accounting for limited companies

Preparation of Financial Preparation of Financial Statements of Limited Statements of Limited

CompaniesCompanies

P. GURU PRASADP. GURU PRASAD

FACULTY MEMBERFACULTY MEMBER

INC GUNTURINC GUNTUR

General requirements of the companies actGeneral requirements of the companies act

The joint stock companies, are legally required The joint stock companies, are legally required to prepare a set of financial statements to to prepare a set of financial statements to periodically assess the profits earned and to periodically assess the profits earned and to know the financial position of the company as on know the financial position of the company as on a specified date.a specified date.

In the case of companies registered under the In the case of companies registered under the companies act the act specified the books of companies act the act specified the books of accounts to be maintained and also prescribes accounts to be maintained and also prescribes the format and content of the financial the format and content of the financial statements. statements.

General requirements of the companies actGeneral requirements of the companies act

The legal requirement laid down by the The legal requirement laid down by the companies act, there fore assumes a great companies act, there fore assumes a great importance in the preparation of the financial importance in the preparation of the financial statements of a join stock company.statements of a join stock company.

In addition , the accounts must be statutorily In addition , the accounts must be statutorily audited by an external person called the auditor audited by an external person called the auditor and it is the duty of the auditor to submit a report and it is the duty of the auditor to submit a report in the prescribed format to the shareholders in the prescribed format to the shareholders

Books of AccountsBooks of Accounts Section 209 of the companies act specifies the Section 209 of the companies act specifies the

books of accounts to be maintained by a books of accounts to be maintained by a companycompany

All sums of money received and expended by All sums of money received and expended by the company and the matters in respect of which the company and the matters in respect of which the receipts and expenditure take placethe receipts and expenditure take place

All sales and purchases of goods by the All sales and purchases of goods by the companycompany

The assets and liabilities of the companyThe assets and liabilities of the company Companies have to compulsorily maintain their Companies have to compulsorily maintain their

accounts only on the accrual basis . Cash basis accounts only on the accrual basis . Cash basis of accounting cannot be followed. Also double of accounting cannot be followed. Also double entry system of accounting should be followed.entry system of accounting should be followed.

Books of AccountsBooks of Accounts

The books of accounts for a period of eight The books of accounts for a period of eight years preceding the current year together with years preceding the current year together with the vouchers relating to any entry in such books the vouchers relating to any entry in such books of accounts should be preserved in good of accounts should be preserved in good conditioncondition

The books of accounts and other books and The books of accounts and other books and papers of a company must be open to inspection papers of a company must be open to inspection during business hours , by the registrar or such during business hours , by the registrar or such authorized government officer to carry out such authorized government officer to carry out such inspectionsinspections

Legal requirements regarding Legal requirements regarding annual accountsannual accounts

The annual accounts of the company must be submitted The annual accounts of the company must be submitted in an annual general meeting within six months counted in an annual general meeting within six months counted from the last day of the accounting period to which the from the last day of the accounting period to which the accounts relate.accounts relate.

The period to which the accounts relate is known as the The period to which the accounts relate is known as the financial year and it may be less than, equal to or greater financial year and it may be less than, equal to or greater than 12 months but cannot exceed 15 months. Where than 12 months but cannot exceed 15 months. Where special permission has been granted by the registrar the special permission has been granted by the registrar the financial year may extend to eighteen monthsfinancial year may extend to eighteen months

Format of Balance sheetFormat of Balance sheet

The balance sheet should be in the form The balance sheet should be in the form set out in part I of schedule VI of the set out in part I of schedule VI of the companies act,1956. However this format companies act,1956. However this format does not apply to banking companies , does not apply to banking companies , insurance companies and companies insurance companies and companies engaged in the generation or supply of engaged in the generation or supply of electricity.electricity.

Requirement of the companies Act Requirement of the companies Act with Respect to Profit and loss a/cwith Respect to Profit and loss a/c

Part II of schedule VI of the companies act Part II of schedule VI of the companies act 1956 does not prescribe any format for the 1956 does not prescribe any format for the profit and loss account but only outlines profit and loss account but only outlines the information to be included. The various the information to be included. The various items of receipts ad expenses should be items of receipts ad expenses should be arranged under the most convenient arranged under the most convenient headsheads

Revenues Revenues The following are the revenues which must be disclosed The following are the revenues which must be disclosed

in the P&Lin the P&L The turnover or the aggregate amount of sales effected The turnover or the aggregate amount of sales effected

by the companyby the company The gross income derived from services rendered or The gross income derived from services rendered or

supplied.supplied. Incomes from trade investments and other investmentsIncomes from trade investments and other investments Incomes by way of interestsIncomes by way of interests Profit on investmentsProfit on investments Profits of non recurring natureProfits of non recurring nature Miscellaneous incomeMiscellaneous income Dividends from subsidiary companiesDividends from subsidiary companies

ExpensesExpenses The following are the expenses which must be disclosed in the profit The following are the expenses which must be disclosed in the profit

and loss a/cand loss a/c The value of raw material consumes, item wise break up and The value of raw material consumes, item wise break up and

quantity consumed.quantity consumed. Opening & closing stock of raw materialOpening & closing stock of raw material Opening & closing work-in-progress Opening & closing work-in-progress The amount provided for depreciation,The amount provided for depreciation, Consumption of stores and spare partsConsumption of stores and spare parts Power and fuelPower and fuel RentRent Repairs to buildingsRepairs to buildings Repairs to machineryRepairs to machinery Salaries and wages and bonusSalaries and wages and bonus Miscellaneous expensesMiscellaneous expenses

ExpensesExpenses

Contribution to provident fund an other fundsContribution to provident fund an other funds Staff welfare expensesStaff welfare expenses InsuranceInsurance Income tax payableIncome tax payable Dividend paidDividend paid Provision for losses of subsidiary companiesProvision for losses of subsidiary companies Amounts reserved for repayment of share capitalAmounts reserved for repayment of share capital Amounts set aside for reservesAmounts set aside for reserves Amounts set aside for provisionsAmounts set aside for provisions Expenses related to sales, trade discountsExpenses related to sales, trade discounts

Notes to profit and loss a/cNotes to profit and loss a/c According to part II schedule VI , certain information has to be According to part II schedule VI , certain information has to be

provided by way of notes to P&L account.provided by way of notes to P&L account.

payments made to directorspayments made to directors Managerial remuneration paid or payable under section 198 Managerial remuneration paid or payable under section 198 Other allowances & commissionOther allowances & commission Any other perquisites or benefits in cash or in kind Any other perquisites or benefits in cash or in kind PensionsPensions GratuitiesGratuities Payment to provident fundPayment to provident fund Compensation for loss of officeCompensation for loss of office Retirement benefitsRetirement benefits Auditors feesAuditors fees Value of imports calculate on C.I.F basisValue of imports calculate on C.I.F basis Expenditure in foreign currency on account of royalty, etc.,Expenditure in foreign currency on account of royalty, etc., Export of goods calculated on F.O.B basisExport of goods calculated on F.O.B basis Other incomes indicating the nature there of Other incomes indicating the nature there of

Profit and loss appropriation Profit and loss appropriation accountaccount

It shows in detail the appropriations made from It shows in detail the appropriations made from the profits in respect of dividends and transfer to the profits in respect of dividends and transfer to reserves etc., The balance in the P&L reserves etc., The balance in the P&L appropriation account ,if it is a credit balance will appropriation account ,if it is a credit balance will be shown on the liability side of the balance be shown on the liability side of the balance sheet heading “reserves and surplus”. If there is sheet heading “reserves and surplus”. If there is a closing debit balance in the profit and loss a closing debit balance in the profit and loss appropriation account (that is, a loss), then such appropriation account (that is, a loss), then such balance will be shown on the asset side under balance will be shown on the asset side under the heading “miscellaneous expenditure”the heading “miscellaneous expenditure”

Requirements of the companies act Requirements of the companies act with respect to Balance Sheetwith respect to Balance Sheet

The assets of the limited company should The assets of the limited company should be classified into be classified into

Fixed assets and investments,Fixed assets and investments, Current assets,Current assets, Loans and advances and Loans and advances and Miscellaneous expenditureMiscellaneous expenditure

Fixed assetsFixed assets Goodwill Goodwill Land Land BuildingsBuildings Lease holdLease hold Railway sidingsRailway sidings Plant and machinery Plant and machinery Furniture and fittingsFurniture and fittings Development of propertyDevelopment of property Patents, trademarks and designsPatents, trademarks and designs Live stocksLive stocks Vehicles etc.,Vehicles etc.,

Current assetsCurrent assets Interest accrued on investmentInterest accrued on investment Stores and spare partsStores and spare parts Loose toolsLoose tools Stock-in-tradeStock-in-trade Work-in-progressWork-in-progress Sundry debtorsSundry debtors Cash balance on handCash balance on hand Bank balancesBank balances

Sundry debtorsSundry debtors

Broadly classified intoBroadly classified into Debits outstanding for a period exceeding Debits outstanding for a period exceeding

6 months6 months Other debitsOther debits The provision for doubtful debits should be The provision for doubtful debits should be

shown as deduction from the debtorsshown as deduction from the debtors

Miscellaneous expenditureMiscellaneous expenditure Preliminary expensesPreliminary expenses Expenses including commission or Expenses including commission or

brokerage on un writing or subscription of brokerage on un writing or subscription of share or debenturesshare or debentures

Discount allowed on the issue of share or Discount allowed on the issue of share or debenturesdebentures

Interest paid out of capital during Interest paid out of capital during constructionconstruction

Development expenditure (not adjusted)Development expenditure (not adjusted) Other itemsOther items

LiabilitiesLiabilities

Share capitalShare capital Reserves and surplus Reserves and surplus Secured loansSecured loans Unsecured loansUnsecured loans current liabilitiescurrent liabilities provisionsprovisions

Share capitalShare capital Authorized capitalAuthorized capital Issued capitalIssued capital Subscribed capitalSubscribed capital Called up capitalCalled up capital Calls in arrearsCalls in arrears Any forfeited sharesAny forfeited shares Classes of preferencesClasses of preferences Paid up capitalPaid up capital Bonus shares have been issuedBonus shares have been issued

ForfeitureForfeiture

DefinitionDefinition

A loss of money, property, or privileges A loss of money, property, or privileges due to a breach of legal obligation, which due to a breach of legal obligation, which serves as compensation for resulting serves as compensation for resulting losses.losses.

Preference sharesPreference shares


Capital stock which provides a specific dividend that is Capital stock which provides a specific dividend that is paid before any dividends are paid to common stock paid before any dividends are paid to common stock holders, and which takes precedence over common holders, and which takes precedence over common stock in the event of a liquidation. Like common stock, stock in the event of a liquidation. Like common stock, preference shares represent partial ownership in a preference shares represent partial ownership in a company, although preferred stock shareholders do not company, although preferred stock shareholders do not enjoy any of the voting rights of common stockholders. enjoy any of the voting rights of common stockholders. The main benefit to owning preference shares are that The main benefit to owning preference shares are that the investor has a greater claim on the company's assets the investor has a greater claim on the company's assets than common stockholders. In the event the company than common stockholders. In the event the company goes bankrupt, preferred shareholders are paid off goes bankrupt, preferred shareholders are paid off before common stockholders.before common stockholders.

Book buildingBook building


The process of determining the price at which an The process of determining the price at which an Initial Public Offering will be offered. The book is Initial Public Offering will be offered. The book is filled with the prices that investors indicate they filled with the prices that investors indicate they are willing to pay per share, and when the book are willing to pay per share, and when the book is closed, the issue price is determined by an is closed, the issue price is determined by an underwriter by analyzing these values.underwriter by analyzing these values.

Reserves and surplusReserves and surplus

Capital reservesCapital reserves Capital redemption reserveCapital redemption reserve Share premium accountShare premium account Other reservesOther reserves Surplus, balance after providing for Surplus, balance after providing for

dividend, bonus or reservesdividend, bonus or reserves Proposed additions to reservesProposed additions to reserves Sinking fundSinking fund

Sinking fundSinking fund


Reserves created by periodically setting Reserves created by periodically setting aside certain sums in a custodial account aside certain sums in a custodial account (as cash or investment in marketable (as cash or investment in marketable securities) for future replacement of an securities) for future replacement of an asset or repayment of a liability.asset or repayment of a liability.

Secured loansSecured loans

DebenturesDebentures Loans and advances from the banksLoans and advances from the banks Loans and advances from subsidiariesLoans and advances from subsidiaries Other loans and advancesOther loans and advances

DebentureDebenture

Definition 1:-Definition 1:- Charge, claim, or lien on asset or property, usually as a Charge, claim, or lien on asset or property, usually as a

result of a loan.result of a loan. Definition 2:-Definition 2:- Promissory note or a corporate bond which (in the US) is Promissory note or a corporate bond which (in the US) is

backed generally only by the reputation and integrity of backed generally only by the reputation and integrity of the borrower and (in the UK) by the borrower's specific the borrower and (in the UK) by the borrower's specific assets. When unsecured, it is called a bare debenture or assets. When unsecured, it is called a bare debenture or naked debenture; when secured by a charge on a naked debenture; when secured by a charge on a specific property, it is called a mortgage debenture.specific property, it is called a mortgage debenture.

Unsecured loansUnsecured loans

Fixed depositsFixed deposits Short term loans from banksShort term loans from banks Loans from othersLoans from others

Current liabilitiesCurrent liabilities

Bills payable (accounts payable)Bills payable (accounts payable) Sundry creditorsSundry creditors Amount due to subsidiary companiesAmount due to subsidiary companies Advance payment receivedAdvance payment received Unclaimed dividendUnclaimed dividend Other’s liabilitiesOther’s liabilities interest accrued but not due on loansinterest accrued but not due on loans

Accounts payable (A/P)Accounts payable (A/P)

DefinitionDefinition Unpaid bills. Accounts that are owed to suppliers Unpaid bills. Accounts that are owed to suppliers

(trade creditors) as distinguished from accrued (trade creditors) as distinguished from accrued interest, rent, salaries, taxes, and other such interest, rent, salaries, taxes, and other such accounts. Accounts payable are shown under accounts. Accounts payable are shown under current (short-term) liabilities in the balance current (short-term) liabilities in the balance sheet. Lenders and investors examine the sheet. Lenders and investors examine the relationship of these accounts to the firm's relationship of these accounts to the firm's purchases in order to judge the soundness of its purchases in order to judge the soundness of its day to day financial management.day to day financial management.

Accrued interestAccrued interest

DefinitionDefinition Interest earned but not received (realized). Interest earned but not received (realized).

For example, bonds usually pay interest For example, bonds usually pay interest every six months, therefore interest every six months, therefore interest accrues between one interest payment accrues between one interest payment and the next. The buyer of a bond pays its and the next. The buyer of a bond pays its market value plus the interest earned up to market value plus the interest earned up to the settlement date.the settlement date.

Sundry creditorsSundry creditors


Miscellaneous small or infrequent Miscellaneous small or infrequent suppliers that are not assigned individual suppliers that are not assigned individual ledger accounts but are classified as a ledger accounts but are classified as a group.group.

capital reservecapital reserve

DefinitionDefinition Resource created by the accumulated capital Resource created by the accumulated capital

surplus (not revenue surplus) of a firm, such as surplus (not revenue surplus) of a firm, such as by an upward revaluation of its assets to reflect by an upward revaluation of its assets to reflect their current market value after appreciation. their current market value after appreciation. Allocating such sums to capital reserve means Allocating such sums to capital reserve means they are permanently invested and will not be they are permanently invested and will not be paid as dividends.paid as dividends.

ProvisionsProvisions

Provision for taxationProvision for taxation Proposed dividendsProposed dividends Provision for contingenciesProvision for contingencies Provision for provident fund and to their Provision for provident fund and to their

schemesschemes Provisions for insurance, pension and Provisions for insurance, pension and

similar staff benefit schemessimilar staff benefit schemes Other provisionsOther provisions

ProvisionProvision Provision:Provision: A present obligation which satisfies A present obligation which satisfies

the rest of the definition of a liability, even if the the rest of the definition of a liability, even if the amount of the obligation has to be estimated.amount of the obligation has to be estimated.

In In financial accountingfinancial accounting, , provisionsprovisions are are liabilitiesliabilities similar to similar to accrualsaccruals, for which the amount or , for which the amount or probability of occurrence are not known.probability of occurrence are not known.

Typical examples are provisions for warranty Typical examples are provisions for warranty costs and provision for taxes, or for the results of costs and provision for taxes, or for the results of court ruling.court ruling.

Sometimes, the term Sometimes, the term reservereserve is used instead of is used instead of term provision; such a use, however, is term provision; such a use, however, is inconsistent with the terminology suggested by inconsistent with the terminology suggested by International Accounting Standards Board. International Accounting Standards Board.

ReservesReserves In In financial accountingfinancial accounting, the term , the term reservereserve is most is most

commonly used to describe any part of commonly used to describe any part of shareholders' equityshareholders' equity, except for basic share , except for basic share capital. Sometimes, the term is used instead of capital. Sometimes, the term is used instead of the term the term provisionprovision; such a use, however, is ; such a use, however, is inconsistent with the terminology suggested by inconsistent with the terminology suggested by International Accounting Standards BoardInternational Accounting Standards Board. . ReserveReserve - ACCOUNT used to earmark a portion - ACCOUNT used to earmark a portion of EQUITY or fund balance to indicate that it is of EQUITY or fund balance to indicate that it is not available for expenditure. An obsolete term not available for expenditure. An obsolete term in the United States. More commonly used in in the United States. More commonly used in Europe.Europe.

ReservesReserves Equity Equity reservesreserves are created from several are created from several

possible sources:possible sources: Reserves created from shareholders' Reserves created from shareholders'

contributions, the most common examples of contributions, the most common examples of which are: which are:

legal reserve fundlegal reserve fund - it is required in many - it is required in many legislations and it must be paid as a legislations and it must be paid as a percentage of share capital percentage of share capital

share premiumshare premium - amount paid by - amount paid by shareholders for shares in excess of shareholders for shares in excess of their nominal valuetheir nominal value

ReservesReserves

Reserves created from profit, especially Reserves created from profit, especially retained earningsretained earnings, i.e. accumulated accounting , i.e. accumulated accounting profits. However, profits may be distributed also profits. However, profits may be distributed also to other types of reserves, for example: to other types of reserves, for example:

legal reserve fund from profitlegal reserve fund from profit - many - many legislations require creation of the fund as a legislations require creation of the fund as a percentage of profits percentage of profits

remuneration reserveremuneration reserve - will be used later to pay - will be used later to pay bonuses to employees or management bonuses to employees or management

translation reservetranslation reserve - arises during consolidation - arises during consolidation of entities with different reporting currenciesof entities with different reporting currencies

Difference Between Provision & Difference Between Provision & ReserveReserve

The Provisions are charged on profit and loss The Provisions are charged on profit and loss account, even though there were no profits for account, even though there were no profits for the current financial year. It is mandatory to the current financial year. It is mandatory to create the Provisions according to conservatism create the Provisions according to conservatism concept.concept.

Where as the Reserves are apportioned from Where as the Reserves are apportioned from the profits only. If there are no profits, then the the profits only. If there are no profits, then the management can not create Reserve. They are management can not create Reserve. They are not mandatory. It can be used to write off capital not mandatory. It can be used to write off capital losses. Later they will form the part of owners losses. Later they will form the part of owners net worth.net worth.

Share premium accountShare premium account Share Premium account is shown on Share Premium account is shown on

liability side of balance sheet under the liability side of balance sheet under the head reserves and surplus. Section 78 of head reserves and surplus. Section 78 of the companies act restricts the use of the the companies act restricts the use of the amount collected as premium on amount collected as premium on securities for the following purpose securities for the following purpose alone.alone.

1.1. Issuing fully paid bonus shares to the Issuing fully paid bonus shares to the membersmembers

2.2. Writing off preliminary expensesWriting off preliminary expenses

Share premium accountShare premium account1.1. Writing off the expenses of issue or the Writing off the expenses of issue or the

commission paid of or discount allowed on any commission paid of or discount allowed on any issue of shares or debentures of the company.issue of shares or debentures of the company.

2.2. Providing for the premium payable on the Providing for the premium payable on the redemption of any redeemable preference shares redemption of any redeemable preference shares or of any debentures of the company,or of any debentures of the company,

3.3. In purchasing its own shares (buy back) [section In purchasing its own shares (buy back) [section 77A]77A]

4.4. Otherwise called as “Securities Premium Account. Otherwise called as “Securities Premium Account. (Shares, Bonds, or debentures)(Shares, Bonds, or debentures)

Notes to the balance sheetNotes to the balance sheet

Claims against the company not Claims against the company not acknowledged as debtsacknowledged as debts

Uncalled liability on shares partly paidUncalled liability on shares partly paid Arrears of fixed cumulative dividendsArrears of fixed cumulative dividends Estimated amount of contracts remaining to Estimated amount of contracts remaining to

be executed on capital account and not be executed on capital account and not provided for.provided for.

Other money for which the company is Other money for which the company is contingently liable. contingently liable.

Form of balance sheetForm of balance sheet

A company may prepare its balance sheet A company may prepare its balance sheet either in the horizontal form specified in either in the horizontal form specified in part I of schedule VI or may prepare it in a part I of schedule VI or may prepare it in a statement form, stating the liabilities as statement form, stating the liabilities as sources of funds in the first part and listing sources of funds in the first part and listing the assets as applications of funds in the the assets as applications of funds in the second partsecond part

Depreciation Depreciation

The companies act requires the provision of The companies act requires the provision of adequate depreciation for the following purposeadequate depreciation for the following purpose

For determination of the profits out of which For determination of the profits out of which dividends can be declareddividends can be declared

for determination of the profits for the purpose for determination of the profits for the purpose of calculation of managerial remuneration.of calculation of managerial remuneration.

The depreciation to be written off to profit and The depreciation to be written off to profit and loss account is the amount of depreciation loss account is the amount of depreciation chargeable for the calculation of devisable chargeable for the calculation of devisable profitsprofits

Interest on debenturesInterest on debentures When a company has raised funds by When a company has raised funds by

floating debenture, the profit and loss floating debenture, the profit and loss account must be charged with interest on account must be charged with interest on debentures for the financial year or where debentures for the financial year or where the debentures had been floated only in the debentures had been floated only in the current financial year , for the period the current financial year , for the period for which they have been out standing.for which they have been out standing.

Interest accrued but not due should be Interest accrued but not due should be shown in the balance sheet as a current shown in the balance sheet as a current liability liability

Income taxIncome tax Dividends to both the equity and the preference Dividends to both the equity and the preference

share holders can paid only out of profits available share holders can paid only out of profits available after taking into account the income tax. the profits after taking into account the income tax. the profits on which income tax is payable is termed as on which income tax is payable is termed as taxable profits and the calculation of taxable profits taxable profits and the calculation of taxable profits is based on the provisions as per the income tax is based on the provisions as per the income tax act. act.

Though the actual amount of tax can be calculated Though the actual amount of tax can be calculated only when the books of accounts are closed for the only when the books of accounts are closed for the accounting period and profits are ascertained, the accounting period and profits are ascertained, the income tax act requires a business to pay advance income tax act requires a business to pay advance tax by forecasting the likely profits that would tax by forecasting the likely profits that would accrue during the yearaccrue during the year

Income taxIncome tax The process of assessment may take quite The process of assessment may take quite

some time to be completed and until such some time to be completed and until such completion, the exact tax liability will not be completion, the exact tax liability will not be known to the company. Thus the accounting known to the company. Thus the accounting treatment of income tax must take into account treatment of income tax must take into account the following three stages.the following three stages.

Payment of advance income taxPayment of advance income tax Determination of the tax liability by the company Determination of the tax liability by the company

from its books of accounts, making a provision from its books of accounts, making a provision for such liability and payment of difference, if for such liability and payment of difference, if any, between advance tax and tax now any, between advance tax and tax now computedcomputed

Completion of the assessment by the income tax Completion of the assessment by the income tax officer.officer.

DividendsDividends Dividends may be defined as the share of profits Dividends may be defined as the share of profits

that is payable to each share holder of the that is payable to each share holder of the company. The companies act lays down that company. The companies act lays down that dividends can be paid out of profits only and dividends can be paid out of profits only and prohibits the payment of any dividend out of prohibits the payment of any dividend out of capital .also , dividends should be paid in cash capital .also , dividends should be paid in cash only. a company may pay dividends from any or only. a company may pay dividends from any or all of the three sources.all of the three sources.

Profits of the current yearProfits of the current year Undistributed profits of previous yearUndistributed profits of previous year Money provided by the central or any state Money provided by the central or any state

government for the payment of dividends government for the payment of dividends

DividendsDividends

The directors generally recommended the The directors generally recommended the percentage of dividend payable on the equity percentage of dividend payable on the equity shares . The share holders in the annual general shares . The share holders in the annual general meeting may pass a resolution adopting the meeting may pass a resolution adopting the recommendation or may lower the percentage recommendation or may lower the percentage recommended. The share holders don’t have the recommended. The share holders don’t have the power to enhance the dividend recommended by power to enhance the dividend recommended by the directors. The percentage adopted must be the directors. The percentage adopted must be applied only on the paid up capital. Calls in applied only on the paid up capital. Calls in arrears do not qualify for the dividends.arrears do not qualify for the dividends.

DividendsDividends The dividend recommended by the The dividend recommended by the

directors is termed as proposed dividend directors is termed as proposed dividend till such time it is adopted by the share till such time it is adopted by the share holders in the annual general meeting.holders in the annual general meeting.

The proposed dividend will be classified as The proposed dividend will be classified as a provision and shown on the liability side a provision and shown on the liability side of the balance sheet . The dividend finally of the balance sheet . The dividend finally decided by the share holders in the annual decided by the share holders in the annual general meeting as a payable is termed as general meeting as a payable is termed as declared dividend.declared dividend.

DividendsDividends Any dividend declared must be paid with in Any dividend declared must be paid with in

42 days from the date of declaration. 42 days from the date of declaration. Hence a declared dividend must be Hence a declared dividend must be classified current liability in the balance classified current liability in the balance sheet of the company. Though the sheet of the company. Though the dividends can be declared only by a dividends can be declared only by a resolution of the share holders , if the resolution of the share holders , if the articles of the company permit , the articles of the company permit , the directors can declare and interim dividend directors can declare and interim dividend between two annual general meetings.between two annual general meetings.

DividendsDividends

As per the companies act , no dividend As per the companies act , no dividend shall be declared or paid by a company for shall be declared or paid by a company for any financial year out of the profits of the any financial year out of the profits of the company for that year arrived at after company for that year arrived at after providing for depreciation in accordance providing for depreciation in accordance with the provisions of he sec 205 (2), with the provisions of he sec 205 (2), except after the transfer to the reserves of except after the transfer to the reserves of the company a percentage for its profits of the company a percentage for its profits of that year as specified belowthat year as specified below

DividendsDividends Where the dividend proposed exceeds Where the dividend proposed exceeds

10% but not 12.5% of the paid up capital , 10% but not 12.5% of the paid up capital , the amount to be transferred to the the amount to be transferred to the reserves shall not be less than 2.5% of the reserves shall not be less than 2.5% of the current profitscurrent profits

Where the dividends proposed exceeds Where the dividends proposed exceeds 12.5% but does not exceed 15% paid up 12.5% but does not exceed 15% paid up capital , the amount to be transferred to capital , the amount to be transferred to the reserves shall not be less than 5% of the reserves shall not be less than 5% of the current profitsthe current profits

DividendsDividends

Where the dividend proposed 15% but Where the dividend proposed 15% but does not exceed 20% of the paid up does not exceed 20% of the paid up capital the amount to be transferred to the capital the amount to be transferred to the reserves shall not be less than 7.5% of the reserves shall not be less than 7.5% of the current profits.current profits.

Where the dividend exceeds 20% of the Where the dividend exceeds 20% of the paid up capital the amount to be paid up capital the amount to be transferred to reserves shall not be less transferred to reserves shall not be less than 10% of the current profits.than 10% of the current profits.

DividendsDividends Any dividend declared by the company reaming Any dividend declared by the company reaming

un paid with in 30 days of declaration , shall be un paid with in 30 days of declaration , shall be transfer by the company to a special account transfer by the company to a special account with in 7 days of the expiry of the aforesaid with in 7 days of the expiry of the aforesaid 30days.30days.

If the dividend is not claimed for a period of 7 If the dividend is not claimed for a period of 7 years from the date of transfer to the special years from the date of transfer to the special bank account , then the unclaimed amount must bank account , then the unclaimed amount must be transferred by the company to the fund be transferred by the company to the fund established under sec 205C.established under sec 205C.

After such transfer , any share holder entitled to After such transfer , any share holder entitled to claim such dividend may claim it from the claim such dividend may claim it from the government.government.

Profit on revaluation of fixed assetsProfit on revaluation of fixed assets When a company revalues its fixed assets and if there is When a company revalues its fixed assets and if there is

profit on revaluation it should be transfer to capital profit on revaluation it should be transfer to capital reserve account.reserve account.

Capital Reserve- Reserve created by the accumulated Capital Reserve- Reserve created by the accumulated capital surplus( not the revenue surplus) of the firm e.g. capital surplus( not the revenue surplus) of the firm e.g. an upward revaluation of assets by a firm to reflect its an upward revaluation of assets by a firm to reflect its assets at the current market values after appreciation.assets at the current market values after appreciation.

Capital reserve is created from the capital gainsCapital reserve is created from the capital gains. . Capital reserve is that reserve which is created out of Capital reserve is that reserve which is created out of profit of capital nature such as: revaluation, business profit of capital nature such as: revaluation, business purchase, forfeiture, etc.purchase, forfeiture, etc.

Interest out of capitalInterest out of capital

Though the companies act provides that the Though the companies act provides that the dividends to share holders are payable only out dividends to share holders are payable only out of profits , in certain circumstances with the of profits , in certain circumstances with the previous sanction of central government interest previous sanction of central government interest may be paid to share holders out of capital . The may be paid to share holders out of capital . The circumstances classified by sec 208 of the circumstances classified by sec 208 of the companies act are as below:-companies act are as below:-

Interest out of capitalInterest out of capital

Where any shares in a company are Where any shares in a company are issued for the purpose of raising money to issued for the purpose of raising money to defray the expenses of the construction of defray the expenses of the construction of any work or building or the provision of any work or building or the provision of any plantany plant

Such construction or provision of plant Such construction or provision of plant cannot be made profitable for a lengthy cannot be made profitable for a lengthy period. ( notified rate of interest 12%)period. ( notified rate of interest 12%)

Suspense accountSuspense account

Some times suspense account is shown in Some times suspense account is shown in the trial balance because some items the trial balance because some items which cannot be posted to the correct which cannot be posted to the correct account for some reason or the other is account for some reason or the other is shown as suspense account which is shown as suspense account which is rectified or adjusted while preparing the rectified or adjusted while preparing the final accountsfinal accounts

Managerial remunerationManagerial remuneration

Calculating of managerial remuneration payable Calculating of managerial remuneration payable to directors , mangers , managing director is to directors , mangers , managing director is base on net profit which is calculated as follows.base on net profit which is calculated as follows.

The net profit for this purpose is calculate after The net profit for this purpose is calculate after making the four adjustment to gross profitmaking the four adjustment to gross profit

Credit shall be given for the following sumsCredit shall be given for the following sums Credit shall not be given for the following sumsCredit shall not be given for the following sums The following sums shall be deductedThe following sums shall be deducted The following sums shall not be deductedThe following sums shall not be deducted

Credit shall be given for the Credit shall be given for the following sumsfollowing sums

Bounties and subsidies received from any Bounties and subsidies received from any government or any public authority should government or any public authority should be added with the gross profit.be added with the gross profit.

Bounty:- rewards, generosityBounty:- rewards, generosity Subsidies:- gift of supporting fundsSubsidies:- gift of supporting funds

Credit shall not be given for the following Credit shall not be given for the following sumssums

Profits, by way of premium, on shares or Profits, by way of premium, on shares or debentures of the companydebentures of the company

Profits on sales by the company of forfeited Profits on sales by the company of forfeited sharesshares

Profits of capital nature including profits from Profits of capital nature including profits from sale of undertakingsale of undertaking

Profits from the sale of immovable propertyProfits from the sale of immovable property However, credit shall be given for revenue profit( However, credit shall be given for revenue profit(

difference between original cost and written difference between original cost and written down value) on the sale of fixed assetdown value) on the sale of fixed asset

The following sums shall be deductedThe following sums shall be deducted All the usual working chargesAll the usual working charges Directors remunerationDirectors remuneration Bonus or commission paid to any member of the Bonus or commission paid to any member of the

staffstaff Any tax on excess or abnormal profitsAny tax on excess or abnormal profits Interest on debenturesInterest on debentures Interest on mortgageInterest on mortgage Expenses on repairsExpenses on repairs Outgoings , inclusive of contributionsOutgoings , inclusive of contributions Depreciation toa the extent specified in sec 350Depreciation toa the extent specified in sec 350

The following sums shall be The following sums shall be deducteddeducted

The excess of expenditure over incomeThe excess of expenditure over income Any compensation or damages to be paid Any compensation or damages to be paid

in virtue of any legal liabilityin virtue of any legal liability Any sum paid by way of insuranceAny sum paid by way of insurance Debts considering bad and written-offDebts considering bad and written-off Amount paid as cess u/s441 AAmount paid as cess u/s441 A

The following sums shall not be The following sums shall not be deducteddeducted

The remuneration payable to the The remuneration payable to the managing agent (not in force)managing agent (not in force)

Income tax and super tax payableIncome tax and super tax payable Any compensation, damages or payments Any compensation, damages or payments

made voluntarilymade voluntarily Loss of capital nature including loss on Loss of capital nature including loss on

sale of the undertaking. sec 350sale of the undertaking. sec 350

Commission after charging such Commission after charging such commissioncommission

:- as per the provision of the companies :- as per the provision of the companies act, commission to managerial staff should act, commission to managerial staff should be calculated before charging such be calculated before charging such commission . However, a company may commission . However, a company may enter into an agreement to pay enter into an agreement to pay commission as a percentage of profit after commission as a percentage of profit after charging such commission. In this case, charging such commission. In this case, commission is calculated as followscommission is calculated as follows

commission is calculated as followscommission is calculated as follows

*profit before commissionrate of commission

100+rate of commission

Commission =

Commission payable to more than Commission payable to more than one member of managerial staffone member of managerial staff

There may be an agreement that the There may be an agreement that the whole time directors will get commission at whole time directors will get commission at a fixed rate on net profits after the a fixed rate on net profits after the commission of the part time directors. commission of the part time directors. Again the part time directors will get Again the part time directors will get commission at a fixed rate on net profit commission at a fixed rate on net profit after the commission of the whole time after the commission of the whole time directors. In this situation, the commission directors. In this situation, the commission of each group is calculated with the help of of each group is calculated with the help of simultaneous equations.( refer 7.3)simultaneous equations.( refer 7.3)

Thank youThank you

"When people say to me: "How do you do "When people say to me: "How do you do so many things?" I often answer them so many things?" I often answer them without meaning to be cruel: "How do you without meaning to be cruel: "How do you do so little?" It seems to me that people do so little?" It seems to me that people have vast potential. Most people can do have vast potential. Most people can do extraordinary things if they have the extraordinary things if they have the confidence or take the risks. Yet most confidence or take the risks. Yet most people sit in front of the TV and treat life people sit in front of the TV and treat life as if it goes on forever." -- Phillip Adamsas if it goes on forever." -- Phillip Adams