounts
8.5. Profit and Loss Accounts
8.6. Balance sheet
8.7. Forms for Life Insurance Final Accounts
8.8. Schedule forming part of Final Statement
8.9. Explanation of important Terms and their treatment in Final Accounts of
Life Insurance
8.10. Assurance and Insurance
8.11. Double Accounts
8.12. Examples
8.13. Self Assessment Test
8.1 INTRODUCTION
Accounts of Life Insurance Companies are to be maintained according to the
provisions of the Insurance Act 1938, as amended in Insurance (Amendment) Act
2000. However the Accounts shall comply with the requirements of Schedule A of
the IRDA Regulations, 2002
8.2 BOOKS OF ACCOUNTS
The life insurance businesses are required to maintain the following two types
of books: i) Statutory books and ii) Subsidiary books
i. Statutory Books
The following statutory books are to be maintained.
a) Register of policies: This book contains particulars of various policies such
as the name and address of the assured, date on which the policy was
effected etc.
b) Register of Claims: This book contains particulars regarding each claim
such as the name and address of the claimant, the date of claim, the date
on which the claim was settled or date and ground for rejection.
c) Register of licensed insurance agents: It gives information about various
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insurance agents, their names and addresses, particulars of business done
and commission due to them.
ii. Subsidiary books
Apart from the above mentioned statutory books, the following subsidiary
books, for proper accounting, will have to be prepared:
A. Register of proposals and proposal advance cash book.
B. First year’s premium cash book.
C. Renewal premium cash book
D. Agency and Branch cash book
E. Petty cash book
F. Claims cash book
G. General cash book containing summarized entries for the six above
mentioned books. H) Bank cash book
H. Commission Register
I. Lapsed and cancelled policies book
J. Journal
K. Agency Ledger
L. Policy loan ledger
M. General loan ledger
N. Investment ledger.
8.3 PREPARATION OF FINAL ACCOUNTS:
Final Accounts of a Life Insurance company comprise of (a) Revenue Account
b) Profit and Loss Account and (c) Balance sheet
The following are the relevant forms under Schedule A of the IRDA regulations
2002, applicable to Life Insurance Companies.
Revenue Account –From A-RA
Profit and Loss Account –From A-PL
Balance Sheet—From A-BS.
The Revenue Account, profit and Loss Account and Balance Sheet are in
summary form. They are accompanied by 15 schedules. The first four schedules are
related to Revenue Account and the remaining eleven schedules are relating to
Balance sheet. The schedules provide ‘details’ of the summary heads in Revenue
A/c and Balance sheet.
8.4 REVENUE ACCOUNT:
Before preparing Revenue Account of a life insurance company, four schedules
have to be prepared.
The first schedule deals with premiums earned.
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The second schedule deals with commission expenses.
The third schedule consists of various operating expenses.
The Fourth schedule includes all benefits paid like Claims, Annuities,
Surrenders.
Premiums earned, income from investments and other incomes are added up
in the revenue Account. From that total, commission expenses, operating expenses,
benefits paid, provision for doubtful debits and bad debts, provision for Tax are
subtracted. The balance represents surplus or deficit. From the surplus, transfer to
shareholders account and other reserves is made. Balance of surplus is transferred
to funds for future a appropriations, which in practice, is represented by ‘Life
Assurance Fund’.
8.5 PROFIT AND LOSS ACCOUNT:
Here profit transferred from Revenue Account is shown along with opening
balance. Any dividends declared and dividend distribution tax is subtracted. After
making transfer to specified reserves, the remaining balance is carried to the
Balance sheet.
8.6 BALANCE SHEET:
The balance sheet consists of two major parts—Sources of Funds and
Application of Funds.
Sources of Funds include
a) Shareholders funds
b) Borrowings
c) Policyholders’ funds and
d) Funds for future Application .
Applications of Funds include.
a) Investments
b) Loans
c) fixed assets
d) Net current Assets, represent by current Assets—current liabilities.
e) Miscellaneous expenditure.
It is to be note that current liabilities are not included as part of ‘Sources of
Funds’.
8.7 FORMS FOR LIFE INSURANCE FINAL ACCOUNTS
The following are the forms prescribed by IRDA for Revenue Account, Profit
and Loss Account and Balance sheet.
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FORM-RA
Name of the insurer:
Registration no. and date of registration with the IRDA
REVENUE ACCOUNT FOR THE YEAR ENDED 31ST MARC, 20………..Policyholders’
Account (Technical Account)
No Particulars Schedule Current Year Previous Year
(Rs.’000 (Rs.’000)
Premiums earned –net
a) Premium
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
Income (to be specified)
Total (A) 1
Commission
Operating expenses related to Insurance Business
Provision 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) 2
Benefits Paid (Net)
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) 3
Surplus (Deficit) (D)=(A)-(B)-(C)
Appropriations
Transfer to Shareholders’ Account
Transfer to Other Reserves (to be specified)
Balance being Funds for future
Appropriations.
Total (D) 4
Notes: * Represents the deemed realized gain as per norms specified by the Authority.
** Represents Mathematical Reserves after allocation of bonus.
The total surplus shall be disclosed separately with the following details:
a) Interim Bonuses paid:
b) Allocation of Bonus to policyholders:
c) Surplus shown in the Revenue Account;
d) Total Surplus ;( a + b + c)
See Notes appended at the end of Form A-PL
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FORM-PL
Name of the Insurer:
Registration No. and Date of Registration with the IRDA
PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31ST MARCH, 20…….
Shareholders’ account (on-technical Account)
No. Particulars Schedule Current Year Pre. Year
(Rs,000) (Rs.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 investment)
Other Income (To be specified)
Total (A)
Expense other than those directly related to the insurance business
Bad debts written off.
Provisions (Other than taxation)
a)For diminution in the value of investments (Net)
b)Provision for doubtful debts
c) Others (to be specified)
Total (B)
Profit (Loss) before tax
provision for Taxation
Profit/Loss after tax
Appropriation
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 an 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 Rs.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
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gains or losses and other items.
g) Interest, dividends and rentals receivable in connection with an investment
should be stated as gross amount, the 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 realized rent. It shall not include
any “national rent”.
FORM A-BS
Name of the Insurer:
Registration No. and Date of Registration with the IRDA
BALANCE SHEET AS AT 31ST MARCH, 20…….
No. Particulars Schedule Current Year Previous Year
(Rs.000) (Rs.000)
Sources of Funds
Shareholders’ funds:
Share Capital 5
Reserves and Surplus 6
Credit/[Debit] fair value Change Account
sub-Total 7
Borrowings
Policyholders’ Funds:
Credit/[Debit]Fair Value Change Account
Policy Liabilities
Insurance Reserves
Provision for Linked Liabilities
Sub-Total
Funds for future Appropriations
Total
Application of Funds
Investments:
Shareholders 8
Policy holders’ 8A
Assets held to Cover Linked Liabilities 8B
Loans 9
Fixed Assets 10
Current Assets:
Cash and Bank balances 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
No. Particulars Current Previous
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Year Year
(Rs.000’) (Rs,’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
8.8 SCHEDULES FORMING PART OF FINANCIAL STATEMENT
SCHEDULE 1- PREMIUM
No. particulars Current Year (Rs.000) Previous Year (Rs.000)
1. First year premiums
2. Renewal premiums
3. Single premiums
Total premium
SCHEDULE 2-COMMISSION EXPENES
Particulars Current Year (Rs.000) Previous Year (Rs’000)
Commission paid
Direct
–First year premiums
–Renewal premium
–Single premiums
Add: Commission on
Re-insurance Accepted
Less: Commission on
Re-insurance ceded
Net Commission
Note: The profit/commission, if any, are to be combined with the Re-insurance accepted or
Re-insurance ceded figures.
SCHEDULE 3—OPERATING EXPENSES RELATED TO INSURANCE
NO. Particulars Current Year (Rs.000) Previous year (Rs.000)
1. Employees’ remuneration & welfare benefit.
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
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NO. Particulars Current Year (Rs.000) Previous year (Rs.000)
12. Interest & Bank charges
13. Others (to be specified)
14. Depreciation
Total
Note:Items of expenses and income in excess of one per cent of the total premiums (less
reinsurance) or Rs.5,00,000 whichever is higher, shall be shown as a separate line item.
SCHEDULE 4-BENEFITS PAID (NET)
No. Particulars Current Year (Rs,000) Previous Year (Rs.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
c) Annuities/Pension payment,
d) Other benefits, specify.
3. Amount accepted in reinsurance;
a) Claims by Death
b) Claims by Maturity,
c) Annuities/Pension payment other benefits specify
Total.
Note: 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
No. Particulars Current Year (Rs.000) Previous year (Rs.000)
1. Authorized Capital
Equity shares of Rs. …. Each
2. Issued Capital
Equity Shares of Rs… each
3. Subscribed capital
Equity shares of Rs….each
4. Called-up Capital
Equity shares of Rs.…..each
Less: Calls unpaid
Add: Shares forfeited (amount originally paid up)
Less: Par value of equity shares bought back.
Less: Preliminary expenses including commission or
brokerage on underwriting or subscription of shares.
Total
Notes: a) Particulars of the different classes of capital should be separately stated.
b) The amount capitalized 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.
SHEDULE 5A- PATTERN OF SHAREHOLDING
Shareholder Current Year Previous Year
Promoters Number of Shares % of Holding Number of Shares % of Holding
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Indian
Foreign
Others
Total
SCHEDULE-6 RESERVES AND SURPLUS
No. Particulars Current Year Previous Year
(Rs.000) (Rs.000)
1. Capital Reserve
2. Capital Redemption Reserve
3. Share Premium
4. Revaluation Reserve
5. General Reserves
Less: Debit balance in profit and Loss Account, if any,
Less: Amount utilized 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 deductions from the reserves shall be disclosed under each of the
specified heads.
SCHEDULE 7-BORROWINGS
No. Particulars Current Year (Rs,000) Previous Year (Rs.000)
1. Debentures/Bonds
2. Banks
3. Financial institutions
4. Others (to be specified)
Total
Note: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 are shown separately.
SCHEDULE 8- INVESTMENTS-SHAREHOLDERS
Current Year Previous Year
No. Particulars
(Rs.000) (Rs.000)
1 Long-term Investments
Government securities and Government guaranteed bonds
including Treasury Bills
2 Other Approved Securities
3 Other Investments
a) Shares
aa) Equity
bb) Preference
b)Mutual Funds
c) Derivative Instruments
d) Debentures /Bonds
e) Other Securities (to be specified)
f) Subsidiaries
4 Investment properties-Real Estate
5 Investments in Infrastructure and Social Sector
Other than Approved Investments
Total
Short term Investment
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Current Year Previous Year
No. Particulars
(Rs.000) (Rs.000)
1 Government securities and Government guaranteed bonds
including Treasury Bills
2 Other Approved Securities
3 Other Investments
a)Shares
aa) Equity
bb) Preference
b)Mutual Funds
c) Derivative Instruments
d) Debentures/Bonds
e) Other Securities(to be specified)
f) Subsidiaries
4 Investment Properties-Real Estate
5 Investment in Infrastructure and Social Sector
Other than Approved Investments
Total
Note: See Notes appended at the end of schedule-8B
SCHEDULE 8A-INVESTMENTS –POLICHOLDERS
Current Year Previous Year
No. Particulars
(Rs.000) (Rs.000)
Long-term Investments
1. Government securities and Government guaranteed bonds
including Treasury Bills
2. Other Approved Securities
3. a)shares
aa) Equity
bb) Preference
b)Mutual Funds
c)Derivative Instruments
d) Debentures/Bonds
e) Other Securities (to be specified)
4. f) Subsidiaries
5. Investments in infrastructure and social sector
Other than approved Investments.
Total
Sort-term Investments
1 Government securities and Government guaranteed bonds
including Treasury Bills.
2 Other Approved Securities
3 a)Shares
aa) Equity
bb) Preference
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
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Current Year Previous Year
No. Particulars
(Rs.000) (Rs.000)
Total
Note: See Notes appended at the end of Schedule-8B
SCHEDULE 8B-ASSETS HELD TO COVER LINKED LIABILITES
Current Year Previous Year
No. Particulars
(Rs.000) (Rs.000)
Long-term Investment
1. Government securities and Government guaranteed bonds
including Treasury Bills
2. Other Approved Securities
3. a)shares
aa) Equity
bb) Preference
b) Mutual Funds
c) Derivative instruments
d) Debentures (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
1. Government securities and Government guaranteed bonds
including Treasury Bills
2. Other Approved Securities
3. a)Shares
aa) Equity
bb) Preference
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.
Total
Note: (applicable to Schedules 8 and 8A & 8B
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 enter price in which the company has significant influence and which is
neither a subsidiary nor a joint venture of the company.
v. Significant influence (for the purpose of this schedule) means participation in the financial and
operating policy dictions of a company but not control of those policies. Significant influence may
be exercised in several ways, for example, by representation on the board of directors,
participation in the policy making process, material inter-company transactions, interchange of
managerial personnel or dependence on technical information. Significant influence may be
gained by share ownership, statute or agreement. As regards share ownership, if an investor
holds, directly or indirectly though subsidiaries, 20 per cent or more of the voting power of the
investee, it is presumed that the investor does have significant influence, unless it can be clearly
demonstrated that this is not the case. Conversely, if the investor holds, directly or indirectly
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through subsidiaries, less than 20 percent of the voting power of the investee. It is presumed that
the investor does not have significant influence unless such influence is clearly demonstrated. A
substantial of majority ownership by another investor does not necessarily preclude an investor
from having significant influence.
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) Investment 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 costs subject to amortization
e) Investment 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.
f) Investments maturing within twelve months from balance sheet date and investment 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
No. Particulars Current Year (Rs.000) Previous Year (Rs.000)
1. Security-wise Classification
Secured
a)On mortgage of property
aa) in India
bb) Outside India
b) On Shares, Bonds. Govt. Securities, etc.
c) Loans against policies
d) Others (to be specified) Unsecured Total
2. Borrower –wise Classification
a)Central and State Governments
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
aa) in India
bb) Outside India
Total
4. Maturity-wise Classification
a)Short Term
b)Long terms
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-terms 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 purposes of this schedule, means loans secured wholly
or partly against an asset of the company.
d) Loans considered doubtful and the amount of provisions created against such loans
shall be disclosed.
SCHEDULE 10 –FIXED ASSETS
Cost/Gross
Depreciation Net Block
Block
Particulars Opening Upto As at
For the On Sales / To pre.
Adds Deds Cls Last year
Year Adjust date year
Year end
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Goodwill
Intangibles (specify)
Land-Freehold
Leasehold property
Buildings
Furniture & Fittings
Information Technology
Equipment
Vehicles
Office Equipment
Other (specify nature)
Total
Work in progress
Grand Total
Previous year
Note: Assets included in land, property and building exclude investment properties as defined in
note to Schedule 8
SCHEDULE 11-CASH AND BANK BALANCES
No. Particulars Current Previous
year year
(Rs.000) (Rs.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
c) Others (to be specified)
3. Money at call and short Notice
a) With Banks
b) with other institutions
4. Others (to be specified)
TOTAL
Balances with non-scheduled banks in 2 and 3 above. CASH & BANK BALANCES
1. In India
2. Outside India
Total
Note: Bank balance may include remittances in transit. If so, the nature and amount shall be
separately stated.
SCHEDULE 12-ADVANCES AND OTHER ASSETS
Current Year Previous Year
No. Particulars
(Rs.000) (Rs.000)
Advances
1. Reserve deposits with ceding companies
2. Application money for investments
3. Prepayments
4. Advances to Directors/Officers
5. Advance tax paid and taxes deducted at source (Net of provision for taxation)
6. Others (to be specified)
Total (A)
1. Income accrued on investments
2. Outstanding premiums
3. Agents’ Balances
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4. Foreign Agencies Balances
5. Due from other entities carrying on insurance business (including reinsures)
6. Due from subsidiaries/holding company
7. Deposit with Reserve Bank of India [Pursuant to section 7 of insurance Act,1938]
8. Others (to be specified)
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 the definition of that terms as given under the
companies Act 1956.
c) Sundry debtors will be shown under item 8 (Others)
SCHEDULE 13- CURRENT LIABILITIES
No. Particulars Current Year Previous Year
(Rs.000) (Rs.000)
1. Agents’ Balances
2. Balances due to other insurance companies
3. Deposits held on re-insurance ceded
4. Premiums received in advance
5. Unallocated premium
6. Sundry creditors
7. Due to subsidiaries/holding company
8. Claims Outstanding Annuities Due
9. Annuities Due
10. Due to officers/Director
11. Others (to be specified)
Total
SCHEDULE 14 –PROVISIONS
No. Particulars Current year Previous Year
(Rs.000) (Rs.000)
1. For taxation
(less payments and taxes deducted at source)
2. For proposed dividends
3. For divided distribution tax
4. Others (to be specified)
Total

SCHEDULE 15-MISCELLANEOUS EXPENDITURE

(To the extent not written off or adjusted)
No. Particulars Current Year Previous Year
(Rs.000) (Rs.000)
1. Discount allowed in issue of shares/debentures
2. Others (to be specified)
Total
Notes; a) No item shall be included under the head “Miscellaneous Expenditure” and carried
forward unless.
1) some benefit from the expenditure can reasonably be expected to be received in
future, and
2) The amount of such benefit it reasonably determinable
b) The amount to be carried forward in respect of any item included under the head
“Miscellaneous Expenditure” shall not exceed the expected future revenue/other
benefits related to the expenditure.
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8.9 EXPLANATION OF IMPORTANT TERMS AND THEIR TREATMENT IN FINAL
ACCOUNTS OF LIFE INSURANCE COMPANIES:
1. Premiums: Premium is the consideration for payment of the ‘sum assured’
on completion of the stipulated period of time or on the happening of the death of
policyholder. Thus premium is payable of purchasing ‘insurance protection’.
Usually it is a “series of equal payments” occurring at regular intervals throughout
the life of the insurance policy. The mode of payment is determined on the basis of
agreement entered by both parties i.e. ,Policyholder and Insurance company.
Premiums are shown under schedule-I under the following heads:
1. First year premium-It is the Total of premiums paid by policyholders in the
first year of their policies.
2. Renewal premium—It is the premium paid by policyholders in the
subsequent years.
3. Single premiums—If the entire premium payable is paid by the policyholder
in a Lump sum, it is known as ‘single premium’.
Outstanding premium at the end of the year is to be added to premiums
received and opening outstanding premium collected is subtracted. Premium on
reinsurance accepted is also added and premium on reinsurance ceded is reduced.
Net premium earned is shown in the Revenue Account.
2. Reinsurance: Life Insurance Company provides cover for risk to life when the
management of an insurance company feels that the risk taken is more than its
risk bearing capacity, risk can be shifted through “reinsurance”. So. Reinsurance
means transferring the whole or a part of the risk undertaken by an insurance
company to another insurance company by paying agreed premium. The risk and
resulting loss are shared between the two companies in the ratio of the premium.
When there is claim on policies which are reinsured, the company which
reinsured pays its share of the claim.
The company which pays reinsurance premium is eligible for commission of
reinsurance ceded by it. The company which provides the reinsurance pays
commission on reinsurance accepted. Reinsurance is adjusted while computing
premiums, claims and commissions.
3. Claims: Claims refer to the amount payable by the insurance company to
various persons who have suffered Loss on account of the events Insured against.
In life insurance business, claims may arise due to death of policyholder or
maturity of policies.
Claims can be classified into the following categories.
Claims intimated, accepted and paid.
Claims intimated, accepted but not paid
Claims intimated but not yet accepted and paid.
Claims rejected.
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Based on the convention to ‘conservation’. ‘Claims intimated’ are taken at par
with ‘claims intimated and accepted but not paid’ and provision is made.
The following adjustment entry is passed for outstanding claims at the end of
the year.
Journal Entry
Date Particulars L.F. Dr.Rs. Cr.Rs.
Claims A/c
To Claims intimated and accepted but not paid account
To Claims intimated but not accepted and paid A/c
At the beginning of the next year a reverse is passed so that when the claims
intimated are paid, there is no effect of the claims intimated on the claims paid
account.
Two kinds of claims are shown separately
Claims by death refer to the amount paid on account of the death of the
insured.
Claims by maturity refer to claims paid by insurance company on the
completion of the policy period, like in endowment policies.
In Schedule 4, benefits paid, claims paid and closing outstanding claims are
added and opening outstanding claims are reduced. Any claims covered under
reinsurance are also subtracted. Net balance of claims with other benefits paid
appears in the revenue account.
Policies becoming claims:
When a policy falls due for payment it is said that ‘the policy has become a
claim.’
As far as life policies are concerned, if the policy is a ‘whole life’ the policy
amount is payable on the death of the assured. In case of an ‘endowment policy’.
The amount is payable on the policyholder reaching a stipulated age. However, the
life policy is payable if the assured dies before reaching the specified age.
4. Commission: Insurance Company pays commission to its agents. The rates
of commission are specified separately for principal agents and others. The
commission payable to agents is the commission of direct business.
Commission on reinsurance accepted-It is the commission payable by an insurance
company to another insurance company for the reinsurance business provided by it.
Under schedule 2. Commission expenses, commission on direct business and
commission on reinsurance accepted are added and commission on reinsurance
ceded is reduced. The net balance is shown in the revenue account.
5. Annuities and consideration for annuity granted: Annuity is an annual
payment guaranteed and paid by an insurance company regularly as long as the
insured is alive in consideration of a “lump sum” received in the beginning.
Sometimes, the consideration may be paid over a certain period in regular
installments. Annuity is expenditure for the insurance company and is shown
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under schedule 4. Benefits paid. Consideration for annuities granted is an income
to the insurance company. It is shown in the Revenue Account as an income, under
the heading “other incomes.
6)Surrender Value and Surrenders: It is the amount that the insurer is willing
to pay on the insured requesting that the life insurance policy covering his life be
terminated and he be relieved from the obligation to pay further premiums. A
person may take out a 20 year policy but he may wish to stop paying premiums
after he has paid them for say, three years. He may surrender the policy and
thereafter the life insurance company will pay him a small proportion of the total
premium paid. There is no surrender value if only one annual premium is paid;
thereafter with passage of time, the surrender value as a proportion of the premium
paid goes on increasing. Surrender value will also include the present value of
bonus in the case of “with profit policies”. Since the amount can be claimed
whenever the insured wishes to do so and the policy benefits can be transferred,
the policyholders can obtain a loan from banks and other institutions up to the
surrender value-the insurer himself is always ready to grant a loan on the policy up
to the surrender value. For the insurer, the amount of the surrender value, if paid,
is a charge. Surrenders are shown as an expenditure under Schedule.
4-benefits paid along with claims, annuities etc.
7) paid up value: When a policyholder finds it very difficult to pay the premiums,
he may be allowed an option to get the policy paid up. In such a case, the policyholder
will not be asked to pay the rest of premiums but he will not get the full value of policy.
The paid up value of policy is calculated in the following manner:
Paid up value=Sum assured x Total No. of premiums paid
Total No. of premiums payable
The amount paid on maturity in respect of paid up policies is included in the
amount of claims.
8. Bonus: Bonus refers to the share of profit which a policyholder gets from the
Insurance company. In case of Life Insurance, 95% of the profit of insurance
company is distributed amount the policyholders as Bonus. Only the ‘with profits
policies’ are eligible for Bonus.
Bonus may be of the following types:
a) Bonus in cash: It refers to bonus paid in cash to the eligible policyholders
after actuary’s valuation of liability is made. It is shown separately in schedule 4.
benefits paid.
b) Interim Bonus: It refers to Bonus payable on the maturity of a policy pending
ascertainment of profit. It is shown in the revenue account as a separate item after
schedule 4, benefits paid (Net).
c) Bonus in reduction of premium: It refers to the bonus which is payable in
cash but utilized by the policyholders to adjust the premium due from them. It is
shown under schedule 4-Benefits paid. The premiums adjusted from bonus are
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also recorded as premiums.
d) Reversionary Bonus: It refers to Bonus declared by insurance company which
is payable only on the maturity of the policy together with policy amount. Usually it
becomes a part of the claim amount and is not separately shown. Endowment life
policies usually are issued subject to the clause of reversionary bonus.
9) Life Assurance Fund: A Life Insurance company maintains a Life Assurance
fund which represents the excess of revenue income over revenue expenditure
relating to the life insurance business. The fund is available to meet the aggregate
Liability on all life policies, In fact, when Actuaries assess the liability of a Life
Insurance company, such liability is ‘matched’ with Life assurance fund on that
date. Any surplus is called ‘Valuation surplus’ and is treated as a profit Life
assurance Fund is shown under “schedule 6 Reserves and surplus” under the
heading “Other Reserves” Funds for Future appropriations transferred from
revenue Account represents the surplus for the year and is added to the Life
assurance Fund in schedule 6
8.10 ASSURANCE AND INSURANCE
Both these terms are used synonymously in the context of insurance.
Assurance is used in case of ‘life insurance ’alone while the word insurance applies
to other types of insurance like fire or marline.
Assurance refers to a contract under which the sum assured is bound to be
paid sooner or later but a contract of insurance is contract for compensation of
damage or loss and he question of claim does not arise in case there is no loss.
Thus, the terms insurance is used when the risk is uncertain and in such cases the
policy does not always become a claim. But in the case of assurance, the policy is
bound to become a claim in the stipulated manner. E.g., the assured may die in the
course of the term of the policy or else, he is bound to attain a particular age.
8.11 DOUBLE INSURANCE
Taking more than one policy on the same subject matter with two or more
insurance companies is called double insurance. The insured can do so because he
has unlimited interest in his valuable life and he can realize money from all the
insuring companies on maturity but the same does not apply to fire and marine
insurance for they are contracts of indemnity. In these cases nothing more can be
realized than the actual loss. A person may get his property insured with as many
companies as he/she likes for reasons of security for the total value of property and
when loss takes place he can realize the actual loss from any one or all the
companies. In this case, all the companies will meet the actual loss jointly. If a
single insurance company makes the entire payment, it can realize proportionate
amount from the remaining companies.
8.12 EXAMPLES
1. A Life Assurance company prepared its Revenue A/c for the year ended
31.3.2021 and ascertained its Life Assurance fund to be Rs.28,35,000. It
was found later that the following had been omitted from the accounts;
 114
interest accrued on investments Rs.39,000.
a) Income tax liable to be deducted thereon is estimated to be Rs.10,500.
b) Outstanding premiums Rs.32,800.
c) Bonus utilized for reduction of premium Rs.6,750.
d) Claims intimated but not admitted Rs. 17,400.
e) Claims covered under reinsurance Rs.6,500.
What is the Life Assurance Fund?
Solution
Statement showing correct Life Assurance Fund
Particulars Rs. Rs.
Balance of Life Assurance Fund as on 31-3-2021 28,35,000
Add: Interest accrued on investment, gross 39,000
Bonus utilized on reduction of premium 6,750
Outstanding premium 32,800
Claims covered under reinsurance 6,500 85,050
29,20,050
Less: Bonus utilized in reduction of premium 6,750
Claims intimated but not admitted 17,400
Income Tax on Interest accrued 10,500 34,650
Correct Life Assurance Fund 28,85,400

2. The Revenue account of a Life Insurance Company showed the life fund at
Rs.73,17,000 on 31.3.2021 before taking into account the following items;
Rs.
a) Claims intimate but not admitted 98,250
b) Bonus utilized in reduction of premium 13,500
c) Interest accrued on investments 29,750
d) Outstanding premiums 27,000
e) Claims covered under reinsurance 40,500
f) Provision for taxation 31,500
Pass journal entries giving effect to the above adjustments and show the
adjusted life fund.
Solution
Journal entries
Date Particulars L.F. Dr. Cr.
1.ClaimsA/c Dr. 98,250
To Outstanding Claims A/c 98,250
[Being claims intimated but not admitted taken into A/c ]
2.Bonus in reduction of premium Dr. 13,500
To Premium A/c 13,500
[Being the bonus in reduction of premium taken into A/c]
3.Accrued interest A/c Dr 29,750
To interest A/c 29,750
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[Being the adjustment for accrued interest]
4.Outstanding premium A/c Dr 27,000
To Premium A/c 27,000
[Being outstanding premiums taken into account]
5.Reinsurance claims A/c Dr 40,500
To Claims A/c 40,500
[Being adjustment for claims covered under reinsurance]
6.Revenue A/c Dr 31,500
To Provision for taxes A/c 31,500
[Being adjustment for provision for taxation]

Statement showing correct Life Assurance Fund

Particulars Rs. Rs.
Life Assurance Fund as on 31-3-2021 73,17,000
Add: Bonus in reduction of premium 13,500
Accrued interest 29,750
Outstanding premium 27,000
Reinsurance claims 40,500 1,10,750
74,27,750
Less: Claims outstanding 98,250
Bonus in reduction of premium 13,500
provision for taxation 31,500 1,43,250
Adjusted or correct life fund on 31.3.2021 72,84,500

3. The Life fund of a Life Insurance Company on 31.3.2021 showed a balance

of Rs. 54,00,000. However, the following items were not taken into account
while preparing the Revenue A/c for 2020-21. Ascertain the correct life
fund balance. Rs.
a) Interest and dividends accrued on investments 20,000
b) Income tax deducted at source on the above 6,000
c) Reinsurance claims recoverable 7,000
d) Commission due on reinsurance premium paid 10,000
e) Bonus in reduction of premium 3,000
Solution
Statement showing True Life Fund of Life Insurance Co. as on 31.3.2021
Particulars Rs. Rs.
Life Assurance Fund given 54,00,000
Add: Interest & Dividend accrued on investments Gross) Reinsurance 20,000
claims recoverable 7,000
Commission due on reinsurance premium paid 10,000
Premium in reduction of bonus. 3,000 40,000
54,40,000
Less: Bonus in reduction of premium 3,000
Income tax on Interest and Dividend accrued 6,000 9,000
True Life Assurance Fund 54,31,000
Note: Bonus in reduction of premium reduces and also bonus. So it has to be added and also
 116
subtracted from the fund.

4. A Life Insurance Co., disclosed a fund of Rs.20,00,000 and the Balance

sheet total Rs.45,00,000 on 31.3.2021 before taking into consideration:
a) A claim of Rs.10,000 intimates and admitted but not paid during the year.
b) A claim of Rs.6,000 outstanding in the books for 8 years and writing back.
c) Interest on securities accrued Rs.800 but not received during the year.
d) Premium of Rs.600 is payable under reinsurance.
e) Reinsurance recoveries Rs.26,000
f) Bonus utilized in reduction of premiums Rs.10,000
g) Agent’s commission to be paid Rs.8,000
Pass the necessary journal entries for the above omissions, recomputed the
fund and show the balance sheet total after making the above adjustments.
Solution
Journal entries
Particulars L.F Dr. Cr.
a) Claims A/c Dr. 10,000
To Outstanding Claims A/c 10,000
[Being claims intimated and admitted but not yet paid]
b) Outstanding Claims a/c Dr. 6,000
To Claims A/c 6,000
[Being claims outstanding written back]
c) Accrued interest A/c Dr. 800
To Interest A/c 800
[Being interest on securities brought back]
d) Premium 9Reinsurance) A/c Dr. 600
To Outstanding premium A/c 600
[Being premium payable under reinsurance]
e) Outstanding debtors A/c Dr. 26,000
To Claims A/c 26,000
[Being claims receivable under reinsurance]
f) Bonus in reduction of premium A/c Dr. 10,000
To premium A/c 10,000
[Being bonus utilized in reduction of premium]
g) Commission A/c Dr. 8,000
To outstanding commission A/c 8,000
[Being commission due to agent but not yet paid]
Statement showing Re computation of Life Assurance Fund
Effect of entries on the Balance Sheet
Liabilities Assets
Items Increase Decrease Increase Decrease
Rs. Rs. Rs. Rs.
a)Claim intimated & admitted but not paid
during the year 10,000 10,000 ---- ---
b) Claims outstanding written back 6,000 6,000 ---- ---
c) Interest on securities accrued 800 ----- 800 ----
d) Premium payable under reinsurance 600 600 ---- ---
e) Reinsurance recoveries 26,000 ---- 26,000 ----
g) Agents commission to be paid 8,000 8,000 ---- ----
Hence the correct total of the Balance Sheet will be:
Rs.45,00,000+Rs.26,800=Rs.45,26,800
5. The following balances are abstracted from the books of New Bharat Life
 117
Insurance Co. Ltd., as on 31.3.2021.
Rs. Rs.
(‘000) (‘000)
Life Assurance Fund (1.4.2020) 15,00,000 Claims paid during the year 64,900
Premiums 4,96,000 Annuities 2,050
Consideration for annuities granted 15,000 Bonus in reduction of premiums 1,600
Interest & Dividends 1,00,000 Medical fees 2,400
Fines for revival of policies 750 Surrenders 4,000
Reinsurance premium 20,750 Commission 18,650
Claims outstanding (1.4.2020) 4,500 Management expenses 22,000
Income tax on Dividends 8,500
Prepare Revenue A/c after making the following adjustments:
i)Outstanding balances: Claims 14,000
Premiums 4,600
ii) Further bonus for premium 2,400
iii) Claim under reinsurance 8,000
Solution
New Bharath Life Assurance Co. Ltd.
Revenue Account for the year ended 31st March 2021
Particulars Schedule No. Current Previous
year (000) year (‘000)
Premiums Earned –Net 1
a)Premium 5,03,000 ---
b) Reinsurance ceded (-)20,750 ---
c) Reinsurance accepted ---- ---
Income from investments:
a)Interest and Dividends (Gross) 1,00,000 ---
Other Income (To be specified)
Consideration for annuities granted 15,000 ---
Fines for revival of policies 750 ---
Total (A) 5,98,000 ---
Commission 2 18,650
Operating expenses related to Insurance Business 24,400
Total (B) 3 43,050
Benefits paid (Net) 76,450 ---
Total (C) 76,450 ---
Surplus (D)=(A)-(B)-(C) 4 4,78,500 ---

Note: Income tax on dividends is a ‘TDS’ and will appear in schedule 12

under advances and other assets, as per the IRDA form.
Schedules Forming Part of Revenue Account
Schedule 1-Premium
No. particulars Current Year (Rs.’000) Previous Year (‘000)
Premiums received 4,96,000 ---
Add: Outstanding premiums 4,600 ---
Add: Further bonus in reduction of premium. 2,400 ---
5,03,000
Schedule 2—Commission expenses
No. Particulars Current Year (‘000) Previous Year (‘000)
Commission paid 18,650 ---
18,650 --
Schedule 3- Operating expenses related to Insurance Business
No. Particulars Current Year (‘000) Previous Year (’000)
Management expenses 22,000 ---
Medical fees 2,400 ---
24,400
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Schedule 4—Benefits paid (Net)
No. Particulars Current Year (Rs.’000) Previous Year (‘000)
Claims paid 64,900 ---
Add: Outstanding claims on 31.3.21 14,000 ---
78,900
Less: Outstanding Claims on 1-4-20 4,500 ---
74,400 ---
Less: Claims under reinsurance 8,000
66,400 ---
Annuities 2,050 ---
Surrenders 4,000 ---
Bonus in reduction of premium (1,600+2,400) 4,000 ---
76,450 ---

6. Prepare from the following a Life Insurance revenue A/c and Balance sheet
as on 31.3.2021
Rs.(‘000) Rs.(‘000)
Claims by death 16,890 Outstanding interest on Advances (31.3.2021) 1,944
Agent’s salaries & Allowances 6,420 Bonus paid with claims 2,700
Surrender values paid 2,810 Endowment assurance matured 24,415
Actuarial expenses 1,520 Annuities paid 1,350
Premiums 94,836 Interest revenue 19,060
Commission to Agents 8,900 Rent, Rates & Taxes 5,475
Salaries 13,500 General charges 1,860
Medical fees 1,200 Fees received 172
Traveling expenses 1,800 Bonus paid in cash 2,825
Director’s fees 900 Advertisement 726
Agents balances 750 Consideration for Annuities granted 12,853
Claims expenses 1,432 Printing & Stationery 650
Premium outstanding (1.4.2020) 2,134 Claims O/S (1.4.20) 2,376
Premium Outstanding (31.3.2021) 3,143 Claims O/S (31.3.21) 3,735
Investments 1,46,700 Loans on policies 38,300
Share capital 2,00,000 Loans on mortgages 2,90,500
Sundry Creditors 9,200 Freehold premises 1,22,600
Life Assurance Fund (1.4.20) 3,53,672 Furniture & fitting 64,100
Reserve fund 1,46,000 Cash on hand & deposits 76,300
Solution
Revenue Account for the year ended 31-3-2021
Schedul Current Pre.
Particulars
e No. Year Year
Premiums earned –Net: 1 ---
Interest revenue 92,702 ---
Other Incomes (To be specified): 19,060
Consideration for annuities granted 12,853
Fees received 172
Total (A) 1,24,787 ---
Commission 2 8,900 ---
Operating expenses related to Insurance Business 3 34,051 ---
Total (B) 42,951 ---
Benefit paid (Net) 4 50,046
Total (C) 50,046 ----
Surplus (D)=(A)-(B)-(C) 31,790 ----
Appropriations: ---- ----
Transfer to shareholders account --- ----
 119
Transfer to other reserves
Balance being funds for future Appropriations 31,790
Total (D) 31,790

Balance Sheet as on 31-3-2021

Schedule Current Previous
Particulars
No. Year Year
Sources of Funds:
Share Capital 5 2,00,000 -----
Reserves and surplus 6 5,31,462 ----
Borrowings 7 ----
Total 7,31,462 ----
Application of Funds:
Investments 8 1,46,700 ---
Loans 9 3,28,860 ----
Fixed Assets 10 1,86,700 ----
Total 6,62,260 ---
Current Assets: ---
Cash and Bank Balances 11 76,300 ---
Advances and Other Assets 12 5,837 ----
Sub-Total (A) 82,137
Current Liabilities 13 12,935 ---
Provisions 14 -- ---
Sub-Total (B) 12,935 --
Net current assets (A-B) 69,202 ---
Total 7,31,462
(Total of Schedules 8,9,10 and Net current assets) ---
Schedules forming part of Financial statements
Schedule 1-Premiums
No. particulars Current Year (Rs.’000) Previous Year (Rs.’000)
Premiums received 94,836 ----
Less: Outstanding premiums on 1.4.2020 2,134
92,702
Note: Premiums outstanding on 31-3-2021 will appear in schedule 12 as an asset.
Schedule 2—Commission expenses
No. Particulars Current Year (Rs.’000) Previous Year (Rs.’000)
Commission to agents 8,900 ---
Schedules 3-Operating expenses related to Insurance business
No. Particulars Current Year (Rs.’000) Previous Year (Rs.’000)
Agents’ salaries and allowances 6,420 ---
Actuarial expenses 1,520 ----
Salaries 13,500 ---
Medical fees 1,200 ---
Travelling expenses 1,800 ---
Directors fees 900 ---
Rent rates and taxes 5,475 ---
General charges 1,860 ---
Advertisement 726 ---
Printing & Stationery 650 ---
34,051
Schedule 4-Benefit paid (Net)
No. Particulars Current year (Rs.000) Previous Year (Rs.000)
 120
Claims paid:
By Death 16,890
By maturity (Endowment Assurance matured) 24,415
41,305
Add: Claim expenses 1,432
42,737
Less: Outstanding claims on 1-4-2020 2,376
Net claims 40,361
Annuities 1,350
Surrenders 2,810
Bonus paid in cash 2,825
Bonus paid with claims 2,700
50,046
Note: Claims outstanding on 31-3-2021 will appear in Schedule 13 as liability:
Schedules 5—Share Capital
Particulars Current Year (Rs.’000) Previous Year (Rs.’000)
Share Capital 2,00,000 ----
Schedule 6—Reserves and Surplus
Particulars Current Year (Rs.’000) Previous Year (Rs.’000)
Reserve Fund 1,46,000 -----
Life Assurance Fund on 1.4.20 3,53,672
Add: Surplus transferred to
Funds for Future appropriations 31,790 3,85,462 ------
5,31,462 -------
Schedules 7—Borrowings - NIL -
Schedules 8—Investments
Particulars Current Year (Rs.’000) Previous Year (Rs’000)
Investments 1,46,700 ----
Schedules 9—Loans
Particulars Current Year (Rs.000) Previous Year (Rs.000)
Loans on Mortgages 2,90,560 -----
Loans on policies 38,300 -----
3,28,860
Schedules 10—Fixed Assets
Particulars Current Year (Rs.000) Previous Year (Rs.’000)
Freehold premises 1,22,600 ----
Furniture and Fittings 64,100 ----
1,86,700
Schedules 11—Cash and Bank Balance
Particulars Current Year (Rs.’000) Previous Year (Rs.’000)
Cash on hand and deposits 76,300 ---
Schedules 12—Advances and other Assets
Particulars Current Year (Rs.’000) Previous (Rs.’000)
Advances --- ---
Others: ---
Outstanding premiums 3,143 ---
Outstanding Interest and Dividend 1,944 ---
Agents’ Balances 750 ---
5,837
Schedules 13 –Current liabilities
Particulars Current Year (Rs.000) Previous Year (Rs.000)
 121
Sundry Creditors 9,200 ---
Outstanding claims 3,735 ---
12,935 ----
7. From the following Trial balance of National Life Assurance Co. Ltd.,
prepare Revenue A/c and Balance Sheet as on 31.3.2021
Debit balance Rs.(‘000) Credit balance Rs.(‘000)
Claims by death 76,980 Life Assurance fund
Claims by maturity 36,420 (91.4.05) 14,70,562
Expenses of management 19,890 Premiums 2,10,572
Commission 26,541
Dividend paid 20,000 Consideration for annuities granted 10,620
Income tax on interest etc. 3,060
Surrenders 21,860 Interest, Dividends & Rents 52,461
Annuities 29,420 Fines 92
Bonus paid in cash 9,450 Annuities due but not paid 22,380
Bonus in reduction of premium 2,500 Share capital:40,00,000 4,00,000
Preliminary expenses 200 Shares of Rs.100 each
Stamps on hand 400 Claims admitted but not paid 80,034
Govt. securities 8,70,890
Furniture 20,000
Mortgages 3,09,110
Loans on company’s policies 2,00,000
Freehold premises 3,00,000
Leasehold ground rents 2,00,000
House property 1,00,000
22,46,721 22,46,721
Additional Information
i. Management expenses due 600
ii. Premium Outstanding 7,400
iii. Reinsurance premium 6,000
iv. Interest accrued 15,400
v. Surrenders adjusted against loans 5,000
vi. Further bonus utilized in reduction of premium 1,500
vii. Further claim intimated 8,000
viii. Claim covered under reinsurance 10,000
Solution
National Insurance Co., Ltd.,
Revenue Account for the year ended 31st March 2021
Particulars Schedule No Current Year Previous Year
(Rs.’000) (Rs.’000)
Premiums earned—Net 1 2,19,472
a)Premium (-)6,000
b)Reinsurance ceded -----
c) Reinsurance accepted
Income from investments:
Interest, dividends and Rents (gross)
(52,461+15,400) 67,861
Other Incomes (to be specified):
Consideration for annuities granted 10,620
Fines 92
Total (A) 2,92,045
Commission 2 26,541
Operating expenses related to Insurance 3
Business 20,490
Total (B) 47,031
Benefit paid (Net) 1,81,130
 122
Total (C) 1,81,130
Surplus (D)=(A)-(B)-(C) 63,884
Appropriations:
Transfer to Shareholders Account—
Dividend 20,000
Transfer to other reserves ----
Balance being funds for future appropriations 43,884
Total (D) 63,884
Note: 1. Dividend is to be shown as an item of payment in profit and loss amount.
2. Income tax on interest etc., is a ‘TDS’ and it will appear under schedule 12
Advances and other assets, as per the IRDA form.
Balance sheet as on 31st March 2021
Particulars Schedules No. Current Year. Previous Year
(Rs.’000) (Rs.’000)
Sources of Funds:
Share Capital 5 3,99,800
Reserves and surplus 6 15,14,446
Borrowings 7
Total 19,14,246
Application of Funds:
Investment 8 10,70,890
Loans 9 5,04,110
Fixed Assets 10 4,20,000
Total 19,95,000
Current Assets:
Cash and Banks Balances 11
Advances and other Assets 12 36,260
Sub Total (A) 36,260
Current Liabilities 13 1,17,014
Provisions 14
Sub Total (B) 1,17,014
Net Current Assets (A)-(B) (-)80,754

Total (Total of Schedules 8,9,&10 and Net 19,14,246

current Assets)
Schedules forming part of Financial statements
Schedule 1—Premiums
Particulars Current Year. Previous Year
(Rs.’000) (Rs.’000)
Premiums Received 2,10,572 ----
Add: Outstanding premiums of 31-3-2021 7,400 ---
Add: Bonus in reduction of premium 1,500 ----
2,19,472 ---
Schedule 2—Commission Expenses
Commission 26,541 ---
Schedules 3—Operating expenses related to Insurance Business
Expenses of management 19,890 ----
Add: Expenses of Management due 600 ----
20,490 ----
Schedule 4—Benefits Paid (Net)
Claims Paid:
By Death 76,980
By Maturity 36,420
 123
1,13,400
Add: Further Claims intimated 8,000
1,21,400
Less: Claims covered under insurance 10,000 1,11,400 ---
Annuities 29,420 ---
Surrenders 21,860
Add: surrenders adjusted against loans 5,000 26,860 ---
Bonus paid in cash 9,450 ---
Bonus in reduction of premium 2,500
Add: Further Bonus in reduction of premium 1,500 4,000
1,81,130 ---
Schedule 5—Share Capital
Particulars Current Year. Previous Year
(Rs.’000) (Rs.’000)
40,00,000 shares of Rs.100 each 4,00,000 ----
Less: preliminary Expenses 200
3,99,800
Note: As per IRDA form, preliminary expenses and all losses on issue of shares should be
reduced from share capital;
Schedules 6—Reserves and Surplus
Reserves ---- ----
Life Assurance Fund on 1-4-2020 14,70,562
Add: Transfer to Funds for
Future appropriations 43,884 15,14,446 -----
Schedules 7—Borrowings
-- NIL --
Schedule 8 –Investments
Government securities 8,70,890 ----
Leasehold ground rents 2,00,000
10,70,890 -----
Schedules 9—Loans
Loans on Mortgages 3,09,110 ---
Loans on Policies 2,00,000
Less: Surrenders adjusted 5,000 1,95,000 ----
5,04,110 ---
Schedules 10—Fixed Assets
Freehold premises 3,00,000 ----
House property 1,00,000 ----
Furniture 20,000 ----
4,20,000
Schedules 11-Cash and Bank Balances
-- NIL --
Schedules
Advances:
Income tax on interest etc 3,060 ---
Other Assets:
Outstanding Premiums 7,400
Amount due from other Insures 10,000 ----
 124
Accrued Interest 15,400 ---
Stamps 400 ---
36,260 ---
Schedules 13—Current Liabilities
Claims admitted, but not paid 80,034 ---
Further claims intimated 8,000 ---
Annuities due but not paid 22,380 ---
Management Expenses due 600 ---
Reinsurance premium due 6,000 ---
1,17,014 ---
SUMMARY
Preparation of life insurance accounts, like a financial accounts. But it is have
the different steps, these are Revenue A/c, profit and loss a/c and balance sheet.
From these the insurers may get the information about their investing company.
Each steps of accounts having a separate schedule also.
KEYWORDS
Statutory Books: This books have the following, registered policy, register of
claims, registered of licensed agents.
Revenue Account: It is have four schedules. First-premium earned secured
commission expended, third various operating expenses, and fourth claims to be
paid.
Profit and loss Account: It is transferred from revenue Accounts from these
balance any dividend and reserves are made, the remaining should be shown to
Balance sheet.
Balance sheet: It is consist of this parts-source of funds and application of
funds. Each sources and application have their own schedules.
8.13 SELF ASSESSMENT TEST
1. How does a life Insurance company ascertain its profit or loss?
2. Explain the following items relating to insurance business:
a) Reinsurance b) Commission on reinsurance ceded
c) Reserve for unexpired risk d) Revenue Account.
3. From the following particulars, calculate the premiums earned (Net) to be
derived in schedule 1 of a life insurance company:
Premiums less reinsurance 1,61,500
Accrued premium 5,000
Bonus in reduction of premium (Not yet adjusted) 5,000
4. Compute commission expenses to be derived in schedule 2 of a life
insurance company:
Commission on direct business 93,000
Commission on reinsurance accepted 40,000
Commission on reinsurance ceded 50,000
5. From the following details relating to claims, you are required to calculate
the net claim to be shown in Revenue a/c for the year ending 31.3.21:
 125
Claims paid for the year ended 31.3.21 Rs.4,50,000
Claims intimated but not accepted & paid on 31-3-21 Rs.25,000
Claims intimated but not paid on 31-3-21 Rs.35,000
Legal expenses regarding claims 15,000
Medical expenses regarding claims 5,000
Reinsurance recoveries 6,000
6. A Life insurance Company prepared its Revenue A/c for the year ended
31.3.2021 and ascertained its life assurance fund to be Rs.22,34,400. It
has found later that the following had been omitted from the accounts: Rs.
a) Interest accrued on investments 32,000
Income tax liable to be deducted estimated to be 10,000
b) Outstanding premiums 31,400
c) Bonus utilized for reduction of premium 6,600
d) Claims intimated but not admitted 15,200
e) Claims covered under reinsurance 5,300
What is the true life assurance fund?
7. The revenue account of a life assurance company shows the life Assurance
Fund on 31-3-2021 at Rs.62,21,310/- before taking into account the
following:
i. Claims covered under reinsurance 12,000
ii. Bonus utilized in reduction of life insurance premium 4,500
iii. Interest accrued on securities 8,260
iv. Outstanding premiums 5,420
v. Claims intimated but not admitted 26,500
What is the Life Assurance Fund after taking into account the above
omissions?
8. A life Assurance Fund has been ascertained without adjusting the following
you are required to calculate the correct Life Assurance Fund.
Life Assurance fund, as ascertained 56,70,000
Premiums outstanding 2,30,000
Claims Outstanding 1,80,000
Claims Covered under reinsurance 20,000
Claims of last year paid during this year. 5,000
Bonus Paid in Cash 14,000
Bonus utilized in reduction of premium 16,000
Interest and dividend accrued 7,500
Income tax thereon 800
9. The Revenue Account of a Life Insurance Company showed a balance of
Rs. 4,75,000 at the end of 2020-21 before considering the following items:
a) Bonus in reduction of premiums Rs.40,000
b) outstanding premiums Rs.1,00,000
c) interest accrued on investments Rs.20,000
d) Claims intimate but not admitted Rs.35,000
e) Claims recovered under reinsurance Rs.3,000
Pass necessary adjustment entries.
 126
10. The Revenue account of a Life Insurance Company shown the life
insurance Fund on 31-3-2021 at Rs.48,78,000 before taking into account
the following items.
a) Claims intimated but not admitted
b) Bonus utilized in reduction of premiums
c) Interest accrued on securities
d) Outstanding premiums
e) Claims recovered under reinsurance
Pass the entries given effect to the above adjustments and show the life fund at the
end of the year 2020-21 after making the above adjustments.
11. The following figures relate to life insurance corporation for the year ended
31-3-2021 Prepare the Revenue A/c.
(Rs. ‘000) (Rs. ‘000)
Claims 39 Consideration for annuities granted 16.5
Management expenses 14 Surrenders 9
Director’s fees 4 Premia received 151
Audit fees 3 Life fund (1.4.20) 1150
Medical expenses 5 Interest received 40
Agents’ Commission 5 Rent received 10
Depreciation 4 Claims cancelled 5
Bonus in reduction of premium 1.5 Annuities 1.5
Note: a) Premium outstanding Rs.9 Thousand Claims outstanding Rs. 3 Thousand.
[Claims cancelled owing to some inherent defect in the policy or any other reason,
would reduce the total claim. Hence, the claim cancelled should be deducted from
claims]
Prepare in the proper statutory form the Revenue account of the Super Insurance.
12. Company Ltd. for the year ended 31st March 2021 from the following
figures.
Rs. (‘000) Rs. (‘000)
Claims by death 76,000 Expenses of Management 31,920
Claims by maturity 30,110 Commission 9,574
Premiums: Interest, dividends & rents 97,840
First premiums 2,50,000 Income tax on interests,
Renewal premiums 3,55,690 dividends etc. 35,710
Single premiums 1,00,000 Surrenders 13,140
Transfer fees 129 Bonus in reduction of premiums 980
Consideration for annuities Dividend paid to shareholders 5,500
granted less re assurance 82,127 Amount of life insurance
Annuities paid 53,461 fund at the beginning
Bonus paid in cash 2,416 of the year. 15,21,000
[Hints: 1.Bonus in reduction of premium should be shown only as an expenditure in
Revenue A/c
2.Income tax on interest, dividend etc will be shown in schedule 12 of
Balance Sheet, since it is tax deducted at source]
13. The following balances are extracted from the books of a life insurance
business as on 31st March 2021: Rs.(‘000)
Life assurance fund as on 1.4.20 5,06,000
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Premiums 90,000
Reinsurance premium paid 2,075
Fine for revival of policies 15
Consideration for annuities granted 1,500
Management expenses 21,000
Income tax 850
Commission 18,650
Claims 40,000
Interest, dividend etc. 20,000
Surrenders 3,250
Medical fees 1,505
Annuities 1,955
Bonus in cash. 600
Prepare the Revenue A/c for the year 2020-21 after making the following
adjustments: Rs. (‘000)
a) Claim payable 9,250
b)Interest accrued on investment 2,695
c) Medical fees outstanding 375
d) Outstanding premium 3,750
e) Commission payable 750
f) A claim of Rs.500 Thousands included in the above claims payable is to e
written off as it is ten yeas old and is not likely to arise
g) The managing director is to be paid at the rate of 5% on the net increase
of Life Assurance Fund during the year before providing such commission.
14. From the following figures relating to the Cosmopolitan Life Insurance
Company prepares its revenue account and Balance Sheet for the year
ended 31-3-2021. Rs.(‘000)
Shareholders’ capital in 2, 00, 00,000 shares of
Rs.25 each, Rs.10 per share paid up 2,00,000
Claims under policies paid ad outstanding
less received on reassurance 45,00,000
Life Assurance fund (1.4.20) 4,80,00,000
Investment reserve fund (1.4.20) 50,00,000
Expenses of management 15,00,427
Investments 5,10,00,000
Freehold and Leasehold property 25,00,000
Unpaid dividends 51,790
Outstanding premia (net) 6,03,200
Claims admitted but not paid 30,00,000
Outstanding interest 5,90,000
Surrenders 3,58,950
Annuities 30,000
Premia less reassurances 75,00,000
Consideration for annuities granted 50,500
Bonus in reduction of premium 4,000
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Gain on redemption of debentures (to be carried to
investment reserve fund) 20,000
Interest, dividends and rents received 32,00,337
Interest accrued 3,17,000
Income tax 2,80,149
Transfer fee 6,430
Agents balances 1,45,904
Furniture and fittings 90,500
Loans on company’s policies 49,00,000
Cash in hand and at banks 3,64,000
Stamps on hand 7,322
Cheques paid into banks and in course of collection 49,000
Cheques issued be not presented for payment 66,520
Sundry creditors 44,875
Premia received in advance 1,00,000
Hint: Treat Income Tax as revenue account item.
REFERENCE BOOKS
1. Jain SP, Navang KL., Corporate Accountancy, Kalyani Publishers, New
Delhi.
2. Gupta RL, Radhasamy M, Corporate Accountancy, Sultan Chand & Sons,
New Delhi.
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LESSON – 9
VALUATION OF BALANCE SHEET
OBJECTIVES
Students after studying in this lesson they can able to learn the more on how
the prepare and present the valuation of balance sheet with some workings.
CONTENTS
9.1 Introduction
9.2 Computation of profit in life insurance business
9.3 Treatment of profit
9.4 Accounting entries for dealing with profits
9.5 Examples
9.6 Self Assessment Test
9.1 INTRODUCTION
Generally, the life policies are take for a number of years. The premium
received on such long term polices cannot be treated as income for computation of
profits for that year. But at the same time, under a contract of annuity, premium is
received once but the payment is made till the death of the annuitant. In case of life
insurance, the claim must arise either on the death of the assured or expiry of the
policy period. The difference between the present value of the future premiums to
be received and the present value of future liability on all policies in force is known
as ‘net liability’ for life insurance companies. Hence, it becomes desirable to create
a reserve equal to its net liability in order to calculate the profit made by the
company. In order to ascertain the profit of the insurance company net liability all
outstanding policies should be calculated. The method of calculation is a highly
technical one, and is done by experts called ‘Actuaries’. The process by which net
liability is determined by an actuary is called actuarial valuation.
9.2 COMPUTATION OF PROFIT IN LIFE INSURANCE BUSINESS.
Once the net liability of the life insurance business is determined, it is to be
compared with the life assurance fund on that particular date in order to calculates
the surplus or deficiency. If amount of life assurance fund is more than net liability
excess is treated as surplus (or profit). If net liability is more that life assurance
fund, this excess is treated as deficiency (or loss). This comparison is made by
preparing a valuation balance sheet, specimen form of which is given below.
Valuation Balance Sheet as on ……..
Particulars Rs. Particulars Rs.
To Net liability as per By Life assurance fund as per Balance
Actuary’s valuation xxx Sheet xxx
To Surplus x(Bal. fig) xxx By Deficiency x (Bal. fig.) xxx
xxx xxx
x Surplus or deficiency may be the balancing figure. Only surplus (and not
deficiency) will be shown in the Balance Sheet.
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9.3 TREATMENT OF PROFIT
According to Section 28 of life Insurance Corporation Act 1956, 95% of the
surplus, as disclosed in valuation Balance sheet, should be declared as bonus to
policyholders.
The following points should be taken into account while calculating the
amount due to the policy holders.
i. Any interim bonus paid to policy holders should be added back to surplus
as disclosed by the valuation balance sheet as interim bonus is really an
advance payment of bonus.
ii. Any dividend payable, provision for loss on revaluation of investments etc.
should be subtracted from the surplus as disclosed by the valuation
balance sheet, if those items were not already adjusted.
iii. After making the above mentioned adjustments the balance of surplus
amount should be taken as surplus available for bonus, of which only 95%
should be calculated as bonus to policyholders. Any interim bonus already
paid should be deducted from the amounts as calculated. The balance is
the amount now due to the policyholders.
The balance of 5% of surplus is available to the shareholders.
Policy holders are paid bonus only in that year when profit is found out by
valuation method, but shareholders are usually paid dividend every year.
9.4 ACCOUNTING ENTRIES FOR DEALING WITH PROFITS
There are two methods to record the accounting entries for disposal of profit or
surplus as disclosed by the valuation Balance sheet.
First method.
Under this method, the following entries are passed.
S.no Particulars LF Dr Cr
1 For transferring the whole of profits from Life assurance fund
Life Assurance Fund a/c Xxxx
To Profit & Loss a/c Xxxx
2 For appropriation &Provisions out of profits
Profit &Loss a/c Xxxx
To Dividend(to shareholders) a/c Xxxx
To Income tax(on profits) a/c Xxxx
To Bonus paid to policy holders Xxxx
To Bonus utilized in reduction of premises Xxxx
To General/Contingency reserve Xxxx
3 For transferring reversionary bonus declared
Out of surplus to life assurance fund
Profit & Loss a/c xxxx
To Life assurance Fund a/c xxxx
The Balance in profit & Loss A/c are shown in the Balance Sheet.
Second method
Under this method, the amounts due to various parties are to be ascertained
and the related entries are passed through life assurance fund account (or) revenue
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account. There is no need to transfer surplus or profit to a profit & Loss account.
Thus, items like dividend to shareholders, bonus paid to policyholders in cash, etc.
should be debited to revenue account provided the amounts do not exceed those
warranted by profits. As the entire surplus is not transferred from life assurance
Fund, the question of transferring the reversionary bonus back into the fund does
not arise.
9.5 EXAMPLES
1. A Life Insurance Company gets its valuation made once in every two years.
Its Life Assurance fund on 31-3-21 amounted to Rs.63,84,000 before providing
Rs.64,000 for the shareholders’ dividend for the year 2020-21. Its actuarial
valuation due on 31-3-21 disclosed a net liability of Rs.60,80,000 under assurance
annuity contracts. An interim bonus of Rs.80, 000 was paid to the policy holders
during the two years ending 3-3-2021. Prepare a statement showing the amount
now available as bonus to policy holders.
Solution
Valuation Balance Sheet as on 31-3-2021
Rs. Rs.
To Net liability as per actuarial valuation 60,80,000 By Life assurance fund as per balance sheet 63,84,000
To surplus (balancing figure) 3,04,000
63,84,000 63,84,000

Statement showing bonus due to policy holders

Rs.
Surplus as per valuation Balance Sheet 3,04,000
Add: Interim bonus paid to policy holders 80,000
3,84,000
Less: Dividend for 2020-21 due to shareholders 64,000
Net profit 3,20,000
Policy holders will get 95% of Rs.3,20,000 3,04,000
Less: Bonus already paid to the policy holders 80,000
Amount due to the policy holders. 2,24,000

2. Life fund of a life assurance company was Rs.86,48,000 as on 31-3-2021.

The interim bonus paid during the inter valuation period was Rs.1,48,000. The
periodical actuarial valuation determined the net liability at Rs.74,25,000. Surplus
brought forward from the previous valuation was Rs.8,50,000. The directors of the
company proposed to carry forward Rs.9.31.000 and to divide the balance between
the shareholders and the policy holders in the ratio of 1:10.
Show a) the valuation Balance sheet
b) the net profit for the valuation period
c) the distribution of the surplus
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Solution
a) Valuation Balance Sheet as at 31-3-2021
Rs. Rs.
To Net liability as per Actuarial valuation 74,25,000 By Life fund as per Balance sheet 86,48,000
To surplus (Balancing figure) 12,23,000
86,48,000 86,48,000
b) Calculation of net profit for the valuation period
Rs.
Surplus as per valuation Balance sheet 12,23,000
Add: Interim Bonus distributed 1,48,000
13,71,000
Less: Surplus at the beginning of the period 8,50,000
Net profit 5,21,000
c) Statement showing distribution of surplus
Total surplus 13,71,000
Less: Surplus to be carried forward 9,31,000
4,40,000
Distribution: To shareholders(4,40,000 x 1/11) 40,000
To Policy holders(4,40,000 x10/11) 4,00,000
Less: Interim bonus already distributed 1,48,000 2,52,000
Amount payable to policy holders
(This equal Rs.4,40,000 to be distributed less Rs.1,48,000 already paid as interim bonus) 2,92,000
SUMMARY
The difference between the present value of the future premiums to be received
and the present value of future liability are all policies in force is known as net
liability. If net liability is more that life assurance fund, this excess is treated as
deficiency for loss. It is to be known by with help of valuation of balance sheet.
KEYWORDS
Valuation of Balance Sheet: It is shares net liability and life assurance fund,
differences between them called either surplus nor deficiency.
Bonus to policy holders: From the surplus some percentage is transferred to
policy holders as bonus.
9.6 SELF ASSESSMENT TEST
1. What do you mean by Valuation of Balance Sheet?
2. What is ‘Valuation Balance Sheet’? Why is it prepared? How is the surplus
revealed therein dealt with?
3. What is “Bonus to Policy holders”? Explain the meaning of (a) Bonus in
Cash (b) Bonus in reduction of Premiums and (c) Reversionary Bonus
4. How can you calculate the amount available to Policy Holders?
5. The Life Assurance fund of an Insurance company on 31-3-2021 showed a
balance of Rs. 87,76,500. It was found later that the following were not
taken into account:
Dividend from investments 4,80,000
Income tax on above 48,000
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Bonus in reduction of premium 8,77,500
Claims covered under re-insurance 4,23,000
Claims intimated but not accepted by company ,62,000
Ascertain the correct balance of fund.
6. The life Insurance Fund of Hindustan Life Insurance Co., Ltd. was
Rs.34,00,0000 on 31-3-2021. Its actuarial valuation on 31st march 2021
disclosed a net liability Rs.28,80,000. An interim bonus of Rs.40,000 was
paid to the policy holders during the previous two years. It is now propose
to carry forward Rs.1,10,000 and to divide the balance between the
policyholders and shareholders. Show (a) The valuation Balance Sheet, b)
the net profit for the two year period and c) the distribution of the profits.
7. A Life Insurance Company got its valuation made once in every three years.
The Life Assurance Fund on 31-3-21 amounted to Rs.41,92,000 before
providing for Rs.32,000 for the shareholders’ dividend for the year 2020-
21. Its actuarial valuation on 31-3-21 disclosed a net liability of
Rs.40,40,000 under the assurance and annuity contracts. An interim
bonus of Rs.40,000 was paid to the policy holders during the period ending
31.3.21.
Prepare a statement showing the amount now available as bonus to policy
holders.
8. A Life Assurance Company makes its valuation made once in every three
years. Its life assurance fund on 31-3-2021 amounted to Rs.31,92,000
before providing Rs.40,000 for shareholders’ dividend for the year 2020-21.
Its actuarial valuation due on 31-3-2021 disclosed a net liability of
Rs.30,40,000 under assurance annuity contracts. An interim bonus of
Rs.40,000 was paid to the policy holders during the year ending 31-3-21.
Prepare a statement showing the amount now available as bonus to policy
holders assuming that the surplus disclosed by the valuation is to be
allocated to the shareholders and the policy holders in the ratio of one and
nine respectively.
REFERENCE BOOKS
1. Shukla MC, Grewal TS, Gupta SC, Advanced Accountany, S.Chand &
Company Ltd., New Delhi.
2. Reddy TS, Murthy A, Corporate Accountancy, Margham Publications,
Chennai.
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LESSON – 10
ACCOUNTING PRINCIPLES FOR GENERAL INSURANCE BUSINESS
OBJECTIVES
After studying the above lessons the students to cover the below lesson, the
can able to learn the some of the following objectives, various part of accounting
principles related the general insurance business.
CONTENTS
10.1 Introduction
10.2 Part I Accounting Principles for preparation of Financial Statements
10.3 Part II Disclosures forming part of Financial Statement
10.4 Part III General instruction for preparation of Financial Statement
10.5 Part IV Contents for managerial report
10.6 Part V Preparation of Financial report
10.7 Self-Assessment Test
10.1 INTRODUCTION
In general, in this lesson discussed about the various format of the different
part of general insurance business accounts. Students are go through this lesson
with the respective format they can able to easy to present the accounts are
understandable manner. This is to practice with the help of rules, which is provided
by the insurance business in India the
10.2 PART—1 ACCOUNTING PRINCIPLES FOR PREPARATION OF FINANCIAL
STATEMENTS
Schedule B
(See Regulation 3)
1. Applicability of Accounting Standards:
Every Balance Sheet, Receipts and Payments Account [Cash Flow Statement]
and Profit and Loss Account [Shareholders’ Account] of the insurer shall be in
conformity with the Accounting Standards (AS) issued by the ICAI, to the extent
applicable to the insurers carrying on general insurance business, except that:
i. Accounting Standard 3 (AS-3) –Cash Flow Statements—shall be prepared
only under the Direct Method.
ii. Accounting Standard 13 (As-13)—Accounting for investments, shall not be
applicable.
iii. Accounting Standard 17 (As-17)—Segment Reporting—shall apply to all
insurers irrespective of the requirements regarding listing and turnover
mentioned therein.
2. Premium:
Premium shall be recognized as income over the contract period of risk,
whichever is appropriate. Premium received in advance, which represents premium
income not relating to the current accounting period, shall be disclosed separately
in the financial statements.
A reserve for unexpired risks shall be created as the amount representing that
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part of the premium written which is attributable to, and to be allocated to the
succeeding accounting periods and shall not be less than as required under section
64 V(i) (ii) (b) of the IRDA Act.
Premium Received in Advance, which represents premium received prior to
commencement of the risk, shall be shown separately under the head ‘Current
Liabilities’ in the financial statements.
3. Premium Deficiency:
Premium deficiency shall be recognized if the sum of expected claim costs, related
expenses and maintenance costs exceeds related reserve for unexpired risks.
4. Acquisitions Costs:
Acquisition costs, if any, shall be expensed in the period in which they are
incurred. A Acquisition costs are those costs that very with, and are primarily
related to the acquisition of new and renewal insurance contracts. The most
Essential test is the obligatory relationship between costs and the execution of
insurance contracts (i.e., commencement of risk)
5. Claims:
The components of the ultimate cost of claims to an insurer comprise the
claims under policies and specific claims settlement costs. Claims under policies
comprise the claims made for losses incurred, and those estimated or anticipated
under the policies following a loss occurrence.
a) Future payments in relation to unpaid reported claims:
b) Claims Incurred But Not Reported (IBNR) including inadequate reserves
[sometimes referred to as Claims Incurred But Not Enough Reported (IBNER) which
will result in future cash/asset outgo for settling liabilities against those claims.
Change in estimated liability represents the difference between a the estimated
liabilities for outstanding claims at the beginning and the end of the financial period.
The accounting estimate shall also include claims cost adjusted for estimated
salvage value if there is sufficient degree of certainty of its realization.
Claims made in respect of contracts where the claims payment period exceeds
four years shall be recognized on an actuarial basis, subject to regulations that may
be prescribed by the Authority. In such cases, certificate from a recognized actuary
as to the fairness of liability assessment must be obtained. Actuarial assumptions
shall be suitably disclosed by way of notes to the account.
6. Procedure to determine the value of investments:
An insurer shall determine the values of investments in the following manner:
a) Real Estate—Investment Property:
Investment Property shall be measured at historical cost less accumulated
depreciation and impairment loss, residual value being considered zero and no
revaluation being permissible.
The insurer shall assess at each balance sheet date whether any impairment
of the investment property has occurred.
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An impairment loss shall be recognized as an expense in the Revenue/Profit
and Loss Account immediately.
Fair value as at the balance sheet date and the basis of its determination shall
be disclosed in the financial statements as additional information.
b) Debt Securities:
Debt securities including government securities and redeemable preference
shares, shall be considered as “held to maturity”. Securities and shall be measured
at historical cost subject to amortization
c) Equity Securities and Derivative Instruments that are traded in active markets:
Listed equity securities and derivative instruments that are traded in active
markets shall be measured at fair value as at the balance sheet date. For the
purpose of calculation of fair value, the lowest of the last quoted closing price of the
stock exchanges where the securities are listed shall be taken.
The insurer shall assess on each balance sheet date whether any impairment
of listed equity security(ies)/derivative (s) instruments has occurred.
An active market shall mean a market, where the securities traded are
homogeneous, availability of willing buyers and willing sellers is normal and the
prices are publicly available.
Unrealized gains/losses arising due to changes in the fair value of listed equity
shares and derivative instruments shall be taken to equity under the head ‘Fair
Value Change Account’. The Profit on sale of investments’ or ‘Loss on sale of
investments’. As the case may be, shall include accumulated changes in the fair
value previously recognized in equity under the heading Fair Value change Account
in respect of a particular security and being recycled to profit and Loss Account on
actual sale of that listed security.
For the removal of doubt, it is clarified that balance or any part thereof shall
not be available for distribution as dividends. Also, any debit balance in said Fair
value Change Account shall be reduced form the profits/free reserves while
declaring dividends.
The insurer shall assess, at each balance sheet ate, whether any impairment
has occurred. An impairment loss shall be recognized as an expense in
Revenue/Profit and Loss Account to the extent of the difference between the re-
measured fair value of the security/investment and its acquisition cost as reduced
by any previous impairment loss, recognized as expense in Revenue/Profit and Loss
Account. Any reversal of impairment loss, earlier recognized in Revenue/Profit and
Loss Account shall be recognized in Revenue/Profit and Loss Account.
d) Unlisted and other than actively traded equity Securities and Derivative Instruments:
Unlisted equity securities and derivative instruments and listed equity
securities and derivative instruments that are not regularly traded in active market
will be measured at historical cost. Provision shall be made for diminution in value
of such investments. The provision so made shall be reversed in subsequent
periods if estimates based on external evidence show an increase in the value of the
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investment over its carrying amount. The increased carrying amount of the
investment due to the reversal of the provision shall not exceed the historical cost.
For the purposes of this regulation, a security shall be considered as being not
actively traded, if as per guidelines governing mutual funds laid down from time to
time by SEBI, such a security is classified as ‘Thinly traded”.
7. Loans:
Loans shall be measured at historical cost subject to impairment provisions.
The insurer shall assess the quality of its loan assets and shall provide for
impairment. The impairment provision shall not be lower than the amounts derived
on the basis of guidelines prescribed from time to time by the Reserve Bank of India
that apply to companies and financial institutions.
8. Catastrophe Reserve:
Catastrophe reserve shall be created in accordance with norms, if any,
prescribed by the Authority. Investment of funds of catastrophe reserve shall be
made in accordance with prescription of the Authority.
10.3 PART-II DISCLOSURES FORMING PART OF FINANCIAL STATEMENTS
A. The following shall be disclosed by way of notes to the Balance Sheet
1. Contingent Liabilities:
(a) Party-paid up investments;
(b) Underwriting commitments outstanding;
(c) Claims, other than those under policies, not acknowledged as debts;
(d) Guarantees given by or on behalf of the company;
(e) Statutory demands/liabilities in dispute, not provided for ;
(f) Reinsurance obligations to the extent not provided for in accounts;
(g) Others (to be specified).
2. Encumbrances to assets of the company in and outside India.
3. Commitments made and outstanding for Loans, Investments and Fixed
Assets.
4. Claims, less reinsurance, paid to claimants in/outside India.
5. Actuarial assumptions for determination of claim liabilities in the case of
claims where the claims payment period exceeds four years.
6. Ageing of claims-distinguishing between claims outstanding for more than
six months and other claims.
7. Extent of premium income recognized, based on varying risk pattern,
category wise, with basis and justification therefor, including whether
reliance has been placed on external evidence.
8. Value of contracts in relation to investments, for
(a) Purchases where deliveries are pending;
(b) Sales where payments are overdue.
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9. Operating expenses relating to insurance business; basis of allocation of
expenditure to various classes of business.
10. Historical costs of those investments valued on fair value basis.
11. Computation of managerial remuneration.
12. Basis of amortization of debt securities
13. (a) Unrealized gain /losses arising due to changes in the fair value of listed
equity shares and derivative instruments are to be taken to equity
under the head ‘Fair Value Change Account’ and on realization
reported in Profit and Loss Account.
(b) Pending realization, the credit balance in the ‘Fair Value Change
Account’ in not available for distribution.
14. Fair value of investment property and the basis therefore.
15. Claims settled and remaining unpaid for a period of more than six months
as on the balance sheet date.
B. The following accounting policies shall form an integral part of the financial statements
1. All significant account policies in terms of the accounting standards issued
by the ICAI and, significant principles and policies given in part 1 of
Accounting Principles. Any other accounting policies, followed by the
insurer, shall be stated in the manner required under Accounting Standard
AS I issued by the ICAI.
2. Any departure from the accounting policies as aforesaid shall be separately
disclosed with reasons for such departure.
C. The following information shall also be disclosed:
1. Investments made in accordance with any statutory requirement should be
disclosed separately together with its amount, nature, security and any
special rights in and outside India.
2. Segregation into performing/non performing investments for purpose of
income recognition as per the directions, if any, issued by the Authority.
3. Percentage of business sector-wise.
4. A summary of financial statements for the last five years, in the manner as
may be prescribed by the Authority.
5. Accounting Ratios as may be prescribed by the Authority.
6. Basis of allocation of Interest, Dividends and Rent between Revenue
Account and Profit and Loss Account.
10.4 PART III GENERAL INSTRUCTIONS FOR PREPARATION OF FINANCIAL
STATEMENTS
1. The corresponding amounts for the immediately preceding financial year
for all items shown in the Balance sheet, Revenue Account, profit and Loss
Account shall be given.
2. The figures in the financial statements may be rounded off to the nearest
 139
thousands.
3. Interest, dividends and rentals receivable in connection with an investment
should be stated at gross value; the amount of income tax deducted at
source being included under ‘advance taxes paid’.
4. Income from rent shall not include any notional rent.
5. (I) For the purposes of financial statements, unless the context otherwise
requires:
a. the expression ‘provision’ shall, subject to not (I I) below mean any
amount written off or retained by way of providing for depreciation,
renewals or diminution in value of assets, or retained by way of
providing for any known liability or loss of which the amount cannot be
determined with substantial accuracy.
b. the expression ‘reserve’ shall not, subject to as aforesaid, include any
amount written off or retained by way of providing for depreciation
renewals or diminution in value of assets or retained by way of
providing for any known liability.
c. the expression ‘capital reserve’ shall not include any amount regarded
as free for distribution through the profit and loss account; and the
expression ‘revenue reserve’ shall mean any reserve other than a capital
reserve.
d. The expression “liability” shall include all liabilities in respect of
expenditure contracted for and all disputed or contingent liabilities.
(II) Where:
a. any amount written off or retained by way of providing for depreciation,
renewals or diminution in value of assets, or
b. any amount retained by way of providing for any known liability is in
excess of the amount which in the opinion of the directors is reasonably
necessary for the purpose, the excess shall be treated for the purpose of
these accounts as a reserve and not provision.
6. The company should make provisions for damages under lawsuits where
the management is of the opinion that the award may go against the
insurer.
7. Extent of risk retained and reinsured shall be separately disclosed.
8. Any debit balance of the profit and Loss Account shall be shown as
deduction from uncommitted reserves and the balance, if any, shall be
shown separately.
10.5 PART-IV CONTENTS OF MANAGEMENT REPORT
There shall be attached to the financial statements, a management report
containing, inter alia, the following duly authenticated by the management:
1. Confirmation regarding the continued validity of the registration granted by
the Authority.
2. Certification that all the dues payable to the statutory authorities has been
duly paid.
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3. Confirmation to the effect that the shareholding pattern and any transfer of
shares during the year are in accordance with the statutory or regulatory
requirements.
4. Declaration that the management has not directly or indirectly invested
outside India the funds of the holders of policies issued in India
5. Confirmation that the required solvency margins have been maintained.
6. Certification to the effect that the values of all the assets have been
reviewed on the date of the Balance Sheet and that in his (insurer’s) belief
the assets set forth in the Balance-sheets are shown in the aggregate at
amounts not exceeding their realizable or market value under the several
headings—(i) “Loans”, (ii) “Investments”. (iii) “Agents balances”(iv)
“Outstanding Premiums”, (v) “ Interest, Dividends and Rents outstanding”,
(vi) “Interest, Dividends and Rents accruing but not due”.(vii) “ Amounts
due from other persons or Bodies carrying on insurance business”. (viii)
“Sundry Debtors”, (ix) “ Bills Receivable”, (x) “ Cash” and the several items
specified under (xi) “Other Accounts”.
7. Disclosure with regard to the overall risk exposure and strategy adopted to
mitigate the same.
8. Operations in other countries, if any, with a separate statement giving the
management’s estimate of country risk and exposure risk and the hedging
strategy adopted.
9. Ageing of claims indicating the trends in average claim settlement time
during the preceeding five years.
10. Certification to the effect as to how the values, as shown in the balance
sheet, of the investments and stocks and shares have been arrived at, and
how the market value thereof has been ascertained for the purpose of
comparison with the values so shown.
11. Review of asset quality and performance of investment in terms of
portfolios, i.e., separately in terms of real estate, loans, investments, etc.
12. A responsibility statement indicating therein that:
i. in the preparation of financial statements, the applicable accounting
standards, principles and policies have been followed along with proper
explanations relating to materials departures, if any;
ii. the management has adopted accounting policies and applied them
consistently and made judgments an 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 and of the operating profit or
loss and of the profit or loss of the company or the year.
iii. the management has taken proper and sufficient care for the maintenance
of adequate accounting records in accordance with the applicable
provisions of the Insurance Act, 1938 (4 of 1938) /Companies Act, 1956 (1
 141
of 1956) for safeguarding the assets of the company and for preventing
and detecting fraud and other irregularities;
iv. the management has prepared the financial statements on a going
concern basis;
v. the management has ensured that an internal audit system
commensurate with the size and nature of the business exists and is
operating effectively
13. A schedule of payments, which have been made to individuals, firms
companies and organizations in which Directors of the insurer are
interested.
10.6 PART-V PREPARATION OF FINANCIAL STATEMENTS
1. An insurer shall prepare the Revenue Account, Profit and Loss Account
[Shareholder’s Account] and the Balance Sheet in Form B-RA, Form B-PL and Form
B_BS, or as near there to as the circumstances permits.
Provided that an insurer shall prepare Revenue Account and Balance sheet for
fire, marine and miscellaneous insurance business and separate schedules shall be
prepared for Marine Cargo, Marine—other than Marine cargo and the following
classes of miscellaneous insurance business under miscellaneous insurance and
accordingly application of AS17- Segment Reporting-Shall stand modified.
1. Motor 2. Workmen’s Compensation/Employers’ Liability 3. Public/ Product
Liability 4. Engineering 5 .Aviation 6. personal Accident 7. Health Insurance 8. Others.
2. An insurer shall prepare separate Receipts and Payments Account in
accordance with the Direct Method prescribed inaS-3 “ Cash Flow Statement”
issued by the ICAI
Schedule C
(See Regulation 3)
Auditor’s Report
The report of the auditors on the financial statements of every insurer shall
deal with the matters specified herein:
1. a) That they have obtained all the information and explanations which to
the best of their knowledge and belief were necessary for the purpose of their audit
and whether they have found them satisfactory.
b) Whether proper books of account have been maintained by the insurer so
far as appears from an examination of those books.
c) Whether proper returns, audited or unedited, from branches and other
offices have been received and whether they were adequate for the purpose of audit.
d) Whether the Balance sheet, Revenue Account, Profit and Loss Account and
the Receipts and payments Account dealt with the report are in agreement with the
books of account and returns.
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e) Whether the actuarial valuation of liabilities is duly certified by he appointed
actuary including to the effect that the assumptions for such valuation are in
accordance with the guidelines and norms, if any, issued by the Authority , and/or
the Actuarial society of India in concurrence with the Authority.
2) The auditors shall express their opinion on:
a) i) Whether the balance sheet gives a true and fair view of the insurer’s
affairs at the end of the financial year/period;
ii) Whether the revenue account gives a true and fair view of the surplus or the
deficit for the financial year/period;
iii) Whether the profit and loss account gives a true and fair view of the profit
or loss for the financial year /period;
iv) Whether the receipts and payment account gives a true and fair view of the
receipts and payments for the financial year period;
b) The financial statements stated at (a) above are prepared in accordance with
the requirements of the Insurance Act, 1938 (4 of 1938) the Insurance Regulatory
and Development Authority Act, 1999 (41 of 1999) and the Companies Act, 1956 (1
of 1956), to the extent applicable and in the manner so required.
c) Investments have been valued in accordance with the provisions of the Act
and these Regulations.
d) The accounting policies selected by the insurer are appropriate and are in
compliance with the applicable accounting standards and with the accounting
principles, as prescribed in these Regulations or any order or direction issued by
the Authority in this behalf.
3) The auditors share further certifies that:
a) They have reviewed the management report and there is no apparent
mistake or material inconsistencies with the financial statements;
b) The insure has complied with the terms and conditions of the registration
stipulated by the authority.
4) A certificate signed by he auditors (which shall be in addition to any other
certificate or report which is required by law to be given with respect to the balance
sheet) certifying that
a) They have verified the cash balances and the securities relating to the
insurer’s loans, reversions and life interests (in the case of life insurance and
investments; b) To what extent, if any they have verified the investments and
transactions relating to any trusts undertaken by the insurer as trustee; and c) No
part of the assets of the policyholders’ funds has been directly or indirectly applied
in contravention of the provisions of the Insurances Act, 1938 (4 of 1938) relating to
the application and investments of the policyholders’ funds.
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SUMMARY
Every balance sheet, receipts and payments accounts, shows in the form of
cash flow statement. General Insurance business has some principles, each content
of this as self explanatory. This is explained with different part which is included in
four parts.
KEYWORDS
Premiums: It is shall be recognized as income over the contract period.
Claims: Claims under policies comprise the claims made for horses incurred.
Auditors Reports: A report of Auditors is present in the form financial
statement.
10.7 SELF-ASSESSMENT TEST
1. What are the procedures prepare for general insurance accounts.
2. Give a proforma for preparing general insurance accounts.
REFERENCE BOOKS
1. Gupta RL, Radhasamy M., Corporate Accountancy, Sultan Chand & Sons,
New Delhi.
2. Jain SP, Narang KL, Corporate Accountancy, Kalyani Publishers, New
Delhi.

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LESSON – 11
ACCOUNTS OF GENERAL INSURANCE COMPANIES
OBJECTIVES
Students after go through this lesson they can able to learn the following
objectives, they are, introduction, important terms and their treatment, preparation
of accounts, formats and schedule of the general insurance accounts and so on.
CONTENTS
11.1 Introduction
11.2 Important Terms
11.3 Preparation of Final Accounts
11.4 Revenue Accounts
11.5 Profit and Loss Accounts
11.6 Balance sheet
11.7 Forms of general insurance accounts
11.8 Examples
11.9 Self-Assessment Test
11.1 INTRODUCTION
Accounts of general insurance companies, shall comply with the requirements
of “Schedule B” of the IRDA Regulations, 2002
The following points and explanation of Terms are to be kept in view, while
preparing accounts of general insurance companies.
11.2 IMPORTANT TERMS
1. General insurance companies may be doing more than one business-Fire,
Marine, Miscellaneous business etc. For each type of business, a separate Revenue
Account has to be prepared at the end of each Financial year in the prescribed form
“B-RA”.
2) A combined Profit and Loss Account has to be prepared in Form “BPL”.
Showing common expenses and incomes.
3) Reserve for unexpired Risk: It is peculiar to general insurance business. It
represents the income received in advance by the insurance company as premium.
Policies in general Insurance business are only for one year and there is no
question of liability after the year is over. But the point to be noted is that policies
are issued throughout the year and most of these will be “in force” even after the
end of the Financial year. A Provision must be made to meet claims which may
arise under such policies which may mature after the close of the accounting year
of the company. Such a provision is known as ‘Reserve for unexpired risk”. Under
section 64 v(i) (ii) (b) of the IRDA Act, the Reserve for unexpired Risk should be as
under;
i) Fire and Miscellaneous business 50% of premium earned.
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ii) Marine Cargo business 50% of premium earned.
iii) Marine Hull business 100% of the premium earned.(Adopted in problems)
Treatment: In schedule 1, premiums earned (Net), Adjustment for change in
reserve for unexpired risk should be made.
The difference between closing reserve for unexpired risk and additional
reserve (if any) and opening reserve for unexpired risk and additional reserve (if
any) should be ascertained. If closing reserves are more than opening reserves the
amount of change should be reduced from the premium earned. If opening reserves
are more, the amount of change should be added to the premium.
Net premium, after making the adjustment should be shown in revenue
account as ‘premium earned—Net”. The closing reserve for unexpired risk appears
under “schedule 14—Provisions” prepared for Balance Sheet purpose.
4. Additional Reserve: IRDA Act has prescribed the minimum percentage of
Reserve for unexpired risk for Fire, Marine and Miscellaneous Insurance
businesses. However, some management may feel that the Statutory Reserve may
not be sufficient to cover the entire risk. Such companies may create an “Additional
Reserve” for Unexpired Risk. The additional reserve may be a flat amount or a
percentage of the premiums received. It should be continued only when specific
mention is made about the continuance of additional reserve. Along with reserve for
unexpired risk additional reserve is also adjusted in schedule 1 premiums earned,
as shown in (3) above. It also appears under schedule 14 – “Provisions”.
5. Premiums: In general insurance business policies are issued only for one
year. They can be renewed year after year. So, premium charged on policies is only
for one year from the date of issuing policy. After adjusting change in Reserve for
unexpired risk net premium is shown in Revenue Account
6. Claims: Claims can be made by policyholders any time during the one year
when the policy is in force. Claim should be based on occurrence of “Specified
Loss”. Against which policy is taken. Claims incurred (net) are computed under
“Schedule 2 “ Claims paid, closing outstanding claims and expenses relating to
claims are added and opening outstanding claims are subtracted. Any reinsurance
claims payable or paid should also be added and claims covered under reinsurance
should be reduced. The balance is Net claims to be shown in Revenue Account.
7) Catastrophe reserve: This is a reserve to be created to meet any loss due to
natural calamities. It should be in accordance with norms prescribed IEDA. It is
shown as a part of appropriations in Revenue Account and also in schedule 6 –
Reserves and surplus, as part of Balance sheet.
11.3 PREPARATION OF FINAL ACCOUNTS:
Final Accounts of a general insurance company comprise of (a) Revenue
Account (b) Profit and Loss Account and (c) Balance Sheet.
The following are the relevant forms under schedule B of the IRDA
Regulations, 2002, applicable to general Insurance companies.
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Revenue account—From B-RA
Profit and Loss Account –From B-PL
Balance Sheet—From B-BS.
The Revenue account, Profit and Loss Account and Balance Sheet are in
‘Summary form’. They are accompanied by 15 schedules. The first four schedules
are related to Revenue Account and the remaining eleven schedules are pertaining
to Balance Sheet. The schedules provide ‘details’ of the summary heads in Revenue
A/c and balance Sheet.
11.4 REVENUE ACCOUNT:
It is a summary of Schedules one to Four:
Separate Revenue account is prepared for each kind of insurance business
like Fire, Marine, Accident under Form B-RA prescribed by IRDA.
Premiums, Income and profit from Investments and other incomes are added
up as “Total (A)”. Expenditure on claims (Net), commission and operating expenses
are totaled as “Total (B)”. Difference between Total (A) and Total (B) is the operating
profit of the business concerned.
After making appropriations, if any, the operating profit is transferred to Profit
and Loss Account.
11.5 PROFIT AND LOSS ACCOUNT:
Combined Profit and Loss Account is prepared for a general insurance
company, conducing one or more businesses.
Operating profit or Loss of each kind of business is transferred from Revenue
Account to Profit and Loss Account.
Any incomes not related to specific businesses are added top the operating
profits resulting in “Total A”.
Expenses and Losses not connected to any specific business are added up as
“Total B” and are subtracted from “Total A” to ascertain profit before tax.
After providing for tax and making appropriations for dividend and transfer to
reserves, balance of profit is added to the Balance brought forward from previous
year. The Net balance of profit or loss is transferred to Balance sheet.
11.6 BALANCE SHEET:
Balance sheet is a summarized presentation of schedules 5 to 15. It contains
sources of Funds which is the Total of schedules 5,6,7 representing share capital,
reserves and surplus and borrowings respectively.
Application of Funds is arrived at by adding up Investments, Loans, Fixed
assets representing schedules 8,9,& 10 respectively and then adding Net current
assets to that total. Net current assets are the difference between current assets
represented by Cash and Bank balances (Schedule 11) and Advances and other
assets (Schedule 12) and current liabilities and provisions represented by schedules
13 & 14 respectively. Miscellaneous expenditure presenting accumulated losses is
shown as schedule 15.
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Any contingent liabilities are shown as a foot note to the Balance sheet.
11.7 FORMS FOR GENERAL INSURANCE FINAL ACCOUNTS:
The following are the forms prescribed IRDA for Revenue Account, profit and
Loss Account and Balance Sheet.
FROM B-RA
Name of the insurer:
Registration No. and Date of Registration with IRDA
Revenue account for the year ended 31st march 20………
No. Particulars Schedule Current Year Previous Year
(Rs.000) (Rs,000)
1 Premiums earned (Net) 1
2 Profit/Loss on Sale/Redemption of Investments
3 Others (To be specified)
4 Interest, Dividend and Rent-Gross -------------------- --------------------
Total(A) -------------------- --------------------
1 Claims incurred (Net) 2
2 Commission 3
3. Operating expenses related to insurance business 4 -------------------- --------------------
Total (B) -------------------- --------------------
Operating profit/(Loss) from
Fire/Marine/Miscellaneous business(C) =(A)-(B)
Appropriations:
Transfer to Shareholder’s Account
Transfer to Catastrophe Reserve
Transfer to Other Reserves (To be specified
Total (C ) -------------------- --------------------
Note: See notes appended at the end of Form B-PL
FORM B-PL
Name of the Insurer:
Registration No. and Date of Registration with the IRDA
Profit and Loss Account for the year ended 31st March 20………..
Shareholders’ Account (Non-technical Account)
No. Particulars Schedule Current Year Previous Year
(Rs.000) (Rs,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
Less: Loss on sale of Investments
3. Other Income (To be specified) --------------------------------------------------
Total (A) --------------------------------------------------
4. Provisions (other than taxation)
a) For diminution in the value of Investments
b) For doubtful debts
c) Others (To be specified)
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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 (A-B)
Provision for Taxation
Appropriations:
Interim dividends paid during the year.
Proposed final dividend
Dividend distribution tax
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.
Note: To form B-RA and B-PL
Premium income receives from business concluded in and outside India shall be separately
disclosed.
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”
Claims incurred shall comprise claims paid specific claims settlement costs wherever
applicable and change in the outstanding provisions for claims at the year end.
Items of expenses and income in excess of one percent of the total premiums (less
reinsurance) or Rs.5,00,000 whichever is higher, shall be shown as a separate line item.
Fees and expenses connected with claims shall be included in claims.
Under the sub-head “Others” shall be included items like foreign exchange gains or losses
and other items.
Interest, dividends and rentals receivable in connection with an investment should be stated at
gross amount, the amount of Income tax deducted at source being included under “advance
taxes paid and deducted at source”.
Income from rent shall include only the realized rent. It shall not include any ‘Notional rent’.
FROM B-BS
Name of the Insurer:
Registration No. and date of Registration with the IRDA
Balance sheet as at 31st March 20……………
No. Particulars Schedule Current Year Previous Year
(Rs.000) (Rs,000)
Sources of Funds
Share capital 5
Reserves and Surplus 6
Fair value change account Borrowings 7 ------------------------- ------------------------
Total ------------------------- ------------------------
Application of Funds
Investments 8
Loans 9
Fixed Assets 10
Current Assets
Cash and Bank Balances 11
Advances and other assets 12
Sub Total (A) ------------------------- ------------------------
Current Liabilities 13
Provisions 14 ------------------------- ------------------------
Sub total (B) ------------------------- ------------------------
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Net current assets (C )=(A)-(B)
Miscellaneous Expenditure 15
(To the extent not written off or adjusted) ------------------------- ------------------------
Debit Balance in Profit and Loss Account ------------------------- ------------------------
Contingent Liabilities
No. Particulars Schedule Current Year Previous Year
(Rs.000) (Rs,000)
1. Partly paid 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 earned (Net)
No. Particulars Current Year Previous Year
(Rs.000) (Rs,000)
Premium from direct business written
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)
No. Particulars Current Year Previous Year
(Rs.000) (Rs,000)
Claims paid:
Direct
Add: Reinsurance accepted
Less: Re-insurance ceded
Net claims paid
Add: Claims outstanding at the end of the year.
Less: Claims outstanding at the beginning of the year. ------------------------- ------------------------
Total claims incurred ------------------------- ------------------------
Notes: Incurred but not reported (IBNR) incurred but not enough reported (IBNER) claims should be
included in the amount for outstanding claims.
Claims include specific claims settlement cost but not expenses of management.
The surveyor fees, legal and other expenses shall also form part of claims cost.
Claims cost should be adjusted for estimated salvage value if there is sufficient certainty of its
realization.
Schedule 3—Commission
No. Particulars Current Year Previous Year
(Rs.000) (Rs,000)
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Commission paid:
Direct
Add: Commission on Re-insurance accepted
Less: Commission on Re-insurance accepted ------------------------- ------------------------
Net Commission ------------------------- ------------------------
Note: The profit/Commission, if any, are to be combined with the Reinsurance accepted or Re-
insurance ceded figures.
Schedule 4 –Operating Expenses related to Insurance Business
No. Particulars Current Year Previous Year
(Rs.000) (Rs,000)
1. Employees’ remuneration and welfare benefits
2. Travel, conveyance and Vehicle running expenses
3. Training expenses
4. Rent, Rates and Taxes
5. Repairs
6. Printing and Stationery
7. Communication
8. Legal and Professional charges
9. 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
10. Advertisement and publicity
11. Interest and Bank charges
12. Others (To be specified)
13. Depreciation ------------------------- ------------------------
Total ------------------------- ------------------------
Note: Items of expenses and income in excess of one percent of the total premiums (Less
reinsurance) or Rs.5,00,000 whichever is higher, shall be shown as a separate line item.
Schedule 5-Share Capital
No. Particulars Current Year Previous Year
(Rs.000) (Rs,000)
Authorized
capital Equity shares of Rs…each
Issued Capital
Equity shares of Rs………each
Subscribed capital
Equity shares of Rs………each
Called-up capital
Equity shares of Rs……..each
Less: Calls unpaid
Add: Equity shares forfeited (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 ------------------------- ------------------------
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Notes: Particulars of the different classes of capital should be separately stated.
The amount capitalized on account of issue of Bonus shares should be disclosed.
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]
Current year Previous Year
Shareholder
Number of shares % of Holding Number of shares % of holding
Promoters:
--Indian
--Foreign
Others
Total
Schedule 6—Reserves and Surplus
No. Particulars Current Year Previous Year
(Rs.000) (Rs,000)
1. Capital Reserve
2. Capital Redemption Reserve
3. Securities premium
4. General Reserves
Less: Debit balance in profit & loss account
Less: Amount utilized for Buy –back
5. Catastrophe Reserve
6. Other Reserves (to be specified)
7. Balance of profit and loss account ------------------------- ------------------------
Total ------------------------- ------------------------
Note: Additions to and deductions from the reserves should be disclosed under each of the
specified heads.
Schedule 7—Borrowings
No. Particulars Current Year Previous Year
(Rs.000) (Rs,000)
Debentures/Bonds
Banks
Financial Institutions
Others (to be specified)
Total
Notes: The extent to which the borrowings are secured shall be separately disclosed stating the
nature of the security under each sub-head.
Amounts due within 12 months from the date of Balance sheet should be shown separately.
Schedule 8—Investments
No. Particulars Current Year Previous Year
(Rs.000) (Rs,000)
Long Term Investments
Government securities and Government guaranteed bonds
including Treasury Bills.
Other Approved Securities
Other Investments
Shares aa) Equity
ab) Preference
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Mutual Funds
Derivative Instruments
Debentures/Bonds
Other Securities (to be specified)
Subsidiaries
Investment properties-Real Estate
Investment in Infrastructure and Social Sector.
Other than Approved Investment
Short term Investments
Government securities and Government guaranteed bonds
including Treasury Bills.
Other Approved Securities
Other Investments
Shares aa) Equity
ab) Preference
Mutual Funds
Derivative Instruments
Debentures/Bonds
Other Securities (to be specified)
Subsidiaries
Investment Properties-Real Estate
4) Investments in Infrastructure and Social Sector.
5) Other than approved Investments
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 its.
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.
v) Significant influence (for the purpose of this schedule)—means participation in the
financial and operating policy decisions of a company, but not control of
those policies, Significant influence may be exercised in several ways, for
example, by representation on the board of directors, participation in the
policy making process, material inter company transactions, interchange of
managerial personnel or dependence on technical information Significant
influence may be gained by share ownership, statute or agreement. As
regards share ownership, if an investor holds, directly or indirectly through
subsidiaries, 20 percent or more of the voting power of the investee, it is
presumed that the investor does have significant influence, unless it can be
clearly demonstrated that this is not the case. Conversely, if the investor
holds, directly or indirectly through subsidiaries, less than 20 percent of the
voting power of the investee, it is presumed that the investor does not have
significant influence, unless such influence is clearly demonstrated. A
substantial or majority ownership by another investor does not necessarily
preclude an investor from having significant influence.
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) Investment 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 costs subject to amortization.
e) Investment property means a property [land or building or part of a building or both] held to
 153
earn rental income or for capital appreciation or for both, rather than for use in
services or for administrative purposes.
f) 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
No. Particulars Current Year Previous Year
(Rs.000) (Rs,000)
1. Security—Wise Classification secured
a) On mortgage of property
aa) In India
ab) Outside India
b) On shares, Bonds, Govt. Securities, etc.
Loans against policies
Others (to be specified)
Unsecured
Total
2. Borrowers-wise Classification
a) Central and State Governments
b)Banks and Financial Institutions
c) Subsidiaries
d) Industrial Undertakings
e) Others (to be specified)
Total
3. performance-wise Classification
a) Loans classified as standard
aa) In India
ab) Outside India
b)Non-performing loans provisions
aa) In India
ab) Outside India
Total
4. Maturity-wise Classification
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 purposes 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
Cost/Gross Block Depreciation Net Block
On
Upto for as at
Particulars Opening Additions Deduction Sales/ To Previous
Last the year
Closing Adjus Date year
Year year end
tment
Goodwill
Intangibles(specify)
Land-Freehold
Leasehold Property
Buildings
Furniture &Fittings
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Information Technology
Equipment
Vehicles
Office Equipment
Others (Specify nature)
TOTAL
Work-in-progress
Grand Total
PREVIOUS YEAR
Note: Assets included in land, property and building above exclude Investment Properties as
defined in Note (e) to Schedule-8
Schedule 11- Cash and Bank Balances
No. Particulars Current Year Previous Year
(Rs.000) (Rs,000)
1. Cash (including cheques, drafts and stamps)
2. Bank Balances
a) Deposit Accounts
aa) Short-term (due within 12 months)
ab) Others
b) Current Accounts
c) Others (to be specified)
3. Money at Call and Short Notice
a) With Banks
b) With others Institutions
4. Others (to be specified)
TOTAL
Balance with non-scheduled banks included in 2 and 3
above.
Note: Bank balance may include remittances in transit. If so, the nature and amount should be
separately stated.
Schedule 12 –Advances and Other Assets
No. Particulars Current Year Previous Year
(Rs.000) (Rs,000)
ADVANCES
1. Reserve Deposits with Ceding Companies
2. Application Money for Investments
3. Prepayments
4. Advances to Director/Officers
5. Advance Tax paid and taxes deducted at source (Net of
provision for taxation0
6. Others (to be specified)
Total (A)
OTHER ASSETS
1. Income accrued on investment
2. Outstanding premiums
3. Agents’ balances
4. Foreign Agencies Balances
5. Due from other entities carrying on insurance business
(including re-insures)
6. Due from Subsidiaries/Holding Company
7. Deposit with Reserve Bank of India [Pursuant to Section 7
of Insurance Act. 1938]
Others (to be specified)
Total (B)
TOTAL (A)+ (B)
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Notes: 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.
The term ‘officer’ should conform to the definition of that term as given under the Companies
Act, 1956.
Sundry Debtors will be shown under item 8 (others)
Schedule 13—Current Liabilities
No. Particulars Current Year Previous Year
(Rs.000) (Rs,000)
Agents’ Balances
Balances due to other insurance companies
Deposits held on re-insurance ceded
Premiums received in advance
Unallocated Premium
Sundry Creditors
Due to Subsidiaries/Holding company
Claims Outstanding
Due to officer/Directors
Others (to be specified)
TOTAL
Schedule 14—provisions
No. Particulars Current Year Previous Year
(Rs.000) (Rs,000)
Reserve for Unexpired Risk
For Taxation (less advance tax paid and taxes deducted at source)
For proposed Dividends
For Dividend Distribution Tax
others (to be specified)
TOTAL
Schedule 15—Miscellaneous Expenditure (To the Extent not written off or Adjusted)
No. Particulars Current Year Previous Year
(Rs.000) (Rs,000)
Discount Allowed in issue of Share/Debentures
Others(to be specified)
TOTAL
Notes: a) No item shall be included under the head ‘Miscellaneous Expenditure’ and carried forward
unless: 1. Some benefit from the expenditure can reasonably be expected to be received in
future, and 2. the amount of such benefit is reasonably determinable
b) The amount to be carried forward in respect of item included under the head
‘Miscellaneous Expenditure’ shall not exceed future revenue/other benefits related to
the expenditure.
11.8 EXAMPLES
1. From the following figures appearing in the books of Fire Insurance division of
a General insurance company, show the amount of claim as it would appear in
revenue account, by preparing schedule 2, claims incurred.
Direct Business Rs.(‘000) Re-insurance Rs. (’000)
Claims paid during 2020-21
Claims payable- 1-4-2020 763 87
31-3-2021 812 53
Claims received --- 230
Claims receivable-1-4-2020 --- 65
31-3-2021 --- 113
Expenses of Management 230
(includes Rs.35 Thousand surveyor’s fees and Rs.45 Thousand legal expenses for settlement of claims)
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Solution
Schedules 2- Claims incurred (Net)
Particulars Current Year Previous Year
(Rs.’000) (Rs.’000)
Claims paid 4,670 --
Add: Surveyors fees for settlement of claims 35 ---
Legal expenses for settlement of claims 45 ---
Claims paid on reinsurance accept 700 --
Claims payable on direct business on 31-3-2021 812 ---
Claims payable on reinsurance accepted on 31-3-2021 53
Claims receivable on reinsurance on 1-4-2020 65
6,380
Less: claims received from reinsurance 230
Claims receivable from reinsurance on 31-3-21 113
Claims payable on direct business on 1-4-2020 763
Claims payable on reinsurance accepted on 1-4-20 87 1,193
Claims incurred (Net) 5,187
Note: 1. Claims paid should be added with all expenses relating to claims, closing outstanding
claims, both direct and reinsurance and also opening claims receivable from reinsurance.
2. Claims paid should be reduced by claims received from reinsurance and its closing
outstanding, and also opening outstanding claims, both direct and on reinsurance.
2. Indian Insurance Co., Ltd. furnishes you the following information:
i) On 31-3-20 it had reserve for unexpired risks to the tune of Rs.40 crores. It
comprised of Rs.15 crores in respect of Marine insurance business, Rs.20
crores in respect of Fire insurance business and Rs.5 crores in respect of
miscellaneous insurance business.
ii) It is the practice of the company to create reserves at 100% of net premium
income in respect of Marine insurance policies and at 50% of net premium
income in respect of Fire and miscellaneous insurance policies.
iii) During 2020-21, the following business was conducted.
Figures Rs. in Crores.
Marine Fire Mis.
Premia collected from:
a) Insured’s in respect of policies issued. 18 43 12
b) Other insurance companies in respect of risks undertaken. 7 5 4
Premia paid/payable to other Insurance companies on business ceded. 6.7 4.3 7
a) Pass journal entries relating to “unexpired risks reserve”.
b) Show in columnar form :unexpired risks reserve A/c” for 2020-21
Solution
a) In the books of Indian Insurance Co., Ltd.
Journal
Date Particulars L.F Debit Credit
2021 Unexpired risk reserve A/c Dr. 40
March 31 To Marine Revenue A/c 15
To Fire Revenue A/c 20
To Miscellaneous Revenue A/c 5
[Being opening unexpired risks reserve transferred to Revenue A/c]
March 31 Marine Revenue A/c Dr. 18.3
Fire Revenue A/c Dr. 21.5
Miscellaneous Revenue A/c Dr. 4.5
To unexpired risks reserve A/c 44.65
[Being reserve for unexpired risk to be maintained at the end of the year
debited to revenue A/c)
 157
Working Note:
Closing Reserve for unexpired risk: Figures Rs. In crores.
Particulars Marine Fire Mis.
Premia collected on Direct business 18 43 12
Add: Premia collected on reinsurance accepted. 7 5 4
Total 25 48 16
Less: Premia paid/payable on reinsurance ceded. 6.7 4.3 7
Net premia received 18.3 43.7 9
Percentage of Reserve required on Net premia 100% 50% 50%
Amount of Reserve for unexpired risks (in Rs.croses) 18.3 21.85 4.5
b) Unexpired Risk Reserves Account for 2020-2021
Date Particulars Marine Fire Mis.
2021 March 31 To Revenue A/c (Transfer) 15 20 5
March 31 To Balance c/d 18.3 21.85 4.5
33.3 41.85 9.5
2020April 1 By Balance 15 20 5
2021 March 31 18.3 21.85 4.5
33.3 9.5
2021 April 1 By Balance b/d 18.3 21.85 4.5
3. The books of Ranjitha insurance Co. Ltd., contain the following information in
respect of fire insurance as on 31.3.2021
(Rs. In (Rs. in
Thousands) Thousands)
Provision for unexpired risks (1.4.20) 8,000 Refund of double taxation 600
Estimated liability in respect of Outstanding 10,000 Management expenses 55,000
claims: On 1.4.20
On 31.3.2021 15,000 Interest & Dividends 8,000
Medical expenses regarding claims 1,000 Legal expenses regarding 1,500
Claims
Claims paid 70,000
Reinsurance premium 14,500 Profit on sale of Investments 1,750
Reinsurance recoveries 1,500 Additional reserve on 31.3.05 60,000
Premiums 1,90,000
Commission on direct business 25,000
Commission on re insurance ceded 3,000
Commission on re insurance accepted 1,000
Additional reserve is to be increased by 10% of the net premium income.
Prepare revenue A/c keeping the reserve for unexpired risks at 50% of premium income
Solution
Jaiprakash Insurance Co., Ltd.
Revenue Account in respect of Fire business
For the year ended 31st March 2021
No. Particulars Schedule No. Current Year Previous Year
(Rs.’000) (Rs.’000)
1. Premiums earned (Net) 1 1,50,200 ---
2. Profit on sale of Investments 1,750 ---
3. Other Incomes: Refund of double taxation 600 ---
4. Interest, dividends and rents (gross) 8,000 ---
Total (A) 1,60,550
1. Claims incurred (Net) 2 76,000 ---
2. Commission 3 23,000 ---
3. Operating expenses related to Insurance business 4 55,000 ---
Total (B) 1,54,000 ---
 158
Operating profit from Fire business
(C ) =(A)-(B) 6,550 ---
Schedules forming part of Revenue Account
Schedule 1-Premiums earned (Net)
Particulars Current Previous
Year Year
(Rs. ‘000) (Rs. ‘000)
Premiums received 1,90,000 ---
Less: Reinsurance premium 14,500 ----
Net premium 1,75,500 ---
Adjustment for change in provision for unexpired risk:
Provision for unexpired risk (31.3.21): 1,75,500x50% 87,750
Additional Reserve(1,75,500x10%) 77,550
1,65,300
Less: Provision for unexpired Risk(1.4.20) 80,000
Additional reserve (1.4.20) 60,000 1,40,000
Change in provisions for unexpired risk 25,300
Total Premiums earned (Net) 1,50,200
Note: Any increase in reserve for unexpired risk and additional reserve should be reduced from
premium. Similarly any decrease in the reserves should be added to premium.
Schedule 2- Claims incurred (Net)
Particulars Current Year (Rs.‘000) Previous Year (Rs.‘000)
Claims paid 70,000 --
Add: Medical Expenses regarding claims 1,000 ---
Add: Legal expenses 1,500 ---
Add: Outstanding claims on 31-3-21 15,000 ---
87,500
Less: Outstanding claims on 1-4-20 10,000
Less: Reinsurance recoveries 1,500 11,500
Claims incurred (Net) 76,000
Schedule 3—Commission
Particulars Current Year (Rs.‘000) Previous Year (Rs.‘000)
Commission on direct business 25,000 --
Add: Commission on reinsurance accepted 1,000 ---
26,000 ---
Less: Commission on reinsurance ceded 3,000 ---
Net Commission 23,000
Schedule 4—Operating expenses related to Insurance business
Particulars Current Year (Rs.‘000) Previous Year (Rs.‘000)
Management expenses 55,000 ---
Total 55,000 ---
4. From the following balances, prepare the fire insurance revenue account for the
year ended 31.3.2021 of ABC fire insurance Co. Ltd.
Particulars (Rs. in ‘000) Particulars (Rs. ‘000)
Commission on reinsurance Audit fees 2,500
Accepted 1,86,458 Professional taxes 2,875
Commission on direct business 1,95,172 Bad debts written off 2,206
Depreciation on Furniture 650 Claims under policies less reinsurance
Depreciation on Library 148 paid during the year 1,52,930
Depreciation on Motor car 6,240 Reserve for unexpired risk as
Loss on sale of Motor car 12,074 at 31.3.05 3,66,594
24,000 Additional reserve for unexpired risk
 159
General manager’s salary 5,100 as at 31.3.05 45,824
Telephone 5,150 Premiums received less reinsurance 9,89,980
postage & telegrams 62,500
Rent 45,600 Commission on reinsurance ceded 3,41,208
Traveling expenses 45,500 Unpaid claims on 31.3.06 6,264
Motorcar expenses 1,45,500 Unpaid claims on 31.3.05 1,198
Establishment 24,000 Miscellaneous Expenses 250
Bonus 35,550
Stationery 14,062
Newspapers & periodicals 23,400
Legal expenses 16,100
Electricity charges 11,875
Provident fund contribution.
You are required to make 40% of the net premium received as provision for
unexpired risk as at 31.3.21 and 10% of the net premiums as additional reserve for
the same.
Solution
From B-RA(Prescribed by (IRDA)
Policyholders’ Account (Technical Account)
ABC Fire Insurance Co., Ltd.
Revenue Account for the year ended 31-3-2021
In respect of Fire Business
No. Particulars Schedule Current Year Previous Year
No. (Rs. ‘000) (Rs. ‘000)
Premiums earned (Net) 1 9,07,408 ---
Profit on Sale/Redemption of investments --- ---
Other incomes: --- ---
Interest, dividends and Rents(Gross) ---- ---
Total(A) 9,07,408 ---
Claims incurred (Net) 2 1,57,996 ---
Commission 3 40,422 ---
operating expenses related to Insurance business: 4 4,85,280 ---
Total (B) 6,83,698 ---
Operating profit from Fire business (C)=(A)-(B) 2,23,710 ---
Schedules Forming Part of Revenue Account
Schedule 1—premiums earned (Net)
Particulars Current Year Previous Year
(Rs.‘000) (Rs.‘000)
Premium received, less reinsurance 9,89,980 ---
Net Premium 9,89,980 ---
Adjustment for change in Provision for unexpired risk:
Reserve for unexpired risk (31-3-2021)
(9,89,980x40) 3,95,992
Additional Reserve 9,89,980x10% 98,998
4,94,990
Less: Reserve for unexpired risk(1.4.2020) 3,66,594
Additional reserve (1.4.2020) 45,824
4,12,418
Change in reserve for unexpired risk 82,572 -----
Total premiums earned (Net) 9,07,408 -----
Note: 1. Any increase in Reserve for unexpired risk and additional Reserve should be reduced from
premium. Similarly any decrease therein should be added to premium.
2. As per IRDA format for Revenue Account (From B-RA), adjustment for change in reserve
 160
for unexpired risk is to be carried out in Schedule 1.So, net premiums after making the
adjustment are to be shown in the Revenue Account.
Schedule 2—Claims incurred (Net)
Particulars Current Year Previous Year
(Rs.‘000) (Rs.‘000)
Claims paid less reinsurance 1,52,930 --
Add: Unpaid claims on 31.3.2021 6,264 ---
1,59,194 ---
Less: Unpaid claims on 31.3.2020 1,198 ---
Total claims incurred 1,57,996 ---
Schedules 3--Commission
Particulars Current Year Previous Year
(Rs.‘000) (Rs.‘000)
Commission on direct business 1,95,172 ---
Add: Commission on reinsurance accepted 1,86,458 ---
3,81,630 ---
Less: Commission on reinsurance ceded 3,41,208 ---
Net Commission 40,422
Schedules 4—Operating expenses related to Insurance business
Particulars Current Year Previous Year
Expenses of Management:
General Managers salary 24,000 ---
Rent 62,500 ---
Traveling expenses 45,600 ---
Motor expense 45,500 ---
Establishment 1,45,500 ---
Bonus 24,000 ---
Stationery 35,550 ---
Newspapers and periodicals 14,062 ---
Electricity charges 16,100 ---
Legal charges (assumed not connected with claims) 23,400 ---
provident Fund contribution 11,875 ---
Telephone 5,100 ---
Postage and Telegrams 5,150 ---
Audit fees 2,500 ---
Professional tax 2,875 ---
Miscellaneous expenses. 250 ---
4,63,962 ---
Depreciation (650 + 148 +6.240) 7,038 ---
Bad debts 2,206 ---
Loss on sale of Motor car 12,074 ---
Total 4,85,280 ---
5. Quick Pay Insurance Co. Ltd. has furnished the following information for
preparation of revenue account for fire insurance business for the year ended
31-3-2021 and its Profit and loss A/c for the year.
(Rs. in ‘000) ( Rs. in ‘000)
Claims admitted but not paid 42,376 Bad debts 2,500
Commission paid 50,000 Claims paid 15,000
Commission on re insurance received 12,000 P & L Appn. A/c 10,000
Share transfer fees 5,000 Premium received Less reinsurance 5,52,000
Expenses of management 78,000 Claims outstanding as on 1.4.20 27,000
Reserve for unexpired risk as on 1.4.20 2,30,000 Dividend on on share capital 18,500
Additional reserve on 1.4.20 40,000
The following further information has also to be considered:
i) Premium outstanding at the end of the year Rs.40,000.
ii) Additional reserve at 10% of net premium to be maintained.
iii) It is the policy of the company to maintain Rs.505 of premium towards reserves for
unexpired risk.
 161
Solution
From-B-RA(Prescribed by IRDA)
Policy holders’ Account (Technical Account)
Quick pay insurance Co., Ltd.
Fire Revenue Account for the year ended 31st March 2021
No Particulars Schedule No. Current Year Previous Year
Premiums earned (Net) 1 5,06,800 ---
Profit on sale/redemption of investment --- ---
Other Income --- ---
Interest, dividends and rents (gross) --- --
Total(A) 5,06,800 ---
Claims incurred (Net) 2 30,376
Commission 3 38,000 ---
Operating expenses related to Insurance business: 4 80,500 ---
Total (B) 1,48,876 ---
Operating profit from fire business (C)=(A) –(B) 3,57,924 ---

Form B-PL (Prescribed by IRDA)

Shareholders’ Account
(Non Technical Account)
Profit and Loss Account for the year ended 31st March 2021
No. Particulars Current Year Previous Year
(Rs.‘000) (Rs.‘000)
Operating profit /loss Operating profit from Fire Business 3,57,924 ---
2. Income from Investments --- ---
3. Other Income: Share Transfer fees 5,000 ---
Total (A) 3,62,924 ---
Provisions Other than taxation
Other Expenses ---- ---
Total (B) ----- ----
Profit before tax (A)-(B)
Less: Provision for Taxation 3,62,924 ----
Profit after tax ----
Appropriations: 3,62,924 ----
Dividend on Share capital 18,500 -----
Dividend distribution tax (18,500 x 10%) 1,850 20,350 ----
Transfer to Reserve -----
Balance of profit brought forward from last year. 3,42,574 -----
Balance of profit carried forward to 10,000
Balance sheet. 3,52,574 -----
Note: After the year 1998, dividend distribution tax has to be provided at 10% of dividend.
Surcharge varies from year and may be ignored.
Schedules Forming Part of Financial Statements
Schedule 1—Premiums earned (Net)
Particulars Current Year Previous Year
Rs.‘0000 (Rs.‘000)
Premium received, less reinsurance 5,52,000 ---
Add: Premium outstanding on 31-3-21 40,000 ---
Net Premium 5,92,000 ---
Adjustment for change in reserve for unexpired risk
Reserve for unexpired risk on31-3-21 (5,92,000x50%) 2,96,000
Additional reserve on 31-3-21 (5,92,000x10%) 59,200
3,55,200
Less: Reserve for unexpired risk on 1-4-20 2,30,000
Additionalreserveon1-4-20 40,000 2,70,000
Change in reserve for unexpired risk 85,200 ---
Total premiums earned (Net) 5,06,800 ---
 162
Schedules 2- Claims incurred (Net)
Particulars Current Year (Rs.‘000) Previous Year(Rs.‘000)
Claims paid 15,000 ---
Add: Claims admitted but not paid on 31-3-21 42,376 ---
57,376
Less: Claims outstanding on 1-4-20 27,000
Claims incurred net 30,376
Note: Since the details given in the problem are described as ‘Information’, closing claims admitted
but not paid is not taken as a ‘Ledger Balance’. So, it is added to claims Otherwise, closing
outstanding claims given in Trial balance should be shown only in Balance sheet.
Schedule 3—Commission
Particulars Current Year (Rs.‘000) Previous Year(Rs.‘000)
Commission paid 50,000 ---
Less: Commission on reinsurance received 12,000 ---
Net commission 38,000 ---

Schedule 4—Operating expenses related to Insurance business

Particulars Current Year (Rs.‘000) Previous Year(Rs.‘000)
Expenses of Management 78,000 ------
Bad debts 2,500 ----
Total 80,500 ---

6. The following balances are extracted from the books of United Insurance Ltd.
as on 31-3-2021. (Rs.‘000) (Rs.‘000)
Commission on Reinsurance Claims paid
ceded: Fire 13,000 Fire 1,00,000
Commission: Fire 62,000 Marine 87,000
Marine 51,000 Premium during the year:
Expenses of management: Fire 3,74,000
Fire 86,000 Marine 2,97,000
Marine 68,000 Audit fees 13,000
Depreciation of assets 36,000 Director’s remuneration 36,000
Loss on revaluation of Interest, dividends (Cr.) 63,000
Investments 28,000 Reserve for unexpired risk
Difference in exchange (Cr) 300 (1.4.05): Fire 2,10,000
Recovery of bad debts 1,200 Marine 2,40,000
Miscellaneous receipts 5,000 Additional reserve:
P & L A/c (Cr.) 60,000 (1.4.05) Fire 60,000
Claims outstanding (1.4.05):
Fire 24,000 Marine 10,000
Marine 11,000 Premium outstanding:
Fire 26,000
(1.4.05) Marine 17,000
Further information is also given;
i) Premium outstanding as on 31.3.21
 163
Fire – Rs.(‘000) 33,000
Marine—Rs.(‘000) 15,000
ii) Claims outstanding as on 31.3.06
Fire –Rs.(‘000) 46,000
Marine—Rs. (‘000) 17,000
Out of the above, a fire claim amounting to Rs. (‘000) 11,000 was covered
by reinsurance.
iii) Interest accrued on investments Rs. (‘000) 10,700
iv) Transfer Rs. (‘000) 80,000 to general reserve
v) Directors recommend Rs. (‘000) 1,00,000 dividend for current year
vi) Reserve for unexpired risks is to be maintained at 50% of premium less
reinsurance for fire and 100% of premium less re insurance for marine.
vii) Additional reserve for fire is to be maintained at 20% of net premium.
Prepare revenue accounts and P & L A/c. for the year ended 31st march
2021.
Solution
United Insurance Co., Ltd.
Revenue Account for the year ended 31-3-2021
No. Particulars Schedule Current Year Previous Year
No. (Rs. ‘000) (Rs. ‘000)
Premiums earned (Net) 1 3,84,300 2,50,000
Total (A) 3,84,300 2,50,000
Claims incurred (Net) 2 1,11,000 93,000
Commission 3 49,000 51,000
Operating expenses related to Insurance business 4 86,000 68,000
Total (B) 2,46,000 2,12,000
Operating profit (C) =(A)-(B) 1,38,300 38,000

Profit and Loss Account

For the year ended 31st march 2021
No. Particulars (Rs.‘000)
Operating Profit /Loss
a) Operating Profit from Fire business 1,38,300
b) Operating Profit From Marine business 38,000
Total operating profit 1,76,300
Income from Investments:
a) Interest dividends and rents 63,000
b)Interest accrued on investments 10,700
Interest dividends and Rents (gross) 73,700
Other Incomes:
Difference in exchange 300
Miscellaneous receipts 5,800
Recovery of bad debts 1,200
Total (A) 2,57,300
Provisions (other than taxation):
For Diminution in the value of investments:
Loss on revaluation of investments. 28,000
Other expenses:
 164
Expenses other than those related to Insurance business:
Directors’ Remuneration 36,000
Audit fees 13,000
Depreciation on Assets 36,000
Total (B) 1,13,000
Profit before tax (A-B) 1,44,300
Provision for taxation ---
Profit after Tax 1,44,300
Appropriations: Proposed dividend 1,00,000
Dividend distribution tax (1,00,000 x 10%) 10,000
Transfer to General Reserve 80,000 1,90,000
Total -45,700
Balance of profit brought forward from Last year 60,000
Balance of Profit carried forward to Balance Sheet 14,300
Note: Dividend distribution tax at 10% has to be provided, after surcharge varies from year and may
be ignored.
Schedules Forming Part of Financial Statements
Schedule I – Premiums earned(Net)
Particulars Fire (Rs. ‘000) Marine (Rs. ‘000)
Premium received 3,74,000 2,97,000
Add: Premiums outstanding (31.3.21) 33,000 15,000
4,07,000 3,12,000
Less: premium outstanding (1.4.20) 26,000 17,000
Net premiums received 381,000 2,95,000
Adjustment for change in reserve for unexpired risk:
Add: Reserve for unexpired risk on 1-4-20 2,10,000 2,40,000
Add: Additional reserve on 1-4-20 60,000 10,000
6,51,000 5,45,000

Less: Reserve for unexpired risk on 31-3-21 1,90,500 2,95,000

(3,81,000 x 50%) (2,95,000 x100%) 4,60,500 2,50,000
Less: Additional Reserve on 31.3.21 76,200 -----
(3,81,000 X 20%)
Total premiums earned 3,84,300 2,50,000
Note: Additional reserve for Fire Business alone is asked to be maintained. So, there is no need to
maintain any additional Reserve for marine business.
Schedule 2—Claims incurred (Net)
Particulars Fire (Rs. ‘000) Marine (Rs.’000)
Claims paid 1,00,000 87,000
Add: Claims outstanding as on 31-3-21 35,000 17,000
1,35,000 1,04,000
Less: Claim outstanding as on 1-4-20 24,000 11,000
Claims incurred Net 1,11,000 93,000
Schedule 3—Commission
Particulars Fire (Rs. ‘000) Marine(Rs. 000)
Commission on direct business 62,000 51,000
Less: Commission on reinsurance ceded 13000 ----
Net Commission 49,000 51,000
Schedule 4—Operating expenses related to Insurance business
Particulars Fire (Rs. ‘000) Marine (Rs. ‘000)
Expenses on Management 86,000 68,000
Total 86,000 68,000
7. From the following trial balance of the National Insurance Co. Ltd. as at March
31. 2021, prepare the final accounts of the company for 2020-21.
 165
Trial Balance as on 31-3-2021
Dr. (Rs. ‘000) Cr. (Rs ‘000)
Cash at Bank 51,500
Capital --- 1,50,000
Government . securities 5,25,000 ---
Claims paid: Marine 1,00,000 ---
Fire 80,000 ---
Commission: Marine 55,000 ---
Fire 60,000 ---
Provision for unexpired risk (1.4.20)
Marine --- 3,00,000
Fire --- 1,25,000
Additional Reserve (Fire) --- 50,000
Expenses: Marine 1,05,000 ---
Fire 1,02,500 ----
Claims outstanding on 1.4.20
Marine --- 15,000
Fire --- 12,500
General expenses 75,000 ---
Premium outstanding:
Marine 10,000 ---
Fire 7,500 ---
Due to other insurance companies --- 17,500
Interest on securities --- 32,500
General reserve --- 25,000
Profit & Loss A/c --- 9,000
Premiums received:
Marine -- 3,75,000
Fire --- 3,50,000
Dividend paid 15,000
Premises 2,50,000
Furniture 25,000
14,61,500 14,61,500
Additional Information: i) Claims outstanding on 31.3.21 were: Fire Rs. 12,500 Thousands; Marine
Rs.12,500 Thousands, ii) A taxation reserve of Rs.15,000 Thousands is
required, iii) Depreciate premises by 5% and furniture by 10%, iv) Additional
reserve (fire) is to be increased by 5% of net premiums.
Solution
National Insurance co., Ltd.
Revenue Account
For the year ended 31st march 2021
No Particulars Schedules Current Year Previous Year
No. (Rs. ‘000) (Rs. ‘000)
Premiums earned (Net) 1 2,82,500 3,00,000
Total(A) 2,82,500 3,00,000
Claims incurred(Net) 2 80,000 97,500
Commission 3 60,000 55,000
Operating expenses related to insurance business 4 1,02,500 1,05,000
Total (B) 2,42,500 2,57,500
Opening profit (A-B) 40,000 42,500
Profit and loss account
For the year ended31st march 2021
No. particulars (Rs.‘000)
Operating profit from Fire Insurance business
Income from Investments 40,000
 166
Interest on Securities (Gross) 42,500
Other Income 32,500
Total (A) 1,15,000
Provisions (Other than taxation)
Other Expenses:
a) Expenses other than those related to Insurance business:
General expenses 75,000
b) Bad debts written off -----
c) Others:
Depreciation: On premises 2,50,000 x 5% 12,500
On Furniture 25,000 x 10% 2,500
Total (B) 90,000
Profit before tax (A-B) 25,000
Provision for taxation 15,000
Profit after Tax 10,000
Appropriations:
Dividend paid 15,000
Dividend distribution tax 15,000 x10% 1,500 16,500
-6,500
Balance of profit brought forward from last year 9,000
Balance of profit carried to Balance sheet. 2,500
Note: After 1998, Dividend distribution tax at 10% has to be provided on dividend to shareholders.
Surcharge varies from year to year and may be ignored.
Balance Sheet of National Insurance Co., Ltd.
As at 31st March 2021.
Particulars Schedules Current year Previous Year
No (Rs. ‘000) (Rs. ‘000) (Rs. ‘000)
Sources of Funds:
Share Capital 5 1,50,000 ---
Reserves and surplus 6 27,500 ---
Fair value change account --- ---
Borrowings 7 --- ---
Total (A) 1,77,500 ----
Application of Funds:
Investments 8 5,25,000
Loans 9 ----
Fixed Assets 10 2,60,000
Current Assets:
Cash and Bank Balances 11 51,500
Advances and Other Assets 12 17,500
Sub Total (A) 69,000
Current Liabilities 13 42,500
Provisions 14 6,34,000
Sub Total (B) 6,76,500
Net Current Assets (A-B) (6,07,500)
Miscellaneous expenditure 15 ----- ------
Total (B) 1,77,500
Schedules Forming Part of Financial Statements
Schedule 1—Premiums earned (Net)
Particulars Fire Marine
(Rs. ‘000) (Rs. ‘000)
Premiums received 3,50,000 3,75,000
 167
Adjustment for change in Reserve for unexpired risk:
Add: provision for unexpired on 1-4-2020 125,000 3,00,000
Add: Additional reserve on 1-4-2020 50,000 --------
5,25,000 6,75,000
Less: Provision for unexpired risk on 31-3-2021
1,75,000 3,75,000
(3,50,000 x50%) (3,75,000 x 100%)
3,50,000 3,00,000
Less: Additional reserve on 31-3-2021
Fire: 3,50,000 x 50% + 50,000) 67,500 ------
Total premiums (Net) 2,82,500 3,00,000
Schedules 2—Claims incurred (Net)
Particulars Fire Marine
(Rs. ‘000) (Rs. 000)
Claims paid 80,000 1,00,000
Add: Outstanding claims on 31-3-2021 12,500 12,500
92,500 1,12,500
Less; Outstanding claims on 1-4-2020 12,500 15,000
Claims incurred (Net) 80,000 97,500
Schedules 3-- Commission
Particulars Fire Marine
(Rs. ‘000) (Rs. 000)
Commission on direct business 60,000 55,000
Net commission 60,000 55,000
Schedule 4 –Operating expenses related to Insurance business
Particulars Fire Marine
(Rs. ‘000) (Rs. 000)
Expenses of Management 1,02,500 1,05,000
Total 1,02,500 1,05,000
Schedule 5—Share Capital
Particulars Fire Marine
(Rs. ‘000) (Rs. 000)
Share Capital 1,50,000
Total 1,50,000
Schedule 6—Reserves and Surplus
Particulars Fire Marine
(Rs. ‘000) (Rs. 000)
General Reserve 25,000
Balance of profit and Loss Account 2,500
Total 27,500
Schedule 7—Borrowings -- NIL --
Schedule 8—Investments
Particulars (Rs. ’000)
Govt. Securities 5,25,000
Total 5,25,000
Schedule 9—Loans -- NIL --
Schedule 10—Fixed Assets
Particulars (Rs. ‘000)
Premises 2,50,000 ---
Less: Depreciation 12,500 2,37,500
Furniture 25,000
Less: Depreciation 2,500 22,500
 168
Total 2,60,000
Schedule 11—Cash and Bank Balances
particulars (Rs.000)
Cash and Bank 51,500
Total 51,500
Schedule 12—Advances and Other Assets
Particulars (Rs.’000)
Advances -----
Other Assets: Outstanding premiums 17,500
Total 17,500
Schedule 13—Current Liabilities
Particulars (Rs. ‘000)
Claims outstanding 25,000
Due to other Insurance companies 17,500
Total 42,500
Schedule 14--Provisions
Particulars (Rs. ‘000)
Provision for unexpired risk: Fire 2,42,500
Marine 3,75,000
Provision for taxation 15,000
Dividend distribution tax 1,500
Total 6,34,000
SUMMARY
Policies in general insurance business are only for one year. It is also doing
more than one business. In the kind of insurance business having premium,
additional reserve premiums etc. with help of final accounts the general insurance
business prepared. It is also have different form of schedule, under this Revenue
Accounts, Profit and Loss Accounts and Balance Sheet also prepared.
KEYWORDS
Net Premium: It is calculated during the period how much amount to be paid
for the policy holders.
Claims: Claims to be considers as special loss.
Catastrophe Reserve: It is to be created to meet any loss due to natural calamities.
Revenue Account: It shows a summary of schedules one to four.
Profit and Loss Account: Operating profit (or) loss of each kind of business is
transferred from revenue amount to profit and loss account. Any income and
expenses directly transferring in this account.
Balance Sheet: Accounts and Liability information post here under,
irrespective schedules.
11.9 SELF ASSESSMENT TEST
1. Give the meaning of ‘Reversionary Bonus’
2. Write short notes on ‘Valuation Balance sheet’.
3. Difference ‘Commission on reinsurance accepted ‘from ‘commission on
reinsurance’.
4. Write a note on ‘Reserve for unexpired Risk’
5. What is additional Reserve?
6. From the following Trial balance prepare the revenue account and the
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Balance sheet of the United India Assurance Co. Ltd.
Trial Balance as at 31-3-2021
Debits Creditors
Particulars Particulars
(Rs. ‘000) (Rs. ‘000)
Loans on life interests 4,281 Premiums received 3,65,982
Expenses of Management 18,241 Profit on sale of investments 10,824
Deposits with RBI 2,00,000 Claims admitted but not paid 58,421
Commission 9,872 Sundry creditors 7,734
Freehold ground rent 1,68,421 Life Assurance fund (1.4.05) 28,00,500
Bonus in cash 4,222 Consideration for annuities granted 12,272
Surrenders 21,104 Interest, dividends and rent (gross) 1,20,682
Claims by maturity 1,04,728
Annuities paid 7,681
Claim by death 1,72,681
House property 59,888
Outstanding premiums 21,641
Income tax on interest receipts 7,139
Agents balances 6,824
Port trust debentures 5,28,241
Cash at bank 12,724
Cash in hand 354
Foreign securities 1,42,520
Office furniture 1,500
Fully paid up shares in Ltd. liability companies 1,21,621
Stock of policy stamps in hand 168
Mortgages of India 6,61,421
Loans on Govt. securities 4,98,321
British Govt. securities 2,21,640
Loans on company’s policies 1,74,692
Mortgages outside India 2,06,490
33,76,415 33,76,415
Hint; 1. Deposit with RBI is treated as an ‘Other Assets’.
2. Income tax on interest receipts will appear in schedule 12 as tax deducted at
source—TDS, as per IRDA form]
7. The following balance form part of the books of Bharat Insurance Company
as on 31-3-2021.
Rs.(‘000) Rs. (‘000)
Life fund on 1.4.20 15,70,562 Bonus paid in reduction of premium 3,500
Claims by death 1,16,980 Preliminary expenses 600
Claims by maturity 96,420 Claim admitted but not paid at the end of 80,034
the year
Premiums 2,70,572 Annuities due but not paid 22,380
Management expenses 29,890 Capital paid up 6,00,000
Commission 36,541 Govt. securities 16,90,890
Consideration for annuities 10,620 Sundry assets 5,68,110
Granted
Surrenders 21,768 Interests, dividends and rent 49,401
Annuities 29,420
Bonus paid in cash 9,450

Rs.(‘000)
i. Claims covered by re insurance 10,000
ii. Further claims intimated 8,000
iii. Further bonus utilized in reduction of premium 1,500
iv. Interest accrued 15,400
v. Premiums outstanding 7,400

Prepare a revenue account and the Balance sheet.

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8. The following are the balance extracted from the books of the Comet
Insurance Co. Ltd. for the fire and marine departments as on 31st March
2021.
Fire Rs. (‘000) Marine Rs. (‘000)
Claim paid 112 107.4
Commission paid 109.6 89.4
Expenses of management 69.2 26.4
Commission on reinsurance accepted 8 5
Commission on reinsurance ceded 4 3
Outstanding premium 31-3-06 40.6 33.6
Reserve for unexpired risk 130.2 244
Additional reserve 142.8 15
Premium received less reinsurance 330.6 223.6
Claim outstanding 1-4-20 3.8 0.2

Adjustments to be taken in consideration:

Estimate liability in respect of claims outstanding on 31-3-06 was fire-
Rs.06 Thousands and Marine-Rs.13.4 Thousands/ Provide—Rs.20
Thousands for survey expenses (marine) and Rs.16.24 Thousands for
survey expenses (fire). Provide in case of fire insurance for additional
reserve at 10% of the net premium in addition to the opening balance.
Prepare fire and marine revenue accounts.
9. From the following balances of Global Insurance Co. Ltd., as on 31st march
2021, prepare the (i) Fire revenue A/c (ii) Marine revenue A/c and (iii) Profit
& Loss a/c
Rs.(‘000) Rs.(‘000)
Bad debts: Fire 10,000 Depreciation 70,000
Marine 24,00 Interest, Dividend received 28,000
Auditor’s fees 6,000 Difference in exchange (Cr) 600
Director’s fees 6,400 Miscellaneous receipts 10,000
Share transfer fees 1,600 Profit on sale of land 1,20,000
Bad debts recovered 2,400 Fire premium
Reserve (fire as on 1.4.20) 5,00,000 less reinsurance 12,00,000
Reserve (marine as on 1.4.20) 16,40,000 Marne premium
Claims paid and outstanding (fire) 3,80,000 less reinsurance 21,60,000
Claims paid and outstanding (marine) 7,60,000 Management expenses:
Commission paid: Fire 2,90,000
Fire 1,80,000 Marine 8,00,000
Marine 2,16,000 Commission earned on
reinsurance ceded:
Additional reserve(fire) as on 1.4.20 1,00,000 Fire 60,000
Marine 120,000
In addition to the usual reserve additional reserve in the case of fire
insurance is to be increased by 5% of net premiums.
10. The following balance is extracted from the books of peerless General
Insurance Co. Ltd. for the year ended 31-3-2021. You are required to
prepare the necessary revenue accounts and Profit & Loss Account for the
year 2020-21.
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(Rs. ‘000) Rs. (‘000)
Bad debts: Difference in exchange 3,000
Fire 50,000 Profit on sale of Govt. bonds 6,00,000
Marine 1,00,000 Premiums less reinsurance:
Auditor’s fees 20,000 Fire 60,00,000
Director’s fees 42,000 Marine 1,08,00,000
Share transfer fees 4,000 Management expenses:
Miscellaneous income 16,000 Fire 14,50,000
Fire fund (1.4.05) 25,00,000 Marine 40,20,000
Marine fund (1.4.05) 82,00,000 Claims outstanding on 1.4.20:
Claims paid: Fire 5,00,000
Fire 14,00,000 Marine 6,00,000
Marine 30,00,000 Commission on reinsurance ceded:
Commission paid: Fire 3,00,000
Fire 9,00,000 Marine 6,00,000
Marine 10,80,000
Additional reserve as on 1.4.20
Fire 5,00,000
Marine 10,00,000
Depreciation 3,50,000
Interest, Dividends etc. received 1,90,000
Additional information;
The normal reserve required is 50% of net premiums for fire and 100% for
marine.
Outstanding claims on 31-3-2021 were:
Fire—Rs.10,00,000 Thousands
Marine—Rs. 14,00,000 Thousands
Management expenses not yet provided for amount to Rs.10,00,000
Thousands which are to be divided between fire and marine business at
40:60.
11. The following reinsurance premiums in respect of business accepted and
ceded respectively have not been included in the above figures:
Reinsurance accepted Reinsurance ceded
(Rs.’000) Rs. (‘000)
Fire 2,50,000 2,00,000
Marine 6,00,000 4,50,000
The rate of commission in case of fire business is 15% of reinsurance
premium accepted and in case of marine business, it is 10% of reinsurance
premium accepted.
Additional reserve for fire business at Rs.3,00,000 Thousands is to be
provided.
REFERENCE BOOKS
1. Shukla ML, Grewal TS, Gupta SC, Advanced Accounts, S.Chand &
Company Ltd., New Delhi.
2. Jain Sp, Navarg KL, Corporate Accountancy, Kalyani Publishers, New
Delhi.

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LESSON – 12
DOUBLE ACCOUNT SYSTEM
OBJECTIVES
Students after studying in this lesson they can able to understand the
following objectives, introduction of double accounts, revenue accounts, differences
from other accounts, capital expenditure, revenue expenditure, replacement of
asset account and etc.
CONTENTS
12.1 Introduction
12.2 Special features of double account system
12.3 Double account system Vs Single account system
12.4 Advantages of double account system
12.5 The chief limitations of double account system
12.5 Final accounts under double account system
12.6 Replacement of assets
12.7 Self-Assessment Test
12.1 INTRODUCTION
Public utility undertaking supplying or operating Electricity, Gas, Water
Power, Railways, Tram ways, etc., which operate under special acts of Parliament
enjoy monopolistic rights in their business of rendering service to the community.
These undertakings require huge amount of fixed or long term capital to be invested
on fixed or permanent assets. They raise most part of their fixed capital from the
Public by the issue of shares and debentures. So, they are bound to give
information to the public as to what amount of fixed capital has been raised by
them from the public and how much of it has been invested on fixed assets. To
provide such information to the public, the public utility undertakings split their
balance sheet into two parts viz.
i) Receipts and Expenditure on capital account disclosing the amount of fixed
capital raised from the public and the manner in which the fixed capital has been
invested on fixed assets, and
ii) The general balance sheet disclosing the other liabilities and assets.
The system of presenting balance sheet in two parts is called the ‘Double
Accounts system’. In other words, it is a alternative system of presenting final
accounts. It was originally adopted in England, when the public utility concerns
were owned by incorporated companies. Today, it has lost its importance.
12.2 SPECIAL FEATURES OF DOUBLE ACCOUNT SYSTEM
The following are the special features of the double account system:
1. It is not a system of maintaining accounts, but only a system of presenting
the final accounts.
2. It is generally adopted by public utility concerns formed under special acts
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of parliaments.
3. As indicated earlier, under this system, the balance sheet is bifercated into
two parts viz.,
i. Receipts and Expenditure on capital A/c and
ii. General Balance Sheet.
4. The main purpose of this system is not to reveal the financial position of
the Public utility concern as on the last date of the accounting year but to
reveal the amount of fixed capital raised from the public and the manner in
which the fixed capital has been utilized in the acquisition of fixed assets.
5. Under this system, the account prepared for disclosing the expenses and
incomes of a public utility concern is known as ‘Revenue A/c’ and not
profit & Loss Account.
6. The account prepared, under this system, for disclosing the appropriations
of profits is known as ‘Net Revenue A/c’ and not profit & Loss
Appropriation A/c.
7. Under this system, interest on debentures and loans is shown on the debit
side of Net Revenue Account as an appropriation. Similarly, interest
received/receivable is also shown on the credit side of Net Revenue
Account.
8. Under the system, the fixed assets are shown in the ‘Capital Account’ at
cost, but not at depreciated value. The depreciation on fixed assets is,
usually, debited to revenue account and credited to depreciation reserve or
fund account which appears in the general balance sheet.
9. Discount and premium on issue of shares and debentures are permanently
retained as capital items. The discount on issue of shares and debentures
is not shown separately in the account. Instead, it is deducted from the
proceeds of issue of shares and debentures and only the net proceeds after
such deduction is shown in the capital account.
10. Loans and debentures are treated as capital and shown in the capital
account.
11. Renewals are provided out of current revenue.
Double Account system Vs. Double Entry system
The double account system is entirely different from double entry system. The
double entry system is a system of maintaining records in the books of accounts,
whereas the double account system is a system of presenting the final accounts of
public utility concerns. However, both the systems go together, Usually, the final
accounts of the public utility concerns, which are presented under the double
account system, are maintained on the double entry system.
12.3 DOUBLE ACCOUNT SYSTEM VS SINGLE ACCOUNT SYSTEM
The single account system is nothing but preparation of a single balance sheet
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disclosing the financial position of a business concern on a particular date . This
system differs from double account system in many respects. The main different
between these two are summarized as follows:
Single Account system Double Account system
1. It is usually maintained by non-public utility 1. It is generally maintained in public utility
undertakings. undertakings.
2. The financial affairs of a concern are shown 2. The financial affairs of a concern are shown
through a single balance sheet. through two statements viz., (i) Capital A/c and (ii)
General balance sheet,
3. The main object of preparing the balance sheet is 3. The main object of preparing two separate
to show the financial position of the concern. statements is to show how the capital is raised
and how it is invested in fixed assets.
4. ’A’ profit & Loss A/c is prepared to calculate the 4. A ‘Revenue A/c’ is prepared to ascertain the
profit earned during the year. current year’s profit.
5. A Profit & Loss Appropriation A/c is prepared to 5. A ‘Net Revenue A/c’ is prepared to disclose the
indicate the various appropriations of profits appropriations of profits.
6. Interest paid/payable and interest received/ 6. Interest paid/payable and interest received/
accrued are shown in the profit & Loss account. accrued are shown in the Net Revenue A/c
7. Under this system, fixed assets are shown at 7. Under this system, fixed assets are shown at
depreciated value. original cost in capital account and depreciation
fund is shown on the liabilities side of General
balance sheet.
8. Discount on issue of shares and debentures is 8. Discount on issue of shares and debentures is
shown separately in the Balance sheet under the subtracted from the share or debenture capital in
head ‘Miscellaneous expenses and losses’. the capital A/c
9. When a old fixed asset is replaced by new fixed 9. When an old fixed asset is replaced by a new
asset, the old fixed asset is completely written off fixed asset, the original cost of the old asset
in the books. continues to appear in the books, even after
replacement.
12.4 ADVANTAGES OF DOUBLE ACCOUNT SYSTEM
The important advantages of double account system are as follows:
i. The presentation of accounts in the prescribed form enables the state to
ensure that the undertaking is rendering efficient service at reasonable
cost.
ii. The capital account readily discloses the sources of funds and the manner
in which they are utilized, thereby enabling an outsider to know whether
the concern is over-capitalized or under-capitalized
iii. (iii)As depreciation fund is compulsory under double account system, it
helps the undertaking to replace any fixed asset without any depletion of
the cash resources of the company.
iv. The segregation of income statement into ‘Revenue A/c’ and ‘Net Revenue
A/c’ enables the ascertainment of ‘pure’ operating results of the concern.
v. (v)The publication of accounts in prescribed from enables the undertakings
to compile many statistical returns reflecting the services rendered to the
public.
DISADVANTAGES OF DOUBLE ACCOUNT SYSTEM:
12.5 THE CHIEF LIMITATIONS OF DOUBLE ACCOUNT SYSTEM
i. The Revenue Account fails to exhibit the true and fair view of the result of
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the business as interest paid or received is not shown in the Revenue
Account.
ii. The Balance sheet also fails to exhibit the true and fair view of the position
of the company on a particular date as the assets are shown in the capital
account at cost price and depreciation is credited to the Depreciation Fund
which appears as a liability in the General balance sheet.
iii. Moreover, some of the assets of short duration are taken to the capital
Account and are continued to be shown at cost price even after they have
been reduced to scrap value.
iv. Calculations regarding how much to be charged to ‘revenue account’
towards replacement of assets, is confusing and not easily understandable.
v. The system cannot be understood by the general public easily.
12.6 FINAL ACCOUNTS UNDER DOUBLE ACCOUNT SYSTEM:
From the above discussion, it is clear that the final accounts prepared under
the double account system consists of:
A Revenue A/c
A Net Revenue A/c
A Capital A/c i.e., Receipts and Expenditure on Capital A/c.
A General Balance Sheet.
i. Revenue Account
It is in the nature of profits & Loss Account. All the expenses are shown on the
debit side of this account and all the incomes are shown on the Credit side of this
account. The balance found in this account represents either Profit or Loss which
will be transferred to Net Revenue Account. The following is a specimen form of a
Revenue account.
Revenue A/c for the year ended……………..
Particular Rs. Particular Rs.
To Staff Salaries xxx By Income Interest earned and
To Rent, rates & taxes xxx government subsidy xxx
To Printing & Stationery xxx By Net Revenue A/c xxx
To Postage & Telegrams xxx (Loss-if any,
To Repairs & Renewals xxx transferred) (Bal. fig.) xxx
To Depreciation of Fixed assets xxx
To Discount allowed xxx
To Miscellaneous expenses xxx
To Net Revenue A/c (Bal. fig.) xxx
xxx xxx
ii) Net Revenue Account:
It is similar to the ordinary Profit & Loss Appropriation Account. This account
starts with the balance of the net revenue account brought forward from the last
year. The balance disclosed by the Revenue Account of the current year is shown in
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this account. All interests paid are entered on the debit side and all interests
received are entered on the credit side of this account. In the case of railway
companies, even the rents paid on leased lines and rent charges and Chief rents
(i.e., rent paid on leasehold properties) are entered on the debit side of this account.
All appropriations of Profits such as transfer to any reserve, income-tax on profits,
interim dividends and final dividends are entered on the debit side. Government
subsidy (i,e., Govt. grant) and not Government loan, is entered on the credit side.
The balance of this account is transferred to the General Balance Sheet. The
following is a specimen form of Net Revenue Account
Net Revenue A/c for the year ended…………..
Particulars Rs. Particular Rs.
To Balance b/d (if any) xxx By Balance b/d (Balance from last year) xxx
To Revenue A/c (Loss of current year transferred xxx By Revenue A/c (Profit of Current year xxx
from Revenue A/c) transferred from Revenue A/c)
To Interest on debentures xxx By Government subsidy xxx
To Interest on Loans xxx By Interest earned xxx
To Interest on Security deposits xxx By Transfer from Reserve xxx
To Contingency Reserve xxx By General Balance xxx
To Dividend Control Reserve xxx sheet (Loss-if any, transferred to general
balance sheet- Bal. fig
To General Balance Sheet (Bal. fig.) xxx
xxx xxx

iii) Capital Account (or) Receipts and Expenditure on Capital Account

This account is mainly prepared to show as to how much fixed or long term
capital has been raised by a public utility concern and how it has been utilized. The
account is usually prepared in a three columnar form on either side. On the left
side is recorded the Capital expenditure and on the right side Capital Receipts. The
first column is meant for recording the receipts or expenditure, as the case may be,
of the items pertaining to the previous financial year. In the second column items
relating to the current financial year are recorded and the last column is meant for
the total of the first two columns. The balance of the capital account is carried
down and shown as a separate item in the General Balance sheet. In case of
Electricity supply companies, the total capital receipts and the credit side of capital
account is more than the total of debit side balance is transferred to the liabilities
side of General balance sheet; and when the total of debit side of this account is
more than the total of credit side, the balance is transferred to the assets side of
General Balance Sheet. Following is the Specimen form of this account.
Receipts and Expenditure on Capital A/c for the year ending……..
Expenditure Upto the end During Total Receipts Upto the end During Total
of previous the year of previous the year
year year
To Preliminary Exp. Xxx Xxx Xxx By Equity Shares Xxx Xxx Xxx
To Land Xxx Xxx Xxx By Preference Shares Xxx Xxx Xxx
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To Building Xxx Xxx Xxx By Debentures Xxx Xxx Xxx
To Plant Xxx Xxx Xxx By Loans Xxx Xxx Xxx
Total Expenditure By Calls-in advance Xxx Xxx Xxx
Transferred to xxx xxx xxx Total Receipts xxx xxx xxx
General Balance transferred to General
Sheet. Balance Sheet
iv) General Balance Sheet.
n the General Balance Sheet the balance of the capital account, the current
assets and liabilities are recorded. As usual on the left side various funds created
and other current liabilities are recorded such as depreciation fund, General fund.
Sinking fund, investment fluctuation funds, creditors etc. On the right side, the
current and floating assets and other debit balances are recorded. The Performa of
General Balance Sheet is given below.
General Balance Sheet
Liabilities Rs. assets Rs.
Capital A/c (Total receipt brought forward from capital A/c) xxx Capital A/c xxx
Sundry Creditors for Capital A/c xxx Total expenditure xxx
Sundry Creditors on Open A/c xxx Stores xxx
Net Revenue A/c (Balance Brought forward from New Revenue A/c) xxx Sundry debtors xxx
Reserve Fund xxx Cash at bank xxx
Depreciation Fund xxx Cash in hand securities xxx
Sinking Fund xxx Special items xxx
Investment Fluctuation fund xxx Other assets xxx
Other Liabilities xxx
xxx xxx
12.7 Replacement of Assets
It is not uncommon with a concern, especially with a public utility concern, to
spend huge sums of money on the replacement of old fixed assets by new ones with
a view to providing better services to the public. When a concern spends a huge
sum of money on the replacement of an old fixed assets by a new one, a problem
arises as to what portion of the expenditure should be charge to capital or revenue
expenditure. Under single accounting system, whenever an asset is replaced, old
asset is completely written off and cost of new asset is capitalized. But under
double account system, the treatment is based on the following situations:
i. When the replacement does not involve any extension or improvement over
the existing asset.
ii. When the replacement involves extension or improvement over the existing
asset.
iii. When the replacement does not involve any extension or improvement over
the existing assets: In this case, the original cost of the existing asset itself
remains in the books of accounts and the cost of new asset (i.e., cost of
replacement) will be charged to Revenue Account.
The actual cost of replacement that will be charged to Revenue Account will be
calculated as given below. Rs.
Cost of New Assets xxx
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Less: Amount realized on sale of old materials xxx
Old materials used in new assets xxx xxx
Cost of replacement to be charged to Revenue A/c xxx
(ii) When the replacement involves extension or improvement over the
existing asset:
In this case, a portion of replacement cost (to the extent it increases
revenue-earning capacity) will be charged to capital account and the balance of
replacement cost (i.e., the total replacement cost minus portion of replacement cost
charged to capital account) will be charged to Revenue Account. That is a portion of
replacement cost will be treated as capital expenditure and the balance will be
treated as ‘Revenue expenditure’.
The amount of replacement to be capitalized (i.e., to be treated as capital
expenditure) can be ascertained as given below:
Total cost of New asset xxx
Less: Estimated cost of replacement xxx
Cost of replacement to be capitalized xxx
The amount of replacement cost to be charged to Revenue Account can be
ascertained as follows:
Estimated present cost of replacement xxx
Less: amount realized on sale of old asset xxx
Value of old asset’s materials used in new asset xxx xxx
Cost of replacement to be charged to Revenue A/c xxx
Notes
1. Estimated cost of replacement should be calculated on the basis of data
given in the problem.
2. Total cost of new asset can be ascertained as follows:
Amount spend on new asset xxx
Less: Value of old asset’s materials used in new asset xxx xxx
If the problem mentions no details, but only the total cost of new asset, it
should be considered as inclusive of value of old materials used.
(iii) When the total cost of the new asset is given, the actual Cash spent on new
asset can be determined as follows:
Total actual cost of new asset. xxx
Less: Value of old materials used for new assets xxx
Actual Cash spent on new asset xxx
The following journal entries are passed for replacement of an asset:
i) For amount spent on asset
Replacement A/c (Cost of replacement) Dr. Xxx
New Asset A/c (Bal. Fig.) Xxx
To Bank A/c Xxx
ii) For sold of old materials:
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Bank A/c Dr. Xxx
To Replacement A/c Xxx
iii) For value of old materials used in the new asset:
New Asset A/c Dr. Xxx
To Replacement A/c Xxx
iv) For amount entirely spent on extensions:
New Assets A/c Dr. Xxx
To Bank A/c Xxx
v) For transfer of balance of Replacement A/c
Revenue A/c: Dr. xxx
To Replacement A/c. xxx
After passing the above journal entries, New assets A/c and Replacement A/c
can be prepared.
12.8 EXAMPLES
1. The Bangalore Municipal corporation replaces part of its existing water mains
with larger mains at the cost of Rs.75,00,000. The original cost of laying the old
mains was Rs.15,00,000 and the present cost of laying those mains would be
three times the original cost Rs.1,25,000 were used in the replacement and
included in the cost given above. Give the journal entries to record the above
and show the allocation of expenses between revenue and capital along with
Replacement Account.
Solution
Working Notes: Rs.
i) Total cost of new mains (including old material used) 75,00,000
ii) Computation of amount to be charged to Revenue A/c:
Estimated present cost of replacement (Rs.15,00,000 x 3) 45,00,000
Less: Amount realized on sale of old materials 1,25,000
Old material used in new asset 3,75,000 5,00,000
Charge to Revenue 40,00,000
iii) Computation of amount to be charged to Capital A/c:
Total cost of new main 75,00,000
Less Estimated present cost of replacement 45,00,000
Amount to be capitalized 30,00,000
iv) Computation of actual cash spent on replacement:
Total cost of New main 75,00,000
Less: Old Material used in New main 3,75,000
71,25,000
Journal Entries
Date Particulars L.F. Dr. Rs. Cr. Rs.
1 Replacement A/c (W.N.11) Dr. 45,00,000
Main A/c (Bal. Fig) Dr. 26,25,000
To bank A/c (W.N.1V) 71,25,000
[Being actual cash spent on replacement allocated between revenue
and capital]
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2 Bank A/c Dr. 1,25,000
To Replacement A/c 1,25,000
[Being amount realized on sale of old materials]
3 Main A/c Dr. 3,75,000
To Replacement A/c 3,75,000
{Being old material used for new asset]
4 Revenue A/c(W.N.11) Dr. 40,00,000
To Replacement A/c 40,00,000
[Being the balance in replacement A/c transferred to Revenue A/c]
Replacement A/c
Rs. Rs.
To Bank A/c 45,00,000 By Bank A/c 1,25,000
By Main A/c 3,75,000
By Revenue A/c (Bal.fig) 40,00,000
45,00,000 45,00,000
Note: The total amount Debited to New Main A/c is Rs.26,25,000(in Journal entry 1) and
Rs.3,75,000 (in Journal Entry 3 ) together totaling Rs.30,00,000.
2. The Pioneer Gas Co. rebuilt and re-equipped part of their works at a cost of
Rs.15,00,000. The part of the old works thus superseded cost Rs.9, 00,000,
Rs. 60,000 is realized by the sale of old materials and old materials valued
Rs.2,000 are used in the reconstruction and included in the cost of
Rs.15,00,000 mentioned above. The cost of labour and materials is 20% higher
now than when the old works were constructed. Giver Journal entries and
prepare the necessary ledger accounts.
Solution
Working notes:
Rs.
i) Total cost of New work (given) 15,00,000
(including old material used)
(ii) Computation of estimated present cost of old work:
Cost of old work 9,00,000
Add: Increase in cost of material and labour (9,00,000x20%) 1,80,000
10,80,000
iii) Computation of amount of replacement to be charged to Revenue A/c:
Estimated cost of replacement (See above) 10,80,000
Less: Sale of old material 60,000
Value of old material used in new work 2,000 62,000
Charge to Revenue 10,18,000
iv) Computation of amount of replacement to be capitalized:
Total cost of New work 15,00,000
Less: Estimated present cost of replacement 10,80,000
 181
Amount to be capitalized 4,20,000
v) Computation of actual amount of Cash spent on replacement:
Total cost of new work 15,00,000
Less: Value of old material used for new work 2,000
14,98,000
Journal Entries
Date Particular L.F Dr. Rs. Cr. Rs.
1) Replacement A/c (W.N.ii) Dr. 10,80,000
New Works A/c (Bal. Fig.) Dr. 4,18,000
To Bank A/c [ W.N.(v)] 14,98,000
[Being actual cash spent on replacement allocated between revenue and
capital]
2) Bank A/c Dr. 60,000
To Replacement A/c 60,000
[Being amount realized on sale of old material]
3) New Work A/c Dr. 2,000
To Replacement A/c 2,000
[Being value of old material used for new work transferred]
4) Revenue A/c (W.N.iii) Dr. 10,18,000
To Replacement A/c 10,18,000
[Being the balance in Replacement A/c transferred to Revenue A/c]
New Work A/c
Rs. Rs.
To Balance 9,00,000
To Bank 4,18,000
To Replacement A/c 2,000 By Balance c/d (Bal. Fig) 13,20,000
13,20,000 13,20,000
Replacement A/c
Rs. Rs.
To Bank A/c 10,80,000 By Bank A/c 60,000
By New works a/c 2,000
By Revenue A/c (Bal. Fig) 10,18,000
10,80,000 10,80,000
3. The Ranjitha Electricity company decided to replace some parts of its plant by
an improved plant. The Plant to be replaced was built in 2021 for
Rs.54,00,000. It is estimated that it would now cost Rs.80,00,000 to build a
new Plant of the same size and capacity. The cost of the new Plant as per the
improved design was Rs.1,70,00,000 and in addition, material belonging to the
old Plant valued at Rs.5,50,000 was used in the construction of the new plant.
The balance of the old Plant was sold for Rs. 3,00,000. Compute the amount to
be capitalized. Also pass the journal entries and Replacement Account.
Solution
Working notes: Rs.
i) Estimated present cost of Replacement (given) 80,00,000
ii) Computation of Total cost of new Plant:
 182
Cost (given) 1,70,00,000
Add: Value of old material used in construction of new plant 5,50,000
1,75,50,000
iii) Computation of amount of replacement to be capitalized
Total actual cost of new Plant 1,75,50,000
Less: Estimated present cost of replacement 80,00,000
Amount to be capitalized 95,50,000
iv) Computation of replacement to be charged revenue account
Estimated present cost of replacement 80,00,000
Less: Amount realized on sale of old Plant 3,00,000
Value of old plant materials used to
Construction of new plant 5,50,000 8,50,000
Charge to revenue account 71,50,000
v) Computation of actual of Cash spent on replacement:
Total cost of New plant 1,75,50,000
Less: Value of Old material used for new Plant 5,50,000
1,70,50,000
Journal Entries
Date Particulars L.F. Dr. Rs. Cr. Rs.
1 Replacement A/c [W.N.(i)] Dr. 80,00,000
New Plant A/c (Bal. Fig] Dr. 90,00,000
To Bank A/c [W.N.(v)] 1,70,00,000
[Being actual cash spent on replacement and extension i.e. new
Plant A/c]
2 Bank A/c Dr.
To Replacement A/c 3,00,000
[Being amount realized on the sale of old Plant] 3,00,000
3 .New Plant A/c Dr. 5,50,000
To Replacement A/c 5,50,000
[Being value of old Plant Materials used in construction of new plant
transferred]
4 Revenue A/c Dr. 71,50,000
To Replacement A/c 71,50,000
[Being balance in replacement a/c transferred to Revenue A/c]
Replacement A/c
Rs. Rs.
To Bank A/c 80,00,000 By Bank A/c 3,00,000
By New Plant A/c 5,50,000
By Revenue A/c (Big. Fig.) 71,50,000
80,00,000 80,00,000
4. The Mettur Electricity Company Ltd. decides to replace one of its old plants
with a modern one with a larger capacity. The plant when installed in 1950
 183
cost the company Rs.48,00,000, the components of materials, labour and
overhead being in the ratio of 5:3:2. It is ascertained that the cost of materials
and labour have gone up by 40% and 80% respectively. The proportion of
overheads to total costs is expected to remain the same as before. The cost of
the new Plant as per improved design is Rs.1,20,00,000 and in addition,
materials recovered from the old Plant of a value of Rs.4,80,000 have been used
in the construction of the new plant. The old plant was scrapped and sold for
Rs.15,00,000. The accounts of the company are maintained under double
account system, Indicate how much would be capitalized and the amount that
would be charged to revenue. Show journal entries and prepare necessary
ledger accounts.
Solution
Working Notes:
i) Computation of total actual cost of New Plant: Rs.
Cost of new plant (as given) 1,20,00,000
Add: Value of materials of old Plant used
in construction of new plant 4,80,000
1,24,80,000
ii) a) Split-up of cost of old plant when acquired in 1950:
Materials (48,00,000 x 5/10) 24,00,000
Labour (48,00,000 x 3/10) 14,40,000
Overheads (48,00,000 x 2/10) 9,60,000 48,00,000

Percentage of overheads to total cost = 9,60,000 x 100 = 20% (Or)

48,00,000
Percentage of overheads to combined cost of
material and labour = 9,60,000 x 100= 25%
38,40,000
b) Current cost of Replacement: Rs. Rs.
Materials (increase by 40% )over Rs. 24,00,000
(i.e., Rs. 24,00,000 =40% increase) 9,60,000 33,60,000
Labour (increase by 80%) over Rs. 14,40,000)
(i.e., Rs.14,40,000+80% increase Rs.11,52,000) 25,92,000
Overheads (25% of combined cost of material
and labour i.e. 25% of (Rs.33,60,000 + 25,92,000) 14,88,000
74,40,000
iii) Computation of amount of replacement to be civilized:
Total actual cost of new plant 1,24,80,000
Less: Estimated present cost of replacement 74,40,000
 184
Amount to be capitalized 50,40,000
iv) Computation of amount of replacement to be charged to Revenue A/c:
Estimated present cost of replacement 74,40,000
Less: Value of old material used in
construction of new plant 4,80,000
Amount realized on sale of old plant 15,00,000 19,80,000
Charge of Revenue 54,60,000
v) Computation of actual amount of Cash spent on replacement: Rs.
Total actual cost of new plant 1,24,80,000
Less: Value of old materials used
in construction of new plant 4,80,000
1,20,00,000
Journal Entries
Date Particulars L.F Dr. Rs. Cr. Rs.
1 Replacement A/c [W.N. ii)] Dr. 74,40,000
Plant A/C [Bal. Fig.) Dr. 45,60,000
To Bank A/c [W.N.(v)] 1,20,00,000
[Being the amount paid for replacement of plant allocated between
Revenue and Capital]
2 Bank A/c Dr. 15,00,000
To Replacement A/c 15,00,000
[Being the amount realized from the sale of old Plant]
3 Plant A/c Dr. 4,80,000
To Replacement A/c 4,80,000
[Being the cost of old parts used in new Plant]
4 Revenue A/c Dr. 54,60,000
To Replacement A/c 54,60,000
[Being the transfer of balance of replacement A/c to revenue A/c
Plant A/c
Rs Rs.
To Balance B/d 48,00,000
To Bank A/c 45,60,000
To Replacement A/c 4,80,000 By Balance C/d 98,40,000
98,40,000 98,40,000
Replacement A/c
Rs. Rs.
To Bank A/c 74,40,000 By Bank A/c 15,00,000
By Plant A/c 4,80,000
By Revenue A/c (Bal. Fig.) 54,60,000
74,40,000 74,40,000
5. An Electricity company laid down a main at cost of Rs.24,00,000. Some years
later, the company laid down an auxiliary main for one-fourth of the length of
the old main at a cost of Rs.9,00,000. It also replaced the rest of the length of
the old main at a cost of Rs.27,00,000. The cost of materials and labour has
 185
gone up by 15%. Sale of old materials realized Rs. 60,000. Old materials valued
at Rs.60,000 were used in the renewal and old materials valued at Rs.90,000
were used in the auxiliary man.
Give the journal entries for recording the above transactions. Show the Capital
Expenditure and the revenue Expenditure.
i) Replacement is made only for ¾th of the main
ii) In the absence of specific information, the cost of new main and
replacement is treated as inclusive of value of old materials used.
Solution
Working Notes:
i) Computation of total actual cost of: Rs.
a) Auxiliary main (treated to be inclusive of value of old materials) 9,00,000
b) Replacement (treated to be inclusive of value of old materials) 27,00,000
Cost of three fourth of original main (24,00,000 x 3/4) 18,00,000
Add: Increase in material and labour cost (18,00,000 x 15%) 2,70,000
20,70,000
iii) Computation of Amount to be capitalized:
a) Auxiliary main Rs. 9,00,000
b) Replacement:
Total actual cost of replacement 27,00,000
Less: Estimated present cost of replacement 20,70,000
6,30,000
iv) Computation of Amount to be charged to Revenue A/c
Estimated present cost of replacement 20,70,000
Less: Sale old materials realized 60,000
Value of old materials used for replacement 60,000
Value of old materials used for auxiliary main 90,000 2,10,000
Charge to Revenue 18,60,000
v) Computation of actual amount of Cash spent:
a) On auxiliary main: Rs.
Total actual cost 9,00,000
Less: Value of old material used 90,000
8,10,000
b) On Replacement: Rs.
Total actual cost 27,00,000
Less: Value of old materials used 60,000
 186
26,40,000
Journal Entries
Date Particulars L.F. Dr. Rs. Cr. Rs.
1 Replacement A/c [W.N.(ii)] Dr. 20,70,000
New mains A/c (Bal. Fig.) Dr. 5,70,000
To Bank A/c [W.N.(v)] 26,40,000
[Being the Cash spent on replacement allocated between replacement and
extension i.e., New Mains]
2 Bank A/c Dr. 60,000
To Replacement A/c 60,000
[Being the old materials realized]
3 New Mains A/c Dr. 1,50,000
To Replacement A/c 1,50,000
[Being the value of old materials used for replacement and used for
auxiliary main transferred.]
4 New Auxiliary Main A/c Dr. 8,10,000
To Bank A/c 8,10,000
[Being the Cash spent on auxiliary mains]
5 Revenue A/c Dr. 18,60,000
To Replacement A/c 18,60,000
[Being the transfer of balance of replacement A/c to revenue A/c]
Replacement A/c
Rs. Rs.
To Bank 20,70,000 By Bank A/c 60,000
By New Main A/c 1,50,000
By Revenue A/c (Big. Fig.) 18.60,000
20,70,000 20,70,000

SUMMARY
The public company like electricity and railways are prepared in this
accounting systems. It is shows receipts and expenditure. From this statement the
company to know what amount spent, how much going to be spent in respective
periods while preparing this accounting statement replacement of asset is also
essential one with help of revenue account, net revenue account, receipts and
expenditure and balance sheet, these company presents the report, getting the
approval from authority.
KEYWORDS
Double Accounts: General utility company prepare indifferent form it is not
double entry system.
Revenue Accounts: Nature of profits and losses found with help of the account.
Hence, considering the expenses and incomes.
Net Revenue Accounts: Balances transferred from revenue account shows
here. In addition, other than direct expenses and incomes transferring here.
Capital Account: It is called receipts and expenditure on capital Account.
General Balance Sheet: The General balance sheet of the capital account.
Various funds and assets transferring in this balance sheet.
 187
12.9 SELF-ASSESSMENT TEST
1. What is meant by Double Account system?
2. Mention any two characteristic features of double account system.
3. State any two differences between double account system and Single
account system.
4. Mention any two limitations of double account system.
5. Enumerate the different statements/accounts opened under double
account system.
6. How do you ascertain the amount to be charged to Revenue account in
case of replacement of an asset under double account system?
7. How do you compute the amount to be capitalized in case of replacement of
an asset under double account system?
8. Explain the accounting treatment for replacement when there is no
extension or improvement involved.
9. The Southern Railways built a station 20 Years ago at a cost of Rs.40,000.
Owing to increase in the cost of labour and materials, a similar station
would now cost Rs.60,000. The station, having proved inadequate for the
increased traffic, is rebuilt at a cost of Rs. 1,40,000. Old materials to the
value of Rs.4,000 are utilized in the new construction and included in the
above cost. The remaining old materials are sold for Rs.6,000. Apportion
the new expenditure between capital and revenue.
10. A new building for an Electric Supply Power House has been constructed at
a cost of Rs. 50,00,000 to replace an old Building, the original cost of
which was Rs.25,00,000 and the estimated present cost of replacing which,
as it stands, is Rs.32,00,000. The sale proceeds of the old materials of the
dismantled building amount to Rs. 28,000 and the value of the old
materials utilized in the new construction is Rs.12,000
11. A water supply company had to replace a quarter of its mains and lay
auxiliary mains for the remaining length. The total cost of the old mains is
Rs.10,00,000. The cost of auxiliary mains is Rs.9,00,000 and that of the
new mains has gone up by 30% Amount spent on replacements
is:Rs.33,50,000 Journalize. Show your workings.
12. The Indian Gas company rebuilt their works with double the capacity at a
cost of Rs. 8,00,000. The cost of the part of old works was Rs.3,50,000. In
working the new works, old material of Rs.15,000 was reused and material
worth Rs.25,000 was sold away. The cost of labour and materials are 50%
higher now than when the old works were built. You are required to make
necessary calculations and give journal entries.
13. A Gas company rebuilt and reequipped part of its works at a cost of
Rs.3,30,000. The part of the old works, thus superseded cost Rs.1,30,000.
 188
The capacity of the new works is double that of the old.Rs.12,000 is
realized by the sale of old materials and materials valued at Rs.5,000 are
used in the reconstruction and included in the cost of Rs.3,30,000
mentioned above. The cost of labour and materials is respectively 155 and
12% higher now than when the old works were built. The proportion of
labour to materials in the works then and now is 4:7 Give the journal
entries for recording the above transactions showing what amount you
consider should be capitalized.
REFERENCE BOOKS
1. Reddy TS, Murthy A, Corporate Accountancy, Margham Publications,
Chennai – 17.
2. Pillai RSN, Bagavathi, Uma S, Fundamental of Advanced Accountancy,
S.Chand & Company Ltd., New Delhi.

 189
LESSON – 13
FINAL ACCOUNTS OF DOUBLE ACCOUNTS
(ELECTRICITY COMPANIES)
OBJECTIVES
Students are after studying in this lesson they can able to understand the
following objectives, introduction, specimen the electric supply companies,
important terms related to electricity companies and etc,
CONTENTS
13.1 Introduction
13.2 The specimen form of Revenue accounts of electricity companies
13.3 Indian Electricity rules
13.4 Important terms and provisions relating to electricity companies
13.5 Examples
13.6 Self-assessment Test
13,1 INTRODUCTION
Electricity supply being a public utility service, the business is controlled by
the government. These undertakings are governed by the Indian Electricity Act
1910 and the Electricity (Supply) Act 1984. The published accounts of electricity
companies are to be prepared in accordance with the provisions of companies Act
1956 to ensure greater transparency and maximum disclosure. The electricity
companies are required to present their final accounts according to the Double
account system. The preparation final accounts involve preparation of ‘Revenue
A/c’. Net Revenue A/c’, ‘Capital A/c’ and ‘General Balance Sheet’. However, the
Revenue account of electricity companies is different from the generalized Revenue
Account given earlier.
13.2 THE SPECIMEN FORM OF REVENUE ACCOUNT OF ELECTRICITY COMPANIES
Revenue A/c for the year ended…………
Particulars Rs. Particular Rs.
A, Generation: By Sale of energy for lighting Xxx
To Fund Xxx By Sale of energy for power Xxx
To Oil, Wastage, Water etc, Xxx By Sale of energy under special contracts Xxx
To Salary of engineers Xxx By public lighting Xxx
To Wages and gratuities Xxx By Rent receivable Xxx
To Repairs & Maintenance Xxx By Transfer fees Xxx
B. Distribution: By other items Xxx
To Salary of engineers Xxx By Miscellaneous Receipts Xxx
To Wages & gratuities Xxx By sale of Ashes Xxx
To Repairs & Maintenance Xxx By Reconnection and Disconnection fees xxx
C. Public lamps:
To Attendance & Repairs Xxx
To Repairs Xxx
D. Rent, Rates &Taxes:
To Rent payable Xxx
 190
To Rates & Taxes Xxx
E. Management Expenses:
To Directors remuneration Xxx
To General establishment Xxx
To Auditors of the company Xxx
F. Law Charges:
To Law charges Xxx
G. Depreciation:
To Lease xxx
To Building Xxx
To Plant & Equipment Xxx
H. Special Charges:
To Bad debts. Xxx
To Net Revenue A/c (Bal. Fig. transferred) xxx xxx
Rule 26 of the Indian Electricity Rules 1956 makes the following provisions in
accordance with Section 11 of the Indian Electricity Act 1910 for final accounts of
Electricity (Supply) companies.
Every Electric supply company shall prepare its accounts to 31st March and
shall render them to the State Government within six month, from such date.
The account shall be made in the prescribed forms as set in Annexure IV and
Annexure V of the Indian Electricity Rules 1956.
The following are the forms of the annual accounts of the Electricity supply
companies as prescribed by the Indian Electricity Rules:
13.3 INDIAN ELECTRICITY RULES
A. Annexure IV --- Summary of Technical and Financial Particulars.
B. Annexure V --- No. I Statement of share and loan capital.
C. Annexure V --- No. IA(1) Statement of loans raised and redeemed.
D. Annexure V --- No .IA(2) Statement of loan and other capital.
E. Annexure V --- No. II Statement of capital expenditure
F. Annexure V --- No.2(A) Statement showing the written-down cost of fixed
assets retied On account of obsolescence, in adequacy superfluity, etc.
G. Annexure V --- No.III Statement of Operating Revenues
H. Annexure V --- No.1V Statement of Operating Expenses
I. Annexure V --- No. V Statement of Provision for depreciation.
J. Annexure V --- No.VI Statement of contingencies Reserve.
K. Annexure V --- No.VII Statement of Tariffs and Dividends control Reserve.
L. Annexure V --- No.VIII Statement of Consumer Rebate Reserve.
M. Annexure V --- No.IX Statement of special appropriation permitted by State
Govt.
N. Annexure V --- No. X Statement of Net Revenue and Appropriation
Account.
O. Annexure V --- No.XI General Balance Sheet.
13.4 IMPORTANT ACCOUNTING TERMS AND PROVISIONS RELATING TO
ELECTRICITY SUPPLY COMPANIES
 191
Some of the important provisions of the Electricity (Supply) 1948 (Sixth
schedule) which have a bearing on the preparation of final accounts are discussed
below:
1. Depreciation
a) Two methods of depreciation are recognized. Under the Act. Viz.,
i. the compound interest method a certain sum is set aside every year and
accumulated at compound interest continues throughout the prescribed
period of the life of the asset till an amount equal to 90% of the original
cost of the asset is reached. Under this method, interest at the rate of 4%
p.a. on the opening balance of the Depreciation Reserve must be
transferred every year from the Revenue account to the Depreciation
Reserve Account. If it is not possible to credit the full amount to this
account in any year; the arrears must be carried forward and charged as
an appropriation in the future years. This can be done only after interest
on unguaranteed bonds or stocks has been allowed.
ii. Under the Straight line method of depreciation, as allowance is made
each year which is equivalent to 90% of the cost of the asset divided by
the prescribed period of the life of the asset.
b) Dividend to shareholders cannot be paid as long as arrears of depreciation
remain to be adjusted.
c) Depreciation need not be provided when the asset has been written down
to 10% of its original cost.
d) When a fixed asset is discarded, the written down value of the assets
transferred to Discarded Asset Account which will be credited with the
value realized by its sale. Any profit or loss in discarding of a fixed asset is
to be transferred to the contingency Reserve Account.
2. Contingency Reserve
a) Every Electricity company should create from the existing reserves or from
the revenues a reserve to be called the Contingency Reserve.
b) The company shall appropriate to the Reserve from the revenues of every
year of the account a sum equal to not less than ¼ and not more than ½ %
of the original cost of the fixed asset.
c) The said Reserve should be created until it equals 5% of the original cost of
the fixed assets.
d) The sums appropriated to this Reserve should be invested in securities
authorized under the India Trust Act 1882 and such investment should be
made within a period of six months of the closing of the year of account in
which such appropriation is made.
e) This Reserve should be utilized with the approval of the State Government
for the following purposes:
Meeting expenses or losses arising out of accidents, Strike or
 192
circumstances beyond the control of management.
Meeting expenses of replacement or removal of Plant or works other than
the expenses necessary for normal maintenance or renewal.
Paying compensation payable under law for which not other provision has
been made.
3. Development Reserve.
a) There shall be created a reserve to be called as ‘Development Reserve’ to
which shall be appropriated in respect of each accounting year a sum
equal to the amount of income tax saved on account of development rebate
to which the licensee is entitled to for the accounting year by virtue of the
Income Tax Act 1961.
b) Any sum to be appropriated towards this Reserve may be done in annual
installments spread over a period not exceeding five years from the
commencement of that accounting year.
c) If in any accounting year, the clear profit excluding the special
appropriation together with the accumulations, if any, in the Tariffs and
Dividend Control Reserve Less the amount to be credited to Development
Reserve falls short of reasonable return, the sum to be appropriated to the
Development Reserve in respect of such accounting year may be reduced
by the amount of short fall.
d) This reserve can be invested in the business of electricity supply of the
undertaking.
e) When an undertaking is sold, this Reserve should be handed over to the
purchaser and continued to be maintained as a Development Reserve.
4. Tariffs and Dividend Control Reserve
a) This reserve is created out of Profits in excess of the reasonable return
earned by an electricity undertaking.
b) This Reserve can be utilized by the undertaking only to the extent to which
the clear profits is less than the reasonable return in any year of account.
c) When an undertaking is sold, any balance remaining in this Reserve
should be handed over to the purchaser and this Reserve should continue
to be maintained as the Tariffs and Dividend Control Reserve.
5. General Reserve
a) Section 67 of the Act provides for the creation of a General Reserve.
b) An annual contribution at a rate not exceeding ½ % of the original cost of
the fixed assets can be made after providing for interest and depreciation
c) This Reserve can be created until the total of such Reserve does not exceed
8% of the original cost of the assets.
6. Clear Profits
Para XV11 of the Sixth Schedule of the A/c provides guidelines for the
computation of clear profits which means the difference between the amount of
 193
income and the sum of expenditure plus specific appropriations. This can be
calculated in the following manner:
Rs Rs
Expenditure incurred on: Income derived from:
i) Generation& Purchase of energy xxx i) Gross receipts from sale of energy less xxx
ii) Distribution and sale of energy xxx ii) Rental on maters and other apparatus hired to xxx
consumers
iii) Rent, rates and taxes other than all iii) Sale and repairs of lamps and apparatus xxx
taxes On Income & Profits
iv) Interest on loans advanced by the board xxx iv) Rents xxx
v) Interest on loans borrowed from xxx v) Transfer fees xxx
organizations (or) institutes approved
by the State Government.
vi) Interest on debentures xxx vi) Investments, fixed and call deposits and bank xxx
balance
vii) Interest on Security deposits xxx vii) Other general receipts accountable in the xxx
assessment of income tax incidental to the
business of electricity supply.
viii) Legal charges xxx xxx
ix) Bad debts xxx Balance b/d xxx
x) Auditors’ fees xxx
xi) Management expenses xxx
xii) Depreciation xxx
xiii) Other expenses admissible under the xxx
Income Tax Act
xiv) Contribution to provident fund, staff xxx
pension, gratuity, apprentice and other
training scheme.
xv) Bonus to employees xxx
xvi) Balance of profit c/d xxx
xvii) All taxes on Income & Profits xxx
xix) Installments in respect of intangible xxx
assets and expenses regarding issue of
capital
xx) Contribution to contingency Reserve xxx
xxi) Arrears of depreciation xxx
xxii) Development Reserve xxx
xxiii) Other appropriations permitted by the xxx
State Govt.
Clear profit (Bal. Fig) xxx
xxx xxx
7. Reasonable Return:
In order to prevent an electricity undertaking to earn too high a profit a
reasonable return has been allowed. Reasonable return means the sum of the
following:
a) A yield at the standard rate which is the Bank Rate stipulated by the RBI
from time to time, plus 2% on the capital base.
b) Income derived from investments excluding investments made against the
contingency reserve.
c) An amount equal to ½ % on any loans advanced by the Board.
 194
d) An amount equal to ½ % on the amounts borrowed from organizations or
institutions approved by the State Government.
e) An amount equal to ½ on the amounts realized by the issue of debentures.
f) An amount equal to ½ % on the accumulations in the development reserve.
8. Capital Base
The capital Base can be, computed as given below:
i) The original cost of fixed assets available xxx
ii) The cost of intangible assets. xxx
iii) The original cost of work-in-progress xxx
iv) The amount of investment made compulsorily against contingency reserve. xxx
v) The monthly average of the stores, materials, supplies and Cash and Bank xxx
balances held at the end of each month.
Less:
i) The amount written off or set aside on account of depreciation on fixed assets xxx
and amounts written off in respect of intangible assets
ii) Loans advanced by the Board xxx
iii) The amount of any loans borrowed from organizations or institutions xxx
approved by the State Govt.
iv) Debentures xxx
v) Security deposits of customers held in Cash xxx xxx
vi) the amount standing to the credit of Tariffs and Dividend control Reserve xxx xxx
vii) The amount set apart for the Development Reserve xxx xxx
viii) Balance in the Consumer Benefit Reserve xxx xxx
ix) Amount contributed by consumers xxx xxx
Capital Base xxx
xxx

9. Disposal of Surplus
Surplus is the excess of clear profits over reasonable return. If the clear profits
exceed the reasonable return, the surplus has to be disposed of as under:
One-third of the surplus not exceeding 5% of the reasonable return will be at
the disposal of the undertaking;
Of the balance, one-half will be transferred to tariffs and Dividend control
Reserve.
The balance will be distributed among consumers by way of reduction of rates
or by way of special rebate.
An electricity undertaking must so adjust the rates that the amount of clear
profit in any year does not exceed the reasonable return by more than 20% of the
reasonable return.
13.5 EXAMPLES
1. City Electricity Ltd. earned a part of Rs. 8,45,000 during the year ended 31st
March 2020 after debenture interest @ 7½ % on Rs.2,50,000. With the help of
the figures given below, show the disposal of profits: Rs.
 195
Original cost of fixed assets 1,00,00,000
Formations and other expenses 5,000
Monthly average of current assets (net) 25,00,000
Reserve Fund (represented by 4% Govt. securities) 10,00,000
Contingencies Reserve Fund Investments 2,50,000
Loan from Electricity Board 15,00,000
Total depreciation written off to date 20,00,000
Tariff and Dividend Control Reserve 50,000
Security deposits received from customers 2,00,000
Assume Bank Rate to be 6%.
Solution
i) Computation of Capital Base: Rs. Rs.
Original cost of fixed assets 1,00,00,000
Formation and Other expenses 5,00,000
Monthly average of Current assets 25,00,000
Contingency Reserve Fund Investments 2,50,000
1,32,50,000
Less: Depreciation written off 20,00,000
Loans from Electricity Board 15,00,000
Debentures 2,50,000
Tariff and Dividend Control Reserve 50,000
Security deposits from customers 2,00,000 40,00,000
Capital Base 92,50,000
ii) Computation of Reasonable Return:
8% on capital base of Rs. 92,50,000 7,40,000
(6% Bank rate + 2 %)
½% on loan from Electricity Board( 15,00,000 x ½%) 7,500
½% on debentures (2,50,000 x 1%) 1,250
Income from Reserve Fund Investments (10,00,000 x 4%) 40,000
Reasonable Return 7,88,750
iii) Computation of Surplus:
Clear Profit (given) 8,45,000
Less: Reasonable Return 7,88,750
Surplus 56,250
iv) Computation of Disposal of Surplus:
½ for the Company limited to 5% of reasonable return 18,750
(7,88,750 x 5% (or) 18,750, whichever is less)
½ of the balance to be credited to
Tariff and Dividends Control Reserve 18,750
(56,250-18,750)= 37,500 x ½
Balance Credited to Consumers Benefit Reserve 18,750
Total 56,250
The journal entry will be:
Date Particulars L.F. Dr. Cr.
Net Revenue A/c Dr. 37,500
To Tariff and Dividend control Reserve A/c 18,750
To Consumer Benefit Reserve A/c 18,750
[Being the Profit appropriated]
2. From the following particulars, draw up:
a) Balance sheet as on 31-12-2020 under the Single Account system; and
b) The capital a/c and General Sheet as at the same date under the Double
Account system.
Authorized Capital-20,000 shares of Rs.100 each. Issued and paid up capital -
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10,000 shares of Rs.100 each including 1,000 shares issued in 2020.
8% Debentures 2,00,000
Reserve Fund 3,00,000
Trade Creditors 1,00,000
Trade Debtors 2,20,000
Cash at Bank 60,000
Stock 1,20,000
Reserve Fund Investments- at cost Rs. 3,00,000 (Market Value Rs. 3,60,000)
Fixed Assets -- Expenditure upto 31-12-2019:
Building -- Rs.5,00,000
Machinery -- Rs.5,00,000
Expenditure during the year 2020:
Machinery --- Rs.1,40,000
Depreciation fund: Building ---- Rs.60,000
Machinery --- Rs.1,00,000
Solution
a) Under Single Account System: Balance Sheet as on 31-12,2020
Liabilities Rs. Assets Rs.
Share Capital: Fixed Assets:
Authorized Capital 20,000 20,00,000 Building 5,00,000
shares of Rs.100 each
Issued & Paid up: 10,000 shares 10,00,000 Less: Depreciation 60,000 4,40,000
of Rs.100 each
Reserves & Surplus: Machinery 5,00,000
Reserve Fund 3,00,000 Add: Additions 1,40,000
Profit & Loss A/c 80,000 6,40,000
Secured Loans: Less: Depreciation 1,00,000 5,40,000
8% Debentures 2,00,000 Investments:
Unsecured Loans ---- Reserve Fund Investments (Market 3,00,000
value Rs.3,60,000)
Current Liabilities & Provisions: Current Assets. Loans & Advances:
Trade Creditors 1,00,000 Stock 1,20,000
Trade Debtors 2,20,000
Cash at Bank 60,000
Miscellaneous Expenses -----
16,80,000 16,80,000
b) Under Double Account System:
Receipts and Expenditure on Capital A/c for the year ending 31-12-20
Exp. Exp. Receipts Receipts
Total Total
Expenditure upto during Receipts upto during
Exp. Receipts
31-12-20 the year 31-12-20 the year
To Building 5,00,000 ---- 5,00,000 By share Capital 9,00,000 1,00,000 10,00,000
To Machinery 5,00,000 1,40,000 6,40,000 By 8% 2,00,000 --- 2,00,000
Debentures
To Total 10,00,000 1,40,000 11,40,000 Total Receipts 11,00,000 1,00,000 12,00,000
Expenditure
To Balance c/d 60,000
12,00,000 12,00,000
b) General Balance Sheet as on 31-12-20
Liabilities Rs. Assets Rs.
Capital A/c Total Receipts 12,00,000 Capital A/c- 11,40,000
Sundry Creditors 1,00,000 Total expenditure Stock 1,20,000
Reserve Fund 3,00,000 Trade debtors 2,20,000
Net Revenue A/c Balance 80,000 Cash at bank 60,000
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Depreciation fund: Reserve fund investment (market value Rs.3,60,000) 3,00,000
Building 60,000
Machinery 1,00,000 1,60,000
18,40,000 18,40,000
3. The following are the balance on 31-03-21 in the books of the Ernakulum
power and Light company Ltd. Rs. Rs.
Lands on 31-3-20 1,20,000
Lands Expended during 2020-21 4,000
Machinery on 31-3-20 4,80,000
Machinery expended during 2020-21 4,000
Mains including cost of laying 1,60,000
Mains expended during 2020-21 40,800
Equity shares --- 4,39,200
Debentures --- 1,60,000
Sundry Creditors --- 800
Depreciation Fund A/c --- 2,00,000
Sundry debtors for Current supplied 32,000
Other debtors 400
Cash 4,000
Cost of generation of electricity 28,000
cost of distribution of electricity 4,000
Rent rates and taxes 4,000
Management expenses 9,600
Depreciation 16,000
Sale of current 1,04,000
Rent of Meters 4,000
Interest on Debentures 8,000 ---
Interim dividend 16,000 ---
Net Revenue A/c Balance on 31-3-20 . --- 22,800
9,30,800 9,30,800
From the above Trial Balance, prepare Revenue A/c, Net Revenue A/c Capital A/c and
General Balance Sheet.
Solution
Ernakulum Power and Light Company Ltd. Revenue A/c for the year ended March 31,2021.
Particulars Rs. Particulars Rs.
To cost of Generation 28,000 By sales of Current 1,04,000
To Cost of Distribution 4,000 By Rent of Meters 4,000
To Rent, Rates & Taxes 4,000
To Management Expenses 9,600
To Depreciation 16,000
To Balance Carried to Net Revenue A/c 46,400
1,08,000 1,08,000
Net Revenue A/c for the year ended March 31,2021.
Particulars Rs. Particulars Rs.
To Interest on Dentures 8,000 By Balance b/d 22,800
To Interim dividend 16,000 By Revenue A/c (Transfer) 46,400
To Balance carried to General Balance Sheet 45,200
69,200 69,200
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Receipts and Expenditure on Capital A/c for the year ending March 31, 2021
Expenditure Upto During Total Receipts Upto During Total
31-3-20 2020-21 31-3-20 2020-21
To Land 1,20,000 4,000 1,24,000 By Equity Shares 4,39,000 --- 4,30,200
To Machinery 4,80,000 4,000 4,84,000 By Debentures 1,60,000 --- 1,60,000
To Mains 1,60,000 40,800 2,00,800 5,99,200 --- 5,99,200
7,60,000 48,800 By Balance c/d 2,09,600
8,08,800 8,08,800
General Balance Sheet as on March 31,2021
Liabilities Rs. Assets Rs.
Capital A/c—Total Receipts 5,99,200 Capital A/c –
Sundry Creditors 800 Total Expenditure 8.08,800
Net Revenue A/c 45,200 Sundry Debtors 32,000
Depreciation Fund 2,00,000 Other Debtors 400
Cash 4,000
8,45,200 8,45,200
4. From the following Trial Balance and other information relating to Mysore
Electric Light and Power company, prepare final accounts in proper form;
Trial Balance as on 31st March 2021
Amount on Particular Dr. Rs. Cr. Rs.
31-3-2020
Capital: Authorised:20,000 shares of Rs.100 each
4,00,000 Subscribed: 10,000 shares of Rs.100 each Rs.50 paid 5,00,000
10% Debentures ---- 3,00,000
3,00,000 Depreciation fund 20,000
20,000 Calls-in-arrears 20,000 ---
---- Land 1,86,000 ----
1,86,000 Buildings 1,00,000 ---
80,000 Machinery 2,00,000 ---
1,20,000 Mains 1,60,000 ---
1,00,000 Motors 40,000 ---
20,000 Meters 30,000 --
10,000 Electrically Instruments 8,000 --
6,000 Furniture 5,000 --
5,000 Cables and Lamps 47,000 ---
47,000 Coal and Oil 53,000 ---
Coal and Oil in Stock 2,000 --
Wages and Salaries 90,000 ---
Repairs 10,000 ---
Printing & Stationery 38,000 --
Law Charges 6,000 --
Sales by Meter --- 1,75,000
Sales by contract --- 1,00,000
Meter rents ---- 6,000
Sundry Creditors --- 20,000
Sundry Debtors 60,000 ---
Cash at bank 66,000 ---
11,21,000 11,21,000
A call of Rs.10 per share was payable on 30th Sept. 2020 and arrears are
subject to interest at 5% per annum.
Depreciation to be provided for Building 2½% per annum,
Machinery 7½ % Per annum
Mains 5% per annum
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Motors 10% per annum
Meters and electrical instruments 15% per annum.
Solution
Mysore Electric Light and Power Company Revenue A/c for the
year ended 31-03-2021
Particulars Rs. Particulars Rs.
To Cost and Oil used 53,000 By Sales by Meter 1,75,000
To wages and Salaries 90,000 By Sales by Contract 1,00,000
To Printing & Stationery 38,000 By Meter rents 6,000
To Law Charges 6,000
To Depreciation on:
Buildings 2,000
Machinery 9,000
Mains 5,000
Motors 2,000
Meters 1,500
Electrical Instrument 900 20,400
To Repairs 10,000
To Balance carried to
Net Revenue A/c 63,600
2,81,000 2,81,000
Net Revenue A/c for the year ended 31-03-21
Particulars Rs. Particulars Rs.
To Interest on Debentures (3,00,000 x 10% 30,000 By Revenue A/c (Transfer) 63,600
To Balance carried to General Balance Sheet 34,100 By Interest on calls-in-arrears 500
( 20,000 x5% ½)
64,100 64,100
Receipts and Expenditure on Capital A/c for the ended 31-03-21
Expenditure Upto During Total. Receipts Upto During Total
31-03-21 2020-21 31-3-21 2020-21
To Land 1,86,000 -- 1,86,000 By Equity 80,000 4,80,000
Shares (paid up) 4,00,000
To buildings 80,000 20,000 1,00,000 By Debentures 3,00,000 Nil 3,00,000
To Machinery 1,20,000 80,000 2,00,000
To Mains 1,00,000 60,000 1,60,000
To Motors 20,000 20,000 40,000
To Meters 10,000 20,000 30,000
To Electrical Instruments 6,000 2,00,000 8,000
To furniture 5,000 --- 5,000
To Cable & Lamps 47,000 --- 47,000
To Balance carried to B/S 5,74,000 2,02,000 7,76,000 7,00,000 80,000
4,000
7,80,000 7,80,000
General Balance Sheet as on 31-03-21
Liabilities Rs. Assets Rs.
Capital A/c- Total Receipts 7,80,000 Capital A/c
Sundry Creditors 20,000 Total Expenditures 7,76,000
Net Revenue A/c-Balance 34,100 Coals and Oil in Stock 2,000
Interest on Debentures Outstanding 30,000 Sundry debtors 60,000
Depreciation Fund Outstanding interest on Calls-in- 500
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20,000 arrears
Add: Depreciation during the year Cash at bank 66,000
credited to depreciation fund 20,400 40,400
9,04,500 9,04,500
Note: No depreciation is charged on the additions during the year, as the dates of
addition are not known.
SUMMARY
The electricity companies to present their accounts in the form of final
accounts. Here, the company considered the different terms and provisions to
respect of electricity company, clear profit and capital base is very important aspect
in this form of company accounts.
KEYWORDS
Depreciation: In electricity company generally practiced two methods of
depreciation i.e., compound interest method and straight line method this is comes
under depreciation calculation.
Contingent Reserves: These reserves provide and approved by the state
government, and utilised to various natural event.
Clear profits: It is found from differences of income and expenditure incurred
on various heads of accounts.
Capital Base: Capital base is calculated from the original cost of fixed assets.
Disposal of Surplus: From the surplus, various disposals be consider.
13.6 SELF-ASSESSMENT TEST
1. State the rules relating to calculation of reasonable return?
2. Mention the Provisions relating to ‘Disposal of Surplus’.
3. Bring out the format of ‘Revenue A/c’ of an Electricity Supply company.
4. Explain the provisions relating to reasonable return and disposal of
surplus of an Electric supply company.
5. Write short notes on:
i) Development Reserve; ii) Tariffs and Dividends Control Reserve; iii) Clear
Profit
6. Gopal Electricity Co earned a profit of Rs.33,97,000 after paying
Rs. 1,20,000 @ 6% as debenture interest for the year ended 31.3.2021. The
following further information is supplied to you:
Fixed Assets 7,20,00,000
Depreciation written off 2,00,00,000
Loan from Electricity Board 1,60,00,000
Reserve Fund Investment at par (4%) 40,00,000
Contingency Reserve Investment at par (4%) 30,00,000
Tariffs and Dividend Control Reserve 4,00,000
Security deposits of customers 6,00,000
Customers’ contribution to assets 2,00,000
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Preliminary expenses 1,60,000
Monthly average of current assets including
amount due from customers Rs.10,00,000 30,00,000
Development Reserve 10,00,000
Show the disposal of the profits.
7. The following balance has been extracted at the end of March 2021, from
the books of an electricity company:
Share capital 2,00,00,000
Fixed Assets 5,00,00,000
Depreciation Reserve on Fixed Assets 60,00,000
Reserve Fund (invested in 8% Govt. Securities at par) 1,20,00,000
Contingency Reserve in invested in 7% State Loan 24,00,000
Consumers’ deposit 80,00,000
Amount contributed by consumers towards cost of fixed assets 4,00,000
Tariffs and dividends control reserve 20,00,000
Development Reserve 16,00,000
12% Debentures 40,00,000
Loan from State Electricity Board 50,00,000
Intangible assets 16,00,000
Current assets (monthly average) 30,00,000
The company earned a profit of Rs.56,00,000 (after tax) in 2020-21.
Show how the profits have to be dealt with by the company assuming the
bank rate was 10%. All workings should form part of your answer.
8. The trial balance of Shock Proof Electric supply company for the year
ending 31-3-21 is given below together with additional information:
Trial Balance
Dr. Cr.
Land & Buildings 4,00,000 ---
Generation Plant 10,00,000 --
Transformers Cables and Lines 2,00,000 ---
Distribution cables and lines 2,00,000 ---
Furniture & Fixture 20,000 ---
Share Capital -- 8,00,000
8% Debentures --- 6,00,000
Rent & Taxes 20,000 ---
Coal, Carriage etc. 3,00,000 ---
Investment of Reserve Fund 4,00,000 ---
Sundry debtors 74,000 ---
Sundry Creditors --- 58,000
Reserve Fund --- 2,00,000
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Cash in hand 20,000 ---
Cash at bank 80,000 ---
Wages at generation plant 3,40,000 ---
Wages for distribution 60,000 ---
Bad debts 2,000 ---
Sale of scrap --- 4,000
Depreciation Fund --- 2,00,000
Oil, Waste etc., for generation station 1,00,000 ---
Law charges 10,000 ---
Public lighting expenses 44,000 ---
Sale of current --- 16,38,000
Interest on debentures 32,000 ---
Insurance premium 16,000 ---
Transfer fees --- 2,000
Auditors fees 4,000 ---
Salaries of Staff and Engineers:
Generation 60,000 ---
Distribution 40,000 ---
Office 50,000 ---
Administration 30,000 ---
Repairs & Maintenance:
Generation 6,000 ---
Distribution 4,000 ---
Management Expenses 40,000 ---
Meter rents --- 30,000
Stores in hand 80,000 ---
Balance of Net Revenue A/c ---- 1,00,000
36,32,000 36,32,000
Additional Information:
i) Addition to fixed assets, Capital and Debentures:
Generation plant 2,00,000
Distribution Cable 40,000
Share Capital 1,00,000
Debenture 1,00,000
ii) Depreciation to be provided during the year: Rs.
Buildings 40,000
Generation 1,00,000
Transmission 20,000
Office Equipments 2,000
Distribution 16,000
iii) Sale of Energy includes:
 203
Rs.1,60,000 for Public lighting
Rs.7,00,000 for power
Rs.40,000 under Special contracts.
iv) Provide for:
Income Tax Rs.1,60,000
Contribution to Reserve Fund out of last years balance Rs.60,000 Draw
out the final accounts under Double Account system in the prescribed
formats.
REFERENCE BOOKS
1. Shukla Mc, Grewal TS, Gupta SC, Advanced Accounts, S.Chand &
Company Ltd, New Delhi.
2. Jain SP, Navarg KL, Corporate Accounts, Kalyani Publishers, New Delhi.

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LESSON – 14
HUMAN RESOURCE ACCOUNTING
OBJECTIVES
Students after studying in this lesson they can able to learn the following
objectives, introduction, meaning and definition of HRA, objectives of HRA, various
methods for valuation of HRA, advantages and limitations of HRA,
CONTENTS
14.1 Introduction
14.2 Meaning of HRA
14.3 Definition of HRA
14.4 Objectives of HRA
14.5 Advantages of HRA
14.6 Limitations of HRA
14.7 Self-Assessment Test
14.1 INTRODUCTION
Introduction Human Resources are the most valuable resources of any
organization. The success or failure of an organization mainly depends on the
quality, caliber and character of the people who are employed in the organization.
Different organizations employ different classes of workers according to the
requirements of the job/work. In educational institutions, teachers, who put in a
lot of hard of work, are responsible for the overall development of the students, But,
their hard work and efforts are not assigned any monetary value and not shown
anywhere in the Balance Sheet of the concerned educational institution. Similarly,
in corporate sector, the directors, considered as the pillars of the company, are
responsible to make vital decisions on various aspects so as to enhance the earning
capacity of the company. The potential investors are willing to invest their hard
earned money in those companies where eminent directors are present.
Unfortunately, the contributions of die rectors towards development of company are
not accounted and not given a place in the Balance sheet of the company, Even in
Indian History, the contributions of great leaders like Mahatma Gandhi, Sardar
vallabhbhai patel and Jawaharlal Nehru cannot be forgotten in the freedom
movement of India. But no one made efforts to assign any monetary value to such
individuals in the Balance Sheet of the Nation. So, human elements are completely
ignored while recording the transactions in the books of accounts. Unless efforts
and contributions of people are measured in terms of money, it is not possible to
understand the real value of human beings present in the organization. In order to
ascertain the value of human beings, a new system of accounting has been evolved
which is popularly known as ‘Human Resource Accounting’ (HRA)
14.2 MEANING OF HRA
HRA refers to accounting for people as an ‘organizational resource’. It involves
measuring the costs incurred by business firms and other organizations to recruit,
select, hire, train and develop ‘human assets’. It also includes measuring the
 205
economic value of people to organizations. It serves both the internal and external
users, providing management (internal users), with relevant data on which to base
recruiting training and other development decisions and supplying investors,
lenders and other external users of financial statements with information
concerning the investment in and utilization of human resources in the
organization.
14.3 DEFINITIONS OF HRA
i. Wood riff, “HRA is an attempt to identify and report investments made in
human resources of an organization that are presently not accounted for in
conventional accounting practice. Basically, it is an information system
that tells the management what changes over time are occurring to the
human resources of the business”.
ii. The American Accounting Association’s Committee. “HRA is the process of
identifying and measuring data about human resources and
communicating this information to interested parties”.
iii. Stephen Knauf, “HRA is the measurement and quantification of human
organizational inputs such as recruiting, training, experience and
communication”.
14.4 OBJECTIVES OF HRA
The following are the major objectives of an HRA system.
i. To provide quantitative information for making managerial decisions about
acquiring, allocating, developing and maintaining human resources in
order to attain cost effective organization objectives;
ii. To permit managerial personnel to monitor effectively the use of human
resources.
iii. To help in the development of management principles by classifying the
financial consequences of various practices;
iv. To recognize the nature of all resources used or cultivated by a firm and
improvement of the management of human resources, so that the quality
and quantity of goods and services are increased;
v. To evaluate the return on investment of human resources;
vi. To communicate the value of human resources to the organization and the
society at large.
From the above, it is quite evident that there are several important aspects
of HRA as given below:
1. Valuation of human resources;
2. Recording the valuation in the books of accounts and
3. Presenting the information in the financial statements for communication
14.5. VALUATION OF HUMAN RESOURCES
Valuation of human resources can be made on the basis of either the ‘cost of
 206
the resource’ or an the basis of ‘economic value of resource’. Therefore, different
methods of valuation of human resources can be classified into the following two
categories viz.
Cost based methods of human resource valuation.
Value based methods of human resource valuation.
a) Cost based Methods of Human Resource Valuation:
The following are the various methods under this category:
i) Historical cost method ii) Replacement cost method
iii) Opportunity cost method iv) Standard cost method
v) Total cost method
i) Historical Cost Method:
This method of valuing human resources was first developed by William C.Pyle
and R.G.Barry Corporation, USA in 1967. Under the method actual costs incurred
on recruiting, selecting, hiring, training and developing the human resources of the
organization are capitalized and amortized over the expected useful life of the
human resources. Thus, a proper record of the expenditure made on hiring,
selecting, training and developing the human assets is maintained and a part of it
is written off from the income of the next few years during which human resources
will provide service. If the human resources expire before the end of the expected
useful life, the whole of the amount not yet written off is charged to the revenue of
the year in which such liquidation takes place.
The valuation of human resources, under this method, is similar to valuation
of any physical asset. The most important limitation of this method is that historic
costs are not relevant for decision making and are useless. The data may be of
some use to mangers in calculating Ro1 on human resources, planning and
controlling expenditures for human resource development activities, etc. ,but will
be of not use to investors because this method does not give a correct value of
human resources. The capitalized figure of human resources under this method
merely indicates the ‘unamortized balance’ of the costs and does not give any
indication of the ‘potential benefits’ that accrue to the organization from the use of
such resources.
ii) Replacement Cost Method:
This method, first suggested by Rensis Likert, was developed by Eric G.
Clamholtz. Under this method, the human resources are valued at their present
replacement cost. If a new organization has to be started the cost of recruiting,
selecting, hiring, training and developing human resources to their present
efficiency level will be considered as the value of human resource of the
organization.
This method is more realistic as it incorporates the current value of company’s
human resources in its financial statements prepared at the end of the year.
Though this method comes closer to the ideal method of asset valuation, yet it
 207
suffers from two short-comings
a) there may be no similar, certain existing assets,
b) the determination of a replacement value is affected by the subjective
considerations and, therefore, the value is likely to differ from man to man.
There are two views regarding replacement cost i.e., Positional and Personal.
Positional replacement cost refers to the sacrifice that would have been incurred if a
person presently employed in a specified position were to be replaced today with a
substitute capable of providing an equivalent set of services in that given position,
Positional replacement cost typically comprises i) acquisition and learning costs,
and ii) Separation costs. On the contrary, personal replacement cost refers to the
sacrifice to be incurred to replace a person today with a substitute capable of
providing an equivalent set of services in all the positions that the former might
occupy. These concepts of replacement cost can be extended to groups as well as
individuals, though emphasis has been on individuals as the basic unit of analysis.
iii) Opportunity Cost Method:
This method was first advocated by Hekimian and Jones. Under the method,
the value of human resources is ascertained on the basis of its alternative use. i.e.
on the basis of ability of doing other jobs. It an employee has no alternative, use, he
has no value according to this method. To Put it in a nutshell, the value of an
employee of one department can be determined on the basis of the offers made by
other departments of the organization for his services.
iv) Standard Cost Method:
This method was propounded by David Watson Under the method, the
standard cost per grade of employee for recruiting, selecting hiring, training and
developing is determined year after year. The standard cost so arrived for all
employees of the organization, when aggregated, gives the value of human
resources of the organization. The standard costs of recruitments training and
developing individuals, can be developed on the basis of replacement costs. The
standard costs for various purposes are also useful to compare the actual and
analyze the variations from standards.
v) Total-Cost Method:
This method was advocated by Prof. N; Dasgupta. Under the method, the total
expenditure incurred by the organization towards education and training of an
employee so as to make him efficient in his present level or to make him fit for the
organization’s requirement, it taken as the value of an employee. To an
organization, such value is to be adjusted every year on the basis of age,
experience, seniority, status, performance, etc.,
1. Value based methods of Human Resources Valuation:
The following are the various methods under this category:
a) Unpurchased Goodwill method or capitalization of super profits method.
b) Present value of future earnings method.
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c) Rewards valuation method.
d) Net benefit method.
e) Total payment method.
a. Unpurchased Goodwill Method or Capitalization of super profits method
This method was developed by Hermanson. Under the method, the value of
human resources of an organizations measured by capitalizing the earnings of the
business in excess of normal earnings earned from similar type of business. The
excess or super earnings of the business is assumed to be due to the better
resources of the organization and accordingly capitalized as the value of the human
resources.
b. Present value of future earnings method:
This method was developed by Brauch Lev and Aba Schwartz in 1971. Under
the method, the value of human resources is found out by capitalizing the salary,
and other remuneration payable till the age of retirement. The value of an employee
can be ascertained by using the following formula.
I(t)
Vr =
(I+R) t—r
Where, Vr = the value of an individual (or) years old.
I(t) = the individual ‘s annual earnings upto the retirement.
T = Retirement age. R = a discount rate specific to the person.
The value per employee, as computed above, multiplied by the total number of
employees in the organization, gives the total value of human resources of the
organization. The above formula, however, ignores the possibility of death prior to
retirement. But that can be easily taken care of by visualizing “E” as the age at
which the employee may die, if that is before retirement. Mortality tables can help
in this regard. Infosys Ltd., in India used the method to value its human resources
in 2003-04 and 2004-05.
The method ignores the possibility of a person moving from one career to
another and the possibility of early exit. The most important limitation of this
method is that it assumes remuneration of an employee being equal to his value.
Further, the synergistic effect is totally ignored.
c. Rewards valuation method:
This method was suggested by Flamholtz. The method removes the defects of
the previous method and values the human resources on the basis of their
discounted earnings in the future taking into account changes in their service and
the possibility of early retirement. The expected realizable value of an employee,
under the method, is calculated by applying the following formula.
I[ m] R1 –p[Ri)
E(RV)= t = 1 =
i-1 (1+r) t
Where, E(RV) =A person’s expected realizable value
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Ri = Value R to be derived by the organization for each position i
P(Ri) = Probability that an individual would occupy position
T= time of retirement
M= state of exit
R= discount rate
This method suggests a five step approach for ascertaining the value of an
individual to the organization.
First of all, anticipate the period a person will remain in the organization i.e.
his expected service life;
Second, identify the service states i.e., the roles he might occupy;
Third, estimate the value derived by the organization when a person occupies a
particular position for a specified time period;
Fourth, estimate the probability of occupying each possible mutually exclusive
state at specified future times;
Finally, discount (at as specified predetermined rate) the expected services
rewards to their present value.
This method is certainly an improvement over the present value of future
earning method. But according to Jaggi and Lav, this method falls short of a
practical value in as much as that ‘probabilities will have to be determined for each
individual occupying various service states for a period on individual basis and
would be tremendously expensive and time consuming and will involve large
variance reducing its usefulness.
d. Net Benefit Method:
This method was suggested by Morse in 1972. Under the method, the value of
human resources is equivalent to the present value of the net benefits derived by
the enterprise from the service of its employees. That is, the value of human
resources of an organization is:
Gross value of future Value of future Present value of annuity at a predetermined
services rendered by the = payment to X discount rate (usually, cost of capital) for the
employees employees. future period.
f. Total payment method:
This method was advocated by Prof. S.K. Chakraborty (1976) the first Indian to
suggest a model on human resources of an organization. Under this method the
value of human resources is not calculated on individual basis but in aggregate.
However, managerial and non-managerial man power can be evaluated separately.
The value of Human Resources on a group can be computed with the help of the
following formula.
A Pre-determined discount
Present value of Average tenure of all Averages salary of all (usually, the expected average
annuity at Value of = employees in the X employees in the X after tax return on capital
Human Resources organization / Group organization/ Group employed) for the average tenure
period.
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2. Recording and Presenting in Financial Statements
So far the various methods of calculation of value of human resources of an
organization have been discussed in detail. In India, Human Resources Accounting has
not been recognized as a system of accounting. The Indian Companies Act 1950, does
not give any specific instruction about inclusion of human resources in the financial
statements or in notes or in schedules. However, there are twelve major companies in
India which have adopted the concept of human resource accounting so far, the data of
only five companies is compatible for comparison. The companies are:
i. Bharat Heavy Electrical Company (BHEL): This is the first Indian Company,
which has published human resource accounts from 1974-75 onwards and
considered as one of the FORTUNE 500 companies listed outside U.S.A.
ii. Steel Authority of India Ltd (SAIL). This is a holding company, comprising
five integrated steel plants and two alloy steel units in the public sector.
iii. Minerals and Metals Trading Corporation (MMTC): This is the biggest
trading organization in India:
iv. Southern Petrochemical Industrial Corporation Ltd (SPIC): This is one of
the biggest diversified organizations in the Joint Sector, producing
fertilizers, chemicals, electronics, etc.
v. Infosys: The company valued its human resources at Rs.28,334 crores in
2004-05.
Most of the Indian Companies adopted the present value of future earning
method in the sense that they have calculated the present value of future direct
and indirect payment to their employees as the basic framework of human
resources valuation. MMTC has considered 12%; Infosys has discounted its
earnings at 13.63% in 2004-05 and at 14.09% in 2003-04, while SAIL has applied
14% to get the present value of human capital. BHEL also reported human resource
value similarly using12% discount factor on the future earnings of employees. The
human resource accounting is usually presented in the form of supplementary
information attached to the financial statements in annual reports, which are
basically meant for external reporting.
14.6 ADVANTAGES OF HRA
i. HRA provides relevant information to the management enabling it to take
appropriate decisions in matters relating to human resources like
recruitment, selection, hiring, training and development etc,.
ii. It helps management to judge the adequacy or other wise of the resource
and go in for further recruitment, if necessary.
iii. It brings in awareness in the employees about their levels of efficiency and
performance, and thereby provides an opportunity for their improvement.
iv. It recognizes the importance of an individual and thus promotes the
intellectual and social growth thereby facilitating the achievement of
economic goals of the organization as well.
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v. It is useful to an investor or an analyst to get the complete picture about
the effectiveness of application of funds by the organization.
vi. It also helps management to reorient their attitudes towards labour and in
improving their leadership styles.
14.7 LIMITATIONS OF HRA
i. There are no specific and clear-out guidelines for ascertaining ‘cost’ and
‘value’ of human resources of an organization. The existing valuation
methods suffer from many drawbacks.
ii. If the cost of measuring human resource value is higher than the benefits
derived from it, the entire effort would be a waste and uncalled for.
iii. The life of human resources is uncertain and, therefore, valuing them
under uncertainty seems unrealistic.
iv. No law considers human resource as an asset, making human resource
accounting just a theoretical concept.
v. The much needed empirical evidence is yet to be found to support the
hypothesis that HRA, as managerial tool, facilitates better and effective
management of human resources.
vi. The behaviour of human resources being unpredictable in nature, the
output in any form is difficult to estimate, proving every model as
insufficient and incomplete.
vii. There is a constant fear of opposition from the trade unions. Placing the
value of employees on record would prompt them to seek rewards and
compensation based on such valuation.
viii. When the existing pay structure, promotion policies, training polices. Etc.,
are not structured, human resource valuation, based on such weak
structure may not be appropriate.
SUMMARY
The success or failure of an organisation mainly depends in the manpower,
which are contains quality, caliber and character. The organisation possessing good
man power with potential investors. The investors expected more return from the
company, with effective administrative capacity. It is only a way to perform the
human resource. These to be assess the efforts and contributions of people are
measured in terms of money, it is not easy to understand suppose the oragnisation
having non-real value of human being. The valuation of Human Resource accounts
in various base, like historical cost, opportunity cost, and standard cost. From
these may calculate the human resource to organisation.
KEYWORDS
HRA: It is the process of identifying and measuring data about human
resources.
Cost Base: Historical, Replacement, Opportunity, Standard, total cost are the
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main bases of cost.
Historical Cost: The cost incurred in recruiting and selecting.
Replacement Cost: Human Resources are valued at their present replacement
cost.
Net Benefit: Value of Human Resource is equivalent to the present value.
14.7 SELF-ASSESSMENT TEST
1. What is human resource accounting?
2. Enumerate the various methods of valuation of human resources.
3. List the different cost based methods of human resource valuation.
4. How is human resource valued under ‘Historical cost method’?
5. What do you understand by ‘Unpurchased Goodwill’ method?
6. State the formula for valuation of human resources under ‘present value of
future earning method’.
7. Write the formula under ‘Rewards valuation method’ of Human Resource
Accounting.
8. Explain briefly the Net Benefits Method of valuing human resources.
REFERENCE BOOKS
1. Shukla MC, Grewal TS, Gupta SC, Advanced Accounts, S.Chand &
Company Ltd., New Delhi.
2. Reddy TS, Murthy A, Corporate Accounts, Margham Publishers Chennai –
17.
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LESSON – 15
SOCIAL RESPONSIBILITY ACCOUNTING
OBJECTIVES
After studying in this lesson students are able to know the following objectives,
introduction of social responsibility accounts, meaning and definition of social
responsibility accounts, objectives of this accounts, approaches and method of
social responsibilities accounts, and preparation social responsibilities accounts
income and balance sheet
CONTENTS
15.1 Introduction
15.2 Social responsibilities business
15.3 Meaning Definition
15.4 Objectives
15.5 Approaches and Methods of Social responsibilities Accounting and responsibility
15.6 Preparation of Social income and balance sheet
15.7 Examples
15.8 Self-Assessment Test
15.1 INTRODUCTION
A ‘Business unit’ is one of the critical organs of society. Its activities vitally
affect the society and its various segments. The goods and services produced by a
business unit and the fact that it provides employment to the members of the
society make it a vital part of the society. Business units also derive different
benefits from the society in various forms. Successful operation of business units is
possible only in a developed society. Society provides the infrastructure and other
facilities without which business firms cannot operate at all. Business units are an
important part of modern societies and they have several responsibilities towards
the society in which they are situated.
15.2 SOCIAL RESPONSIBILITIES OF BUSINESS:
Social responsibilities of a business are wide and varied.
1. Minimizing negative effects of factory operations: Environmental pollution
through emissions, fumes, effluents, radioactive wastes etc,. should be
minimized by factories by organizing their production facilities as per safety
norms and standards.
2. Efficient utilization of resources: Scarce resources at the disposal of
business units should be used efficiently to achieve high input output
ratio.
3. Employment potential: Business units have a responsibility to the society
to provide employment to the members of the society on a continuous
basis.
4. Employee welfare: Every business unit should ensure that its employees
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are taken care of properly. Good and safe working conditions and fair
remuneration are essential for employee safety and satisfaction.
5. Contribution to social causes: Serving the community in which a business
unit is situated is important. It can be done by contribution to public
health, education, community welfare measures, etc.
Different companies discharge their responsibilities in different ways for the
benefit of general public in the society.
I. In the area of education, some companies facilitate primary education through
a) Adoption of schools,
b) Provision of equipments and aids for education
c) Special programmes for education of girls
d) Running adult education facilities to educate adult women and men.
e) Scholarships and sponsorship for the need and deserving students.
f) Programmes to boost universalisation of primary education.
II. In the area of public health, some companies undertake activities like
a) Organizing medical camps,
b) Free eye camps.
c) ENT camps,
d) General surgery camps
e) Obstetrics and gynecology camps
f) Family welfare camps
g) Camps for physically handicapped challenge persons
h) Camps for patients suffering from leprosy
i) Camps for preventive health check ups, etc
III. Some companies jump into the fray in times of national calamities like Tsunami,
earthquakes, floods and major accidents etc., with help of various kinds to
mitigate the suffering of affected people.
IV. Some companies implement different schemes to provide amenities to rural areas
in the following diverse ways.
a) Disburse aid/relief to rural public-hospitals, clinics, dispensaries, crèches,
etc.
b) Help small marginal farmers to improve farming methods, breeding of
plants, animals, etc.
c) Promote cottage industries and cooperative ventures for production,
manufacture, sale and distribution of products.
d) Slum eradication, improving hygiene and living standards through supply
of electricity and gas utilities.
e) Development and urbanization of rural community by assisting local
bodies, and
f) Welfare and upliftment of rural communities.
For discharging these services/responsibilities, the companies have to shell
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out huge amounts.
Unless these responsibilities/services rendered are brought to the knowledge
of the general public, they may not have an idea about the contributions made by
the companies towards betterment of the society. To bring them to the public
knowledge, the social responsibilities fulfilled by companies must be accounted for.
Hence, there is a need for social responsibility accounting.
15.3 MEANING AND DEFINITION.
Traditionally accounting has been evaluating business units in terms of
profitability and ignoring its social aspects.
The term “social responsibility accounting” is of recent origin. Many other
terms such as “Social Audit’, “Social Accounting”. Social information system”
“Social cost benefit Audit”, etc., are used interchangeably with “Social
Responsibility Accounting”.
It has been realized that evaluating the contribution of a business unit can be
completed only when both commercial evaluation and evaluation of its contribution
to society are carried out together.
Definition:
According to Seidler Lee and Seder Lynn, in their book “Social Accounting” the
term “Social Responsibility Accounting” refers to “the modification and application of
conventional accounting to the analysis and solutions of problems of a social nature”.
K.V.Ramanathan (“Towards a Theory of Corporate Social Accounting”. The
accounting Review, July 1976) has defined social responsibility accounting as “the
process of selecting firm-level social performance variables, methods and
measurement procedures, systematically developing information useful for
evaluating the firm’s social performance and communicating such information to
concerned social groups both within and outside the firm”.
From the above definitions, it is quite evident that social responsibility
accounting is the normal accounting for social responsibilities met by the
organization. It is mainly concerned with the measurement and disclosure of costs
and benefits to the society as a result of the operating activities of a business
organization. Thus, social responsibility accounting measures social costs and
social benefits resulting from business activities for communication to various
groups both within and outside the business area. It may be noted that social
responsibility accounting has no separate and exclusive principles, it is the
application of the same basic accounting principles for measuring and disclosing
the extent to which a business organization has met its social responsibilities.
15.4 OBJECTIVES
The following are the major objectives of social responsibility accounting:
i. To identify and measure the periodic net social contribution of a firm. This
includes the aggregate of net benefits to the company’s employees to the
local community (i.e., local population) and to the general public.
ii. To determine whether the firm’s strategies and policies are consistent with
the legitimate individual aspirations and also with the overall priorities of
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the community and the society.
iii. To make available information of a firm’s goals, policies, programmes,
contribution to social goals, etc, to all segments of the society.
15.5 APPROACHES AND METHODS TO SOCIAL RESPONSIBILITY ACCOUNTING AND
REPORTING
The following are the different approaches to report the way in which a firm
has carried out its social Responsibilities.
a) Narrative Approach:
Here the activities of a firm relating to social responsibilities are described
without significant quantitative or accounting data.
b) Footnote disclosure approach:
Business units provide information regarding their contribution towards social
responsibility in the form of ‘foot notes’ to financial statements.
c) Pictorial approach:
Social activities of a business firm are reported with the help of photographs of
the work carried on with the help of the firm in orphanages schools, hospitals etc.
d) Goal oriented social responsibility approach:
Here business firms fix specific goals or targets for specific time period and
report their achievements along with financial statements.
e) Social statement approach (or) social impact statement:
This method was suggested by Seidler, Clark, Dilley, Ralph.W.Estes etc. Here,
a social income statement and a Social balance sheet are prepared. Many Indian
companies like SAIL,ONGC follow this method.
f) Operating statement approach:
In this approach, a firm presents the positive and negative aspects of social
activities as a result of business operations. Positive aspects are termed “Social
Benefits” and negative aspects are called “Social costs”. The difference between the
two is the “Net social contribution” by the firm.
15.6 PREPARATION OF SOCIAL INCOME STATEMENT AND
SOCIAL BALANCE SHEET.
Seidler’s approach of preparing social income statement and Social Balance
Sheet is the most popular among the large public sector companies in India.
This methods is described and presented below, with detailed format.
Costs incurred for the benefit of society and the benefits derived by the society
from such cost incurred are recorded and presented in the form of final accounts
comprising of Social income statement Social Balance sheet.
1. Social Income Statement
This statement includes three sub-statements, each showing separately social
benefits and social costs to the staff, community and general public. The net social
income is worked out for each of them. The sum of the net social income of these
categories represents the net social impact of the company. A specimen social
income statement is as follows:
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In the Books of Social Income Statement for the year ended
Particulars Rs.
I. Social Benefits and Costs to Staff
A. Social Benefits to staff
i). Medical facilities, medical insurance, sick leave xxx
ii) Township and housing facilities including concessional water and electricity supply xxx
iii) Career advancement xxx
iv) Education facilities xxx
v) Food service and canteen facilities xxx
vi) Vacation, holidays and recreation xxx
vii) Recreational and cultural facilities xxx
viii) Concessional transport xxx
ix) Banks and other benefits xxx
x) Retirement benefits xxx
xi) Quality of life (space and its quality) xxx
Total Benefits to staff xxx
B. Social Costs to staff:
i) Lay offs and involuntary termination xxx
ii) Overtime worked but not paid xxx
iii) Inequality of opportunity xxx
Total cost to staff xxx
C. Net Social income to staff (A-B) xxx
II. social Benefits and Costs to Community:
A. Social Benefits to community
i) Local taxes paid xxx
ii) Environmental improvements xxx
iii)Welfare activity for the community xxx
iv) Local tax worth of net jobs created xxx
v) Worth of business generated for the community xxx
Total Benefits to Community xxx
B. Social costs to community:
Increase in cost of living
Local taxes consumed in service xxx
Total costs to community xxx
C. Net social income to community(A-B) xxx
III. social Benefits and Costs to General Public:
A. Social Benefits to General Public:
(i) Central taxes and duties xxx
(ii) State taxes and duties xxx
iii)Business generated and jobs created xxx
iv) Contribution to knowledge (publication etc) xxx
v) Foreign exchange earned and saved xxx
vi) Research and Development efforts xxx
Total Benefits to General Public xxx
B. Social Costs to General Public:
(i) Central and state services consumed xxx
(ii) Foreign exchange spent xxx
Total costs to general public xxx
C. Net social income to general public (A-B) xxx
Net social income to Staff, Community and General Public (I+II+III) xxx
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2. Social Balance Sheet
Like the financial position statement, this statement consists of assets and
equities. The assets comprise of three categories.
1. Social capital investments which represent the capital expenditures on
social overheads like township lands, buildings, township roads and
electrification etc.
2. Other social assets owned by company, which could be described as capital
invested in current social assets or highly depreciable social assets, like
school equipments, school buses, hospital equipments, club equipments,
etc.
3. The third category is that of the human assets which evaluated using
human resources statement methods are.
The liabilities in the social balance sheet comprise two major categories-“social
equity” and “organization equity”. The first one represents the contribution made by
the staff which is mentioned in the human resource statement, whereas the second
category is the amount which represents the variation between the value of assets
and social equity category.
The proforma of social balance sheet is given below:
Social Balance sheet as on………
Liabilities Rs.
1.Organisation Equity xxx
2. Social Equity (Contribution by staff) xxx
Total xxx
Assets
I. Social capital Investments:
Land xxx
Residential and other buildings xxx
Road and Bridges
Road supply and sewerage xxx
Furniture & fittings xxx
Other Equipment xxx
II. Other Social Assets xxx
III.Human Assets xxx
Total xxx
15.7 EXAMPLES
1. XYZ Ltd. has supplied the following information relating to its staff,
community and general public benefits for the year 2020-21: (Rs.000)
Tax paid to State Govt. 4,994
Tax paid to Central Govt. 10,346
Local Tax paid 32
Generation of business 1,049
Medical facilities 196
Educational facilities 60
Training and career development 34
Extra hours put in by officers voluntarily 35
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Increase in cost of living in the
Vicinity on account of cement plant 500
State services consumed: Electricity services 3,921
Central services consumed: Telephone Telegrams etc. 413
Provident fund, bonus, insurance benefits 363
You are required to prepare social income statement.
Solution
Social Income Statement of XYZ Ltd. for the year ended 31-3-21
Particulars (Rs.000)
I. Social Benefits and Costs to Staff
A. Social Benefits to staff
i) Medical facilities 196
ii) Education facilities 60
iii) Training and career development 34
iv) provident fund, bonus, insurance benefits 363
Total 653
B. Social costs to staff
Extra hours put in by officers voluntarily 35
Total 35
Net social benefits to staff (A-B) 618
II. Social Benefits and costs to community:
A: social Benefits to community
Local tax paid 32
Generation of business 1,049
Total 1,081
B: social costs to community
Increase in cost of living in the vicinity
on account of the cement plant 500
Total 500
Net social benefits to community (A-B) 581
III . Social Benefits and costs to General public
A: Social Benefits to General Public
Tax paid to state Government 4,994
Tax paid to Central Government 10,364
Total 15,340
B: Social costs to General public
State services consumed: Electricity services 3,912
Central services consumed; Telephone., Telegrams 413
Total (A-B) 4,334
Net social benefits to General public 11,006
Net social income & staff,
Community and general Public (I+II+III) 12,207
SUMMARY
Successful units also derive different benefits from the society in various
forms. Society provides the infrastructure and other facilities without which
business firms cannot operate at all. Social responsibility accounts are wide and
vary of the following, minimising negative factors, efficient utilisation, employment
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potentials. In general this account may prepare separate book of statment in every
year with this can identify the net social income.
KEYWORDS
SRA: It is realised that evaluating the contribution of business both of the
commercial and society.
Social Income Statement: This statement includes three sub-statements. Each
one has more transactions.
Social Balance Sheet: It is contented the following, they are, social capital
investment, other social assets, and human assets.
15.8 SELF-ASSESSMENT TEST
1. What is meant by social responsibility accounting?
2. What are the statements of social responsibility accounting?
3. Why do we need social responsibility accounting?
4. List the social benefits and costs to community.
5. Mention the social benefits and costs to general public.
6. Explain in detail social income statement and social Balance sheet.
7. From the following information taken from the books of ‘F’ Ltd. relating to
staff and community benefits, prepare a statement classifying the various
items under the appropriate heads, required under corporate social
reporting. Rs.
Environment improvements 21,10,000
Medical facilities 45,00,000
Training programmes 10,25,000
Generation of job opportunities 60,75,000
Municipal taxes 10,70,000
Increase in cost of living in the
vicinity due to a thermal power station 16,55,000
Concessional transport, water supply 11,25,000
Extra work put in by staff and officers for drought relief 18,50,000
Leave encashment and leave travel benefits 52,00,000
Educational facilities for children of staff members 21,60,000
Subsidized canteen facilities 14,40,000
Generation of business 25,00,000
REFERENCE BOOKS
1. Shukla MC, Grewal TS, Gupta SC, Advanced Accounts, S.Chand & Company
Ltd., New Delhi.
2. Reddy TS, Murthy A, Corporate Accounts, Margham Publishers Chennai – 17.

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LESSON – 16
INFLATION ACCOUNTING (OR) ACCOUNTING FOR
PRICE LEVEL CHANGES
OBJECTIVES
After studying in this lesson students are able to learn the following objectives
introduction and limitation of historical cost and inflation accounting, various
methods of preparing for inflation accounting, preparation of financial statement
etc,
CONTENTS
16.1 Introduction
16.2 Limitation of Historical accounts
16.3 Inflation accounting
16.4 Different methods of inflation accounting
16.5 Preparation of financial statement
16.6 Examples
16.7 Self-Assessment Test
16.1 INTRODUCTION
‘Money measurement concept’ is a Basic Concept of Accounting. All business
transactions are recorded in the books of accounts in terms of ‘money’—Rupees in
India, dollars in U.S.A., etc. The accounting cycle culminates in the preparation of
financial statements—Profit and loss account and Balance sheet which aim at
ascertaining the net result of business operations of a period and a true and fair
view of the financial position of the business. The reliability of the accounts and
financial statements depends on the ‘stability’ of the unit for recording – rupee or
dollar.
In fact stability of the monetary unit is the basic assumption of Historical Cost
approach (HCA). ‘HCA’ presumes that money value is constant and the price-level
over a period of time is stable. Fixed assets acquired are recorded at the ‘cost of
purchase’ (cost concept). Liabilities are recorded at the amounts contracted for.
Sales are shown at the current market prices, where as inventories are valued at
the prices at which they were purchased.
The historical cost approach which governs recording of business transactions
can serve the purpose if the basic assumption holds good i.e., ‘Monetary unit’
remains the same. However, from the time of great depression’ before the second
world war, changing price levels characterized by inflation have become routine. In
the past three decades, rising prices reflecting rampant inflation have become a
world wide phenomenon. Double digit rates of inflation have become common in
many countries. In India, the inflation rate oscillates between 4% and 10% per
annum.
The changing price levels resulting from inflation have adversely affected the
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‘stability of the monetary unit’. As a result, the reliability of the financial statements
is seriously affected. The fixed assets recorded at cost less depreciation do not
reflect the current market values or replacement values. The price levels at which
goods are bought and sold are different. Inventories are shown at unrealistic prices,
not revealing their true value. To sum up, operating results shown by a business
have become unreliable and the balance sheet does not reflect true and fair view of
the financial position of a business
16.2 LIMITATIONS OF HISTORICAL ACCOUNTING
Conventional Accounts based on ‘stability of monetary unit’ show the business
transactions in chronological order, almost like history. No adjustments are made
to reflect changing prices. As a result, they suffer from the following limitations.
1. Unrealistic Values of Fixed assets: Fixed assets are recorded ‘at cost’ as
and when purchased. Subsequent changes in the market values of such assets are
ignored. The fixed assets are, thus, shown in the balance sheet at unrealistic
values, not at all reflecting the current economic realities.
2. Insufficient depreciation provision: Depreciation is computed on the
basis of the original cost of the assets and their estimated lifetime. As a result, the
depreciation provided on assets and charged to the profit and loss account does not
reflect the realistic cost of using such assets, based on their present value.
3. Problems in replacement of Fixed assets: Depreciation provision made on
fixed assets is based on their original cost. So, the accumulated depreciation, when
invested in outside securities, is not at all sufficient to replace the assets due to the
higher market prices which are the consequence of inflation.
4. Inflated profits; The profits shown by income statement under historical
accounting are highly unreliable. Depreciation on fixed assets is insufficient
resulting in higher profits. Similarly, sales are shown at current market prices
whereas cost of goods sold includes stock purchased in the past at lower price
levels. The inflated profits results in payment of higher taxes.
5. Erosion of owners’ capital: Inflated erodes the value of money and thus
the value of owners’ capital erodes due to the decline in the purchasing power of
money. No effort is made in historical accounts to protect the value of capital. In
fact, dividends paid out of unrealistic profits shown by the income statement may
result in payment of dividend out of capital.
6. Reliability and Utility of Accounting Records: Accounting records are
used by different people for different purposes. Employees, creditors, owners,
potential investors, tax authorities etc., are interested in the accounting data. The
unreliable profit shown by historical accounts and the unrealistic asset values
shown in balance sheet seriously affect the value of the accounting records for the
various purposes for which the users need them.
7. Violation of Matching principle: An important accounting principle is
matching of expenses and incomes. During inflationary periods, sales reflect
current market prices whereas the purchases reflect earlier prices. Thus, the
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matching of income and expenditure becomes distorted due to changing prices
8. Holding and operating gains: The legitimate business profit made as a
result of trading is called operating gain. Profit made on goods by storing them for
appreciation in price is called holding gain. Operating gain is a trading profit
whereas holding gain is a speculative profit. No distinction is made in historical
accounts between these two types of gains.
9. Violation of the law additively. During the period of inflation, accounting
data may not be capable of being added. For example, 500 units purchased at
Rs.10 per unit and another 400 units purchased at Rs.14 per unit should not be
added as they are because the amounts give a wrong picture without the quantities.
However, in historical accounts, all the goods and assets purchased are added,
irrespective of the purchase prices, thus, distorting the results.
10. Inter-firm and intra-firm comparisons. Historical accounting data is not
really useful for comparison purposes; comparing the data of two different periods
of the same business is not possible because of different price levels during the
periods. Similarly, comparison of the data relating to two or more businesses is also
not possible without reference to the price levels at which each business has
computed its data.
11. Managerial decision making: The top management has to make decision
relating to profitability, capital expenditure, etc. historical accounting data may
lead to wrong decisions, adversely affecting the future prospects of the business.
16.3 INFLATION ACCOUNTING
The limitations of historical accounting have paved the way for inflation
accounting.
The various ways in which financial accounts can be adjusted for changing
prices have come to be known as ‘inflation accounting’. It is a system of accounting
which regularly records all items in financial statements at their current values. It
recognizes that the purchasing power of money (monetary unit) changes with
passage of time. It finds out profit or loss and presents the financial position of the
business on the basis of the current prices prevailing in the country.
According to the American Institute of Certified Public Accountants (AICPA),
“Inflation Accounting is a system of accounting which purpose to record, as a built-
in mechanism all economic events in terms of current cost”.
Inflation Accounting at International and national levels
Before Second World War, the Institute of Chartered Accountants in England
and Wales published a paper “Rising price level in relation to the Accounts”. This
paper and H.H. Sweney’s Stabilized Accounting” have brought into focus the impact
of inflation on accounts. In U.S.A and U.K, wide ranging studies were made on the
effect of changing prices on accounting methods and practices. The International
Accounting Standards Committee (IASC) published IAS-6 titled “Accounting
Responses to changing prices” in June 1977. Later on it was superseded by IAS-15
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titled “Information reflecting the effects of changing prices”
In India, the C.A. Instituted has published a ‘guidance not’ on accounting for
changing prices. This note is not recommendatory or mandatory to the members of
the institute. The note is meant to encourage the adoption of the accounting for
changing prices. The note has dealt with three methods—current cost accounting
method, current purchasing power approach and periodic revaluation of fixed
assets along with the adoption of Last in First Out method (LIFO) for inventory
valuation. However, current cost accounting method (CCA) is recommended by the
institute as the most appropriate method for Indian environment.
16.4 DIFFERENT METHODS OF INFLATION ACCOUNTING
Price level changes of inflation can be measured in various ways. The following
are the methods of accounting for price level changes, based on different methods
of measuring inflation.
1. Current Purchasing Power method (CPP) or General Purchasing Power
method (GPP)
2. Current Cost Accounting method (CCA)
3. Hybrid method, which combines the features of both CPP and CCA
methods.
1) Current Purchasing Power Method (CPP)
This method was evolved in 1974 by the Institute of Charted Accountants in
England and Wales. It was issued as Statement of Standard Accounting Practice
No.7. (SSAP-7), entitled “Accounting changes in the purchasing power of money”.
CPP method ensures the maintenance of the purchasing power of the
shareholders or owners’ funds. In this method, all items in the financial statements
are to be restated for changes in the general price level. This is accomplished by
using any established and approved general price index. In India, the wholesale
price index compiled by the Reserve Bank of India which shows the change in the
value of Rupee in the past year is an appropriate index.
The CPP method takes into account the changes in the value of items as a
result of the general price level alone. It does not account for the changes in the
value of individual items. For example, a machine purchased on 1-1-20 at Rs.5,000
when general price index was 100 is restated as Rs.10,000 on 31-12-21 if the
general price index on that date is 200. However, the machine might have actually
become cheaper in the market due to technological improvements and may actually
be available for Rs.4,000. But this aspect is completely ignored.
Steps in the preparation of Financial statements under C.P.P method
1) Determining the conversion factors: Historical Accounting figures are to
be restated at current price level. This has to be done by multiplying the figures in
the conventional income statement and Balance sheet with conversion factor which
is computed as follows:
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Index on the date of conversion
Conversion Factor =
Index on the date the item arose
For example, a building purchased forRs.2,00,000 on 31.12.20 when the
general price index was 100 is restated on 31-12-2021 when the index was 180 as
follows:
Index on the date of conversion
Conversion Factor =
Index on the date the item arose
180
= = 1.8
100
Value of building on 31-12-2021 =Existing value X Conversion Factor
= 2,00,000 X 1.8= Rs.3,60,000
2) Mid period conversion: Many transactions in a business occur throughout
a period. For example, sales, purchases, expenses like salaries, rent, etc. They must
be converted on the basis of average index as shown in the middle of the period.
This adoption of the mid period index for items which take place throughout a
period is called ‘mid period convention. If mid period index is not available, average
of the index at the beginning and at the end of the period has to be used.
3) Gain or loss on monetary items: All assets and liabilities can be broadly
divided into two categories based on the variability of their value. Monetary items
are all those assets and liabilities whose amounts are fixed by contract or otherwise
regardless of the changes in the general price level. The liabilities are payable and
the assets are receivable in fixed amounts. For example, a creditor for Rs.10,000
will be paid the same amount without any compensation for the decline in money
value from the date the creditor was created till the actual date of payment. Thus,
cash, bank balance, bills receivable, sundry debtors, prepaid expenses, etc., are all
monetary assets. Similarly, bills payable, sundry creditors, outstanding expenses,
redeemable preference share capital, etc., are all monetary liabilities.
Non monetary items are all those assets and liabilities whose value is likely to
change with the general price index or inflation. So, they cannot be stated in fixed
monetary amounts. All the fixed assets like buildings, machinery, furniture and
also, inventories and marketable investments are non monetary assets. Equity
share capital is a non monetary liability because of the residual claims on the
company’s net assets which renders it variable in value.
Computation of gain or loss on monetary items
The change in the purchasing power of money or inflation affects the value of
all assets and liabilities. The non monetary assets and non monetary liabilities are
receivable or payable at the changed values. But the monetary assets and monetary
liabilities are receivable and payable at the original amounts only. Thus holding of
monetary liabilities results in gain and holding of monetary assets results in loss in
inflationary period. A firm receives or pays fixed a mounts as per the terms of
contract but it gains or loses in terms of real purchasing power. Such gain or loss is
taken into account in C.P.P method as “general price level gain or loss”. It is shown
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as a separate item in the restated income statement apart from the routine
business profit or loss. It is not used for dividend payment though shown as a profit
because of its nature as ‘revaluation profit’.
Method of computation of general price level gain or loss
There are two ways of computing general price level gain or loss.
Method I: When all the transactions influencing the change in monetary
items, occur
Uniformly throughout the year and the average rate of change is applicable to
such transactions the first method can be used.
1) Conversion factors are computed for both opening items and any changes in
the items during the year.
Closing Index
Conversion Factor for opening items =
Opening Index
Closing Index
Conversion Factor for change in items during the year =
Average Index
2) Opening monetary liabilities are converted to the closing level. Change in
monetary liabilities during the year is also converted to the closing level. From the total
of these two items converted, the closing monetary liabilities as per historical accounts
are subtracted. The difference is gain (or loss) on holding monetary liabilities.
3) Monetary assets at the beginning of the year are converted to the closing
level. Change in monetary assets during the year is also converted to the closing
level. From the total of these two items converted, the actual closing monetary
assets are subtracted. The difference is loss (or gain) on holding monetary assets.
4) The difference between the result of step 2 and step 3 is the net ‘gain or loss
on monetary items’ or’ monetary result’ or ‘general price level gain or losses
Method II: When transactions influencing monetary items do not occur
uniformly but their occurrence is random, the following procedure is used to
ascertain monetary gain or loss.
1) Net monetary assets or liabilities at the beginning of the year are ascertained.
This is the difference between opening monetary assets and opening monetary
liabilities. Sources of monetary assets during the year are to be added to the net
opening monetary assets. Usually sales, both cash and credit is the source. Uses of
monetary assets during the year should be subtracted. Purchases and other
expenses are the usual uses. The opening net monetary assets as well as the
sources and uses of the monetary assets have to be converted to the closing level
with the help of appropriate conversion factors. The balance at this stage represents
what should be the closing net monetary assets. The actual net monetary assets on
the closing date must be reduced from the above balance. The result is net
monetary loss for the year, If it is a negative figure, it is net monetary gain.
In case the opening monetary liabilities are more than the assets, then, there
are net monetary liabilities at the beginning. In such cases, the uses of monetary
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assets i.e., purchases and expenses should be added and the sources i.e., sales
etc., should be reduced.
4) Cost of sales and inventories:
Cost of sales and the value of stocks depend on the cost flow assumptions
relating to the usage of goods i.e., first-in-first-out’ (FIFO) or ‘Last-in-first-out’
(LIFO) when FIFO method is used, it is assumed that the stocks acquired first are
used or sold first. When LIFO method is followed, goods purchased last are
assumed to be used or sold first. While restating the income statement and balance
sheet under C.P.P method, it is essential to keep in mind the cost flow assumptions
relating to goods because they affect the value of cost of goods sold as well as the
closing and opening inventories.
a) When FIFO method is followed:
i) Cost of sales includes the entire opening stock and the balance from current
year’s purchases.
ii) Closing inventory is completely out of current year’s purchases. Since the
opening stock is assumed to be completely sold closing stock can be a part of
current year’s purchases only..
b) When LIFO method is followed:
i) Cost of sales includes current year’s purchases. If cost of sales is more than
the current year’s purchases the excess is out opening stock.
ii) Closing inventory includes the opening inventory. If current purchases are
not fully sold or used, the closing inventory includes the opening inventory and the
unsold portion of the current year’s purchases.
The following conversion factors are used for restating inventories and
purchases:
Closing Index
Opening stock =
Opening Index
Closing Index
Current Year Purchases =
Average Index
c) Goods purchased in previous years, but still in stock
Closing Index
=
Index on the date of purchase of the goods

5) Ascertainment of profit.
The profit made during a period may be ascertained in two different ways
under C.P.P method.
A) Conversion method or restatement of income method
The income statement prepared on historical cost basis is restated in C.P.P
terms with the help of conversion factors as follows:
i) Sales which take place throughout the year and operating expenses which
are also paid from the beginning till the end of the year are converted on the basis
of average index rate for the year.
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Closing Index
The conversion factor is =
Average Index
ii) Cost of goods sold is converted on the basis of cost flow assumptions (FIFO
or LIFO) explained earlier.
iii) Fixed assets and depreciation thereon have to be converted on the basis of
the index numbers prevailing on the dates the assets concerned were purchased.
Conversion factor is:
Closing Index
=
Index on the date of buying the asset
iv) Dividends and taxes paid should be converted on the basis of the index
prevailing on the dates they were paid. Conversion factor is:
Closing Index
=
Index on the date of payment
v) Monetary result i.e., gain or loss on monetary items or ‘general price level
gain or loss’ should be computed as explained earlier. It should be shown as a
separate item in the restated incomes statement. Of course, gain on this account
cannot be used for payment of dividend to the shareholders.
B) Net change method:
This method is based on the concept that profit is the difference between the
owners’ capital at two different points in time. The same concept is used in the
statement of affairs method’ in ascertaining profit in single entry systems. In simple
words, “profit is the change in owner’s equity during an accounting period”.
The following steps are taken to determine the change in equity
i) Opening balance sheet prepared under historical accounting method is
converted into C.P.P terms at the end of the accounting period. This is done with
the help of appropriate conversion factors. One should remember that both
monetary and non-monetary items in the opening balance sheet must be converted.
Even equity may be converted and the difference in the balance sheet may be
taken as reserves. Aliteratively, the equity share capital is not converted. Difference
in the balance sheet is taken as equity.
If there is opening balance sheet which is already converted (at the end of last
year) such a balance sheet must be updated for the closing date by converting all
the items with the conversion factor.
ii) Closing balance sheet prepared under historical cost accounting should also
be converted into C.P.P terms.
The monetary items in the closing balance sheet are not restated because they
are payable or receivable at their face values. All non monetary items have to be
converted. If equity capital is also converted , the difference in the balance sheet is
Reserves. If equity capital is not converted, the difference in the balance sheet is
equity.
iii) Profit or loss for the accounting period is the change of Reserves or equity
between the opening balance sheet as converted and the closing balance sheet as
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converted.
Profit =Closing reserves –opening Reserves (or)
Profit = Closing equity –Opening equity
2) Current Cost Accounting Method
The general complaint that CPP method is not satisfactory in dealing with
price level changes has made the British Government withdraw the Statement of
Standard Accounting Practice –7 (SSAP-7) which was issued in 1974. The
committee formed under the chairmanship of Sir Francis Sandilands recommended
the usage of CCA method in its report in September 1975. The method was
extensively studied and reported later on. In March 1980, the accounting
Committee of U.K has issued SSAP-16 (Statement of Standard Accounting practice-
16) recommending the usage of CCA method.
In India also, the Institute of the Chartered Accountants of India has
published a guidance note on Accounting for changing prices in 1982, which
describes both CPP and CCA methods, but recommends CCA method as the most
appropriate to the Indian economic conditions.
Important characteristics of CCA method
1) Current value of individual items is taken as the basis for preparation of
financial statements. The general purchasing power of money (The Basis in CPP
method) is ignored. Current Values of individual items are ascertained on the basis
of specialized index for each specific item.
2) Fixed assets are shown in the balance sheet at their current replacement
values. Original cost of the assets is ignored as basis for depreciation.
3) Inventories are shown at their current replacement cost. The old rule of cost
or market price whichever is lower is ignored.
4) Depreciation is provided on the current replacement cost of the fixed assets.
Depreciation is charged on current value basis, not only for the current accounting
period but also the previous accounting periods, from the date of acquiring the
assets respectively.
5) A current cost reserve account is maintained to deal with different
adjustments require under CCA method.
6) Cost of sales is shown at average current cost of the goods and not the
original purchase price of the goods.
7) Monetary assets and liabilities are not adjusted under CCA method because
the value of these items does not change with the price level.
8) Holding gains and operating gains are distinguished. Normal operating
profit is separate from the holding gains. The holding gains can be realized holding
gains and unrealized holding gains.
16.5 PREPARATION OF FINANCIAL STATEMENTS:
In CCP method, converted financial statements are not at all a part of the
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regular accounts. They are supplementary in nature and are on memorandum
basis. But, CCA method may be incorporated into the regular accounts.
Preparation of Income Statement
Income statement under CCA method is prepared with the Income Statement
of Historical Accounting as its basis. After completing the income statement of
historical accounts, several adjustments are made to ascertain profit or loss as per
CCA method. The following are the adjustments required, explained in detail
individually.
(A) COST OF SALES ADJUSTMENT (COST)
It ensures that inventories are shown in the balance sheet at the current
values. It also helps in showing the stock sold or used at its current value.
In simple terms, COSA represents that portion of the increase in stock which
is due to the change in prices during the accounting period. Increase in stock due
to increases in physical quantity is called ‘volume change’ and is not a part of
COST. The COSA is computed as follows:
i) Change in the inventories during the accounting period is ascertained by
finding the difference between closing inventory and opening inventory as per
historical accounts
ii) closing inventory is brought down to the average level, using conversion
factor as given below:
Average Index
Closing inventory ×
Closing Index
Opening inventory is also taken upto the average level by using conversion
factor as given below:
Average Index
Opening Inventory ×
Opening Index
The difference between the converted closing inventory and opening inventory
is called volume change.
iii) ‘Volume change’ is subtracted from the change in inventory as shown in
step (i).
The balance is the COSA (cost of sales adjustment) which is nothing but the
change in value of stock due to change in prices alone.
The COSA must be added to the cost of sales as per Historical accounts to
find the adjusted cost of sales.
The following formula may be used to obtain COSA directly.
C O
COSA = (C-O) -- La --
Ic 10
Where C = Closing stock under historical accounting system.
O =Opening Stock under historical accounting system.
La = Average index for the accounting period.
Lc = Closing index for the accounting period.
Lo = Opening index for the accounting period.
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Alternative method of ascertaining COSA
Cost of sales as per historical accounting + COSA= Cost of sales as per CCA method
The following format may be used to compute cost of sales and cost of sales
adjustment (with imaginary figures)
Particulars Historical Conversion In CCA terms
Accounting
Rs. Average index
Opening Stock X
Opening Stock 50,000 Opening index
Add: Purchases 2,00,000
2,50,000 120 60,000
50,000 X
Less: Closing Stock 55,000 100 2,00,000
1,95,000 2,60,000
Cost of sales Average index
adjustment = Closing Stock X
Closing index
2,10,000-
120 50,000
1,95,000=Rs. 15,000 55,000 X
132 2,10,000
The above working can be proved with help of the formula given earlier;
la c – o 55,000 50,000
COSA = (c-0) = {55,000 -50,000 } – 120 –
Lc lo 132 100
= 5,000- {--10,000) =5,000+10,000= 15,000
Accounting treatment of Cost of sales Adjustment
Cost of Sale Adjustment must be debited to the income statement and
credited to current Cost Reserve.
B) DEPRECIATION ADJUSTMENT
Depreciation should be on the basis of current replacement value of fixed
assets under the CCA. During every accounting period, the current replacement
value of each fixed asset is ascertained and depreciation is computed on the basis
of that replacement value. However, in the historical accounting, depreciation is on
the basis of the original cost of the fixed asset. Depreciation adjustment is the
difference between the depreciation chargeable under the two methods.
Depreciation Depreciation as per Depreciation as per historical
Adjustment = CCA method on - accounts on original cost of asset current
value of asset .
Accounting Treatment of Depreciation Adjustment
The depreciation adjustment is debited to the Income statement and also
reduced from the asset in the balance sheet.
The following additional aspects relating to depreciation under CCA method
require close attention.
i) Asset value on which depreciation should be computed: Replacement
cost of the assets forms the basis for depreciation. However, whether it should be
replacement cost of the asset at the beginning of the year or at the end of the year
or at the middle of the year is the question. I historical accounting, depreciation is
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computed on the assets value shown at the beginning of the year. In CCA method,
the average replacement value of the asset is used for computing depreciation. The
logic is that income statement must be debited for the use of the asset throughout
the year. If the asset value changes due to inflation during the year, the average
value for the year is the appropriate basis for computing depreciation.
For example, replacement value of a machine on 1.1.21 is Rs, 1,00,000 and on
31.12.21 is Rs.1,40,000. Depreciation, say at 10% should be calculated on
1,00,000 + 1,40,000 10
= Rs.1,20,000 i.e., 120,000 X = Rs.12,000
2 100
ii) Additional depreciation: Though depreciation is computed on the average
replacement value of an asset for the purpose of income statement, the asset must
be shown in the balance sheet at its up-to-date replacement value.
Thus, the difference between the depreciation on the replacement value at the
end of the year and the depreciation on the average replacement value is termed as
Additional depreciation.
Additional Depreciation on replacement Depreciation on average
Depreciation = value of asset at the end of the -- replacement value of the asset
Accounting period during the accounting period.
Accounting Treatment of Additional Depreciation
The additional depreciation is to be debited to the ‘current cost reserve’ and
also it is to be subtracted from the asset concerned in the balance sheet. The
current year’s profit is not affected by the additional depreciation.
iii) Backing of Depreciation: In CCA method, depreciation is charged on fixed
assets on the basis of their current replacement value. It must be understood that
the depreciation on the current value of the assets should be charged, not only for
the current year but also for the previous years from the date of acquiring the
assets, respectively. Thus, depreciation charged in the current year for the sake of
the previous years is called ‘Back-log depreciation’. For example, if an asset is
acquired on 1-1-20 at Rs.1,00,000 and replacement values on 31-12-20 and 31-12-
21 respectively were Rs.1,50,000 and Rs.2,00,000 and depreciation is charged at
10% p.a. Depreciation under historical accounting is Rs.10,000 each in 2020 and
1996.
Under CCA method, depreciation for 2020 is
10
1,50,000 x = Rs.15,000
100
Or 1996 the depreciation is 2,00,000 x 10 = Rs.20,000. However, in 1996
depreciation 100
on the difference in the asset value between 2021 and 2020 should be
adjusted. Depreciation to be provided in 2021 for the year 2020.
10
= {2,00,000-1,50,000} x
100
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10
= 50,000 x = Rs. 5,000
100
Thus, Rs.5,000 is the backlog depreciation provided in the year 2021 for the
year 2020.
Accounting Treatment of backlog depreciation
Backlog depreciation is not debited to income statement. It is debited to the
‘current cost reserve’ and credited to the asset account which is shown as a
reduction in the balance sheet assets’ side. Thus, the current year’s profit is not
affected because of the backlog depreciation relating to the previous years.
C) MONETARY WORKING CAPITAL ADJUSTEMENT (MWCA)
The objective of this adjustment is to maintain the real value of funds invested
as monetary working capital i.e., debtors less creditors. This enables the business
to retain sufficient profits to finance its previous volume of sales at the current
prices.
Monetary working capital is the difference between trade debtors and trade
creditors. Whenever volume of business increase, additional monetary working
capital may be required. However, additional monetary working capital necessitated
due to inflation should be separated and provided for. Thus, apparent increase in
monetary working capital due to price level changes is called MWCA (Monetary
Working Capital Adjustment Money). Increase in monetary working capital due to
increase in business turnover is different and is called ‘Volume change’ which does
not require any provision in the income treatment.
MWCA is computed in the following way:
i) Monetary working capital I,e., Trade Debtors less Trade Creditors should be
ascertained both at the beginning of the year and at the end of the year. The
difference between the monetary working capital at the end of the year and that at
the beginning of the year is calculated. This is the total change in the monetary
working capital during the year.
ii) The closing monetary working capital should be brought down to the
average level with the help of conversion factor as given below:
Average index
Closing monetary working capital x
Closing index
Opening monetary working capital should also be taken upto the average level
by using conversion factor as given below:
Average index
Opening monetary working capital x
Opening index
The difference between the converted closing monetary working capital and
opening monetary working capital is called ‘volume change’.
iii) ‘Volume change’ is subtracted from the change in monetary working capital
as shown in step (i)
The balance is the MWCA ( Monetary Working Capital Adjustment) which is
nothing but the change in the amount of monetary working capital due to change
 234
in price level or inflation
The MWCA can also be computed as follows:
MCWA = C-O- La (c – o)
Ic Io
Where O =Opening monetary working capital
C= Closing monetary working capital
Ia = Average index for the period
Io = Index applicable to opening MWC
Ic = Index applicable to closing MWC
Accounting treatment of MWCA
The MWCA is debited to the Income Statement and it is credited to the
current cost reserve’.
D) GEARING ADJUSTEMENT
Current cost Adjustments i.e., COSA, MWCA and depreciation adjustment
help in preserving the operating resources of a business against the adverse impact
of inflation. These adjustments reduce the profit available to the shareholders.
However, funds utilized by a business are provided not only by the shareholders
but also the long-term lenders. So, the decline in profits due to inflation, should
also be shared by the long term lenders in proportion to the funds provided by
them, called gearing proportion.
If there are no long term borrowings by a business gearing adjustment is not
needed. Computation of gearing adjustment is done through the following formula.

Gearing adjustment = L × A
O
Where, L = Net Borrowings
O = Net average operating assets
A = The total current cost adjustments
L is also called ‘gearing ratio’.
O
Net borrowings include the following
a) Debentures
b) Bank loans, mortgage loans
c) Long term bank overdraft
d) Hire purchase creditors
e) Leasing obligations
f) Provision for taxation
Net operating assets comprise of the following
a) Fixed assets
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b) Trading investments
c) investments in subsidiary companies
d) inventories and
e) monetary working capital
Alternatively, gearing adjustment can also be computed as follows:

Gearing adjustment = L × A
L+S
L =Net borrowings A = Total of current cost adjustments
S = Shareholders’ funds
Shareholders funds include the equity and preference capital, accumulated,
profits, current cost reserve and proposed dividends.
Accounting treatment of Gearing Adjustment
The gearing adjustment is added to the profit disclosed by the historical
accounts in the income statement. Alternatively, it can be reduced from the total of
current cost adjustments shown in the income statement.
In the balance sheet, the gearing adjustment is subtracted from the current
cost reserve’.
Model current cost income statement
Sales xxx
Cost of goods sold and other operating expenses Profit before interest and tax, xxx
xxx
CCA adjustments:
COSA xxx
MWCA xxx
Depreciation adjustment xxx
Current cost operating profit xxx xxx
xxx
Gearing adjustment xxx
provision for income tax Current cost profit after tax xxx
Dividends Retained earnings xxx
xxx
Preparation of current cost balance sheet
The following are the relevant points to note while preparing the balance sheet.
a) All monetary items-both monetary assets and monetary liabilities are shown
at their stated values since they do not require any adjustment.
b) Inventories are to be shown at the current value on the balance sheet date.
For this purpose, conversion factor is as follows:
Index on Balance Sheet Date
Index on the date of acquiring the Inventory items
It is preferable to use different conversion factors for different items in the
stocks, depending on the dates on which they were purchased.
c) All the fixed assets have to be shown at their current replacement values.
 236
For this purpose, specific indexes have to be used for each type of fixed asset to
ascertain its current value.
The profit on revaluation of the fixed assets at the end of each accounting year
is to be credited to ‘current cost reserve A/c’ and debited to the assets’ accounts.
The assets are shown in the balance sheet at their current value less depreciation
based on the current value, respectively.
d) Current cost reserve: The balance of current cost reserve has to be shown
on the liabilities side of the balance sheet as a separate item. A separate note may
be prepared to show the opening balance of the reserve, additions in the form of (a)
revaluation profit on fixed assets (b) COSA (c) MWCA and deductions in the form of
(a) gearing adjustment (b) backlog depreciation and (c) additional depreciation.
(3) HYBRID METHOD
Some accounting experts have combined the CCA and CPP methods to develop
a hybrid method with the intention of reaping the advantages of both the methods.
In this method, fixed assets and inventories are to be converted on the basis of
the specific price indexes, as done in CCA method. The general price index is
ignored in their case. Gain or loss on monetary items is computed and taken into
account as in CPP method.
The hybrid method is still evolving and is not yet full-fledged. It also suffers
from the negative features of both CCA and CPP methods. This method cannot be of
much practical use now.
Evaluation of CPP method of inflation accounting
Merits
1) A single general price index is used to convert all the items in the balance
sheet. Problems of obtaining a suitable specialized index for specific items are avoided.
2) All the balance sheet items are adjusted to show their current values, so, the
balance sheet presents a true and fair view of the financial position of the business.
3. Loss or gain due to holding monetary assets and liabilities are recognized in
this method. The concept of such loss or gain is logical and practical.
4.Inventories are shown at their current values, though purchased at different
points of time in the past.
Demerits
1) CPP method is based on general price index which is to be uniformly applied
to all the items in a balance sheet. This can result in misleading data. The method
cannot be applied with precision to individual firms.
2) Selection of a suitable general price index is problematic since there are
different indexes available.
3) Profit shown in this method continues to be unreliable because appropriate
adjustments are not made to the profit for the effect of inflation on stocks, assets, etc,
4) In India, tax authorities and the statutory bodies do not recognize inflation
 237
accounting, thus making it impracticable to introduce them into accounts.
Evaluation of CCA method of Inflation Accounting
Merits
1) Specialized price indexes are used for different items which make conversion
factors used more accurate and relevant.
2) Assets are shown at their current replacement cost, Depreciation is on that
basis, with respective effect. This makes the values of assets shown more realistic
and practical.
3) Replacement of assets becomes easier because of ‘relevant’ and “sufficient”
depreciation provided to enable easy replacement when the time for that comes.
4) The concept of “value” which is the basis of CCA is that earnings and assets
of a firm should be measured with reference to their value to the business.
5)The profits shown are after maintaining the operating capability of the firm.
6) Current costs are matched with current revenues in this method.
7) Management decisions based on the financial statements prepared under
CCA are likely to be more accurate and effective.
Demerits
1) CCA method does not aim at maintaining the financial capital in terms of
purchasing power’.
2) Specific price indexes applicable to different assets or items of inventory are
difficult or obtain.
3.Frequent changes in the values of assets due to the change in current values
introduce high level of instability into the accounting system.
4) Current cost accounts are prepared in monetary units having a different
purchasing power each year, profits and capital employed disclosed in different
years cannot be compared because of this reason.
5) Profits shown in this method are not fully realized. Notional increase in
assets values and inventory values are shown as profits. So, payment of dividend
must be done carefully to avoid dividend payment out of capital.
6) General purchasing power of money may be constant. Even ten, CCA method
should be employed because in specific items price level might have changed.
7) Tax authorities do not accept CCA in place of historical accounting. In India,
it is recommended in a ‘guidance note’ by the Institute of Chartered Accountants of
India. It is neither mandatory nor statutory.
Evaluation of Inflation accounting or Accounting for price level changes.
The following are the merits and demerits of recognizing the effect of price
level changes in accounts.
Merits of Inflation accounting
1) Profits shown by the historical accounting are usually inflated in
 238
inflationary periods. Insufficient depreciation based on original cost of assets and
cost of sales based on the older values of goods is the main causes for the inflated
profits. Inflation accounting shown correct profits and avoids payment of dividend
out of capital.
2) Fixed assets are shown at their current values.
3) Balance sheet prepared under inflation accounting shows a ‘true and fair
picture’ of the financial position of the business. This is accomplished by showing
inventories and all the assets at their current values.
4) Financial statements prepared under inflation accounting are more useful
for inter-firm comparisons and comparison of results of different periods because
the figures are more reliable and realistic.
5) ROI (return on investment) based on profit revealed through inflation
accounting is a reliable guide for the investment decisions of the owners, lenders
and the management.
6) Ratio Analysis based on the financial statements can provide more
authentic, reliable, and meaningful information.
7) Managerial decisions are likely to be more effective and timely due to the
‘price adjusted’ accounting data made available.
8) The owners, employees, creditors etc. can get a proper assessment of the
performance and prospects of the business.
Demerits or Limitations of inflation Accounting.
1) Tax authorities do not accept depreciation on replacement cost of assets, so,
for tax purposes, depreciation has to be shown on the original cost of assets.
2) For statutory purposes, all the published accounts must be on historical
accounting basis in India. Incorporating inflation accounting into regular
accounting records is not legally permitted. So, in India, as on today, Inflation
accounting is only for guidance purpose.
3) Depreciation, conceptually, is spreading the cost of purchase of asset over
its effective life’. So, charging higher amount as depreciation than what is spent is
against the concept of depreciation.
4) Prices change constantly, day after day, month after month. Adjusting the
accounts, particularly the values of assets, according to the changing prices
introduces instability and frequent changes into the accounting system.
5) Recording assets at the cost of purchase is based on objective evidence of
the purchase price. But replacement value is not based on objective evidence but
subjective estimates of individual accountants. This can make the accounts
unreliable.
6) Profit on revaluation of assets on the basis of their current values is not
realistic profit. It is only a national profit and serves no real purpose.
We may conclude by saying that Inflation accounting provides guidelines
 239
regarding the effects of rising prices on the profits and the financial position of a
business. It may be used as relevant additional data or information by all those
interested in the accounting information for various purpose.
16.6 EXAMPLES
1. A real estate company started with a capital of Rs.50,00,000 which was
invested in urban land on 1-1-20. On that date the general price index was 100 and
specific price index for land was 200. The company had no other transactions and
it sold the land on 1-1-21 on which date the general price index was 180 and the
specific price index was 420. The sale price of the land was Rs.1,80,00,000.
You are required to ascertain profit under (1) Historical cost (2) CCA method
and (3) CPP method.
Solution
Statement showing comparative profit
Particulars HCA Rs. CCA.Rs. CCP. Rs.
Investment in Land 50,00,000 50,00,000 50,00,000
Current cost of Investment on the date of sale
CCA {50,00,000 x 420 } CPP { 50,00,000 x 180 } ----- 1,05,00,000 90,00,000
200 100
Sale Value of Land 1,80,00,000 1,80,00,000 1,80,00,000
Operating gain 1,30,00,000 75,00,000 90,00,000
Realized holding gain --------- 55,00,000 40,00,000
Total gain 1,30,00,000 1,30,00,000 1,30,00,000
2.From the following details compute appropriate conversion factors.
a) General price index numbers—opening 200; Closing 300; average for the
year 240
b) General price index numbers—At the end of the year200. On the date of
acquiring an item of stock 120. On the date of acquiring an asset 150.
Solution
Closing index 300
a) For opening items = =1.5
Opening index 200
For items from transactions during the year like sales, salaries, etc.
Closing index 300
= =1.25
Average index 240
Closing index
b) For ascertaining value of the stock =
Index on the date of acquiring stock
200
= =1.667
120
Closing index
For ascertaining asset value =
Index on the date of acquiring the asset
200
= =1.333
150
3. The following information is given to you regarding ‘X’ Ltd., for the financial
year ended 31.3.2021.
 240
1.4.20 31.3.21
Rs. Rs.
Monetary Assets 80,000 80,000
Monetary liabilities 1,00,000 1,00,000
Retail price index 200 300
Ascertain gain or loss on monetary items
Solution
Statement showing monetary result of X Ltd. for the year ended 31.3.2021
Particulars Rs. Rs.
Monetary liabilities on 1.4.20 should have gone up in line with general prices upon 1,50,000
1,00,000 x 1.5
But the liabilities stayed at 1,00,000
Gain on holding of monetary liabilities 50,000
Monetary assets on 1.4.20 should have gone up in line with general prices upto 80,000x 1,20,000
1.5
But the assets stayed at 80,000
Loss on holding of monetary assets 40,000
Net gain on monetary items 10,000
Working note
Closing index number
Conversion factor for items on 1.4.21 =
Opening index number
= 300 = 1.5
200
The following information relating to Malar Ltd., for the year ended 31.12.21
is provided to you and you are requested to calculate net monetary gain or loss for
the year 2021. Rs.
Net monetary assets on 1-1-21 5,000
Net monetary assets on 31-12-21 35,000
Transaction for the year is as given below
Cash sales 40,000
Credit sales 50,000
Credit purchases 35,000
Wages 10,000
Other operating expenses 5,000
Interest paid on 31-12-21 10,000
General price index on 1.1.21 100
General price index on 31-12-21 150
Average index for the year 125
Solution
Statement showing monetary result of Malar Ltd., for the year ended 31st Dec. 2021
Particulars Historical Conversion CPP
cost Accounting Factor terms
Rs. Rs.
Net Monetary Assets on 1.1.21 5,000 150/100 7,500
Add: Total sales (40,000+50,000) 90,000 150/125 1,08,000
 241
Total (A) 95,000 1,15,500

Purchases 35,000 150/125 42,000

Wages 10,000 150/125 12,000
Other operating expenses 5,000 150/125 6,000
Interest 10,000 150/150 10,000
Total (B) 60,000 70,000
Net monetary assets as on 31.12.21 (A-B) 3,500 45,500
Less: Monetary assets on 31.12.21 as per 35,000
historical cost accounts given
Net monetary loss 10,500
5. The opening balance sheet and income statement for the year 2021 of
Chandra Ltd. are as follows:
Balance sheet as on 1-1-21
Liabilities Rs. Assets Rs.
Share capital 7,00,000 Plant & Machinery (new) 6,00,000
10% Debentures Current 2,00,000 Furniture 80,000
Liabilities 2,00,000 Inventory 1,20,000
Debtors 1,00,000
Cash 2,00,000
11,00,000 11,00,000
Income statement for the year ending 31st December 2021
Particulars Rs. Rs.
Sales 20,00,000
Less: cost of good sold: 1,20,000
Opening Inventory (FIFO) 14,20,000
Purchase 15,40,000
Closing inventory 1,40,000 14,00,000
Gross profit 6,00,000
Less: Operating expenses 3,08,000
Interest on debentures 20,000
Deprecation on machinery 90,000
Depreciation on furniture 8,000 4,26,000
Net profit 1,74,000
Debtors and current liabilities remained unchanged throughout the year
interest on debentures was paid on 31-12-21
On 1.1.21 -- Rs.300; On 31.12.21 -- Rs.360
Average for the year Rs.320
You are required to prepare the final accounts for the year 2021, after
adjusting for price level change under CPP method.
Solution
Income Statement of Chandra Ltd., restated as per CPP method for the year ended 31st
December 2021
Particulars HCA Rs. Conversion CPP Rs.
Factor
Opening inventory (FIFO) 1,20,000 360/300 1,44,000
Purchases 14,20,000 360/320 15,97,500
Cost of goods available for sale 15,40,000
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Less: Closing inventory (FIFO) 1,40,000 360/320 1,57,500
Cost of goods sold (B) 14,00,000 15,84,000
Gross profit (A)-(B)=(C) 6,00,000 6,66,000
Operating expenses 3,08,000 360/320 3,46,500
Interest on debentures 20,000 360/360 20,000
Depreciation on machinery 90,000 360/300 1,08,000
Depreciation on furniture 8,000 360/300 9,600

Total Expenses (D) 4,26,000 4,84,100

Profit before general 1,74,000 1,81,900
Price level gain or loss (C-D)=(E)

Less: Loss on general price level or monetary loss (Note 1)

--- 14,000
Retained earnings 1,74,000 1,67,900
Working Note:
Statement showing gain or loss on monetary items.
Particulars RCA Rs. Conversion CPP Rs.
Factor
Net monetary liabilities on r1-1-96 (2,00,000 – 1,00,000 -2,00,000) 1,00,000 360/300 1,20,000
Add: Purchases 14,20,000 360/320 15,97,500
Operating expenses 3,08,000 360/320 3,46,500
Interest on debentures 20,000 360/360 20,000
Total 18,48,000 20,84,000
Less: Sales 20,00,000 22,50,000
Net monetary assets on 31.12.96 1,52,000 1,66,000
Monetary assets on HCA basis -- 1,52,000

Loss on general price level 14,000

Balance sheet of Chandra Ltd., as on 31.12.21
Liabilities HCA Rs. Com. Factor CPP Rs.
Share capital 7,00,000 360/300 8,40,000
Retained earnings 1,74,000 -- 1,67,900
10% Debentures 2,00,000 360/360 2,00,000
Current liabilities 2,00,000 360/360 2,00,000
14,07,900
Assets HCA Rs. Conv factor CPP Rs.
Plant & Machinery 6,00,000 360/300 7,20,000
Less: Depreciation (A) 90,000 360/300 1.08,000
5,10,000 360/300 6,12,000
Furniture 80,000 360/300 96,000
Less Depreciation (B) 8,000 360/320 9,600
72,000 360/360 86,400
Total fixed assets (A+B) 5,82,000 360/360 6,98,400
Inventory 1,40,000 1,57,500
Debtors 1,00,000 1,00,000
Cash 4,52,000 4,52,000
12,74,000 14,07,900
Working note 1:
Monetary assets on 31.12.21:
Cash (see working note 2) + Debtors- Debentures –Current liabilities
= 4,52,000 + 1,00,000-2,00,000
= 5,52,000- 4,00,000=1,52,000
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Working note 2.
Cash opening balance+ Sales receipts –Payments for purchases – payments for
expenses
= 2,00,000+20,00,000-14,20,000-3,28,000
= 22,00,000-17,48,000=4,52,000
6. From the following information, calculate the cost of sales adjustment
(COSA) under CCA method.
Particulars Historical Cost Index for Goods
Opening stock 4,00,000 200
Purchases 14,40,000 240 (average)
Less: Closing stock 18,40,000 280
Cost of sales 6,72,000
11,68,000
Solution
Statement showing cost of sales Adjustment (COSA)
Particulars Rs. Rs.
Increase in stock as per historicral accounting stock (6,72,000 x 4,00,000) 2,72,000
Average account cost of opening stock 6,72,000 x 240 5,76,000
280
Less: Average current cost of opening stock 4,00,000 x 240
Volume change 200 4,80,000 96,000
Cost of sales adjustment (COSA) 1,76,000
7. From the following data rerating to 2021. You are required to compute
MWCA under CCA method;
Opening Closing
Accounts receivable 10,00,000 13,00,000
Accounts payable 6,00,000 7,00,000
Index numbers applicable 100 150
Average index 125
Solution
Statement showing MWCA for the year 1994
Particulars Rs. Rs.
Closing monetary working capital (13,00,000-7,00,000) 6,00,000
Less; Opening monetary working capital (1,00,000-6,00,000) Increase in 4,00,000 2,00,000
MWC as per Historical Accounts
Average current cost of closing MWC
125 5,00,000
6,00,000 x
150
Average current cost of opening MWC
125 5,00,000
4,00,000 x
100
Monetary working capital adjustment (MWCA) ------
2,00,000
Note: The full amount of increase in MWCA is due to inflation.
8. The following details are taken from the Balance Sheets of Suraj ltd.
As on 31.12.2019 As on 31-3-2020
Inventories 8,00,000 10,00,000
Book debts 2,00,000 3,30,000
Cash at Bank 80,000 90,000
Advances to suppliers of materials 80,000 60,000
Trade creditors 1,20,000 1,40,000
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During the year 2019-20, material prices rose by 20% and those of Finished
goods by 10%. Calculate the Monetary working capital adjustment (MWCA) to be
made under CCA system.
Solution
Statement showing MWCA for the year ended 31-3-2019
Particulars Rs. Rs.
Monetary working capital as on 31-3-2019. 2,50,000
As per historical Accounts (W.N.2)
Less: Monetary working capital as on 31-3-2020.
as per Historical Accounts (W.N.3) 1,60,000
Increase in Monetary working capital in 2019-2020 90,000
Average current cost of closing M.W.C. (W.N.4) 2,25,500
Less: Average current cost of opening MWC (W.N.5) 1,66,000
Increase in M.W.C in 2020-21 under CCA 59,500
Monetary Working capital Adjustment (MWCA) 30,500
Note: (1) Inventories and Cash at Bank are irrelevant for computing MWCA.
Working note. i
Index levels for creditors and advance to suppliers:
Since Material prices have gone up by 20% during the year, opening index
Rs.100. closing index is 100+120; Average Index is (100+120)/2 = 110
Index levels for Debtors:
Since Finished goods prices have gone up by 10% during the year, opening
index is 100; closing index is 100+10=110; Average Index is (100+110) 2=105.
Working note ii Rs.
Book debts as on 31-3-2020 3,30,000
Advances to suppliers as on 31-3-2020 60,000
3,90,000
Less Trade creditors as on 31-3-2020 1,40,000
M.W.C. as per Historical Accounts on 31-3-2020 2,50,000
Working note iii
Book Debts as on 31-3-2019 2,00,000
Advance to suppliers as on 31-3-2019 80,000
2,80,000
Less: Trade Creditors as on 3-3-19 1,20,000
M.W.C as per Historical Accounts on 31-3-2019 1,60,000
Working note iv Rs.
Book debts on 31-3-2020, at average 105
3,30,000 x 3,20,500
price level 110
Advances to suppliers on 31-3-2020 110
60,000 x 55,000
at average price level 120
3,57,500
Less; Trade creditors on 31-3-2020, 110
1,44,000 x 1,32,000
at average price level 120
Average current cost of closing MWC. 2,25,500
Note: Since advances to suppliers relate to Material supplies, it must be converted like creditors
though it is a monetary asset. As a result instead of finding average current cost of “MWC as a
whole”. we have to find the average current cost of each item included in the computation of
MWC.
Working note v Rs.
Book debts on 31-3-2019, at average 2,00,000 x 105 2,10,000
 245
price level 100
Advances to suppliers on 31-3-2019 110
80,000 x 88,000
at average price level 100
2,98,000
Less: Trade Creditors on 31-3-2019 110
1,20,000 x 1,32,000
at average Price level 100
Average current cost of opening M.W.C 1,66,000
9. A company purchased a fixed asset on 1-1-19 for Rs.1,00,000 and decided
to depreciate it at 10% per annum on straight line basis. The replacement value of
the asset on the following dates was noted as follows
31.12.19 Rs. 1,20,000
31.12.20 Rs. 1,50,000
31.12.21 Rs. 2,00,000
Assuming depreciation is chargeable on the basis of the year end replacement
value, under CCA method of Inflation Accounting, you are required to compute for
each of the 3 years. 1) Depreciation adjustment 2) Backing depreciation
Solution
1. Computation of depreciation adjustment and back-log depreciation
Rs.
As on 31-12-2019
Depreciation under CCA method 1,20,000 x 10/100 12,000
Depreciation under HCA method 1,00,000 x 10/100 10,000
Depreciation adjustment 2,000
Backlog depreciation –Nil
As on 31-12-2020
Depreciation under CCA method 1,50,000x 10/100 15,000
Depreciation under HCA method 1,00,000 x 10/100 10,000
Depreciation adjustment 5,000
Backlog depreciation = { 1,50,000-1,20,000} x 10/100 3,000
i.e., Rs.3,000 depreciation provided in 2019 for the year 2020.
As on 31-12-2021
Depreciation under CCA method 2,00,000 x 10/100 20,000
Depreciation under HCA method 1,00,000 x 10 10,000
Depreciation adjustment Backlog depreciation 10,000
For 2020 (2,00,000-1,50,000} x 10/100 5,000
For 2021 ( 2,00,000-1,50,000) x 10/100 5,000
Total backing depreciation to be provided. 10,000
Note: For 2019, 3,000 is provided as backing depreciation in 2020, So, appreciation asset value
after 2021 only should be considered in 2021 to provide backing depreciation relating to 2019.
10. Vikas Ltd., purchased a machine on 1-1-20 for Rs.50,000 whose life span
is estimated at 5 years and straight-line method of depreciation has to be provided
assuming no scrap value. Replacement cost of the machine on 31-12-20 was
70,000 and on 31-12-21 was Rs.1,00,000. You are required to compute for 2020
and 2021
1)Depreciation under CCA method and depreciation Adjustment
2) Additional depreciation 3) Backlog depreciation and 4) Transfer to current
cost reserve.
 246
Solution
During the year 2020
Rs.
Average value of the machine during 2020= 50,000 + 70,000 60,000
2
Depreciation under CCA method = 60,000x 20 12,000
100
Depreciation under HCA method = 50,000 x 20 10,000
100
Depreciation adjustment 2,000
Additional depreciation = (70,000-60,000) x 20
100
Transfer to current cost reserve:
Credit: Increase in CCA value of machine = 70,000-50,000 20,000
Debit: Additional Depreciation NIL
Backlog of depreciation
During the year 2021.
Average value of the machine during the year = 70,000 + 1,00,000 85,000
2
Depreciation under CCA method = 85,000 x 20 17,000
100
Depreciation under HCA method = 50,000 x 20 10,000
100
Depreciation adjustment 7,000
Additional Depreciation = (1,00,000-85,000) x 20 3,000
100
Backlog depreciation = (1,00,000-70,000) x 20 6,000
100
Transfer to current cost reserve:
Credit; Increase in the CCA value of machine = 1,00,000 – 7,000-Rs.30,000
Debit Additional depreciation = Rs.3,000
Backlog depreciation = Rs.6,000
11. Ramya Ltd. provides you the following data and requests you to ascertain
‘gearing adjustment’ required under CCA method.
31-12-20
1) Net Borrowings 2,10,000 2,90,000
2) Net operating assets 4,70,000 5,30,000
3) Shareholders funds 2,00,000 3,00,000
Current cost adjustments computed on 31-12-20 were as follows;
COSA Rs. 40,000
MWCA Rs.20,000
Depreciation Adjustment Rs.30,000
Average Net Borrowings 2,10,000 + 2,90,000= Rs.2,50,000
2
Average Net operating assets = 4,70,000 + 5,30,000 = Rs.5,00,000
2
Average shareholders funds = 2,00,000 + 3,00,000 = Rs.2,50,000
2
 247
Gearing Adjustment = L x A
O
A=Total adjustments under CCA
COSA 40,000
MWCA 20,000
Depreciation adjustment 30,000
Total current cost adjustment (A) 90,000
L= Net average borrowings = Rs.2,50,000
O= Net average operating assets = Rs.5,00,000
x Gearing adjustment = 2,50,000 x 90,000= Rs.45,000
5,00,000
Alternative method
Gearing adjustment = L xA
L+S
= 2,50,000 x 90,000
2,50,000 + 2,50,000
= 1/2 x 90,000=Rs.45,000
12. You are required to prepare profit & Loss A/c and Balance sheet under
CCA method form the following Historical Accounting Financial Statement and
additional information.
Profit & Loss Account for the year ended 31-12-21 9Historical Accounting)
Rs. Rs.
To Opening Stock 80,000 By sales 10,00,000
To purchases 6,40,000 By Sundry income 20,000
7,20,000
Less: Closing stock 1,20,000
Cost of sales 6,00,000
To operating expenses 2,40,000
To Interest 30,000
To Depreciation 50,000
To Net profit C/d 1,00,000
10,20,000 10,20,000
To Provision for Tax 50,000 By Net profit B/d 1,00,000
To Dividend 30,000
To Balance carried to Balance sheet 20,000
1,00,000 1,00,000

Balance sheet as on 31-12-20 and 31-12-21 (Historical Accounting)

Liabilities 2020 Rs. 2021 Rs. Assets 2020 Rs. 2021 Rs.
Share capital 2,00,000 2,00,000 Fixed assets 5,00,000 5,00,000
Reserves & Surplus 60,000 80,000 Less: Depreciation 1,50,000 2,00,000
Bank Loan 2,20,000 2,00,000 Current Assets: 3,50,000 3,00,000
Creditors 1,00,000 1,20,000 Stock 80,000 1,20,000
Debtors 1,10,000 1,44,000
Cash 40,000 36,000
Additional Information:
1) Fixed assets are valued at Rs 7,40,000 on 31-12-21. Depreciation
adjustment Rs.20,000 Backlog depreciation Rs.28,000. Current year depreciation
 248
Rs.70,000. Additional depreciation Rs.4,000
2)Specific index applicable to stocks on 1-1-21-100; on 31-1-2-21-120. Average 110
3) Specific index applicable to Debtors and creditors opening 100; Average
110; Closing 120
Solution
Current cost profit and loss account for the year ended 31-12-21
Particulars Rs. Rs.
Sales 10,00,000
profit before interest and tax as per Historical A/c (1,00,000 + 30,000) 1,30,000
Less: Current cost operating Adjustments:
COSA 18,000
MWCA 3,000
Depreciation adjustment 20,000 41,000
89,000
Less: Interest 30,000
59,000
Add: Gearing adjustment 15,950
74,950
Less: Provision for tax 50,000
24,950
Less: Dividend 30,000
Dividend paid out of retained earnings -5,050
Balance sheet as on 31-12-21 (as per CCA method)
Liabilities Rs. assets Rs.
Share capital 2,00,000 Fixed assets (as per Historical A/cs) 5,00,000
Reserves & Surplus Add: Profit on revaluation
(7,40,000-5,00,000) 2,40,000
Reserves (B/f) 60,000 7,40,000
Less: Dividend paid out of Less: Depreciation
reserves 5,050 (1,50,000+7,00,000 2,20,000
Current cost Reserve: 54,950 5,20,000
Profit on Revaluation 2,40,000 Less: Backlog depn. 28,000
Less: Backlog Depn. 28,000 4,92,000
Add: COSA 2,12,000 4,000 4,88,000
Add: MWCA 18,000 Closing stock 1,20,000
Less: Gearing Adjustment 3,000 Debtors 1,44,000
Bank Loan 2,29,000 Cash 36,000
Creditors 15,950 2,13,050
2,00,000
1,20,000
7,88,000 7,88,000
Working notes:
Rs. Rs. Rs.
1) Cost of Sales Adjustment (COSA)
Increase in stock as per Historical Accounting (1,20,000-80,000) 40,000
Average current cost of closing stock (1,20,000 x 110 ) 1,10,000
120
Average current cost of opening stock (80,000x 110 ) 88,000 22,000
100
COSA 18,000
2) Monetary working capital adjustment (MWCA) Opening Closing
Debtors 1,10,000 1,44,000
Less: Creditors 1,00,000 1,20,000
Net monetary working capital 10,000 24,000
 249
Increase in MWC as per Historical Accounts (24,000-10,000) 14,000
Average value of closing MWC 10,000x 110 ) 22,000
120
Average value of opening MWC 10,000 x 110 ) 11,000 11,000
100
MWCA 3,000
3) Gearing adjustment Opening Closing Average
Bank Loan 2,20,000 2,00,000
Less: Cash 40,000 36,000
Net Borrowings (L) 1,80,000 1,64,000 1,72,000
Shareholders’ funds (S) Share capital + Reserves) 2,60,000 2,80,000 2,70,000
Net Borrowings + shareholders’ funds (L+S) 4,40,000 4,44,000 4,42,000
Gearing adjustment L x A 18,000
L+S
A= Current cost adjustments=COSA MWCA 3,000
21,000
Depreciation adjustment 20,000
Total Current cost adjustment =A= 41,000
Gearing adjustment = 1,72,000 x 41,000 = Rs.15,950
4,42,000
SUMMARY
Changing price levels resulting from inflation have adversely affected the
stability of the monetary unit. The fixed assets recorded at cost less depreciation do
not reflect the current market value or replacement value. Operating results shown
by a business have become unreliable and the balance sheet does not reflect true
and fair value of the financial position of a business unit. Inflate accounting, is a
system of accounting, to record all financial statements at the current value
compare the Historical cost with the various methods an organisation to found their
cost at present level of changes.
KEYWORDS
Inflation Accounting: System of accounting which purpose is records all
economic events.
CPP: Accounting Changes in the purchasing power of money.
CCA: It is considering current price level changes, in cost nature.
COSA: It represents that portion of the increase in stock which is due to
change in price during the accounting period.
16.7 SELF-ASSESSMENT TEST
1. Explain the meaning of Inflation Accounting’.
2. What is the need for Inflation Accounting’?
3. State the objectives of ‘Inflation Accounting.
4. What are the Limitations of ‘Historical Accounting’ in a period of Inflation?
5. What are objections against ‘Inflation accounting?
6. Write a brief note on ‘Current purchasing power method’.
7. Distinguish between ‘Holding gains’ and ‘Operating gains’.
8. What are ‘Conversion Factors’?
9. What is ‘Monetary Working capital Adjustment’ (MWCA)?
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10. Describe different methods of Inflation Accounting.
11. Discuss the merits of current purchasing power accounting.
12. How do you compute purchasing power gain or loss on Monetary items?
13. Distinguish between historical, current cost and current purchasing power
concepts of accounts.
14. Write short notes on: a) Monetary assets and Liabilities
b) Gearing adjustment c) Depreciation adjustment
d) FIFO and LIFO methods of valuation of Inventories under CPP method.
15. Compute conversion factor for the transactions which have taken place
during the year from the following information:
Opening price Index Number : 120
Closing price Index Number: 140
Average price Index Number: 125
16. Compute conversion factor to ascertain the value of stock and asset from
the information given below.
Closing price Index Number 220
Index Number on the date of :
Purchase of an item of stock: 200
Index Number on the date of :
Purchase of a fixed asset: 176
17. Priya Ltd. adopts FIFO method of inventory valuation. From the following
Historical information, calculate the value of closing stock in CPP terms:
Closing Stock : Rs.60,000 (out of current purchases)
General price Index Numbers : Opening :100
Closing : 150
Average:120
18. From the following information. You are required to find out the value of
closing stock as per CPP method, when the firm follows. LIFO method for
inventory valuation:
Closing Stock: Rs.90,000 (Out of which Rs. 30,000 from current purchases)
General price Index Numbers: Opening: 200; Closing: 280 Average:250.
19. From the date given below, calculate COSA:
Increase in Stock as per historical accounting: 20,000
Average current cost of Closing stock :90,000
Average Current of Opening Stock :88,000
20. From the following data, calculate MWCA under CCA method:
Increase in Monetary working capital as per HCA: 40,000
Average current cost of Opening Monetary working capital :86,530
Average current cost of Closing Monetary working capital :1,11,580
21. Toby Investments Ltd., started with a capital of Rs.2,00,000 on 1-1-21 on
which date they purchased real estate property for that amount. The
general price index on that data was 120 and specific price index for real
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estate was 200. The company sold the property on 1-1-21 for Rs.4,60,000.
On that date the general price index was 180 and the specific price index
was 320.
You are required to ascertain profit on the purchase and sale of the
property under 1) HCA 2) CCA and 3) CPP methods of accounting.
22. Compute the net monetary result of ‘X’ company Ltd., as at 31-12-2021.
The relevant date is given below:
Particulars 1-1-21 Rs. 31-12-21 Rs.
Cash 5,000 10,000
Book debts 20,000 25,000
Creditors 15,000 20,000
Loan 20.000 20,000
Retail price Index numbers:
January 1.2021 200
December 31,2021 300
Average for the year 240
23. Ascertain net monetary result as at 31st December 2021 from the data
st st
given below: 1 Jan. 2021 31 Dec. 2021
Rs. Rs.
Cash at Bank 15,000 21,000
Accounts receivable 45,000 54,000
Accounts payable 75,000 50,000
General price Index Numbers:
1-1-2021; 100; 31-12-2021 Average; 120

24. From the following information as per historical cost accounting method,
compute the net monetary gain CPP method.
Particulars 1-1-21 31-12-21
Rs. Rs.
Sundry debtors 20,000 25,000
Bills receivable 10,000 12,000
Bank Account 15,000 12,000
Sundry Creditors 20,000 30,000
Bills payable 16,000 20,000
price index on 1-1-21 200
price index on 31-12-21 300
The average price index 250

25. From the following data relation to Mousam Ltd., for the year ended 31-12-
2021 you are required to calculate net monetary gain or loss for the year
2021. Rs.
Net Monetary Assets on 1-1-21 20,000
Net monetary Assets on 31-12-21 64,000
Transactions for the year are as follows:-
Total Sales 2,00,000
Total purchases 1,20,000
Operating expenses 20,000
Interest paid on 31-12-2021 16,000
Wholesale price Index for the year was as follows: 1-1-21 100
31-12-21 150
Average 120
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26. Following is the income statement of a company for the year ending 31-12-21
Rs. Rs.
Sales 10,000
Less: Cost of goods sold:
Opening stock (FIFO) 2,400
purchases (Net) 4,600
7,000
Less: Closing stock (FIFO) 2,000 5,000
Gross profit 5,000
Less: Operating expenses 800
Depreciation 1,500
Interest on Debentures 600 2,900
Retained earnings 2,100
You are required to prepare the income statement for the year 2021 after
adjusting for price-level changes under CPP method.
General price index on1-1-2021-200
Average for the year 240
On 31-12-2021-300
27. The following income statement is furnished by Ranjitha Ltd., for the ended
31-12-2021.
Income statement for the year ended 31-12-21
Rs. Rs.
Sales 4,00,000
Less: Cost of sales
Opening stock (FIFO) 40,000
Purchases 2,00,000
2,40,000
Closing stock (FIFO) 32,000 2,08,000
1,92,000
Gross profit
Less: Operating expenses;-
Selling expenses 20,000
General expenses 40,000
Depreciation 20,000 80,000
Net profit Before Tax 1,12,000
The General price index was as follows: As on 1-1-2021 125
As on 31-12-2021 200
Average for 2021 160
General price level gain for the year was Rs.20,000. You are required to compute the income
CPP terms.
General price level gain for the year was Rs. 20,000. You are required to
compute the income under CPP terms.
Calculate the cost of sales adjustment (COSA) from the following data:
Particulars Historical cost Index of goods Rs. Rs.
Opening stock 80,000 100
Purchases 4,40,000 110 (average)
Total available for sales 5,20,000
Less: Closing stock 1,20,000 120
4,00,000
28. The following information is available for the year 2021 in the books of
Ranjitha Ltd. relating to its suppliers and customers.
Particulars 1-1-21 31-12-21
Trade debtors 3,60,000 4,00,000
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Trade creditors 2,00,000 1,60,000
The average age of the debtors and creditors is two months. The following index numbers are
applicable.
November 2021 – 480
December 2021-- 500
November 2021-- 560
December 2021-- 580
You are required to calculate M.W.C.A as required under Current Cost Accounting (CCA)
method.

29. A Machine was purchased by Yuga Ltd. on 1.1.21 for Rs. 2,00,000,
depreciable at 20% on straight line basis. The replacement value of the
machine on the following dates was noted.
Rs.2,50,000
Rs.3,00,000
You are required to ascertain under CCA method of inflation accounting:
(1) Depreciation Adjustment (2) Back log depreciation. Assume that CCA
depreciation is on the year end values of assets.
30. A company purchased fixed assets for Rs.80,000 on 1-1-2020 and decided
to depreciate them at 10% p.a on straight line basis. The following
replacement cost of the assets was ascertained at the end of the years 2020
and 2021.
31-12-20 Rs. 1,00,000
31-12-21 Rs. 1,40,000
Assuming depreciation is provided on average current cost of assets under
CCA method, you are required to ascertain for the both the years.
1) Depreciation Adjustment 2) Backlog Depreciation
3) Additional Depreciation 4) Transfer to ‘Current cost Reserve’
31-12-21 Rs. Rs.
Depreciation Adjustment 1,000 4,000
Backlog Depreciation nil 4,000
Additional Depreciation 1,000 2,000
Transfer to Current Cost Reserve
—Credit— 20,000 40,000
Debit 1,000 6,000

31. Tigron Ltd. Provides you the following date computed as per CCA method
and requests you to prepare its Current Cost Profit and Loss Account for
the year ended 31st March 2021. Rs.
Net profit before interest and Tax , 3,25,000
Interest paid on loans 75,000
Provision for Tax needed 1,25,000
Proposed Dividend 50,000
Adjustments Computed: Rs.
COSA 45,000
MWCA 7,500
Depreciation Adjustment 50,000
Gearing Adjustment 39,875
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32. The following financial Statement prepared according to Historical Cost
Accounting are presented to you. You are required to prepare final
accounts under CCA method of Inflation Accounting.
Profit and Loss Account for the ended 31-12-2021
Particulars Rs. Particulars Rs.
To Opening Stock 30,000 By Sales 4,00,000
To Purchases 2,60,000 By closing Stock 40,000
To Gross profit c/d 1,50,000 4,40,000
4,40,000 1,50,000
To Operating expenses 60,000
To Depreciation on fixed assets 20,000
To Interest on loan 30,000
To provision for Tax 15,000
To Dividend 5,000
To Balance c/d 20,000
1,50,000 By Gross profit b/d 1,50,000

Balance Sheet as on 31st Dec., 2020 and 2021

Liabilities 2020 2021 Assets 2020 2021
Rs. Rs. Rs. Rs. Rs. Rs.
Share Capital 1,00,000 1,00,000 Fixed Assets 2,00,000 2,00,000
Reserves & Surplus 30,000 50,000 Less: Depn. At 10% 40,000 60,000
Mortgage loan 90,000 1,05,000 1,60,000 1,40,000
Creditors 30,000 35,000 Stock 30,000 40,000
Debtors 40,000 50,000
Cash 20,000 60,000
2,50,000 2,90,000 2,50,000 2,90,000

The fixed assets are revalued at 2,60,000 on 31-12-21 and depreciation on

average value during the year should be provided at Rs.23,000 for the
current year. Back log depreciation is arrived at Rs.12,000 and additional
depreciation is Rs.3,000 .Depreciation adjustment is computed at
Rs.3,000. The specific index applicable to the goods traded by the company
was as follows:
On 1-1-21 –Rs.200; Average for the year 2021-Rs 220 and on 31-12-2021-
240. Specific index applicable to debtors and creditors was 100 on 1-1-
2021.150 on 31-12-2021 and 130 on average during the year.
REFERENCE BOOKS
1. Shukla MC, Grewal TS, Gupta SC, Advanced Accounts, S.Chand &
Company Ltd., New Delhi.
2. Pillai RSN, Bagavathi, Uma S., Fundamentals of Advanced Accounting,
S.Chand & Company Ltd., New Delhi.
3. Reddy TS, Murthy A, Corporate Accounting, Margham Publishers, Chennai
– 17.
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GLOSSARY
Subsidiary Company
A company shall be deemed to be the holding company of another, if, but only
if, that other is its subsidiary.
Holding Company
AS-21 Terms a holding company as ‘parent Company’ which has one or more
subsidiaries and a ‘Subsidiary’ as an enterprise that is controlled by another
enterprise known as ‘parent’.
Minority interest
A holding company acquires majority equity shares in a subsidiary,
representing the controlling interest. The remaining shares may be in the hands of
the general public. Such holding of the general public in the subsidiary company is
called ‘Minority interest’.
Cost of control or goodwill
When holding company acquires majority of the shares in a subsidiary it may
be forced to pay more than the face value and even the subsidiary, it may be forced
to pay more than the face value and even the book value of such share. The
demand and supply equation operates here. The demand for the subsidiary
company’s shares generated in the proves of acquiring controlling interest in the
subsidiary, ‘pushes up’ the market price of such shares. Thus, cost of control is the
‘penalty’ or ‘excess’ paid by the holding company to acquire ‘controlling interest’ in
the subsidiary company.
Revenue profits or post acquisition profits
Profits earned by a subsidiary company after the date of acquisition of shares
by the holding company are called revenue profits or post acquisition profits. These
profits may be a part of the profit Loss account of the subsidiary company or they
might have been transferred to reserves or proposed as dividend.
Revenue losses or post acquisition losses.
Any loss incurred by the subsidiary company after the date of purchase of
shares by the holding company is called ‘revenue losses or post acquisition losses’.
Revenue loss has to be divided in the ‘Holding minority ratio’. Minority share has to
be subtracted while ascertaining minority interest. Holding company’s share has to
be reduced form its Profit & Loss account in the consolidated Balance Sheet. If
profits & Loss Account does not show any credit balance, the revenue loss may be
shown on the assets side of the consolidated Balance Sheet under ‘Miscellaneous
expenditure’.
Capital profits and Losses or pre acquisition profits & Losses
All the accumulated profits of the subsidiary company on the date of purchase
of shares by the holding company are called ‘capital profits’ or pre acquisition
profits’. They may be in the form of capital reserve, general reserve, reserve fund,
share premium. Profit & Loss account, etc. If shares are acquired during the
current year, profit earned by the subsidiary in the months before purchase of
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shares in he current year is also to be taken s capital profit. Similarly any profit on
revaluation of assets or liabilities on the date of purchase of shares has to be
treated as capital profit.
Revaluation of assets and liabilities
When holding company acquires controlling interest in a subsidiary, it may
revalue the assets and liabilities to reflect their current values. These revised values
may form the basis for determining the value of shares for the purpose of
acquisition. Any profit or loss on revaluation of the assets and the outside liabilities
has to be adjusted in the respective assets and liabilities in the consolidated
balance Sheet, if it is not already done. The same profit or loss has to be included
in the computation of ‘capital profits’, as explained earlier.
Provision for unrealized profits in stocks.
On the date of the consolidated Balance sheet, the holding company or the
subsidiary may have in its stock goods purchased from the other company which were
sold at profit. So, the stock includes the unrealized profit charged by the seller. In the
consolidated Balance sheet, provision must be made for such unrealized profit.
Reserve fund (Statutory Reserve)
According to section 17, “Every banking company incorporated in India shall
create a reserve fund and shall, out of the balance of profit and loss account
prepared under Section 29 and before any dividend is declared, transfer to the
reserve fund a sum equivalent to not less than twenty per cent of such profit.”
Cash Reserve Ratio
Banks are statutorily required to maintain a certain percentage of demand and
time liabilities with RBI. With effect from Ist June, 2002, all banks have been
required to keep 5% of their net time and demand liabilities in the form of each
and/or current account balance with the RBI. This percentage varies from time to
time with changes in monetary policy.
Statutory Liquidity Radio (SLR)
In addition to CRR, banks are expected to maintain 25%, with effect from 22nd
October, 1997, of their net demand and time liabilities in the form of cash, gold and
unencumbered approved securities. (This percentage was preciously as high as 37.5.
Non-compliance is penalized with the current applicable penalty rates for the shortfall
with 3% over the “bank rate: -the rate at which the RBI lands to commercial banks.
Under the Banking Regulation Act, SLR may vary between 25 and 40%
Cash Credits
Cash credit is a system of lending by which the customer’s account is credited
in the books of the banker against which cheques may be drawn. Interest is
charged only on the amount of credit availed of by the customer.
Acceptances, Endorsements and Other Obligations
A bank has better credit status than its customer. Credit of a bank is more
acceptable than that of its customers. Therefore, a bank is often requested by its
customers to accept or endorse bill of exchange on their behalf or give a guarantee
 257
of repayment of loans raised by its customers.
Bill for Collection
The sellers of goods draw bills and hundis on their customers and send them
to their bankers for collection against delivery documents like lorry receipts, railway
receipts, bills of lading etc. The particulars of these bills are properly recorded in a
separate book known as “Bills for Collection Register”.
Bills Payable
Bankers provide instruments like demand drafts, telegraphic transfers, mail
transfers and traveler cheques for remitting funds from one place to another. All
such instruments which are outstanding are shown as bills payable. Bankers’
cheques are issued by banks for payments of their own and also when customers
request the same in lieu of cash.
Bills Purchased and Discounted
Customers offer to a bank bills receivable for outright purchase or discounting.
When the bank purchases or discounts the bill, the amount of the bill less discount
charge is credited to the account of the customers, the discount charged is credited to
the Discount Account and the full amount of bill is debited to Discounted Bills Account.
Rebate of Bills Discounted
This refers to unexpired Discount. This can also be called by other names such
as, “Discount Received in Advance,” “Discount Received but not Earned”. Its
treatment is the same as that for Interest Received in Advance. Rebate on Bills
Discounted Account, like Interest Received in Advance Account, is a personal
account in nature.
Inter-Office Adjustments
A bank having several branches will receive periodical statements from them
regarding the inter-branch transactions. It is possible that some entries may
remain unadjusted in the head office of the bank at the close of the financial year.
Such entries are recorded in the Balance Sheet under the sub-heading “Branch
Adjustments” and ay appear on the asset side under the heading “Other Assets” if it
has a debit balance and on the liabilities side under the heading “Other Liabilities”
if it has a credit balance.
Standard Assets
Standard assets are those which do not pose any problems and which do not
carry more than normal risk attached to the business. They are Non-Performing
Assets (NPA). No provision is required to be made against them. However, banks
have been asked to make provision at the rate of 0.25% on their standard advances
also from the year ending 31st March, 2000.
Sub-standard Assets
Sub-standard assets are those which have been classified as NPA for a period
not exceeding 18 months. In such cases, the security available to the bank is
inadequate and there is a distinct possibility that the bank will suffer some loss, if
deficiencies are not corrected. Provision has to e made at the rate of 10% of the
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total outstanding amount of sub-standard assets.
Doubtful Assets
Doubtful assets are those which have remained NPA for a period exceeding 18
months. This period of two years is being reduced to 18th months by 31st March,
2001. These assets are so weak that their collection of liquidation in full is
considered highly improbable. A loan classified as doubtful has all the weaknesses
inherent in the classified as sub-standard with the added characteristic that the
weaknesses make collection or liquidation in full, high questionable and improbable
on the basis of currently known facts, condition and values.
Life Insurance
A contract of life insurance is a contract under which, in consideration of
sums of money called premium, the insurer agrees to pay a certain amount on the
death of the assured or upon the expiry of a certain fixed period, whichever is
earlier. Life policies are of various types. But their man varieties are the following.
Whole Life policy
Under this policy, the premium continues to be paid throughout the life –time
of the assured, but the policy money becomes payable only after his/her death.
Endowment Policy
It is a policy which runs for a fixed period(i.e., number of years) Under this
policy, the money is payable either at the end of a specified number of years or
upon death of the insured person whichever is earlier. It may also be taken for the
marriage of children when they attain a certain age, or for the education of children
after the death of the assured.
With profit Policy
Under this policy, the policyholders are entitled to participate in the profit of
the company in addition to receiving a guaranteed sum of money on maturity.
Without profit policy
Under this policy, the policy holders will get only a fixed sum of money on
maturity and they are not eligible to get any share in the profits of the company.
Annuity
The person taking out an annuity may pay the premium in regular
installments over a certain period or, he/she may pay it in a lump sum at one go.
After the assured reaches a certain age, the insurer will pay back the money by
monthly, quarterly, half yearly or yearly installments. An annuity provides a source
of regular income to the assured or to his/her dependents after the expiry of a
specified period.
General Insurance
It is a contract under which the insurer, in consideration of a certain
premium, undertakes to reimburse the insured for any loss or liability he/she may
incur on the happening of an uncertain event. In practice, all insurance other than
life are regarded as general insurance. The following are the various types of
insurance included in it.
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Fire insurance
It is a contract of indemnity under which the insurance company undertakes
to pay the insured for the damage or loss caused to the property insured against
fire for consideration of premium. Moreover the compensation given to the insured
never exceeds the amount insured.
Marine Insurance
It is a contract of insurance under which the insurer who is also known as the
underwriter agrees to indemnify the insured against the losses incidental to marine
adventure. A contract of marine insurance today covers cargo, the ship and also the
freight.
Accident Insurance Contracts
Under these contracts, amount of insurance becomes payable on the
happening of insured accident. Insured has to pay premium in this case also like
all other cases.
Other insurance
In addition to fire, marine and accident insurance, there are other forms of
insurances also, as a musician insures his voice and a dancer insures his/her legs
etc. sometimes, the policy may also be taken for burglary, fidelity, third party,
workmen compensation, consequential loss etc.
Premium
Premium shall be recognized as income when due. For linked business the due
date for payment may be taken as the date when the associated units are created.
Acquisition Costs
Acquisition costs, if any, shall be expensed in the period in which they are
incurred. Acquisitions costs are those costs that vary with and are primarily related
to the acquisition of new and renewal insurance contracts. The most essential test
is the obligatory relationship between cost and the execution of insurance
contracts(i.e., commencement of risk).
Claims Cost
The ultimate cost of claims shall comprise the policy benefit amount and
specific claims settlement costs, wherever applicable.
Net liability
The difference between the present value of the future premiums to be received
and the present value of future liability on all policies in force is known as ‘net
liability’ for life insurance companies.
Reserve for unexpired Risk
It is peculiar to general insurance business. It represents the income received
in advance by the insurance company as premium. Policies in general Insurance
business are only for one year and there is no question of liability after the year is
over.
Additional Reserve
IRDA Act has prescribed the minimum percentage of Reserve for unexpired
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risk for Fire, Marine and Miscellaneous Insurance businesses. However, some
management may feel that the Statutory Reserve may not be sufficient to cover the
entire risk. Such companies may create an “Additional Reserve” for Unexpired Risk.
The additional reserve may be a flat amount or a percentage of the premiums
received. It should be continued only when specific mention is made about the
continuance of additional reserve. Along with reserve for unexpired risk additional
reserve is also adjusted in schedule 1 premiums earned, as shown in (3) above. It
also appears under schedule 14 – “Provisions”.
Premiums
In general insurance business policies are issued only for one year. They can
be renewed year after year. So, premium charged on policies is only for one year
from the date of issuing policy. After adjusting change in Reserve for unexpired risk
net premium is shown in Revenue Account
Claims
Claims can be made by policyholders any time during the one year when the
policy is in force. Claim should be based on occurrence of “Specified Loss”. Against
which policy is taken. Claims incurred (net) are computed under “Schedule 2 “
Claims paid, closing outstanding claims and expenses relating to claims are added
and opening outstanding claims are subtracted. Any reinsurance claims payable or
paid should also be added and claims covered under reinsurance should be
reduced. The balance is Net claims to be shown in Revenue Account.
Catastrophe reserve
This is a reserve to be created to meet any loss due to natural calamities. It
should be in accordance with norms prescribed IEDA. It is shown as a part of
appropriations in Revenue Account and also in schedule 6 –Reserves and surplus,
as part of Balance sheet.
Double Accounts
Public utility undertaking supplying or operating Electricity, Gas, Water
Power, Railways, Tram ways, etc., which operate under special acts of Parliament
enjoy monopolistic rights in their business of rendering service to the community.
The ser undertakings require huge amount of fixed or long term capital to be
invested on fixed or permanent assets. They raise most part of their fixed capital
from the Public by the issue of shares and debentures. So, they are bound to give
information to the public as to what amount of fixed capital has been raised by
them from the public and how much of it has been invested on fixed assets.
Reasonable Return
In order to prevent an electricity undertaking to earn too high a profit a
reasonable return has been allowed. Reasonable return means the sum of the
following:
a) A yield at the standard rate which is the Bank Rate stipulated by the RBI
from time to time, plus 2% on the capital base.
Disposal of Surplus
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Surplus is the excess of clear profits over reasonable return. If the clear
profits exceed the reasonable return, the surplus has to be disposed of as under:
One-third of the surplus not exceeding 5% of the reasonable return will be at
the disposal of the undertaking;
HRA
Wood riff, “HRA is an attempt to identify and report investments made in
human resources of an organization that are presently not accounted for in
conventional accounting practice. Basically, it is an information system that tells
the management what changes over time are occurring to the human resources of
the business”.
Replacement Cost Method
This method, first suggested by Rensis Likert, was developed by Eric G.
Clamholtz. Under this method, the human resources are valued at their present
replacement cost. If a new organization has o be started the cost of recruiting,
selecting, hiring, training and developing human resources to their present
efficiency level will be considered as the value of human resource of the
organization.
Social Responsibility Accounts
According to Seidler Lee and Seder Lynn, in their book “Social Accounting” the
term “Social Responsibility Accounting” refers to “the modification and application of
conventional accounting to the analysis and solutions of problems of a social nature”.
Price Level Changes
The changing price levels resulting from inflation have adversely affected the
‘stability of the monetary unit’. As a result, the reliability of the financial statements
is seriously affected. The fixed assets recorded at cost less depreciation do not
reflect the current market values or replacement values. The price levels at which
goods are bought and sold are different. Inventories are shown at unrealistic prices,
not revealing their true value. To sum up, operating results shown by a business
have become unreliable and the balance sheet does not reflect true and fair view of
the financial position of a business
Inflation accounting
According to the American Institute of Certified Public Accountants (AICPA),
“Inflation Accounting is a system of accounting which purports to record, as a
built-in mechanism all economic events in terms of current cost”.
Mid period conversion
Many transactions in a business occur throughout a period. For example,
sales, purchases, expenses like salaries, rent, etc. They must be converted on the
basis of average index as shown in the middle of the period. This adoption of the
mid period index for items which take place throughout a period is called ‘mid
period convention. If mid period index is not available, average of the index at the
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beginning and at the
Cost of sales and inventories
Cost of sales and the value of stocks depend on the cost flow assumptions
relating to the usage of goods i.e., first-in-first-out’ (FIFO) or ‘Last-in-first-out’
(LIFO) when FIFO method is used, it is assumed that the stocks acquired first are
used or sold first. When LIFO method is followed, goods purchased last are
assumed to be used or sold first. While restating the income statement and balance
sheet under C.P.P method, it is essential to keep in mind the cost flow assumptions
relating to goods because they affect the value of cost of goods sold as well as the
closing and opening inventories.
Current Cost Accounting Method
The general complaint that CPP method is not satisfactory in dealing with
price level changes has made the British Government withdraw the Statement of
Standard Accounting Practice –7 (SSAP-7) which was issued in 1974. The
committee formed under the chairmanship of Sir Francis Sandilands recommended
the usage of CCA.
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M.COM. MODEL QUESTION PAPER
ADVANCED CORPORATE ACCOUNTING
Time: Three hours Maximum: 75 marks
SECTION-A (5×3=15)
Answer All questions
1. Give the meaning of subsidiary company.
2. What you mean by surrender value?
3. What is statutory reserve?
4. What you mean by valuation of balance sheet?
5. What is current cost accounting method?
SECTION-B (5×6=30)
Answer any FIVE out of EIGHT
1. How would you ascertain the amount of minority interests?
2. ‘H’ Ltd purchased 16,000 out of 20,000 shares of Rs.10 each in ‘S’ Ltd., for
3. Rs. 2,80,000. On the date of purchase of shares , ‘S’ Ltd had reserve of Rs.
60,000, Rs.80,000 has been earned by ‘S’ Ltd., after the purchase of shares.
‘S’ Ltd., decided to issue bonus shares out of revenue profit in the ratio of 2
shares for every 5 shares hold. Calculate the cost of control after the issue of
bonus shares.
4. From the information given below, you are required to calculate the amount of
provision for tax to be created by Nanda Bank Ltd:

Rs.
Interest earned 15,64,000
Other incomes 16,400
Interest expended 7,70,000
Operating expended 1,64,000
Bad debts 80,000
Provisions for tax to be made 55%
5. While closing its books of accounts, an commercial bank has its advanced
classified as follows:

Rs. in lakhs
Standard assets 16,000
Sub-Standard assets 1,300
Doubtful assets:
Upto one year 700
One to three years 400
More than three years 200
Loss assets 500
You are required to calculate the amount of provision to be made by the bank,
assuming that all the doubtful assets are secured.
6. A Life Assurance Fund has been ascertained without adjusting the following.
You are required to calculate the Correct Life Assurance Fund.
 264
Rs.
Life assurance fund, as ascertained 56,70,000
Premium outstanding 2,30,000
Claims outstanding 1,80,000
Claims covered under reinsurance 20,000
Claims of last year paid during this year 5,000
Bonus paid in cash 14,000
Bonus utilised in reduction of premium 16,000
Interest and dividend accrued 7,500
Income tax theorem 800
7. How will you compute reasonable return under the electricity Act 1948?
8. What are the objectives of human resources accounting?
9. State the approaches to price level accounting.
SECTION-C (3×10=30)
Answer any THREE questions

10. The following are the Balance sheets of Ranjitha Ltd and Priyanka Ltd on
31.12.2021
Ranjitha Priyanka Ranjitha Priyanka
Liabilities Ltd Ltd Assets Ltd Ltd
Rs. Rs. Rs. Rs.
Share Capital: Goodwill 30,000 20,000
Shares of Rs. 10 each 6,00,000 2,50,000 Fixed Assets 5,80,000 2,00,000
General reserve 1,60,000 95,000 Stock 1,60,000 80,000
Profit for the year 2,20,000 1,20,000 Investments in15,000 shares of ‘S’ Ltd 2,00,000 -
Bill payable 20,000 - Bills receivable - 15,000
Sundry creditors 1,00,000 35,000 Sundry debtors 80,000 1,15,000
Cash in hand 50,000 70,000
11,00,000 5,00,000 11,00,000 5,00,000
(a) Ranjitha Ltd., acquired the shares of Priyanka Ltd on 1.9.2021
(b) Bills payable of Ranjitha Ltd was Connolly in favour of S Ltd.
(c) Debtors of Priyanka Ltd., include Rs. 15,000 owed by Ranjitha Ltd.
(d) Stock of Ranjitha Ltd., includes Rs. 10,000 worth of goods bought from
Priyanka Ltd. On which the latter company has made a profit of 25% on cost.
(e) Prepare the Consolidated Balance Sheet.
11. From the following particulars, prepare the profit and loss accounts of x Bank
Ltd., for the year ending 31st March 2021:
Rs.
(‘000)
Interest on loans 3,490
Interest on fixed deposits 3,650
Rebate on bills discounted (1.4.2020) 480
Commission 94
Office expenses 1,550
Discount on bills discounted 1,940
 265
Interest on cash credits 2,240
Interest on current accounts 120
Rent and taxes 180
Directors fees 1,280
Interest on savings deposit accounts 690
Postal expenses 15
Printing and stationary 39
Offer expenses 18
Adjustments to be made:
a) Rebate on bills discounted 5,20,000
b) Provide for taxation @ 50% of the profits.
12. The following balances are extracted from the books of a Life insurance
business as on 31st March 2021.

Rs.
(‘000)
Life assurance fund, as on 1.4.2021 5,06,000
Premiums 90,000
Reinsurance premium paid 2,075
Fines for revival of policies 15
Considerations for annuities granted 1,500
Management expenses 21,000
Income Tax 850
Commission 18,650
Claims 40,000
Interest, dividend etc 20,000
Surrenders 3,250
Medical Fees 1,505
Annuities 1,955
Bonus in cash 600
Prepare the Revenue A/C for the year 20205-21 after making the following
adjustments
Rs.
a) Claim payable 9,250
b) Interest accrued on investment 2,695
c) Medical Fees outstanding 375
d) Outstanding premium 3,750
e) Commission payable 750
f) A claim of Rs. 500 thousands included in the above claims payable is to be written
off as it ten years old and is not likely to arise.
g) The managing director is to be paid at the rate of 5% on the net increase of Life
Insurance fund during the year before providing such commission.
13. How do you compute the amount to be capitalized incase of replacement of an
asset under double account system.
14. Discuss the importance and problems in social accounting.
*********
 266
PROBLEMS ON ADVANCED CORPORATE ACCOUNTING
CONTENTS
SL. No. Title No. of Problems
1. Holding Company Accounts- 6
2. Banking Companies Accounts- 7
Total 13

Copyright Reserved
(For Private Circulation Only)

GROUP – A
FOR PERSONAL CONTACT PROGRAMME – I ROUND
HOLDING COMPANY
1. Balance sheets on 31st March 2021
Liabilities R Ltd P Ltd Assets R Ltd P Ltd
Share Capital: Sundry Assets 5,50,000 2,60,000
Shares of Rs.10 60% Shares in
each fully paid 5,00,000 2,00,000 S Ltd. (at cost) 1,30,000 -
Reserves 1,00,000 -
Creditors 80,000 60,000
6,80,000 2,60,000 6,80,000 2,60,000
Prepare consolidated Balance Sheet as on 31st March 2021.
2. ‘R’ Ltd. Purchased 60% of the shares in ‘M’ Ltd. On 1.1.21. The following is the
summarized profit & Loss Account of the companies, after ascertaining net profit
Profit & Loss Account of R Ltd. And M Ltd. For the year ended 31.12.21.
R. Ltd M. Ltd. R. Ltd. M. Ltd.
Particulars Particulars
Rs. Rs. Rs. Rs.
To Proposed -- 4,60,000 1,00,000 By Net profit b/d 4,00,000 1,80,000
dividend By Dividend Receivable
To Balance c/d 80,000 from S Ltd. 60,000 --
4,60,000 1,80,000 4,60,000 1,80,000
You are required to prepare a consolidated Profit & Loss Account of the two
companies.
3. Balance Sheets as on 31st March 2021 of H Ltd and S Ltd
H Ltd S. Ltd H. Ltd. S. Ltd.
Particulars Particulars
Rs. Rs. Rs. Rs.
Share capital: Fixed Assets 3,00,000 1,00,000
Shares of 60% shares in S
Rs.10 Ltd. (at cost)
 267

Each fully paid 5,00,000 2,00,000 Current Assets 1,62,000 ----

General Preliminary 2,77,600 2,39,000
Reserves 1,00,000 50,000 Expenses
Profit and Loss --- 6,000
a/c 60,000 53,000
Creditors 80,000 60,000
7,40,000 3,45,000 7,40,000 3,45,000
H Ltd. Acquired the shares on 1st April 2021 on which date General Reserve and
Profit and Loss Account of S Ltd showed balances of Rs. 40,000 and Rs.8,000
respectively. No part of Preliminary Expenses was written off during the year ending
31st March 2021. Prepare the consolidated balance sheet of H Ltd and its subsidiary
S Ltd as on 31st March 2021.
4. Following are the balance sheets of H Ltd and its subsidiary S Ltd as on 31st March
2021.
H Ltd. S. Ltd. H. Ltd. S. Ltd.
Particulars Particulars
Rs. Rs. Rs. Rs.
Share capital: Machinery 3,00,00 1,00,000
Shares of Rs.10 Furniture 70,000 45,000
Each fully paid 6,00,0002,00,000 70% shares in 2,60,000
S Ltd. (at cost)
General Reserve 1,50,000 70,000 Stock 1,75,000 1,89,000
Profit and Loss a/c 70,000 50,000 Debtors 55,000 30,000
Creditors 90,000 60,000 Cash at bank 50,000 10,000
Preliminary Expenses --
60,000
9,10,0003,80,000 9,10,000 3,80,000
H Ltd acquired the shares of S Ltd. On 30th June 2020. On 1st April 2020
S. Ltd’s General Reserve and profit and Loss Account stood at Rs.60,000 and
Rs. 20,000 respectively. No part of preliminary Expenses was written off during the
year ended 31st march 2021.Prepare the consolidated balance sheet of H Ltd. And its
subsidiary S Ltd. as on 31st March 2021.
5. On 31st March 2021 the Balance Sheets of H Ltd and its subsidiary S Ltd stood as
follows.
Particulars H Ltd S Ltd Particulars H Ltd S Ltd
Equity Shares Fixed Assets 5,50,000 1,00,000
Capital 8,00,000 2,00,000 75%
General Reserves 1,50,000 70,000 Shares in S 2,80,000
Ltd. (at cost)
Profit and Loss a/c 90,000 55,000 Stock 1,05,000 1,77,000
 268

Creditors 1,20,000 80,000 Other Current 2,25,000 1,28,000

Assets
11,60,000 4,05,000 11,60,000 4,05,000
Draw a consolidated balance sheet as on 31st March 2021 after taking into
consideration the following information also:-
i) H Ltd. Acquired the shares on 31st July 2021.
ii) S Ltd. Earned a Profit of Rs.45,000 for the year ended 31st March 2021.
iii) In January. 2020 S Ltd. Sold to H Ltd. Goods costing Rs. 15,000 for Rs. 20,000.
On 31st March 2021 half of these goods were lying as unsold in the god owns of
H Ltd.
6. M Ltd acquired 12,000 shares in D Ltd. For Rs. 1,70,000 on April 1, 2010. The
Balance Sheets of the two companies on 31st Dec. 2020 were as follows:
Liabilities M. Ltd. D. Ltd. Assets M. Ltd D. Ltd.
Rs. Rs. Rs. Rs.
Share capital: 10,00,000 3,00,000 Goodwill 3,00,000 70,000
(Rs 10 each) Land & Buildings 4,00,000 1,00,000
General reserve 4,20,000 50,000 Machinery 5,00,000 1,00,000
Profit & Loss A/c 2,60,000 85,000 Stock 2,00,000 40,000
Sundry creditors 2,40,000 42,000 Book debts 3,00,000 1,35,000
Bills payable 80,000 60,000 Investment 1,70,000 --
Bills receivable 50,000 30,000
Cash and bank 80,000 62,000
20,00,000 5,37,000 20,00,000 5,37,000
On Jan. 1, 2021 the Profit & Loss account of D Ltd. Stood at Rs. 40,000 out of
which a dividend of 15% on the then capital of Rs. 2,00,000 was paid in June 2010.
At the same time a bonus issue of one fully paid share for every two shares held was
also made out of general reserve. Bills payable of D Ltd, represent bills issued in
favour of M Ltd. Which company still held Rs. 40,000 of the bills accepted by D Ltd.
The entire closing stock of D Ltd. Represents goods supplied by M Ltd. At cost plus
20% . M Ltd. And D Ltd. Agreed that for services rendered M Ltd. Should charge
Rs.500 P.M. from D Ltd. Entries for this were not made. Prepare consolidated Balance
Sheet of the two companies on 31st Dec. 2021.
BANKING COMPANY
7. In respect of the following transactions of the prosperity Bank Ltd., you are
required to indicate the necessary journal entries as well as their treatment in the
profit and loss account and balance sheet in respect of year ended 31-12-2020: The
following bills were discounted at 5% :

Discounted on Rs. Due date inclusive of 3 days of grace

28.12.20 50,000 31.01.21
29.07.20 1,00,000 30.11.21
 269

29.10.20 4,00,000 30.04.21

31.12.20 30,000 03.03.21
8. On 31st March, 2020 a bank held the following bills discounted by it
earlier:-

Date of bills Term of Bills Discounted @ % Amount to bills

(months) P.a. Rs.
(i) January 17 4 17 3,65,000
(ii) February, 7 3 18 7,30,000
(iii) March, 9 3 17.5 1,82,000
You are required to calculate the Rebate on Bills Discounted. Also show
the necessary journal entry for the rebate.
9. From the following information prepare the Profit and Loss Account of Progress
Bank Ltd. For the year ended on 31st march 2021 in the prescribed from.
Rs.
Interest on loan 2,59,000
Interest on fixed deposits 2,75,000
Rebate on bills discounted required 49,000
Commission 8,200
Establishment 54,000
Discount on bills discounted 1,95,000
Interest on cash credit 2,23,000
Interest on current account 42,000
Rent and taxes 18,000
Interest on overdraft 1,54,000
Director’s fees 3,000
Auditor’s fees 1,200
Interest on savings bank deposits 68,000
Postage and telegrams 1,400
Printing and stationery 2,900
Sundry charges 1,700
Bad debts to be written off amounted to Rs. 40,000. Provision for taxation may
be made @ 55% .Balance of profit from last year was Rs. 1,20,000. The directors
have recommended a dividend of Rs.20,000 for the shareholders.
 270
10. Some of the items in the Trial Balance of Victory Bank Limited as on December
31, 2021 were as follows:
Loans and advances 71,50,000 Printing and stationery 4,500
Current accounts (Including Int. on saving banks
overdraft of Rs. 15,00,000) 66,00,000 deposits 75,000
Bill discounted and purchased 19,20,000 Auditor’s fees 5,000
Interest on fixed deposits 1,55,000 Directors’ fees 2,500
Interest on loans 2,25,000 Interest on overdrafts 95,000
Discount (subject to unexpired Provision for bad debts, 42,000
discounts Rs, 30,000) 2,01,000 January 1, 2021
Interest on cash credits 1,05,000 Bad debts 21,000
Commission earned 46,500 Provision for income tax, 66,000
Loss on sale of investments 34,000 January 1, 2021
Salaries and allowances 82,000 Income tax paid for 2021. 54,000

You are required to prepare the Profit and Loss account of the bank,
maintaining the provision for income tax at Rs.84,000 and provision for bad debts at
Rs.52,000 for the year ended December 31, 2021.
11. From the books of accounts of Nava Bharat Bank Ltd., as on 31st
Mach, 2020 the following particulars regarding loans and advances given by the Bank
in India are available:
Rs.
i. Loans to corporate sector fully secured (excluding banks but 10,00,000
including companies in which directors are interested)
ii. Loan to Vijaya Bank Ltd., fully secured 3,00,000
iii. Debts due by officers (excluding directors, fully secured) 2,00,000
iv. Loans to non-corporate sector-fully secured 9,00,000
v. Loans to Nagarik Bank Ltd., fully secured 4,00,000
vi. Debts due by Manoj, director of the bank-fully secured 1,00,000
vii. Debts considered good which are unsecured 5,00,000
viii. Debts due by companies in which the directors are interested, 6,00,000
fully secured
ix. Maximum amount of debts at any time during the year 15,00,000
x. Doubtful debts 50,000
xi. Provision for bad and doubtful debts 75,000
xii. Maximum amount of debts due by officers and directors at any 5,00,000
time during the year
You are required to show how the items are statutorily required to be entered
in the balance sheet of the bank.
 271
12. From the following particulars of YES Bank Ltd., having its own premises,
prepare the balance sheet in the prescribed form as on 31st December, 2011.
Rupees
(in thousands)
Authorised capital 4,000
Subscribed capital 4,00,000 shares of Rs.10 each Rs.5 paid 2,000
Investments 7,000
Bills discounted(in India) 15,000
Profit and Loss (Cr) 850
Endorsement on bills for collection 100
Liability of customers for acceptances 5,000
Money at call and short notice 9,000
Cash in hand 2,000
Cash with RBI 4,000
Reserve 3,000
ash with State Bank 4,000
Letters of credit issued 500
Telegraphic transfers payable 800
Bank drafts payable 1,200
Short loans 40
Rebate on bills discounted 10
Acceptances for customers 5,000
Loans and Advances 10,000
Cash credits 10,000
Overdrafts 1,000
Bills purchased payable outside India) 1,000
Current and deposit accounts 56,000
Investment fluctuation fund 100
Bills for collection 100
Prepare a trial balance and determine the balancing figure which constitutes the
value of premises.
13. The following is the Trial Balance of Sound Bank Ltd., as on 31.12.2010.
Debits Rs. Credit Rs.
Authorized capital 5,00,000
Unissued capital 2,00,000
Un called capital 1,50,000
Reserve fund -- 3,00,000
Investment fluctuations fund -- 20,000
Bank overdraft, loans and cash credits 4,00,000 --
Bank premised 60,000 --
Government bonds 3,00,000 --
Other government securities 2,00,000 --
Current accounts -- 6,00,000
Profit and Loss Account on 1.1.2010 -- 25,000
Money at call and short notice 70,000 --
 272

Debits Rs. Credit Rs.

Bills discounted 73,000 --
Shares 17,000 --
Cash in hand 1,10,000 --
Cash at bank 3,00,000 --
Income tax paid 9,000 --
Salaries and other expenses 73,500 --
Interest discounts etc., -- 1,70,000
Interim dividend paid 7,500
Deposits and savings bank accounts -- 3,55,000
19,70,000 19,70,000
Additional information:
i) The bills discounted mature at an average date of February 19, 2011
(including days of grace). All bills are discounted at 10% per annum.
ii) The market value of investments in government securities was Rs.4,75,000.
Increase investment fluctuations fund with the necessary amount.
iii) Bank added premises during the year for Rs.10,000. Provide 5% depreciation
on the opening balance.
iv) Interest accrued on investment was Rs.750.
v) Provision for taxation 1.1.11was Rs.10,000. It is to be increased to Rs,30,000.
vi) Prepare final accounts in the statutory form.
Specimen of Banking Companies Schedules
Schedule Current Year previous
Particulars
No (Rs.) Year (Rs.)
i) Income:
Interest Earned Other income 13 xxx xxx xxx xxx xxx xxx
Total
ii) Expenditure:
Interest Expanded Operating Expanded 14 xxx xxx xxx xxx xxx xxx
Provision & Contingencies xxx xxx
Total
iii) Profit & Loss:
Net Profit & Loss for the Year…… Profit 15 xxx xxx xxx xxx xxx xxx
& Loss b/f xxx xxx xx xxx
Total
iv) Appropriations:
Transfer to Statutory Reserve Transfer xxx xxx
16
to Other Reserves
Transfer to Govt. proposed dividend
Balance carried over to Balance sheet
Total xxx xxx
 273
SCHEDULE 13 – INTEREST EARNED
SCHEDULE 14 – OTHER INCOME
Interest/Discount on advances/bills xxx
(-Rebate on Bills discounted if it is in adjustment).
Income on investments xxx
Interest on balances with RBI xxx
Others xxx
Total xxx
asdasd

Commission, exchange & Brokerage xxx xxx

Profit on sale of investments less Loss on sale of investment
Profit on revaluation of investments xxx xxx
Less: Loss on sale of investments xxx
Profit on sale of land, building & Other assets xxx xxx
Less: Loss on sale of Land, buildings & other assets
Profit on exchange transactions
Less: Loss on exchange transactions
Income earned by way of dividends etc.
Miscellaneous income
Total xxx
Schedules 15 – Interest Expended
Interest on deposits Interest on RBI Others xxx xxx xxx

Total xxx
Schedules 16 – Operating Expenses
Payments to & provision for employees xxx xxx xxx
Rent. Taxes and Lighting xxx xxx xxx
Printing & Stationery xxx xxx xxx
xxx xxx
Advertisement and publicity
xxx
Depreciation on Bank’s property
Director’s fees, allowances & Expenses
Auditor’s fees and expenses
Law charges
Postage, Telegrams, Telephones etc.
Repairs and Maintenance
Insurance
Other expenditure
Total xxx
 274
Provision & Contingencies
Provision for Bad & Doubtful Debts Provision for Taxation xxx
Provision for diminution in the value of investment xxx
xxx
Total xxx
Form ‘A’
Balance Sheet of…………………..Co. as on 31st march…..
Particulars Schedule No Current Previous
Year Year
Rs.) (Rs.)
Capital & Liabilities:
1
Capital xxx xxx
Reserves & Surplus Deposit 2 xxx xxx
Borrowings 3 xxx xxx
Other liabilities provisions 4 xxx xxx
xxx xxx
Total
Assets xxx xxx
5
Cash & Balances with RBI
Balances with bank and Money at call and 6 xxx xxx
short notice
Investments Advances Fixed Assets Other 7 xxx xxx
Assets
xxx xxx
Total
Contingent Liabilities, bills for collections, 8 xxx xxx
Acceptances/Endorsement/ Guarantees 9 xxx xxx
Total 10 xxx xxx
11 xxx xxx
12 xxx xxx
xxx xxx
asdasd

For Nationalized Banks xxx xxx

For Banks incorporated outside India Other Banks: xxx xxx
(Authorized/Issued/subscribed/called up+ forfeited-unpaid calls)
Total xxx
Schedules 2 – Reserves & Surplus
For Nationalized Banks xxx xxx
For Banks incorporated outside India Other Banks: xxx xxx
(Authorized/Issued/subscribed/called up+ forfeited-unpaid calls)
Total xxx
 275
Schedules 3 – Deposits
Statutory Reserves (op. Bal + Additions – deductions) xxx
Capital Reserves xxx
Share premium xxx
Revenue & other reserves xxx
Balance in Profit & Loss a/c xxx

Total xxx
Schedules 4
Demand Deposits xxx
Savings Bank Deposits xxx
Term Deposits xxx

Total xxx
Schedules 5 – Other liabilities &
Borrowings in India: xxx
RBI xxx
Other Banks xxx
Borrowings outside India xxx

Total xxx
Schedules 6 Balance
Bills Payable xxx
Inter Office Adjustments xxx
Interest Accrued xxx
Total xxx
Schedules 7 – Balances with Banks & Money at call &
Cash in Hand xxx xxx
Balances with RBI
Total xxx
Schedule 8 –
Investments in India:
Govt. Securities xxx
Approved securities xxx
Shares securities xxx
xxx
Debentures/Bonds
xxx
Investments outside India
Total xxx
In India xxx
Outside India xxx
Total xxx
 276

Bills Payable xxx

Inter Office Adjustments xxx
Interest Accrued xxx
Total xxx
Schedules 9 – Advances
Bills Purchased & Discounted xxx
Loan, Cash Credit & O/Ds xxx
Term Loans xxx

Total xxx
Schedule 10 – Fixed assets
Premises (Op + Additions- deductions) xxx
Other Fixed Asset xxx
Total xxx
Schedule 11– Other Assets
Inter office adjusted xxx
Interest accrued xxx
TDS/Tax Paid in Advance xxx
xxx
Stationery & Stamps
xxx
NBA Acquired
Total xxx
Schedule 12 – Contingent Liabilities
Claims against the bank not acknowledged as debit xxx
Liability for partly paid investments xxx
Liability on account of outstanding forward exchange contracts xxx
xxx
Guarantees given on endorsements of constituents
xxx
Acceptances, endorsements and other obligations
xxx
Other items for which the balance is contingently liable
Total xxx
Rebates on Bills Discount: Interest 13 Less Otherwise 5 plus
Depreciation:
O. Expenditure 16(+) FA 10 (-)
Doubtful Debts
Provision (+)
Tax Provision
Provision (+)
Schedule 5 other liabilities (+)
 277
PROBLEMS ON ADVANCED CORPORATE ACCOUNTING
FOR PERSONAL CONTACT PROGRAMME – II ROUND
Contents No of Problems
Life Insurance accounts 3
Valuation of Balance Sheet 2
General Insurance accounts 3
Double Accounts 2
Replacement of Assets 2
Social Responsibility accounts 1
Inflation Accounts 4
17
LIFE INSURANCE ACCOUNTS (NEW FORMAT)
The Revenue account of Life Insurance Company showed the life fund at
Rs.73,17,000 on 31.3.2020 before taking into account the following items:
Claims intimated but not admitted 98,250 Bonus utilized in reduction of
premium 13,500 Interest accrued on investments 29,750 Outstanding premiums
27,000
(a) Claims covered under re insurance 40,500 Provision for taxation 31,500
(b) Pass journal entries giving effect to the above adjustments and show
the adjusted life fund.
(c) From the following balances extracted from the books of the L.I.C as at
(d) 31.3.10. prepare a Revenue A/c for the year ending 31.3.2020 in the
prescribed form:
Rs. (in Rs. (in
‘000’) ‘000’)
Claims by death 3,30,000 Life Assurance fund (1.4.05) 3,31,000
Claims by maturity 2,15,000 Premiums 20,65,000
Agents & Canvasser’s allowance 6,500 Bones in reduction of premiums 1,000
Salaries 4,200 Income tax on interest and dividends 5,700
Travelling expenses 1,200 Printing & Stationery 13,900
Directors’ fees 8,700 Postage & telegrams 14,300
Auditors’ fees 1,000 Receipt stamps 2,300
Medical fees 52,000 Reinsurance Premiums 40,950
Commission 2,18,000 Interest & Dividend (Gross) 2,72,000
Rent 2,800 Policy renewal fees 9,600
Law charges 200 Assignment fees 540
Advertising 4,300 Endowments fees 690
Bank charges 1,500 Transfer fees 1,400
General charges 2,000
Surrenders 47,500
Provided Rs.1,500 Thousands for depreciation of furniture and Rs.2,20,000
Thousands for depreciation on investments.
 278
From the following Trial Balance, prepare the Revenue A/c and the Balance
Sheet of the Great Life Assurance Co. Ltd.
Rs.(‘000’) (Rs.‘000’)
Loans on life policies 4,200 Premiums 3,65,900
Expenses of management 18,200 Profit on sale of investments 10,800
Deposit with RBI-Govt. of 2,00,000 Claims admitted but not paid 58,400
India securities:
Commission 9,800 Sundry trade creditors 7,700
Freehold Ground rents 1,68,000 Life Assurance fund(1.4.05) 28,00,000
Bonus in cash 4,200 Consideration for 12,200
annuities granted
Surrenders 21,100 Interest, dividends & 1,20,500
rents-gross
Claims by maturity 1,04,700
Claims by death, 172,600
house property 59,800
Annuities paid 7,600
Outstanding premiums 21,600
Income tax on interest 7,100
receipts
Agents’ balances 6,800
Port Trust debentures, 5,28,200
Interest and Principal
guaranteed by Govt.
Cash at Bank, Current A/c 12,700
Cash in hand 1,750
Foreign Govt. securities 1,42,500
Office furniture 1,500
Fully paid up share capital in 1,21,600
limited liability companies
registered in India
Stock of policy stamps in 150
hand
Mortgage in India 6,61,400
Mortgage out of India 2,06,400
Loans on Govt. securities 7,19,000
Loans on company policies 1,74,600
33,75,500 33,75,500
 279
LIFE INSURANCE ACCOUNTS (NEW FORMAT)
The Revenue account of Life Insurance Company showed the life fund at
Rs.73,17,000 on 31.3.2020 before taking into account the following items:
Claims intimated but not admitted 98,250 Bonus utilized in reduction of
premium 13,500 Interest accrued on investments 29,750 Outstanding premiums
27,000 Claims covered under re insurance 40,500 Provision for taxation 31,500 Pass
journal entries giving effect to the above adjustments and show the adjusted life
fund.
From the following balances extracted from the books of the L.I.C as at
31.3.10. Prepare a Revenue A/c for the year ending 31.3.2020 in the prescribed form:

Rs. (in ‘000’) Rs. (in ‘000’)

Claims by death 3,30,000 Life Assurance fund (1.4.05) 3,31,000
Claims by maturity 2,15,000 Premiums 20,65,000
Agents & Canvasser’s 6,500 Bones in reduction of 1,000
allowance premiums
Salaries 4,200 Income tax on interest and 5,700
dividends
Travelling expenses 1,200 Printing & Stationery 13,900
Directors’ fees 8,700 Postage & telegrams 14,300
Auditors’ fees 1,000 Receipt stamps 2,300
Medical fees 52,000 Reinsurance Premiums 40,950
Commission 2,18,000 Interest & Dividend (Gross) 2,72,000
Rent 2,800 Policy renewal fees 9,600
Law charges 200 Assignment fees 540
Advertising 4,300 Endowments fees 690
Bank charges 1,500 Transfer fees 1,400
General charges 2,000
Surrenders 47,500
Provided Rs.1,500 Thousands for depreciation of furniture and Rs.2,20,000
Thousands for depreciation on investments.
From the following Trial Balance, prepare the Revenue A/c and the Balance
Sheet of the Great Life Assurance Co. Ltd.
Rs.(‘000’) (Rs.‘000’)
Loans on life policies 4,200 Premiums 3,65,900
Expenses of management 18,200 Profit on sale of 10,800
investments
Deposit with RBI-Govt. of 2,00,000 Claims admitted but not 58,400
India securities paid
Commission 9,800 Sundry trade creditors 7,700
 280

Rs.(‘000’) (Rs.‘000’)
Freehold Ground rents 1,68,000 Life Assurance fund 28,00,000
(1.4.05)
Bonus in cash 4,200 Consideration for 12,200
annuities granted
Surrenders 21,100 Interest, dividends & 1,20,500
rents-gross
Claims by maturity 1,04,700
Claims by death, 172,600
house property 59,800
Annuities paid 7,600
Outstanding premiums 21,600
Income tax on interest 7,100
receipts
Agents’ balances 6,800
Port Trust debentures, 5,28,200
Interest and Principal
guaranteed by Govt.
Cash at Bank, Current A/c 12,700
Cash in hand 1,750
Foreign Govt. securities 1,42,500
Office furniture 1,500
Fully paid up share capital in 1,21,600
limited liability companies
registered in India
Stock of policy stamps in 150
hand
Mortgage in India 6,61,400
Mortgage out of India 2,06,400
Loans on Govt. securities 7,19,000
Loans on company policies 1,74,600
33,75,500 33,75,500
Valuation of Balance Sheet
A Life Insurance Company gets its valuation made once in every two years. Its
Life Assurance fund on 31.3.20 amounted to Rs.63,84,000 before providing
Rs.64,000 for the shareholders’ dividend for the year 2020-21. Its actuarial
valuation due on 31.3.20 disclosed a net liability of Rs.60,000 under assurance
annuity contracts. An interim bonus of Rs.80,000 was paid to the policy holders
during the two years ended 31.3.2020.Prepare a statement showing the amount
now available as bonus to policy holders.
 281
Life Assurance Co. got its valuation made once in every three years. The life
assurance fund on 31st March, 2020 amounted to Rs.41,92,000 before providing
for Rs.32,000 for the shareholders dividend for the year 1987-88. Its actuarial
valuation on 31st March, 2020 disclosed net liability of Rs.40,40,000 under the
assurance and annuity contracts. An interim bonus of Rs.40,000 was paid to the
policyholders during the year ending 31st March, 2020. Prepare statement showing
the amount now available as bonus to policyholders.
General Insurance Accounts (New Format)
The books of Birla Insurance Co. Ltd. Contain the following information in
respect of fire insurance as on 31.3.2020.
Additional reserve is to be increased by 10% of the net premium income.
Prepare revenue A/c keeping the reserve for unexpired risks at 50% of premium
income.
(Rs n‘000) (Rs. In‘000)
Provision for unexpired risks 80,000 Refund of double taxation 600
(1.4.18)
Estimated liability in respect of 10,000 Management expenses 55,000
outstanding claims: On 1.4.19
On 31.3.20 15,000 Interest & Dividends 8,000
Medical expenses regarding 1,000 Legal expenses regarding 1,500
claims claims
Premiums 1,90,000
Commission on direct business 25,000
Commission on reinsurance 3,000
ceded
Commission on re insurance 1,000
accepted
From the following information as on 31-3-2020, Prepare the Revenue Account of
Sagar Bhima Co., Ltd., engaged in Marine Insurance business.

Direct Business Re-insurance

Particulars
(Rs.’000) (Rs.(‘000)
Premium:
Received 2,400 360
Receivable 1-4-2019 120 21
31-3-2020
180 28
Payable 1-4-2019
-- 240
31-3-2020
-- 20
Claims:
Paid 42
Payable 1-4-2019 -- 125
 282
31-3-2020 1650 13
Received 95 22
Receivable 1-4-2019
-- 100
31-3-2020
-- 9
Commission:
On Insurance accepted On Insurance ceded -- 12
150 11
-- 14
as d

(Rs.’000) (Rs.’000)
Salaries 260 Indian Income tax paid 240
Rent rates and taxes 18 Interest dividend and 115.5
rent received (Net)
Printing and Stationery 23 Income Tax Deducted 24.5
at source
Legal expenses (Inclusive of 20 60 Double Income tax 12
Bad
Debts in connection with refund
settlement
of claims)
Profit on sale of motor car 5
Balance of fund on 1-4-2019 was 2,650 thousand including additional reserve of
325 Thousand. Additional reserve has to be maintained at 5% of the net premium of
the year.
8. From the following trial balance as on 31.3.2019 drawn from the books of
Calcutta General Insurance Co. Ltd. And with the help of the further information,
draw up the separate revenue accounts. Profit & Loss Account for 2008-09 and a
Balance sheet as on 31-3-2019

(Rs. in (Rs. in
Debit balances Credit balances
‘000) ‘000)
Claims paid less reinsurance Share transfer fee 200
Fire 2,00,000 Compensation from L.I.C. 2,00,000
(transferred to P & L A\c)
Marine 75,000 50,000
General reserve
Miscellaneous 1,50,000 3,00,000
Share capital (equity shares of
Commission paid: Rs.10 each)
Fire 45,000 Balance of funds as on 1.4.08: 2,50,000
Fire
Marine 30,000 50,000
Marine Miscellaneous
Miscellaneous 37,000 1,00,000
Unclaimed dividend
Expenses of management Amount due to other insurers 5,000
Marine 24,000 Sundry creditors 1,75,000
Fire 30,000 P & L A.c (1.4.08) 25,000
Miscellaneous 22,000 Interest & dividends (net) not 30,000
 283

(Rs. in (Rs. in
Debit balances Credit balances
‘000) ‘000)
Interest accrued but not due 5,000 relating to any fund) 20,000
Amount due from other 85,000 Investment reserve 50,000
insurers
Outstanding claims as on
Furniture (cost 8,000) 7,000 1.4.08
Building (cost 1,50,000) 1,40,000 Marine Fire 10,000
Cash in hand 8,200 Miscellaneous 30,000
Cash at bank in current A/c 2,50,000 Commission on reinsurance 20,000
ceded:
Investments (at cost): 1,00,000
Deposit with R.B.I. Fire Marine
(Central Govt. securities) Miscellaneous
Central Govt. securities 6,50,000 15,000
State Govt. securities 2,00,000 Premium less reinsurance: 18,000
Marine
Fully paid shares of Joint 50,000 10,000
Fire Miscellaneous
stock companies
2,00,000
3,00,000
2,50,000
21,08,200 21,08,200
Additional information:
i) Outstanding claims as on 31.3.19 (less reinsurances)
 Fire –Rs.40,000
 Marine –Rs.20,000 Miscellaneous _Rs.25,000
 Market value of investments on 31.3.09-Rs.8,90,000 .
 Depreciation on furniture @ 10% and on Buildings @ 2% to be charged to
Profit & Loss A/c.
 Transfer to general reserve Rs.2,00,000 Thousands.
 Reserve for unexpired risks to be provided @ 50% of the premium income
for the year.
 Ignore taxation.
Social Responsibility Accounts
9. XYZ Ltd. Has supplied the following information relating to its staff community
and general public benefits for the year 2019-20:

(Rs.’000)
Tax paid to State Govt. 4,994
Tax paid to Central Govt. 10,346
 284

Local tax paid 32

Generation of business 1,049
Medical facilities 196
Educational facilities 60
Training and career development 34
Extra hours put in by officers voluntarily 35
Increase in cost of living in the vicinity on account of cement plant 500
State services consumed: Electricity services 3,921
Central services consumed: Telephone Telegrams etc. 413
Provident fund, bonus, Insurance benefits3 63
State services consumed: Electricity services
Dr. Rs. Cr. Rs.
Equity Shares 10,00,000
6% Preference Shares 6,00,000
7½% Debentures 4,00,000
Lines open for traffic 17,04,000
Lines in the course of construction 10,00,000
Lines Leased 40,000
Working Stock (engines, carriages etc.) 2,60,000
Lines Jointly owned 1,00,000
Freehold Land 25,000
Premium on Preference Shares 55,000
Cash at Bank 10,000
General Stores and Stocks 25,000
Net Revenue A/c 32,000
Traffic Accounts due to the company 20,000
Due from other companies 5,000
Sundry outstanding Accounts 7,000
Due to other companies 4,000
Sundry Creditors 30,000
Fire insurances Fund 5,000
General Reserve 65,000
Superannuation Fund 15,000
22,06,000 22,06,000
During the year there was an issue of Rs.1.50,000 6% preference shares at par
and this was fully subscribed. Equity shares of Rs.2,00,000 were also issued at a
premium of 10%. Expenditures on lines open for traffic Rs.40,000 and lines in the
 285
course of construction Rs. 3,000 were made and the construction to lines jointly
owned Rs. 20,000.
The following are the balances on 31st March 2019 in the books of the Guntur
Power and Light Co. Limited:-
Dr. Rs. Cr. Rs.
Land on April 1 2018 60,000
Land expended during the year 2,000
Machinery on April 1 2018 2,40,000
Machinery expended during 2018-19 2,000
Mains, including cost laying 80,000
Mains expended during 2018-19 20,400
Equity shares 2,19,600
Debentures 400
Sundry Creditors 1,00,000
Depreciation Fund Account 80,000
Sundry debtors for current Supplied 16,000
Other Debtors 200
Cash 2,000
Cost of generation of Electricity 14,000
Dr. Rs. Cr. Rs.
Cost of Distribution of Electricity 2,000
Rent, Rate and Taxes 2,000
Management 4,800
Depreciation 8,000
Income statement for the year ending 31st December 2020

Sales of Current Rent of Meters 52,000

Interest on Debentures Interim Dividend 2,000
Balance of net Revenue Account, April, 4,000
2018 8,000
11,400
4,65,400 4,65,400
From the above Trial Balance, prepare Capital Account, General Balance
Sheet, Revenue Account and Net Revenue Account.
Replacement of an Asset
An Electric supply Co. rebuilds cots Mains at the cost of Rs. 19,90,000. This
includes value of Rs. 13,800 material of old Main used for new one. The original
mains were constructed at a cost of Rs.9,90,000. Te ratio of material and labour
 286
therein was 7:3. The increase in material prices is 12 ½ % and wage rates 15%
Materials worth Rs.25,200 from old works was sold.
An Electricity company laid down a main at cost of Rs.24,00,000. Some years
later, the company laid down an auxiliary main for one-fourth of the length of the
old main at a cost of Rs.9,00,000. It also replaced the rest of the length of the old
main at a cost of Rs.27,00,000. The cost of materials and labour has gone up
by 15%. Sale of old materials realized Rs.60,000. Old materials valued at
Rs.60,.000 were used in the renewal and old materials valued at Rs. 90,000 were
used in the auxiliary main. Give the journal entries for recording the above
transactions. Show the Capital Expenditure and the revenue Expenditure.
Inflation Accounts
A real estate company started with a capital of Rs.50,00,000 which was invested
in urban land on 1-1-2018. On that date the general price index was 100 and specific
price index for land was 200. The company had no other transactions and it sold the
land on 1-1-2020 on which date the general price index was 180 and the specific price
index was 420. The sale price of the land was Rs. 1,80,00,000.
You are required to ascertain profit under (1) Historical cost (2) CCA method and
(3) CPP method.
The opening balance sheet and income statement for the year 2020 of Chandra Ltd.
Are as follows:
Liabilities Rs. Assets Rs.
Share capital 7,00,000 Land and Building 6,00,000
10% Debentures Current 2,00,000 Plant and Machinery (New) 80,000
Liabilities 2,00,000 Furniture 1,20,000
Debtors 1,00,000
Cash 2,00,000
11,00,000 11,00,000
asd

Particulars Rs. Rs.

Sales 20,00,000

Less: Cost of goods sold: 1,20,000

Opening Inventory 14,20,000
(FIFO) Purchases 15,40,000
Closing inventory 1,40,000 14,00,000
Gross profit
6,00,000
3,08,000
Less: Operating expenses:
20,000
Interest on debentures
90,000
Depreciation on machinery
8,000 4,26,000
 287
Depreciation on furniture 1,74,000
Net profit
Debtors and current liabilities remained unchanged throughout the year
Interest on debentures was paid on 31.12.20.
The general price index during the year was as follows: On 1.1.20 300
On 31.12.20 360
Average for the year 320
You are required to prepare the final accounts for the year 2020, after
adjusting for price level changes under CPP method.
From the following information, calculate the cost of sales adjustment (COSA)
under CCA method:
Particulars Historical Index for
Cost goods
Opening stock Add: 4,00,000 200
Purchases 14,00,000 240
18,40,000 (average)

Less: Closing stock 6,72,000

280
Cost of sales 11,68,000
You are required to prepare Profit & Loss A/c and Balance sheet under CCA
method form the following Historical Accounting Financial Statements and
additional information.
Rs. Rs.
To Opening Stock 80,000By Sales 10,00,000
To Purchases 6,40,000By sundry income 20,000
7,20,000
Less : Closing stock 1,20,000
Cost of sales 6,00,000
To Operating expenses 2,40,000
To Interest 30,000
To Depreciation 50,000
To Net profit C/D 1,00,000
10,20,000 10,20,000
To Provision for Tax 50,000By Net profit B/d 1,00,000
To dividend 30,000
To Balance carried to
Balance Sheet 20,000
1,00,000 1,00,000
 288
Balance Sheet as on 31-12-19 and 31-12-20 (Historical Ac
Liabilities 2019 2020 Assets 2019 2020
Rs. Rs. Rs. Rs.
Share capital 2,00,000 2,00,000fixed assets 5,00,000 5,00,000
Reserves & Surplus 60,000 80,000 Less: Depreciation 1,50,000 2,00,000
Bank Loan 2,20,000 2,00,000 3,50,000 3,00,000
Creditors 1,00,000 1,20,000
Current Assets:
80,000 1,20,000
Stock
Debtors 1,10,000 1,44,000
Cash 40,000 36,000
5,80,000 6,00,000 5,80,000 6,00,000
 289

FORMS FOR LIFE INSURANCE FINAL ACCOUNTS

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………..
Policyholders’ Account (Technical Account)
Current Previous
No Particulars Schedule Year Year
(Rs.’000 (Rs.’000)
Premiums earned –net 1
Premium
Reinsurance ceded
Reinsurance accepted
Income from Investments
Interest, Dividends & Rent –Gross
Profit on sale/redemption of investments
(Loss on sale/redemption of investments)
Transfer/Gain on revaluation/change in fair value
Other Income (to be specified)
Total (A)
Commission
Operating expenses related to Insurance Business 2
Provision for doubtful debts
3
Bad debts written off Provision for Tax
Provisions (other than taxation)
For diminution in the value of investments (Net)
Others (to be specified)
Total (B)
Benefits Paid (Net)
Interim bonuses Paid
Change in valuation of liability in respect of life policies
Gross
4
Amount ceded in Reinsurance
Amount accepted in Reinsurance
Surplus (Deficit) (D)= (A) - (B) - (C)
Total (C)
Appropriations
Transfer to Shareholders’ Account Transfer to Other
Reserves (to be specified) Balance being Funds for
future Appropriations.
Total (D)
 290
FORM A-PL
Name of the Insurer:
Registration No. and Date of Registration with the IRDA
Profit and Loss Account for the year ended 31ST March, 20…….
Shareholders’ account (Non-technical Account)
Current Previous
No. Particulars Schedule Year Year
(Rs,000) (Rs.000)
Amounts transferred from / to the Policyholders Account
(Technical Account)
Income from investments
a) Interest, Dividends & Rent –Gross
Profit on sale/redemption of investments
(Loss on sale/redemption of investment)
Other Income (To be specified)
Total (A)
Expense other than those directly related to the
insurance business
Bad debts written off. Provisions (Other than
taxation)
For diminution in the value of investments (Net)
Provision for doubtful debts Others (to be specified)
Total (B)
Profit (Loss) before tax provision for Taxation
Profit/Loss after tax Appropriation
Balance at the beginning of the year
Interim dividends paid during the year.
Proposed final dividend
Dividend distribution tax
Transfer to reserves/other accounts (to be specified)
Profit carried to the Balance Sheet
 291
FORM A-BS
Name of the Insurer:
Registration No. and Date of Registration with the IRDA
Balance Sheet As At 31ST March, 20…….
Current Year Previous Year
No. Particulars Schedule
(Rs.000) (Rs.000)
Sources of Funds
Shareholders’ funds: 5
Share Capital Reserves and Surplus 6
Credit/[Debit] fair value Change Account 7
Sub-Total
Borrowings
Policyholders’ Funds: 8
Credit/[Debit]Fair Value Change Account 8A
Policy Liabilities 8B
Insurance Reserves 9
Provision for Linked Liabilities 10
Sub-Total
Funds for future Appropriations 11
Total Application of Funds Investments:
Shareholders Policy holders’
Assets held to Cover Linked Liabilities 12
Loans
Fixed Assets Current Assets:
Cash and Bank balances Advances and 13
other Assets
Sub-Total (A) Current Liabilities Provisions
Sub-Total (B)
Net Current Assets (C)=(A-B)
Miscellaneous Expenditure (to the extent 14
not written off or adjusted)
Debit Balance in profit & Loss Account 15
(Shareholders’ Account)
Total
Contingent Liabilities
Current Year Previous Year
No. Particulars
(Rs.000’) (Rs,’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
 292
Statutory demands/liabilities in dispute, not provided for Reinsurance
obligations to the extent not provided for in accounts. Others (to be specified)
Total
SCHEDULES FORMING PART OF FINANCIAL STATEMENT
Schedule – 1: Premium
Current Year Previous Year
No. particulars
(Rs.000) (Rs.000)
1. First year premiums Renewal premiums
2. Single premiums
3. Total premium
Schedule – 2: Premium
Current Year Previous Year
Particulars
(Rs.000) (Rs’000)
 Commission paid Direct
 First year premiums
 Renewal premium
 Single premiums
Add: Commission on
Re-insurance Accepted Less: Commission on
Re-insurance ceded
 Net Commission
Schedule – 3: Operating Expenses Related To

Schedule – 4: Benefits Paid (Net)

Current Year Previous Year
No. Particulars
(Rs,000) (Rs.000)
1. Insurance Claims a)Claims by Death.
Claims by Maturity.
Annuities/Pension payment,
Other benefits, specify. (Amount ceded in
reinsurance): a)Claims by Death,
2. Claims by Maturity
Annuities/Pension payment,
Other benefits, specify. Amount accepted
in reinsurance;
Claims by Death
3. Claims by Maturity,
Annuities/Pension payment other benefits
specify
Total
 293
Schedule – 5: Share Capital
No. Particulars Current Year Previous year
(Rs.000) (Rs.000)
1. Authorized Capital
Equity shares of Rs. …. Each Issued Capital
2. Equity Shares of Rs… each Subscribed capital
Equity shares of Rs….each Called-up Capital
3. Equity shares of Rs. each
Less: Calls unpaid
4. Add: Shares forfeited (amount originally paid up)
Less: Par value of equity shares bought back.
Less: Preliminary expenses including commission
or brokerage on underwriting or subscription
of shares.
Total
Schedule – 5a: Pattern of Shareholding
Shareholder Current Year Previous Year
Promoters Number of Shares % of Holding Number of Shares % of Holding
Indian Foreign
Others
Total

Schedule – 6: Reserves and Surplus

No. Particulars Current Year Previous Year
(Rs.000) (Rs.000)
Capital Reserve
1. Capital Redemption Reserve
2. Share Premium
3. Revaluation Reserve
4. General Reserves
5. Less: Debit balance in profit and
Loss Account, if any,
Less: Amount utilized for Buy-back
6. Catastrophe Reserve
7. Other Reserves(to be specified)
8. Balance of profit in profit and Loss Account
Total
 294
Schedule – 7:
No. Particulars Current Year (Rs,000) Previous Year (Rs.000)
1. Debentures/Bonds Banks
2. Financial institutions
3. Others (to be specified)
Total

Schedule – 8: Investments
No. Particulars Current Year Previous Year
(Rs.000) 9Rs.000)
Long-term Investments:
1. Government securities and Government
guaranteed
2. bonds including Treasury Bills
3. Other Approved Securities
4. Other Investments:
a) Shares
aa) Equity
bb) Preference
b)Mutual Funds
c) Derivative Instruments
d) Debentures /Bonds
e) Other Securities (to be specified)
f) Subsidiaries
5. Investment properties-Real Estate
Investments in Infrastructure and Social Sector
Other than Approved Investments
Total
Short term Investment:
1 Government securities and Government
guaranteed
2 bonds including Treasury Bills
3 Other Approved Securities
4 Other Investments:
Shares
Equity
Preference
Mutual Funds
Derivative Instruments
Debentures/Bonds
Other Securities(to be specified)
Subsidiaries
Investment Properties-Real Estate
5 Investment in Infrastructure and Social Sector
Other than Approved Investments
Total
 295
Schedule – 8a: Investments –Policyholders
Current Year Previous Year
No. Particulars
(Rs.000) (Rs.000)
Long-term Investments:
1.
Government securities and Government
2. guaranteed bonds including Treasury Bills
3.
Other Approved Securities:
a)shares
aa) Equity
bb) Preference b)Mutual Funds c)Derivative
Instruments
Debentures/Bonds
Other Securities (to be specified)
4.
5. Subsidiaries
Investments in infrastructure and social sector
Other than approved Investments.
Total

1. Sort-term Investments:
2. Government securities and Government
3. guaranteed bonds including Treasury Bills.
Other Approved Securities
Shares
Equity
Preference
Mutual Funds
4. Derivative Instruments
Debentures/Bonds
Other Securities (to be specified)
Subsidiaries

5. Investment properties-Real Estate Investments in

infrastructure and Social sector Other than
Approved investments
Total
 296

Schedule – 8b: Assets Held To Cover Linked Liabilities

Current Year Previous Year
No. Particulars
(Rs.000) Rs.000)
Long-term Investment:
1. Government securities and Government
2. guaranteed bonds including Treasury Bills
3. Other Approved Securities:
shares
Equity
Preference
Mutual Funds
Derivative instruments
Debentures (to be specified)
Subsidiaries
4. Investment properties-Real Estate Investments
5. in Infrastructure and social sector Other than
approved investments.
Total
1. Short-term Investments:
2. Government securities and Government
guaranteed bonds including Treasury Bills Other
3. Approved Securities:
Shares
Equity
Preference
Mutual Funds
Derivative Instruments
Debentures/Bonds
Other Securities (to be specified)
Subsidiaries
4. Investment properties
5. Real Estate Investments in Infrastructure and
Social Sector Other than approved Investments.
Total
as d

Current Year Previous

No. Particulars
(Rs.000) Year (Rs.000)
1. Security-wise Classification Secured
On mortgage of property in India Outside India On
Shares, Bonds. Govt. Securities, etc. Loans against
policies
2. Others (to be specified) Unsecured
Total Borrower –wise Classification Central and
 297

Current Year Previous

No. Particulars
(Rs.000) Year (Rs.000)
State Governments Banks and Financial
Institutions Subsidiaries Companies

3. Loans against policies Others (to be specified)

Total
Performance-wise Classification Loans classified as
4. standard in India Outside India
Total Maturity-wise Classification
Short Term
Long terms
Total
Schedule – 10: Fixed Assets
Cost/Gross Block Depreciation Net Block
Particulars

Adjustmen
Deduction

As at year
Additions

On Sales/
Upto Last

previous
Opening

tTo date
Closing

For the
Year

Year

year
end
s
Goodwill Intangibles (specify)
Land-Freehold Leasehold
property Buildings
Furniture & Fittings
Information Technology
Equipment Vehicles
Office Equipment Other (specify
nature) Total
Work in progress
Grand Total
Previous year
Schedule – 11: Cash and Bank Balances
No. Particulars Current year Previous year
(Rs.000) (Rs.000)
1. Cash (including cheques, drafts and stamps)
2. Bank Balances
Deposit Accounts
Short-term (due within 12 months of the
date of Balance Sheet)
Others
current Accounts
Others (to be specified)
3. Money at call and short Notice
With Banks
4. with other institutions Others (to be
specified)
Total
 298

Balances with non-scheduled banks in 2 and

3 above
1. Cash & Bank Balances In India
2. Outside India
Total
Schedule – 12: Advances and Other
No. Particulars Current Year Previous Year
(Rs.000) (Rs.000)
Advances:
1. Reserve deposits with ceding companies
2. Application money for investments Prepayments
3. Advances to Directors/Officers
4. Advance tax paid and taxes deducted at source
5. (Net of provision for taxation)
6. Others (to be specified)
Total (A)
Other Assets:
1. Income accrued on investments Outstanding
premiums
2.
Agents’ Balances
3.
Foreign Agencies Balances
4.
Due from other entities carrying on
5.
insurance business (including reinsures)
6.
Due from subsidiaries/holding company
7.
Deposit with Reserve Bank of India [Pursuant to
8. section 7 of insurance Act,1938]
Others (to be specified)
Total (B) Total (A+B)
Schedule – 13: Current
Current Year Previous Year
No. Particulars
(Rs.000) (Rs.000)
1. Agents’ Balances
2. Balances due to other insurance companies
3. Deposits held on re-insurance ceded Premiums
4. received in advance Unallocated premium
5. Sundry creditors
6. Due to subsidiaries/holding company Claims
7. Outstanding Annuities Due Annuities Due
8. Due to officers/Director Others (to be specified)
. Total

Schedule – 14: Provisions

Current year Previous Year
No. Particulars
(Rs.000) (Rs.000)
1. For taxation (less payments and taxes
deducted at source)
 299

2. For proposed dividends

3. For divided distribution tax
4. Others (to be specified)
Total
Schedule – 15: Miscellaneous Expenditure (To the extent not written off or adjusted)
Current Year Previous Year
No. Particulars
(Rs.000) (Rs.000)
1. Discount allowed in issue of shares /
debentures
2. Others (to be specified)
Total
FORMS FOR GENERAL INSURANCE FINAL ACCOUNTS:
FORM B - RA
Name of the insurer:
Registration No. and Date of Registration with IRDA
Revenue account for the year ended 31st march 20………
Current Previous
No. Particulars Schedule Year Year
(Rs.000 (Rs,000)
1. Premiums earned (Net) 1
2. Profit/Loss on Sale/Redemption of Investments
3. Others (To be specified)
4. Interest, Dividend and Rent-Gross
Total(A)
1. Claims incurred (Net) 2
2. Commission 3
3. Operating expenses related to insurance 4
business
Total (B)
Operating profit/(Loss) from
Fire/Marine/Miscellaneous business (C) =(A)-(B)
Appropriations:
Transfer to Shareholder’s Account
Transfer to Catastrophe Reserve
Transfer to Other Reserves
(To be specified)
Total (C )
 300
FORM B-PL
Name of the Insurer:
Registration No. and Date of Registration with the IRDA
Profit and Loss Account for the year ended 31st March 20………..
Shareholders’ Account (Non-technical Account)
Current Previous
No. Particulars Schedule Year Year
(Rs.000 (Rs,000)
1) Operating profit/(Loss)a
Fire Insurance
Marine Insurance
Miscellaneous Insurance Income from
Investments
2) Interest, dividend & rent—gross
Profit on sale of Investments Less: Loss on
sale of Investments
Other Income (To be specified)
Total (A)
3) Provisions (other than taxation)
For diminution in the value of Investments
4) For doubtful debts
Others (To be specified)
Other expenses
Expenses other than those related to Insurance
business.
5) Bad debts written off
Other (To be specified)
Total(B) Profit before Tax (A-B) Provision for
Taxation Appropriations:
Interim dividends paid during the year.
Proposed final dividend
Dividend distribution tax
Transfer to any reserves or other accounts.(To
be specified)
Balance of profit and loss brought forward
from last year.
Balance carried forward to Balance Sheet.
 301
FROM B-BS
Name of the Insurer:
Registration No. and date of Registration with the IRDA
Balance sheet as at 31st March 20……………
Current Previous
No. Particulars Schedule Year Year
(Rs.000 (Rs,000)
Sources of Funds:
1. Share capital Reserves and Surplus 5
2. Fair value change account Borrowings 6
Total
3. Application of Funds Investments 7
Loans:
4. Fixed Assets Current Assets 8
Cash and Bank Balances Advances and other 9
assets
Sub Total (A) 10
1.
Current Liabilities Provisions 11
2. Subtotal (B) 12
3. Net current assets (C )=(A)-(B) 13
4. Miscellaneous Expenditure 14
5. (To the extent not written off or adjusted) Debit 15
Balance in Profit and Loss Account
Total
Contingent Liabilities
Current Previous
No. Particulars Schedule Year Year
(Rs.000 (Rs,000)
1. Partly paid 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
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SCHEDULES FORMING PART OF FINANCIAL STATEMENTS
Schedule –1: Premium Earned (Net)
Current Previous
No. Particulars Schedule Year Year
(Rs.000 (Rs,000)
1. Premium from direct business written
2. Add: Premium on reinsurance accepted Less:
3. Premium on reinsurance ceded Net premium
4. Adjustment for change in reserve for unexpired risks
5. Total premium earned (Net)
6. Premium from direct business written
7.
Schedule – 2: Claims
Current Previous
No. Particulars Schedule Year Year
(Rs.000 (Rs,000)
1. Claims paid:
2. Direct
3. Add: Reinsurance accepted Less: Re-insurance
4. ceded Net claims paid
5. Add: Claims outstanding at the end of the year.
6. Less: Claims outstanding at the beginning of the
7. year.
Total claims incurred
Schedule – 3:
Current Previous
No. Particulars Schedule Year Year
(Rs.000 (Rs,000)
Commission paid:
Direct
Add: Commission on Re-insurance accepted
Less: Commission on Re-insurance ceded Net
Commission
Schedule – 4: Operating Expenses related to Insurance Business
Current Previous
No. Particulars Schedule Year Year
(Rs.000 (Rs,000)
1. Employees’ remuneration and welfare benefits
2. Travel, conveyance and Vehicle running expenses
3. Training expenses
4. Rent, Rates and Taxes Repairs
5. Printing and Stationery Communication
6. Legal and Professional charges Auditors’ fees,
expenses etc.
7. as auditor
8. as adviser or in any other capacity in respect of
9. Taxation matters
10. Insurance matters
11. Management services and
12. in any other capacity Advertisement and publicity
13. Interest and Bank charges Others (To be specified)
Depreciation
Total
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Schedule – 5: Share Capital
Current Previous
No. Particulars Schedule Year Year
(Rs.000 (Rs,000)
Authorized capital
Equity shares of Rs…each Issued Capital
Equity shares of Rs………each Subscribed
capital
Equity shares of Rs………each
Called-up capital Equity shares of Rs… each
Less: Calls unpaid
Add: Equity shares forfeited (Amount originally
paid up)
Less: Par value of Equity shares bought back.
Less: Preliminary expenses including
commission or brokerage on
underwriting or subscription of shares.
Total
SCHEDULE – 5A: SHARE CAPITAL PATTERN OF SHAREHOLDING
[AS CERTIFIED BY THE MANAGEMENT]
Current year Previous Year
Shareholder Number of % of Holding Number of % of holding
shares shares
Promoters:
 Indian
 Foreign
Others
Total
Schedule –6: Reserves and Surplus
Current Previous
No. Particulars Schedule Year Year
(Rs.000 (Rs,000)
1. Capital Reserve
2. Capital Redemption Reserve Securities
3. premium General Reserves
4. Less: Debit balance in profit & loss account
Less: Amount utilized for Buy –back
5. Catastrophe Reserve
6. Other Reserves (to be specified) Balance of
7. profit and loss account
Total
Schedule – 7:
Current Previous
No. Particulars Year Year
Schedule
(Rs.000 (Rs,000)
1. Debentures/Bonds
2. Banks
3. Financial Institutions
4. Others (to be specified)
Total
Schedule – 8:
No. Particulars Schedule Current Previous
 304
Year Year
(Rs.000 (Rs,000)
Long Term Investments:
1. Government securities and Government
guaranteed bonds including Treasury Bills.
2. Other Approved Securities Other Investments
3. Shares
Equity
Preference
Mutual Funds
4. Derivative Instruments:
Debentures/Bonds
Other Securities (to be specified)
5. Subsidiaries:
1. Investment properties-Real Estate Investment
in Infrastructure and Social Sector. Other than
2. Approved Investment
Short term Investments
Government securities and Government
guaranteed bonds including Treasury Bills.
3. Other Approved Securities
Other Investments:
Shares
Equity
Preference
Mutual Funds
Derivative Instruments
Debentures/Bonds
4. Other Securities (to be specified)
5. Subsidiaries
Investment Properties-Real Estate Investments
in Infrastructure and Social Sector. Other than
approved Investments
Total
Schedule – 9: Loans
Current Previous
No. Particulars Schedule Year Year
(Rs.000 (Rs,000)
1. Security—Wise Classification secured
On mortgage of property i In India
ii) Outside India
On shares, Bonds, Govt. Securities, etc.
Loans against policies
Others (to be specified) Unsecured
Total Borrower-wise Classification
Central and State Governments
Banks and Financial Institutions
Subsidiaries
Industrial Undertakings
2. Others (to be specified)
Total
 305
3. performance-wise Classification
Loans classified as standard
In India
Outside India
Non-performing loans provisions
In India
Outside India
Total
Maturity-wise Classification
4) Short Term
Long Term
Total

Schedule – 10: Fixed

Cost/Gross Block Depreciation Net Block
Particulars

Opening

Additions

Adjustme
Last Year
Deductio

year end
previous
Closing

To date
For the

Sales/

As at
Upto

Year

year
On
ns
Goodwill Intangibles(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
Schedule – 11 : Cash and Bank
Previous
Current Year
No. Particulars Year
(Rs.000)
(Rs.000)
1. Cash (including cheques, drafts and stamps)
Bank Balances
2. Deposit Accounts
Short-term (due within 12 months)
Others
3. Current Accounts
Others (to be specified) Money at Call and Short
Notice
a) With Banks
b) With others Institutions Others (to be specified)
Total
4. Balance with non-scheduled banks included in 2
and 3 above.
 306
Schedule –12: Advances and Other Assets
Previous
Current Year
No. Particulars Year
(Rs.000)
(Rs.000)
1. Advances
2. Reserve Deposits with Ceding Companies
Application Money for Investments
3. Prepayments
4. Advances to Director/Officers
5. Advance Tax paid and taxes deducted at source
(Net of provision for taxation0
6. Others (to be specified)
Total (A)
1. Other Asset

2. Income accrued on investment Outstanding

3. premiums Agents’ balances
4.
5. Foreign Agencies Balances
Due from other entities carrying on insurance
6. business (including re-insures)
7. Due from Subsidiaries/Holding Company
Deposit with Reserve Bank of India
[Pursuant to Section 7 of Insurance Act.1938]
Others (to be specified)
Total (B)
Total (A)+ (B)z

Schedule – 13: Current Liabilities

Previous
Current Year
No. Particulars Year
(Rs.000)
(Rs.000)
1. Agents’ Balances
2. Balances due to other insurance companies
3. Deposits held on re-insurance ceded
4. Premiums received in advance
5. Unallocated Premium
6. Sundry Creditors
7. Due to Subsidiaries/
8. Holding company
9. Claims Outstanding Due to officer/Directors
10. Others (to be specified)
Total
 307

Schedule– 14:
Previous
Current Year
No. Particulars Year
(Rs.000)
(Rs.000)
1. Reserve for Unexpired Risk
2. For Taxation (less advance tax paid and taxes
deducted at source)
3. For proposed Dividends
4. For Dividend Distribution Tax
5. Others (to be specified)
Total

Schedule – 15: Miscellaneous Expenditure (To the Extent not Written off or Adjusted)
Previous
Current Year
No. Particulars Year
(Rs.000)
(Rs.000)
1. Reserve for Unexpired Risk
2. For Taxation (less advance tax paid and taxes
deducted at source)
3. For proposed Dividends
4. For Dividend Distribution Tax
5. Others (to be specified)
Total
asas

Previous
Current Year
No. Particulars Year
(Rs.000)
(Rs.000)
Discount Allowed in issue of Share/Debentures
Others(to be specified)

Total
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