QUTBI TUTORIALS

FINANCIAL ACCOUNTS SHORT NOTES

1 Company Final Accounts

Q.1 Contingent Laibility

Ans A contingent liability is a liability that may occur depending on the outcome of an
uncertain future event which is beyond the control of the business or affairs of the company.
Contingent Liabilities are only Recorded when there is a certain occurrence of uncertain Liability.
Contingent Liabilities does not form a part of the balance sheet, rather they are written as separate
note after the balance sheet is prepared.
It does not give any effect untill and unless the liability becomes certain or sure.
Therefore, no accounting treatment exists for contingent liabilities.
The most common contingent liabilities examples are as follows:
1 Claims against company not acknowledge as Debt
2 Bill discounted but not mature
3 Guarantee given by the company
4 Commitments
5 Un called amount on partly paid shares held as Investments
6 Capital Expenditure Commitments

Q.2 Tangible fixed assets and Intangible fixed assets.

Ans Before Understanding about Tangible and intamgible assets it is important to understand the
term fixed assets.
Fixed Assets are Long term Assets that are used to generate income and are destined to stay for
a longer pperiod of time.
Fixed assets provide the firm with long term financial gain as they have a useful life of
more than one year.
There are two typers of Fixed Assets namely:
Tangible Assets:
Tangible asset is an asset that has a physical existence.
Tangible assets are assets which are concluded to be crucial for any business organisation as
without them the main operation such as production or providing services is not possible.
Tangible assets examples are land, buildings and machinery.
Intangible Assets:
Intangible Assets are non physical assets which is used over a long period of time.
Intangible Assets add up to a company's future value or company's worth and can be far more
valuable than the tangible assets.
Intangible assets are intellectual property that includes:
Patents , which provide property rights to an inventor
Trademarks :- Are a recognizable phrase or symbol that denotes a specific product and
differentiates a company
Franchises , which are a type of license that a party (franchisee) buys to allow them to have access to
a company's brand and sell goods under their name
Goodwill , which represents the value above and beyond a target company's assets that
another company pays to acquire them
Copyrights , which represent intellectual property that's protected from being duplicated
by non-authorized parties

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Q.3 Disclosures of Reserves and Surplus in the Balance Sheet

Ans Reserves and surplus are part of the Shareholder Funds.
It is a part of Profits or gains which has been alloted to fulfill a certain purpose in the company.
Reserves are usually kept aside to purchase new assets, pay bonus, redeem shares, etc.
The Disclosure which are need ti be made in Reserve and Surplus in notes to accounts of the
Company's Final Accounts Balance sheet are as follows:
Reserves and Surplus
Capital Reserves XX
Capital Redemption Reserve XX
Securities Premium Reserve XX
Debenture Redemption Reserve XX
Revaluation Reserve XX
Other Reserve XX XX
Surplus (Profit & Loss A/C)
Surplus as at the beginning of the year XX
(Add) Profit/(Loss) for the period XX
(Less) Proposed Dividend (DDT) (XX)
(Less) Transfer to Reserves (XX)
(Add) Transfer from Reserves XX XX

Q.4 Disclosure of Share Capital in Company Balance

Ans Share capital is the money a company raises by issuing common or preferred stock.
Share capital is reported by a company on its balance sheet in the shareholder's equity section.
A company has to raise funds to conduct its business. Since it is an artificial person,
it cannot generate capital on its own. So it approaches investors for funds and issues shares.
Disclosure of Share Capital in the Balance Sheet
Capital is present on the Liabilities side of the Balance Sheet of a company.
The reason is that a company is an artificial person, and it owes the Capital amount to its
owners and investors. Share Capital is present under the head Shareholders Fund.
Balance Sheet (As per Schedule III of Companies Act 2013) as on ............
Particulars Note No. CY ₹ PY ₹
EQUITY AND LIABILITIES
1 Shareholders' funds
a) Share capital (Sh.C) 1
b) Reserve and surplus (R&S) 2
Notes to Accounts ₹ ₹
1 Share Capital
a) Authorised
……….Equity Shares of Rs…. each XX
……….%Preference Shares of Rs…… each XX XX

b) Issued Subscribed called up and paid up

………. Equity Shares of Rs …. each fully paid/called up XX

……….%Preference Shares of Rs ….. each fully paid/ called XX

(Less) Calls in Arrears (due from directors officers) (XX)

(less) Share Forfeiture Alc (XX) XX

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Q.5 Outstanding Expenses and Prepaid Expenses.

Ans Prepaid Expenses.
A prepaid expense is an expense that is paid for in advance. Recurring expenses such as insurance
and rent can be paid for with one payment that covers the cost of the expense for
several months or even a year.
Often, businesses prepay expenses in this manner because they can receive a discount.
Prepaid expenses also provide a benefit to a business by relieving the obligation of payment
for future accounting periods. In this manner, prepaid expenses are considered an asset.
The Following is the Journal Entry Of Prepaid Expenses
Prepaid Expense A/c Dr.
To Expense A/c

Outstanding Expenses.
During the usual course of a business, there are expenses that will be incurred during the
current accounting period and are not paid or in other words, there are certain expenses
that take place during the current accounting period but payment for the same are not made,
such expenses are called outstanding expenses
The Following is the Journal Entry of Outstanding Expenses
Expense A/c Dr.
To Outstanding Expense A/c

Q.6 Disclosure of Tangible Assets in Company Balance Sheet.

Ans Before Understanding about Tangible assets is important to understand the term fixed assets.
Fixed Assets are Long term Assets that are used to generate income and are destined to stay for
a longer pperiod of time.
Fixed assets provide the firm with long term financial gain as they have a useful life of
more than one year.
Tangible Assets:
Tangible asset is an asset that has a physical existence.
Tangible assets are assets which are concluded to be crucial for any business organisation as
without them the main operation such as production or providing services is not possible.
Tangible assets examples are land, buildings and machinery.

Balance Sheet (As per Schedule III of Companies Act 2013) as on ............
Particulars Note No. CY ₹ PY ₹
ASSETS
1 Non-current assets
a) Fixed assets
▪ Tangible assets (T.A) 9
▪ Intangible assets (Int.A) 10

Notes to Accounts ₹ ₹
Tangible Assets
Land & Building
Furniture & fixtures
Motor Car
Plant & machinery
Office equipments etc.
(Tangible assets shall be disclosed at cost)

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2 Buyback Of Equity Shares

Q.7 Sources of Buy back of equity shares.
Ans A buyback of shares is buying back of own shares by a company that was issued earlier.
It is a corporate action event wherein a company makes a public announcement for the
buyback offer to acquire the shares from existing shareholders within a given timeframe.
The company announces an offer price for the buyback that is generally higher than the
current market price.
Sources of Buy back of equity shares.
A company may purchase its own shares or other “specified securities”
a. its free reserves;
b. the securities premium account;
c. or the proceeds of the issue of any shares or other specified securities.

However, Buy-back of any kind of shares or other specified securities cannot

be made out of the proceeds of the earlier issue of same kind of shares or
same kind of other specified securities.

Q.8 Benefits of Buy Back.

Ans A buyback of shares is buying back of own shares by a company that was issued earlier.
It is a corporate action event wherein a company makes a public announcement for the
buyback offer to acquire the shares from existing shareholders within a given timeframe.
The company announces an offer price for the buyback that is generally higher than the
current market price.
The Benefits Of Buyback Are as Follows:
There are multiple reasons where a company buy backs its own shares. Here are some reasons
which are listed as follows:
1 To strengthen the holding of the promoter in the company.
2 To increase earning per share (EPS)
3 To use surluscash lying idle in the Company.
4 To prevent threatful take overs or acquisitions by other companies,
5 To increase share holding of the promoter.
6 To reduce Excess share capital.

Q.9 What are the Conditions for Buying back of Equity shares
Ans A buyback of shares is buying back of own shares by a company that was issued earlier.
It is a corporate action event wherein a company makes a public announcement for the
buyback offer to acquire the shares from existing shareholders within a given timeframe.
The company announces an offer price for the buyback that is generally higher than the
current market price.

As per Section 68 of the Companies Act, 2013 the conditions for Buy-back of shares are:
1 Authorization for Buy-Back
Articles of Association(AOA) of the company should authorize Buy-Back, if no provision in AOA
then first alter the AOA.

2 Approval
a. Approval of Board of Directors- up to 10% of the total paid-up equity capital and free reserves of
the company; or
b. Approval of Shareholders- up to 25% of the aggregate of paid-up capital and free reserves of
the company.

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c. Post buy-back debt-equity ratio cannot exceed 2:1.

d. Only fully paid up shares can be brought back in a financial year.
e. Time limits:
The buy-back should be completed within a period of one year from the
date of passing of Special Resolution or Board Resolution, as the case may be.
f. Cooling Period:
From the date of completion of Buy-back Company can not issue same kind shares
including right issue of shares within a period of 6 month except Bonus issue or discharge of
subsisting obligations.
g. Withdrawal of offer:
No withdrawal of offer is allowed once it is announced to the shareholders

Q.10 Maximum Limits on Buyback.

Ans A buyback of shares is buying back of own shares by a company that was issued earlier.
It is a corporate action event wherein a company makes a public announcement for the
buyback offer to acquire the shares from existing shareholders within a given timeframe.
The company announces an offer price for the buyback that is generally higher than the
current market price.
1 Authorization for Buy-Back
Articles of Association(AOA) of the company should authorize Buy-Back, if no provision in AOA
then first alter the AOA.
2 Approval
a. Approval of Board of Directors- up to 10% of the total paid-up equity capital and free reserves of
the company; or
b. Approval of Shareholders- up to 25% of the aggregate of paid-up capital and free reserves of
the company.
c. Post buy-back debt-equity ratio cannot exceed 2:1.

3 Internal Reconstruction
Q.10 Internal Reconstruction of Companies.
Ans When a company faces substantial losses over the past years and its financial books are not
showing an accurate picture of its financial position.
The reason for such an instance is that the company is overloaded with Intangible and Fictitious
Assets or Assets whose value is recorded overvalued price.
The liabilities are not paid for a long time which leads to an increase in the amount of interest
on such long overdue.
Dividends of these companies are also not paid on time which again leads to cumulating the
dividends which increase the liability.
Equity shareholders and the stakeholders lose their interest in investing in such companies
which leads to fall in the share prices.
Thus the immediate and effective solution for these outcomes is to reconstruct the
company internally.
Reconstruction is a process where the affairs of the company are reorganized by revaluating and
assessing the assets and liabilities and writing off all the losses already prevailing in the company
by reducing the paid-up value of shares or compounding with the creditors.

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Q.11 Consolidation and Subdivision of Shares.

Ans Consolidation of Shares
Consolidation of shares is a corporate action where a company reduces the number of outstanding
shares by combining the shares and increasing the face value.
Consolidation of shares is also known as ‘reverse stock split’.
The company notifies the shareholders through email before the stock consolidation.
Consolidations are most commonly used by public corporations, particularly when a
corporation’s share price has fallen and it wants to prevent a delisting of its shares from stock
exchange or attract more investors

Subdivision of Shares
When there is a subdivision of shares, the company changes the structure of its share capital by
increasing the number of shares originally issued and decreasing the par value of each.
Therefore the value of each individual share is decreased and the number of total
shares is increased. The class of shares and the total value of shares issued remain unchanged.

Q.12 Methods of Internal Reconstruction.

Ans The two methods of InternaL Reconstruction are discussed as follows:-
Alteration of Share Capital (Section 61 Company Act 2013)
In this, we alter the share capital to restructure the Company internally.
Alteration can be in the form of:
Increment in Share Capital
New shares are issued by the company with a view of increasing the share capital.
Consolidation of Existing Shares
Here we convert the existing shares or smaller values into higher denominations.
Conversion to stocks
In this alteration method, the shares are converted into stocks and vice-versa.
The fully paid shares are converted into one unit of stock.
Sub-division
It includes converting shares with higher face values into smaller face values.
Cancellation of Unissued Shares
It involves cancelling the shares that the company did not issue. Consequently,
it results in a change in the structure of capital.

Reduction of Share Capital (Section 66, 67 Company Act 2013)

In this type of internal reconstruction, there is a reduction in the share capital.
The capital reduction can take place in the following ways:
Extinguishment of Liability
Here we write off the uncalled amount, i.e. it is not asked from the shareholders.
Consequently, the paid-up capital remains the same. But there is a reduction in the shares’
par value. Hence, it reduces the liability of the shareholders.
Payoff Surplus Paid-up Capital
The company may refund the amount that is in excess. This amount is in surplus with the
company and is returned to the shareholders.
Writing off the paid-up capital
We use this method when the assets do not fairly depict the company’s capital loss.
In this, the capital reduction takes place by elimination of lost capital.

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Q.13 Difference Between Internal and External Reconstruction

Ans

Q.14 Need and benefits of reconstruction of a company and

Internal reconstruction is the rearrangement of the company’s existing capital structure.
More precisely, it involves a change in the financial structure by Alteration or Reduction.
Need
1 The need for alteration arises in the organization when:
2 There is an over or undervaluation of assets and liabilities.
3 The company has been facing a financial crisis for a while.
4 Reduction in external liabilities to become profitable.
5 To save organizations from unforeseen circumstances.

Benefits of Internal Reconstruction

There are several advantages of restructuring companies’ capital structure. It helps in:-
1 Writing-off accumulated losses
2 Fair asset valuation in the Balance Sheet
3 Depicting the actual value in the financial statements
4 Taking company back on track and making it profitable again
5 Availing tax advantage

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4 Investment Accounting (AS-13)

Q.15 Bonus Shares and Right Shares.
Ans Right Shares
The Right Shares refers to those issues of shares which a company offers to their
existing shareholders at a discounted price.
The company’s shareholders have rights to accept or reject the proposal and also there are
minimum criteria for subscriptions of the share if the shareholder accepts the proposal.
Such issuance of shares is called Right issues and such share is known as Right Shares.
The company notifies to each shareholder regarding the issuance of the right share.
The shareholders have to respond the notice within a stipulated time period,
however, they have the option to either subscribe fully or partially or avoid or can sell the
offer as well in the market. On the other hand, bonus shares refer to the shares which are

Bonus shares.
Bonus shares refer to the shares which are issued free of cost to their shareholders on a
specified date by the companies.
The bonus shares are issued at a certain proportion (eg. 1:1 or 2:1 or 3:1) according to the
shareholders’ stake in the company. The bonus shares are issued when the companies
don’t want to disburse cash dividend to their shareholders, in such scenario,
they issue bonus share to handle liquidity crunch of their shareholders.
The bonus shares can also be issued if a company requires to decrease its share price in the
market to make shares affordable to small investors. The bonus shares can also be issued
in case of surplus reserves and the intention of the company is to expand its operations.
Due to the bonus issue, the share price of the company reduces and being affordable the
demand of shares increases and thus the price of the share is also appreciated.

Q.16 Ex-interest and Cum-interest transactions in Investment Acc

Ans Cum-Interest or Cum-Dividend:
Where the right to receive interest or dividend from the issuer of security passes from the
seller to the buyer, the transaction is known as ‘Cum-Interest’ or ‘Cum-Dividend’ purchase or sale.
In other words, when the accrued interest or dividend from the last interest or dividend date
up to the date of transaction is included in the quoted price, the capital cost of
investment purchased or sold is ascertained by deducting the accrued
interest/dividend from the quoted prices. And the difference between the
quoted price and the actual cost may be represented as ‘Cum-Interest’ or ‘Cum-Dividend’.

Ex-Interest or Ex-Dividend:
When the seller retains the right to receive the interest/dividend, the transaction is called
‘Ex-Interest’ or ‘Ex-dividend’ purchase or sale. In other words, when the price quoted is exclusive of
accrued interest/dividend, the price so quoted is treated as the capital cost of investment,
i.e., the buyer has to pay accrued interest due from the last interest date to the date of
transaction to the seller along with the cost price of investment.

Q.17 Investment Accounting.

Accounting Standard 13.
Ans Investment means to spend money outside the business in order to earn some income which
are not related to the buisiness.
Usually, money is invested in Government Bonds, Securities, Shares and Debentures of companies etc.

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Investments are made in two ways:

(a) As Trade Investments:

The investments which are made permanently for a regular income outside the business is known as
Trade Investment. These are treated as fixed assets. That is why if this type of investments are
sold at a profit, profit on such sale of investment is transferred to Capital Reserve Account and not
to Profit and Loss Account.

(b) As Marketable Securities:

Sometimes a business wants to invest its idle cash purely on a temporary basis
(of course, if the rate of earning is higher than cost of capital).
This type of investment is known as Marketable Securities and is treated as Current Assets.
That is why profit or sale of such investments is transferred to Profit and Loss Account
and not to Capital Reserve.
Format of Investment Accounting

5 Ethical Behavior and Implications for Accountants

Q.18 Factors affecting Ethical Behaviour.
Ans Ethical Behaviour means an individual or collective behaviour that is in respect to the principles
laws,actions,nature,values within a business.
Whether a particular behaviour is ethical or not depends on the
a) standard applied to judge the behaviour
b) the factors influencing the behaviour

The factors influencing the behaviour are as follows:-

a) Culture
Ethical views differ between cultures. What is immoral or even illegal in some cultures is acceptable
behaviour in others. A major problem for multinational or global companies is achieving a
common code of business ethics to apply in all countries in which the company operates.

b) Law
Illegal behaviour is unethical, even when the law differs between countries.
Company codes of ethics typically state that the company's employees should always
comply with the local law in the countries in which they operate.

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c) Consequences
Sometimes, whether an act is ethical or unethical is judged by the consequences it will have.

d) Consequences
When there is a formal code of ethics, behaviour can be judged in terms of whether or not it
complies with the code.

Q.19 Ethics.
Ans The word 'ethics' is derived from the Greek word 'ethos' meaning character.
Ethics means principles which govern a person's behaviour or the conducting of an activity.
Ethics indicate beliefs about right and wrong. Ethics signify how people act in order to make the right
choice and practise 'good' behaviour. Ethics is concerned with right and wrong and how
behaviour should be judged to be good or bad.

Q.20 Corporate Social Responsibility (CSR).

Ans Corporate social responsibility is a type of business self-regulation with the aim of social accountability
and making a positive impact on society. Some ways that a company can embrace CSR include
being environmentally friendly and eco-conscious; promoting equality, diversity, and inclusion
in the workplace; treating employees with respect; giving back to the community; and ensuring
business decisions are ethical.

Section 135 of Companies Act 2013 requires the board of directors of the company, whose networth
is Rs 500 Crore or more to spend 2% of their profits of the company into CSR.

Q.21 Principal based approach to Professional Code of Ethics.

Ans Codes of corporate ethics normally have the following approach.
• They focus on regulating individual employee behaviour.
• They are formal documents.
• They cover specific areas such as gifts, anti-competitive behaviour and so on.
• Employees may be asked to sign that they will comply.
• They may be developed from third party codes (e.g. regulators) or use third parties for monitoring
• They tend to mix moral with technical imperatives. Sometimes they do little more than
describe current practices.
• They can be used to shift responsibility (from senior managers to operational staff).

Q.22 Meaning and types of Whistle Blowing.

Ans Meaning of whistleblowing
Whistleblowing is described as an unethical activity or misconduct within private, public
or third-sector companies. Some everyday activities that come under whistleblowing are
bullying, fraud, corruption, discrimination, cover-ups, violation of company
rules and policies, and safety and health violations.
Protection of whistleblowers is an essential factor and this is why governments, as well as
several organizations, have come together to create individual acts that will safeguard
the interest of the people who dare to act as whistleblowers.

Types of whistleblowing
There are two types of whistleblowing, and these are

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1. Internal whistleblowing
When an employee from an organization informs about the illegal activities or misconduct
or any wrongdoing to his seniors holding the top position in that company, it is known as internal
whistleblowing.

2. External whistleblowing
When an employee informs about the wrongdoing to someone who is not part of his organization,
for instance, a statutory body or a lawyer or any other authority figure it is known as external
whistleblowing.

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