The following article will guide you about how to prepare final accounts of companies.
We know that there is no hard and fast rule of preparing accounts of a sole proprietorship firm. But according to Sec. 209 of the Companies Act, every company is to prepare its Profit and Loss Account and Balance Sheet at the end of every year as per Schedule VI of the said Act and the procedures of preparing such accounts are stated in Sec. 211.
It has also been stated that the Board of Directors of a company is to present the Profit and Loss Account and the Balance sheet to be prepared at the end of a stipulated period (generally annually) at the annual general meeting of the company. A non-trading company is, however, to prepare an Income and Expenditure Account instead of a Profit and Loss Account.
Trading Account is not mentioned in the Companies Act. Therefore, items relating to Trading Account are to be recorded first (i.e., at the top) while preparing Profit and Loss Account, The period for which the Profit and Loss Account and Balance Sheet is prepared is known as financial year. The financial year may be a period of less than 12 months but the same cannot exceed a period of 15 months.
Before highlighting any more about the Profit and Loss Account and the Balance Sheet, we mention below the various books which are to be maintained by a company.
Statutory Books and Statistical Records:
Books of Accounts:
Section 209, as amended in 1974, provides that every company shall keep at its registered office proper books of accounts with respect to all sums of money received and expended by the company and the matters in respect of which the receipt and expenditure take place. Of course, the Board of Directors may keep the books at some other place in India but the address of such place must be notified to the Registrar.
Books up to 8 years previous to the current year must be kept in good condition along with the relevant vouchers. The books of account must give a true and fair view of the state of affairs of the company and explain its transactions. If the books of accounts are not maintained properly, every person responsible can be fined up to Rs. 1,000 and imprisoned up to 6 months.
It may be mentioned in this respect that the books of accounts and other books and papers shall be opened for inspection during business hours by the Registrar or by such officer of the Govt. as may be authorised by the Central Government – Section 209 of Companies (Amendment) Act, 1974.
It is the duty of every Director, other officer and employee of the company to produce such books, furnish any statement, information or explanation, within such time and such place as required by the person making the inspection.
According to the Companies Act, every limited company must maintain the following books:
(i) Register of members with an index where necessary (Sec. 150);
(ii) Register of Debenture-holders with an index where necessary (Sec. 152(2)];
(iii) Register of Mortgage and Charge (Sec, 143);
(iv) Register of Directors; Managing Directors’ and chief executives’ shareholdings contract and concerns in which directors are interested (Sec. 307);
(v) Register of Directors, Manager, Secretary and Treasurers (Sec. 303);
(vi) Register of Selling Agents;
(vii) Register of Supply or Rendering or Services;
(viii) Register of Buying Agents;
(ix) Directors’ Attendance Books;
(x) Annual Returns, Books of Accounts and summary of share capital (Sees. 209 and 211);
(xi) Minute Book concerning General Body Meetings and Board Meetings (Sec. 193);
(xii) Register of loans made, guarantees given or securities provided to companies under the same management;
(xiii) Register of investments showing investment in companies under the same group as well as investments not held in company’s name (Sec. 49);
(xiv) Register of contracts, and companies and firms in which directors are interested (Sec. 301);
(xv) Foreign Register of members and debenture-holders, if any (Sec. 157).
The following books may also be maintained by a company:
(iii) Share Certificate;
(iv) Share Transfer;
(v) Share Warrants;
(vi) Agenda Book etc.
The company may find it convenient and necessary to maintain the following statistical books.
They are called statistical books since they serve to supply detailed statistical information in regard to:
(i) Holding and transfer of shares and debentures;
(ii) The call made on the shareholders and debenture-holders;
(iii) Dividends to shareholders etc.
The following statistical books are usually maintained:
(a) Share Application and Allotment Book;
(b) Share Call Book;
(c) Debenture Application and Allotment Book;
(d) Debenture Call Book;
(e) Register of Share Transfer,
(f) Register of Share Certificate;
(g) Register of Share Warrants;
(h) Register of Probates;
(i) Debenture Transfer Register;
(j) Shareholders’ Dividend Book;
(k) Agenda Book etc.
(l) Register of Certifications and Balance tickets;
(m) Register of Sealed Documents; and
(n) Register of Powers of Attorney; etc.
Inspection of Books of Accounts etc.:
Sec. 209A of Companies (Amendment) Act, 1974, states that the books of accounts and other books and papers of every company shall be opened for inspection during business hours by the Registrar or by such officer of the Government as may be authorised by the Central Government. This inspection may be made without giving any previous notice to the company or any officer thereof.
It shall be the duty of every director, other officers and employee of the company to produce to the person all books of accounts, other books and papers of the company, furnish with statements, information or explanation relating to the affairs of the company within such time and place as he may specify.
It shall also be the duty of every director, other officers and employees of the company to give all assistance regarding inspection which the company may reasonably expected to give.
The person making the inspection may make or cause to be made copies of books and paper. He may place or cause to be placed any mark of identifications thereon.
The person making such inspection is vested with the power of a Civil Court (under Code of Civil Procedure, 1908) including discovery and production of books of accounts, summoning and enforcing the attendance of persons and examining them on oath; inspection of any books, registers and any documents at any place.
The person making the inspection shall make a report to the Central Government.
He shall have all the powers that a Registrar has in relation to the making of inquiries.
If default is made in complying with the provisions, every officer who is in default shall be punishable with fine which shall not be less than Rs. 5,000 and also with imprisonment for a term not exceeding one year.
Where a director or any officer is convicted, he shall be deemed to have vacated his office and shall be disqualified for holding such office in any company for a period of 5 years from such date.
Annual Accounts and Balance Sheet:
At every general meeting of the company, the Board of Directors of the company shall lay before the company:
(i) A Balance Sheet as at the end of the period;
(ii) A Profit and Loss Account for that period;
(iii) In the case of companies not carrying on business for profit there must be an Income and Expenditure Account instead of Profit and Loss Account.
The Profit and Loss Account shall Relate:
(i) In the case of first annual general meeting, from the date of incorporation to a date not later than 9 months previous to the date of the meeting;
(ii) In the case of any subsequent annual general meeting, from the date immediately after the date of the last account to a date not later than 6 months previous to the date of the meeting;
(iii) The period of accounts which is the financial year of the company may be more or less than a calendar year but it shall not exceed 15 months. It may extend to 18 months where special permission has been taken from the Registrar. Sec. 210 states that if any person (being a director of a company) fails to take all reasonable steps to comply with the provisions, he shall be punishable with imprisonment for a term which may extend to 6 months or with fine which may extend to Rs. 1,000, or with both.
Form and Contents of Balance Sheets and Profit and Loss Account:
Sec. 211 of the Companies Act lays down that every Balance Sheet of a company shall give a true and fair view of the state of affairs of the company, as at the end of the financial year and shall be in the form set out in Part I of Schedule VI to the Act, or as near thereto as circumstances admit or in such other form as the Central Govt. may approve. Separate forms have been prescribed for Banking and Insurance companies or any company engaged in the generation or supply of electricity or to any other class of company for which a form of Balance Sheet has been specified.
Every Profit and Loss Account of a company shall give a true and fair view of the profit or loss of the company for this financial year. The form set out in Part II of Schedule VI does not, however, apply to any Banking or Insurance Company or to any other class of company for which a form of Profit and Loss Account has been specified.
The Central Govt. may, by notification in the Official Gazette, exempt any class of companies from compliances with any of the requirements in Schedule VI if, in its opinion, it is necessary to grant the exemption in the public interest. (Any such exemption may be granted either unconditionally or subject to such conditions as may be specified in the notification).
The Profit and Loss Account and the Balance Sheet of a company must not be treated as not disclosing a true and fair view of the state of affairs of the company, simply by reason of the fact that they do not disclose in the case of Insurance Company, banking company or a company engaged in the generation or supply of electricity or a company governed by any special Act for the time being in force, any matters which are not required to be disclosed by the respective Acts.
For the purpose of Sec. 211, except where the context otherwise requires, any reference to a Profit and Loss Account or Balance Sheet shall include any notes or documents annexed thereto, giving information required by this Act, and allowed by this Act to be given in the form of such notes or documents.
Where the persons responsible for securing compliance with the provisions of Sec. 211 fails to take all reasonable steps to do so, he shall be punishable for a term which may extend to 6 months or with fine which may extend to Rs. 1,000 or both. But no such person shall be sentenced to imprisonment for any offence under Sec 211 unless the same was committed wilfully.
Similarly, Sec. 211(8) states that this person may entrust any other competent and reliable person with the discharge of responsibility u/s 211 and if he was in a position to discharge it, he shall be liable for any default in complying with the requirements of Sec. 211.
Authentication of Balance Sheet and Profit and Loss Account (Sec. 215):
The Balance Sheet and Profit and Loss Account of a company must be signed on behalf of the Board of Directors by the manager or secretary, if any, and not less than two directors one of whom shall be the Managing Director where there is one stating the reason for his signing alone [Sec. 215(2)].
Moreover, the Balance Sheet and the Profit and Loss Account shall be approved by the Board of Directors before they are signed on behalf of the Board and before they are submitted to the auditor for their report [Sec.215(3)].
Schedule VI, Part(II):
Requirements as to Profit and Loss Account:
1. The provisions of this Part shall apply to the Income and Expenditure Account referred to in sub-section (2) of Section 210 of the Companies Act, 1956, in like manner as they apply to a Profit and Loss Account, but subject to the modification of references as specified in that sub-section.
2. The Profit and Loss Account:
(a) Shall be so made out as clearly to disclose the result of the working of the company during the period covered by the account; and
(b) Shall disclose every material feature, including credits or receipts and debits or expenses in respect of non-recurring transactions or transactions of an exceptional nature.
3. The Profit and Loss Account shall set out the various items relating to the income and expenditure of the company arranged under the most convenient heads; and, in particular, shall disclose the following information in respect of the period covered by the account:
(i) (a) The turnover, that is, the aggregate amount for which sales are effected by the company, giving the amount of sales in respect of each class of goods dealt with by the company, and indicating the quantities of such sales for each class separately.
(b) Commission paid to sole selling agents within the meaning of Section 294 of the Act.
(c) Commission paid to other selling agents.
(d) Brokerage and discount on sales, other than the usual trade discount.
(ii) (a) In the case of manufacturing companies:
(1) The value of the raw materials consumed, giving item-wise break-up and indicating the quantities thereof. In this break-up, as far as possible, all important basic raw materials shall be shown as separate items, the intermediates or components procured from other manufactures may, if their list is too large to be included in the break-up, be grouped under suitable headings without mentioning the quantities, provided all those items which in value individually account for 10% or more of the total value of the raw material consumed shall be shown as separate and distinct items with quantities thereof in the break-up.
(2) The opening and closing stocks of goods produced, giving break-up, in respect of cash class of goods and indicating the quantities thereof.
(b) In the case of trading companies, the purchases made and the opening and closing stocks, giving break-up in respect of each class of goods traded in by the company and indicating the quantities thereof.
(c) In the case of companies rendering or supplying services, the gross income derived from services rendered or supplied.
(d) In the case of a company, which falls under more than one of the categories mentioned in (a), (b) and (c) above, it shall be sufficient compliance with the requirements herein if the total amounts are shown in respect of the opening and closing stocks, purchases, sales and consumption of raw material with value and quantitative break-up and the gross income from services rendered is shown. (e) In the case of other companies, the gross income derived under different heads.
The quantities of raw materials, purchases, stocks and the turnover shall be expressed in quantitative denominations in which these are normally purchased or sold in the market.
For the purposes of items (ii)(a), (ii)(b) and (ii)(d), the items for which the company is holding separate industrial licences, shall be treated as separate classes of goods, but where a company has more than one industrial licence for production of the same item at different places or for expansion of the licensed capacity, the item covered by all such licences shall be treated as one class. In the case of trading companies, the imported items shall be classified in accordance with the classification adopted by the Chief Controller of Imports and Exports in granting the import licences.
In giving the break-up of purchases, stocks and turnover, items like spare parts and accessories, the list of which is too large to be included in the break-up, may be grouped under suitable headings without quantities, provided all those items, which in value individually account of 10% or more of the total value of the purchases, stocks or turnover, as the case may be, are shown as separate and distinct items with quantities thereof in the break-up.
(iii) In the case of all concerns having work-in-progress, the amounts for which such works have been completed at the commencement and at the end of the accounting period.
(iv) The amount provided for depreciation, renewals or diminution in value of fixed assets.
If such provision is not made by means of a depreciation charge, the method adopted for making such provision.
If no provision is made for depreciation, the fact that no provision has been made shall be stated and the quantum of arrears of depreciation computed in accordance with Section 205(2) of the Act shall be disclosed by way of a note.
(v) The amount of interest on the company’s debentures and other fixed loans, that is to say, loans for fixed periods, stating separately the amount of interest, if any, paid or payable to the managing director and the manager, if any.
(vi) The amount of charge for Indian Income-tax and other Indian taxation on profits, including, where practicable, with Indian Income-tax any taxation imposed elsewhere to the extent of the relief, if any, from Indian Income-tax and distinguishing, where practicable, between income-tax and other taxation.
(vii) The amounts reserved for:
(a) Repayment of share capital; and
(b) Repayment of loans.
(viii) (a) The aggregate, if material, of any amounts set aside or proposed to be set aside, to reserves, but not including provisions made to meet any specific liability, contingency or commitment known to exist at the date as at which the Balance Sheet is made up.
(b) The aggregate, if material, of any amounts withdrawn from such reserves.
(ix) (a) The aggregate, if material, of any amounts set aside to provisions made, for meeting specific liabilities, contingencies or commitments.
(b) The aggregate, if material, of the amounts withdrawn from such provisions, as no longer required.
(x) Expenditure incurred on each of the following items, separately for each item:
(a) Consumption of stores and spare parts;
(b) Power and fuel;
(d) Repairs to buildings;
(e) Repairs to machinery;
(f) (1) Salaries, wages and bonus.
(2) Contribution to provident and other funds.
(3) Workmen and staff welfare expenses to the extent not adjusted from any previous provision or reserve.
Information in respect of this item should also be given in the Balance Sheet under the relevant provision or reserve account.
Relating to disclosure of break-up of the expenditure incurred on employees, omitted by notification No. 80723(E), dated 18.9.90.
(h) Rates and taxes, excluding taxes on income;
(i) Miscellaneous expenses:
Provided that any item under which the expenses exceed 1% of the total revenue of the company or Rs. 5,000, whichever is higher, shall be shown as a separate and distinct item against an appropriate account head in the Profit and Loss Account and shall not be combined with any other item to be shown under ‘Miscellaneous Expenses’.
(xi) (a) The amount of income from investments, distinguishing between trade investments and other investments.
(b) Other income by way of interest, specifying the nature of the income.
(c) The amount of income-tax deducted if the gross income is stated under sub-paragraphs (a) and (b) above.
(xii) (a) Profits or losses on investments showing distinctly the extent of the profits or losses earned or incurred on account of membership of a partnership firm to the extent not adjusted from any previous provision or reserve.
Information in respect of this item should also be given in the Balance Sheet under the relevant provision or reserve account.
(b) Profits or losses in respect of transactions of a kind, not usually undertaken by the company or undertaken in circumstances of an exceptional or non-recurring nature, if material in amount.
(c) Miscellaneous income.
(xiii) (a) Dividends from subsidiary companies.
(b) Provisions for losses of subsidiary companies.
(xiv) The aggregate amount of the dividends paid, and proposed, and stating whether such amounts are subject to deduction of income-tax or not.
(xv) Amount, if material, by which any items shown in the Profit and Loss Account are affected by any change in the basis of accounting.
4. The Profit and Loss Account shall also contain or give by way of a note detailed information, showing separately the following payments provided or made during the financial year to the directors (including managing directors), or manager, if any, by the company, the subsidiaries of the company and any other person— (i) managerial remuneration under Section 198 of the Act paid or payable during the financial year to the directors (including managing directors), or manager, if any. (ii) (iii), (iv) and (v) — omitted. (vi) other allowances and commission including guarantee commission (details to be given); (vii) any other perquisites or benefits in cash or in kind (stating approximate money value where practicable); (viii) Pensions, etc.
(c) Payments from provident funds, in excess of own subscriptions and interest thereon,
(d) Compensation for loss of office, and
(e) Consideration in connection with retirement from office.
4A. The Profit and Loss Account shall contain or give by way of a note a statement showing the computation of net profits in accordance with Section 349 of the Act with relevant details of the calculation of the commissions payable by way of percentage of such profits to the directors (including managing directors), or manager (if any).
4B. The Profit and Loss Account shall further contain or give by way of a note detailed information in regard to amounts paid to the auditor, whether as fees, expenses or otherwise for services rendered:
(a) As auditor;
(b) As adviser, or in any other capacity, in respect of:
(i) Taxation matters;
(ii) Company law matters; and
(iii) Management service;
(c) In any other manner.
4C. In the case of manufacturing companies, the Profit and Loss Account shall also contain, by way of a note in respect of each class of goods manufactured, detailed quantitative information in regard to the following, namely:
(a) The licenced capacity (where licence is in force);
(b) The installed capacity; and
(c) the actual production.
The licenced capacity and installed capacity of the company as on the last date of the year to which the Profit and Loss Account relates, shall be mentioned against items (a) and (b) above, respectively.
Against item (c), the actual production in respect of the finished products meant for sale shall be mentioned. In cases where semi-processed products are also sold by the company, separate details thereof shall be given.
The items for which the company is holding separate industrial licences shall be treated as separate classes of goods but where a company has more than one industrial licence for production of the same item at different places or for expansion of the licensed capacity, the item covered by all such licences shall be treated as one class.
4D. The Profit and Loss Account shall also contain by way of a note the following information, namely:
(a) Value of imports calculated on C.I.F. basis by the company during the financial year in respect of:
(i) Raw materials;
(ii) Components and spare parts;
(iii) Capital goods;
(b) Expenditure in foreign currency during the financial year on account of royalty, know- how, professional consultation fees, interest and other matters;
(c) value of all imported raw materials, spare parts and components consumed during the financial year and the value of all indigenous raw materials, spare parts and components similarly consumed and the percentage of each of the total consumption;
(d) the amount remitted during the year in foreign currencies on account of dividends, with a specific mention of the number of non-resident shareholders, the number of shares held by them on which the dividends were due and the year to which the dividends related;
(e) Earnings in foreign exchange classified under the following heads, namely:
(i) Export of goods calculated on F.O.B. basis;
(ii) royalty, know-how, professional and consultation fees;
(iii) interest and dividend;
(iv) other income, indicating the nature thereof.
5. The Central Government may direct that a company shall not be obliged to show the amount set aside to provisions other than those relating to depreciation, renewal or diminution in value of assets, if the Central Government is satisfied that the information should not be disclosed in the public interest and would prejudice the company, but subject to the condition that in any heading stating an amount arrived at after taking into account the amount set aside as such, the provision shall be so framed or marked as to indicate that fact.
6. (1) Except in the case of the first Profit and Loss Account laid before the company after the commencement of the Act, the corresponding amounts for the immediately preceding financial year for all items shown in the Profit and Loss Account shall also be given in the Profit and Loss Account.
(2) The requirement in sub-clause (1) shall, in the case of companies preparing quarterly or half- yearly accounts, relate to the Profit and Loss Account for the period which ended on the corresponding date of the previous year.
Profit and Loss Account:
Sec. 211 (2) of Companies Act, 1956, states:
“Every Profit and Loss Account of a company shall give the true and fair view of the profit or loss of the company for the financial year and shall, subject as aforesaid, comply with the requirements of Part II of Schedule VI so far as they are applicable thereto: Provided that nothing contained in this sub-section shall apply to any insurance or banking company, or any company engaged in the generation or supply of electricity or to any other class of company for which a form of Profit and Loss Account has been specified in or under the Act governing such class of company”. The Central Government may exempt any class of companies from compliance with any of the requirements of Schedule VI relating to the Profit and Loss Account.
It is to be noted that no form of Profit and Loss Account is prescribed as has been done in the case of a Balance Sheet. Part II of Schedule VI deals with the “Requirements as to Profit and Loss Account.” And the provision of this part shall apply to the Income and Expenditure Account—Sec. 210(2).
As per Part II of Schedule VI “the Profit and Loss Account shall be so made out as clearly to disclose the result of the working of the company during the period covered by the account”.
The Profit and Loss Account shall disclose every material fact including credits and receipts and debits or expenses in respect of non-recurring transactions or transactions of an exceptional nature. “The Profit and Loss Account shall set out the various items relating to the income and expenditure of the company arranged under the most convenient heads”.
It means relative importance in a given situation. In other words, the amount involved is neither too small nor significant. Whether a particular amount is ‘material’ or not, depends on the amount and, at the same time, the size of the business. In short, an amount of Rs. 1,000 is found to be a ‘material’ one in case of a small business whereas the same is ‘immaterial’ to a big company.
However, if the amount is found to be a ‘material’ one the following items will appear in Profit and Loss Account according to law:
(a) Transfer to Reserves and Provisions and withdrawals from the same;
(b) Any profit or loss arising from abnormal or exceptional transactions;
(c) If the Profit and Loss Account is affected by a change in the method of providing for depreciation or in the mode of valuation of stock.
Besides the above the following items must also be stated in Profit and Loss Account if the same are found to be ‘materials’:
(i) Adjustments for prior years;
(ii) Incomes or expenditures which affect the true and fair view of the accounts;
(iii) Any undetected errors.
The contents of Profit and Loss Account are discussed below as per Part II of Schedule VI:
(a) Turnover and Items Connected with Turnover:
They are to be shown as under:
(i) The turnover, i.e., the aggregate amount for which sales are affected by the company:
(ii) Commission paid to sole selling agents within the meaning of Sec. 294 of the Act;
(iii) Commission paid to other selling agents;
(iv) Brokerage and discounts on sales other than usual trade discount.
(b) Cost of Sales, Stocks and Work-in-progress:
These items are to be shown as under:
(i) In the case of manufacturing concern, the purchase of raw materials and the opening, and closing stock of the goods produced;
(ii) In case of trading concern, the purchases made, and the opening and the closing stocks;
(iii) In case of a concern which falls under more than one of the categories mentioned in (a) (i), (ii) and (iii) above, it shall be sufficient compliance of the requirements herein if the total amounts are shown in respect of the opening and closing stocks, purchases and sales and the gross income from services rendered is shown;
(iv) In case of all concerns having work-in- progress the amount for which (such works have been completed) at the commencement and at the end of the accounting period.
(c) Stores, Power, Rent, Repairs, Salaries etc.:
These are to be shown as under:
(i) Consumption of stores;
(ii) Power and fuel;
(iv) Repairs to Building;
(v) Repairs to Machinery;
(vi) Salaries, wages and bonus—contribution to provident and other funds—workmen and staff welfare expenses to the extent not adjusted from any previous provision or reserve;
(viii) Rates and Taxes;
(ix) Miscellaneous expenses.
The amount provided for depreciation, renewals or diminution in the value of fixed assets—where such provision is not made by means of a depreciation charge, the method adopted for making such provision. But where no such provision is made for depreciation, the fact that no provision has been made shall be stated and the quantum of arrear depreciation computed in accordance with Sec. 205 (2) of the Act shall be disclosed by way of a note.
(e) Interest on Loans and Debentures:
The amount of interest on fixed loans and company’s debentures, i.e., loans for fixed period, the amount of interest, if any, (paid or payable) to managing director, secretaries, treasurers, managers, etc. all have to be stated separately.
(f) Other Expenses:
The following items are included under the Head ‘Other expenses’:
(ii) Rates and Taxes;
(iii) Insurance Premium;
(iv) Miscellaneous Expenses (if it exceeds 1% of the total revenue or Rs. 5,000, whichever is higher, under appropriate head).
(g) Managerial Remuneration:
The Profit and Loss Account must contain the following payments made to directors or managers by the company:
(i) Managerial Remuneration;
(ii) Other allowances and commission;
(iii) Any other perquisites;
(iv) Pension, Gratuities, payments from P.F. in excess of own contribution and interest.
(h) Payment to Auditors:
The Profit and Loss Account must contain the payments made to the auditors as (i) auditor; (ii) in any other capacity.
(i) Audit fees
(ii) Fees for management services and company law matters;
(iii) Fees for internal auditing, if any;
(iv) Other Services.
The aggregate, if material, of the amounts set aside to provisions made for meeting specific liabilities, contingencies or commitments should separately be shown in Profit and Loss Account. At the same time, the aggregate, if material, of the amounts withdrawn from such provisions, if no longer required, should also be disclosed.
(j) Income from Investments and Profit and Loss on Sales of Investments:
Income from investments should be shown in the following manner:
(i) The amount of income from investments, distinguishing between trade investments and other investments;
(ii) Other income by way of interest;
(iii) Profits or Losses on investments (to the extent not adjusted from any previous provision/reserve);
(iv) The amount of income-tax deducted, if the gross income is stated.
(k) Special/Miscellaneous Income:
Profit or Losses in respect of transactions of a kind not usually undertaken by the company or undertaken in circumstances of an exceptional or non-recurring nature, if material, in amount and Miscellaneous Incomes are to be separately stated.
(l) Taxation Provision:
The amount of charge for Indian Income-tax and other Indian taxation on profit are to be made.
The amount appropriated out of profit for:
(i) repayment of Share Capital; and
(ii) repayment of loans, are to be shown separately. The aggregate of any amount set aside or proposed to be set aside are to be shown separately if they are material and accounts withdrawn from such reserves should also be disclosed.
The aggregate of the dividend paid and proposed, and stating whether such amounts are subject to deduction of income-tax or not, are to be stated.
Some Adjustments to be considered before preparing Final Accounts of a Company:
Provision for Depreciation and the methods prescribed by the Companies Act:
At present the Companies Act makes depreciation a legal compulsion i.e., according to Sec. 205, a company cannot declare and pay dividend for any financial year out of profit before charging depreciation. The Companies Act also lays down how the depreciation has to be worked out.
According to Sec. 205 (2) of the Act, depreciation must be provided either:
(a) To the extent specified in Sec. 350 or,
(b) In respect of each items of depreciable asset, for such an amount which is arrived at by dividing 95% of the original cost thereof to the company by the specified period relating to such asset; or,
(c) On any other basis which has been approved by the Central Govt. which has the effect of writing-off by way of depreciation 95% of the original cost to the company of each such depreciable asset on the expiry of the specified period; or
(d) As regards any other depreciable assets for which no rate of depreciation has been laid down by Indian Income Tax Act, 1961, or the rules made there under, on such basis as may be approved by the Central Govt. by any general order published in the official gazette or by any special order in any particular case.
The Act also provided that when depreciation is provided for in the manner stated above (a), (b), (c), any asset which is being sold, discarded, demolished or destroyed (before charging depreciation in full) the excess of W.D.V. over its sale prices shall be written-off in the financial year.
Similarly, for clauses (b) and (c) stated above the specified period in respect of any depreciable asset shall mean the number of years at the end of which at least 95% of the original cost of that asset should have been provided for by way of depreciation if the depreciation is to be calculated according to Sec. 350 of the Companies Act.
Since there is a sharp rise in the rate of depreciation by the Income-Tax Act, the companies find it extremely difficult to declare and pay dividend after charging depreciation. For this purpose an amendment was proposed.
Needless to mention here that after such amendment, depreciation should be calculated according to the prescribed rates which has been specified—the Schedule XIV of the Act as under:
(i) Asset have been clarified as
(b) Plant and Machinery;
(c) Furniture and Fittings;
(ii) Rates of depreciation have been prescribed only as by the following alternatives viz.:
(a) Straight Line Method; and
(b) Diminishing Balance Method.
(iii) In case of addition or sold/discarded/demolished etc., depreciation should be calculated on a prorata basis.
(iv) Rate of depreciation for Double-shift/Triple-Shift working have been applied only in case of Plant and Machinery.
The rates which have been specified in the scheduled (some of them) are given below:
(i) If Depreciation is given only in Trial Balance:
The same will appear in the debit side of Profit and Loss Account.
(ii) If Depreciation is given in the adjustment:
The same will appear in the debit side of Profit and Loss Account and also will be deducted from the respective assets from the asset side of the Balance Sheet, i.e., the usual adjusting entry should be made.
But if the original cost of the asset is given and provision for depreciation is also given, in that case the existing provisions along with the annual depreciation will be deducted from the assets.
(B) Income Tax:
(i) If Income Tax is deducted at source:
As per Sec. 193 and 194 of the Income-tax Act, 1961, income-tax is deducted while paying salary, interest, dividend etc. at source and the amount which is deducted must be deposited to the credit of the Central Government. That is why, if any balance is left, the same appears as a liability of the company and is shown as a credit balance.
(i) When deducted, Tax deducted at source is credited (because of a liability) and the same is debited when it is paid.
(ii) If Tax deducted at source appears as a credit balance, the same is shown as a current liability.
(2) Payment of Advance Tax:
Advance tax is paid in the previous year before the income has been assessed on the basis of estimated earnings although the income of the previous year is assessed in the assessment year.
If is shown as an asset in the asset side of the Balance Sheet under Current Asset, Loans & Advances.
(3) Provision for Taxation:
When provisions are made for taxations against tax liability, the accounting treatment will be:
Profit and Loss A/c …Dr.
To Provision for Taxation …A/c
In short, the same will appear in the debit side of Profit and Loss Account and also will be shown as a current liability, under the head Current Liabilities and Provisions.
(C) Issue of Shares:
Calls-in-Arrear Account appears only when any shareholder fails to pay any allotment or call money.
We pass the usual entry for the purpose:
Calls-in-Arrear A/c Dr.
To Share Allotment A/c (if amount due on Allotment)
To Share First-Call A/c (amount due of on First Call)
To Share Final Call A/c (amount due to Final Call)
Amount of Call-in-Arrear is deducted from the called-up Capital in the liability side of the Balance Sheet.
(2) Forfeited Shares Account:
While forfeiting shares we known that Forfeited Shares Accounting shows a credit balance and as such, the same appears in the credit side of the Trial Balance. But the same is shown as an addition with the paid-up share capital in the liability side of the Balance Sheet.
(3) Share Premium Account:
It is shown as a liability in the liability side of the Balance Sheet under the head Reserves and Surplus.
(4) Discount on Issue of shares:
It is shown in the asset side of the Balance Sheet under “Miscellaneous Expenditure.”
(i) Interim Dividend:
Interim dividend is paid on the basis of interim account in-between two accounting periods. It is paid before preparing final accounts. It appears in the debit side of Trial Balance. Because, when it is paid, Interim Dividend Account is debited and Bank Account is credited.
It will appear in the debit side of Profit and Loss Account in appropriation section as an appropriation of profit.
(ii) Proposed Dividend:
The proposed dividend is recommended by the Directors and, when the same is approved by the shareholders, it is called Approved Dividend. For this purpose the entry being.
Profit and Loss (Appropriation) A/c …Dr.
To Proposed Dividend …A/c
It will appear in debit side of Profit and Loss Account in the appropriation section and the same also appears in the liability side of the Balance Sheet under the head Current Liabilities and Provisions.
(3) Final Dividend:
This dividend is declared and paid on the basis of final account at the end of the year.
(4) Unclaimed Dividend:
The dividend which is not collected by the shareholders is known as Unclaimed Dividend. The same will appear in the liability side of the Balance Sheet under Current Liabilities and Provisions till it is collected by the respective shareholders.
(5) Dividend Received:
The gross dividend (i.e. Net Dividend plus tax deducted at source) will appear in the credit side of Profit and Loss Account as an income whereas Tax deducted at source will appear as an asset in the asset side of the Balance Sheet.
(6) Preference Dividend:
The dividend which is paid to the preference shareholders also will appear in the debit side of Profit an Loss (Appropriation) Account. It is shown as a current liability under the head Current Liabilities and Provisions till it is paid to the Preference shareholders.
In order to safeguard the interest of the shareholders, the Companies Act provides for the employment of auditor who is ‘the the watch-dog’ of the shareholders and his duty is to examine the books of account, i.e. the affairs of the company on behalf of them at the end of the year. The auditor will make a report, after examining the accounts, to the shareholders.
Qualifications of an Auditor:
Sec. 226 of the Companies Act lays down that a person shall not be qualified for appointment of an auditor of a company (public or private) unless he is a Chartered Accountant within the meaning of the Chartered Accountant’s Act, 1949, and
It also provides that a firm whereof all the partners practising in India are qualified for appointment as aforesaid may be appointed by its firm name to be auditors of a company, in which case any partner so practising may act in the name of the firm.
Sec. 226(2) of the Companies Act, however, lays down that a person who holds a certificate under the Restricted Auditors Certificates (Part B States) Rules, 1956, is also qualified to act as auditor of a company.
Moreover, the Central Govt. may by notification in the Official Gazette make rules providing for the grant, renewal, suspension or cancellation of such certificates and may prescribe conditions and restrictions for such purposes [Sec. 226(2) b].
Sec. 226(3) of the Companies Act states that none of the following persons are qualified for appointment as auditors of a company:
(a) A body corporate;
(b) An officer or employee of the company;
(c) A person who is a partner, or who is in the employment, of an officer or employee of the company;
(d) A person who is indebted to the company for an amount exceeding Rs. 1,000 or who has given any guarantee or provided any security in connection with the indebtedness of any third person to the company for an amount exceeding Rs. 1,000;
(e) A person who is a director or member of a private company, or a partner of a firm, who is the managing agent, or the secretaries and treasurers of the company;
(f) A person who is a director or the holders of shares exceeding 5% in nominal value of the subscribed capital, or anybody corporate which is the managing agent or the secretaries and treasurers, of the company.
If an auditor becomes subject, after his appointment, to any of the disqualifications stated above, he shall be deemed to have vacated his office as such.
Appointment of a Company Auditor:
Sec. 224 of the Companies Act lays down the procedures regarding the appointment of a company auditor.
These are discussed as under:
(a) First Auditor:
Sec. 224(5) states that the first auditor or auditors of a company shall be appointed by the Board of Directors within one month of the registration of the company and he shall hold office till the conclusion of the first annual general meeting. If the Board fails to make such appointment, the company in general meeting may appoint the first auditor. Such an auditor is also automatically reappointed.
(b) In General Meeting:
Sec. 224 (1) lays down that every company shall, at each general meeting, appoint an auditor or auditors to hold office from the conclusion of that meeting until the conclusion of the next annual general meeting, and shall, within 7 days of the appointment, give intimation thereof to every auditor so appointed unless he is a retiring auditor.
An auditor so appointed, unless he is retiring auditor, shall within 30 days of the receipt from the company of the intimation of his appointment, inform the Registrar in writing that he has accepted, or refused to accept, the appointment.
(c) By Central Government:
Sec. 224(3) states that where at an annual general meeting no auditors are appointed or re-appointed, the Central Government appoints a person to fills the vacancy. The company shall, within 7 days of the Central Govt.’s power under this section becoming exercisable, give notice of that fact to the Government. If the company fails to intimate this fact to the Central Government, the company and every officer who is in default, shall be punishable with a fine which may extend to Rs. 5,000.
(d) Compulsory re-appointment:
Sec. 224(2) lays down that the auditor appointed by whatever authority shall be re-appointed at the Annual General Meeting unless;
(i) He is not qualified for re-appointment; or
(ii) He has given the company notice in writing of his unwillingness to be re-appointed; or
(iii) A resolution has been passed at that meeting appointing somebody instead of him or providing expressly that he shall not be re-appointed; or
(iv) Where a notice has been given to the company of an intended resolution to appoint some person or persons in the place of a retiring auditor, and by reason of the death, incapacity or disqualification of that person or all those persons, as the case may be, this resolution cannot be proceeded with.
(e) Appointment in Govt. Companies:
Sec. 619(2) states that the auditor of a Government Company shall be appointed or re-appointed by the Central Government on the advice of the Comptroller and Auditor — General of India.
(f) Casual Vacancy:
Sec. 224(6) of the Companies Act lays down that any casual vacancy, except one caused by prior resignation, may be filled by the Board but the remaining auditor or auditors may continue to act. Where such vacancy is caused by the resignation of an auditor, the same must be decided in general meeting. And an auditor appointed to fill a casual vacancy shall hold office till the conclusion of the next annual general meeting.
Remuneration of an Auditor:
Sec. 224(8) of the Companies Act lays down the principles regarding the remuneration of an auditor as under:
(i) If the auditor is appointed by the Board of Directors, the Board of Directors will fix his remuneration;
(ii) If the auditor is appointed by the Central Government, the Central Government will fix his remuneration;
(iii) If the auditor is appointed by the shareholders at the general meeting, the company will fix the remuneration until and unless the company in general meeting may delegated the power of such fixation to some others.
(iv) If the retiring auditor is re-appointed at the annual meeting, he is entitled to get the same remuneration as he was getting previously unless a resolution is passed refixing his remuneration.
And any sum paid by the company in respect of the auditor’s expense shall be demand to be included in the expression ‘remuneration’.
Removal of Auditor:
Sec. 224 and Sec. 225 of the Companies Act state the information about the removal of auditor.
Once the first auditor has been appointed by the Board of Directors of a company he cannot be removed before the expiry of his term unless a due notice is served on him and that previous approval of the Central Government in that behalf is obtained [Sec. 229(5)].
Similarly, Sec. 224(7) states that except the first auditor, auditors appointed u/s 224, can be removed before the expiry of the term in a general meeting only after receiving previous approval of the Central Government in that behalf.
Sec. 225(4) lays down that the first auditor and other auditors proposed to be removed before the expiry of the term, the rights to make written representation, gets copies of the representation circulated among the members and be heard orally at the annual general meeting.
Sec. 225 lays down the procedures of removal of an auditor after expiry of the term of office which are noted below:
(i) A special notice must be given by a member of the intended resolution to be passed at an Annual General Meeting.
(ii) On receipt of such notice, the company must send a copy of it to the retiring auditor.
(iii) The retiring auditor may make a written representation, not exceeding a reasonable length, to the company, which in its turn shall send it to the shareholders provided the same was received in time.
If it was not possible to send such representation to the shareholders due to the fact that the same was received too late, such representation must be read at the annual general meeting if so required by the retiring auditor. The auditor who will be removed has a right to attend the general meeting where his removal will be discussed.
An auditor may also be removed from his office before the expiry of his term, if he is found to be guilty of Professional Misconduct relating to Chartered Accountants in practice requiring the actions by the High Court and Professional Misconduct relating to the members of the Institute, e.g. if a Chartered Accountant in practice accepts the position as an auditor of a company which was previously held by another Chartered Accountant, without first communicating with him in writing.
Status of an Auditor:
Status of an auditor depends on his role as such since ‘status’ means the position belonging to a person.
However, the status of an auditor can be explained with the help of the following three aspects:
(a) As an ‘Agent’;
(b) As an ‘Officer’; and
(c) As a ‘Servant’.
(a) As an Agent:
An auditor is usually appointed by the shareholders except in case of first auditor or appointed by the Central Government. It is the duty of the auditor to audit accounts on behalf of the shareholders and he should give his report to the shareholders and, as such, he is the agent of the shareholders.
According to the law of contract “an agent is a person employed to do any act for another or to represent another in dealing with third person”, i.e. an agent binds his principal by his acts. Similarly, an auditor binds the members, as Lord Cranworth pointed out in Spackman vs. Evans: “the auditor may be agent of the shareholders, so far as relate to the audit of the accounts. For the purpose of the audit, the auditor will bind the shareholders”.
But is to be remembered that if the auditors fail to communicate any information to the shareholders during the course of his audit, the shareholders cannot be so bound.
(b) As an ‘Officer’:
it is a controversial question whether the auditor of a company is an officer or not. The legal decisions are not even clear; they are conflicting each other on either basis — de facto or de jure.
However, Sec. 2(30) of the Companies Act lays down the following purpose for which an auditor may be treated as an officer:
(i) Sec. 477 and 478:
Powers of the court in winding-up to summon persons;
(ii) Sec. 539:
Penalty for falsification of books;
(iii) Sec. 543:
Power of the court in winding up to assess damages against delinquent officers;
(iv) Sec. 545 and 621:
Prosecution of delinquent officers and the court’s cognizance of offences under the Act;
(v) Sec. 625:
Payment of compensation in case of frivolous or vexatious prosecution;
(vi) Sec. 633:
Power of the court to grant relief in certain cases.
With the exception of the above, an auditor is not termed as an ‘officer’ of a company. It is interesting to note that in one leading legal discussion Findley vs. Maddell (1910) it was decided that casual auditor and a person to whom the work of preparing books of accounts has been given is not an officer. But in Connele vs. Himalaya Bank (1895) court consider auditor as an officer of a company only when he is appointed in general meeting. In short, it is yet to be decided whether the auditor is an officer or not.
(c) As a ‘Servant’:
Sometimes the auditor of a company is stated as a servant of the company since he is paid for. But an auditor can never be a servant of the company being a representative of the shareholders or the Board of Directors. In the case of London and General Bank Ltd. (1895) it was decided that he is not the servant of the directors, and, as such, he should not be considered as a servant of the company and of the directors.
Rights and Powers of a Company Auditor:
The Companies Act, 1956, recognises the following rights and powers of a company auditor:
(i) Right of Access to Books and Accounts:
Sec. 227(1) states that the auditor has a right of access at all times to the books of accounts and vouchers of the company, whether kept at head office of the company or elsewhere. The term ‘books’ includes all the statutory, statistical and costing books whereas ‘vouchers’ include all documents such as memorandum, minute books, share ledger and any documentary evidence in respect of a transaction in the books of account.
(ii) Right to call for Information and Explanation:
Sec. 227(1) also lays down that the auditor has a right to ask the directors and officers of the company to give any information and explanation as may be necessary for the due discharge of his duty as auditor.
(iii) Right to attended meetings:
Sec. 231 states that an auditor has got the right to receive a notice of and to attended every general meeting of the shareholders irrespective of the fact that whether accounts are being discussed or not at such a meeting. The auditor has right to speak at such meeting when the accounts are being discussed.
(iv) Right to be indemnified:
Sec. 633 lays down that an auditor has a right to be indemnified out of the assets of the company against any liability incurred by him while defending himself against civil and criminal proceedings by the company in which judgement is given in his favour or the court is of opinion that the auditor acted honestly.
(v) Right to make any Statement or Explanation:
The auditor has the right to make any statement or explanation as he thinks fit at a meeting relating to accounts. But he is not bound to do so. If he is asked to say something about the accounts by the Chairman then only he is bound to give the answer only about the affairs relating to accounts. If he finds that some wrong statement has been made by any director, he has the right to amend it.
(vi) Right to visit Branch Offices:
Sec. 228(2) states that a company auditor has right to visit the branches of the company. If he has to audit the accounts of the branches, he will have the right of access to all the books of accounts and vouchers etc. of the branches at all times.
Similarly, in case of a banking company which has branches outside India, the auditor has no right to visit such branches but he has the right of access to all the returns sent by such branches at the head-office in India.
(vii) Right to take experts’ advice:
The company auditor has the right to take any legal or technical expert’s advice. But while giving this report, he must express his own opinion and not the opinions of the experts (London & General Bank 1895).
(viii) Right of remuneration:
The auditor has the right to have remuneration after the completion of his work. If he is appointed to audit the annual accounts and if he is dismissed before his completion he is entitled to have full years’ remuneration (Homer vs. Quilter, 1908).
(ix) Right to sign audit report:
Sec. 229 lays down that the person who is appointed as auditor of the company or where a firm is so appointed, only the partner, may sign the auditor’s report or sign or authenticate any other documents of the company.
Duties of a Company Auditor:
The provisions of the Companies Act, the Chartered Accountant’s Act and Regulations, the different laws which are applicable on the particular company, all govern the duties of an auditor.
However, his duties are:
(i) He should submit his audit report to the shareholders of the company on the company’s Profit and Loss Account and Balance Sheet and on every other document annexed which are laid before the company in general meeting during his tenure of office [Sec. 227 (2)].
(ii) U/s 227(3) states that his report must contain the following:
(a) Whether he has obtained all the information and explanations which to the best of his knowledge and belief were necessary for the purpose of his audit;
(b) Whether, in his opinion, the Profit and Loss Account, referred to in his report, exhibits a true and fair view of the profit or loss;
(c) Whether, in his opinion, the Balance Sheet, referred to in his report, exhibits a true and fair view of the states of affairs of the company and the same is properly drawn up;
(d) Whether, in his opinion, proper books of accounts as required by law have been maintained by the company and adequate returns have been received from the branch office which are not audited by him;
(e) Whether the report on the accounts of any branch office audited by a person other than the company’s auditor has been forwarded to him and how he has dealt with the same;
(f) Whether the company’s Profit and Loss Account and Balance Sheet have been drawn-up according to the requirements of the Companies Act.
Sec. 227(4) states that if the answers to the above matters are found to be negative or with qualifications, the auditor must state the reasons for answer.
Sec. 227 (1 A) requires the auditor to enquire:
(a) Whether loans and advances made by the company on the basis of security have been properly secured and whether the terms on which they have been made are not prejudicial to the interest of the company or its members;
(b) Whether transactions of the company which are represented merely by book entries are not prejudicial to the interest of the company;
(c) Whether the company is not an investment company within the meaning of the Sec. 372 or a banking company, whether so much of the assets of the company as consist of shares, debentures and other securities have been sold at a price less than that at which they were purchased by the company;
(d) Whether loans and advances made by the company have been shown as deposits;
(e) Whether personal expenses have been charged to revenue accounts;
(f) Whether it is stated in the books and papers of the company that any shares have been allotted for cash, whether cash has actually been received in respect of such allotment and, if no cash has actually been so received, whether the position as stated in the account books and the Balance Sheet is correct, regular and not misleading.
The Companies Act provides some restrictions on the managerial remuneration provided by a private company (a subsidiary of a public company) or a public company.
These restriction, are enumerated below:
Overall Maximum and Minimum Remuneration:
According to Sec, 198 of the Companies Act, the total managerial remuneration payable by a public company or a private company which is subsidiary of a public company, to its directors and its managing agents, secretaries and treasurers or managers in respect of a financial year shall not exceed 11% of the net profits of that company for that financial year computed in the manner laid down in Sections 349, 350 and 351 except that the remuneration of the directors shall not be deducted from the gross profit.
The percentage, stated above, shall be exclusive of any fees payable to directors u/s 309 (2).
But within the limits of the maximum remuneration, a company may pay a monthly remuneration to its managing or whole-time directors or managers in accordance with the provisions of Sec. 307 and Sec. 387.
‘Remuneration’ includes (as per Sections, 309, 311, 348 and 387):
(a) Any expenditure incurred by the company in providing any rent-free accommodation or any other benefit or amenity in respect of accommodation free of charge, to any of the persons aforesaid;
(b) Any expenditure incurred by the company in providing any other benefit or amenity free of charge or at a concessional rate to any of the persons aforesaid;
(c) Any expenditure incurred by the company in respect of any obligation or service, which, but for such expenditure by the company, would have been incurred by any of the persons aforesaid;
(d) Any expenditure incurred by the company to effect any insurance on the life of, or to provide any pension, annuity or gratuity for any of the person aforesaid or his spouse or child.
Remuneration to Directors:
The remuneration to Directors is governed by Sec. 309 of the Companies Act, which is to be determined by the articles or by the resolution (special resolution if the articles so require).
Fees may be payable by the articles for attendance of the meeting of the Board or Committee subject to the following:
(a) A whole-time or managing director may be paid remuneration by way of monthly pay and/or specified percentage of net profit of the company (not exceeding 5% where there is only one such director, and not exceeding 10% in all where there are more than one whole-time director).
(b) A part-time director (i.e., not whole-time or managing director) may be remunerated either by way of monthly, quarterly or annually (with the approval of Central Govt. or by way of commission (if the company by special resolution authorises) not exceeding 1% for all such directors, secretaries, treasurers or managers and not exceeding 3% for all such directors in other cases, or at higher percentage with the approval of Central Government.
(c) Any whole-time or managing director receiving commission form the company shall not be entitled to receive any commission from any subsidiary of such company.
(d) For attending each Board meeting or a committee, Director’s fees must not exceed Rs. 250 for each meeting and any increase, thereof, must be approved by the Central Government.
(e) Net profit for this purpose must be computed, as per Sees. 349 – 350 before deducting Directors’ remuneration.
Sec. 309 does not apply to a private company unless it is a subsidiary of a public company. It should be noted that the remuneration payable to a director shall include all remuneration payable to him for services rendered in any other capacity unless the services are rendered in professional capacity and the director possesses the requisite qualifications for the practice of the profession in the opinion of the Central Government.
Remuneration to Manager:
The remuneration to manager is governed by Sec. 387 of the Companies Act. The manager of a company may receive remuneration by way of a monthly payment and/or by way of a specified percentage on net profit calculated according to Sees. 349, 350 and 351 provided that such remuneration shall not exceed in the aggregate 5% of the net profit without the approval of the Central Government — Sec. 387. The provisions do not apply to private company unless it a subsidiary of public company.
To Sum up:
It has already been highlighted above that the Companies Act provides certain restrictions on managerial remuneration (the same is not, however, applicable to a private company which is not a subsidiary of a public company).
The provisions are enumerated below:
Maximum limits of Remuneration Payable to Various Managerial Personnel:
Method of Computation of Net profit for remuneration purpose (See 349-350):
It is interesting to note that the method of computing net profit for ascertaining managerial remuneration is quite different than the ordinary method of computing net profit in the case of general business units which are published in the annual report.
As per Sees. 359 and 360, the net profit is computed as under:
Net Profit = Gross Profit Plus
Bounties and subsidies received from any Govt., profit from sale of fixed assets to the extent of the excess over the written-down value below original cost but excluding profit from premium of issues of Shares and Debentures or sale of forfeited shares; sale of the undertaking and sale of any immovable or fixed assets of a capital nature, except to the extent mentioned above. [For example, a Plant was purchased for Rs. 50,000, its written-down value was Rs. 30,000 and was sold for Rs. 55,000. Here the total profit was Rs. 25,000. But the profit of Rs. 20,000 (i.e. difference between original cost and written-down value) would be added and a profit of Rs. 5,000 (i.e. difference between sale price and original cost) should be deducted from net profit.]
All the usual working charges, Directors’ remuneration, bonus or commission paid or payable, any tax notified by the Central Govt. on excess of abnormal profits/or business profits imposed for special reasons, interest on Debentures, mortgages, loans or advances: expenses on repairs: normal depreciation; losses arising after the commencement of the Act; any sum paid by way of compensation or damages by virtue of any legal liability, any sum paid by way of insurance, debts considered bad and written-off.
But the following items shall not be deducted:
(i) Remuneration payable to Managing Director or Manager;
(ii) income-tax, Super-tax and other taxes on income;
(iii) Any compensation, damages or payments made voluntarily;
(iv) Capital losses.
Transfer to Reserves:
According to Provisions of Company Transfer of Profit to Reserve Rule, 1975, no company can pay or declare dividend out of profit in any year until and unless it transfers a certain percentage of profit to reserve for that year.
The Percentages are given below:
(i) Where the proposed dividend exceeds 10% but does — Not less than 2.5% of the current not exceed 12.5% of the paid-up capital profit to be transferred to Reserve.
(ii) Where the proposed dividend exceeds 12.5% but — Not less than 5% of the current does not exceed 15% of the paid-up capital profit to be transferred to Reserve.
(iii) Where the proposed dividend exceeds 15% but does — Not less than 7.5% of the current not exceed 20% of the paid-up capital profit to be transferred to Reserve.
(iv) Where the proposed dividend exceeds 20% of the — Not less than 10% of the current paid-up capital profit to be transferred to Reserve.
Profit and Loss Appropriation Account:
The Profit and Loss Appropriation Account is the appropriation account in the appropriation section of Profit and Loss Account. In other words, Net Profit or Net Loss from Profit and Loss Account will be transferred to the opposite site ‘Below the line’ method. This account deals with the items relating to the distribution of profit, Interims dividend, Proposed dividend, Reserve or adjustment relating to previous year (i.e. excess provisions made for Income-Tax etc.).
Needless to mention here that the balance of this account (if it shows a credit balance) will be shown in the liability side of the Balance Sheet under the head Reserves and Surplus. On the other hand, if it shows debit balance, the same is shown in the assets side of the Balance Sheet under the head Miscellaneous Expenditures.
The outline of Profit and Loss Appropriation Account is shown as under:
Profit and Loss Account and the Balance Sheet are to be prepared in accordance with the requirements of Sec. 211 and Schedule VI of the Companies Act, 1956. Part I of this Schedule contains the prescribed form of Balance Sheet and Part II contains the Profit and Loss Account.
Sub-section (1) of Sec. 211 of Companies Act requires:
“Every Balance Sheet of a company shall give a true and fair view of the state of affairs of the company as at the end of the financial year and shall, subject to the provisions of this section, be in the form set out in Part I of Schedule VI, or as near thereto as circumstances admit, or in such other forms as may be approved by the Central Government either generally or any particular case; and in preparing the Balance Sheet, due regard shall be had, as far as may be, to the general instructions for preparation of Balance Sheet under the heading ‘Notes’ at the end of that part. Provided that nothing contained in this sub-section shall apply to any Insurance or Banking Company or any company engaged in the generation or supply of electricity, or to any other class of company for which a form of Balance Sheet has been specified in or under the Act governing such class of company”.
However, the Central Government may, by notification in the Official Gazette, exempt any class of companies from compliance with any of the requirements in Schedule VI if, in its opinion, it is necessary to grant the exemption in the public interest.
Any such exemption may be granted either unconditionally or subject to such conditions as may be specified in the notification.
“The Central Government may, or. the application, or with the consent of the Board of Directors of the company, by order, modify in relation to the company any of the requirements of this Act as to the matters to be stated in the Company’s Balance Sheet or Profit and Loss Account for the purpose of adapting them to the circumstances of the company” —Sec. 211(4).
True and Fair view:
According to Sec. 211 of the Companies Act every Balance Sheet of a company must give a true and fair view of the state of affairs of the company and every Profit and Loss Account must give a true and fair view of profit or loss (i.e. the results of the operation) of a company.
From the above, it becomes clear that the Balance Sheet and the Profit and Loss Account must satisfy the following:
(i) The Balance Sheet and Profit and Loss Account should be drawn up in accordance with the requirements of Schedule VI, unless otherwise required by law.
(ii) There must not be any concealment of material facts, over-statements and under-statements in the Balance Sheet and Profit and Loss Account, i.e., financial statement must not be window- dressed.
(iii) Assets and liabilities should properly be valued, i.e.
(a) Value of Fixed Assets should correctly be ascertained after charging proper depreciation.
(b) Current Asset, like stock, should be valued on a consistent basis.
(c) Contingent Liabilities, if any, should be ascertained fairly and stated as a footnote.
(d) Proper provision should be made against known liabilities.
(iv) All expenses and losses, incomes and gains must be included in the Profit and Loss Account.
(v) Usually expenses and incomes should separately be stated and must not be mixed up with general transactions.
(vi) Books of Account s should be maintained as per Sec. 209 which will help to make the Profit and Loss Account and the Balance Sheet and will exhibit a true and fair view of the state of affairs of the company.
But Sec. 211(5) states that the following companies are not required to disclose certain matters by virtue of other statutory provisions applicable to them, under the Companies Act:
(i) In the case of an Insurance Company;
—any matter which are not required to be disclosed by the Insurance Act, 1938;
(ii) In the case of a Banking Company;
—any matter which are not required to be disclosed by the Banking Regulations Act, 1949;
(iii) In the case of any company engaged in the generation or supply of electricity;
—any matter which are not required to be disclosed by the Indian Electricity Act, 1910, and the Electricity (Supply) Act, 1948;
(iv) In the case of a company governed by any other special Act, any matters which are not required to be disclosed by that special Act.
1. A separate Schedule should always be maintained for each of the above items in detail which will incorporate all the information.
2. The Schedule shall form an integral part of the Balance Sheet.
3. Contingent Liabilities, if any, should be shown separately in the foot-note of the Balance Sheet.
The skeleton form of Balance Sheet is given below:
Disclosure of Assets and Liabilities as Per Schedule VI:
The disclosure of Assets and Liabilities as per Schedule VI are given below:
Share Capital is disclosed in the following form:
(a) Authorised Share Capital:
The amount of authorised share capital with total number of shares and the nominal/face value of each share.
(b) Issued Share Capital:
The amount of issued share capital distinguishing between various classes of capital and stating the number of shares issued together with the respective nominal value.
(c) Subscribed Share Capital:
The amount of subscribed share capital distinguishing between various classes of capital and stating the number of shares subscribed together with the respective nominal value.
i. Of the above shares ……….. shares are allotted as fully paid-up pursuant to contract without payments being received in cash.
ii. Of the above shares……….. shares are allotted as fully paid-up by way of bonus shares.
(d) The amount of unpaid calls (i.e. calls-in-arrears) is to be deducted from the called-up amount and, at the same time, amount of calls due from directors and others are to be stated separately.
(e) The amount of forfeited shares is to be deducted from subscribed capital and the profit on reissue of such forfeited shares should be transferred to Capital Reserve.
(f) The terms and conditions of redemption/conversion of redeemable preference shares are to be stated alongwith the earlier date of redemption/conversion.
(g) The particulars of different kinds of preference shares, if any, are to be stated separately.
(h) The shares of holding company and its subsidiary are to be shown separately.
Reserves and Surplus:
The Reserves and Surplus are to be disclosed in the Balance Sheet in the following manner:
(a) Reserves and Surplus are to be categorically stated as:
(i) Capital Reserve;
(ii) Capital Redemption Reserve;
(iii) Share Premium Account;
(iv) Other Specific Reserves;
(v) The credit balance of Profit and Loss Account;
(vi) Proposed additions to Reserve, and
(vii) Sinking Fund.
(b) If there is any addition or deduction which is to be made, it is to be shown clearly.
(c) The Share Premium Account, if any, must state the detailed description of its utilisation.
(d) If there is any debit balance of Profit and Loss Account, the same should be shown as a deduction from the uncommitted revenue reserve.
(e) The word ‘Fund’ relating to any reserve must be used only where such reserve is specially represented by earmarked investments.
It is the balance of Profit and Loss Appropriation Account which remains after setting aside the amount transferred to Reserve and Proposed Dividends, i.e., it is an un-appropriated profit. It is shown together with the other revenue reserves. Some companies prefer to transfer the closing balance of Profit and Loss Appropriation Account (after adjusting all appropriation items) to General Reserve, i.e. no balance left in Profit and Loss Appropriation Account.
The secured loans are to be disclosed in the Balance Sheet in the following manner:
(a) Secured loans should be categorically stated as:
(ii) Loans and Advances from Banks;
(iii) Loans and Advances from Subsidiaries; and
(iv) Other loans and advances.
(b) Secured loans from directors or mangers, if any, should be shown separately.
(c) Interest accrued and due on secured loans is to be shown under the head ‘Secured Loans’ but interest accrued but not due is to be shown under the head ‘Current Liabilities’.
(d) The nature and type of security must be stated.
(e) If any loan is taken which has been guaranteed by directors and/or managers, the same should be stated.
(f) The information should also be disclosed regarding the issue of Debentures.
(i) The terms of redemption or conversion;
(ii) Particulars of any redeemed debentures which may be further re-issued;
(iii) If any debenture is taken by a nominee or a transfer, the total number and face value of such debentures are to be disclosed;
(iv) The amount of debentures deposited by way of security for a loan.
The unsecured loans are to be disclosed in the following manner:
(a) Unsecured loans are to be categorically stated as:
(i) Fixed Deposits;
(ii) Loans and Advances from Subsidiary;
(iii) Short-term loans and advances – (a) from Bank and (b) from others;
(iv) Other Loans and advances—(a) Bank; (b) from others.
(b) If there is any unsecured loans which are taken from directors/managers, the same should be shown separately.
(c) Same as point (c) stated above under ‘Secured Loans’.
(d) Same as point (e) stated above under ‘Secured Loans’.
Current Liabilities and Provisions:
Current Liabilities and Provisions are to be separately shown as under:
A. Current Liabilities:
(ii) Sundry Creditors;
(iii) Subsidiary Companies;
(iv) Advance Payment and Unexpired Discounts;
(v) Unclaimed Dividend;
(vi) Other Liabilities,
(vii) Interest Accrued but not due on Loans (secured or unsecured).
(i) Provision for Taxation;
(ii) Proposed Dividends;
(iii) For Contingencies;
(iv) For Provident Fund Scheme;
(v) For Insurance, Pension and Similar Staff Benefit Schemes, and
(vi) Other Provisions.
Contingent Liabilities are to be disclosed in the following manner:
(a) If a provision is made in the books for contingent liabilities, the same provision should be shown in the Balance Sheet under the head ‘Provision’.
(b) If a provision is not made in the books for contingent liabilities, the same should be shown on the Balance Sheet by way of a footnote.
As a result, contingent liabilities should be separated as:
(i) Claims against the company not acknowledged as a debt;
(ii) Uncalled liability on partly paid shares;
(iii) Arrear of cumulative dividend (fixed);
(iv) Estimated amounts of contracts to be executed on capital account;
(c) The amount of any guarantee given by the Directors/other officers on behalf of the company must also be stated.
(d) If there is any arrears of fixed cumulative dividend, the period for which the dividends are in arrears must be stated together with the amount of such dividend.
Fixed assets are to be disclosed in the following manner:
(a) The expenditure on fixed assets should categorically be classified as:
(v) Railway siding;
(vi) Plant and Machinery;
(vii) Furniture and Fittings;
(viii) Development of property;
(ix) Patent, Trademarks and Designs;
(x) Livestock’s; and
(xi) Vehicles, etc.
(b) Under each head the original cost, the additions thereto and deductions therefrom during the year and the total depreciation written-off or provided up to the end of the year to be stated.
(c) In every case, where the original cost cannot be ascertained without unreasonable expenses or delay the valuation shown by the books shall be given. Such valuation shall be the net amount at which an asset stood in the company’s books at the commencement of this Act after deducting the previous amount and, at the same time, where any such asset is sold, the amount of sale proceeds shall be shown as deduction.
(d) Where sales have been written-off on a reduction of capital or a revaluation of assets every Balance Sheet shall show the reduced figures with the date of reduction in place of original cost. Similarly, where sums have been added by writing-up the assets, every Balance Sheet shall show the increased figures with the date of increase in place of original cost.
(e) Each Balance Sheet for the first five years subsequent to the date of variation shall show also the amount of variation so made.
(f) Depreciation written-off or provided shall be allocated under different asset heads and deducted in arriving at the fixed assets value.
Disclosure of Investments should contain:
(a) Investments in Government or Trust Securities, Investments in Shares or Debentures or Bonds, Immovable properties.
(b) The nature of investment and the mode of its valuation should be mentioned clearly.
(c) The aggregate amount of company’s quoted investments and also the market value should be shown.
(d) The aggregate amount of unquoted investments shall also be shown.
(e) Shares, Debentures or Bonds of subsidiary companies should be separately shown.
(f) A statement of investments whether shown under the head ‘Investments’ or under the head ‘Current Assets’ as stock-in-trade, should separately be classified from Trade Investments and other investments and the same should be annexed to the Balance Sheet.
(A ‘Trade Investment’ means an investment by a company in the shares or debentures of another company, not being its subsidiary, for the purpose of promoting trade or business of the first company. Trade Investments are fixed assets.)
Current Assets, Loans and Advances:
These are to be classified into two categories:
A. Current Assets, and
B. Loans and Advances.
A. Current Assets Current Assets are classified as:
(i) Interest accrued on Investments;
(ii) Stores and spare parts;
(iii) Loose Tools;
(vi) Sundry Debtors;
(a) Debts outstanding for a period exceeding 6 months, and
(b) Other debts, less provisions
(vii) (a) Cash Balance in hand, and
(vii) (b) Bank Balances—
(a) With Scheduled Banks, and
(b) With others.
Interest accrued on Investments:
This should not include dividend declared by subsidiary companies after the date of the Balance Sheet.
The different classes of inventories are to be separately shown, viz., stores and spare parts, loose tools, stock-in-trade and work-in-progress. The mode of valuation of inventories shall be stated and the amount of raw materials shall also be stated separately, if possible.
The amounts to be shown under Sundry Debtors shall include the amounts due in respect of goods sold or services rendered or in respect of other contractual obligations but shall not include the amounts which are in the nature of loans and advances.
(a) With regard to Sundry Debtors particulars to be given separately of:
(i) Debts considered good and in respect of which the company is fully secured;
(ii) Debts considered good for which the company holds no security other than the debtor’s personal security; and
(iii) Debts considered doubtful or bad.
(b) Debts due by directors or other officers of the company or any of them either severally or jointly with any other person or debts due by firms or private companies, respectively, in which any director is a partner or a director or a member to be stated separately.
(c) Debts due from other companies under the same management within the meaning of sub-section (1B) of Section 370 to be disclosed.
(d) The maximum amount due by directors or other officers of the company at any time during the year to be shown, by way of a note.
Cash and Bank Balances:
The Cash and Bank Balances should be shown separately.
With regard to bank balances, particulars to be given separately of:
(i) The balance lying with Scheduled Banks on current accounts, call accounts and deposit accounts;
(ii) The names of the bankers other than Scheduled Banks and the balance lying with each such banker on current accounts, call accounts and deposit accounts, and the maximum amount outstanding at any time during the year from each such banker; and
(iii) The nature of interest, if any, of any director or his relative in each of the bankers (other than Scheduled Bank) referred to in (ii) above.
Loans and Advances:
(i) Advances and loans to subsidiaries,
(ii) Advances and loans to partnership firm in which the company or any of its subsidiaries is a partner,
(iii) Bills of Exchange,
(iv) Advances recoverable in cash or in kind or for value to be received,
(v) Balance with Customs, Port Trust etc.
The instructions regarding Sundry Debtors apply to ‘Loans and Advances’ also.
The following additional information is also required:
(a) Loans and advances due by directors or other officers of the company or any of them either severally or jointly with any other person should be separately stated.
(b) The amounts due from other companies under the same management within the meaning of Sec. 370(1 B) should also be given with the names of the companies.
(c) The maximum amount due from everyone of these at any time during the year must be shown.
Moreover, the following items will appear under the head ‘Loans and Advances’:
(i) Advances for Supplies;
(ii) Advances for capital expenditure;
(iii) Advances to workmen and staff;
(iv) Trade Deposits;
(v) Advances Tax paid and Tax deducted at source;
(vi) Refund due from Income-tax Department.
The miscellaneous expenditure is to be classified as:
(i) Preliminary Expenses;
(ii) Expenses including commission or brokerage or underwriting or subscription of shares or debentures;
(iii) Discount on issue of Shares or Debentures;
(iv) Interest paid out of capital during construction;
(v) Development expenditure not adjusted, and
(vi) Other items (specifying nature).