Intermediate (IPC) Course Paper 1: Accounting Chapter 2: Financial Statements of Companies CA. Pankajj Goel

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1 Intermediate (IPC) Course Paper 1: Accounting Chapter 2: Financial Statements of Companies CA. Pankajj Goel The Institute of Chartered Accountants of India Recorded on: 24-October-2014

2 1 This lecture has been delivered by faculty members to supplement the Study Material, Practice Manual and other content 2 3 The views expressed in this lecture are of the Faculty Member. The content of this video lecture has not been specifically discussed by the Council of the Institute or any of its Committees and the views expressed herein may not be taken to necessarily represent the views of the Council or any of its committees 2

3 Students are advised to refer to e-lectures available on the Students LMS for this and other topics Free Access Register with your Student Registration Number and Start learning immediately 3

This e-lecture was Recorded on: October 24, 2014 The e-lectures, PPT, Podcasts and Video lectures on ICAI Cloud Campus aim to supplement the Study Material,

recording. Due to changes in law, there is likely to be some time gap between these changes and the recording of updated lectures.

4 This e-lecture was Recorded on: October 24, 2014 The e-lectures, PPT, Podcasts and Video lectures on ICAI Cloud Campus aim to supplement the Study Material, Practice Manual and Supplementary Study Material The lecture recordings are made according to the syllabus and laws existing/ applicable as on the date of recording. Due to changes in law, there is likely to be some time gap between these changes and the recording of updated lectures. Hence, students are advised to refer to the Study Material including Supplementary Study Material, if any, and other relevant legislation for latest provisions/ amendments required for forthcoming examination. 4

5 Shares can be issued at discount with some conditions (sec 79) No Preference shares can be issued if redemption period is more than 20 years Specific percentage of profit to transfer to reserve. No shares can be issued at discount except sweat equity shares (sec 53) Preference shares can be issued if redemption period is more than 20 years.( infrastructure case) No specific percentage required to transfer to general reserve. 5

6 Concept1:Adjustments for Dividend Concept2:Managerial Remuneration Concept3:Adjustments for Taxation Concept4:Preparation of Final Accounts as per Schedule III(Earlier revised Schedule VI) 6

7 An Intro. 7

8 Section 51:Payment of dividend in proportion to amount paid-up.a company may, if so authorised by its articles, pay dividends in proportion to the amount paid-up on each share Section 123:company may, before the declaration of any dividend in any financial year, transfer such percentage of its profits for that financial year as it may consider appropriate to the reserves of the company: 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 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 8

9 Dividend can be declared only on the recommendation of the Board of Directors of the Company. The shareholders do not have any power to declare any dividend. The Board of Directors after considering and approval of the financial statements of the Company, determines the rate of dividend to be declared and then recommends the same to the shareholders. For this purpose, a Board Meeting shall be convened to pass the resolution for Rate of dividend and the amount of dividend to be paid. Book closure date for dividend purposes Date of annual general meeting Bank with which the account shall be opened for the purpose of remittance of dividend. 9

10 Profit & Loss Appropriation A/c/Surplus A/c Dr. To Proposed Dividend-Preference To Proposed Dividend-Equity To Corporate Dividend Tax-Equity & Preference 10

11 Proposed Dividend A/c Dr To Dividend Payable A/c 11

12 The dividend recommended by the Board of Directors is declared by a resolution passed at the Annual General Meeting by the shareholders. The declaration of dividend should form part of an ordinary business item to be transacted in the notice of the Annual General Meeting. While approving the rate of dividend at the Annual General Meeting, the shareholders have power to declare a lower rate of dividend than what is recommended by the Board but they have no power to increase the amount or the rate of dividend so recommended by the Board of Directors. Dividend when declared becomes debt against the company 12

13 Step 3- Open New Bank Account So That Money Is Not Used For Any Other Purpose. This Is Like Transferring From SBI TO PNB DIVIDEND BANK A/C DR TO BANKA/C DIVIDEND 13

14 The Company should deposit the dividend amount ( including interim dividend) within 5 days of its declaration in the separate bank account opened for this purpose. It means that the interim dividend will have to be deposited in a bank account within 5 days of the Board Meeting whereas final dividend will have to be deposited within 5 days from the date of Annual General Meeting in which it was approved by the shareholders. Also Section 205 (1B) stipulates that the amount so deposited shall be used only for the purpose of payment of dividend ( whether interim or final). 14

15 Rate of dividend is calculated on paid up capital but transfer to reserve is calculated on PAT. Subject to Rules to be prescribed, dividend can be paid out of accumulated reserves without restrictions as to rate of dividend As per The companies Act 2013, companies are free to transfer any or no amount to it s reserves.mandatory transfer of profits to reserves before declaration of dividend done away with. Companies may voluntarily transfer a portion of its profits to reserves Dividend to be paid out of profits of the company for the year after providing for depreciation; or profits of the previous years arrived at after providing for depreciation and remaining undistributed; or both of the above 15

16 Dividend to be distributed within 30 days of its declaration in cash only. Dividend cannot be distributed in kind. Where unpaid / unclaimed dividend has been transferred to IEPF, the corresponding shares on which such dividend was unpaid / unclaimed shall also be transferred by the company to IEPF 16

17 STEP 4- ISSUE CHEQUE FOR PAYMENT OF DIVIDEND DIVIDEND PAYABLE a/c DR TO DIVIDEND BANK A/C DIVIDEND 17

18 Concept 2:MANAGERIAL REMUNERATION 18

19 Remuneration in case of nil or inadequate profits.(section II) Remuneration in case of adequate or sufficient profits. (section I)

20 Remuneration may be paid by way of salary, dearness allowance, perquisites or any other allowances not exceeding the ceiling limit of : Rs 24,00,000 per annum or 2,00,000 per month. Rs48,00,000 per annum or 4,00,000 per month.

21 Effective capital i. Less than Rs.1 crore ii. Rs. 1 crore or more but less than 5 crores iii. Rs. 5 crores or more but less than 25 crores iv. Rs 25 crores or more but less than 50 crores Maximum remuneration payable per month 75,000 1,00,000 1,25,000 1,50,000

22 iv. Rs.50 crores or more but less than 100 crores 1,75,000 v. Rs100 crores or more 2,00,000

23 Effective capital i. Less than Rs. 1 crore. ii. Rs 1 crore or more but less than 5 crores iii. Rs 5 crores or more but less than 25 crores iv. Rs 25 crores or more but less than 50 crores Maximum remuneration payable per month 1,50,000 2,00,000 2,50,000 3,00,000

24 v. Rs. 50 crores or more but less than 100 crores. vi. Rs. 100 crores or more 3,50,000 4,00,000

25 Maximum Limit Section 198 of the companies act, 1956 puts a maximum limit of 11% of the net profits in any financial year on the managerial remuneration payable by a public company or a private company which is a subsidiary of a public company to it s directors including any managing or whole time director or manager Minimum Limit if in any financial year a company has no profits or its profits are inadequate, the company shall not pay to its directors including any managing or whole time director or manager, by way of remuneration any sum except with the previous approval of the central government. 25

26 Total of : Paid -up share capital(excluding share application money or advances) Share premium account balance Reserves and surplus (excluding revaluation reserve) Long-term loans and deposits repayable after 1 year(excluding working capital loans, overdrafts, interest due on loans unless funded, bank guarantee etc. and other short -term advances)

27 Less: Investment(except investment by an investment company) Accumulated losses Preliminary expenses (not written off).

28 But except with the previous approval of the central government the remuneration shall not exceed: Ø If one whole time director : 5% Ø If More than one whole time director : 10% Ø If only part time directors : 3% Ø If part time directors as well as whole time directors and managers 11% 28

29 Public company-limit if Adequate Profit Overall managerial remuneration not to exceed 11% of the Net Profit of the F.Y. MD/WTD: 5% of NP if one. 10% of NP if more than one. Manager: 5% of NP Other directors 1% of NP if company has MD/WTD/Manager 3% of NP if company has no MD/WTD/Manager In all the above cases the approval of central government is required if the company wants to exceed the above limit. 29

30 Net profit for the purpose of calculation of Managerial Remuneration Net profit as per P & L account xxxx Add: ALL Provisions including reserves made in books xxxx Add: Managerial remuneration (if debited to P & L account) xxxx Add: Depreciation charged in books xxxx Less: Depreciation as per schedule iv xxxx Less: Actual expenditures (not debited to P&L account) xxxx Book profit xxxx 30

31 The Manager of LIBERTY LTD. is entitled to get a salary of Rs per month plus 1% commission on the net profits of the company after such salary and commission. The following is the profit and loss account of the company for the year ended 31st March,2014:

To salaries and wages 1,92,500 By gross profit b/d 11,70,000 To general expenses 74,000 By subsidy from govt. 60,000 To depreciation 82,000 By profit on sale of assets(cost price Rs.

32 To salaries and wages 1,92,500 By gross profit b/d 11,70,000 To general expenses 74,000 By subsidy from govt. 60,000 To depreciation 82,000 By profit on sale of assets(cost price Rs.2,50,000 and WDV Rs. 1,80,000) To expenditure on scientific research 14,000 To manager s salary 3,00,000 To commission to manager(on account) 6,000 To reserve for bad debts 17,500 To provision for tax 2,40,000 To proposed dividend 1,00,000 To balance c/d 3,04,000 1,00,000 13,30,000 13,30,000

33 Calculation of net profit for the purpose of calculation of managerial remuneration: Net profit as per Statement of Profit and Loss Add: Items to be added back- proposed dividend 1,00,000 provision for taxation 2,40,000 reserve for bad debts 17,500 commission to manager (on account) 6,000 expenditure on scientific research 14,000 depreciation (as per schedule IV) 1,000

34 Less : Items to be deducted Profit on sale of fixed asset 30,000 Net profit for the purpose of managerial calculation 6,52,500 Manager s commission 6,460 Less: advance paid on account of commission 6000 Amount still payable to manager 460

35 Profit on sale: 1 Book value=original cost-accumulated depreciation 1,80,000=2,50,000-accumulated depreciation Accumulated depreciation=70,000 2 Selling price-book value=+profit/-loss Selling price-1,80,000=1,00,000 Selling price=2,80,000

36 Manager s commission=(net profit x rate)/100+rate Manager s commission =( x 1)/101 Manager s commission =6460

37 Provision of tax for the year P&L Account Dr To Provision for Taxation Payment of Advance tax during the year Advance tax account Dr To Bank account 37

38 The trial balance of Mona Creations Ltd. as at 31 March 2014 shows the following terms : Debit Credit Rs. Rs. Provision for taxation 5,40,000 Advance Payment of Tax 10,50,000 38

39 You are also given the following information : (i) Advance payment of tax includes Rs. 6,20,000 for (ii) Assessment for is completed in and the actual tax liability amounts to Rs. 6,45,000 and no payment has been made so far for the same (iii) For the financial year , provision for income tax required is Rs. 7,50,000. Make journal entries and prepare the various ledger accounts affected. 39

40 1. Profit and Loss Account Dr. 1,05,000 To Provision for Taxation Account 1,05,000 (Being the additional amount for tax appropriated on completion of the assessment for ) 2. Provision for Taxation Account Dr. 6,45,000 To Advance Tax Account 6,20,000 To Liability for Taxation Account 25,000 (Provision for taxation adjusted against advance tax and balance transferred to liability for taxation account) 3. Profit and Loss Account Dr. 7,50,000 To Provision for Taxation Account 7,50,000 (Estimated tax liability for provided) 40

41 Ledger Accounts Provision for taxation Account Rs Liability for taxation account Balance c/d 7,50,000 Rs. 5,40,000 Balance b/d 5,40, Profit and loss account(estimate liability for 13-14) 7,50,000 12,90,000 12,90,000 41

42 Advance tax Account Rs Balance b/d 6,20,000 Liability for taxation Account Rs. 6,20,000 To Bank 4,30,000 Balance c/d 4,30,000 10,50,000 10,50,000 Liability for taxation Account Advance tax Account 6,20,000 By P&L(Bal) Balance c/d 25,000 Provision for taxation 5,40,000 42

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44 Every balance sheet shall be in the form set out in Part I of Schedule III Every profit and loss account shall comply with the requirements of Part II of Schedule III These sub-sections are not applicable to banking co., insurance co. and companies engaged in generation and supply of electricity.

45 General Instructions Part 1 Form of Balance Sheet General Instructions for preparation of Balance Sheet Part 2 Form of Statement of Profit and loss General Instructions for preparation of Statement of Profit and Loss

46 For Balance sheet only vertical format is available. Format of Profit and Loss Account is also available now. Part III Interpretation- containing explanation of provisions, reserve etc. is not given now. Part IV- Balance sheet Abstract and Co s General Business Profile is not required to be given.

47 Rounding off conditions-turnover -Rounding off < Rs. 100 crores-to the nearest hundreds, thousands, lakhs or millions, or decimals thereof. > = Rs. 100 crores-to the nearest, lakhs, millions or crores, or decimals thereof.

48 Particulars Note No. Figures as at the end of the current reporting period Figures as at the end of the previous reporting period I. EQUITY AND LIABILITIES (1) Shareholders Funds (2) Share application money pending allotment (3) Non-current liabilities (4) Current Liabilities II. ASSETS TOTAL (1) Non-current assets (2) Current assets TOTAL

49 Particulars Note No. Figures as at the end of the current reporting period Figures as at the end of the previous reporting period I. EQUITY AND LIABILITIES (1) Shareholders Funds 1 (a) share capital 2 (b) Reserve and Surplus (c) Money received against share warrants (2) Share application money pending allotment 3 (3) Non-current liabilities (a) Long term borrowings (b) Deferred tax liabilities (net) (c) Other long term liabilities (d) Long term provisions (4) Current Liabilities (a) Short term borrowings (b) Trade payables (c) Other current liabilities (d) Short term provisions TOTAL

50 Criteria to be met to classify as current liability: Expected to be settled in the co s normal operating cycle, Due to be settled within twelve months after the reporting date, Held primarily for the purpose of being traded or There is no unconditional right to defer settlement for at least 12 months after the reporting date. Operating cycle time between the acquisition of assets for processing and their realisation in cash or cash equivalents. If can not be identified- duration of twelve months. All other liabilities are classified as non-current liabilities.

51 Particulars Note No. Figures as at the end of the current reporting period Figures as at the end of the previous reporting period II. ASSETS (1) Non-current assets (a) fixed assets (i) Tangible assets (ii) Intangible assets (iii) Capital work-in-progress (iv) Intangible assets under development (b) Non- current investments 13 (c) Deferred tax assets (Net) (d) Long term loans and advances (e) Other non-current assets (2) Current assets (a) Current investments (b) Inventories (c) Trade receivables (d) Cash and cash equivalents (e) Short term loans and advances (f) Other current assets TOTAL

52 Criteria to be met to classify as current asset: Expected to be realise in or intended for sale or consumption in normal operating cycle of the co., Held primarily for the purpose of trading, Expected to be realised within 12 months from the closing date or It is cash or cash equivalent. Operating cycle time between the acquisition of assets for processing and their realisation in cash or cash equivalents. If can not be identified- duration of twelve months. All other assets shall be classified as non-current.

53 Particulars Note For the For the No. Current year Last year I. Revenue from operations XXX XXX II. Other income XXX III. Total Revenue (I + II) XXX IV. Expenses: Cost of materials consumed XXX XXX Purchases of Stock-in-Trade XXX XXX Changes in inventories of finished goods, WIP and Stock-in-Trade XXX XXX Employee benefits expense XXX XXX Finance costs XXX XXX Depreciation and amortization expense XXX XXX Other expenses XXX XXX Total expenses XXX XXX V. Profit before exceptional and extraordinary items and tax (III-IV) XXX XXX VI. Exceptional items XXX XXX VII. Profit before extraordinary items and tax (V - VI) XXX XXX VIII. Extraordinary Items XXX XXX IX. Profit before tax (VII- VIII) XXX XXX X. Tax expense: (1) Current tax XXX XXX (2) Deferred tax XXX XXX XI. Profit (Loss) for the period from continuing operations (VII-VIII) XXX XXX XII Profit/(loss) from discontinuing operations XXX XXX XIII. Tax expense of discontinuing operations XXX XXX XIV. Profit/(loss) from Discontinuing operations (after tax) (XII-XIII) XXX XXX XV. Profit (Loss) for the period (XI + XIV) XXX XXX

54 (i) Cost of material consumed (ii) Purchase of stock-in-trade (iii) Changes in inventories of finished goods,work-in-progress and stock in trade (iv) Employee benefit expenses (v) Finance cost (vi) Depreciation and amortisation expenses (vii)other expenses.

55 In respect of contingent liabilities Claims against the co not acknowledged as debts Guarantees Other moneys for which co is contingently liable In respect of commitments Estimated amount of contracts remaining to be executed on capital account and not provided for Uncalled liability on shares and other investments partly paid Other commitments

56 1. Prepare the Balance Sheet of Payal Textiles Ltd. as required under Schedule III of the Companies Act, 2013, as on 31 March Following balances are given : NTM Accounts Dr. Cr. Secured Term Loans 10,00,000 Creditors 11,45,000 6% Debentures Account 27,00,000 Provision for Tax 1,70,000 Share Premium Account 4,75,000 General Reserves 20,50,000 Loans from Debtors 2,00,000 Provision for (Doubtful) Debts 20,200 Provision for Depreciation 5,00,000 Equity Share Capital (30,000 10) 3,00,000 8% Preference Share Capital (10, ) 10,00,000 Advances given 3,72,000 Advances to staff 55,000 Cash and Bank 2,75,000 Loose Tools 50,000 Investments 2,25,000 Profit and Loss Account (Losses) 3,00,000 Debtors 12,25,000 Miscellaneous Expenditure 58,000 Stores Items 4,00,000 Fixed Assets 56,50,000 Capital Work-in-Progress 2,00,000 Finished Goods Stock 7,50,200 Rs. Rs. 95,60,200 95,60,200 56

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58 The following is the trial balance of SONA Ltd. as at 31 March, 2014: Rs. Rs. Stock, 1 April, ,000 Purchases returns 10,000 Purchases and sales 2,19,000 3,40,000 Sales Returns 1500 Wages Discount 3,000 Furniture and fittings 10,000 Salaries 4,500 Advance Tax 5000 Bad Debts 4,050 Preliminary Expenses 3000 Profit and loss appropriation account, 31 March ,000 Share capital 70,000 Calls In arrears 3000 Debtors and creditors 27, Plant and machinery 20,000 Cash at bank 66,200 Patents and trade marks 2,

59 Prepare Statement of Profit and Loss and profit and loss appropriation account for the year ended 31 March, 2014 and a balance sheet at that date. Take into consideration the following adjustments: a) Stock on 31 March, 2014 was valued at Rs. 88,000. b) Make a provision for income 50%. c) Depreciate plant and 15%, d) The Directors propose a 15% per annum for the year ended 31 March, 2009 e) A claim of Rs. 25,000 for workmen s compensation is being disputed by the company 59

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26 th Regional Conference of WIRC. Revised Schedule VI. CA N. Venkatram 16th December, 2011

26 th Regional Conference of WIRC Revised Schedule VI CA N. Venkatram 16th December, 2011 Agenda Background and Applicability Structure of Revised Schedule VI Points and Issues Comparison with the Existing