CHAPTER 4

FINANCIAL STATEMENTS
OF COMPANIES

UNIT 1: PREPARATION OF FINANCIAL

STATEMENTS

LEARNING OUTCOMES
 After studying this unit, you will be able to–
 Know how to maintain books of account of a company.
 Learn about statutory books of a company.
 Prepare and present the financial statements of a company
as per Schedule III to the Companies Act, 2013
 Calculate managerial remuneration of managers in a
company.
 Appreciate the term divisible profits and dividends.

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 4.2 ACCOUNTING

Meaning of
Preparation of Requisites of
Company and
financial financial
maintenance of
statements statements
books of accounts

Declaration and
Managerial
payment of Divisible profits
remuneration
dividend

Transfer to
Reserve

1.1 MEANING OF COMPANY

As per Section 2(20) of the Companies Act, 2013, “Company” means a company
incorporated under the Companies Act, 2013 or under any previous company law
(e.g., the Companies Act, 1956). Different types of companies have been defined
(under various sub-sections of the Companies Act, 2013) as follows:
2(21) “company limited by guarantee” means a company having the liability of
its members limited by the memorandum to such amount as the members
may respectively undertake to contribute to the assets of the company in
the event of its being wound up;
2(22) “Company limited by shares” means a company having the liability of its
members limited by the memorandum to the amount, if any, unpaid on the
shares respectively held by them;

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 FINANCIAL STATEMENTS OF COMPANIES 4.3

2(42) “Foreign company” means any company or body corporate incorporated

outside India which –
(a) has a place of business in India whether by itself or through an agent
physically or through electronic mode; and
(b) conducts any business activity in India in any other manner.
2(45) “Government company” means any company in which not less than 51%
of the paid-up share capital is held by the Central Government, or by any
State Government or Governments, or partly by the Central Government and
partly by one or more State Governments, and includes a company which is
a subsidiary company of such a Government company;
2(62) “One Person Company” means a company which has only one person as a
member;
2(68) “Private company” means a company having a minimum paid-up share
capital as may be prescribed, and which by its articles,—
(i) restricts the right to transfer its shares;
(ii) except in case of One Person Company, limits the number of its
members to two hundred:
Provided that where two or more persons hold one or more shares in
a company jointly, they should, for the purposes of this sub-clause, be
treated as a single member:
Provided further that—
(A) persons who are in the employment of the company; and
(B) persons who, having been formerly in the employment of the
company, were members of the company while in that
employment and have continued to be members after the
employment ceased, should not be included in the number of
members; and
(iii) prohibits any invitation to the public to subscribe for any securities of
the company;
2(71) “Public Company” means a company which—
(a) is not a private company;
(b) has a minimum paid-up share capital as may be prescribed:

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 4.4 ACCOUNTING

Provided that a company which is a subsidiary of a company, not being a

private company, should be deemed to be public company for the purposes
of this Act even where such subsidiary company continues to be a private
company in its articles;
2(85) “Small company” means a company, other than a public company, -
(i) paid-up share capital of which does not exceed ` 50 lakhs or such
higher amount as may be prescribed which should not be more than
` 5 crores; or
(ii) turnover of which as per its last profit and loss account does not
exceed ` 2 crores or such higher amount as may be prescribed which
should not be more than ` 20 crores:
Provided that nothing in this clause should apply to:
(A) a holding company or a subsidiary company
(B) a company registered under section 8
(C) a company or body corporate governed by any special Act
2(92) “Unlimited company” means a company not having any limit on the liability
of its members;
2(46) “Holding company”, in relation to one or more other companies, means a
company of which such companies are subsidiary companies;
2(87) “Subsidiary company”, or “subsidiary”, in relation to any other company
(that is to say the holding company), means a company in which the holding
company-
(i) controls the composition of the Board of Directors; or
(ii) exercises or controls more than one-half of the total share capital
either at its own or together with one or more of its subsidiary
companies:

Provided that such class or classes of holding companies as may be

prescribed should not have layers of subsidiaries beyond such
numbers as may be prescribed.

Explanation – For the purposes of this clause, -

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 FINANCIAL STATEMENTS OF COMPANIES 4.5

(a) a company should be deemed to be a subsidiary company of the

holding company even if the control referred to in sub-clause (i) or
sub-clause (ii) is of another subsidiary company of the holding
company;

(b) the composition of a company’s Board of Directors should be deemed

to be controlled by another company if that other company by exercise
of some power exercisable by it at its discretion can appoint or remove
all or a majority of the directors;

(c) the expression “company” includes any body corporate;

(d) “layer” in relation to a holding company means its subsidiary or

subsidiaries;

1.2 MAINTENANCE OF BOOKS OF ACCOUNT

As per Section 128 of the Companies Act, 2013, Every company should prepare and
keep at its registered office books of account and other relevant books and papers
and financial statement for every financial year which give a true and fair view of
the state of the affairs of the company, including that of its branch office or offices,
if any, and explain the transactions effected both at the registered office and its
branches and such books should be kept on accrual basis and according to the
double entry system of accounting:

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

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 4.6 ACCOUNTING

As per Section 128 of the Companies Act, 2013

Every company should prepare and keep

at its registered office

books of account and other relevant books and

financial statements
accrual basis and according to double entry system of
accounting.

for every financial year

giving a true and fair view of the state of the affairs

Maintenance at Place other than Registered Office

It is a duty of the company to inform the Registrar of Companies within seven days
of the decision in case the Board of Directors decides to maintain books at the
place other than the registered office.
In Case of Branch Office
Where a company has a branch office in India or outside India, it should be deemed
to have complied with the provisions of the Act, if proper books of account relating
to the transactions effected at the branch office are kept at that office and proper
summarised returns periodically are sent by the branch office to the company at its
registered office or such other place as the Board of Directors has decided.
Section 128 (3) further lays down that the books of account and other books and
papers maintained by the company within India should be open for inspection at
the registered office of the company or at such other place in India by any director
during business hours, and in the case of financial information, if any, maintained
outside the country, copies of such financial information should be maintained and
produced for inspection by any director subject to such conditions as may be
prescribed. Section 128(5) further states that the books of account of every
company relating to a period of not less than 8 financial years immediately
preceding a financial year, or where the company had been in existence for a period
less than 8 years, in respect of all the preceding years together with the vouchers
relevant to any entry in such books of account should be kept in good order.

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 FINANCIAL STATEMENTS OF COMPANIES 4.7

1.3 STATUTORY BOOKS

The following statutory books are required to be maintained by a company under
different sections of the Companies Act, 2013:

 Register of Investments of the company held in its own name (Section 187)

 Register of Charges (Section 85)

 Register of Members (Sections 88)

 Register of Debenture-holders and other Security holders (Section 88)

 Minute Books (Section 118)

 Register of Contracts, or arrangements in which directors are interested

(Section 189)

 Register of directors and key managerial personnel and their shareholding

(Section 170)

 Register of Loans and Investments by Company (Section 186)

In addition, a company usually maintains a number of statistical books to keep

a record of its transactions which have resulted either in the payment of
money to it or constitute the basis on which certain payments have been
made by it.

 Registers and documents relating to the issue of shares are:

(i) Share Application and Allotment Book

(ii) Share Call Book

(iii) Certificate Book

(iv) Register of Members

(v) Share Transfer Book

(vi) Dividend Register.

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 4.8 ACCOUNTING

1.4 ANNUAL RETURN

In accordance with Section 92 of the Companies Act, 2013, every company should
prepare an annual return in the form prescribed by the Companies Act, 2013 signed
by a director and the company secretary, or where there is no company secretary,
by a company secretary in practice:

Provided that in relation to One Person Company and small company, the annual
return should be signed by the company secretary, or where there is no company
secretary, by the director of the company.

The annual return should be filed with the Registrar within 60 days from the day on
which each of the annual general meeting (AGM) is held or where no AGM is held
in any year, within 60 days from the date on which AGM should have been held
along with a statement showing the reasons why AGM was not held.

1.5 FINAL ACCOUNTS

Under Section 129 of the Companies Act, 2013, at the annual general meeting of a
company, the Board of Directors of the company should lay financial statements
before the company:

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

(i) a balance sheet as at the end of the financial year;

(ii) a profit and loss account, or in the case of a company carrying on any activity
not for profit, an income and expenditure account for the financial year;

(iii) cash flow statement for the financial year;

(iv) a statement of changes in equity, if applicable; and

(v) any explanatory note annexed to, or forming part of, any document referred
to in (i) to (iv) above:

Provided that the financial statement, with respect to One Person Company, small
company and dormant company, may not include the cash flow statement.

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 FINANCIAL STATEMENTS OF COMPANIES 4.9

Statement of
Profit and loss

Statement of Cash Flow

changes in Statement
Equity (if
applicable) Financial
statements

Notes and
Balance sheet other
statements

As per the Amendment, under Chapter I, clause (40) of section 2, an exemption has
been provided vide Notification dated 13th June, 2017 under Section 462 of the
Companies Act 2013 to a startup private company besides one person company,
small company and dormant company. As per the amendment, a startup private
company is not required to include the cash flow statement in the financial
statements.
Thus the financial statements, with respect to one person company, small company,
dormant company and private company (if such a private company is a start-up),
may not include the cash flow statement.
Requisites of Financial Statements
It should give a true and fair view of the state of affairs of the company as at the
end of the financial year.
Provisions Applicable
(1) Specific Act is Applicable
For instance, any
(a) insurance company
(b) banking company or

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 4.10 ACCOUNTING

(c) any company engaged in generation or supply of electricity  or

(d) any other class of company for which a Form of balance sheet or Profit
and loss account has been prescribed under the Act governing such
class of company

(2) In case of all other companies

Balance Sheet as per Form set out in Part I of Schedule III and Statement of
Profit and Loss as per Part II of Schedule III
Points to be kept in mind while preparing final accounts:
 Requirements of Schedule III to the Companies Act;
 Other statutory requirements;
 Accounting Standards notified by Ministry of Corporate Affairs (MCA) (AS 1
to AS 291);

 Statements and Guidance Notes issued by the Institute of Chartered

Accountants of India (ICAI); which are necessary for understanding the
accounting treatment/ valuation/ disclosure suggested by the ICAI.
Compliance with Accounting Standards
As per section 133 of the Companies Act, it is mandatory to comply with accounting
standards notified by the Central Government from time to time.
Schedule III of the Companies Act, 2013
As per section 129 of the Companies Act, 2013, Financial statements should give a
true and fair view of the state of affairs of the company or companies and comply
with the accounting standards notified under section133 and should be in the form
or forms as may be provided for different class or classes of companies in Schedule
III under the Act. Schedule III to the Companies Act, 2013 has been given as
Annexure at the end of this chapter.


The Electricity Act, 2003 does not specify any format for presentation of Financial Statements.
Therefore, Schedule III of the Companies Act, 2013 is followed by Electricity Companies in
preparation of their financial statements.
1
AS 6 and AS 8 have been withdrawn

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 FINANCIAL STATEMENTS OF COMPANIES 4.11

Requirements of
Schedule III to
the Companies
Act, 2013

Financial
statements

Accounting
Other
Standards
statutory
notified by
requirements
MCA

Example 1
In the financial statements of the financial year 20X1-20X2, Alpha Ltd. has mentioned
in the notes to accounts that during financial year, 24,000 equity shares of ` 10 each
were issued as fully paid bonus shares. However, the source from which these bonus
shares were issued has not been disclosed. Is such non-disclosure a violation of the
Schedule III to the Companies Act? Comment.
Solution
Schedule III has come into force for the Balance Sheet and Profit and Loss Account
prepared for the financial year commencing on or after 1 st April, 20X1. As per Part
I of the Schedule III, a company should, inter alia, disclose in notes to accounts for
the period of 5 years immediately preceding the balance sheet date (31 st March,
20X2 in the instant case) the aggregate number and class of shares allotted as fully
paid-up bonus shares. Schedule III does not require a company to disclose the
source from which bonus shares have been issued. Therefore, non-disclosure of
source from which bonus shares have been issued does not violate the Schedule III
to the Companies Act.
Example 2
The management of Loyal Ltd. contends that the work in process is not valued since
it is difficult to ascertain the same in view of the multiple processes involved. They
opine that the value of opening and closing work in process would be more or less
the same. Accordingly, the management had not separately disclosed work in process
in its financial statements. Comment in line with Schedule III.

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 4.12 ACCOUNTING

Solution

Schedule III to the companies Act does not require that the amounts of WIP at the
beginning and at the end of the accounting period to be disclosed in the statement
of profit and loss. Only changes in inventories of WIP need to be disclosed in the
statement of profit and loss. Non-disclosure of such change in the statement of
profit and loss by the company may not amount to violation of Schedule III if the
differences between opening and closing WIP are not material.
Example 3
Futura Ltd. had the following items under the head “Reserves and Surplus” in the
Balance Sheet as on 31 st March, 20X1:
Amount ` in lakhs
Securities Premium Account 80

Capital Reserve 60
General Reserve 90
The company had an accumulated loss of ` 250 lakhs on the same date, which it has
disclosed under the head “Statement of Profit and Loss” as asset in its Balance Sheet.
Comment on accuracy of this treatment in line with Schedule III to the Companies
Act, 2013.
Solution

Part I of Schedule III to the Companies Act, 2013 provides that debit balance of
Statement of Profit and Loss (after all allocations and appropriations) should be
shown as a negative figure under the head ‘Surplus’. Similarly, the balance of
‘Reserves and Surplus’, after adjusting negative balance of surplus, should be
shown under the head ‘Reserves and Surplus’ even if the resulting figure is in the
negative. In this case, the debit balance of profit and loss i.e. ` 250 lakhs exceeds
the total of all the reserves i.e. ` 230 lakhs. Therefore, balance of ‘Reserves and
Surplus’ after adjusting debit balance of profit and loss is negative by ` 20 lakhs,
which should be disclosed on the face of the balance sheet. Thus the treatment
done by the company is incorrect.

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 FINANCIAL STATEMENTS OF COMPANIES 4.13

Example 4
Sumedha Ltd. took a loan from bank for ` 10,00,000 to be settled within 5 years in
10 equal half yearly instalments with interest. First instalment is due on 30.09.20X1
of ` 1,00,000. Determine how the loan will be classified in preparation of Financial
Statements of Sumedha Ltd. for the year ended 31 st March, 20X1 according to
Schedule III.
Solution
As per Schedule III, a liability should be classified as current when it satisfies any of
the following criteria:
(i) it is expected to be settled in the company’s normal operating cycle;
(ii) it is held primarily for the purpose of being traded;
(iii) it is due to be settled within twelve months after the reporting date; or
(iv) the company does not have an unconditional right to defer settlement of the
liability for at least twelve months after the reporting date.
In the given case, instalments due on 30.09.20X1 and 31.03.20X2 will be shown
under the head ‘other current liabilities’ as per criteria (c).
Therefore, in the balance sheet as on 31.3.20X1, ` 8,00,000 (` 1,00,000 x 8
instalments) will be shown under the heading ‘Long term Borrowings’ and
` 2,00,000 (` 1,00,000 x 2 instalments) will be shown under the heading ‘Other
Current Liabilities’ as current maturities of loan from bank.
Note: Students may note that the questions based on preparation of Statement of
Profit and Loss and Balance Sheet and explanatory notes as per Schedule III have
been given in this Unit. However, questions requiring preparation of cash Flow
statements have been separately given in the next unit of this chapter.

1.6. MANAGERIAL REMUNERATION

Managerial remuneration is calculated as a percentage of profit. Managerial
remuneration payable by a company is governed by various sections of the
Companies Act, 2013 and also Schedule V under the Companies Act, 2013.
The scope of the relevant sections is as below:
Section 197 prescribes the overall maximum managerial remuneration payable and
also managerial remuneration in case of absence or inadequacy of profits.

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 4.14 ACCOUNTING

As per Section 197 of the Companies Act, 2013, total managerial remuneration
payable by a public company, to its directors, including managing director and
whole-time director, and its manager in respect of any financial year should not
exceed 11% of the net profits of that company for that financial year computed in
the manner laid down in section 198 except that the remuneration of the directors
should not be deducted from the gross profits. The company in general meeting
may, with the approval of the Central Government, authorise the payment of
remuneration exceeding 11% of the net profits of the company, subject to the
provisions of Schedule V.
Provided further that, except with the approval of the company in general
meeting,—
(i) the remuneration payable to any one managing director; or whole-time
director or manager should not exceed 5% of the net profits of the company
and if there are more than one such director, remuneration should not exceed
10% of the net profits to all such directors and manager taken together;
(ii) the remuneration payable to directors who are neither managing directors
nor whole-time directors should not exceed,—
(A) 1% of the net profits of the company, if there is a managing or whole-
time director or manager;
(B) 3% of the net profits in any other case.
Section 198 lays down how the net profit of the company will be ascertained for
the purpose of calculating managerial remuneration.
Schedule V consists of four parts. Part I lays down conditions to be fulfilled for the
appointment of a managing or whole-time director or a manager without the
approval of the Central Government. Part II deals with remuneration payable to
managerial person by companies having profits and also by companies having no
profits or inadequate profits. Part III specifies the provisions applicable to parts 1
and 2 of this schedule and Part IV deals with Central Government’s power to relax
any requirements in this Schedule.
The relevant details given under Part II of Schedule V are as follows:
Section I - Remuneration payable by companies having profits:
Subject to the provisions of section 197, a company having profits in a financial
year may pay remuneration to a managerial person or persons not exceeding the
limits specified in such section.

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 FINANCIAL STATEMENTS OF COMPANIES 4.15

Section II - Remuneration payable by companies having no profit or

inadequate profit:
Where in any financial year during the currency of tenure of a managerial person,
a company has no profits or its profits are inadequate, it may, pay remuneration to
the managerial person not exceeding the higher of the limits under (A) and (B)
given below:-
(A)

(1) (2)

Where the effective capital is Limit of yearly remuneration payable
should not exceed (Rupees)
(i) Negative or less than 5 crores 60 Lakhs
(ii) 5 crores and above but less 84 Lakhs
than 100 crores
(iii) 100 crores and above but less
120 Lakhs
than 250 crores
(iv) 250 crores and above 120 lakhs plus 0.01% of the effective
capital in excess of ` 250 crores.

Provided that the remuneration in excess of the above limits may be paid if
the resolution passed by the shareholders is a special resolution.
Explanation - It is hereby clarified that for a period less than one year, the
limits should be pro-rated.
(B) In case of a managerial person who is functioning in a professional capacity,
remuneration as per item (A) may be paid, if such managerial person is not
having any interest in the capital of the company or its holding company or
any of its subsidiaries directly or indirectly or through any other statutory
structures and not having any, direct or indirect interest or related to the
directors or promoters of the company or its holding company or any of its
subsidiaries at any time during the last two years before or on or after the date
of appointment and possesses graduate level qualification with expertise and
specialised knowledge in the field in which the company operates:


Effective Capital has been explained after Section IV in the succeeding pages of this unit.
Students are advised to please refer that definition of Effective Capital.

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 4.16 ACCOUNTING

Provided that any employee of a company holding shares of the company

not exceeding 0.5% of its paid up share capital under any scheme formulated
for allotment of shares to such employees including Employees Stock Option
Plan or by way of qualification should be deemed to be a person not having
any interest in the capital of the company;
Provided further that the limits specified under items (A) and (B) of this section
should apply, if-
(i) payment of remuneration is approved by a resolution passed by the Board
and, in the case of a company covered under Section 178(1) also by the
Nomination and Remuneration Committee;
(ii) the company has not committed any default in payment of dues to any bank
or public financial institution or non-convertible debenture holders or any
other secured creditor, and in case of default, the prior approval of the bank
or public financial institution concerned or the non-convertible debenture
holders or other secured creditor, as the case may be, shall be obtained by
the company before obtaining the approval in the general meeting.
(iii) an ordinary resolution or a special resolution, as the case may be, has been
passed for payment of Remuneration as per item (A) or a special resolution has
been passed for payment of remuneration as per item (B), at the general meeting
of the company for a period not exceeding 3 years.
(iv) a statement along with a notice calling the general meeting referred to in clause
(iii) is given to the shareholders containing the following information, namely:-
I. General Information:
(1) Nature of industry
(2) Date or expected date of commencement of commercial production.
(3) In case of new companies, expected date of commencement of activities
as per project approved by financial institutions appearing in the
prospectus
(4) Financial performance based on given indicators
(5) Foreign investments or collaborations, if any.
II. Information about the appointee:
(1) Background details

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 FINANCIAL STATEMENTS OF COMPANIES 4.17

(2) Past remuneration

(3) Recognition or awards
(4) Job profile and his suitability
(5) Remuneration proposed
(6) Comparative remuneration profile with respect to industry, size of the
company, profile of the position and person (in case of expatriates the
relevant details would be with respect to the country of his origin)
(7) Pecuniary relationship directly or indirectly with the company, or
relationship with the managerial personnel, if any.
III. Other information:
(1) Reasons of loss or inadequate profits
(2) Steps taken or proposed to be taken for improvement
(3) Expected increase in productivity and profits in measurable terms.
IV. Disclosures:
The following disclosures should be mentioned in the Board of Director's report
under the heading "Corporate Governance", if any, attached to the financial
statement:-
(i) all elements of remuneration package such as salary, benefits, bonuses, stock
options, pension, etc., of all the directors;
(ii) details of fixed component and performance linked incentives along with the
performance criteria;
(iii) service contracts, notice period, severance fees;
(iv) stock option details, if any, and whether the same has been issued at a
discount as well as the period over which accrued and over which exercisable.
Section III - Remuneration payable by companies having no profit or
inadequate profit in certain special circumstances
In the following circumstances a company may, pay remuneration to a managerial
person in excess of the amounts provided in Section II above:-
(a) where the remuneration in excess of the limits specified in Section I or II is
paid by any other company and that other company is either a foreign
company or has got the approval of its shareholders in general meeting to

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make such payment, and treats this amount as managerial remuneration for
the purpose of Section 197 and the total managerial remuneration payable
by such other company to its managerial persons including such amount or
amounts is within permissible limits under Section 197.
(b) where the company-
(i) is a newly incorporated company, for a period of seven years from the
date of its incorporation, or
(ii) is a sick company, for whom a scheme of revival or rehabilitation has
been ordered by the Board for Industrial and Financial Reconstruction
for a period of 5 years from the date of sanction of scheme of revival,
(iii) is a company in relation to which a resolution plan has been approved
by the National Company Law Tribunal under the Insolvency and
Bankruptcy Code, 2016 for a period of 5 years from the date of such
approval, it may pay any remuneration to its managerial persons.
(c) where remuneration of a managerial person exceeds the limits in Section II
but the remuneration has been fixed by the Board for Industrial and Financial
Reconstruction or the National Company Law Tribunal:
Provided that the limits under this Section should be applicable subject to
meeting all the conditions specified under Section II and the following
additional conditions:-
(i) except as provided in para (a) of this Section, the managerial person is
not receiving remuneration from any other company;
(ii) the auditor or Company Secretary of the company or where the
company has not appointed a Secretary, a Secretary in whole-time
practice, certifies that all secured creditors and term lenders have stated
in writing that they have no objection for the appointment of the
managerial person as well as the quantum of remuneration and such
certificate is filed along with the return as prescribed under sub-section
(4) of section 196.
(iii) the auditor or Company Secretary or where the company has not
appointed a secretary, a secretary in whole-time practice certifies that
there, is no default on payments to any creditors, and all dues to deposit
holders are being settled on time.

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 FINANCIAL STATEMENTS OF COMPANIES 4.19

(d) a company in a Special Economic Zone as notified by Department of

Commerce from time to time which has not raised any money by public issue
of shares or debentures in India, and has not made any default in India in
repayment of any of its debts (including public deposits) or debentures or
interest payable thereon for a continuous period of thirty days in any financial
year, may pay remuneration up to ` 2,40,00,000 per annum.
Section IV -Perquisites not included in managerial remuneration:
1. A managerial person should be eligible for the following perquisites which
should not be included in the computation of the ceiling on remuneration
specified in Section II and Section III:-
(a) contribution to provident fund, superannuation fund or annuity fund to
the extent these either singly or put together are not taxable under the
Income-tax Act, 1961;
(b) gratuity payable at a rate not exceeding half a month's salary for each
completed year of service; and
(c) encashment of leave at the end of the tenure.
2. In addition to the perquisites specified in paragraph 1 of this section, an
expatriate managerial person (including a non-resident Indian) should be
eligible to the following perquisites which should not be included in the
computation of the ceiling on remuneration specified in Section II or Section III-
(a) Children's education allowance: In case of children studying in or
outside India, an allowance limited to a maximum of ` 12,000 per month
per child or actual expenses incurred, whichever is less. Such allowance
is admissible up to a maximum of two children.
(b) Holiday passage for children studying outside India or family staying
abroad: Return holiday passage once in a year by economy class or once
in two years by first class to children and to the members 'of the family
from the place of their study or stay abroad to India if they are not
residing in India, with the managerial person.
(c) Leave travel concession: Return passage for self and family in accordance
with the rules specified by the company where it is proposed that the leave
be spent in home country instead of anywhere in India.

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 4.20 ACCOUNTING

Explanation I- For the purposes of Section II of this Part, "Effective capital" means
the aggregate of the paid-up share capital (excluding share application money or
advances against shares); amount, if any, for the time being standing to the credit
of share premium account; reserves and surplus (excluding revaluation reserve);
long-term loans and deposits repayable after one year (excluding working capital
loans, over drafts, interest due on loans unless funded, bank guarantee, etc., and
other short-term arrangements) as reduced by the aggregate of any investments
(except in case of investment by an investment company whose principal business
is acquisition of shares, stock, debentures or other securities), accumulated losses
and preliminary expenses not written off.
Explanation II- (a) Where the appointment of the managerial person is made in
the year in which company has been incorporated, the effective capital should be
calculated as on the date of such appointment;
(b) In any other case the effective capital should be calculated as on the last date
of the financial year preceding the financial year in which the appointment of the
managerial person is made.
Explanation III- For the purposes of this Schedule, "family" means the spouse,
dependent children and dependent parents of the managerial person.
Explanation IV- The Nomination and Remuneration Committee while approving
the remuneration under Section II or Section Ill, should-
(a) take into account, financial position of the company, trend in the industry,
appointee's qualification, experience, past performance, past remuneration, etc.;
(b) be in a position to bring about objectivity in determining the remuneration
package while striking a balance between the interest of the company and
the shareholders.
Explanation V- For the purposes of this Schedule, "negative effective capital"
means the effective capital which is calculated in accordance with the provisions
contained in Explanation I of this Part is less than zero.
Explanation VI- For the purposes of this Schedule:-
(A) "current relevant profit" means the profit as calculated under section 198 but
without deducting the excess of expenditure over income referred to in sub-
section 4 (I) thereof in respect of those years during which the managerial
person was not an employee, director or shareholder of the company or its
holding or subsidiary companies.

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 FINANCIAL STATEMENTS OF COMPANIES 4.21

(B) "Remuneration" means remuneration as defined in clause 78 of section 2 and

includes reimbursement of any direct taxes to the managerial person.
Section V- Remuneration payable to a managerial person in two companies:
Subject to the provisions of sections I to IV, a managerial person should draw
remuneration from one or both companies, provided that the total remuneration
drawn from the companies does not exceed the higher maximum limit admissible
from anyone of the companies of which he is a managerial person.
Note: The appointment and remuneration referred to in Part I and Part II of this
Schedule should be subject to approval by a resolution of the shareholders in
general meeting.
Ascertainment of profit for managerial remuneration
As we have seen above that in case of a company having profits, managerial
remuneration is calculated as a percentage on net profit. Such net profit is to be arrived
in accordance with the provisions of Section 198 of the Companies Act, 2013.
As per Section 198 of the Companies Act, 2013,
(I) In making the computation aforesaid, credit should be given for the bounties
and subsidies received from any Government, or any public authority
constituted or authorised in this behalf, by any Government, unless and
except in so far as the Central Government otherwise directs.
(II) In making the computation of the net profits, credit should not be given for
the following sums, namely:—
(a) profits, by way of premium on shares or debentures of the company,
which are issued or sold by the company
(b) profits on sales by the company of forfeited shares
(c) profits of a capital nature including profits from the sale of the
undertaking or any of the undertakings of the company or of any part
thereof
(d) profits from the sale of any immovable property or fixed assets of a
capital nature comprised in the undertaking or any of the undertakings
of the company, unless the business of the company consists, whether
wholly or partly, of buying and selling any such property or assets:
Provided that where the amount for which any fixed asset is sold
exceeds the written-down value thereof, credit should be given for so

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 4.22 ACCOUNTING

much of the excess as is not higher than the difference between the
original cost of that fixed asset and its written-down value
(e) any change in carrying amount of an asset or of a liability recognised in
equity reserves including surplus in profit and loss account on
measurement of the asset or the liability at fair value
(III) In making the computation aforesaid, the following sums should be
deducted, namely:—
(a) all the usual working charges
(b) directors’ remuneration
(c) bonus or commission paid or payable to any member of the company’s
staff, or to any engineer, technician or person employed or engaged by
the company, whether on a whole-time or on a part-time basis
(d) any tax notified by the Central Government as being in the nature of a
tax on excess or abnormal profits
(e) any tax on business profits imposed for special reasons or in special
circumstances and notified by the Central Government in this behalf
(f) interest on debentures issued by the company
(g) interest on mortgages executed by the company and on loans and
advances secured by a charge on its fixed or floating assets
(h) interest on unsecured loans and advances
(i) expenses on repairs, whether to immovable or to movable property,
provided the repairs are not of a capital nature
(j) outgoings inclusive of contributions made under section 181 of the Act
(k) depreciation to the extent specified in section 123 of the Act
(l) the excess of expenditure over income, which had arisen in computing
the net profits in accordance with this section in any year which begins
at or after the commencement of this Act, in so far as such excess has
not been deducted in any subsequent year preceding the year in
respect of which the net profits have to be ascertained
(m) any compensation or damages to be paid in virtue of any legal liability
including a liability arising from a breach of contract

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 FINANCIAL STATEMENTS OF COMPANIES 4.23

(n) any sum paid by way of insurance against the risk of meeting any
liability such as is referred to in clause (m)
(o) debts considered bad and written off or adjusted during the year of
account
(IV) In making the computation aforesaid, the following sums should not be
deducted, namely:—
(a) income-tax and super-tax payable by the company under the Income-
tax Act, 1961, or any other tax on the income of the company not falling
under clauses (d) and (e) of sub-section (4)
(b) any compensation, damages or payments made voluntarily, that is to
say, otherwise than in virtue of a liability such as is referred to in clause
(m) of sub-section (4)
(c) loss of a capital nature including loss on sale of the undertaking or any
of the undertakings of the company or of any part thereof not including
any excess of the written-down value of any asset which is sold,
discarded, demolished or destroyed over its sale proceeds or its scrap
value
(d) any change in carrying amount of an asset or of a liability recognised in
equity reserves including surplus in profit and loss account on
measurement of the asset or the liability at fair value
Illustration 1
The following extract of Balance Sheet of X Ltd. was obtained:
Balance Sheet (Extract) as at 31st March, 20X1

Liabilities `
Authorised capital:
20,000, 14% preference shares of ` 100 20,00,000
2,00,000 Equity shares of ` 100 each 2,00,00,000
2,20,00,000
Issued and subscribed capital:
15,000, 14% preference shares of ` 100 each fully paid 15,00,000
1,20,000 Equity shares of ` 100 each, ` 80 paid-up 96,00,000
Share suspense account 20,00,000

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 4.24 ACCOUNTING

Reserves and surplus:

Capital reserves ( ` 1,50,000 is revaluation reserve) 1,95,000
Securities premium 50,000
Secured loans:
15% Debentures 65,00,000
Unsecured loans:
Public deposits 3,70,000
Cash credit loan from SBI (short term) 4,65,000
Current Liabilities:
Trade Payables 3,45,000
Assets:
Investment in shares, debentures, etc. 75,00,000
Profit and Loss account (Dr. balance) 15,25,000

Share suspense account represents application money received on shares, the

allotment of which is not yet made.
You are required to compute effective capital as per the provisions of Schedule V.
Would your answer differ if X Ltd. is an investment company?
Solution
Computation of effective capital:

Where X Ltd. Is Where X Ltd. is

a non- an investment
investment company
company `
`
Paid-up share capital —
15,000, 14% Preference shares 15,00,000 15,00,000
1,20,000 Equity shares 96,00,000 96,00,000
Capital reserves (1,95,000 – 1,50,000) 45,000 45,000
Securities premium 50,000 50,000
15% Debentures 65,00,000 65,00,000

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 FINANCIAL STATEMENTS OF COMPANIES 4.25

Public Deposits 3,70,000 3,70,000

(A) 1,80,65,000 1,80,65,000
Investments 75,00,000 —
Profit and Loss account (Dr. balance) 15,25,000 15,25,000
(B) 90,25,000 15,25,000
Effective capital (A–B) 90,40,000 1,65,40,000

Illustration 2
Kumar Ltd., a non-investment company has been incurring losses for the past few
years. The company provides the following information for the current year:

(` in lakhs)
Paid up equity share capital 120
Paid up Preference share capital 20
Reserves (including Revaluation reserve ` 10 lakhs) 150
Securities premium 40
Long term loans 40
Deposits repayable after one year 20
Application money pending allotment 720
Accumulated losses not written off 20
Investments 180

Kumar Ltd. has only one whole-time director, Mr. X. You are required to calculate the
amount of maximum remuneration that can be paid to him if no special resolution
is passed at the general meeting of the company in respect of payment of
remuneration for a period not exceeding three years.
Solution
Calculation of effective capital and maximum amount of monthly
remuneration
(` in lakhs)
Paid up equity share capital 120
Paid up Preference share capital 20
Reserve excluding Revaluation reserve (150- 10) 140

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 4.26 ACCOUNTING

Securities premium 40
Long term loans 40
Deposits repayable after one year 20
380
Less: Accumulated losses not written off (20)
Investments (180)
Effective capital for the purpose of managerial remuneration 180
Since Kumar Ltd. is incurring losses and no special resolution has been passed by the
company for payment of remuneration, managerial remuneration will be calculated on
the basis of effective capital of the company, therefore maximum remuneration
payable to the Managing Director should be @ ` 60,00,000 per annum.
Note: Revaluation reserve, and application money pending allotment are not
included while computing effective capital of Kumar Ltd.
Illustration 3
Mudra Ltd. gives the following information the year ended 31st March, 20X1:
`
Gross profit 40,25,365
Subsidies received from Govt. 2,73,925

Administrative, Selling and distribution expenses 8,22,542

Directors’ fees 1,34,780
Interest on debentures 31,240
Managerial remuneration 2,85,350
Depreciation on Property, plant and equipment (PPE) 5,22,543
Provision for Taxation 12,42,500
Transfer to General Reserve 4,00,000
Transfer to Investment Revaluation Reserve 12,500

Depreciation on PPE as per Schedule II of the Companies Act, 2013 was

` 5,75,345. You are required to calculate the maximum limits of the managerial
remuneration as per Companies Act, 2013.

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 FINANCIAL STATEMENTS OF COMPANIES 4.27

Solution
Calculation of net profit u/s 198 of the Companies Act, 2013
` `
Gross profit 40,25,365
Add: Subsidies received from Government 2,73,925
42,99,290
Less: Administrative, selling and distribution 8,22,542
expenses
Director’s fees 1,34,780
Interest on debentures 31,240
Depreciation on PPE as per Schedule II 5,75,345 (15,63,907)
Profit u/s 198 27,35,383

Maximum Managerial remuneration under Companies Act, 2013= 11% of

` 27,35,383= ` 3,00,892

1.7 DIVISIBLE PROFIT

One of the important functions of company accounting is to determine the amount
of profits which is available for distribution to the shareholders as dividend. This is
necessary since the amount of profits disclosed by the Profit & Loss Account, in
every case, is not available for distribution. The availability of profits for distribution
depends on a number of factors, e.g., their composition, the amount of provisions
and appropriations that must be made out of them in priority, etc.
Meaning of Dividend
(a) A dividend is a distribution of divisible profit of a company among the
members according to the number of shares held by each of them in the
capital of the company and the rights attaching thereto.
(b) Such a distribution may or may not entail a release of assets; it would be
where a distribution involves payment of cash.
(c) But when profits are capitalised and the amount distributed is applied
towards payment of bonus shares, issued free to the shareholders, no part of
the assets of the company can be said to have been released since, in such a
case, profits are only capitalised, thereby increasing the paid up capital of the
company. The company does not give up any asset.

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 4.28 ACCOUNTING

As per Section 2 (35) of the Companies Act, 2013, term “Dividend” includes interim
dividend also.
Under Section 123 (1) of the Companies Act, 2013, no dividend should be declared
or paid by a company for any financial year except-
(a) Out of the profits of the company for that financial year arrived at after
providing for depreciation in accordance with the provisions of section
123(2), or
(b) Out of the profits for any previous financial years arrived at after providing
for depreciation in accordance with the provisions of that sub section and
remaining undistributed; or
(c) Out of both the above;
(d) Out of the moneys provided by the Central Government or any State
Government for the payment of dividend by the Company in pursuance of
any guarantee given by that government
Provided that no dividend should be declared or paid by a company from its
reserves other than free reserves.
Declaration of a dividend presupposes that there is a trading profit or a surplus
available for distribution, arrived at after providing for depreciation on assets, not
only for the year in which the profits were earned but also for any arrears of
depreciation of the past years, calculated in the manner prescribed by sub-section
(2) of Section 123.
Sub-section (3) of Section 124 further states that the Board of Directors of a
company may declare interim dividend during any financial year out of the surplus
in the profit and loss account and out of profits of the financial year in which such
interim dividend is sought to be declared: Provided that in case the company has
incurred loss during the current financial year up to the end of the quarter
immediately preceding the date of declaration of interim dividend, such interim
dividend should not be declared at a rate higher than the average dividends
declared by the company during the immediately preceding three financial years.
Dividends cannot be declared except out of profits.
Capital cannot be returned to the shareholders by way of dividend.
Dividend can be declared and paid by a company only out of the profits or free
reserves (other than moneys provided by Central or State Govt.) as the payment of
dividend from any other source will amount to payment of dividend from capital units.

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 FINANCIAL STATEMENTS OF COMPANIES 4.29

Provision for Depreciation

Section 123(2) provides that depreciation must be to the extent specified in Schedule
II to the Companies Act, 2013.Further, when the assets are sold, discarded, demolished
or destroyed in any financial year, the excess of the written down value over its sale
proceeds as scrap, if any should be written off in the same financial year.
Declaration and Payment of Dividend
For the purpose of second proviso to sub-section (1) of section 123, a company
may declare dividend out of the accumulated profits earned by it in previous years
and transferred by it to the reserves, in the event of inadequacy or absence of
profits in any year, subject to the fulfilment of the following conditions as per
Companies (Declaration and Payment of Dividend) Rules, 2014:
(1) The rate of dividend declared should not exceed the average of the rates at
which dividend was declared by it in the three years immediately preceding
that year: provided that this sub-rule should not apply to a company, which
has not declared any dividend in each of the three preceding financial years.
(2) The total amount to be drawn from such accumulated profits should not
exceed one-tenth of the sum of its paid-up share capital and free reserves as
appearing in the latest audited financial statement.
(3) The amount so drawn should first be utilised to set off the losses incurred in
the financial year in which dividend is declared before any dividend in respect
of equity shares is declared.
(4) The balance of reserves after such withdrawal should not fall below 15% of
its paid up share capital as appearing in the latest audited financial statement.
(5) No company should declare dividend unless carried over previous losses and
depreciation not provided in previous year are set off against profit of the
company of the current year the loss or depreciation, whichever is less, in
previous years is set off against the profit of the company for the year for
which dividend is declared or paid.
Transfer to Reserves
I The Board of Directors are free and can appropriate a part of the profits to
the credit of a reserve or reserves as per section 123 (1) of the Companies
Act, 2013.

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 4.30 ACCOUNTING

II Appropriation of a part of profit is sometimes made under law.

(a) For example, under the Banking Regulation Act, a fixed percentage of
the profit of a banking company must first be transferred to the General
Reserve before any dividend can be distributed.
(b) Transfer of a part of profit to a reserve is also necessary where the
company has undertaken, at the time of raising of loan, that before any
part of its profit is distributed, a specified percentage of the profit every
year should be credited to a reserve for the repayment of the loan and
until the time for repayment arrives, the amount should remain invested
in a specified manner.
III Apart from appropriations aforementioned, it may also be necessary to
provide for losses and arrears of depreciation and to exclude capital profit, as
mentioned earlier, to arrive at the amount of divisible profit.
Declaration of Dividend
As per Section 123 of the Companies Act, 2013, Board of Directors of a company
may declare dividend including interim dividend during any financial year out of
the surplus in the profit and loss account and out of profits of the financial year in
which such interim dividend is sought to be declared:
Provided that in case the company has incurred loss during the current financial
year up to the end of the quarter immediately preceding the date of declaration of
interim dividend, such interim dividend should not be declared at a rate higher than
the average dividends declared by the company during the immediately preceding
three financial years.
The amount of the dividend, including interim dividend, should be deposited in a
scheduled bank in a separate account within five days from the date of declarat ion
of such dividend.
No dividend should be paid by a company in respect of any share therein except
to the registered shareholder of such share or to his order or to his banker and
should not be payable except in cash: Provided that nothing in Section 123 should
be deemed to prohibit the capitalisation of profits or reserves of a company for the
purpose of issuing fully paid-up bonus shares or paying up any amount for the time
being unpaid on any shares held by the members of the company:

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 FINANCIAL STATEMENTS OF COMPANIES 4.31

Provided further that any dividend payable in cash may be paid by cheque or
warrant or in any electronic mode to the shareholder entitled to the payment of
the dividend.
Dividend on preference shares
(a) Holders of preference shares are entitled to receive a dividend at a fixed rate
before any dividend is declared on equity shares.
(b) But such a right can be exercised subject to there being profits and the
Directors recommending payment of the dividend.
Dividend on partly paid shares:
 A company may if so authorised by its Article, pay a dividend in proportion
to the amount paid on each share (Section 51 of the Companies Act, 2013).
Calls in Advance
Calls paid in advance do not rank for payment of dividend.
Payment of Dividend
As per Section 124 of the Companies Act, 2013:
(1) Where a dividend has been declared by a company but has not been paid or
claimed within thirty days from the date of the declaration to any shareholder
entitled to the payment of the dividend, the company should, within seven
days from the date of expiry of the said period of thirty days, transfer the
total amount of dividend which remains unpaid or unclaimed to a special
account to be opened by the company in that behalf in any scheduled bank
to be called the Unpaid Dividend Account.
(2) The company should, within a period of ninety days of making any transfer
of an amount under this section to the Unpaid Dividend Account, prepare a
statement containing the names, their last known addresses and the unpaid
dividend to be paid to each person and place it on the website of the
company, if any, and also on any other website approved by the Central
Government for this purpose, in such form, manner and other particulars as
may be prescribed.
(3) If any default is made in transferring the total amount or any part thereof to the
Unpaid Dividend Account of the company, it should pay, from the date of such
default, interest on so much of the amount as has not been transferred to the
said account, at the rate of 12% per annum and the interest accruing on such
amount should ensure to the benefit of the members of the company in

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 4.32 ACCOUNTING

proportion to the amount remaining unpaid to them.

(4) Any person claiming to be entitled to any money transferred to the Unpaid
Dividend Account of the company may apply to the company for payment of
the money claimed.
(5) Any money transferred to the Unpaid Dividend Account of a company in
pursuance of this section which remains unpaid or unclaimed for a period of
seven years from the date of such transfer should be transferred by the
company along with interest accrued, if any, thereon to the Fund “Investor
Education and Protection Fund” established section 125 and the company
should send a statement in the prescribed form of the details of such transfer
to the authority which administers the said Fund and that authority should
issue a receipt to the company as evidence of such transfer.
(6) All shares in respect of which unpaid or unclaimed dividend has been
transferred to “Investor Education and Protection Fund” should also be
transferred by the company in the name of Investor Education and Protection
Fund along with a statement containing such details as may be prescribed:
Provided that any claimant of shares transferred above should be entitled to
claim the transfer of shares from Investor Education and Protection Fund in
accordance with such procedure and on submission of such documents as
may be prescribed.
(7) If a company fails to comply with any of the requirements of this section, the
company will be punishable with fine which will not be less than five lakh
rupees but which may extend to twenty-five lakh rupees and every officer of
the company who is in default will be punishable with fine which will not be
less than one lakh rupees but which may extend to five lakh rupees.
Illustration 4
Due to inadequacy of profits during the year ended 31 st March, 20X2, XYZ Ltd.
proposes to declare 10% dividend out of general reserves. From the following
particulars, ascertain the amount that can be utilised from general reserves,
according to the Companies (Declaration of dividend out of Reserves) Rules, 20 14:
`
17,500 9% Preference shares of ` 100 each, fully paid up 17,50,000
8,00,000 Equity shares of ` 10 each, fully paid up 80,00,000
General Reserves as on 1.4.20X1 25,00,000

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 FINANCIAL STATEMENTS OF COMPANIES 4.33

Capital Reserves as on 1.4.20X1 3,00,000

Revaluation Reserves as on 1.4.20X1 3,50,000
Net profit for the year ended 31 st March, 20X2 3,00,000
Average rate of dividend during the last three years has been 12%.

Solution

Amount that can be drawn from reserves for 10%

dividend
10% dividend on ` 80,00,000 ` 8,00,000
Profits available
Current year profit 3,00,000
Less: Preference dividend (1,57,500)
(1,42,500)
Amount which can be utilised from reserves 6,57,500

Conditions as per Companies (Declaration of dividend out of Reserves) Rules, 20X1:

Condition I
Since 10% is lower than the average rate of dividend (12%), 10% dividend can be
declared.
Condition II
Maximum amount that can be drawn from the accumulated profits and reserves
should not exceed 10% of paid up capital plus free reserves ie. ` 12,25,000 [10% of
(80,00,000+17,50,000+25,00,000)]
Condition III
The balance of reserves after drawl ` 18,42,500 (` 25,00,000 - ` 6,57,500) should
not fall below 15 % of its paid up capital ie. ` 14,62,500 (15% of ` 97,50,000]
Since all the three conditions are satisfied, the company can withdraw ` 6,57,500
from accumulated reserves (as per Declaration and Payment of Dividend Rules,
2014.)

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 4.34 ACCOUNTING

Illustration 5
The following is the Trial Balance of Omega Limited as on 31.3.20X2:
(Figures in` ‘000)

Debit Credit
Land at cost 220 Equity Capital (Shares of ` 10 300
each)
Plant & Machinery at cost 770 10% Debentures 200
Trade Receivables 96 General Reserve 130
Inventories (31.3.X2) 86 Profit & Loss A/c 72
Bank 20 Securities Premium 40
Adjusted Purchases 320 Sales 700
Factory Expenses 60 Trade Payables 52
Administration Expenses 30 Provision for Depreciation 172
Selling Expenses 30 Suspense Account 4
Debenture Interest 20
Interim Dividend Paid 18
1670 1670

Additional Information:
(i) The authorised share capital of the company is 40,000 shares of ` 10 each.
(ii) The company on the advice of independent valuer wish to revalue the land at
` 3,60,000.
(iii) Declared final dividend @ 10% on 2nd April, 20X2.
(iv) Suspense account of ` 4,000 represents cash received for the sale of some of
the machinery on 1.4.20X1. The cost of the machinery was ` 10,000 and the
accumulated depreciation thereon being ` 8,000.
(v) Depreciation is to be provided on plant and machinery at 10% on cost.
You are required to prepare Omega Limited’s Balance Sheet as on 31.3.20X2 and
Statement of Profit and Loss with notes to accounts for the year ended 31.3.20X2 as
per Schedule III. Ignore previous years’ figures & taxation.

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 FINANCIAL STATEMENTS OF COMPANIES 4.35

Solution
Omega Limited
Balance Sheet as at 31st March, 20X2

Particulars Note No. (` in 000)

Equity and Liabilities
1. Shareholders' funds
a Share capital 1 300
b Reserves and Surplus 2 530
2. Non-Current liabilities
a Long term borrowings 3 200
3. Current liabilities
a Trade Payables 52
Total 1082
Assets
1. Non-current assets
A PPE (Property, Plant & Equipment) 4 880
2. Current assets
A Inventories 86
B Trade receivables 96
C Cash and bank balances 20
Total 1082

Omega Limited
Statement of Profit and Loss for the year ended 31st March, 20X2

Particulars Notes (` in 000)

I. Revenue from operations 700
II. Other Income 5 2
III Total Revenue 702
IV Expenses:
Purchases 320
Finance costs 6 20

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 4.36 ACCOUNTING

Depreciation (10% of 760 ) 76

Other expenses 7 120
Total Expenses 536
V. Profit (Loss) for the period (III – IV) 166
Notes to accounts

(` in 000)
1. Share Capital
Equity share capital
Authorised
40,000 shares of ` 10 each 400
Issued & subscribed & called up
30,000 shares of ` 10 each 300
2. Reserves and Surplus
Securities Premium Account 40
Revaluation reserve (360 – 220) 140
General reserve 130
Profit & loss Balance
Opening balance 72
Profit for the period 166 238
Less: Appropriations
Interim Dividend (18) 220
530
3. Long term borrowing
10% Debentures 200


770 (Plant and machinery at cost) – 10 (Cost of plant and machinery sold)

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 FINANCIAL STATEMENTS OF COMPANIES 4.37

4. PPE
Land
Opening balance 220
Add: Revaluation adjustment 140
Closing balance 360
Plant and Machinery
Opening balance 770
Less: Disposed off (10)
760
Less: Depreciation (172-8+76) (240)
Closing balance 520
Total 880
5. Other Income
Profit on sale of machinery:
Sale value of machinery 4
Less: Book value of machinery (10-8) (2) 2
6. Finance costs
Debenture interest 20
7. Other expenses:
Factory expenses 60
Selling expenses 30
Administrative expenses 30 120

Note: The final dividend will not be recognized as a liability at the balance sheet
date (even if it is declared after reporting date but before approval of the financial
statements) as per Accounting Standards. Hence, it has not been recognized in
the financial statements for the year ended 31 March, 20X2. Such dividends will
be disclosed in notes only.

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 4.38 ACCOUNTING

Illustration 6
You are required to prepare Balance sheet and statement of Profit and Loss from the
following trial balance of Haria Chemicals Ltd. for the year ended 31st March, 20X1.
Haria Chemicals Ltd.
Trial Balance as at 31st March, 20X1

Particulars ` Particulars `
Inventory 6,80,000 Equity Shares
Furniture 2,00,000 Capital (Shares of ` 10 each) 25,00,000
Discount 40,000 11% Debentures 5,00,000
Loan to Directors 80,000 Bank loans 6,45,000
Advertisement 20,000 Trade payables 2,81,000
Bad debts 35,000 Sales 42,68,000
Commission 1,20,000 Rent received 46,000
Purchases 23,19,000 Transfer fees 10,000
Plant and Machinery 8,60,000 Profit & Loss account 1,39,000
Rentals 25,000 Depreciation provision:
Current account 45,000 Machinery 1,46,000
Cash 8,000
Interest on bank loans 1,16,000
Preliminary expenses 10,000
Fixtures 3,00,000
Wages 9,00,000
Consumables 84,000
Freehold land 15,46,000
Tools & Equipments 2,45,000
Goodwill 2,65,000
Trade receivables 4,40,000
Dealer aids 21,000
Transit insurance 30,000
Trade expenses 37,000

© The Institute of Chartered Accountants of India

 FINANCIAL STATEMENTS OF COMPANIES 4.39

Distribution freight 54,000

Debenture interest 55,000
85,35,000 85,35,000

Additional information: Closing Inventory on 31-3-20X1: ` 8,23,000.

Solution
Haria Chemicals Ltd.
Balance Sheet as at 31st March, 20X1
Schedule Rupees as at the
No. end of 31st March 20X1
(1) (2)
Equity and Liabilities
(1) Shareholders’ funds :
(a) Share Capital 1 25,00,000
(b) Reserves and Surplus 2 7,40,000
(2) Non Current Liabilities
(a) Long term borrowings 3 11,45,000
(3) Current Liabilities
(a) Trade payables 2,81,000
Total 46,66,000
Assets
(1) Non current assets
(a) PPE 4 30,05,000
(b) Intangible assets (goodwill) 2,65,000
(2) Current assets
(a) Inventories 8,23,000
(b) Trade receivables 4,40,000
(c) Cash and bank balances 5 53,000
(d) Short term loans and advances 6 80,000
Total 46,66,000

© The Institute of Chartered Accountants of India

 4.40 ACCOUNTING

Haria Chemicals Ltd.

Statement of Profit and Loss for the year ended 31st March, 20X1

Schedule Figures
Revenue from operations 42,68,000
Other income 7 56,000
(A) 43,24,000
Expenses
Cost of materials consumed 8 23,19,000
Change in inventory of finished goods 9 (1,43,000)
Employee benefit expenses 10 9,00,000
Finance cost 11 1,71,000
Other expenses 12 4,76,000
(B) 37,23,000
Profit before tax (A – B) 6,01,000
Provision for tax —
Profit for the period 6,01,000
Notes to Accounts
1. Share capital `
Authorised:
Equity share capital of ` 10 each 25,00,000
Issued and Subscribed:
Equity share capital of ` 10 each 25,00,000
2. Reserves and Surplus
Balance as per last balance sheet 1,39,000
Balance in profit and loss account 6,01,000
7,40,000

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 FINANCIAL STATEMENTS OF COMPANIES 4.41

3. Long term Borrowings

11% Debentures 5,00,000
Bank loans (assumed long-term) 6,45,000
11,45,000
4. PPE

Gross block Depreciation Net Block

Freehold land 15,46,000 15,46,000
Furniture 2,00,000 2,00,000
Fixtures 3,00,000 3,00,000
Plant & Machinery 8,60,000 1,46,000 7,14,000
Tools & Equipment 2,45,000 ________ 2,45,000
Total 31,51,000 1,46,000 30,05,000
5. Cash and bank balances
Cash and cash equivalents
Current account balance 45,000
Cash 8,000
Other bank balances Nil
53,000
6. Short-term loans and Advances
Loan to directors 80,000
7. Other Income
Rent received 46,000
Transfer fees 10,000
56,000
8. Cost of materials consumed
Purchases 23,19,000

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 4.42 ACCOUNTING

9. Changes in inventory of finished goods, WIP & Stock in trade

Opening inventory 6,80,000
Closing inventory (8,23,000) (1,43,000)
10. Employee benefit expense
Wages 9,00,000
11. Finance cost
Interest on bank loans 1,16,000
Debenture interest 55,000
1,71,000
12. Other Expenses
Consumables 84,000
Preliminary expenses 10,000
Bad debts 35,000
Discount 40,000
Rentals 25,000
Commission 1,20,000
Advertisement 20,000
Dealers’ aids 21,000
Transit insurance 30,000
Trade expenses 37,000
Distribution freight 54,000
4,76,000
Illustration 7
You are required to prepare a Statement of Profit and Loss and Balance Sheet from
the following Trial Balance extracted from the books of the International Hotels Ltd.,
on 31st March, 20X2:
Dr. Cr.
` `
Authorised Capital-divided into 5,000 6% Preference Shares
of ` 100 each and 10,000 equity Shares of ` 100 each 15,00,000

© The Institute of Chartered Accountants of India

 FINANCIAL STATEMENTS OF COMPANIES 4.43

Subscribed Capital -
5,000 6% Preference Shares of ` 100 each 5,00,000
Equity Capital 8,05,000
Purchases - Wines, Cigarettes, Cigars, etc. 45,800
- Foodstuffs 36,200
Wages and Salaries 28,300
Rent, Rates and Taxes 8,900
Laundry 750
Sales - Wines, Cigarettes, Cigars, etc. 68,400
- Food 57,600
Coal and Firewood 3,290
Carriage and Cooliage 810
Sundry Expenses 5,840
Advertising 8,360
Repairs 4,250
Rent of Rooms 48,000
Billiard 5,700
Miscellaneous Receipts 2,800
Discount received 3,300
Transfer fees 700
Freehold Land and Building 8,50,000
Furniture and Fittings 86,300
Inventory on hand, 1st April, 20X1
Wines, Cigarettes. Cigars, etc. 12,800
Foodstuffs 5,260
Cash in hand 2,200
Cash with Bankers 76,380
Preliminary and formation expenses 8,000

© The Institute of Chartered Accountants of India

 4.44 ACCOUNTING

2,000 Debentures of ` 100 each (6%) 2,00,000

Profit and Loss Account 41,500
Trade payables 42,000
Trade receivables 19,260
Investments 2,72,300
Goodwill at cost 5,00,000
General Reserve 2,00,000
19,75,000 19,75,000
Wages and Salaries Outstanding 1,280
Inventory on 31st March, 20X2
Wines, Cigarettes and Cigars, etc. 22,500
Foodstuffs 16,400
Depreciation : Furniture and Fittings @ 5% p.a. : Land and Building @ 2% p.a.
The Equity capital on 1st April, 20X1 stood at ` 7,20,000, that is 6,000 shares fully
paid and 2,000 shares ` 60 paid. The directors made a call of ` 40 per share on 1st
October 20X1. A shareholder could not pay the call on 100 shares and his shares were
then forfeited and reissued @ ` 90 per share as fully paid. The Directors declared a
dividend of 8% on equity shares on 2nd April, 20X2, transferring any amount that may
be required from General Reserve. Ignore Taxation.
Solution
Statement of Profit and Loss of International Hotels Ltd.
for the year ended 31st March, 20X2

Particulars Notes Amount

I. Revenue from operations 10 1,83,200
II. Other income (Discount received) 3,300
III. Total Revenue (I + II) 1,86,500
IV. Expenses:
Cost of materials consumed 11 25,060
Purchases of Inventory-in-Trade 12 45,800

© The Institute of Chartered Accountants of India

 FINANCIAL STATEMENTS OF COMPANIES 4.45

Changes in inventories of finished goods work-in- 13 (9,700)

progress and Inventory-in-Trade
Employee benefits expense 14 29,580
Other operating expenses 15 18,000
Selling and administrative expenses 16 14,200
Finance costs 17 12,000
Depreciation and amortisation expense 18 21,315
Other expenses 9 8,000
Total expenses 1,64,255
V. Profit (Loss) for the period (III - IV) 22,245

Balance Sheet of International Hotels Ltd. as at 31st March, 20X2

Particulars Note `
No
Equity and Liabilities
1 Shareholders' funds
a Share capital 1 13,00,000
b Reserves and Surplus 2 2,68,745
2 Non-current liabilities
a Long-term borrowings 3 2,00,000
3 Current liabilities
a Trade Payables 4 42,000
b Other current liabilities 5 13,280
Total 18,24,025
ASSETS
1 Non-current assets
i PPE 6 9,14,985
ii Intangible assets (Goodwill) 5,00,000
iii Non-current investments 2,72,300

© The Institute of Chartered Accountants of India

 4.46 ACCOUNTING

2 Current assets
i Inventories 7 38,900
ii Trade receivables 19,260
iii Cash and bank balances 8 78,580
Total 18,24,025

Notes to accounts
`
1 Share Capital
Equity share capital
Authorised
10,000 Equity shares of ` 100 each 10,00,000
Issued & subscribed
8,000 Equity Shares of ` 100 each (A) 8,00,000
Preference share capital
Authorised
5,000 6% Preference shares of ` 100 each 5,00,000
Issued & subscribed
5,000 6% Preference shares of ` 100 each (B) 5,00,000
Total (A + B) 13,00,000
2 Reserves and Surplus
Capital reserve [100 x (90 – 40)] 5,000
General reserve 2,00,000
2,00,000
Surplus (Profit & Loss A/c) 22,245
Add: Balance from previous year 41,500
63,745
Total 2,68,745

© The Institute of Chartered Accountants of India

 FINANCIAL STATEMENTS OF COMPANIES 4.47

3 Long-term borrowings
Secured
6% Debentures 2,00,000
Total 2,00,000
4 Trade Payables 42,000
5 Other current liabilities
Wages and Salaries Outstanding 1,280
Interest on debentures 12,000 13,280
Total 13,280
6 PPE
Freehold land & Buildings 8,50,000
Less: Depreciation (17,000) 8,33,000
Furniture and Fittings 86,300
Less: Depreciation (4,315) 81,985
Total 9,14,985
7 Inventories
Wines, Cigarettes & Cigars, etc. 22,500
Foodstuffs 16,400
Total 38,900
8 Cash and bank balances
Cash and cash equivalents
Cash at bank 76,380
Cash in hand 2,200
Other bank balances Nil
Total 78,580
9 Other expenses
Preliminary Expenses 8,000
Total 8,000


As per AS 26, preliminary expenses are not shown in the balance sheet.

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 4.48 ACCOUNTING

10 Revenue from operations

Sale of products
Wines, Cigarettes, Cigars etc. 68,400

Food 57,600 1,26,000

Sale of services
Room Rent 48,000
Billiards 5,700
Transfer fees 700
Miscellaneous Receipts 2,800
57,200
Total 1,83,200
11 Cost of materials consumed
Opening Inventory 5,260
Add: Purchases during the year 36,200
Less: Closing Inventory (16,400) 25,060
Total 25,060
12 Purchases of Inventory-in-Trade
Wines, Cigarettes etc. 45,800
Total 45,800
13 Changes in inventories of finished goods
work-in-progress and Inventory-in-Trade
Wines, Cigarettes etc.
Opening Inventory 12,800
Less: Closing Inventory (22,500) (9,700)
Total (9,700)
14 Employee benefits expense
Wages and Salaries 28,300
Add: Wages and Salaries Outstanding 1,280 29,580
Total 29,580

© The Institute of Chartered Accountants of India

 FINANCIAL STATEMENTS OF COMPANIES 4.49

15 Other operating expenses

Rent, Rates and Taxes 8,900
Coal and Firewood 3,290
Laundry 750
Carriage and Cooliage 810
Repairs 4,250
Total 18,000
16 Selling and administrative expenses
Advertising 8,360
Sundry Expenses 5,840
Total 14,200
17 Finance costs
Interest on Debentures (2,00,000 x 6%) 12,000
Total 12,000
18 Depreciation and amortisation expense
Land and Buildings (8,50,000 x 2%) 17,000
Furniture & Fittings (86,300 x 5%) 4,315 21,315
Total 21,315

Note: The final dividend will not be recognized as a liability at the balance sheet
date (even if it is declared after reporting date but before approval of the financial
statements) as per Accounting Standards. Hence, it has not been recognized in
the financial statements for the year ended 31 March, 20X2. Such dividends will
be disclosed in notes only.
Illustration 8
From the following particulars furnished by Pioneer Ltd., prepare the Balance Sheet
as at 31st March, 20X1 as required by Schedule III of the Companies Act. Give notes
at the foot of the Balance Sheet as may be found necessary -
Debit Credit
` `
Equity Capital (Face value of ` 100) 10,00,000
Calls in Arrears 1,000

© The Institute of Chartered Accountants of India

 4.50 ACCOUNTING

Land 2,00,000
Building 3,50,000
Plant and Machinery 5,25,000
Furniture 50,000
General Reserve 2,10,000
Loan from State Financial Corporation 1,50,000
Inventory :
Finished Goods 2,00,000
Raw Materials 50,000 2,50,000
Provision for Taxation 68,000
Trade receivables 2,00,000
Advances 42,700
Dividend Payable 60,000
Profit and Loss Account 86,700
Cash Balance 30,000
Cash at Bank 2,47,000
Loans (Unsecured) 1,21,000
Trade payables (For Goods and Expenses) 2,00,000

18,95,700 18,95,700

The following additional information is also provided :

(1) 2,000 equity shares were issued for consideration other than cash.
(2) Trade receivables of ` 52,000 are due for more than six months.
(3) The cost of assets:
Building ` 4,00,000
Plant and Machinery ` 7,00,000
Furniture ` 62,500

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 FINANCIAL STATEMENTS OF COMPANIES 4.51

(4) The balance of ` 1,50,000 in the loan account with State Finance Corporation
is inclusive of ` 7,500 for interest accrued but not due. The loan is secured by
hypothecation of the Plant and Machinery.
(5) Balance at Bank includes ` 2,000 with Perfect Bank Ltd., which is not a
Scheduled Bank.
(6) The company had contract for the erection of machinery at ` 1,50,000 which is
still incomplete.
Solution
Pioneer Ltd.
Balance Sheet as at 31st March, 20X1
Particulars Notes `
Equity and Liabilities
1 Shareholders' funds
a Share capital 1 9,99,000
b Reserves and Surplus 2 2,96,700
2 Non-current liabilities
a Long-term borrowings 3 2,63,500
3 Current liabilities
a Trade Payables 2,00,000
b Other current liabilities 4 67,500
c Short-term provisions 5 68,000
Total 18,94,700
Assets
1 Non-current assets
a PPE 6 11,25,000
2 Current assets
a Inventories 7 2,50,000
b Trade receivables 8 2,00,000
c Cash and bank balances 9 2,77,000
d Short-term loans and advances 42,700
Total 18,94,700

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 4.52 ACCOUNTING

Notes to accounts
`
1 Share Capital
Equity share capital
Issued & subscribed & called up
10,000 Equity Shares of ` 100 each 10,00,000
(Of the above 2,000 shares have been
issued for consideration other than cash)
Less: Calls in arrears (1,000) 9,99,000
Total 9,99,000
2 Reserves and Surplus
General Reserve 2,10,000
Surplus (Profit & Loss A/c) 86,700
Total 2,96,700
3 Long-term borrowings
Secured
Term Loans
Loan from State Financial Corporation 1,42,500
(1,50,000 – 7,500)
(Secured by hypothecation of Plant and
Machinery)
Unsecured loan 1,21,000
Total 2,63,500
4 Other current liabilities
Interest accrued but not due on loans (SFC) 7,500
Dividend Payable 60,000
Total 67,500
5 Short-term provisions
Provision for taxation 68,000
Total 68,000

© The Institute of Chartered Accountants of India

 FINANCIAL STATEMENTS OF COMPANIES 4.53

6 PPE
Land 2,00,000
Buildings 4,00,000
Less: Depreciation (50,000) (b.f.) 3,50,000
Plant & Machinery 7,00,000
Less: Depreciation (1,75,000) (b.f.) 5,25,000
Furniture & Fittings 62,500
Less: Depreciation (12,500) (b.f.) 50,000
Total 11,25,000
7 Inventories
Raw Material 50,000
Finished goods 2,00,000
Total 2,50,000
8 Trade receivables
Debts outstanding for a period exceeding six 52,000
months
Other Debts 1,48,000
Total 2,00,000
9 Cash and bank balances
Cash and cash equivalents
Cash at bank
with Scheduled Banks 2,45,000
with others (Perfect Bank Ltd.) 2,000 2,47,000
Cash in hand 30,000
Other bank balances Nil
Total 2,77,000

Note: Estimated amount of contract remaining to be executed on capital account

and not provided for ` 1,50,000. It has been assumed that the company had given
this contract for purchase of machinery.

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 4.54 ACCOUNTING

SUMMARY
 Definitions of various types of companies as per the Companies Act, 2013.
 Books of accounts should be maintained at Registered office of company.
 Proper books are not deemed to be kept if they do not provide a true and
fair view of state of affairs of company.
 A number of Statutory Books have been prescribed under Companies Act
which is to be maintained along with statistical books to keep a record of all
transactions.
 Annual Return is to be filed by every company within 60 days of holding
Annual general meeting.
 Financial statements of a company should be as per Schedule III to the
Companies Act, 2013 and they should give true and fair view.
 Managerial Remuneration calculated as a percentage on profit and is
governed by various sections of the Companies Act, 2013 (namely Section
197 and Section 198) and Schedule V to the Companies Act, 2013.
 Following things have been dealt with under various sections:
 Overall maximum managerial remuneration payable
 Managerial remuneration in case of absence or inadequacy of profits
 Remuneration payable to whole-time directors and part-time directors
 Ascertainment of the net profit of company
 Determining amount of profits available for distribution is an important
function and depends on a number of factors, like their composition, the
amount of provisions and appropriations that must be made out of them in
priority, etc.
 Capital cannot be returned to shareholders by way of dividend.
 Appropriating a part of profits may be done as a result of decision of Board
of directors or as per law.
 Dividend may be declared out of reserves subject to certain conditions.
Dividends cannot be declared except out of profits.

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 FINANCIAL STATEMENTS OF COMPANIES 4.55

TEST YOUR KNOWLEDGE

MCQs
1. Trade payables as per Schedule III will include:
(a) Dues payable in respect to statutory obligation
(b) Interest accrued on trade payables
(c) Bills payables.
2. Securities Premium Account is shown on the liabilities side in the Balance
Sheet under the heading:
(a) Reserves and Surplus.
(b) Current Liabilities.
(c) Share Capital.
3. “Fixed assets held for sale” will be classified in the company’s balance sheet
as
(a) Current asset
(b) Non-current asset
(c) Capital work- in- progress
4. Receivables arising from the activities being carried out by the company,
during the lean period, which is not in its normal course of business, is
considered as:
(a) Other current/non-current assets
b) Trade receivables
c) Bills receivables
5. If there is increase in managerial remuneration, exceeding the overall ceiling
as given in section 198 of the Companies Act, then sanction of which authority
is required?
(a) Registrar of the company.
(b) Central Government.
(c) Board of Directors of the company.

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 4.56 ACCOUNTING

6. Declaration of dividends for current year is made after providing for

(a) Depreciation of past years only.
(b) Depreciation on assets for the current year and arrears of depreciation
of past years (if any).
(c) Depreciation on current year only and by forgoing arrears of
depreciation of past years.
7. For companies having profits, the overall maximum limit for managerial
remuneration as per Section 198 of the Companies Act, 2013 is
(a) 11% of net profit.
(b) 10% of net profit.
(c) 5% of net profit.
8. For the purpose of managerial remuneration, paid up share capital used for
calculation of effective capital means
(a) Paid up share capital excluding share application money and advances
against shares.
(b) Paid up share capital excluding share application money but including
advances against shares.
(c) Paid up share capital including both share application money and
advances against shares.
9. Which of the following is not a current liability as per Schedule III?
(a) Bank overdraft
(b) Net deferred tax liability
(c) Dividend declared.
10. As per the Schedule III, separate disclosure is required for an item of income
or expenditure which exceeds:
(a) % of Revenue from operations or ` 1,00,000 whichever is lower
(b) 1% of Revenue or ` 5,000
(c) 1% of Revenue from operations or ` 1,00,000 whichever is higher.

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 FINANCIAL STATEMENTS OF COMPANIES 4.57

11. Few friends created a start-up and formed private company for production
and marketing of product. At the end of financial year, their company is not
required to prepare:
(a) Cash flow statement
(b) Balance Sheet and Profit & Loss Account
(c) Notes to Accounts.
12. The following is not included while computing “Effective capital":
(a) Paid up share capital.
(b) Long term loans repayable after one year.
(c) Revaluation reserves.
Practical questions
Question 1
State under which head these accounts should be classified in Balance Sheet, as
per Schedule III of the Companies Act, 2013:
(i) Share application money received in excess of issued share capital.
(ii) Share option outstanding account.
(iii) Unpaid matured debenture and interest accrued thereon.
(iv) Uncalled liability on shares and other partly paid investments.
(v) Calls unpaid.
(vi) Money received against share warrant.
Question 2
The following extract of Balance Sheet of Star Ltd. (non- investment) company was
obtained:

Liabilities `
Authorised capital:
60,000, 14% preference shares of ` 100 60,00,000
6,00,000 Equity shares of ` 100 each 6,00,00,000
6,60,00,000

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 4.58 ACCOUNTING

Issued and subscribed capital:

45,000, 14% preference shares of ` 100 each fully paid 45,00,000
3,60,000 Equity shares of ` 100 each, ` 80 paid-up 2,88,00,000
Share suspense account 60,00,000
Reserves and surplus:
Capital reserves (` 4,50,000 is revaluation reserve) 5,85,000
Securities premium 1,50,000
Secured loans:
15% Debentures 1,95,00,000
Unsecured loans:
Public deposits 11,10,000
Cash credit loan from SBI (short term) 3,95,000
Current Liabilities:
Trade Payables 10,35,000
Assets:
Investment in shares, debentures, etc. 2,25,00,000
Profit and Loss account (Dr. balance) 45,75,000

Share suspense account represents application money received on shares, the

allotment of which is not yet made.
You are required to compute effective capital as per the provisions of Schedule V.
Would your answer differ if Star Ltd. is an investment company?
Question 3
On 31 st March, 20X1 Bose and Sen Ltd. provides to you the following ledger
balances after preparing its Profit and Loss Account for the year ended 31st March,
20X1:
Credit Balances:
`
Equity shares capital, fully paid shares of ` 10 each 70,00,000
General Reserve 15,49,100
Loan from State Finance Corporation 10,50,000

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 FINANCIAL STATEMENTS OF COMPANIES 4.59

(Secured by hypothecation of Plant & Machinery Repayable

within one year` 2,00,000)
Loans: Unsecured (Long term) 8,47,000
Sundry Creditors for goods &expenses 14,00,000
(Payable within 6 months)
Profit & Loss Account 7,00,000
Provision for Taxation 8,16,900
1,33,63,000

Debit Balances:
`
Calls in arrear 7,000
Land 14,00,000
Buildings 20,50,000
Plant and Machinery 36,75,000
Furniture& Fixture 3,50,000
Inventories: Finished goods 14,00,000
Raw Materials 3,50,000
Trade Receivables 14,00,000
Advances: Short-term 2,98,900
Cash in hand 2,10,000
Balances with banks 17,29,000
Preliminary Expenses 93,100
Patents & Trademarks 4,00,000
1,33,63,000

The following additional information is also provided in respect of the above

balances:
(i) 4,20,000 fully paid equity shares were allotted as consideration for land &
buildings.
(ii) Cost of Building ` 28,00,000

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 4.60 ACCOUNTING

(iii) Cost of Plant & Machinery ` 49,00,000

Cost of Furniture & Fixture ` 4,37,500
(iv) Trade receivables for ` 3,80,000 are due for more than 6 months.
(v) The amount of Balances with Bank includes ` 18,000 with a bank which is not
a scheduled Bank and the deposits of ` 5 lakhs are for a period of 9 months.
(vi) Unsecured loan includes ` 2,00,000 from a Bank and ` 1,00,000 from related
parties.
You are not required to give previous year’s figures. You are required to prepare
the Balance Sheet of the Company as on 31 stMarch, 20X1 as required under
Schedule III to the Companies Act, 2013.
Question 4
From the following particulars furnished by Alpha Ltd., prepare the Balance Sheet
as on 31 st March 20X1 as required by Part I, Schedule III to the Companies Act,
2013.
Particulars Debit ` Credit `
Equity Share Capital (Face value of ` 100 50,00,000
each)
Call in Arrears 5,000
Land & Building 27,50,000
Plant & Machinery 26,25,000
Furniture 2,50,000
General Reserve 10,50,000
Loan from State Financial Corporation 7,50,000
Inventory:
Raw Materials 2,50,000
Finished Goods 10,00,000 12,50,000
Provision for Taxation 6,40,000
Trade receivables 10,00,000
Short term Advances 2,13,500
Profit & Loss Account 4,33,500
Cash in Hand 1,50,000
Cash at Bank 12,35,000
Unsecured Loan 6,05,000

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 FINANCIAL STATEMENTS OF COMPANIES 4.61

Trade payables (for Goods and Expenses) 8,00,000

Loans & advances from related parties 2,00,000
94,78,500 94,78,500
The following additional information is also provided:
(i) 10,000 Equity shares were issued for consideration other than cash.
(ii) Trade receivables of ` 2,60,000 are due for more than 6 months.
(iii) The cost of the Assets were:
Building ` 30,00,000, Plant & Machinery ` 35,00,000 and Furniture ` 3,12,500
(iv) The balance of ` 7,50,000 in the Loan Account with State Finance Corporation
is inclusive of ` 37,500 for Interest Accrued but not Due. The loan is secured
by hypothecation of Plant & Machinery.
(v) Balance at Bank includes ` 10,000 with Omega Bank Ltd., which is not a
Scheduled Bank.
(vi) Transfer ` 20,000 to general reserve is proposed by Board of directors.
(vii) Board of directors declared dividend of 5% on the paid up capital on 2nd April,
20X1.
Question 5
Ring Ltd. was registered with a nominal capital of ` 10,00,000 divided into shares
of ` 100 each. The following Trial Balance is extracted from the books on 31 st March,
20X2:

Particulars ` Particulars `
Buildings 5,80,000 Sales 10,40,000
Machinery 2,00,000 Outstanding Expenses 4,000
Closing Stock 1,80,000 Provision for Doubtful 6,000
Loose Tools 46,000 Debts (1-4-20X1)
Purchases (Adjusted) 4,20,000 Equity Share Capital 4,00,000
Salaries 1,20,000 General Reserve 80,000
Directors’ Fees 20,000 Profit and Loss A/c 50,000
Rent 52,000 (1-4-20X1)
Depreciation 40,000 Creditors 1,84,000

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 4.62 ACCOUNTING

Bad Debts 12,000 Provision for depreciation:

Investment 2,40,000 On Building 1,00,000
Interest accrued on 4,000 On Machinery 1,10,000 2,10,000
investment
Debenture Interest 56,000 14% Debentures 4,00,000
Advance Tax 1,20,000 Interest on Debentures 28,000
Sundry expenses 36,000 accrued but not due
Debtors 2,50,000 Interest on Investments 24,000
Bank 60,000 Unclaimed dividend 10,000
24,36,000 24,36,000

You are required to prepare statement of Profit and Loss for the year ending 31 st
March, 20X2 and Balance sheet as at that date after taking into consideration the
following information:
(a) Closing stock is more than opening stock by ` 1,60,000;
(b) Provide to doubtful debts @ 4% on Debtors
(c) Make a provision for income tax @30%.
(d) Depreciation expense included depreciation of ` 16,000 on Building and that
of ` 24,000 on Machinery.
(e) The directors declared a dividend @ 25% on 2nd April, 20X2 and transfer to
General Reserve @ 10%.
(f) Bills Discounted but not yet matured ` 20,000.
Question 6
On 31st March, 20X1, SR Ltd. provides the following ledger balances after preparing
its Profit & Loss Account for the year ended 31st March, 20X1.

Particulars Amount (`)

Debit Credit

Equity Share Capital, fully paid shares of ` 50 each 80,00,000

Calls in arrear 15,000
Land 25,00,000

© The Institute of Chartered Accountants of India

 FINANCIAL STATEMENTS OF COMPANIES 4.63

Buildings 30,00,000
Plant & Machinery 24,00,000
Furniture & Fixture 13,00,000
Securities Premium 15,00,000
General Reserve 9,41,000
Profit & Loss Account 5,80,000
Loan from Public Finance Corporation (Secured by 26,30,000
Hypothecation of Land)
Other Long Term Loans 22,50,000
Short Term Borrowings 4,60,000
Inventories: Finished goods 45,00,000
Raw materials 13,00,000
Trade Receivables 17,50,000
Advances: Short Term 3,75,000
Trade Payables 8,13,000
Provision for Taxation 3,80,000
Unpaid Dividend 70,000
Cash in Hand 70,000
Balances with Banks 4,14,000
Total 1,76,24,000 1,76,24,000

The following additional information was also provided in respect of the above
balances:
(1) 50,000 fully paid equity shares were allotted as consideration for land.
(2) The cost of assets were:

Building ` 32,00,000
Plant and Machinery ` 30,00,000
Furniture and Fixture ` 16,50,000

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 4.64 ACCOUNTING

(3) Trade Receivables for ` 4,86,000 due for more than 6 months.
(4) Balances with banks include ` 56,000, the Naya bank, which is not a scheduled
bank.
(5) Loan from Public Finance Corporation repayable after 3 years.
(6) The balance of ` 26,30,000 in the loan account with Public Finance
Corporation is inclusive of `1,34,000 for interest accrued but not due. The
loan is secured by hypothecation of land.
(7) Other long term loans (unsecured) includes:

Loan taken from Nixes Bank ` 13,80,000

(Amount repayable within one year ` 4,80,000)
Loan taken from Directors ` 8,50,000

(8) Bills Receivable for ` 1,60,000 maturing on 15th June, 20X1 has been
discounted.
(9) Short term borrowings includes:

Loan from Naya bank ` 1,16,000 (Secured)

Loan from directors ` 48,000

(10) Transfer of ` 35,000 to general reserve has been proposed by the Board of
directors out of the profits for the year.
(11) Inventory of finished goods includes loose tools costing ` 5 lakhs (which do
not meet definition of property, plant & equipment as per AS 10)
You are required to prepare the Balance Sheet of the Company as on March 31st
20X1 as required under Part - I of Schedule III of the Companies Act, 2013.
You are not required to give previous year figures.

ANSWERS/HINTS
MCQ
1. (c) 2. (a) 3. (a) 4. (a) 5. (b) 6. (b)
7. (a) 8. (a) 9. (b) 10. (c) 11. (a) 12. (c)

© The Institute of Chartered Accountants of India

 FINANCIAL STATEMENTS OF COMPANIES 4.65

Practical Questions
Answer 1
(i) Current Liabilities/ Other Current Liabilities
(ii) Shareholders' Fund / Reserve & Surplus
(iii) Current liabilities/Other Current Liabilities
(iv) Contingent Liabilities and Commitments
(v) Shareholders' Fund / Share Capital
(vi) Shareholders' Fund / Money received against share warrants
Answer 2
Computation of effective capital:

Where Star Ltd. Where Star Ltd. is

Is a non- an investment
investment company
company
` `
Paid-up share capital —
45,000, 14% Preference shares 45,00,000 45,00,000
3,60,000 Equity shares 2,88,00,000 2,88,00,000
Capital reserves (5,85,000 – 4,50,000) 1,35,000 1,35,000
Securities premium 1,50,000 1,50,000
15% Debentures 1,95,00,000 1,95,00,000
Public Deposits 11,10,000 11,10,000
(A) 5,41,95,000 5,41,95,000
Investments 2,25,00,000 —
Profit and Loss account (Dr. balance) 45,75,000 45,75,000
(B) 2,70,75,000 45,75,000
Effective capital (A–B) 2,71,20,000 4,96,20,000

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 4.66 ACCOUNTING

Answer 3
Bose and Sen Ltd.
Balance Sheet as at 31st March, 20X1

Particulars Notes Figures at the

end of current
reporting
period (`)
Equity and Liabilities
1 Shareholders' funds
a Share capital 1 69,93,000
b Reserves and Surplus 2 21,56,000
2 Non-current liabilities
a Long-term borrowings 3 16,97,000
3 Current liabilities
a Trade Payables 14,00,000
b Other current liabilities 4 2,00,000
c Short-term provisions 5 8,16,900
Total 1,32,62,900
Assets
1 Non-current assets
a PPE 6 74,75,000
b Intangible assets (Patents & Trade 4,00,000
Marks)
2 Current assets
a Inventories 7 17,50,000
b Trade receivables 8 14,00,000
c Cash and bank balances 9 19,39,000
d Short-term loans and advances 2,98,900
Total 1,32,62,900

© The Institute of Chartered Accountants of India

 FINANCIAL STATEMENTS OF COMPANIES 4.67

Notes to accounts

`
1 Share Capital
Equity share capital
Issued, subscribed and called up
7,00,000 Equity Shares of ` 10 each (Out 70,00,000
of the above 4,20,000 shares have been
issued for consideration other than
cash)
Less: Calls in arrears (7,000) 69,93,000
Total 69,93,000
2 Reserves and Surplus
General Reserve 15,49,100
Surplus (Profit & Loss A/c) 7,00,000
Less: Preliminary expenses (93,100) 6,06,900
Total 21,56,000
3 Long-term borrowings
Secured
Term Loans
Loan from State Finance Corporation 8,50,000
(` 10,50,000 - ` 2,00,000) (Secured by
hypothecation of Plant and Machinery)
Unsecured
Bank Loan 2,00,000
Loan from related parties 1,00,000
Others 5,47,000 8,47,000
Total 16,97,000


Preliminary expenses have been written off in line with Accounting Standards.

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 4.68 ACCOUNTING

4 Other current liabilities

Current maturities of long-term debt- 2,00,000
loan Instalment repayable within one
year
5 Short-term provisions
Provision for taxation 8,16,900
6 Property, plant and equipment
Land 14,00,000
Buildings 28,00,000
Less: Depreciation (7,50,000) (b.f.) 20,50,000
Plant & Machinery 49,00,000
Less: Depreciation (12,25,000) (b.f.) 36,75,000
Furniture & Fittings 4,37,500
Less: Depreciation (87,500) (b.f.) 3,50,000
Total 74,75,000
7 Inventories
Raw Material 3,50,000
Finished goods 14,00,000
17,50,000
8 Trade receivables
Debts outstanding for a period 3,80,000
exceeding six months
Other Debts 10,20,000
Total 14,00,000
9 Cash and bank balances
Cash and cash equivalents
Cash at bank with Scheduled Banks 12,11,000
with others 18,000 12,29,000
Cash in hand 2,10,000
Other bank balances 5,00,000
Bank deposits for period of 9 months 5,00,000
Total 19,39,000

© The Institute of Chartered Accountants of India

 FINANCIAL STATEMENTS OF COMPANIES 4.69

Answer 4
Alpha Ltd.
Balance Sheet as at 31st March, 20X1

Particulars Notes `
Equity and Liabilities
1 Shareholders' funds
a Share capital 1 49,95,000
b Reserves and Surplus 2 14,83,500
2 Non-current liabilities
Long-term borrowings 3 13,17,500
3 Current liabilities
a Trade Payables 8,00,000
b Other current liabilities 4 37,500
c Short-term provisions 5 6,40,000
d Short-term borrowings 2,00,000
Total 94,73,500
Assets
1 Non-current assets
PPE 6 56,25,000
2 Current assets
a Inventories 7 12,50,000
b Trade receivables 8 10,00,000
c Cash and bank balances 9 13,85,000
d Short-term loans and advances 2,13,500
Total 94,73,500

© The Institute of Chartered Accountants of India

 4.70 ACCOUNTING

Notes to accounts
`
1 Share Capital
Equity share capital
Issued & subscribed & called up
50,000 Equity Shares of ` 100 each
(of the above 10,000 shares have been issued for
consideration other than cash) 50,00,000
Less: Calls in arrears (5,000) 49,95,000
Total 49,95,000
2 Reserves and Surplus
General Reserve 10,50,000
Add: current year transfer 20,000 10,70,000
Profit & Loss balance
Profit for the year 4,33,500
Less: Appropriations:
Transfer to General reserve (20,000)
4,13,500
Total 14,83,500
3 Long-term borrowings
Secured Term Loan
State Financial Corporation Loan (7,50,000-
37,500) 7,12,500
(Secured by hypothecation of Plant and
Machinery)
Unsecured Loan 6,05,000
Total 13,17,500
4 Other current liabilities
Interest accrued but not due on loans (SFC) 37,500
37,500

© The Institute of Chartered Accountants of India

 FINANCIAL STATEMENTS OF COMPANIES 4.71

5 Short-term provisions
Provision for taxation 6,40,000
6 Property, plant and equipment
Land and Building 30,00,000
Less: Depreciation (2,50,000) 27,50,000
(b.f.)
Plant & Machinery 35,00,000
Less: Depreciation (8,75,000) 26,25,000
(b.f.)
Furniture & Fittings 3,12,500
Less: Depreciation (62,500) 2,50,000
(b.f.)
Total 56,25,000
7 Inventories
Raw Materials 2,50,000
Finished goods 10,00,000
Total 12,50,000
8 Trade receivables
Outstanding for a period exceeding six months 2,60,000
Other Amounts 7,40,000
Total 10,00,000
9 Cash and bank balances
Cash and cash equivalents
Cash at bank
with Scheduled Banks 12,25,000
with others (Omega Bank Ltd.) 10,000 12,35,000
Cash in hand 1,50,000
Other bank balances Nil
Total 13,85,000

© The Institute of Chartered Accountants of India

 4.72 ACCOUNTING

Note: The final dividend will not be recognized as a liability at the balance sheet
date (even if it is declared after reporting date but before approval of the financial
statements) as per Accounting Standards. Hence, it has not been recognized in
the financial statements for the year ended 31 March, 20X1. Such dividends will
be disclosed in notes only.
Answer 5
Ring Ltd.
Profit and Loss Statement for the year ended 31 st March, 20X2
Particulars Note No. (` In lacs)
I Revenue from operations 10,40,000
II Other income (interest on investment) 24,000
III Total Revenue [I + II] 10,64,000
IV Expenses:
Cost of purchase [4,20,000+ 1,60,000] 5,80,000
Changes in inventories [20,000-1,80,000] (1,60,000)
Employee Benefits Expense 1,20,000
Finance Costs (debenture interest) 56,000
Depreciation and Amortisation Expenses 40,000
Other Expenses 8 1,24,000
Total Expenses 7,60,000
V Profit before Tax (III-IV) 3,04,000
VI Tax Expenses @ 30% (91,200)
VII Profit for the period 2,12,800

Balance Sheet of Ring Ltd. as at 31 ST March, 20X2

Particulars Note `
No.
I EQUITY AND LIABILITIES
(1) Shareholders’ Funds
(a) Share Capital 1 4,00,000
(b) Reserves and Surplus 2 3,42,800
(2) Non-Current Liabilities
(a) Long-term Borrowings (14% debentures) 4,00,000

© The Institute of Chartered Accountants of India

 FINANCIAL STATEMENTS OF COMPANIES 4.73

(3) Current Liabilities

(a) Trade Payable (Sundry Creditors) 1,84,000
(b) Other Current Liabilities 3 42,000
(c) Short-Term Provisions 4 91,200
Total 14,60,000
II ASSETS
(1) Non-Current Assets
(a) PPE 5 5,70,000
(b) Non-current Investments 2,40,000
(2) Current Assets
(a) Inventories 6 2,26,000
(b) Trade Receivables 7 2,40,000
(c) Cash and bank balances 60,000
(d) Short Term Loans and Advances 1,20,000
(Advance Payment of Tax)
(e) Other Current Assets 4,000
(Interest accrued on investments)
Total 14,60,000
Note: There is a Contingent Liability for bills discounted but not yet matured
amounting to ` 20,000.
Notes to Accounts:

1. Share Capital
Authorised Capital
10,000 Equity Shares of ` 100 each 10,00,000
Issued Capital
4,000 Equity Shares of ` 100 each 4,00,000
Subscribed Capital and fully paid
4,000 Equity Shares of ` 100 each 4,00,000
2. Reserve and Surplus
General Reserve [` 80,000 + ` 21,280] 1,01,280
Balance of Statement of Profit & Loss Account

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 4.74 ACCOUNTING

Opening Balance 50,000

Add: Profit for the period 2,12,800
2,62,800
Appropriations
Transfer to General Reserve @ 10% (21,280)
2,41,520
3,42,800
3. Other Current Liabilities
Unclaimed Dividend 10,000
Outstanding Expenses 4,000
Interest accrued on Debentures 28,000
42,000
4. Short-Term Provision
Provision for Tax 91,200
5 Property, plant and equipment
Buildings 5,80,000
Less: Provision for Depreciation 1,00,000 4,80,000
Plant and Equipment 2,00,000
Less: Provision for Depreciation 1,10,000 90,000
5,70,000
6 Inventories
Closing Stock of Finished Goods 1,80,000
Loose Tools 46,000 2,26,000
7 Trade Receivables
Sundry Debtors 2,50,000
Less: Provision for Doubtful Debts (10,000) 2,40,000
8. Other Expenses
Rent 52,000
Directors’ Fees 20,000
Bad Debts 12,000

© The Institute of Chartered Accountants of India

 FINANCIAL STATEMENTS OF COMPANIES 4.75

Provision for Doubtful Debts (4% of ` 2,50,000 4,000

less ` 6,000)
Sundry Expenses 36,000
1,24,000

Note: The final dividend will not be recognized as a liability at the balance sheet
date (even if it is declared after reporting date but before approval of the financial
statements) as per Accounting Standards. Hence, it has not been recognized in
the financial statements for the year ended 31 March, 20X2. Such dividends will
be disclosed in notes only.
Answer 6
SR Ltd.
Balance Sheet as at 31st March, 20X1

Particulars Notes Figures at the end of

current reporting period (`)
Equity and Liabilities
1 Shareholders' funds
a Share capital 1 79,85,000
b Reserves and Surplus 2 30,21,000
2 Non-current liabilities
a Long-term borrowings 3 42,66,000
3 Current liabilities
a Short-term borrowings 4 4,60,000
b Trade Payables 8,13,000
c Other current liabilities 5 6,84,000
d Short-term provisions 6 3,80,000
Total 1,76,09,000
Assets
1 Non-current assets
a PPE 7 92,00,000

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 4.76 ACCOUNTING

2 Current assets
a Inventories 8 58,00,000
b Trade receivables 9 17,50,000
c Cash and cash equivalents 10 4,84,000
d Short-term loans and 3,75,000
advances
Total 1,76,09,000

Notes to accounts

`
1. Share Capital
Equity share capital
Issued, subscribed and called up
1,60,000 Equity Shares of ` 50 each 80,00,000
(Out of the above 50,000 shares have been
issued for consideration other than cash)
Less: Calls in arrears (15,000) 79,85,000
2. Reserves and Surplus
General Reserve 9,41,000
Add: Transferred from Profit and loss 35,000 9,76,000
account
Securities premium 15,00,000
Surplus (Profit & Loss A/c) 5,80,000
Less: Appropriation to General Reserve (35,000) 5,45,000
(proposed)
30,21,000
3. Long-term borrowings
Secured: Term Loans
Loan from Public Finance 24,96,000
Corporation [repayable after 3 years
(` 26,30,000 - ` 1,34,000 for interest
accrued but not due)]

© The Institute of Chartered Accountants of India

 FINANCIAL STATEMENTS OF COMPANIES 4.77

(secured by hypothecation of land)

Unsecured
Bank Loan (Nixes bank) 9,00,000
(` 13,80,000 - ` 4,80,000
repayable within 1 year)
Loan from Directors 8,50,000
Others 20,000 17,70,000
Total 42,66,000
4. Short-term borrowings
Loan from Naya bank (Secured) 1,16,000
Loan from Directors 48,000
Others 2,96,000 4,60,000
5. Other current liabilities
Loan from Nixes bank repayable within one 4,80,000
year
Unpaid dividend 70,000
Interest accrued but not due on 1,34,000 6,84,000
borrowings
6. Short-term provisions
Provision for taxation 3,80,000
7. PPE
Land 25,00,000
Buildings 32,00,000
Less: Depreciation (2,00,000) 30,00,000
Plant & Machinery 30,00,000
Less: Depreciation (6,00,000) 24,00,000
Furniture & Fittings 16,50,000
Less: Depreciation (3,50,000) 13,00,000
Total 92,00,000

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 4.78 ACCOUNTING

8. Inventories
Raw Material 13,00,000
Finished goods 40,00,000
Loose tools 5,00,000 58,00,000
9. Trade receivables
Outstanding for a period exceeding six 4,86,000
months
Others 12,64,000
Total 17,50,000
10. Cash and cash equivalents
Balances with banks
with Scheduled Banks 3,58,000
with others banks 56,000 4,14,000
Cash in hand 70,000
Total 4,84,000

Note: There is a contingent liability amounting to ` 1,60,000

© The Institute of Chartered Accountants of India