BComIIISem197 PDF

CORPORATE ACCOUNTING
CORE COURSE
BCom
(2011 Admission)
III SEMESTER
UNIVERSITY OF CALICUT
SCHOOL OF DISTANCE EDUCATION
Calicut University P.O. Malappuram, Kerala, India 673 635
329
SchoolofDistanceEducation
UNIVERSITYOFCALICUT
SCHOOLOFDISTANCEEDUCATION
StudyMaterial
BCom
III SEMESTER
CoreCourse
Prepared by :
Sri. T.H. JAHFARALI

Assistant Professor
P.G. Department of Commerce
Govt. College Malappuram
Scrutinized by :
Dr. K. Venugopalan
Associate Professor
Department of Commerce
Government College Madappally
Layout:
ComputerSection,SDE
Reserved
CONTENTS
PAGE
Module 1
Module 2
38
Module 3
57
Module 4
82
Module 5
112
Module1
ACCOUNTING FOR SHARE CAPITAL
A company is an association of persons who contribute money or moneys worth to a

commonstockandusesitforacommonpurpose.InthewordsofJusticeJames,acompanyisan
association of persons united for a common object. Sec 3(1) (i) of the Companies Act 1956
definesacompanyascompanyformedandregisteredunderthisActoranexistingcompany.
CharacteristicsofCompany
1. Itisavoluntaryassociationofpersons
2. Ithasaseparatelegalentity
3. Ithasacommonseal
4. Ithasaperpetualsuccession.
KindsofCompanies
I.
Onthebasisofformation
1. CharteredcompaniesThosecompanieswhichareincorporatedunderaspecialcharter
bythekingorsovereignsuchasEastIndiaCompany.
2. StatutorycompaniesThesecompaniesareformedbythespecialActoflegislatureor
parliamentlikeRBI.
3. RegisteredcompaniesSuchcompaniesareincorporatedundertheCompaniesAct1956
orwereregisteredunderanypreviousCompaniesAct.
Onthebasisofliability
1. LimitedcompaniesInthesecompanies,theliabilityofeachmemberislimitedtothe
extentoffacevalueofsharesheldbyhim.
2. Guarantee companies The liability of member of such companies are limited to the
amounthehasundertakentocontributetotheassetsofthecompanyintheeventofits
windingup.
3. UnlimitedCompaniesInthesecompanies,theliabilityofthemembersisunlimitedand
membersarepersonallyliabletothecreditorsofthecompanyfopmakingupthe
deficiency.Suchcompaniesarerarethesedays.
Onthebasisofpublicinvestment
1. PrivateCompaniesThesearecompaniesbyitsArticles,(i)limitsthenumberofmembers
to50,(ii)prohibitstheinvitationtothepublictosubscribetheirsharesordebenturesand
(iii)restrictsthetransferabilityoftheirshares.
2. PubliccompaniesThesearecompaniesotherthanprivatecompanies.
SHARECAPITAL
Total capital of the company is divided into units of small denominations; each one is
calledashare.AccordingtoSec2(46)oftheCompaniesAct1956,sharehasbeendefinedasa
share in the share capital of the company; and includes stock except where a distinction
betweenstockandshareisexpressedorimplied.
ClassesofShares
A. PreferenceShares
Shareswhichenjoythepreferentialrightsastodividendandrepaymentofcapitalin
theeventofwindingupofthecompanyovertheequitysharesarecalledpreferenceshares.
Theholderofpreferenceshareswillgetafixedrateodividend.
Typesofpreferenceshares
1. CumulativepreferencesharesIncaseoftheseshares,thearrearsofdividendarecarried
forwardandpaidoutoftheprofitsofthesubsequentyears.
2. Noncumulative preference shares If dividend not to accumulate and not to carried
forwardtonextyear,thesearecallednoncumulativepreferenceshares.
3. Participating preferenceshares In additiontoafixeddividend,balanceofprofit(after
meeting equity dividend) shared by some preference shareholders. Such shares are
participatingpreferenceshares.
4. Nonparticipating preference shares These shares get only a fixed rate of dividend.
Thesedonotgetshareinthesurplusprofit.
5. RedeemablepreferencesharesIfpreferencesharesarereturnedafteraspecifiedperiod
to shareholders, these preference shares e shares are called redeemable preference
shares.
6. ConvertiblepreferencesharesThesesharesaregiventherightofconversionintoequity
shareswithinaspecifiedperiodorataspecifieddateaccordingtothetermsofissue.
B. EquityShares
Equitysharesarethosewhicharenotpreferenceshares.Equitysharesdonotcarry
anypreferentialgaininrespectofdividendorrepaymentofcapital.Sotheseareknownas
ordinary shares. There will be no fixed rate of dividend to be paid to the equity
shareholdersandthisratemayvaryfromyeartoyear.Inwindingup,theequitycapitalis
repaidlast.However,equityshareholdergetsfullvotingpower.
Typesofsharecapital
1. Authorized(RegisteredorNominal)CapitalItisthemaximumamountofcapitalwhich
thecompanyisauthorizedtoraisebywayofpublicsubscription.
2. Issued Capital The part of authorized capital which is offered top the public for
subscriptioniscalledissuedcapital.
3. Subscribed Capital That part of the issued capital for which applications are received
fromthepubliciscalledsubscribedcapital.
4. CalledupCapitalThatpartofsubscribedcapitalwhichhasbeencalledupordemanded
bythecompanyiscalledcalledupcapital.
5. Paidup Capital The part of calledup capital which is offered and actually paid by the
members is known as paidup capital. Any unpaid amount of balance on the calledup
capitalisknownasunpaidcapitalorcallsinarrears.
6. Reserve Capital It is that portion of the uncalled capital which is calledup only at the
eventofcompanyswindingup.
Differencebetweenequitysharesandpreferenceshares
1
2
3
4
5
Equityshares
Itisanownershipsecurity
Dividendrateisnotfixed
Capitalisrepaidonlyinwinding
up
Theseshareshavevotingrights
Facevalueislower
1.
2.
3.
Preferenceshares
Itisahybridsecurity
Dividendrateisfixed
Capitalisrepaidafterastipulated
period
Thesesharesgenerallydonothave
votingrights
Facevalueishigher
IssueofShareCapital
The shares can be issued either at par, premium or at discount. Shares are said to be
issuedatparwhenashareholderisrequiredtopaythefacevalueofthesharestothecompany.
Sharesaresaidtobeissuedatpremium whenashareholderisrequiredtopaymorethanthe
face value to the company. Shares are said to be issued at discount when the shareholder is
requiredtopaylessamountthanthefacevaluetothecompany.Forexample,acompanyissues
theshareshavingthefacevalueofRs.10atRs.10;itistheissueatpar.IfitisissuedatRs.12,the
issueisatpremium.IfitisissuedatRs.8,theissueisatdiscount.
The issue price of the shares can be received in one instalment or it can be received in
different instalments. If the issue is in different instalments, it may be paid on application,
allotmentandononeormorecalls.Theamountonapplicationiscalledapplicationmoney,the
amountduesonallotmentiscalledallotmentmoneyandtherestamountiscalledcallmoney.
AsperSEBIguidelinestheapplicationmoneyonissuemustnotbelessthan25%ofissueprice
(asperCosAct,itis5%).
Allotmentofshares
Allotment of shares means the acceptance of offer of the applicant for the purchase of
shares.Directorshavethediscretionarypowertorejectoraccepttheapplications.Butthepublic
company cannot allot its shares unless the minimum subscription has been subscribed by the
public and the amount of application has been received. After the allotment of shares to the
applicantswhowillbecometheshareholdersofthecompany.
JournalEntriesforShareIssue
1. Onreceiptofapplicationmoney:
BankA/c
ToShareApplicationA/c
2. Onacceptanceofapplication:
ShareapplicationA/c
ToShareCapitalA/c
Dr
3. Onallotmentmoneydue:
ShareallotmentA/c
ToSharecapitalA/c
Dr
Dr
4. Onreceiptofallotmentmoney:
BankA/c
ToShareallotmentA/c
5. Onmakingfirstcalldue:
SharefirstcallA/c
ToSharecapitalA/c
Dr
Dr
6. Onreceiptoffirstcallmoney:
BankA/c
Dr
ToSharefirstcallA/c
(Note:similarentriesmaybepassedforsecondcall,thirdcall,ifany.)
Illustration1
BharatTradingCo.Ltd.witharegisteredcapitalofRs.100000issued5000equitysharesofRs.10
each,payableRs.2onapplication,Rs.2onallotment,Rs.3onfirstcallandRs.3onfinalcall.Pass
journalentriesassumingthesharesissuedwerefullysubscribedandthemoneyhasbeen
received.
Solution:
Journal
BankA/c
Dr
(Applicationmoneyreceived)
ShareapplicationA/c
Dr
ToShareCapitalA/c
(Transferofapplicationmoneytosharecapital)
ShareallotmentA/c
Dr
ToSharecapitalA/c
(Allotmentmoneydue)
BankA/c
Dr
ToShareallotmentA/c
(Allotmentmoneyreceived)
SharefirstcallA/c
Dr
ToSharecapitalA/c
(Firstcallmoneydue)
BankA/c
Dr
ToSharefirstcallA/c
(Firstcallmoneyreceived)
SharefinalcallA/c
Dr
ToSharecapitalA/c
(Finalcallmoneydue)
BankA/c
Dr
ToSharefinalcallA/c
(Finalcallmoneyreceived)
10000
10000
10000
10000
15000
15000
15000
15000
10000
10000
10000
10000
15000
15000
15000
15000
Issueofsharesatpremium
Sharesaresaidtobeissuedatpremiumwhenashareholderisrequiredtopaymorethan
thefacevaluetothecompany.Theexcessamountreceivedoverthefacevalueiscalledshare
premium.Itisacapitalreceipt.ThesharepremiumshallbetransferredtoSecuritiesPremium
A/c. It should be shown on the liability side of balance sheet under the head Reserves and
Surplus.
Journalentries:
(a) Ifpremiumisreceivedwithapplicationmoney:
(i) BankA/c
Dr
ToShareapplicationA/c
(ii) ShareapplicationA/c
Dr
(withtotal)
ToSharecapitalA/c
(applicationmoney)
ToSecuritiespremiumA/c
(premium)
(b) Ifpremiumisreceivedwithallotmentmoney:
(i) ShareallotmentA/c
Dr
(total)
ToSharecapitalA/c
(allotmentmoneydue)
(premium)
(ii) BankA/c
A/c
ToShareallotmentA/c
Issueofsharesatdiscount
Shares are said to be issued at discount when the shareholder is required to pay
lessamountthanthefacevaluetothecompany.Discountonissueofsharesisacapital
loss and it should be debited to a separate account called Discount on issue of shares
A/c.ItisshownontheassetssideofbalancesheetunderMiscellaneousExpenditure.
The rate of discount should not exceed 10% of nominal value of shares. Generally the
discount on issue is recorded at the time of allotment. It is also noted that a newly
registeredcompanycannotissuesharesatdiscount.Thejournalentryis
ShareallotmentA/c
Dr
(allotmentmoneydue)
DiscountonissueofsharesA/c
ToSharecapitalA/c
Illustration2
Dr
(discount)
(Total)
ALtd.Issued5000sharesofRs.10eachatapremiumofRs.5pershare.Theamountwas
payableasRs.3onapplication,Rs.7onallotment(incl.Premium)andthebalanceonfirst
andfinalcall.Allsharesweresubscribedandmoneydulyreceived.Showthejournal
entries.
Solution:
BankA/c
Dr
ShareapplicationA/c
Dr
ToShareCapitalA/c
ShareallotmentA/c
Dr
ToSharecapitalA/c
(Allotmentmoneydue withpremium)
BankA/c
Dr
ToShareallotmentA/c
SharefirstandfinalcallA/c
Dr
ToSharecapitalA/c
(Firstandfinalcallmoneydue)
BankA/c
Dr
ToSharefirstandfinalcallA/c
(Firstandfinalcallmoneyreceived)
15000
15000
35000
35000
25000
25000
15000
15000
10000
25000
35000
25000
25000
Illustration3
BaluLtd.Issued20000sharesofRs.10eachatadiscountof10%payableasRs.2onapplication,
Rs.3onallotmentandRs.4onfirstandfinalcall.20000applicationswerereceivedandallwere
accepted.Passjournalentries.
Solution:
BankA/c
Dr
40000
40000
ShareapplicationA/c
Dr
40000
ToShareCapitalA/c
40000
ShareallotmentA/c
Dr
60000
20000
Dr
80000
ToSharecapitalA/c
(Allotmentmoneydueat10%discount)
60000
BankA/c
Dr
ToShareallotmentA/c
60000
SharefirstandfinalcallA/c
Dr
80000
ToSharecapitalA/c
80000
(Firstandfinalcallmoneydue)
10
BankA/c
ToSharefirstandfinalcallA/c
(Firstandfinalcallmoneyreceived)
Dr
80000
80000
WhenbothPreferenceandEquitySharesareissued
Whenacompanyissuesbothpreferenceandequitysharesthejournalentriesarewritten
separatelyforeachtypeofsharecapital.
Undersubscriptionofshares
Sometimes the applications for shares received will be less than the number of shares
issued.Thisiscalledundersubscription.Insuchacase,theallotmentwillbeequaltothenumber
ofsharessubscribedandnottothesharesissued.
Oversubscriptionofshares
Sometimes the applications for shares received will be more than the number of shares
issued.Thisiscalledoversubscription.Whenthereisoversubscription,itisnotpossibletoissue
shares to all applicants. In such a situation company shall reject some applications altogether,
allotinfullonsomeapplicationsandmakeaprorataallotmentonsomeapplications.Prorata
allotmentmeansthatallotmentoneveryapplicationismadeintheratiowhichthenumberof
shares allotted bears to number of shares applied. In case of applications fully rejected will be
returnedtotheapplicants.Inprorataallotmenttheexcessapplicationwillbeadjustedeitheron
allotment and or on calls. Any surplus left even after the adjustment will be refunded to the
applicants.Journalentriesare
1. Whenapplicationmoneyisreturned:
ShareapplicationA/c
Dr
ToBankA/c
2. Whenexcessapplicationisadjustedtowardsallotmentorcall:
ShareapplicationA/c
Dr
(total)
ToshareallotmentA/c
(amountadjustedtowardsallotment)
ToCall(ifany)
(amountadjustedtowardscall)
Illustration4
SunLtd.makesanissueof100000equitysharesofRs.10eachpayableRs.3onapplication,Rs.5
onallotmentandRs.2onfirstandfinalcall.Applicationswerereceivedfor250000shares.The
company returned the applications on 24000 shares and excess application money from
remainingapplicantswascarriedforwardinpartsatisfactiononamountdueonallotmentonthe
sharesallottedtothem.Thebalanceofallotmentwasreceived.Thecompanydidnotmakethe
firstandfinalcall.Journalizethetransactions.
11
Solution:
BankA/c
Dr
(Applicationmoneyreceivedfor250000
shares)
ShareapplicationA/c
Dr
ToShareCapitalA/c
ToBankA/c
(Transferofapplicationmoneytosharecapital
and24000applicantsrejectedandrefunded)
ShareallotmentA/c
Dr
ToSharecapitalA/c
(Allotmentmoneydue)
ShareapplicationA/c
Dr
BankA/c
Dr
ToShareallotmentA/c
(Excessapplicationmoneyadjustedand
balancereceivedincash)
750000
372000
500000
378000
122000
750000
300000
72000
500000
500000
CallsinArrearsandCallsinAdvance
Sometimes shareholders may fail to pay the allotment money and or call money. Such
duesarecalledcallsinarrears.Itisshowninthebalancesheetasadeductionfromthecalledup
capital.DirectorsareauthorizedtochargeinterestoncallsinarrearsatarateasperArticles.In
its absence, the interest does not exceed 5% pa. When a shareholder pays more money than
calledup,theexcessmoneyiscalledcallsinadvance.Thecompanymustpayinterestoncallsin
advanceatarateprescribedbyArticles.Initsabsence,thecompanyisliabletopayinterest@6%
pa.Buttheshareholderisnotentitledtoanydividendoncallsinadvance.
Forfeitureofshares
Thecancellationofsharesduetononpaymentofallotmentmoneyorcallmoneywithina
specifiedperiodiscalledforfeitureofshares.Itisthecompulsoryterminationofmembershipof
thedefaultingshareholders.Healsolosseswhateveramounthehaspaidtothecompanysofar.
AcompanycanforfeitthesharesonlyifitisauthorizedbyitsArticles.Theforfeitingisdoneonly
after giving 14 days notice to the defaulting shareholders. The balance of forfeited shares A/c
shouldbeshownbywayofanadditiontocalledupcapitalontheliabilitysideofbalancesheet
tillthesharesarereissued.
Journalentries
1. Forfeitureofshareswhichwereissuedatpar:
ShareCapitalA/c
Dr
(amountcalledup)
ToshareallotmentA/c
(allotmentunpaid)
TosharecallA/c
(callunpaid)
ToforfeitedsharesA/c
(totalamountpaid)
2. Forfeitureofshareswhichwereissuedatpremium:
(a) Whenallotmentmoney(incl.premium)andcallmoneynotpaid
12
ShareCapitalA/c
Dr
(amountcalledup)
SecuritypremiumA/c
Dr
(premiumunpaid)
ToshareallotmentA/c
(allotmentunpaid)
TosharecallA/c
(callunpaid)
(totalamountpaid)
(b) Whencallmoneynotpaid
ShareCapitalA/c
Dr
(amountcalledup)
TosharecallA/c
(callunpaid)
(totalamountpaid)
3. Forfeitureofshareswhichwereissuedatdiscount:
ShareCapitalA/c
Dr
(amountcalledup)

ToshareallotmentA/c
(allotmentunpaid)

TosharecallA/c
(callunpaid)

(totalamountpaid)
TodiscountonissueofsharesA/c (amountofdiscount)
Illustration5
Kerala Ltd issued 5000 shares of Rs.10 each at par payable as Rs.3 on application, Rs.2 on
allotment,Rs.3onfirstcallandRs.2onfinalcall.Mr.Aliwasallotted50sharesandwhofailedto
payallotmentmoneyandfirstcall.Givejournalentriesifthoseshareswereforfeited.
Solution:
400
ShareCapitalA/c
Dr (50x8)
100
ToshareallotmentA/c
150
(50x2)
150
TofirstcallA/c
(50x3)
(50x3)
(forfeitureof50sharesduetononpaymentof
allotmentandfirstcall)
Illustration6
MalabarLtdissued5000sharesofRs.10eachatapremiumofRs.2payableasRs.3on
application,Rs.4onallotment(incl.premium),Rs.3onfirstcallandRs.2onfinalcall.Mr.Ajay
wasallotted50sharesandwhofailedtopayallotmentmoneyandfirstcall.Givejournalentries
ifthoseshareswereforfeited.
Solution:
ShareCapitalA/c
Dr(50x8)
400
SecuritypremiumA/c
100
(50x2)
200
ToshareallotmentA/c
150
(50x4)
150
TofirstcallA/c
(50x3)
(50x3)
13
allotmentandfirstcall)
Illustration7
JayLtdissued5000sharesofRs.10eachatadiscountof10%payableasRs.3onapplication,Re.1
onallotment,Rs.3onfirstcallandRs.2onfinalcall.Mr.Rajuwasallotted50sharesandwho
failedtopayfirstcallandfinalcall.Givejournalentriesifthoseshareswereforfeited.
Solution:
ShareCapitalA/c
Dr
500
(50x10)
150
TofirstcallA/c
100
(50x3)
200
TofinalcallA/c
50
(50x2)
(50x4)
TodiscountonissueofsharesA/c
(50x1)
firstandfinalcall)
Reissueofforfeitedshares
Forfeited shares may be reissued by the company either at pr, premium or

discount.Butthediscountonreissueshouldnotexceedtheamountforfeited.
Journalentries
1. Onreissueatpar(issuedatparorpremium):
BankA/c
Dr(amountreceivedonreissue)
TosharecapitalA/c(amountpaidup)
2. Onreissueofatadiscount(issuedatparorpremium):
BankA/c
ForfeitedsharesA/c
Dr(amountofdiscountonreissue)
TosharecapitalA/c
(amountpaidup)
3. Onreissueatapremium(issuedatparorpremium):
BankA/c
TosharecapitalA/c
(amountpaidup)
TosecuritypremiumA/c
(premiumonreissue)
4. Onreissueatadiscount(issuedatadiscount):
BankA/c
DiscountonissueofsharesA/c Dr(amountoforiginaldiscount)
ForfeitedsharesA/c
Dr(excessofdiscountonreissueoveroriginalissue)
TosharecapitalA/c
(amountpaidup)
14
Ifallforfeitedshareshavebeenreissued,thecreditbalanceinforfeitedsharesA/c
(capitalprofit)shallbetransferredtocapitalReserveA/cbypassingthefollowingentry
ForfeitedsharesA/c
Dr
TocapitalreserveA/c
Ifallforfeitedsharesarenotreissued,onlytheprofitonshareswhichareissuedis
transferredtoCapitalreserveA/c.
Illustration8
ThedirectorsofALtdresolvedthat2000equitysharesofRs.10each,Rs.7.50paid,beforfeited
fornonpaymentoffinalcallofRs.2.50.1800oftheaboveshareswerereissuedforRs.6per
share.Showthejournalentries.
Solution:
20000
SharecapitalA/cDr
5000
(2000x10)
15000
TofinalcallA/c
(2000x2.50)
ToForfeitedsharesA/c
10800
(2000x7.50)
7200
(2000sharesforfeitedduetononpaymentof
18000
finalcall)
BankA/c
Dr(1800x6)
6300
ForfeitedsharesA/cDr(1800x4)
6300
ToShareCapitalA/c
(1800x10)
(1800offorfeitedsharesreissued@Rs.6)
ForfeitedsharesA/c
Dr
ToCapitalReserveA/c(1800x7.5))
(1800x4)
(surplusreceivedonforfeiture&reissue
transferred)
Illustration9
Arjun Ltd invited applications for 10000 shares of Rs.100 each at a premium of 5% payable as
Rs.25 on application, Rs.45 on allotment (incl. premium) and Rs.35 on first and final call. The
applicationsreceivedfor9000sharesandalloftheseshareswereaccepted.Allmoneydueswere
receivedexceptthecallon100shareswhichwereforfeited.Ofthese50shareswerereissued@
Rs.90asfullypaid.Passjournalentries.
Solution:
225000
BankA/c
Dr
225000
225000
ShareapplicationA/c
Dr
225000
ToShareCapitalA/c
15
ShareallotmentA/c
Dr
ToSharecapitalA/c
ToSecuritypremiumA/c
(Allotmentmoneydue)
BankA/c
Dr
ToShareallotmentA/c
SharefinalcallA/c
Dr
ToSharecapitalA/c
(Finalcallmoneydue)
BankA/c
Dr
ToSharefinalcallA/c
SharecapitalA/c
Dr
TosharefinalcallA/c
ToForfeitedsharesA/c
(100sharesforfeited)
BankA/c
Dr
ForfeitedsharesA/c
Dr
TosharecapitalA/c
(50sharesreissued@Rs.90)
ForfeitedsharesA/c
Dr
ToCapitalreserveA/c(65x50)(500)
(BalanceofforfeitedsharesA/ctransferred)
405000
405000
315000
311500
10000
4500
500
2750
360000
45000
405000
315000
311500
3500
6500
5000
2750
Surrenderofshares
Sometimesashareholderisnotabletopayfurthercallsandreturnshissharestothe
companyforcancellation.Suchvoluntaryreturnofsharestothecompanybytheshareholder
himselfiscalledsurrenderofshares.Theaccountingtreatmentofsurrenderofsharesisthe
sameasthatofforfeitureofshares.
REDEMPTIONOFPREFERENCESHARES
When the preference shares are issued it is to be paid back by the company to such
shareholdersaftertheexpiryofastipulatedperiodwhetherthecompanyistobewoundupor
not.
As per Sec 80 of the Companies Act, a company limited by shares can redeem the
preferenceshares,subjecttothefollowingconditions
16
1. Thesharestoberedeemedmustbefullypaidup.
2. Such shares can be redeemed either out of profit or out of the proceeds of fresh issue of
shares. But these cannot be redeemed out of fresh issue of debentures or out of sale
proceedsofanypropertyofthecompany.
3. Premium payable on redemption must be provided out of profits of company or out of
companyssecuritypremiumaccount.
4. Whensharesareredeemedoutofprofit,asumequaltothenominalamountofsharesso
redeemed must be transferred out of profit to a reserve account namely Capital
RedemptionReserveA/c.
5. TheCapitalRedemptionreserveA/ccanbeutilizedonlyfortheissueoffullypaidupbonus
shares.
Thepreferencesharescanberedeemedeitheratparoratpremium(butnotatdiscount).
Premium on redemption is provided out of existing security premium account or security
premiumonfreshissue.Iftheyarenotsufficient,theredemptionpremiumshouldbeprovided
outofP&LA/corGeneralReserve.
MethodsofRedemption
Therearethreemethodsforredemptionofpreferenceshares.Theyare:
(a) Redemptionoutoffreshissueofshares
(b) Redemptionoutofprofits
(c) Redemptionpartlyoutoffreshissueandpartlyoutofprofit
AccountingProcedureforRedemption
1. Ensurethattheredeemablepreferencesharesarefullypaid.Iftheyarepartlypaid,the
followingentriesarepassedtomakethemfullypaid.
(a) PreferenceShareFinalCallA/c
Dr

ToPreferenceShareCapitalA/c
(b) BankA/c
Dr
ToPreferenceShareFinalCallA/c
2. Entryfortotalamountduetopreferenceshareholders
PreferenceSharesCapitalA/c
Dr(facevalue)
PremiumonRedemptionA/c
Dr(premiumonredemption)
ToPreferenceShareholdersA/c
(totalamountpayableon
redemption)
3. Entryforissueofequityshareseitherwithorwithoutpremium
BankA/c
Dr(amountreceived)
Dr(ifsharesissuedatdiscount)
ToEquitysharecapitalA/c
(facevalueofsharesissued)
ToSecurityPremiumA/c
(ifsharesissuedatpremium)
4. Entryforprovidingpremiumonredemption
SecuritypremiumA/corP&LA/corGeneralReserveA/cDr
ToPremiumonRedemptionA/c
17
5. Entryforappropriationfromdivisibleprofitstomeetdeficiencyofamounton
redemption
(orifredemptionisoutofprofit)
P&LA/corGeneralReserveA/c
Dr
ToCapitalRedemptionReserveA/c
6. Entryforpaymenttopreferenceshares
PreferenceShareholdersA/c
Dr
ToBankA/c
Illustration10
SunLtdhad8000,8%redeemablepreferencesharesofRs.25each,Rs.20calledup.Thecompany
decided to redeem the preference shares at 5% premium by the issue of sufficient number of
equity shares of Rs.10 each fully paid up at a premium of 10%. Pass journal entries relating to
redemption.
Solution:
Nominalvalueofsharestoberedeemed
200000
Premiumonredemption
10000
Totalamountrequiredforredemption
210000
No.ofsharestobeissued(exceptpremium)200000=20000
10
40000
PreferencesharefinalcallA/c
Dr
40000
To8%preferencesharecapitalA/c
(prefsharefinalcalldue)
40000
BankA/c
Dr
40000
TopreferencesharefinalcallA/c
(finalcallmoneyreceived)
220000
BankA/c
Dr
200000
ToequitysharecapitalA/c
20000
(issueof20000equitysharesofRs.10eachat
10%premium)
10000
SecuritypremiumA/c
Dr
10000
TopremiumonredemptionA/c
(providedpremiumonredemptionat5%outof
securitypremiumA/c)
200000
8%preferencesharecapitalA/c
Dr
10000
PremiumonredemptionA/cDr
210000
TopreferenceshareholdersA/c
(amountduetopreferenceshareholders)
210000
PreferenceshareholdersA/c
210000
Dr
ToBankA/c
(paymenttopreferenceshareholders)
18
Illustration11
:ThefollowingaretakenfromthebalancesheetofRajaLtdason31December2011.
10000equitysharesofRs.10eachRs.100000
10000,8%preferencesharesofRs.10eachRs.100000
CapitalreserveRs.50000
GeneralreserveRs.30000
P&LA/cRs.85000
Thecompanyredeemsthepreferenceshareson1January2012.Givejournalentries.
Solution:
30000
GeneralreserveA/c

70000
Dr
100000
P&LA/c
Dr
TocapitalredemptionreserveA/c
100000
(transferofanamountequaltonominalvalue
100000
ofsharesredeemedtoCRRA/c)
8%preferencesharecapitalA/c
100000
Dr
100000
Dr
ToBankA/c
Illustration12
:Acompanyhas10000,11%redeemablepreferencesharesofRs.100eachfullypaid.The
companyredeemsthesharesatpar.Forthepurposeitissued50000equitysharesofRs.10each
andbalanceismadeavailablefromtheaccumulatedprofit(P&LA/c).Theissuewasfully
subscribed.Givejournalentries.
Solution:
BankA/c
Dr
500000
ToequitysharecapitalA/c
500000
(freshissueof50000sharesatRs.10)
P&LA/c
500000
Dr
500000
TocapitalredemptionreserveA/c
(amounttransferredtoCRR)
1000000
11%PreferencesharecapitalA/c
1000000
Dr
19
Dr
ToBankA/c
1000000
1000000
Useofequationfordeterminingthefacevalueofsharestobeissued
AnequationcanbeappliedwhenthegivenamountofpremiuminsecuritypremiumA/cin
the balance sheet plus amount of premium to be obtained from fresh issue of shares is not
sufficienttopaypremiumonredemptionofpreferenceshares.ItisduetosecuritypremiumA/c
giveninbalancesheetcannotbeusedforredeemingthefacevalueofshares.
(a) Whenfreshissueistobemadeatapremium:
[Redeemablepreferencesharecapital+premiumonredemption]=[{Balanceinsecurity
premiumA/cinB/S}+{Revenueprofitavailableforredemption}+{N}+{Nx%rateof
premiumonfreshissue}]
(b) Whenfreshissueofsharesistobemadeatadiscount:
premiumA/cinB/S}+{Revenueprofitavailableforredemption}+{N}{Nx%rateof
discountonfreshissue}]
Note:N=Nominalvalueoffreshissueofsharestobemadeforredemption
Illustration13
DeterminetheamountoffreshissueofsharesfromthefollowinginformationrelatingtoALtd.
RedeemablepreferencesharesRs.200000,premiumonredemption10%,divisibleprofits
availableRs.60000,balanceingeneralreserveRs.40000andsecuritypremiumA/cRs.15000.if
freshissueismade(i)atapremiumof5%and(ii)atadiscountof10%.
Solution
(i)iffreshissueismadeatapremiumof5%:
premiumA/cinB/S}+{Revenueprofitavailableforredemption}+{N}+{Nx%rateofpremium
onfreshissue}]
[200000+20000]=[15000+60000+40000+N+0.05N]
1.05N=220000115000
N=105000=Rs.100000
1.05
(ii)Iffreshissueismadeatadiscountof10%:
premiumA/cinB/S}+{Revenueprofitavailableforredemption}+{N}{Nx%rateofdiscounton
freshissue}]
[200000+20000]=[15000+60000+40000+N0.1N]
0.9N=220000115000
N=105000=Rs.116667
0.9
20
BUYBACKOFSHARES
Buy back is a method of cancellation of share capital. It simply means buying of own
shares.Itleadstoreductioninthesharecapitalofacompany.
Objectivesofbuyback
1.
2.
3.
4.
Toreturnsurpluscashtoinvestors
Toimprovethefinancialhealth
ToincreasetheEPS
Toincreasethemarketpriceoftheshare
Advantagesofbuyback
1. Ithelpstoreturnthesurpluscashtoinvestors
2. IthelpstoincreasetheEPS
3. Itincreasespromotersholdinginthecompany
4. Ithelpstorestructurethecapitalbaseofthecompany
Disadvantagesofbuyback
1. Itimpliesundervaluationofcompanysstock
2. Itmaybeusedasatoolofinsidertrading
3. Itmaybeusedformanipulatingthepricesofshares.
Methodsofbuyback
AsperSEBIguidelines,therearetwomethodsofbuybackofshares.Theyare:
1. BuybackthroughtenderofferUnderthis,acompanycanbuybackitssharesfromits
existingshareholdersonaproportionatebasis.
2. BuybackfromtheopenmarketAcompanycanalsobuybackitssharesfromtheopen
marketeitherthroughstockexchangesorbookbuildingprocess.
DEBENTURES
ThetermdebenturehasbeenderivedfromtheLatinworddebere,whichmeansto
borrow.Debentureisaninstrumentinwritinggivenbyacompanyacknowledgingdebtreceived
fromthepublic.
TheCompaniesActdefinesdebentureasdebentureincludesdebenturestock,bondsor
anyothersecuritiesofacompany,whetherconstitutingachargeontheassetsofthecompanyor
not.
FeaturesofDebenture
1.
2.
3.
4.
5.
Itisaninstrumentofdebtissuedbycompanyunderitsseal.
Itcarriesfixedrateofinterest.
Debentureisapartofborrowedcapital.
Itisrepaidafteralongperiod.
Itisgenerallysecured.
21
Differencebetweensharesanddebentures
Share
1. Thepersonholdingshareiscalled
shareholder
2. Itispartofownedcapital
3. Dividendispaidonshares
4. Rateofdividendvariesyeartoyear
5. Shareholderhasvotingright
6. Itcantbeconvertedintodebenture
Debenture
1. Thepersonhavingdebentureis
calleddebentureholder
2. Itisapartofborrowedcapital
3. Interestispaidondebenture
4. Rateofinterestisfixed
5. Debentureholderdoesnthave
votingright
6. Itcanbeconvertedintoshare
Classificationofdebentures
1. SecuredorMortgagedebenturesThesedebenturesaresecuredeitheronaparticular
assetorontheassetsofthecompanyingeneral.
2. UnsecuredorNakeddebenturesThesedebenturesdonotcreateanychargeonthe
assetsofthecompany.
3. RegistereddebenturesThesedebenturesartepayabletothepersonsrecordedinthe
registerofdebentureholdersofthecompanyandthesearetransferableonlywiththe
knowledgeofthecompany.
4. BearerdebenturesInthesedebenturescompanymaintainsnoregisterofdebenture
holdersandthesearetransferablebymeredelivery.
5. RedeemabledebenturesThesedebenturesarerepayableafterafixedperiodeitherin
lumpsumorininstalments.
6.
PerpetualorIrredeemabledebenturesThesedebenturesarenotrepayableduringthe
lifetimeofthecompany.
7.
ConvertibledebenturesThesedebenturescanbeconvertedintotheshareswithinor
afteraSpecifiedperiod,attheoptionoftheholder.
8. NonConvertibledebenturesThesedebenturescantbeconvertedintoshares.
IssueofDebentures
Issueofdebenturescanbestudiedinthefollowingtwopointsofview
1. Fromconsiderationpointofview
a. Forconsiderationincash:Debenturescanbeissuedeitheratpar,atpremiumorat
discount.Theentrywillbe
BankA/c
Dr
DiscountonissueofdebenturesA/c
Dr(ifissueatdiscount)
ToDebenturesA/c
(ifissueatpremium)
b. Forconsiderationotherthancash:Theentriesare
i. Forpurchaseofassets
SundryAssetsA/c
Dr
22

ToVendorA/c
ii. Forissuingdebenturesforpaymentofpurchaseconsideration
VendorA/c
Dr
ToDebenturesA/c
c. Ascollateralsecurity:Whendebenturesareissuedassubsidiaryorsecondarysecurity
inadditiontotheprincipalsecurityagainstaloanorbankoverdraftsuchanissueof
debenturesiscalledissueofdebenturesascollateralsecurity.
2. Frompricepointofview
Fromthispointofviewdebenturescanbeissuedeitheratpar,atpremiumorat
discount.
a. Whendebenturesareissuedatpar
BankA/c
Dr(withfacevalue)

TodebenturesA/c
b. Whendebenturesareissuedatdiscount
BankA/c
Dr(netamountreceived)

ToDiscountonissueofDebenturesA/c(amountofdiscount)

ToDebenturesA/c
(withfacevalue)
c. Whendebenturesareissuedatpremium
BankA/c
Dr(totalamount)

ToDebenturesA/c
(withfacevalue)
(amountofpremium)
Illustration14
:XLtdissued1000,9%debenturesofRs.100each.Writejournalentrieswhentheyareissued(a)
atpar,(b)at20%premiumand(c)at10%discount.
Solution:
(a)
BankA/c
100000
100000
Dr
To9%debenturesA/c
(issueof1000,9%debenturesatRs.100)
120000
BankA/c
Dr
100000
To9%debenturesA/c
(b)
20000
(issueof1000,9%debenturesatRs.100at
20%premium)
(c)
90000
BankA/cDr
10000
DiscountonissueofdebenturesA/cDr
100000
To9%debenturesA/c
(issueof1000,9%debenturesatRs.100at
10%discount)
Illustration15
A company issued 10000 debentures of R.100 each for subscription. Debenture moneys are
payableasRs.30onapplication,Rs.40onallotment,Rs.20onfirstcallandRs.10onsecondcall.
Apersonwho9holds200debenturesfailstopaytheamountdueatthetimeofallotment.He
23
however pays this amount with the first call money. Another person, who is holding 400
debentures,haspaidallthecallsinadvanceatthetimeofallotment.Givejournalentriesinthe
booksofcompany.
Solution:
300000
BankA/c
Dr
300000
ToDebentureApplicationA/c
300000
DebentureapplicationA/c
Dr
300000
ToDebenturesA/c
(Transferofapplicationmoneytodebentures
400000
A/c)
400000
DebentureallotmentA/c
Dr
ToDebenturesA/c
404000
(Allotmentmoneydue)
392000
BankA/c
Dr
12000
ToDebentureallotmentA/c
ToDebenturescallsinadvance
(Allotmentmoneyon9800debenturesandcall
200000
on400debenturesasadvancereceived)
200000
DebenturefirstcallA/c
Dr
8000
ToDebenturesA/c
8000
(Firstcallmoneydue)
DebenturescallsinadvanceA/c
200000
Dr
8000
ToDebenturesfirstcallA/c
192000
(transferofcallsinadvancetofirstcallA/c)
BankA/c
Dr
ToDebentureallotmentA/c
100000
ToDebenturefirstcallA/c
100000
(Firstcallmoneyreceivedalongwithallotment
dueon200debentures)
DebenturefinalcallA/c
Dr
96000
ToDebenturesA/c
4000
(Finalcallmoneydue)
100000
BankA/c
Dr
DebenturescallsinadvanceA/c
Dr
ToSharefinalcallA/c
24
3.Fromconditionofredemptionpointofview
Therearesixcasesonthebasisoftermsofissueandconditionsofredemptionof
debentures.Theyareasfollows:
a. Issuedatparandredeemableatpar.
b. Issuedatpremiumandredeemableatpar.
c. Issuedatdiscountandredeemableatpar.
d. Issuedatparandredeemableatpremium.
e. Issuedatdiscountandredeemableatpremium.
f. Issuedatpremiumandredeemableatpremium.
A. Whenissuedatparandredeemableatpar.
BankA/c
Dr
ToDebenturesA/c
B. Whenissuedatpremiumandredeemableatpar.
BankA/c
Dr
(facevalue+premium)
ToDebenturesA/c
(facevalue)
(premium)
C. Whenissuedatdiscountandredeemableatpar.
BankA/c
Dr
(amountreceived)
Dr
(discount)
ToDebenturesA/c
(facevalue)
D. Whenissuedatparandredeemableatpremium.
BankA/c
Dr
(amountreceived)
LossonissueofdebenturesA/c
Dr
(premiumonredemption)
TodebenturesA/c
(facevalue)
(premiumonredemption)
E. Whenissuedatdiscountandredeemableatpremium.
BankA/c
Dr
(amountreceived)
Dr
(issuediscount+redemption
premium)
TodebenturesA/c
(facevalue)
(redemptionpremium)
F. Whenissuedatpremiumandredeemableatpremium.
BankA/c
Dr
(amountreceived)
Dr
(redemptionpremium)
TodebenturesA/c
(facevalue)
(issuepremium)
(redemptionpremium)
Illustration16
JournalizethefollowingtransactionsatthetimeofissueofdebentureofRs.100.
a. AdebentureissuedatRs.95,repayableatRs.100.
b. AdebentureissuedatRs.95,repayableatRs.105.
c. AdebentureissuedatRs.100,repayableatRs.105.
d. AdebentureissuedatRs.105,repayableatRs.100.
e. AdebentureissuedatRs.102,repayableatRs.105.
25
Solution:
a.
b.
c.
d.
e.
BankA/c
Dr
Dr
ToDebenturesA/c
(issueofdebentureatRs.95,repayableat
Rs.100)
BankA/c
Dr
Dr
TodebenturesA/c
(issueofdebentureatRs.95,repayableat
Rs.105)
BankA/c
Dr
Dr
TodebenturesA/c
(issueofdebentureatRs.100,repayable
atRs.105)
BankA/c
Dr
ToDebenturesA/c
atRs.100)
BankA/c
Dr
Dr
TodebenturesA/c
atRs.105)
95
5
95
10
100
5
105
102
3
100
100
5
100
5
100
5
100
2
3
DiscountorLossonissueofdebentures
Discountorlossonissueofdebenturesandpremiumonredemptionarecapitallosses.Theyare
showninthebalancesheetundertheheadMiscellaneousExpenditure.Beingthelosses,they
aretobewrittenoffagainstcapitalreserveorsecuritypremiumA/c.Initsabsenceitiswritten
offtoP&LA/cduringthelifeofdebentures.Theentryis
Capitalreserve/SecuritypremiumA/c/P&LA/c Dr
ToDiscount/LossonissueofdebenturesA/c.
REDEMPTIONOFDEBENTURES
Redemptionofdebenturesreferstothedischargeofliabilityonaccountofdebentures.Itsimply
meansrepaymentofdebentures.AsperCompaniesAct,thedebenturesshouldberedeemedin
accordancewiththetermsandconditionsofissue.
26
Thefollowingentriesarepassedforredemptionofdebentures.
a. Whendebenturesareredeemedatpar
i. DebenturesA/c
Dr

TodebentureholdersA/c
ii. DebentureholdersA/c
Dr
ToBankA/c
b. Whendebenturesareredeemedatpremium
i. DebenturesA/c
Dr
PremiumonredemptionA/c
Dr

TodebentureholdersA/c
ii. Securitypremium/Generalreserve/P&LA/c
Dr
ToPremiumonredemptionA/c
iii. DebentureholdersA/c
Dr
ToBankA/c
Sourcesofredemptionofdebentures
Debenturescanbedeemedoutofthefollowingsources
1.
Redemptionoutoffreshissue.
A company may issue new shares or debentures or both for redeeming the
existingdebentures.
Illustration17
MoonLtd10%,5000debenturesofRs.100each,redeemableat5%premium.Thecompany
issued40000equitysharesofRs.10eachat10%premiumand1000,9%debenturesofRs.100
eachatparforthepurposeofredemption.Passjournalentries.
Solution
10%DebenturesA/c
Dr
Dr
ToDebentureholdersA/c
(10%debenturesdueforredemption)
BankA/c
Dr
ToEquitysharecapitalA/c
(issueof40000equitysharesat10%premium
forredemption)
BankA/c
Dr
To9%DebenturesA/c
(issueof1000debenturesofRs.100each)
SecuritypremiumA/c
Dr
ToPremiumonredemptionA/c
(provisionforredemptionpremium)
DebentureholdersA/c
Dr
ToBankA/c
(paymenttodebentureholders)
500000
25000
440000
100000
25000
525000
525000
400000
40000
100000
25000
525000
27
2. RedemptionoutofCapital
Ifdebenturesareredeemedoutofcapital,noamountofdivisibleprofitiskeptasidefor
Redeemingdebentures.RedemptionoutofCapitalreducestheliquidresourcesavailableto
thecompany.AspertheguidelinesissuedbySEBI,acompanyhastocreateDebenture
RedemptionReserve(DRR)equivalentto50%otheamountofdebentureissuebefore
redemptionofdebenturescommences.ButthecreationofDRRisnotrequiredinthe
followingcases
a. Debentureswithmaturityof18monthsorless
b. Fullyconvertibledebentures.
3. Redemptionoutofprofit
WhensufficientprofitsaretransferredfromP&LAppropriationA/ctotheDebenture
RedemptionReserveA/catthetimeofredemptionofdebentures,suchredemptionissaid
to be out of profits. It reduces the profits available for dividend. The following entry is
passedfortransferofprofit
P&LAppropriationA/c
Dr
ToDebentureRedemptionReserveA/c
AsperguidelinesofSEBI,creationofDRR(50%ofamountofdebenturesissued)is
compulsory for debentures with maturity period of more than 18 months. On the
completion of redemption of all debentures, the DRR A/c is close by transferring it to
generalreserve.Theentryisasfollows
DebentureRedemptionReserveA/c
Dr
ToGeneralReserveA/c
Illustration18
AbinLtdissued12000debenturesofRs.100eachon1October2010inthetermsofredemption
that1/3ofdebenturesareredeemableeverysixmonths.Journalizethetransaction.
Solution:
Dr
2010 BankA/c
Oct1 To8%DebenturesA/c
(issueof12000,8%debentures)
2011 P&LAppropriationA/c
Dr
Mar ToDebentureRedemptionReserveA/c
31
(Transferofamountfordebenture
redemption)
8%DebenturesA/c
Dr
(amountduetodebentureholders)
DebentureholdersA/c
Dr
ToBankA/c
8%DebenturesA/c
Dr
2011 ToDebentureholdersA/c
Sep
1200000
400000
400000
400000
400000
1200000
400000
400000
400000
28
30
2012
Mar
31
DebentureholdersA/c
Dr
ToBankA/c
P&LAppropriationA/c
Dr
ToDebentureRedemptionReserveA/c
(Transferofamountfordebenture
redemption)
8%DebenturesA/c
Dr
DebentureholdersA/c
Dr
ToBankA/c
DebentureRedemptionReserveA/c Dr
ToGeneralReserveA/c
(transferofDRRtoGRafterredemption)
400000
800000
400000
400000
1200000
400000
400000
800000
400000
400000
1200000
Note:AmountequaltothevalueofdebenturesredeemedistransferredfromP&LAppropriationA/ctoDRRA/c.
4. RedemptionbySinkingFund
Underthismethodofredemption,everyyearapartoftheprofit(fixedamount)issetaside
andsinkingfund(DebentureRedemptionFund)iscreated.SinkingfundIinvestedinoutside
securities. The interest received o such investments along with the amount set aside from
profitwillagainbeinvestedasusual.Itcontinuestillthedateofredemptionofdebenture.
Theinvestmentwillbesoldandthecashthusrealizedwillbusedtorepaythedebentures.
Under this method, sinking fund A/c (Debenture Redemption Fund A/c) and sinking fund
investment A/c (Debenture Redemption Fund Investment A/c) will be opened. After the
redemption, balance of sinking fund A/c is transferred to general reserve. The following
entriesarerequiredunderthismethod.
Attheendoffirstyear:
i.
Fortheamountsetasideeveryyear
P&LAppropriationA/c
Dr
ToSinkingFundA/c
ii.
Forinvestmentofsinkingfund
SinkingFundInvestmentA/c
Dr
ToBankA/c
Attheendofsecondandsubsequentyears:
i.
Forinterestreceivedoninvestment
BankA/c
Dr
ToInterestonSinkingFundInvestmentA/c
ii.
Fortransferringinteresttosinkingfund
InterestonSinkingFundInvestmentA/c
Dr
ToSinkingFundA/c
iii.
Forannualamountsetaside
29
P&LAppropriationA/c
Dr
ToSinkingFundA/c
iv.
Forinvestmentofannualinstallmentandinterest
Dr
ToBankA/c
Attheendoflastyear:
Alltheentriesexceptentry(iv)insecondandsubsequentyearshouldbepassed.
i.
Foramountrealizedonsaleofinvestment
BankA/c
Dr
ToSinkingFundInvestmentA/c
ii.
Forprofitonsaleofinvestment
Dr
ToSinkingFundA/c
(Note:iflosstheaboveentryisreversed)
iii.
Foramountduetodebentureholders
DebenturesA/c
Dr
Dr(ifredemptionatpremium)
iv.
Foramountpaidtodebentureholders
DebentureholdersA/c
Dr
ToBankA/c
v.
FortransferofbalanceinsinkingfundA/c
SinkingFundA/c
Dr
ToGeneralReserveA/c
Illustration19
On1January2007,BaluLtdissued1000,6%debenturesofRs.100eachrepayableatthe
end of 4 year at a premium of 10%. It is decided to create a sinking fund for the purpose; the
investment is expected to yield 5% net. Sinking fund table shows that Re.0.232012 invested
annuallyamountstoRe.1at5%in4years.Investmentsweremadeinmultiplesof100only.On31
December2010,thebalanceatthebankwasRs.40000andtheinvestmentrealizedRs.82000.the
debentureswerepaidoff.Givejournalentriesand showledgeraccountsexceptfordebenture
interest.
Solution:
Amountsannuallysetaside=(100000+10%premium)x0.232012=Rs.25521
Dr
2007 BankA/c
Jan1 LossonissueofdebenturesA/cDr
To6%DebenturesA/c
Topremiumonredemptionof
debenturesA/c
(issueof1000,6%debenturesofRs.100each
redeemableat10%premium)
Dec P&LAppropriationA/c
Dr
31
ToSinkingFundA/c
100000
10000
25521
100000
10000
25521
30
2008
Dec
31
2009
Dec
31
2010
Dec
31
(Transferofprofittosinkingfund)
Dr
ToBankA/c
(investmentmadetonearestmultipleof100)
BankA/c
Dr
(interestreceived@5%oninvestment)
InterestonSinkingFundInvestmentA/cDr
ToSinkingFundA/c
(transferofinteresttosinkingfund)
P&LAppropriationA/c
Dr
ToSinkingFundA/c
SinkingFundInvestmentA/c Dr
ToBankA/c
(investmentwithinterest25521+1275)
BankA/c
Dr
ToInterestonSinkingFundInvestment
A/c
InterestonSinkingFundInvestmentA/cDr
ToSinkingFundA/c
P&LAppropriationA/c
Dr
ToSinkingFundA/c
Dr
ToBankA/c
(investmentwithinterest25521+2615)
BankA/c
Dr
InterestonSinkingFundInvestmentA/c Dr
ToSinkingFundA/c
P&LAppropriationA/c
Dr
ToSinkingFundA/c
BankA/c
Dr
ToSinkingFundInvestmentA/c
(saleofinvestment)
25500
1275
1275
25521
26800
2615
2615
25521
28100
4020
4020
25521
82000
1600
25500
1275
1275
25521
26800
2615
2615
25521
28100
4020
4020
25521
82000
31
Dr
ToSinkingFundA/c
(transferofprofitonsaleofinvestment)
6%DebenturesA/c
Dr
PremiumonredemptionofdebenturesA/cDr
DebentureholdersA/c
Dr
ToBankA/c
(amountpaidtodebentureholders)
SinkingFundA/cDr
TolossonissueofdebenturesA/c
(redemptionprovidedoutofsinkingfund)
SinkingFundA/c
Dr
ToGeneralReserveA/c
(transferofbalanceinsinkingfundA/ctoGR)
6%DebenturesA/c
2007
2007
Dec31
Jan1
100000 2008
ToBalancec/d
2008
100000 Jan1
Dec31 ToBalancec/d
2009
2009
Dec31
Jan1
ToBalancec/d
100000 2010
2010
Dec31 ToDebentureholders
100000 Jan1
A/c
100000
10000
110000
10000
101594
1600
110000
110000
10000
101594
ByBank
ByBalanceb/d
ByBalanceb/d
ByBalanceb/d
100000
100000
100000
100000
2007
Dec31
2008
Dec31
2009
Dec31
2010
Dec31
2010
Dec
31
PremiumonRedemptionofdebenturesA/c
2007
Bylossonissueof
Jan1
10000 2008
ToBalancec/d
debenturesA/c
ToBalancec/d
ByBalanceb/d
10000 Jan1
2009
Jan1
ToBalancec/d
ByBalanceb/d
10000 2010
ToDebentureholders
ByBalanceb/d
10000 Jan1
A/c
DebentureholdersA/c
2010 By6%Debentures
ToBankA/c
110000 Dec31 A/c
Bypremiumon
redemptionof
debenturesA/c
110000
10000
10000
10000
10000
100000
10000
110000
32
2007
Dec
31
2008
Dec
31
ToBalancec/d
ToBalancec/d
ToBalancec/d
Tolossonissueof
debentures
2009
Dec31 Togeneralreserve
(balancetransferred)
2007
Dec31
2008
Jan1
Dec31
2009
Jan1
Dec31
2010
Jan1
Dec31
SinkingFundA/c
25521 2007
52317
52317
80453
80453
10000
Jan1
2008
Jan1
Dec31
2009
Jan1
101594 Dec31
111594
25500 2007
Dec31
25500
2008
26800 Dec31
52300
52300
28100 2009
ToBank
ToBalanceb/d
ToBank
ToBalanceb/d
ToBank
ToBalanceb/d
ToSinkingFundA/c
(profit)
Dec31
80400
80400
1600 2010
82000 Dec31
ByP&LAppnA/c
ByBalanceb/d
ByinterestonS.F.I
ByP&LAppnA/c
ByBalanceb/d
ByinterestonS.F.I
ByP&LAppnA/c
ByBalanceb/d
ByinterestonS.F.I
ByP&LAppnA/c
ByS.F.I(profiton
sale)
ByBalancec/d
ByBalancec/d
ByBalancec/d
ByBank
25521
25521
1275
25521
52317
52317
2615
25521
80453
80453
4020
25521
1600
111594
25500
52300
52300
80400
80400
82000
82000
BankA/c
2010
Dec31
ToBalanceb/d
ToS.F.IA/c
2010
40000 Dec31
82000
122000
ByDebenture
holdersA/c
ByBalanceb/d
110000
12000
122000
5. RedemptionbyInsurancePolicy
This is an alternative to sinking fund method. Under this method, an insurance policy is
purchased by paying annual premium. Such policy will mature on thedate of redemption.
Thismethodprovidesfundsforredemptionandcoverstheriskinvolvedinthetransactions.
Underthismethodthefollowingentriesarepassed.
33
Duringalltheyearstillthepolicymaturity:
i.
Foramountofpremiumpaidatthebeginningoftheyear
DebentureRedemptionPolicyA/c
Dr
ToBankA/c
ii.
Forsettingasidetheprofitattheendoftheyear
P&LAppropriationA/c
Dr
ToDebentureRedemptionFundA/c
Duringthelastyearinadditiontotheabovetwoentries
i.
Forrealizingtheinsurancepolicy
BankA/c
Dr
ToDebentureRedemptionPolicyA/c
ii.
Forthetransferofprofitonrealization
DebentureRedemptionPolicyA/c
Dr
ToDebentureRedemptionFundA/c
(Note:iflosstheentryisreversed)
iii.
Foramountduetodebentureholders
DebenturesA/c
Dr
Dr(ifredemptionatpremium)
iv.
Foramountpaidtodebentureholders
DebentureholdersA/c
Dr
ToBankA/c
v.
FortransferofbalanceinDebentureRedemptionFundA/c
DebentureRedemptionFundA/c
Dr
ToGeneralReserveA/c
Illustration20
Athul Ltd issued 1000, 6% debentures of Rs.100 each at par redeemable after 5 years at
premium of 10%. An insurance policy was taken at the time of issue of debentures on 1 April
2006 for the amount in order to provide for the necessary funds required for the redemption.
The annual premium paid at the beginning of every year Rs.18280. show the accounts for
redemption.
Solution:
6%DebenturesA/c
2007
Mar31
2011
Mar31
ToBalancec/d
2006
100000 Apr1
2010
100000 Apr1
ByBank(firstyear)
ByBalanceb/d
PremiumonredemptionofdebenturesA/c
2007
2006
Bylossonissueof
Mar31 ToBalancec/d
10000 Apr1
debenturesA/c
2011
2010
ByBalanceb/d
10000
Mar31
Apr1
100000
100000
10000
10000
34
2007
Mar31
2008
Mar31
2009
Mar31
2010
Dec31
2011
Mar31
2006
Apr1
2007
Apr1
2008
Apr1
2009
Apr1
2010
Apr1
2011
Mar31
DebentureRedemptionFundA/c
18280 2007
ToBalancec/d
ByP&LAppnA/c
Mar31
ByBalanceb/d
Apr1
2008
ToBalancec/d
ByP&LAppnA/c
36560 Mar31
36560
2008
ByBalanceb/d
Apr1
2009
ToBalancec/d
ByP&LAppnA/c
54840 Mar31
54840
2009
Apr1
ByBalanceb/d
73120 2010
ToBalancec/d
ByP&LAppnA/c
Mar31
73120
2010
ByBalanceb/d
Apr1
Tolossonissueof
ByP&LAppnA/c
debenturesA/c
ByDebenture
10000 2011
Mar31
ToGeneralReserve
RedemptionPolicy
100000
(profitonrealizationB.F)
110000
DebentureRedemptionPolicyA/c(Investment)
ToBank
18280 2007
ByBalancec/d
Mar31
ToBalanceb/d
18280
2008
ToBank
ByBalancec/d
18280 Mar31
36560
ToBalanceb/d
36560 2009
ToBank
ByBalancec/d
18280 Mar31
54840 2010
ToBalanceb/d
ByBalancec/d
54840 Mar31
ToBank
18280
73120
2011
ToBalanceb/d
ByBank
73120 Mar31
(realizationofpolicy)
ToBank
18280
ToDeb.Red.Fund(profitB.F)
18600
110000
DebentureholdersA/c
2011
Mar31
ToBankA/c
2011
110000 Mar31
18280
18280
18280
36560
36560
18280
54840
54840
18280
73120
73120
18280
18600
110000
18280
36560
36560
54840
54840
73120
73120
110000
110000
By6%Debentures
A/c
Bypremiumon
redemptionof
debenturesA/c
110000
100000
10000
110000
6.RedemptionbyConversion
Sometimesthedebentureholdersofacompanyaregiventheoptiontoconverttheir
35
debentures into the shares or new debentures within a stipulated period. The new shares or
debenturescanbeissuedeitheratparoratpremiumoratdiscount.Thefollowingentrywillbe
madeforthepurpose.
OldDebenturesA/c
Dr
Discountonissueofshares/debenturesA/cDr
(ifissueatdiscount)
ToNewShareCapital/DebentureA/c
ToPremiumonissueofshares/debenturesA/c(ifissueatpremium)
Illustration22
On1April2009,FastLtdissued800,12%debenturesofRs.1000eachatRs.950each.Debenture
holders had an option to convert their holdings into 6% preference shares of Rs.100 each at a
premium of Rs.25 per share. On 31 March 2010, one years interest had accrued on these
debentureswhichwerenotpaid.Aholderof50debenturesnotifiedhisintentiontoconverthis
holdinginto13%preferenceshares.JournalizethetransactionsandpreparetheBalancesheetas
on31March2010.
Solution:
alanc
e
Sheet
ason
31
Marc
h
2011
2009
Apr1
2010
Mar
B31
BankA/c
Dr
Dr
To12%DebenturesA/c
(issueof800,12%debenturesofRs.1000each
atRs.950)
InterestondebenturesA/c
Dr
TosundrydebentureholdersA/c
(interestdueondebentures)
12%DebenturesA/c
Dr
To13%PreferenceShareCapitalA/c
(conversionof50debenturesto400,13%
preferencesharesofRs.100eachata
premiumofRs.25)
SundrydebentureholdersA/c
Dr
ToBankA/c
(intereston50,12%debenturespaidon
conversion)
P&LA/c
Dr
TointerestondebenturesA/c
(interestondebenturestransferredtoP&L
A/c)
Liabilities
Sharecapital:
40013%
Rs.
760000
40000
96000
50000
6000
96000
Assets
Bank(7600006000)
Discountonissueof
800000
96000
40000
10000
6000
96000
Rs.
754000
40000
36
preferenceshares
ofRs.100each
75012%Debentures
of
Rs.1000each
Sundrydebenture
holders
Securitypremium
40000
debentures
P&LA/c
750000
90000
10000
890000
96000
890000
OwnDebentures
Thedirectorscanpurchasedebentureswhenevertheyfindthemarketpricefavorabletothe
company.Suchpurchaseddebenturescanbeeithercancelledbythecompanyormaybekept
asaninvestmentcalledowndebenturesandmaybeutilizedforreissuewhenneeded
afterwards.
Purchaseofowndebenturesaretobetreatedinaccountinthesamewayasanordinary
investment.Theentrywillbe:
OwnDebenturesA/c
Dr
(withpurchaseprice)
ToBankA/c
TheowndebenturesA/cwillappearontheassetssideofB/S(underinvestments)untilitis
cancelledorreissued
Asandwhenthecompanywantstocancelinvestmentinowndebenturesthefollowingentry
willbepassed
DebenturesA/c
Dr
(withfacevalue)
LossonredemptionofdebenturesA/c
Dr
(forloss)
ToowndebenturesA/c
(withpurchaseprice)
ToProfitonredemptionofdebenturesA/c(forprofit)
Fortransferofprofitonredemption:
ProfitonredemptionofdebenturesA/cDr
ToCapitalReserve
Illustration23
:AcompanypurchasedRs.30000,6%DebenturesofRs.100eachatRs.95eachforinvestment.
Aftersixmonthsthedebentureswerecancelled.Showjournalentries.
Solution:
28500
OwnDebenturesA/c
Dr
28500
ToBankA/c
(300owndebenturespurchasedfor
investmentatRs.95)
30000
6%DebenturesA/c
Dr
28500
ToowndebenturesA/c
1500
ToProfitonredemptionof
debenturesA/c
(cancellationofdebenturesheldas
investment)
1500
ProfitonredemptionofdebenturesA/cDr
ToCapitalReserve
1500
(transferofprofitonredemptiontoC.R)
Module2
FINALACCOUNTSOFCOMPANIES
37
Itisnotobligatorytosoleproprietorsandpartnershipfirmstopreparethefinalaccounts
as per thestatute. But, according to Section 210 of Indian Companies Act 1956 it is a statutory
obligationtoajointstockcompanytoprepareitsfinalaccounts.Thefinalaccountsofacompany
consistof(a)BalanceSheetand(b)ProfitandLossAccount.
BalanceSheet
TheBalancesheetofcompaniesmustbepreparedaccordingtotheprescribedformgiven
in Part I of Schedule VI of the Companies Act. As per the Companies Act, the Balance sheet of
companiescanbepreparedintwoforms(i)HorizontalFormand(ii)VerticalForm.
HorizontalForm
SCHEDULEVI,PARTI
FORMOFBALANCESHEET
HORIZONTALFORM
BalanceSheetof.(hereenterthenameofthecompany)
Ason..(hereenterthedateatwhichthebalancesheetismadeout)
Figures Figures
Figures
Figures
forthe forthe
forthe
forthe
current
previous Liabilities
current previous Assets
year
(5)
year
year
year
Rs.
Rs.
Rs.
Rs.
(6)
(2)
(1)
(4)
(3)
FixedAssets:
ShareCapital:
Distinguishingasfaras
AuthorizedSharesof
possiblebetween
Rs.Each
expenditureupon:
Issued:(distinguishing
(a) Goodwill
betweenthevarious
(b) Land
classesofcapitaland
(c) Buildings
statingtheparticulars
(d) Leaseholds
specifiedbelow,in
(e) Railwaysidings
respectofeach
(f) Plantand
class)SharesofRs
machinery
each.
(g) Furnitureand
Subscribed:
fittings
(distinguishingbetween
(h) Developmentof
thevariousclassesof
property
capitalandstatingthe
(i) Patents,
particularsspecified
trademarksand
below,inrespectof
designs
eachclass)Sharesof
(j) Livestock,and
Rseach..Rscalled
up.
(k) Vehicles,etc.
(oftheabove
(Undereachheadthe
38
shares.sharesare
allottedasfullypaidup
pursuanttoacontract
withoutpaymentbeing
receivedincash)
(oftheabove
shares.sharesare
allottedasfullypaidup
bywayofbonusshares)
(Specifythesource
fromwhichbonus
sharesareissued,e.g.
capitalizationofprofits
orreservesorfrom
Sharespremium
Account.
Less:Callsunpaid:
(i)bydirectors
(ii)Byothers.
Add:Forfeitedshares:
(amountoriginallypaid
up)
(anycapitalprofiton
issueofforfeitedshares
shouldbetransferred
tocapitalreserve)
Notes:
1. Termsof
redemptionor
conversion(ifany))
redeemable
preferencecapital
istobestated
togetherwith
earliestdateof
redemptionor
conversion.
2. Particularsofany
optiononunissued
sharecapitalareto
bespecified.
3. [particularstothe
differentclassesof
originalcostandthe
additionstheretoand
deductionstherefrom
duringtheyear,andthe
totaldepreciations
writtenofforprovided
uptotheendoftheyear
istobestated.
Depreciationwrittenoff
orprovidedshallbe
allottedunderthe
differentassetheads
anddeductedinarriving
tthevalueoffixedassts.
Ineverycasewherethe
originalcostcannotbe
ascertained,without
unreasonableexpense
ordelay,thevaluation
shownbythebooksisto
begiven.Forthe
purposeofthis
paragraph,stock
valuationshallbethe
netamountatwhichan
assetstoodinthe
companysbooksatthe
commencementofthis
Actafterdeductionof
theamountspreviously
providedorwrittenoff
fordepreciationor
diminutioninvalues,
andwhereanysuch
assetissold,theamount
ofsaleproceedsshallbe
shownasdeduction
Wheresumhavebeen
writtenoffona
reductionofcapita;ora
revaluationofassets,
everybalance
sheet,(afterthefirst
39
preferenceshares
aretobegiven
Theseparticularsareto
begivenalongwith
Sharecapital.
Inthecaseofsubsidiary
companies,thenumber
ofshareheldbythe
holdingcompanyas
wellasbytheultimate
holdingcompanyand
itssubsidiariesshallbe
separatelystatedin
respectofSubscribed
sharecapital.The
auditorisnotrequired
tocertifythe
correctness
shareholdingsas
certifiedbythe
management)
ReservesandSurplus:
1. CapitalReserves
2. Capitalredemption
Reserve
3. SecuritiesPremium
Account(showing
detailsofits
utilizationinthe
mannerprovided
inSection78inthe
yearofutilization).
4. Otherreserves
specifyingthe
natureofeach
Reserveandthe
amountinrespect
thereof.
Less:Debitbalancein
ProfitandLossaccount
(ifany).
(Thedebitbalancein
theProfitandloss
balancesheet)
subsequenttothe
reductionorrevaluation
shallshowthereduced
figureswiththedateof
thereductioninthe
placesoftheoriginal
cost.
Eachbalancesheetfor
thefirstfiveyears
subsequenttothedate
ofreductionshallsow
alsothemountofthe
reductionmade.
Similarly,wheresums
havebeenaddedby
writinguptheassets,
everybalancesheet
subsequenttosuch
writingupshallshowthe
increasedfigureswith
thedateofincreasein
theplaceoftheoriginal
cost.Eachbalancesheet
forthefirstfiveyears
subsequenttothedate
ofwritingupshallalso
showtheamountof
increasemade)
Investments:
Showingnatureof
investmentsandmode
ofvaluation,for
example,costormarket
value,anddistinguishing
between:
1. Investmentsin
Governmentor
trustsecurities
2. Investmentsin
shares,
debenturesor
bonds.
40
Accountshallbeshown
asadeductionfromthe
uncommittedreserves,
ifany).
5. Surplus,i.e.,
balanceinProfit
andLossAccount
afterprovidingfor
proposed
allocationsnamely;
dividend,bonusor
reserves.
6. Proposedadditions
toreserves.
7. Sinkingfunds.
(Additionsand
deductionssincelast
balancesheettobe
shownundereachof
thespecifiedheads.The
wordfundinrelation
toanyReserveshould
beusedonlywhere
suchreserveis
specificallyrepresented
byearmarked
investments).
SecuredLoans:
1. Debentures
2. Loansand
advancesfrom
banks
3. Loansand
advancesfrom
subsidiaries
4. Otherloansand
advances
(Loansfromdirectors
and/ormanagershould
beshownseparately).
Interestaccruedand
dueonSecuredloans
shouldbeincluded
(Showingseparately
sharesfullypaidupand
partlypaidupandalso
distinguishingdifferent
classesofsharesand
showingalsoinsimilar
detailsofinvestmentsin
shares,debenturesor
bondsofsubsidiary
companies).
3. Immovable
properties
4. Investmentsinthe
capitalof
partnershipfirm.
5. Balanceof
unutilizedmoney
raisedbyissues.
(Aggregateamountof
companysquoted
investmentsandalsothe
marketvaluethereof
shallbeshown).
(Aggregateamountof
companysunquoted
investmentsshallalsobe
shown).
CurrentAssets,Loans
andAdvances:
(A) CurrentAssets
1. Interestaccruedon
investments
2. Storesandspare
parts
3. Loosetools
4. Stockintrade
5. Workinprogress.
[Inrespectof(2)and(4),
modeofvaluationof
stockshallbestatedand
theamountinrespectof
rawmaterialsshallalso
bestatedseparately
41
undertheappropriate
subheadsunderthe
headSecuredLoans
Thenatureofsecurity
tobespecifiedineach
case.
Whereloanshavebeen
guaranteedby
managersand/orby
directorsamention
thereofshallalsobe
madeandalsothe
aggregateamountof
suchloansundereach
head.
Incaseofdebentures,
termsofredemptionor
conversion(ifany)are
tobestatedtogether
withearliestdateof
redemptionor
conversion.
UnsecuredLoans:
1. Fixeddeposits
2. Loansand
advancesfrom
subsidiaries
3. Shorttermloans
andadvances:
(a) Frombanks
(b) Fromothers.
(loansfromdirectors
and/ormanagershould
beshownseparately.
).Interestaccruedand
dueonUnsecuredloans
shouldbeincluded
undertheappropriate
subheadsunderthe
headUnsecured
Loans
Whereloanshavebeen
guaranteedby
wherepracticable.Mode
ofvaluationofworkin
progressshallbestated].
6. Sundrydebtors
(a) Debtsoutstanding
foraperiod
exceedingsix
months
(b) Otherdebts
Less:Provision
(theamountstobe
shownundersundry
debtorsshallincludethe
amountsdueinrespect
ofgoodssoldorservices
renderedorinrespectof
othercontractual
obligationsbutshallnot
includetheamounts
whichareinthenature
ofloansoradvances)
Inregardtosundry
debtorsparticularstobe
givenseparatelyof:
(a) Debtsconsidered
goodandinrespect
ofwhichthe
companyisfully
secured
(b) Debtsconsidered
goodforwhichthe
companyholdsno
securityotherthan
thedebtorspersonal
securityand
(c) Debtsconsidered
doubtfulorbad.
Debtsduebydirectors
orotherofficersofthe
companyoranyofthem
eitherseverallyorjointly
withanyotherpersonor
debtsduebyfirmsor
42
managersand/orby
directorsamention
thereofshallalsobe
madetogetherwiththe
aggregateamountof
suchloansundersuch
head.Thisdoesnot
applytofixeddeposits)
CurrentLiabilitiesand
Provisions:
A. CurrentLiabilities
1. Acceptances
2. Sundrycreditors
(i) Total
outstanding
duesof
smallscale
industrial
undertakings
(ii) Totaloutstanding
duesofcreditors
otherthansmall
scaleindustrial
undertakings
3. Subsidiary
companies
4. Advancepayments
andunexpired
discountsforthe
portionforwhich
valuehasstilltobe
given,i.e.,inthe
caseofthe
following
companies:
Newspaper,Fire
insurance,Theatres,
Clubs,Banking,Steam
shipcompaniesetc.
5. Unclaimed
dividends.
6. Otherliabilities(if
any)
7. Interestaccrued
privatecompanies
respectivelyinwhichany
directorisapartnerora
directororamemberto
beseparatelystated.
Debtsduefromother
companiesunderthe
samemanagement
withinthemeaningof
subsection(IB)of
Section370tobe
disclosedwiththe
namesofthe
companies.
Themaximumamount
duebydirectorsorother
officersofthecompany
atanytimeduringthe
yeartobeshownbyway
ofanote.
Theprovisiontobe
shownunderthishead
shouldnotexceedthe
amountofdebtstated
tobeconsidered
doubtfulorbadandany
surplusofsuch
provision,ifalready
createdshouldbe
shownateveryclosing
underReservesand
Surplus(inliabilities
side)underaseparate
subheadReservefor
DoubtfulorBadDebts.
7A.Cashbalanceon
hand.
7B.Bankbalance:
(a) Withscheduled
banks
(b) Withothers
(inregardtobank
balancesparticularsto
43
butnotdueon
loans.
B. Provisions
8. Provisionfor
taxation
9. Proposed
dividends
10. Forcontingencies
11. Forprovidentfund
scheme
12. Forinsurance,
pensionandsimilar
staffbenefit
schemes
13. Otherprovisions.
Afootnotetothe
balancesheetanybe
addedtoshow
separately:
1. Claimagainstthe
companynot
acknowledgedas
debts
2. Uncalledliabilityon
sharespartlypaid.
3. Arrearsoffixed
cumulative
dividends.
(theperiodforwhich
thedividendsarein
arrearsorifthereis
morethanoneclassof
shares,thedividends
oneachsuchclassthat
areinarrearsshallbe
sated.Theamountshall
bestatedbefore
deductionofincome
tax,exceptthatinthe
caseoftaxfree
dividendstheamount
shallbeshownfreeof
incometaxandthefact
begivenseparatelyof:
(a) Thebalancelying
withscheduled
banksoncurrent
accounts,call
accountsand
depositaccounts
(b) Thenamesofthe
bankersotherthan
scheduledbanksand
thebalanceslying
witheachsuch
bankerbankson
currentaccounts,
callaccountsand
depositaccounts
andthemaximum
amountoutstanding
atanytimeduring
theyearwitheach
suchbankerand
(c) Thenatureof
interest,ifany,ofany
directororhisrelative
ineachofthe
bankers(otherthan
scheduledbanks
referredtoin(b)
above)
(B) Loansand
Advances:
8.(a)advancesand
loanstosubsidiaries
(b)Advancesand
loanstopartnership
firminwhichthe
companyoranyofits
subsidiariesisa
partner.
9.Billsofexchange
10.Advances
recoverableincash
orionkindorfor
44
thatitisshownshallbe
stated)
4. Estimatedamountof
contractsremaining
tobeexecutedon
capitalaccountand
notprovidefor.
5. Othermoneysfor
whichthecompany
iscontingentlyliable.
Theamountofany
guaranteesgivenbythe
companyonbehalfof
directorsorother
officersofthecompany
shallbestatedand
whereepracticable,
thegeneralnatureand
amountofeachsuch
contingentliability,if
material,shallalsobe
specified)
valuetobereceived,
e.g.,Rates,taxes,
insuranceetc.
11.Balanceswith
customs,porttrust
etc.(wherepayable
ondemand)
[Theinstructions
regardingsundry
debtorsapplyto
loansand
advancesalso.The
amountsduefrom
othercompanies
underthesame
managementwithin
themeaningofsub
section(IB)ofsection
370shouldalsobe
givenwiththe
namesofcompanies;
themaximum
amountduefrom
everyonethoseat
anytimeduringthe
yearmustbshown]
Miscellaneous
Expenditure
(Totheextentnot
writtenofforadjusted).
1. Preliminary
expenses
2. Expensesincluding
commissionor
brokerageor
underwritingor
subscriptionof
sharesor
debentures.
3. Discountallowedon
theissueofshares
ordebentures
4. Interestpaidoutof
45
capitalduring
construction(also
statingtherateof
interest).
5. Development
expenditurenot
adjusted.
6. Other
sums(specifying
nature)
ProfitandLossAccount
(Showherethedebit
balanceofprofitand
lossaccountcarried
forwardafterdeduction
oftheuncommitted
reserves,ifany).
VerticalForm
VerticalformofbalancesheetinsertsasPartBofPartIofScheduleVItotheCompanies
Act,1956byGSRNo.220(E)dated1231979isasfollows:
VERTICALFORM
NameoftheCompany..
BalanceSheetat
Schedule Figuresat
Figuresatthe
No.
theendof
endof
current
previous
financialyear financialyear
1
2
3
4
I. SourcesofFunds
(1) Shareholdersfunds:
(a) Capital
(b) ReservesandSurplus
(2) Loansfunds:
(a) Securedloans
(b) Unsecuredloans
Total
II. ApplicationofFunds
(1) Fixedassets:
(a) Grossblock
(b) Less:depreciation
(c) Netblock
(d) Capitalworkinprogress
(2) Investments
(3) Currentassets,loansand
advances
(a) Inventories
46
(b) Sundrydebtors
(c) Cashandbankbalances
(d) Othercurrentassets
(e) Loansandadvances
Less:
Currentliabilities&Provisions
(a) Currentliabilities
(b) Provisions
NetCurrentAssets
(4) (a)Miscellaneousexpenditureto
theextentnotwrittenoffor
adjusted
(b)ProfitandLossAccount
Total
InCompaniesAct,thereisnospecifiedformatforpreparationofProfitandLossAccount
ofcompanies.ItisnotrequiredtosplittheProfitandLossAccountintothreesections(Trading
Account,ProfitandLossAccountandProfitandLossAppropriationAccount).OnlytheProfitand
Loss Account is prepared which cover items appearing in Trading Account and Profit and Loss
AppropriationAccount.ButitisdesirabletosplittheProfitandLossAccountintothreesections
sothatGrossprofit,NetprofitandSurpluscarriedtobalancesheetmaybeascertain\ed.Under
thisTradingandProfitandLossAccountitemsarecalledasitemsabovethelineandtheProfit
and Loss Appropriation Account items are called as items below the line. The section of Profit
andLossAppropriationAccountispreparedinthefollowingmanner.
ToTransfertoReserves
ByLastYearsBalanceb/d
ToIncometaxfor
ByNetProfitfortheyearb/d
previousyearnot
ByAmountwithdrawnfrom
providedfor
GeneralReserveoranyOther
ToInterimdividend
Reserves
ToProposeddividend
ByProvisionsuchasincome
taxprovisionnolonger
ToCorporateDividend
required
Tax
ToSurplus(Bal.Fig)
carriedtoBalanceSheet
Thus the account showing the disposal of divisible profits is called Profit and Loss
AppropriationAccount.ThecreditbalanceofProfitandLossAppropriationAccountisshownon
the liability side of the Balance sheet under the head Reserves and Surplus. Debit balance is
shownontheassetssideofthebalancesheetundertheheadMiscellaneousexpenditure.
Illustration1
Fortheyearended31stDecember2011,theprofitofSunderLtd.beforechargingdepreciationon
fixed assets and managerial commission amounted to Rs.300000. De3preciatio for the year
charged Rs.60000 and a commission of 10% of profit(before charging such commission) was
payabletothemanager.
The paid up capital of the company consisted Rs.1000000 divided into 5000, 6%
preference shares of Rs.100 each and 50000 equity shares of Rs.10 each. Interim dividend at
47
Re.0.5persharewaspaidduringtheyear.TherewasacreditbalanceofRs.35000intheProfit
andLossAccountbroughtfromthepreviousyear.Tefollowingproposalswaspassed:
a. Topaytheyearsdividendonthepreferenceshares
b. TopayafinaldividendonequitysharesatRe.0.50persharetopmakeatotaldividendof
Re.1pershareforthatyear.
c. Toprovidefortaxation@50%onthenetprofit
d. TotransferRs.25000toGeneralReserve.
e. Tocarryforwardthebalance.
ShowtheProfitandLossAppropriationAccount.
Solution:
Netprofitbeforechargingdepreciationandmanagerialcommission
300000
LessDepreciation
60000
240000
LessManagerialcommission(10%)
24000
216000
LessProvisionfortaxation(50%)
108000
108000
ProfitandLossAppropriationAccount
ByLastYearsBalanceb/d
35000
ToTransfertoGeneral
25000 ByNetProfitfortheyearb/d
108000
Reserves
ToInterimdividendpaid
25000
onequityshares
(50000x.50)
30000
ToPreferencedividend
(500000x6%)
25000
Tofinaldividendpaidon
equityshares(50000x.50)
ToSurplus(Bal.Fig)
38000
carriedtoBalanceSheet
143000
143000
DifferencebetweenReservesandProvisions
Reserves
Provisions
1. Itisanappropriationofprofit.Hence
1. Itisachargeagainstprofit.
itisdebitedtoProfitandLoss
HenceitisdebitedtoProfitand
AppropriationAccount
LossAccount
2. Itneedsnotbecreatedwhenprofits
areinadequate.
2. Itmustbemadeirrespectiveof
3. Itisshownontheliabilitysideof
whetherprofitorloss.
balancesheetunderthehead
3. Itisusuallyshownbywayof
ReservesandSurplus.
deductionfromtheamountof
4. Itcanbeutilizedfordistributionof
theitemforwhichitiscreated.
dividend.
4. Itcannotbeutilizedfor
distributionofdividend.
Provisionfortaxation
48
Incometax ispayable intheassessmentyear ontheincomeearnedduringtheprevious

year.Acompanywillestimatethetaxpayableforthecurrentaccountingperiodandonthisbasis
itwillmakeprovisionfortaxation.ProvisionfortaxationisdebitedtoProfitandlossAccountand
itwillappearontheliabilitysideofbalancesheetundertheheadProvisions.Whenassessment
completed,theprovisionfortaxwillbeadjusted. Iftheassessedtaxis morethantheprovision
made in the previous year, the excess has to be shown on the debit side of Profit and Loss
Appropriation Account. If the assessed tax is less than the opening provision, such excess
provisionshouldbecreditedtotheProfitandLossAppropriationAccount.
Dividend
Thedivisibleprofit(profitavailabletoshareholders)ofacompanyisdistributedamongthe
shareholdersofthecompanyonthebasisofnumberofsharesheld.Thisiscalleddividend.The
Board of Directors recommends the amount of dividend and the shareholders in their annual
generalmeetingdeclarethedividendrecommendedbytheBoardofDirectors.Dividendisusually
paidonpaidupcapital.
Proposeddividend
It is the dividend recommended by Board of Directors after the close of the books of
account.WhenitIapproverbytheshareholdersintheannualgeneralmeeting,itbecomesfinal
dividend.
Interimdividend
Interim dividend refers to the dividend paid by the company before the preparation of
finalaccounts.Itisdeclaredbetweentwoannualgeneralmeetings.
Finaldividend
Itisthedividendwhichisproposedanddeclaredattheendoftheaccountingyearafter
thecloseofthebooksofaccount.
Unclaimeddividend
Itreferstothedividendnotyetclaimedbytheshareholderswithin30daysofdeclaration
ofdividend.Itisshownasacurrentliabilityinthebalancesheet.
CorporateDividendTax(CDT)
Thecompaniesdistributingdividendarerequiredtopaytaxonsuchdividends.Itiscalled
Corporate Dividend Tax (CDT). CDT is payable on any amount declared, distributed or paid bya
company as dividend. At present, the rate of CDT is 16.995 %( 17%). Corporate Dividend Tax is
shown on the debit side of Profit and Loss Appropriation Account and on the liability side of
BalancesheetundertheheadCurrentliabilitiesandProvisions(Provisions).
TransfertoReserves
Generally,BoardofDirectorshasthediscretionarypowerregardingthetransferofprofit
to the reserve. However, as per Section 205(2A) of the Act, it is compulsory for a company to
transfercertainminimumamounttothereserveataratenotexceeding10%.Amountoftransfer
toreservedependsontherateatwhichdividendistobedeclaredasfollows:
i.
Ifthedividendproposedexceeds10%butnotexceed12.5%ofthepaidupcapital,the
amounttobetransferredtothereserveshallnotbelessthan2.5%ofthecurrentprofits.
49
ii.
iii.
iv.
Ifthedividendproposedexceeds12.5%butnotexceed15%ofthepaidupcapital,the
amounttobetransferredtothereserveshallnotbelessthan5%ofthecurrentprofits.
Ifthedividendproposedexceeds15%butnotexceed20%ofthepaidupcapital,the
amounttobetransferredtothereserveshallnotbelessthan7.5%ofthecurrentprofits.
Ifthedividendproposedexceeds20%ofthepaidupcapital,theamounttobetransferred
tothereserveshallnotbelessthan10%ofthecurrentprofits.
Illustration2
ThefollowingisthetrialbalanceoftheGoodHopeLtd.ason31stDecember2011.
250000
DebtorsandCreditors
647000
PurchasesandSales
4700
Returns
1597900
FixedAssetsatcost
13520
Promotionexpenses
Sharecapital(Rs.100pershare)
Sinkingfund
Reservefund
BaddebtReserve
17750
Cash
21000
Manufacturingexpenses
75000
Wages
Unclaimeddividends
Interestoninvestments
70000
Depreciation
34680
Administrativeexpenses
4%Debentures
6000
Interestondebentures
8000
Salesexpenses
3400
Baddebts
Depreciationfund
Billspayable
350000
Investments
1050
Sundryexpenses
130000
Stockon1stJanuary2011
50000
Goodwillatcost
3280000
Adjustments:
a. ClosingstockamountedtoRs.137000
b. Maintainthereservefordebtors@5%
c. Writeoffpreliminaryexpenses.
d. AddRs.10000tosinkingfund
e. Providefordebentureinterest.
Solution:
GoodHopeLtd.
200000
983500
3500
1250000
250000
47600
10000
1700
11400
300000
202400
9300
10600
3280000
50
Fortheyearended31stDecember2011
130000 BySales 983500
ToOpeningstock
less:Returns4700
ToPurchases647000
643500 ByClosingstock
Less:Returns3500
21000
ToManufacturingexpenses
75000
ToWages
246300
ToGrossProfitc/d
ByGrossprofitb/d
ToPreliminaryexpenses
1115800 ByInterestoninvestment
ToDepreciation
13520
ToAdministrativeexpense
70000
Interestondebentures6000
34680
Add:Outstanding6000
ToSalesexpense
12000
ToBaddebt3400
8000
Add:Newprovision12500
15900
Less:OldProvision10000
ToSundryexpenses
5900
ToNetprofitc/d
1050
112550
ToTransfertosinkingfund
257700
ToSurpluscarriedtoB/S
10000 ByLastyearbalanceb/d
113150 ByProfitfortheyear
123150
GoodHopeLtd.
BalanceSheet
Ason31stDecember2011
FixedAssets
ShareCapital
1250000 Fixedassets
12500sharesofRs.100each
Goodwill
Reserves&Surplus
Investments
Sinkingfund250000
260000 CurrentAssets
Add:Additions10000
47600 SundryDebtors250000
Reservefund
202400 Less:Provision12500
Depreciationfund
113150 Cash
P&LA/c
SecuredLoan
Closingstock
300000 MiscellaneousExpenditure
4%Debentures
Nil
Unsecuredloan
Currentliabilities&Provisions
200000
Sundrycreditors
1700
Unclaimeddividend
9300
BillsPayable
6000
Debentureinterestoutstanding
2390150
978800
137000
1115800
246300
11400
257700
10600
112550
123150
1597900
50000
350000
237500
17750
137000
Nil
2390150
Illustration3
51
FollowingisthetrialbalanceofStandardLtdason31stMarch2011:
Stockon31stMarch2010
75000
Sales
350000
Purchases
245000
Wages
50000
Discount
5000
Furnitureandfittings
17000
Salaries
7500
Rent
4950
Sundryexpenses
7050
ProfitandlossappropriationAccounton31stMarch2010
15030
Dividendpaid
9000
Sharecapital
100000
Debtorsandcreditors
37500
17500
Plantandmachinery
29000
Cashandbank
16200
Reserve
15500
Patentandtrademark
4830
______
_______
503030
503030
______ _______
PrepareProfitandlossaccountfortheyearended31stMarch2011andbalancesheetas
onthatdateaftertakingintoconsiderationthefollowingadjustments:
a. Stockon31stMarch2011wasvaluedatRs.82000
b. Depreciationonfixedassets@10%
c. Makeaprovisionforincometax@50%
d. Providecorporatedividendtax@10%.
Solution:
StandardLtd
Fortheyearended31stMarch2011
350000
BySales
75000
ToOpeningstock
82000
ByClosingstock
245000
ToPurchases
50000
ToWages
62000
ToGrossprofitc/d
432000
432000
52
ToSalaries
ToRent
ToSundryexpenses
ToDepreciationon
plantandmachinery
patentsandtrademark
furnitureandfittings
ToprovisionforIncometax
ToNetProfitc/d
ToDividendpaid
ToCorporatedividendtax
(10%ofdividend9000)
ToBalancec/d(Surplus
carriedtoBalancesheet)
Liabilities
ShareCapital
Reserves&Surplus:
Reserve
ProfitandlossAccount
Current
liabilities
and
provisions:
Creditors
Corporatedividendtax
7500
4950
7050
2900
483
1700
21209
21208
67000
9000
900
ByGrossprofitb/d
ByDiscount
ByBalanceb/d
ByNetProfitforcurrentyear
26338
36238
BalanceSheetofstandardLtd
Ason31stMarch2011
Rs.
Assets
100000 Fixedassets:
Plantandmachinery29000
15500 LessDepreciation2900
26338 Furnitureandfittngs17000
LessDepreciation1700
Patentsandtrademark4830
21209 Currentassets:
900 Stock
Debtors
Cashatbank
181447
62000
5000
67000
15030
21208
36238
Rs.
26100
15300
4347
82000
37500
16200
181447
Illustration4
PreparethefinalaccountsofJanakiLtd.fortheyearended31stMarch2011andtheBalance
sheetasonthatdate.Thebalancesinthebooksafterclosingthetradingaccountaregivenbelow:
53
Equitysharecapital(Authorizedandsubscribedin
sharesofRs.100each)
8%PreferenceShareCapital(Authorizedand
subscribedinsharesofRs.100each)
Plantatcost
Landandbuildingatcost
Depreciationupto31stMarch2010:
Onplant
Onlandandbuilding
Dividendequalizationreserve
Investmentinshares
Stock
Cashatbank
Debtors
ProfitandlossAccounton1stApril2010
Creditors
Incometaxdeductedatsourceondividend
Establishmentexpenses
Rentsandtaxes
Auditfee(includingRs.1000paidforotherservices)
ManagingDirectorsminimumremuneration
Directorsfees
Sundryexpenses
Dividend(Gross)
Miscellaneousreceipts
TradingAccountBalance
Incometaxforpreviousyearnotprovidedfor
300000
500000
200000
70000
60000
50000
2200
15000
6000
2500
12000
2000
6000
6000
1231700
400000
200000
100000
150000
10000
25000
30000
10000
2300
304400
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
k.
l.
m.
n.
o.
p.
q.
r.
s.
t.
u.
v.
w.
x.
y.
z.
aa.
bb.
cc.
1231700
1. Depreciationistobechargedonthewrittendownvalueofplant@10%andlandandbuilding
@5%.
2. Thedirectorsproposetorecommendadividendof15%onequityshares.
3. Provisionfortaxationistobemade@55%.
4. Themanagingdirectorisentitledto5%ofthenetprofitssubjecttoaminimumofRs.12000
perannum.
5. AsumofRs.15000istobetransferredtoDividendequalizationreserve.
6. Providecorporatedividendtax@10%.
Solution:
54
JanakiLtd
15000 ByGrossprofitb/d
ToEstablishmentexpenses
6000 ByDividend
ToRentandtaxes
ByMiscellaneousreceipts
ToauditorsFee:
Auditfee1500
2500
Otherservices1000
2000
ToDirectorsfees
6000
ToSundryexpenses
ToDepreciation:
20000
Plant(200000x10%)
Land&building
(350000x5%)
17500
ToMDsremuneration@5%
12385
ToProvisionfortaxation
(235315x55%)
129423
ToNetProfitc/d
105892
316700
ToProposeddividend:
8%onpreferenceshare
16000 ByBalanceb/d
ByNetProfitb/d
capital
15%onequityshare
capital
60000
ToCorporateDividendTax
(10%onproposeddividend)
7600
Totransfertodividend
EqualizationReserve
15000
Toincometaxforprevious
yearnotprovidedfor
6000
TosurpluscarriedtoB/S
26292
130892
304400
10000
2300
316700
25000
105892
130892
Liabilities
ShareCapital
Authorized, Subscribed and
PaidupCapital:
4000 Equity shares of
Rs.100eachfullypaidup.
2000 Preference shares of
Rs.100eachfullypaidup
BalanceSheetofJanakiLtd
Ason31stMarch2011
Rs.
Assets
Fixedassets:
Land&Building500000
Less:Depreciation167500
Plant300000
Investmentsinshares
200000 Currentassets,Loansand
Rs.
332500
180000
200000
55
Reserves&Surplus:
DividendEqualization
Reserve(01.04.10)10000
Providedforyear15000
ProfitandlossAccount
Current
liabilities
and
provisions:
A. CurrentLiabilities:
Creditors
MDsremuneration
payable(1238512000)
B. Provisions:
ProposedDividend
Corporatedividendtax
Advances:
A. Currentassets
Stock
25000 Debtors
26292 Cashatbank
B. LoansandAdvances:
Incometaxdeductedat
source
30000
70000
50000
60000
2200
385
129423
76000
7600
894700
894700
Exercise:
1.AmulyaLtd.wasregisteredwithanauthorizedcapitalofRs.3000000inequitysharesofRS.10
st
each.Followingisthelistofbalancestakenfromitsbookson31
March2011:
Purchases
84175
925000 Generalexpenses
Wages
375000
424325 Stockon1stApril2010
Manufacturingexpenses
100000
65575 Goodwill
Salaries
28750
70000 Cashinhand
Baddebts
199500
10550 Cashatbank
Directorsfee
31125 Subscribedandfullypaid
Debentureinterestpaid
2000000
45000 capital
Preliminaryexpenses
72500
25000 Profitandlossaccount(cr.)
Callsinarrears
1500000
37500 6%debentures
Plantandmachinery
290000
1500000 Sundrycreditors
Premises
167500
1650000 Billspayable
Interimdividendpaid
2075000
187500 Sales
Furnitureandfixtures
125000
35000 Generalreserve
Sundrydebtors
436000
PrepareProfitandLossAccountfortheyearended31stMarch2011andtheBalancesheet
asonthatdateaftermakingthefollowingadjustments:
a. Depreciateplantandmachineryby10%.
b. Providehalfyearsinterestondebentures.
c. WriteoffRs.2500frompreliminaryexpenses.
d. MaketheprovisionforbadanddoubtfuldebtsRs.4250onsundrydebtors.
e. Stockon31stMarch2011wasRs.455000.
f. IgnoreCorporateDividendTax.
Ans:(GrossprofitRs.740100,NetprofitRs.297500,SurpluscarriedtobalancesheetRs.182500
andBalancesheettotalRs.4272500).
56
Module3
AMALGAMATIONOFCOMPANIES
i.
ii.
iii.
iv.
v.
There are many forms of business combinations to obtain the economies of large scale
productionortoavoidthecutthroatcompetition.Theyareamalgamation,absorption,external
reconstructionetc.
Thetermamalgamationisusedwhentwoormoreexistingcompaniesgointoliquidation
and a new company is formed to take over the business of liquidated companies. The term
absorption is used when an existing company takes over the business of one or more existing
companieswhichgointoliquidation.Inexternalreconstruction,oneexistingcompanygoesinto
liquidationandanewcompanyisformedtotakeovertheformercompany.
DefinitionsasperAccountingStandard14(AS14)
a. AmalgamationmeansanamalgamationpursuanttotheprovisionsoftheCompaniesAct
1956oranyotherstatutewhichmaybeapplicabletocompanies.
b. TransferorCompanymeansthecompanywhichisamalgamatedintoanothercompany.
c. TransfereeCompanymeansthecompanytowhicha6ransferorcompanyis
amalgamated.
d. Reservemeanstheportionofearnings,receiptsorothersurplusesofanenterprise
(whethercapitalorrevenue)appropriatedbythemanagementforageneraloraspecific
purposeotherthanprovisionfordepreciationordiminutioninthevalueofassetsorfora
knownliability.
TypesofAmalgamation
As per AS14 there are two types of amalgamation (1) Amalgamation in the nature of
mergerand(2)Amalgamationinthenatureofpurchase.
AmalgamationinthenatureofMerger(PoolingInterestMethod)
An amalgamation should be considered to be an amalgamation in the nature of merge

whenallthefollowingconditionsaresatisfied:
AlltheassetsandliabilitiesoftheTransferorCompanyorcompaniesbeforeamalgamationshould
becometheassetsandliabilitiesofthetransfereecompany.
Shareholders holding not less than 90% of the face value of the equity shares of the transferor
company (excluding the proportion held by the transferee company) should become the
shareholdersofthetransfereecompany.
The consideration payable to the above mentioned shareholders should be discharged by the
transferee company by the issue of the equity shares and cash can be payable in respect of
fractionalshares.
The business of the Transferor Company/ companies is intended to be carried on by the
transfereecompany.
No adjustment is intended to be made to the book values of the assets and liabilities of the
Transferor Company/ companies when they are incorporated in the financial statements of
thetransfereecompanyexcepttoensureuniformityofaccountingpolicies.
57
Amalgamationinthenatureofpurchase
Anamalgamationshouldbeconsideredtobeanamalgamationinthenatureofpurchase,
whenanyoneormoreoftheconditionsspecifiedforamalgamationinthenatureofmergerisnot
satisfied.
DifferencebetweenAmalgamationinthenatureofmergerandAmalgamationinthenatureof
purchase
Merger
Purchase
1. Onecompanyacquiresanother.Asa
1. Thereisagenuinempooli9ngof
assetsandliabilitiesofthetransferor
consequencx3,theshareholdersofthe
companiesaswellastheshare
transferorcompanynormallydonot
holdersinterest.Assuchthe
continuetohaveaproportionateshare
shareholdersofallthetransferor
intheequitymanagementofthe
companiesconti9nuetohave
transfereecompany.
substantialorproportionatesharein
theequityormanagementof
TransfereeCompany.
2. Assets,liabilitiesandreservesofthe
2. Assets,liabilitiesandreservesofthe
transferorcompanyarerecordedby
thetransfereecompanyeitheratbook
transferorcompanyarerecordedby
valueoratvaluesrevisedonthebasis
thetransfereecompanyattheir
bookvalues.
oftheirfairvalues.
3. ThebalanceofP&LA/cofthe
3. ThebalanceofP&LA/cofthe
transferorcompanyisnotincludedin
transferorcompanyaggregatedwith
thebooksofthetransfereecompany.
thebalanceoftheP&LA/cofthe
transfereecompany.
4. OnlystatutoryreservesofTransferor
4. Allreserveswhethercapitalor
Companyaretakeninthebooksof
revenue0ofTransferorCompanyare
TransfereeCompanyinorderto
mergedintothereservesof
preservetheiridentity.
5. Itmaynotbeintendedtocontinuethe
TransfereeCompany.
5. Itisalwaysintendedtocontinuethe
businessofTransferorCompany.
businessoftransferorcompany.
6. AlltheassetsofTransferorCompany
6. AlltheassetsofTransferorCompany
mayormaynotbecometheassetsof
becometheassetsofthetransferee
thetransfereecompany.
company.
7. Purchaseconsiderationisusually
7. Purchaseconsiderationisusually
valuedatthemarketpriceofthe
valuedattheparvalueoftheshares
sharesissued.
issued.
PurchaseConsideration
Purchaseconsiderationistheamountwhichispaidbythetransfereecompanyforthe
purchasethebusinessofTransferorCompany.AsperAS14,considerationforamalgamation
meanstheaggregateofsharesandothersecuritiesissuedandthepaymentmadeintheformof
58
cashorotherassetsbythetransfereecompanytotheshareholdersofthetransferorcompany.
Purchaseconsiderationdoesnotincludeanypaymenttooutsidersincludingdebentureholders.
Thepurchaseconsiderationmaybecalculatedinthefollowingways:
1. LumpSumMethod:Whenthetransfereecompanyagreestopayafixedsumtothe
transferorcompany,itiscalledlumpsumpaymentofpurchaseconsideration.For
example,XLtdpurchasesthebusinessofYLtdforaconsiderationof1000000.
2. NetWorth(NetAssets)Method:Underthismethod,thenetworthoftheassetstaken
overbythetransfereecompanyistakenaspurchaseconsideration.Here,Purchase
consideration=AssetstakenoveratagreedvaluesLiabilitiestakenoveratagreedvalues.
Thefollowingpointsarenotedwhilecalculatingpurchaseconsiderationunderhismethod:
a. Cashbalanceisusuallyincludedinassets.Butifitisnottakenover,itwillnotbe
included.
b. Fictitiousassetsshouldneverbeadded.
c. Accumulatedprofitsandreservesshouldnotbeconsidered.
d. Thetermliabilitiesincludeallliabilitiestothirdparties.Buttradeliabilitiesinclude
onlytradecreditorsandbillspayable.
e. Thetermbusinesswillalwaysmeansboththeassetsandliabilities.
Illustration1
ThefollowingistheBalanceSheetofAmritaLtd
Liabilities
Rs.
Assets
Rs.
28000
60000 Goodwill
Sharecapital
16000
10000 Land&building
Debentures
28000
6000 Plant&Machinery
Sundrycreditors
16000
4000 Stock
Generalreserve
8000
20000 Debtors
Profit&LossA/c
2000
Cash
2000
Preliminaryexpenses
100000
100000
BangaloreLtdtakesoverthebusinessofAmritaLtd.thevalueagreedforvariousassets
are:GoodwillRs.22000,Land&BuildingRs.25000,PlantandMachineryRs.24000,StockRs.13000
andDebtorsRs.8000.BangaloreLtddoesnottakeovercashbutagreestoassumetheliabilityof
sundrycreditorsatRs.5000.Calculatethepurchaseconsideration.
Solution:
Calculationofpurchaseconsideration
Valueofassetstakenover:
Goodwill
22000
Land&Building
25000
PlantandMachinery
24000
Stock
13000
Debtors
8000
92000
Less:Liabilitiestakenover:
59
Sundrycreditors
5000
Debentures
10000 15000
Purchaseconsideration 77000
3. NetPaymentmethod:Underthismethod,purchaseconsiderationistheaggregateofall
paymentsintheformofcash,shares,securitiesetc.totheshareholdersofthetransferor
companybythetransfereecompany.Thefollowingpointsareconsideredwhilecalculating
purchaseconsiderationunderthismethod:
a. Theassetsandliabilitiestakenoverbythetransfereecompanyarenotconsidered.
b. Purchaseconsiderationincludesthepaymentstoshareholdersonly.
c. Anypaymentsmadebythetransfereecompanytosomeotherpartyonbehalfofthe
transferorcompanyaretobeignored.
Illustration2
ThebalancesheetofJayLtdason31March2011isasfollows:
Liabilities
Rs.
Assets
Rs.
40000
200000 Goodwill
Sharecapital
90000
35000 Land&building
Generalreserve
75000
Profit&LossA/c
52000
50000 Stock
Debentures
58000
25000 Debtors
Sundrycreditors
15000
Cash
330000
330000
JayLtddecidestoamalgamateintoanewcompanyNewLtdwhichwilltakeoverthe
assetsandliabilitiesofJayLtdinthetermthatholdersofeachshareofRs.10inthecompany
wouldreceiveoneshareofRs.10each,Rs.5paidupandRs.4incash.Theliquidationexpenseof
Rs.5000ismetbyNewLtd.calculatepurchaseconsideration.
Solution:
HolderofeachshareofRs.10eachwillgetoneshareofRs.10eachRs.5paidup=100000
HolderofeachequitysharewillgetRs.4incash(2000x4)
=80000
Purchaseconsideration
=180000
(Note:Liquidationexpenseisnotincludedinpurchaseconsideration)
4. Share exchange or Intrinsic value Method: Under this method purchase consideration is
calculatedonthebasisofintrinsicvalueofshares.Theintrinsicvalueofashareiscalculated
by dividing g the net assets available le for equity shareholders by the number of equity
shares.Thisvaluedeterminestheratioofexchangeofthesharesbetweenthetransfereeand
transferorcompanies.
Stepsinaccountingprocedureofamalgamation,absorptionandexternalreconstruction
a. Calculationofpurchaseconsideration.
b. Ascertainmentofdischargeofpurchaseconsideration.
c. Closingthebooksoftransferorcompanies.
d. Passingopeningentriesinthebooksofpurchasingortransfereecompany.
60
Accountingentriesinthebooksoftransferorcompany
1. FortransferringassetstoRealizationA/c:
RealizationA/c
Dr
ToAssetsA/c (individuallyatbookvalue)
(Note:(a).FictitiousassetsshouldnotbetransferredtoRealizationA/c(b).Ifcashinhandand
bankarenottakenoverbytransfereecompanyshouldnotbetransferredtoRealizationA/c.But
itcanbetakenasopeningbalanceofcashorbankA/cand(c).Otherassets,eveniftheyarenot
takenover,shouldbetransferredtoRealizationA/c)
2. Fortransferringliabilities(outsideliabilitiesonly)toRealizationA/c:
LiabilitiesA/c
Dr(individuallyatbookvalue)
ToRealizationA/c
(Note:(a).Ifanyliabilityisnottakenoverbytransfereecompanyshouldnotbetransferredto
RealizationA/c,(b).ItemsinthenatureofprovisionsaretobetransferredtoRealizationA/cand
(c).Anyfundwhichdenotesbothliabilityandreserve,theportionofliabilityshouldbetransferred
toRealizationA/c).
3. Forpurchaseconsiderationduefromtransfereecompany:
TransfereeCompanyA/c
Dr
ToRealizationA/c
4. Onreceivingordischargingpurchaseconsideration:
EquitysharesinTransfereecompanyA/c Dr
PreferencesharesinTransfereecompanyA/c
Dr
DebenturesinTransfereecompanyA/c
Dr
Cash/BankA/c
Dr
ToTransfereecompanyA/c
5. Forsaleofassetsnottakenoverbytransfereecompany:
Cash/BankA/c
Dr(Saleproceeds)
ToRealizationA/c
6. Fordischargingliabilitiesnottakenoverbytransfereecompany:
LiabilityA/c
Dr
RealizationA/c
Dr(ifexcessamountpaid)
ToCash/BankA/c
ToRealizationA/c
(Iflesspaymentismade)
7. Forliquidation(realization)expenses:
a. Ifliquidationexpensesaremetbytransferorcompany.
RealizationA/c
Dr
ToCash/BankA/c
b. Ifliquidationexpensesaremetbytransfereecompany.
Noentryisrequired.
8. Forclosingpreferencesharecapital:
PreferencesharecapitalA/c
Dr
RealizationA/c
Dr(ifexcessamountpaid)
ToPreferenceshareholdersA/c
ToRealizationA/c
(iflessamountpaid)
61
9. ForpayingoffPreferenceshareholders:
Dr
ToPreferencesharesinTransfereecompanyA/c
ToCash/BankA/c(ifany)
ToDebenturesA/c(ifany)
10. Fortransferringequitysharecapital,reservesetc.
EquitysharecapitalA/c
Dr
GeneralreserveA/c
Dr
P&LA/c
Dr
DividendequalizationreserveA/c
Dr
SecuritypremiumA/c
Dr
ToequityshareholdersA/c
11. Fortransferringfictitiousassets:
EquityshareholdersA/c
Dr
ToP&LA/c
Topreliminaryexpenses
ToDiscount/expenseonissueofshares/debentures
12. ForclosingRealizationA/c:
a. Forlossonrealization(ifdebit>credit).
Dr
ToRealizationA/c
b. Forprofitonrealization(ifcredit>debit).
RealizationA/c
Dr
ToEquityshareholdersA/c
13. Forpaymenttoequityshareholders:
Dr
ToEquitysharesinTransfereecompanyA/c
ToCash/BankA/c(ifany)
Afterpaymenttoequityshareholders,allaccountsinthebookoftransferorcompanywill
beclosed.
Accountingentriesinthebooksoftransfereecompany
(Amalgamationinthenatureofpurchase)
1. Forpurchaseconsiderationdueandassetsandliabilitiestakenover:
AssetsA/c
Dr(Atrevised,otherwiseatbookvalue)
GoodwillA/c
Dr(ifcredit>debit)
ToLiabilitiesA/c
(Atrevised,otherwiseatbookvalue)
ToLiquidatoroftransferorcompany(purchaseconsideration)
ToCapitalreserve(ifdebit>credit)
2. Forpaymentofpurchaseconsideration:
LiquidatoroftransferorcompanyA/c
Dr
ToSharecapitalA/c
ToDebentureA/c
ToBankA/c
62
3.
4.
5.
6.
7.
(Note:ifsharesareissuedatpremium,securitypremiumA/ciscreditedwithpremium.If
sharesareissuedatdiscount,discountonissueofsharesA/cisdebitedwithdiscount).
Forpaymentofliquidationexpensesbytransfereecompany:
Goodwill/Capitalreserve/P&LA/c Dr
ToCash/BankA/c
Forpaymentofformationexpenses:
PreliminaryexpensesA/c
Dr
ToCash/BankA/c
IftherearebothGoodwillandCapitalreserveA/c,GoodwillmaybesetoffagainstCapital
reserve:
CapitalReserveA/c
Dr
ToGoodwillA/c
Ifanyliability(includingdebenture)isdischargedbytransfereecompany:
LiabilityA/c
Dr(Amountpayable)
ToSharecapital/Debenture/BankA/c
TorecordStatutoryReservesoftransferorcompany:
AmalgamationAdjustmentA/c
Dr
ToStatutoryReserveA/c
(Note:AmalgamationadjustmentA/cisshownontheassetssideofthecompanys
BalanceSheetundertheheadMiscellaneousExpenditure).
Illustration3
XLtdacquiredthebusinessofYLtdon31March2011forapurchaseconsiderationofRs.
55000tobepaidbyfullypaidequitysharesofRs.10each.Thebalancesheetsofboththe
companiesonthedateofacquisitionwereasfollows:
XLtd
YLtd
XLtd YLtd
Land&Building
21500 13500
EquitysharesofRs.10
55000 32500 Plant&Machinery
40000 25000
each
6000 Furniture
7500 5000
10%Preferenceshares ..
12500 8000
Investment
ofRs.10each
17000 11000 Inventories
25000 22500
GeneralReserve
4000 SundryDebtors
..
8500 5000
Development
3000 1500
Cash&Bank
AllowanceReserve
5000 AdvanceTax
3500 3000
7000
P&LA/c
Workmen
1500
3000
CompensationFund
20000 10000
10%Debentures
5000
7500
Fixed
5500
5000
Deposit(unsecured)
..
3000
Sundrycreditors
3000
4000
BillsPayable
121500 83500
121500 83500
Provisionfortax
63
Debenture holders of Y Ltd will be issued equity shares in X Ltd. Journalize the
transactions in the books of X Ltd sand the Balance sheet after amalgamation assuming
thattheamalgamationisinthenatureofpurchase.Alsogivejournalentriesinthebooks
ofthetransferorcompanytoclosethebooks.
Solution:
InthebooksofYLtd(Transferorcompany)
Closingentries
RealizationA/c
Dr
ToLand&BuildingA/c
ToPlant&MachineryA/c
ToFurnitureA/c
ToInvestmentA/c
ToInventoriesA/c
ToSundryDebtorsA/c
ToCash&BankA/c
ToAdvanceTaxA/c
(transferofvariousassetstoRealizationA/c)
10%DebenturesA/c
Dr
FixedDepositA/cDr
SundrycreditorsA/cDr
ProvisionfortaxA/cDr
ToRealizationA/c
(transferofvariousliabilitiestoRealizationA/c)
XLtdA/c
Dr
ToRealizationA/c
(purchaseconsiderationduefromXLtd)
EquitySharesinXLtdA/cDr
ToXLtdA/c
(purchaseconsiderationreceived)
10%PreferencesharecapitalA/c Dr
ToPreferenceshareholdersA/c
(amountpayabletoPreferenceshareholders
Dr
ToEquitySharesinXLtdA/c
(distributionofequitysharesreceivedfromX
Ltd)
Dr
GeneralreserveA/c
Dr
DevelopmentAllowancereserveA/cDr
P&LA/c
Dr
WorkmencompensationFundA/cDr
(transferofequityshareholdersfunds)
83500
10000
5000
5500
3000
13500
25000
5000
8000
22500
5000
1500
3000
23500
55000
55000
6000
6000
55000
55000
6000
6000
32500
11000
4000
5000
1500
5000
54000
64
Dr
ToRealizationA/c
49000
(transferoflossonrealization)
Dr
ToEquitysharesinXLtdA/c
(distributionofequitysharesreceivedfromX
Ltd)
RealizationA/c
13500 By10%DebenturesA/c
ToLand&BuildingA/c
25000 ByFixedDepositA/c
5000 BySundrycreditorsA/c
ToFurnitureA/c
8000 ByProvisionfortaxA/c
ToInvestmentA/c
22500 ByXLtd(PC)A/c
ToInventoriesA/c
5000 ByEquityshareholdersA/c
ToSundryDebtorsA/c
1500 (realizationloss)Bal.figure
ToCash&BankA/c
3000
ToAdvanceTaxA/c
83500
XLtdA/c
ToRealisationA/c
55000 ByEquitysharesinXLtd.A/c
55000
ToEquitysharesinXLtdA/c
6000 By10%Preferencesharecapital
6000 A/c
5000 ByEquitysharecapitalA/c
ToRealisationA/c(loss)
49000 ByGeneralreserveA/c
ToEquitysharesinXLtd.A/c
ByDevelopmentAllowance
reserve
ByP&LA/c
ByWorkmencompensationFund
A/c
54000
OpeningEntriesinthebooksofXLtd(TransfereeCompany)
13500
Land&BuildingA/cDr
25000
Plant&MachineryA/cDr
5000
FurnitureA/cDr
8000
InvestmentA/cDr
InventoriesA/cDr
22500
SundryDebtorsA/cDr
5000
Cash&BankA/cDr
1500
AdvanceTaxA/cDr
3000
5000
49000
10000
5000
5500
3000
55000
5000
83500
55000
55000
6000
6000
32500
11000
4000
5000
1500
54000
65
To10%DebenturesA/c
ToFixedDepositA/c
ToSundrycreditorsA/c
ToProvisionfortaxA/c
ToLiquidatorsofYLtdA/c
ToCapitalReserve(Bal.figure)
(purchaseconsiderationdueandassetsand
liabilitiestakenover)
LiquidatorsofYLtdA/c
Dr
ToEquitySharecapitalA/c
(paymentofpurchaseconsiderationinequity
shares)
10%DebenturesA/c
Dr
(dischargeofdebenturesbyissuingequity
shares)
AmalgamationAdjustmentA/cDr
ToDevelopmentAllowancereserveA/c
ToWorkmencompensationFundA/c
(statutoryreservesincorporated)
55000
10000
5500
10000
5000
5500
3000
55000
5000
55000
10000
4000
1500
BalanceSheetofXLtdason1April2011(afteramalgamation)
FixedAssets
ShareCapital
Land&Building
12000equitysharesof
Rs.10Each
Furniture
Reserves&Surplus
CapitalReserve
5000 Investments
GeneralReserve
17000 CurrentAssets
Inventories
DevelopmentAllowance
reserve
4000 SundryDebtors
Cash&Bank
Workmencompensation
Fund
4500 AdvanceTax
P&LA/c
7000 MiscellaneousExpenditure
AmalgamationAdjustmentA/c
SecuredLoan
10%Debentures
20000
Unsecuredloan
FixedDeposit
12500
Currentliabilities&
Provisions
Sundrycreditors
10500
BillsPayable
3000
Provisionfortax
7000
210500
35000
65000
12500
20500
47500
13500
4500
6500
5500
210500
66
Accountingentriesinthebooksoftransfereecompany
(Amalgamationinthenatureofmerger)
1. Forpurchaseconsiderationdueandassetsandliabilitiestakenover:
AssetsA/c
Dr(Individuallyatbookvalue)
ToLiabilitiesA/c
(Individuallyatbookvalue)
ToReservesofTransferorCompanyA/c
ToP&LA/c
ToLiquidatoroftransferorcompanyA/c(purchaseconsideration)
(Note:ThedifferencebetweendebitandcreditisadjustedinthereservesofTransferee
Company)
2. Forpaymentofpurchaseconsideration:
LiquidatoroftransferorcompanyA/c
Dr

ToSharecapitalA/c

ToDebentureA/c

ToBankA/c
(Note:ifsharesareissuedatpremium,securitypremiumA/ciscreditedwithpremium.
Ifsharesareissuedatdiscount,discountonissueofsharesA/cisdebitedwith
discount).
3. Paymentofliquidationexpensebytransfereecompany:
GeneralReserve/P&LA/c
Dr
ToCash/BankA/c
4. Forthepaymentofformationexpenses:
PreliminaryexpensesA/c
Dr

ToCash/BankA/c
Illustration4
ThefollowingisthesummarizedBalancesheetofMoonLtdason31March2012.
FixedAssets
ShareCapital
200000
Land&Building
40000equitysharesof
100000
Rs.10Each
80000
Furniture
Reserves&Surplus
180000 Investments
CapitalReserveA/c
60000 CurrentAssets
P&LA/c
40000
Stock
SecuredLoan
60000
10%Debentures
200000 SundryDebtors
300000
Bank
Currentliabilities&
80000
Cash
Provisions
Sundrycreditors
20000
860000
860000
On1April2012SunLtdtookoverthebusinessofMoonLtdasperthefollowingterms:
a. Debenturesaretobedischargedatapremiumof5%inSunLtd.
b. CreditorsaretobepaidoffbySunLtd.
c. SunLtdwillissue5equitysharesofRs.10eachatamarketvalueofRs.11forevery4
equitysharesofMoonLtd.
d. CostofliquidationRs.10000istobepaidbySunLtd.
67
ClosethebooksofMoonLtdandpassopeningentriesinthebooksofSunLtdassumingthatthe
amalgamationsinthenaturefmerger.
Solution:
Purchaseconsideration(inEquityshares)=40000x5/4x11=Rs.550000
InthebooksofMoonLtd.
RealisationA/c
200000 By10%DebenturesA/c
200000
ToLand&BuildingA/c
100000 BySundrycreditorsA/c
20000
80000 BySunLtd(PC)
550000
ToFurnitureA/c
90000
ToStockA/c
60000 (realisationloss)Bal.figure
ToSundryDebtorsA/c
300000
ToBankA/c
80000
ToCashA/c
860000
860000
SunLtdA/c
ToRealisationA/c
550000 ByEquitysharesinSunLtd.
550000
550000
550000
EquitySharesinSunLtdA/c
ToSunLtdA/c
550000
550000
550000
400000
90000 ByEquitysharecapitalA/c
ToRealisationA/c(loss)
180000
550000 ByCapitalReserveA/c
ToEquitysharesinSunLtd.
60000
ByP&LA/c
640000
640000
EntriesInthebooksofSunLtd
200000
Land&BuildingA/c Dr
100000
80000
FurnitureA/cDr
40000
StockA/cDr
60000
SundryDebtorsA/cDr
300000
BankA/cDr
80000
CashA/cDr
200000
To10%DebenturesA/c
20000
ToSundrycreditorsA/c
30000
ToCapitalReserveA/c(Bal.Fig)
60000
ToP&LA/c
550000
ToLiquidatorsofMoonLtdA/c
68
550000
LiquidatorsofMoonLtdA/c Dr
500000
50000
ToSecurityPremiumA/c
(paymentofpurchaseconsiderationin50000
equitysharesofRs.10atRs.11)
200000
10%DebenturesA/c
Dr
PremiumonRedemptionofDebenturesA/cDr
10000
ToBankA/c
210000
(dischargeofdebenturesat5%premium)
CapitalReserveA/c
Dr
10000
ToPremiumonRedemptionof

DebenturesA/c
10000
(PremiumonRedemptionofDebentures
adjusted)
10000
CapitalReserveA/cDr
10000
ToBankA/c
(liquidationexpensespaid)
WorkingNote:CalculationofReserve:
Purchaseconsideration
550000
Less:SharecapitalofMoonLtd
400000
Differencetobeadjusted
150000
CapitalReserveinMoonLtd
180000
Less:Differenceadjusted
150000
BalanceofCapitalReserve
30000
Illustration5
ALtdacquiredthebusinessofBLtdon31March2012forapurchaseconsiderationof
Rs.2,50,00,000tobepaidbyfullypaidequitysharesofRs.10each.Thebalancesheetsof
twocompaniesonthedateofacquisitionwereasfollows:
ALtd
BLtd
ALtd
BLtd
12000000 8000000
Land&Building
Equitysharesof
20000000 18000000
Plant&Machinery
Rs.10eachfully
1000000 2000000
25000000 15000000 Furniture
paid
5500000 4000000
1800000 Stock
12000000
GeneralReserve
4500000 4000000
SundryDebtors
Development
2000000 1700000
3700000 Bank
1000000
RebateReserve
5300000
1000000
P&LA/c
Workmen
Compensation
2400000
1500000
Fund
9500000
4500000
CurrentLiabilities
45000000 37700000
45000000 37700000
69
PassthenecessaryjournalentriesinthebooksofALtdwhenamalgamationisin
thenatureof(i)mergerand(ii)purchase.
AlsopreparetheBalancesheetofALtdafteramalgamationassumingthatDevelopment
RebateReserveandWorkmenCompensationFundofBLtdarerequiredtobecontinuedin
thebooksofALtd.
Solution:
(i)
Whenamalgamationisinthenatureofmerger:
EntriesinthebooksofALtd.
8000000
2012 Land&BuildingA/cDr
18000000
Mar Plant&MachineryA/cDr
FurnitureA/cDr
2000000
31
StockA/cDr
4000000
SundryDebtorsA/cDr
4000000
BankA/cDr
1700000
2900000
GeneralReserveA/c(Bal.Fig)Dr
3700000
ToDevelopmentRebateReserveA/c
2400000
ToWorkmenCompensationFundA/c
ToCurrentliabilitiesA/c
9500000
25000000
ToLiquidatorsofBLtdA/c
25000000
LiquidatorsofBLtdA/c
Dr
25000000
shares)
BalanceSheetofALtdason1April2012(afteramalgamation)
FixedAssets
ShareCapital
Land&Building
5000000equitysharesof
Rs.10Each,fullypaidup
Reserves&Surplus
Furniture
GeneralReserve
4700000 Stock
DevelopmentRebate
Reserve
WorkmenCompensation
Bank
1000000
Fund
14000000
P&LA/c
Currentliabilities
82700000
(ii)
Whenamalgamationisinthenatureofpurchase:
EntriesinthebooksofALtd.
8000000
2012 Land&BuildingA/c Dr
18000000
Mar Plant&MachineryA/cDr
2000000
FurnitureA/c Dr
31
20000000
38000000
3000000
9500000
8500000
3700000
82700000
70
4000000
StockA/c Dr
4000000
SundryDebtorsA/cDr
1700000
BankA/cDr
ToCurrentliabilitiesA/c
9500000
ToLiquidatorsofBLtdA/c
25000000
3200000
LiquidatorsofBLtdA/c
Dr
25000000
25000000
shares)
AmalgamationAdjustmentA/cDr
6100000
ToDevelopmentRebateReserveA/c
3700000
ToWorkmencompensationFundA/c
2400000
(statutoryreservesincorporated)
BalanceSheetofALtdason1April2012(afteramalgamation)
FixedAssets
ShareCapital
20000000
Land&Building
38000000
3000000
Reserves&Surplus
Furniture
CapitalReserve
12000000 Stock
9500000
GeneralReserve
8500000
DevelopmentRebate
3700000
Reserve
Bank
WorkmenCompensation
MiscellaneousExpenditure
3900000 AmalgamationAdjustmentA/c 6100000
Fund
1000000
P&LA/c
14000000
Currentliabilities
88800000
88800000
Illustration6
ALtdagreestoselltheirundertakingtoBLtdonthefollowingterms.BLtdwillpaythem
Rs.600000incashandallotthemtwofullypaidshareofRs.6each(marketvalueRs.7.50per
share)inexchangeofeverythreesharesintheirowncompany.TheBalancesheetofALtdon
thedateofamalgamationstoodasfollows:
FixedAssets
ShareCapital
Land&Building
450000
218700
CurrentAssets
Reserves&Surplus
GeneralReserve
360000 Stock
273450
P&LA/c
34168 SundryDebtors
229500
Creditors
132500 Bank
74280
738
Cash
1246668
1246668
71
AltdwillpaytheirliquidationexpensesthemselveswhichamountedtoRs.9000.closethe
booksofALtdandgiveopeningentriesinthebooksofBLtdassumingthattheamalgamationis
inthenatureofpurchase.
Solution:
Incash
600000
Inequityshares(120000x2/3x7.50)
600000
PurchaseConsideration
1200000
ClosingentriesinthebooksofALtd
RealisationA/c
Dr
1246668
450000
ToLand&BuildingA/c
218700
273450
ToStockA/c
229500
ToSundryDebtorsA/c
74280
ToBankA/c
738
ToCashA/c
(transferofvariousassetstoRealisationA/c)
SundrycreditorsA/cDr
132500
ToRealisationA/c
132500
(transferofsundrycreditorstoRealisationA/c)
BLtdA/c
Dr
1200000
ToRealisationA/c
1200000
(purchaseconsiderationduefromBLtd)
CashA/cDr
600000
EquitySharesinBLtdA/cDr
600000
ToBLtdA/c
1200000
(purchaseconsiderationreceived)
Dr
720000
GeneralreserveA/c Dr
360000
P&LA/c
Dr
34168
1114168
(transferofequityshareholdersfunds)
9000
RealisationA/cDr
9000
ToCashA/c
(liquidationexpensespaid)
76832
RealisationA/cDr
76832
ToEquityshareholdersA/c
(transferofprofitonrealisation)
1191000
EquityshareholdersA/cDr
600000
ToEquitysharesinBLtdA/c
591000
ToCashA/c
(distributionofequitysharesandcash
received)
72
OpeningentriesinthebooksofBLtd
Land&BuildingA/cDr
StockA/cDr
SundryDebtorsA/cDr
BankA/cDr
CashA/cDr
GoodwillA/c(Bal.Fig)Dr
ToSundryCreditorsA/c
ToLiquidatorsofALtdA/c
LiquidatorsofALtdA/c
Dr
ToCashA/c
(paymentofpurchaseconsideration)
450000
218700
273450
229500
74280
738
85832
1200000
132500
1200000
480000
120000
600000
ACCOUNTINGFORINTERNALRECONSTRUCTION
There are two types or reconstruction, namely external reconstruction and internal
reconstruction.Inexternalreconstruction,anewcompanyisformedtotakeovertheassetsand
liabilitiesofanexistingcompanywhichgoesintoliquidation.Butininternalreconstruction,there
willbeneitherliquidationofanexistingcompanynorformationofanewcompany.
Internalreconstructionmeansaninternalrearrangementthatgivesanewlooktothecapital
structure,adjuststherightsofshareholders,debentureholdersandcreditorsalongwithsome
adjustmentsinthevaluesofassetsandwritingofffictitiousassets.Internalreconstructionmaybe
doneduetotheaccumulatelosses,shortageofworkingcapital,overvaluationofassetsetc.
DifferencebetweenInternalreconstructionandExternalreconstruction
Internalreconstruction
1. Thecompanydoesnotlossits
identity
2. Theovervaluedassetsarerevalued
attheirnetworthandthelosses
writtenoff.
3. Nonewcompanyisformednoris
anyexistingcompanyliquidated.It
istheinternalmatterofasingle
company.
4. Debentureholds,creditorsandbank
overdraftmaycontinue.
Externalreconstruction
1. Thecompanylossesitsidentity
2. Thenewlyformedcompanytakes
overtheassetsandliabilitiesofthe
liquidatedcompanyatagreed
values.
3. Anewcompanyisformedinplace
oftheoldcompany.
4. Thesepartieswillhavetobe
settled.
73
FormsorMethodsofInternalreconstruction
1. Alterationofsharecapital.
2. Reductionofsharecapital.
3. Variationofshareholdersrights.
4. Schemeofcompromise.
AlterationofShareCapital
AccordingtoSec.94oftheCompaniesAct,alimitedcompanycan,ifauthorizedbyits
articlesofassociation,alterthecapitalclauseofitsmemorandumofassociationinanyofthe
followingways.
a. Byincreasingitssharecapitalbyissueofnewshares.
b. Byconsolidatingexistingsharesofsmalleramountsintosharesoflargeramo9unts.
c. Bysubdividingtheexistingshareintosharesofsmalleramounts.
d. Byconvertingfullypaidsharesintostock0orstockintofullypaidshares.
Accountingentriesforalterationofcapital
a. Forincreasingitssharecapital
i.
BankA/c
Dr
ToShareApplication&AllotmentA/c
ii.
ShareApplication&AllotmentA/c Dr
ToShareCapitalA/c
b. Forconsolidationofshares:
ShareCapital(old)A/c
Dr
ToShareCapital(New)A/c
c. Forsubdivisionofshares:
Dr
d. Forconversionofsharesintostock:
ShareCapitalA/c
Dr
ToStockA/c
e. Forconversionofstockintoshares:
StockA/c
Dr
ToShareCapitalA/c
Illustration7
ALtdhavingasharecapitalofRs.500000dividedinto5000sharesofRs.100each,resolvesto
subdividethesharesinto50000sharesofRs.10each.Passthejournalentry.
Solution
ShareCapital(Rs.100)A/c
Dr
500000
ToShareCapital(Rs.10)A/c
500000
Illustration8
XLtdresolvestoconvertits50000equitysharesofRs.10eachfullypaidintoRs.500000worthof
equitystock.Journalizethetransaction.
74
Solution:
EquityShareCapitalA/c
Dr
500000
ToEquityStockA/c
500000
Illustration9
BLtdhavinganequitysharecapitalofRs.100000dividedinto10000sharesofRs.10eachresolves
toconsolidatethesharesinto1000sharesofRs.100each.Passthejournalentry.
Solution:
EquityShareCapital(Rs.10)A/c
Dr
100000
ToEquityShareCapital(Rs.100)A/c
100000
ReductionofShareCapital
Reductionofcapitalisunlawfulexceptwhensanctionedbythecourtbecause
conservationofcapitalisoneofthemainprinciplestheCompanyAct.Inordertoreducethe
sharecapital,thecompanymustbeauthorizedbyitsarticlesofassociation,aspecialresolution
mustbepassedatgeneralmeeting,andconfirmationofcourtetc.isrequired.Acompanycan
reduceitssharecapitalbyanyofthefollowingways:
a. Byreducingtheliabilityoftheshareholdersforuncalledcapital.
b. Bypayingoffthesurpluscapital.
c. Byreducingpaidupcapitalwhichisnotrepresentedbyavailableassets.
Accountingentriesforreductionofsharecapital
a. Forreducingtheliabilityinrespectofuncalledcapital:
Dr
b. Forpayingoffsurpluscapital:
i.
ShareCapitalA/c
Dr
ToShareholdersA/c
ii.
ShareholdersA/c
Dr
ToBankA/c
c. Forreducingorcancellingpaidupcapitalwhichisnotrepresentedbyavailableassets:
i.
Forreducingpaidupcapitalbychangingitsfacevalue:
Dr
ToCapitalReductionA/c
ii.
Forreducingpaidupcapitalwithoutchangingitsfacevalue:
ShareCapitalA/c
Dr(amountofreducedcapital)
CapitalReductionAccount
CapitalReductionAccountisanewaccountopenedfortransferringthatpartofcapital
whichislostornotrepresentedbytheassets.Itisatemporaryaccountopenedforcarryingout
75
internalreconstruction.Thisaccountwillbeclosedassoonastheschemeiscarriedout.The
balanceinCapitalReductionA/ccanbeusedtowriteofffictitiousassets,pastlossesandexcess
valueofassets.Theentryisasfollows:
CapitalReductionA/c
Dr
ToP&LA/c(Debitbalance)
ToGoodwillA/c
ToPreliminaryExpensesA/c
Todiscountonissueofshares/debenturesA/c
ToPatents/TrademarksA/c
TootherAssetsA/c
Illustration10
ThefollowingisthebalancesheetofBrahmaLtdason31March2011.
Liabilities
Amount
Assets
Amount
173000
Plant&Machinery
5000EquitysharesofRs.100
850000
500000 Patents
eachfullypaid
55000
Stockintrade
750010%Preferenceshares
77000
750000 Sundrydebtors
ofRs.100eachfullypaid
145000
50000 Profit&LossA/c
Sundrycreditors
1300000
1300000
Thecompanysufferedlossesandthefollowingschemewasadopted:
i. EquitysharesaretobereducedtoanequalnumberofsharesofRs.25each.
ii. ThepreferencesharestobereducedtoanequalnumberofsharesofRs.50each.
iii. TheamountavailabletobeusedtowriteoffRs.39240ofplantandmachineryand
Rs.15000ofstockintrade.
iv. MadeaprovisionofRs.15300fordoubtfuldebt.
v. Thebalancebeingusedtowriteoffpatents.
Journalisethetransactionsandpreparethebalancesheetafterreconstruction.
Solution:
Journal
2011 EquityShareCapital(Rs.100)A/c Dr
500000
Mar ToEquityShareCapital(Rs.25)A/c
125000
31
375000
(reductionofequitysharecapitaltoRs.25
each)
750000
10%PreferenceShareCapital(Rs.100)A/cDr
375000
ToPreferenceShareCapital(Rs.50)A/c
375000
(reductionofpreferencesharecapitalto
Rs.50)
76
750000
CapitalReductionA/c
Dr
145000
ToP&LA/c
39240
15000
ToStockintradeA/c
15300
ToProvisionfordoubtfuldebtsA/c
535460
ToPatents(Bal.Fig)
(utilizationofcapitalreductionA/c)
BalanceSheetason1April2011(afterreconstruction)
Liabilities
Amount
Assets
Amount
133760
Plant&Machinery(173000
5000Equitysharesof
314540
125000 39240)
Rs.25eachfullypaid
40000
Patents(850000535460)
750010%Preferenceshares
61700
ofRs.50eachfullypaid
375000 Stockintrade(5500015000)
Sundrycreditors
50000 Sundrydebtors(7700015300)
550000
550000
Illustration5
ThefollowingisthebalancesheetofJayRamLtdason31March2011
Liabilities
Amount
Assets
Amount
25000
Goodwill
104000
100000 OtherFixedassets
eachfullypaid
95000
Currentassets
10007%Preferencesharesof
26000
Rs.100eachfullypaid
100000 ProfitandlossA/c
Sundrycreditors
50000
250000
250000
ItwasdecidedthatequitysharesofRs.10eachbereducedtosharesofRs.7eachand7%
preferencesharesofRs.100eachbereducedto8%preferencesharesofRs.75each.Thenumber
ofsharesineachcaseistoremainthesame.Itwasdecidedthattheamountsoavailablebeused
forwritingofthedebitbalanceinP&LA/c,goodwillA/candwiththebalanceforwritingdownthe
fixedassts.Journalisethetransactionsandpreparethebalancesheetafterreconstruction.
Solution:
Journal
Dr
2011 EquityShareCapital(Rs.10)A/c
100000
70000
31
30000
each)
100000
75000
To8%PreferenceShareCapital(Rs.75)A/c
25000
Rs.75)
77
CapitalReductionA/c
Dr
55000
ToP&LA/c
ToGoodwillA/c
ToFixedassetsA/c
Liabilities
Amount
Assets
Fixedassets(1040004000)
10000Equitysharesof
70000 Currentassets
Rs.7eachfullypaid
Rs.75eachfullypaid
75000
Sundrycreditors
50000
195000
26000
25000
4000
Amount
100000
95000
195000
VariationofShareholdersrights
Under this, the shareholders rights are altered by changing the rate of dividend or
changingtheclassesofshares.Forexample,itcanbedonebychangingthecumulativepreference
shares to noncumulative preference shares or from 10% preference shares into 7% preference
sharesetc.
Schemeofcompromiseorarrangement
Hereacompromiseorarrangementismadewithcreditorsordebentureholderswhile
settlingtheirliabilities.Thisschemeinvolvesthefollowing:
a. Forsacrificebydebentureholders:
DebenturesA/c
Dr(withamountsacrificed)
b. Forexchangeofdebenturesfornewdebenturesorshares:
DebenturesA/c
(old)
Dr
ToDebentures/ShareCapitalA/c(New)
c. Forsacrificebycreditors:
CreditorsA/c
Dr(withamountsacrificed)
d. Foragreementtoreceivesharesordebenturesinsettlementofclaimsofcreditors:
CreditorsA/c
Dr
ToShareCapital/debenturesA/c
Miscellaneousjournals
a. Forappreciationoffixedassets:
FixedassetsA/c
Dr(withamountofappreciation)
b. Forexpenseincurredonreconstruction:
CapitalReductionA/c
Dr
ToBankA/c
78
Illustration6
:ThebalancesheetofGloomyLtdason31March2011wasasfollows:
Liabilities
Amount
Assets
Amount
15000
Goodwill
200000
400000 Freeholdpremises
eachfullypaid
300000
Plant&Machinery
50000
200000 Stockintrade
Rs.100eachfullypaid
40000
100000 Sundrydebtors
6%Debentures
5000
35000 Cashinhand
Bankoverdraft
225000
100000 Profit&LossA/c
Sundrycreditors
835000
835000
Thecompanyhasgotthefollowingschemeofcapitalreductionapprovedbythecourt.
a. PreferencesharestobereducedtoRs.60persharefullypaidupandequitysharestoRs.40
persharefullypaidup.
b. Thedebentureholderstotakeoverstockintradeandbookdebtsinfullsatisfactionofthe
amountduetothem.
c. Thevalueoffreeholdpremisestobeincreasedby10%.
d. Thevalueofplantandmachinerytobedepreciatedby331/3%.
e. Thegoodwillaccounttobeeliminated.
f. ExpensesofreconstructionamountedtoRs.4000.
Journalizethetransactionsandpreparethebalancesheetafterreconstruction.
Solution:
Journal
400000
2011 EquityShareCapital(Rs.100)A/c Dr
160000
31
240000
each)
200000
120000
To5%PreferenceShareCapital(Rs.60)A/c
80000
Rs.60)
6%DebenturesA/cDr
ToStockintradeA/c
100000
ToSundrydebtorsA/c
50000
ToCapitalReductionA/c(Bal.Fig)
40000
(stockanddebtorstakenoverbydebenture
10000
holders)
FreeholdpremisesA/cDr
(Freeholdpremisesappreciatedby10%)
79
20000
CapitalReductionA/c
Dr
ToP&LA/c
ToGoodwillA/c
350000
ToPlantandmachineryA/c
ToBankA/c(expenses)
ToCapitalReserveA/c
Liabilities
Amount
Assets
Freehold
4000Equitysharesof
160000 premises(200000+20000)
Rs.40eachfullypaid
Plant&Machinery(300000
120000 100000)
Rs.60eachfullypaid
6000 Cashinhand(50004000)
CapitalReserve
35000
Bankoverdraft
100000
Sundrycreditors
421000
20000
15000
225000
100000
4000
6000
Amount
220000
200000
1000
421000
Surrenderofshares
Underreconstruction,theshareholdersmayberequiredtosurrenderapartoftheirshare
holdings.Suchsurrenderedsharesmaybereissuedtootherparties(creditors,debentureholders
etc.)inwholeorinpartsatisfactionoftheirclaims.Theentriesrequiredareasfollows:
i. Onsurrenderofshares:
SharecapitalA/c
Dr
ToSurrenderedsharesA/c
ii. Onreissueofsurrenderedshares:
SurrenderedsharesA/c
Dr
ToSharecapitalA/c
iii. Oncancellationofunissuedsurrenderedshares:
Dr
Illustration7
AcompanyhasequitysharecapitalofRs.1000000consisting10000sharesofRS.100each.Itis
resolved
a. TosubdividethesharesintosharesofRs.10each
b. Toasktheirshareholderstosurrender50%oftheirshares
c. Toissue60%ofthesurrenderedsharesto15%debentureholdersofRs.400000infull
settlementoftheirclaims
d. Tocanceltheunissuedsurrenderedshares.
Giveentriesinthebooksofthecompany.
80
Solution:
Journal
EquityShareCapital(Rs.100)A/c
Dr
ToEquityShareCapital(Rs.10)A/c
(subdivisionofequitysharesintoRs.10each)
EquitySharecapitalA/c
Dr
ToSurrenderedsharesA/c
(50%ofsharessurrendered)
Dr
15%DebenturesA/cDr
(issueof60%surrenderedsharesto
debentureholdersinfullsettlementoftheir
claims)
SurrenderedSharesA/c Dr
(cancellationofunissuedsurrendered
shares)
1000000
500000
300000
400000
200000
1000000
500000
300000
400000
200000
81
Module4
FINALACCOUNTSOFBANKINGCOMPANIES
InIndia,bankingcompaniesaregovernedbytheBankingRegulationAct1949.Section5of
theActdefinesbankingastheaccepting,forthepurposeoflendingorinvestment,ofdepositsof
moneyfromthepublicrepayableondemandorotherwiseandwithdrawablebycheque,draft,
andorderorotherwise.
Businessofbankingcompanies
Inadditiontothebusinessofbanking,abankingcompanymayengageinanyoneormore
ofthefollowingbusiness:
i. Theborrowing,raising,ortakingupofmoney
ii. Thelendingoradvancingofmoneyeitheruponorwithoutsecurity
iii. Thedrawing,making,accepting,discounting,buying,selling,collectinganddealinginb
billsofexchange,hundies,promissorynotes,coupons,drafts,billsoflading,railway
receipts,warrants,debentures,certificates,scripsandotherinstruments,and
securitieswhethertransferableornegotiableornot.
iv. Thegrantingandissuingofletterofcredit,travelerschequesandcircularnotes
v. Onreceivingofallkindsofbonds,scripsorvaluablesondepositorforsafecustodyor
otherwise.
vi. Thebuying,sellinganddealinginbullion
vii. Thecollectingandtransmittingofmoneyandsecurities
viii. Contractingforpublicandprivateloansandnegotiatingandissuingthesame
ix. Carryingonandtransactingeverykindofguaranteesandindemnitybusiness
x. Undertakingandexecutingtrusts,etc
ImportantprovisionsoftheBankingRegulationAct1949
1. StatutoryReserve
AsperSection17,bankingcompaniesincorporatedinIndiahalltransfereveryyearatleast
25%ofitsprofitbeforeanydividendisdeclaredtoaStatutoryreserve(Reservefund)untilthe
amountofthereservetogetherwiththesecuritypremiumAccountisequaltothepaidupcapital.
2. CashReserveRatio(CRR)
BanksarerequiredtomaintainwiththeReserveBankofIndiaacashreserveofatleast3%
ofthetotalofitsdemandandtimeliabilitiesinIndia.
3. StatutoryLiquidityRatio(SLR)
Banksarealsorequiredtomaintainatleas6t25%ofthedemandandtimeliabilitiesinthe
formofliquidassetslikecash,goldorunencumbered.SLRmayvaryinarangeof25%to40%.
4. NonBankingAssets
Thesearetheassetswhicharenotusedintheordinarycourseofbusinessofbanking,but
theyaresuchimmovableandmovablepropertieswhichcomeunderthepossessionothe
bankingcompanyforrecoveringtheamountduefromcustomers.
5. MinimumCapitalandReserves
IncaseofabankingcompanyincorporatedinIndia,thesumofitspaidupcapitaland
reservesshallnotbelessthantheamountmentionedbelow:
82
a. IfithasplacesofbusinessinmorethanonestateRs.500000,andifanysuchplaceof
businessissituatedinMumbaiorKolkataorinboth,Rs.1000000.
b. If it has all its places of business in one state, none of which is Mumbai or
Kolkata,Rs.100000 in respect of its principal place of business plus Rs.10000 for each
additional place of business in the same district plus Rs.25000 for each place of
businesselsewhereinthestate(themaximumamountrequiredbeingRs.500000).
AccountingSystem
Theaccountingsystemofabankingcompanyisdifferentfromthatofatradingor
manufacturingcompany.Themainfeaturesofabanksaccountingsystemareasfollows:
1. Entriesinthepersonalledgersaremadedirectlyfromthevouchers
2. Fromsuchentriesinthepersonalledgerseachdaysummarysheetsintotalareprepared
whicharepostedtothecontrolaccountsinthegeneralledger.
3. Thegeneralledgerstrialbalanceisextractedandagreedeveryday.
4. Allentriesinthepersonalledgersandsummarysheetsarecheckedbypersonsotherthan
thosewhohaverecordedentries.Ithelpsindetectionofmistakes.
5. Atrialbalanceofdetailedpersonalledgersispreparedperiodicallyandgetsagreedwith
thegeneralledgercontrolaccounts.
6. Twovouchersarepreparedforeverytransactionnotinvolvingcash.
Booksmaintainedbybanks
1. ReceivingCashiersCounterCashBook.
2. PayingCashiersCounterCashBook.
3. CurrentAccountsLedger.
4. SavingBankAccountsLedger.
5. FixedDepositAccountsLedger.
6. Investmentledger.
7. BillsDiscountedandPurchasedLedger.
8. LoanLedger.
9. CashCreditLedger.
10. CustomersAcceptances,endorsementsandGuaranteeLedger.
11. RecurringDepositsAccountsLedger,etc.
TheSlipSystem
Thisisnotasystemofbookkeeping,butamethodofrapidlypostingentriestobookskept
on double entry system. In this system, posting is made from slips prepared inside the
organizationitselforfromslipsfilledinbyitscustomers.Inabankingcompany,themainslips
arepayinslips,withdrawalslipsandchequesandalltheseslipsarefilledinbyclientsofthe
bank.
AdvantagesofSlipsystem
1. Itmakesaccountsreliable.
2. Slipsarethebasisofauditing.
3. Thebanksavesalotofclericallabourasmostoftheslipsarefilledinbyitscustomers.
83
4. Thereisnoneedforkeepingsubsidiarybooks.
DisadvantagesofSlipsystem
1. Slipsmaybelost,destroyedormisappropriatedastheseareloose.
2. Intheabsenceofsubsidiarybooks,bookscannotbeverified.
3. Itisverydifficultandexpensivetokeepdatewiserecordofalargenumberofslips.
4. Customersfeeldifficultyonaccountofslipsystem.
FinalAccountsofBanks
AsperSection29,abankingcomp[anyincorporatedinIndia,isrequiredtoprepare,atthe
end of each accounting year, a Balance sheet and profit and Loss Account as on the last
workingdayoftheyear.
AbankingcompanyisrequiredtoprepareitsProfitandLossAccountaccordingtoFormB
intheThirdScheduletotheBankingRegulationAct,1949.FormBisgivenasfollows:
FormB
FormofProfit&LossAccountfortheyearended31stMarch
I. Income
Interestearned
Otherincome
Total
II. Expenditure
Interestexpended
Operatingexpenses
Provisionsandcontingencies
Total
III. Profit/Loss
Netprofit/lossfortheyear(III)
Profit/lossbroughtforward
Total
IV. Appropriations
Transfertostatutoryreserves
Transfertootherreserves
Transfertogovernment/
proposed
Dividend
BalancecarriedovertoBalance
sheet
Total
Schedule Yearended
No
31.3..(Current
Year)
13
14
15
16
(000somitted)
Yearended
31.3.(Previous
Year)
84
SCHEDULE13INTERESTEARNED(000somitted)
Yearended
Yearended
31.3..(Current 31.3.(Previous
Year)
Year)
I. Interest/discountonadvances/bills
II. Incomeoninvestments
III. InterestonbalanceswithReserveBankof
Indiaandotherinterbankfunds
IV. Others
Total
SCHEDULE14OTHERINCOME
(000s
omitted)
Yearended
Yearended
Year)
Year)
I. Commission,exchangeandbrokerage
II. Profitonsaleofinvestments
Less:Lossonsaleofinvestments
III. Profitonrevaluationofinvestments
Less:Lossonrevaluationofinvestments
IV. Profitonsaleofland,buildingsandother
assets
Less:Lossonsaleofland,buildingsand
other
Assets
V. Profitonexchangetransactions
Less:Lossonexchangetransactions
VI. Incomeearnedbywayofdividendsetc.
fromsubsidiaries/companiesand/or
jointventuresabroad/inIndia
VII. Miscellaneousincome
Total
Note:UnderitemsIItoVlossfiguresmaybeshowninbrackets
SCHEDULE15INTERESTEXPENDED(000somitted)
Yearended
Yearended
Year)
Year)
I. Interestondeposits
II. InterestonReserveBankofIndia/inter
bankborrowings
III. Others
Total
85
SCHEDULE16OPERATINGEXPENSES
I. Paymentstoandprovisionsforemployees
II. Rent,taxesandlighting
III. Printingandstationary
IV. Advertisementandpublicity
V. Depreciationonbanksproperty
VI. Directorsfees,allowancesandexpenses
VII. Auditorsfees,allowancesandexpenses
(includingbranchauditors)
VIII. Lawcharges
IX. Postages,telegrams,telephones,etc
X. Repairsandmaintenance
XI. Insurance
XII. Otherexpenditure
Total
Yearended
31.3..(Current
Year)
(000somitted)
Yearended
31.3.(Previous
Year)
Illustration1
FollowingfigureshavebeenobtainedfromthebooksofRaiBankLtdfortheyearending31st
March2011(figuresin000):
IssuedandsubscribedcapitalRs.1000,InterestanddiscountearnedRs.3800,Commissionand
exchangeearnedRs.195,InterestpaidRs.2000,SalariesandwagesRs.210,DirectorsfeesRs.35,
RentandtaxesRs.70,PostageandtelegramsRs.61,ProfitonsaleofinvestmentsRs.240,Losson
saleofinvestmentsRs.38,RentreceivedRs.62,DepreciationRs.31,StationaryRs.60andAuditors
feesRs.8.
Additionalinformation:
a. TheprofitandlossaccounthadabalanceofRs.10,00,000on1stApril2010.
b. AnadvanceofRs.12,00,000hasbecomedoubtfulanditisexpectedthatonly50%ofthe
amountduecanberecoveredfromthesecurity.
c. Theprovisionoftaxismadeat50%.
d. Adividendof10%isproposed.
PrepareProfitandLossAccountofRaiBankLtdfortheyearending31stMarch2011.
Solution:
86
RaiBankLtd
Fortheyearending31stMarch2011
(000somitted)
Schedule Yearended
Yearended
No
31.3.2011
31.3.2010
I. Income
Interestearned
3800
13
Otherincome
459
14
Total
4259
II. Expenditure
Interestexpended
15
2000
Operatingexpenses
16
475
Total
1192
III. Profit/Loss
3667
592
Total
1000
IV. Appropriations
1592
Transfertostatutory
reserves(592x25%)
ProposedDividend
148
BalancecarriedovertoBalancesheet
Total
100
1344
1592
Yearended
Yearended
31.3.2011
31.3.2010
3800
3800
Total
SCHEDULE14OTHERINCOME(000somitted)
Yearended
Yearended
31.3.2011
31.3.2010
195
240
(38)
III. Miscellaneousincome(Rentreceived)
62
Total
459
Yearended
Yearended
31.3.2011
31.3.2010
2000
Total
2000
87
SCHEDULE16OPERATINGEXPENSES(000somitted)
Yearended
Yearended
31.3.2011
31.3.2010
210
70
60
IV. Depreciationonbanksproperty
31
V. Directorsfees,allowancesandexpenses
35
VI. Auditorsfees,allowancesandexpenses
8
61
VII. Postages,telegrams,telephones,etc
Total
475
Illustration2
Fromthefollowinginformation,preparetheProfitandlossAccountoftheNationalBankforthe
yearended31stMarch2011(figuresin000):
InterestonloansRs.518,InterestoncashcreditsRs.446,Discountonbillsdiscounted(net)
Rs.390,InterestonOverdraftsRs.108,InterestonSavingsbankAccountRs.220,Interestonfixed
deposits Rs.554, Commission, exchange and brokerage Rs.16.40, Rent, taxes and lighting Rs.36,
AuditorsfeesRs.2.40,Postage,telegramsandtelephonesRs.2.80,SundrychargesRs.2,Directors
fees Rs.6, Printing and stationery Rs.0.40, Law charges Rs.1.40, payment to employees Rs.108,
Locker rent Rs.0.70, Transfer fees Rs.1.40, Depreciation on banks property Rs.10 and
AdvertisementanpublicityRs.1.40.
Additionalinformation:RebateonbillsdiscountedRs.98000andprovideforbaddebts
Rs.58000.
Solution:
NationalBankLtd
Fortheyearending31stMarch2011
I. Income
Interestearned
Otherincome
Total
II. Expenditure
Interestexpended
Operatingexpenses
Total
III. Profit/Loss
Total
(000somitted)
Schedule Yearended
No
31.3.2011
1364.00
13
18.50
14
1382.50
15
774.00
16
170.40
58.00
1002.40
380.10
380.10
Yearended
31.3.2010
88
IV. Appropriations
Transfertostatutory
reserves(380.10x25%)
proposed
Dividend
sheet
Total
95.03
285.07
380.10
Yearended
Yearended
31.3.2011
31.3.2010
I. Interest/discounton
1364.00
advances/bills(518+446+390+10898)
II. Incomeoninvestments
III. InterestonbalanceswithReserveBankof
Indiaandotherinterbankfunds
IV. Others
1364.00
Total
(000somitted)
Yearended
Yearended
31.3.2011
31.3.2010
16.40
0.70
II. LockersRent
1.40
III. Transferfees
Total
18.50
Yearended
Yearended
31.3.2011
31.3.2010
I. Interestondeposits(220+554)
774.00
Total
774.00
89
Yearended
Yearended
31.3.2011
31.3.2010
108.00
36.00
0.40
1.40
IV. Advertisementandpublicity
10.00
V. Depreciationonbanksproperty
6.00
VI. Directorsfees,allowancesandexpenses
2.40
VII. Auditorsfees,allowancesandexpenses
VIII. Lawcharges
1.40
IX. Postages,telegrams,telephones,etc
2.80
X. Otherexpenditure
2.00
Total
170.40
BalanceSheet
ThebalancesheetofabankingcompanyispreparedaccordingtoFormAinThirdSchedule
whichisasfollows:
BALANCESHEETOF(Hereenternameofthebankingcompany)
ason31stMarch(Year)(000somitted)
Ason
Schedule Ason
No
Year)
Year)
Capital&Liabilities
1
Capital
2
Reserves&Surplus
3
Deposits
4
Borrowings
5
OtherLiabilitiesandProvisions
Total
Assets
CashandbalanceswithRBI
6
Balanceswithbanks&moneyatcalland
shortnotice
7
Investments
8
Advances
9
FixedAssets
10
OtherAssets
11
Total
Contingentliabilities
12
Billsforcollection
90
SCHEDULE1CAPITAL
Ason
31.3..(Current
Year)
I. ForNationalizedBanks
Capital(FullyownedbyCentralGovernment
Total
II. ForBanksIncorporatedOutsideIndia
Capital
(Theamountbroughtinbybanksbywayof
startupcapitalasprescribedbyRBIshouldbe
shownunderthishead)
AmountofdepositkeptwiththeRBIunder
section1(2)ofBankingRegulationsAct,1949
Total
ForotherBanks
Authorisedcapital
.SharesofRs..each
Issuedcapital
.SharesofRs..each
Subscribedcapital
.SharesofRs..each
Calledupcapital
.SharesofRs..each
Less:Callsunpaid
Add:Forfeitedshares
Ason
31.3.(Previous
Year)
91
SCHEDULE2RESERVES&SURPLUS
Ason
31.3..(Current
Year)
I. StatutoryReserves
OpeningBalance
Additionsduringtheyear
Deductionsduringtheyear
II. CapitalReserves
OpeningBalance
III. SecuritiesPremium
OpeningBalance
IV. Revenue&OtherReserves
OpeningBalance
V. BalanceinProfitandLossAccount
Total(I+II+III+IV+V)
SCHEDULE3DEPOSITS
Ason
31.3..(Current
Year)
A.
I. DemandDeposits
(i)
FromBanks
(ii)
FromOthers
II. SavingBankDeposits
III. TermDeposits
(i)
FromBanks
(ii)
FromOthers
Total
(I+II+III)
B.
(i)DepositsofbranchesinIndia
(ii)DepositsofbranchesoutsideIndia
Total
Ason
31.3.(Previous
Year)
Ason
31.3.(Previous
Year)
92
SCHEDULE4BORROWINGS
Ason
31.3..(Current
Year)
I. BorrowingsinIndia
(i)
ReserveBankofIndia
(ii)
Otherbanks
(iii)
Otherinstitutionsandagencies
II. BorrowingsoutsideIndia
Total
SecuredborrowingsincludedinI&IIaboveRs.
SCHEDULE5OTHERLIABILITIESANDPROVISIONS
Ason
31.3..(Current
Year)
I. Billspayable
II. Interofficeadjustments(net)
III. Interestaccrued
IV. Others(includingprovisions)
Total
Ason
31.3.(Previous
Year)
Ason
31.3.(Previous
Year)
SCHEDULE6CASHANDBALANCESWITHRESERVEBANKOFINDIA
Ason
Ason
Year)
Year)
I. Cashinhand
(includingforeigncurrencynotes)
II. BalanceswithReserveBankofIndia
(i) Incurrentaccounts
(ii) Inotherdepositaccounts
Total(I
&II)
SCHEDULE7BALANCESWITHBANKS&MONEYATCALL&SHORTNOTICE
Ason
Ason
Year)
Year)
I. InIndia
(i) Balanceswithbanks
(a) Incurrentaccounts
(b) Inotherdepositaccounts
(ii) Moneyatcallandshortnotice
93
(a) Withbanks
(b) Withotherinstitutions
Total
II. OutsideIndia
(iii) Moneyatcallandshortnotice
GrandTotal(I+II)
SCHEDULE8INVESTMENTS
Ason
31.3..(Current
Year)
I. InvestmentsinIndiain
(i) Governmentsecurities
(ii) Otherapprovedsecurities
(iii) Shares
(iv) Debenturesandbonds
(v) Subsidiariesand/orjointventures
(vi) Others(tobespecified)
Total
II. InvestmentsoutsideIndiain
(i) Governmentsecurities
(includinglocalauthorities)
(ii) Subsidiariesand/orjointventures
abroad
(iii) Otherinvestments(tobespecified)
Total
GrandTotal(I+II)
SCHEDULE9ADVANCES
Ason
31.3..(Current
Year)
A.
(i)Billspurchasedanddiscounted
(ii)cashcredits,overdraftsandloansrepayableon
demand
Ason
31.3.(Previous
Year)
Ason
31.3.(Previous
Year)
94
(iii)Termloans
Total
B.
(i)securedbytangibleassets
(ii)coveredbybank/Governmentguarantees
(iii)unsecured
Total
C.
I.AdvancesinIndia
(i)prioritysectors
(ii)publicsector
(iii)banks
(iv)others
Total
II.AdvancesoutsideIndia
(i) Duefrombanks
(ii) Duefromothers
(a) Billspurchasedanddiscounted
(b) Syndicatedloans
(c) Others
Total
GrandTotal(CI+CII)
SCHEDULE10FIXEDASSETS
Ason
31.3..(Current
Year)
I. Premises
Atcoston31stMarchofthepreceding
year
Depreciationtodate
II. OtherfixedAssets(includingfurnitureand
fixtures)
year
Depreciationtodate
Total
Ason
31.3.(Previous
Year)
95
I.
II.
III.
IV.
V.
VI.
I.
II.
III.
IV.
V.
VI.
SCHEDULE11OTHERASSETS
Ason
31.3..(Current
Year)
Interofficeadjustments(net)
Interestaccrued
Taxp[aidinadvance/taxdeductedatsource
Stationeryandstamps
Nonbankingassetsacquiredinsatisfaction
ofclaims
Others
Total
SCHEDULE12CONTINGENTLIABILITIES
Ason
31.3..(Current
Year)
Claimsagainstthebanknotacknowledgedas
debts
Liabilityforpartlypaidinvestments
Liabilityonaccountofoutstandingforward
exchangecontracts
Guaranteesgivenonbehalfofconstituents
(i) InIndia
(ii) OutsideIndia
Acceptances,endorsementsandother
obligations
Otheritemsforwhichthebankis
contingentlyliable
Total
Ason
31.3.(Previous
Year)
Ason
31.3.(Previous
Year)
ExplanationofsomeitemsrelatingtoBalanceSheet
1. Moneyatcallandshortnotice:Itrepresentstemporaryloanstobillbrokers,stockbrokers
andotherbanks.Iftheloanisgivenforoneday,itiscalledmoneyatcallandiftheloan
cannotbecalledbackondemandandwillrequireatleastanoticeofthreedaysforcalling
back,itiscalledmoneyatshortnotice.
2. Advances: Advances include Bills discounted and purchased, loans, cash credit and
overdraft.
3. Inter office adjustments: Every head office will have a number of transactions with its
branches. The head office makes necessary adjustments in its books on the receipt of
information from the branches. On the date of balance sheet some transaction may
remain unadjusted in the books of the head office. Such entries are recorded in the
balancesheetunderthesubheadingBranchAdjustmentsandmayappearontheassets
side under the heading Other Assets if it has a debit balance and on t e liabilities side
undertheheadingOtherLiabilitiesifithasacreditbalance.
96
4. Bills for Collection: When the bank receives bills receivables from its customers for
collection, it keeps them till maturity. On the date of maturity when bills are collected,
customersaccountiscreditedwiththeamountcollected.Ifsomebillsremainoutstanding,
such bills are treated by the banks as outstanding bills for collection. It is shown as
ContingentLiability(Schedule12).
5. Acceptance,endorsementandotherobligation:Thisrepresentsbanksliabilityonaccount
ofbillsendorsedoracceptedonbehalfofitscustomers.Forgreatersecurity,thedrawerof
billwantsacceptanceofthedraweesbank.Thebankincursaliabilitybyacceptingbillson
behalfofcustomers.Onthematurityofbill,thebankpaysandcollectstheamountfrom
itscustomers.Attheendoftheaccountingperiod,ifteeisanyoutstandingbillsitisshown
ontheContingentLiability(Schedule12).
Illustration3
Fromthefollowingparticulars,preparethefinalaccountsofJayaBankLtdfortheyearended31st
March2011.
Sharecapital
500000
ReserveFund
1000000
Fixeddeposit
2000000
Savingsbankdeposit
3000000
Currentaccounts
7000000
Borrowedfromthebank
200000
Investments
3000000
Premises
1200000
Cashinhand
60000
Cashatbank
2800000
Moneyatcallandshortnotice
300000
Interestaccruedandpaid
200000
Salaries
80000
Rent
30000
ProfitandLossAccount(01.04.2010)
160000
Interestearned
450000
Billsdiscounted
500000
Billspayable
800000
Loans,advances,overdraftandcredits
7000000
Unclaimeddividends
30000
Sundrycreditors
30000
15170000
15170000
ThebankhadthebillsforRs.1400000ascollectionforitsconstituentsandalsoacceptance
andendorsementsforthemamountingtoRs.400000.
97
Solution:
ProfitandLossAccountofJayaBankLtd.
(000somitted)
Schedule Yearended
Yearended
No
31.3.2011
31.3.2010
I. Income
450
Interestearned
13
Otherincome
14
Total
450
II. Expenditure
Interestexpended
15
200
Operatingexpenses
16
110
Total
310
III. Profit/Loss
140
160
Total
300
IV. Appropriations
35
(140x25%)
proposed
265
Dividend
300
BalancecarriedovertoBalancesheet
Total
Yearended
Yearended
31.3.2011
31.3.2010
450
450
Total
Yearended
31.3.2011
Total
(000somitted)
Yearended
31.3.2010
98
I.
Interestondeposits
Total
Yearended
Yearended
31.3.2011
31.3.2010
200
200
Yearended
31.3.2011
Yearended
31.3.2010
80
30
Total
110
BalanceSheetofJayaBankLtdason31stMarch2011(000somitted)
Ason
31.3.2010
Schedule Ason
No
31.3.2011
Capital&Liabilities
1
500
Capital
2
1300
Reserves&Surplus
3
12000
Deposits
4
200
Borrowings
5
860
Total
14860
Assets
6
60
shortnotice
7
3100
Investments
8
3000
Advances
9
7500
FixedAssets
10
1200
OtherAssets
11
Total
14860
12
Billsforcollection
400
1400
99
SCHEDULE1CAPITAL
Ason
31.3.2011
Authorisedcapital:SharesofRs.10each
Issuedcapital:SharesofRs.10each
Subscribedcapital:SharesofRs.10each
Calledupcapital:SharesofRs.10eachRs.5
each
fullypaid
Less:Callsunpaid
Add:Forfeitedshares
Total
Ason
31.3.2010
500
500
Ason
31.3.2011
OpeningBalance1000
Additionsduringtheyear35
II. CapitalReserves
Ason
31.3.2010
1035
265
1300
SCHEDULE3DEPOSITS
A.
I. DemandDeposits
III. TermDeposits
Total
(I+II+III)
B.
Total
Ason31.3.2011 Ason31.3.2010

7000
3000
2000
12000

12000
100
SCHEDULE4BORROWINGS
Ason
31.3.2011
I.
Ason
31.3.2010
BorrowingsinIndia
ReserveBankofIndia
200
Otherbanks
II. BorrowingsoutsideIndia
200
Total
Ason
Ason
31.3.2011
31.3.2010
800
I. Billspayable
II. Interofficeadjustments(net)
III. Interestaccrued
60
IV. Others(includingprovisions)30+30
860
Total
Ason
Ason
31.3.2011
31.3.2010
I. Cashinhand
60
(iii) Incurrentaccounts
(iv) Inotherdepositaccounts
60
Total(I
&II)
Ason
Ason
31.3.2011
31.3.2010
I. InIndia
2800
Balanceswithbanks
300
3100
Total
II. OutsideIndia
3100
GrandTotal(I+II)
101
Ason
31.3.2011
3000
I. InvestmentsinIndia
II. InvestmentsoutsideIndia
Total
3000
SCHEDULE9ADVANCES
Ason
31.3.2011
A.
500
7000
demand
(iii)Termloans
7500
Total
Ason
31.3.2011
I. Premises
1200
year
fixtures)
1200
year
Total
I.
II.
III.
IV.
V.
Interofficeadjustments(net)
Interestaccrued
Taxp[aidinadvance/taxdeductedatsource
Stationeryandstamps
Nonbankingassetsacquiredinsatisfaction
ofclaims
VI. Others
Total
Ason31.3.2010
Ason
31.3.2010
Ason
31.3.2010
Ason
31.3.2011
Ason
31.3.2010
102
I.
II.
III.
IV.
V.
VI.
Ason
Ason
31.3.2011
31.3.2010
Claimsagainstthebanknotacknowledgedas
debts
Liabilityforpartlypaidinvestments
Liabilityonaccountofoutstandingforward
exchangecontracts
Guaranteesgivenonbehalfofconstituents
(iii) InIndia
(iv) OutsideIndia
400
obligations
Otheritemsforwhichthebankis
contingentlyliable
400
Total
NonPerformingAssets(NPA)
Bank advances can be classified as Performing Assets and NonPerforming Assets (NPA).
An asset becomes NPA when it ceases to generate income for the bank. NPA means a credit
facilityinrespectofwhichinterestand/orprincipalrepaymentinstallmentsisinarrearsformore
than90days.InterestincomefromNPAisconsideredasincomeasandwhenitisreceivedrather
thanonaccrualbasis.
AssetClassification
BanksloansandadvancesaretobeclassifiedintotwobroadcategoriesStandardassets
and NonPerforming Assets. NPAs are subdivided into three Substandard, Doubtful and Loss
Assets.Thesemaybeexplainedasfollows:
1. Standard Assets Standard assets are those which do not carry more than the normal
creditriskattachedtothebusiness.TheseareassetswhicharenotNPAs.
2. Substandard Assets These have been classified as NPA for a period not exceeding 12
months.
3. Doubtful Assets Doubtful Assets are those which have remained NPA for a period
exceeding12months.
4. Loss Assets Loss assets are thoseassets in which loss has been identified by the bank,
auditorsorRBIbuttheamounthasnotbeenwrittenoffwhollyorpartly.Theseassetsare
irrecoverable.
Rebateonbillsdiscountedorunexpireddiscounts
Thewholeamountofdiscountonbillsdiscountedmaynotberelatedtothataccounting
year.Apartofitmayberelatedtonextaccountingperiod.Thisissobecauseatthecloseofthe
accounting year, some of the bills discounted may not have matured. In short rebate on bills
discountedmeanstheunearnedamountordiscountreceivedforthosebillswhichmatureafter
thedateofclosingthefinalaccounts.Itisalsocalledunexpireddiscountordiscountreceivedin
advance.Itiscarriedforwardtonextyearbypassingthefollowingentry:
103
InterestanddiscountA/c
Dr
ToRebateonbillsdiscounted.
If rebate on bills discounted is given in trial balance, it should e taken to Balance sheet
under Other Liabilities and Provisions. If it is given under adjustments, it should be deducted
from Interest and Discount in Profit and loss Account and should be taken to Balance sheet
underOtherLiabilitiesandProvisions.
AtthecommencementofnextaccountingyearitistransferredtoInterestandDiscount
Accountbyreversingtheaboveentry.
Illustration4
Inrespect0fthefollowingtransactionsofBestBankLtdpassnecessaryjournalentriesaswellas
theirtreatmentintheP&LA/candBalanceSheetfortheyearended31stMarch2011.
Thefollowingbillsarediscountedat5%.
Discountedon
AmountRs.
Terms(months)
3
50000
23.12.2011
4
100000
19.09.2011
3
400000
20.10.2011
5
30000
30.11.2011
Solution:
CalculationofRebateonbillsdiscounted
UnexpiredDiscount
Duedate
No.ofdays
AmountRs. Rateof
after31.12.11
discount
%
5 50000x5/100x85/365=582
50000
85
26.03.2011
5 100000x5/100x22/365=301
100000
22
22.01.2011
5 400000x5/100x23/365=1260
400000
23
23.01.2011
5 30000x5/100x123/365=506
30000
123
03.05.2011
2649
Rebateonbillsdiscounted=2649
Journalentry:
InterestanddiscountA/c
Dr
2649
ToRebateonbillsdiscounted.
2649
RebateonbillsdiscountedRs.2649willbedeductedfromInterestandDiscountinP&L
A/c.itwillalsoappearontheliabilitysideofBalancesheetundertheheadingOtherliabilities
andprovisions.
Illustration5
ThefollowingaretheledgerbalancesoftheNationalBankLtd.PrepareP&LA/candBalance
Sheetason31stMarch2011aspertherequirementsofTheBankingRegulationAct.
104
2000000
Sharecapital(20000sharesofRs.100each)
1000000
ReserveFundinvestments
182000
Generalexpenses
20244000
Currentaccounts
161000
Interestpaid
2920000
Savingsbankaccount
4000000
Fixeddeposits
st
230000
ProfitandlossAccount(on31 March2010)
180000
Discountreceived
64000
Rebateonbillsdiscounted
44000
Commission,exchangeandbrokerage
227000
Cash
532000
Interestreceived
2012000
CashwithRBI
200000
Owingbyforeigncorrespondents
6482000
Shortloans
15585000
Loansandadvancetocustomers
Investments
9883000
Billsdiscounted
6228000
Premises
2218000
Adjustments:
1. ProvisionforbadanddoubtfuldebtsrequiredRs.129000
2. ThebankhadbillsforcollectionforitsconstituentsRs.500000andacceptances,
endorsementsandguaranteesRs.1600000.
3. TheP&LA/cbalanceisthebalanceleftonthataccountafterthepaymentofinterim
dividendamountingtoRs.200000.
Solution:
ProfitandLossAccountofNationalBankLtd.
(000somitted)
Schedule Yearended
Yearended
No
31.3.2011
31.3.2010
I. Income
712
13
Interestearned
44
14
Otherincome
Total
756
II. Expenditure
15
Interestexpended
161
16
Operatingexpenses
182
129
Total
472
105
III. Profit/Loss
284
430
Total
714
IV. Appropriations
71
(284x25%)
InterimDividendpaid
200
443
sheet
714
Total
Yearended
Yearended
31.3.2011
31.3.2010
712
712
Total
(000somitted)
Yearended
Yearended
31.3.2011
31.3.2010
44
44
Total
Yearended
Yearended
31.3.2011
31.3.2010
161
Total
161
Yearended
Yearended
31.3.2011
31.3.2010
II. Generalexpenses
182
Total
182
BalanceSheetofNationalBankLtdason31stMarch2011(000somitted)
Schedule Ason
Ason
No
31.3.2011
31.3.2010
106
Capital&Liabilities
Capital
Reserves&Surplus
Deposits
Borrowings
Total
Assets
shortnotice
Investments
Advances
FixedAssets
OtherAssets
Total
Billsforcollection
1
2
3
4
5
7
8
9
10
11
12
2239
200
10883
21813
2218
37353
1600
500
SCHEDULE1CAPITAL
Ason
31.3.2011
Authorisedcapital:20000SharesofRs.100
each
Issuedcapital:20000SharesofRs.100each
Subscribedcapital:20000SharesofRs.100
2000
each
Calledupcapital:20000SharesofRs.100
each
2000
Rs.100eachfullypaid
Less:Callsunpaid
Add:Forfeitedshares
Total
Ason31.3.2011
OpeningBalance1000
Additionsduringtheyear71
II. CapitalReserves
2000
1514
27164
6482
193
37353
Ason
31.3.2010
Ason
31.3.2010
1071
107
443
1514
SCHEDULE3DEPOSITS
A.
I. DemandDeposits
III. TermDeposits
Total
(I+II+III)
B.
Total
27164
SCHEDULE4BORROWINGS
Ason31.3.2011 Ason
31.3.2010
I. BorrowingsinIndia
ReserveBankofIndia
6482
Otherbanks
III. BorrowingsoutsideIndia
6482
Total
Ason
Ason
31.3.2011
31.3.2010
I. Others(includingprovisions)
Rebateonbillsdiscounted64
193
Provisions129
193
Total
Ason31.3.2011 Ason31.3.2010
20244
2920
4000
27164
108
Ason
31.3.2011
Ason31.3.2010
227
I.
Cashinhand
Total(I&II)
2012
2239
Ason
31.3.2011
I. InIndia
Balanceswithbanks
Total
II. OutsideIndia
GrandTotal(I+II)
Ason
31.3.2010
200
200
Ason
31.3.2011
Ason31.3.2010
I. InvestmentsinIndia
Investments9883
ReserveFundInvestment1000
Total
10883
10883
SCHEDULE9ADVANCES
A.
demand
(iii)Termloans
Total
Ason
31.3.2011
Ason
31.3.2010
6228
15585
21813
109
Ason
31.3.2011
I.
Premises
2218
year
fixtures)
2218
year
Total
Ason
31.3.2011
I. Interofficeadjustments(net)
II. Interestaccrued
III. Taxp[aidinadvance/taxdeductedatsource
IV. Stationeryandstamps
V. Nonbankingassetsacquiredinsatisfaction
ofclaims
VI. Others
Total
Ason
31.3.2011
1600
obligations
1600
Total
Ason31.3.2010
Ason
31.3.2010
Ason
31.3.2010
110
Module5
FINALACCOUNTSOFINSURANCECOMPANIES
Insurance is a contract whereby one party agrees for a consideration called premium to
indemnifytheotheragainstapossiblelossortopayastatedsumofmoneyonthehappeningofa
particularevent.Thisagreementorcontractwhenputinwritingisknownaspolicy.Theperson
whoseriskiscoverediscalledinsuredorassuredandthecompanyorcorporationwhichinsures
is known as insurer, assurer or underwriter. The consideration in return for which the insurer
agreestomakegoodthelossisknownaspremium.
TypesofInsurance
Fromaccountingpointofview,theinsurancemaybedividedintotwoasfollows:
1. LifeInsurance
A life insurance contract is a long term contract in which the assured must pay the
premium at stated intervals and the insurer guarantee to pay a certain sum of money to the
assuredonthehappeningoftheeventwhichiscertain(eitherdeathorexpiryofthefixedperiod).
Section 2 of Indian Insurance Act 1938 defines life insurance as life insurance business is the
businessofeffectingcontractsuponhumanlife.
2. GeneralInsurance
Allinsuranceotherthanlifeinsuranceisgeneralinsurance.Underthistypeofinsurance,
the insurer undertakes to indemnify the loss suffered by the insured on happening of a certain
eventinconsiderationforafixedpremium.Usuallyalltheseareshorttermagreementsforayear.
Fire insurance, marine insurance, accident insurance, burglary insurance, third party insurance
etc.aretheexamplesforgeneralinsurance.
FINANCIALSTATEMENTSOFINSURANCECOMPANIES
InsuranceRegulatoryandDevelopmentAuthority(IRDA)hasissuedtheregulations
regardingthepreparationoffinancialstatements.
FinalAccountsofLifeInsuranceCompanies
Thefinalaccountsofalifeinsurancecompanyconsistof(a)RevenueAccount,(b)P&LA/c
and(c)BalanceSheet.
RevenueAccount(FormARA)
RevenueAccountispreparedaspertheprovisionsofIRDAregulations2002andcomplies
withtherequirementsofScheduleAasfollows:
FORMARA
Nameoftheinsurer
RegistrationNo.andDateofRegistrationwiththeIRDA
RevenueAccountfortheyearended31stMarch,20.
PolicyholdersAccount(TechnicalAccount)
111
No
.
Particulars
Premiumsearnednet
(a) Premium
(b) Reinsuranceceded
(c) Reinsuranceaccepted
Incomefrominvestments
(a) Interest,dividends&rentGross
(b) Profitonsale/redemptionofinvestments
(c) (Lossonsale/redemptionofinvestments)
(d) Transfer/Gainonrevaluation/changein
fairvalue*
Otherincome(tobespecified)
Total(A)
Commission
OperatingExpensesrelatedtoinsurancebusiness
Provisionfordoubtfuldebts
Baddebtswrittenoff
Provisionfortax
Provisions(otherthantaxation)
(a) Fordiminutioninthevalueofinvestments
(net)
(b) Others(tobespecified)
Total(B)
BenefitsPaid(Net)
InterimBonusespaid
Changeinvaluationofliabilityinrespectoflife
policies
(a) Gross**
(b) AmountcededinReinsurance
(c) AmountacceptedinReinsurance
Total(C)
Surplus(Deficit)(D)=(A)(B)(C)
Appropriations
TransfertoShareholdersAccount
TransfertoOtherReserves(tobespecified)
BalancebeingFundsforFutureAppropriations
Total(D)
Sched
ule
Current
Year
(Rs.000)
Previous
Year
(Rs.000)
Notes:
*RepresentsthedeemedrealizedgainaspernormsspecifiedbytheAuthority.
**RepresentsMathematicalReservesafterallocationofbonus
Thetotalsurplusshallbedisclosedseparatelywiththefollowingdetails:
112
(a) Interimbonusespaid
(b) Allocationofbonustopolicyholders
(c) SurplusshownintheRevenueAccount
(d) TotalSurplus:[(a)+(b)+(c)]
ProfitAndLossAccount(FormAPL)
TheP&LA/cispreparedtocalculatetheoverallprofitofthelifeinsurancebusiness.The
incomesorexpensesthatarenotrelatedtoanyparticularfundarerecordedintheP&LA/c.
FORMAPL
Nameoftheinsurer
ProfitandLossAccountfortheyearended31stMarch,20.
ShareholdersAccount(NontechnicalAccount)
Schedule Current
Previous
No.
Particulars
Year
(Rs.000)
Amountstransferredfrom/tothePolicyholders
Account(TechnicalAccount)
Total(A)
Expensesotherthanthosedirectlyrelatedtothe
insurancebusiness
Baddebtswrittenoff
Provisionfortax
(net)
(b) Provisionfordoubtfuldebts
(c) Others(tobespecified)
Total(B)
Profit(Loss)beforetax
Appropriations
(a) Balanceatthebeginningoftheyear
(b) Interimdividendspaidduringtheyear
(c) Proposedfinaldividend
(d) DividendDistributionTax
(e) TransfertoReserves/otheraccounts(tobe
specified)
Profitcarried.totheBalanceSheet
Year
(Rs.000)
113
NotestoFormARAandAPL:
(a) PremiumincomereceivedfrombusinessconcludedinandoutsideIndiashallbeseparately
disclosed.
(b) Reinsurancepremiumswhetheronbusinesscededoracceptedaretobebroughtinto
accountgross(i.e.,beforedeductingcommissions)undertheheadreinsurancepremiums
(c) Claimsincurredshallcompriseclaimspaid,specificclaimssettlementcostswherever
applicableandchangeintheoutstandingprovisionsforclaimsattheyearend.
(d) Itemsofexpensesandincomeinexcessofonepercentofthetotalpremiums(less
reinsurance)orRs.500000whicheverishigher,shallbeshownasaseparatelineitem.
(e) Feesandexpensesconnectedwithclaimsshallbeincludedinclaims.
(f) UnderthesubheadOthersshallbeincludeditemslikeforeignexchangegainsorlosses
andotheritems.
(g) Interest,dividendsandrentalsreceivableinconnectionwithaninvestmentshouldbe
statedatgrossamount,theamountofincometaxdeductedatsourcebeingincluded
underadvancetaxespaidandtaxesdeductedatsource.
(h) Incomefromrentshallincludeonlytherealizedrent.Itshallnotincludeanynotionalrent.
BalanceSheet(FormABS)
BalanceSheetofLifeInsuranceCompanyispreparedinverticalformat.Theformof
BalanceSheetisasfollows:
FORMABS
Nameoftheinsurer
BalanceSheetasat31stMarch,20.
No.
Particulars
SourcesofFunds
ShareholdersFunds:
ShareCapital
ReservesandSurplus
Credit/[Debit]FairValueChangeAccount
SubTotal
Borrowings
PolicyholdersFunds:
PolicyLiabilities
InsuranceReserves
ProvisionforLinkedLiabilities
SubTotal
FundsforFutureAppropriations
Total
Sched
ule
Current
Year
(Rs.000)
Previous
Year
(Rs.000)
5
6
114
ApplicationofFunds
Investments
8
Shareholders
8A
Policyholders
8B
AssetsheldtoCoverLinkedLiabilities
9
Loans
10
FixedAssets
CurrentAssets
11
CashandBankBalances
12
AdvancesandOtherAssets
SubTotal(A)
13
CurrentLiabilities
14
Provisions
SubTotal(B)
NetCurrentAssets(C)=(A)(B)
15
MiscellaneousExpenditure(totheextentnot
writtenofforadjusted)
DebitBalanceinProfitandLossAccount
(ShareholdersAccount)
Total
CONTINGENTLIABILITIES
No
.
1.
2.
3.
4.
5.
6.
7.
Particulars
Partlypaidupinvestments
Claims,otherthanagainstpolicies,notacknowledgedas
debtsbythecompany
Underwritingcommitmentsoutstanding(inrespectof
sharesandsecurities)
Guaranteesgivenbyoronbehalfofthecompany
Statutorydemands/liabilitiesindispute,notprovidedfor
Reinsuranceobligationstotheextentnotprovidedforin
accounts
Others(tobespecified)
Total
Current
Year
(Rs.000)
Previous
Year
(Rs.000)
115
SCHEDULESFORMINGPARTOFFINANCIALSTATEMENTS
SCHEDULE1PREMIUM
Previous
Particulars
Current
No
Year
Year
.
(Rs.000) (Rs.000)
1. FirstYearPremiums
RenewalPremiums
2.
SinglePremiums
3. TotalPremium
SCHEDULE2COMMISSIONEXPENSES
Previous
Particulars
Current
Year
Year
(Rs.000) (Rs.000)
Commissionpaid
DirectFirstYearPremiums
RenewalPremiums
SinglePremiums
Add:CommissiononReinsuranceAccepted
Less:CommissiononReinsuranceCeded
NetCommission
Note:Theprofit/commission,ifany,aretobecombinedwiththeReinsuranceacceptedorRe
insurancecededfigures.
SCHEDULE3OPERATINGEXPENSESRELATEDTOINSURANCEBUSINESS
Previous
No
Particulars
Current
Year
.
Year
(Rs.000) (Rs.000)
1. Employeesremuneration&welfarebenefits
2. Travel,conveyanceandvehiclerunningexpenses
3. Trainingexpenses
4. Rents,rates&taxes
5. Repairs
6. Printing&stationery
7. Communicationexpenses
8. Legal&Professionalcharges
9. Medicalfees
10. Auditorsfees,expensesetc
(a) Asauditor
(b) Asadviserorinanyothercapacity,inrespectof:
(i) Taxationmatters
(ii)Insurancematters
(iii)Managementservices;and
(c) Inanyothercapacity
Advertisementandpublicity
11. Interestandbankcharges
12. Others(tobespecified)
13. Depreciation
14. Total
116
Note:Itemsofexpensesandincomeinexcessofonepercentofthetotalpremiums(less
SCHEDULE4BENEFITSPAID[NET]
Previous
No
Particulars
Current
Year
.
Year
(Rs.000) (Rs.000)
1. InsuranceClaims:
(a) ClaimsbyDeath
(b) ClaimsbyMaturity
(c) Annuities/Pensionpayment
(d) Otherbenefits,specify.
2. (Amountcededinreinsurance):
(a) ClaimsbyDeath
3. Amountacceptedinreinsurance:
(a) ClaimsbyDeath
Total
Notes:(a)claimsincludespecificclaimssettlementcosts,whereverapplicable.
(b)Legalandotherfeesandexpensesshallalsoformpartoftheclaimscost,wherever
applicable.
SCHEDULE5SHARECAPITAL
Previous
No
Particulars
Current
Year
.
Year
(Rs.000) (Rs.000)
1. Authorisedcapital
EquitysharesofRs..each
2. IssuedCapital
3. SubscribedCapital
4. CalledupCapital
Less:Callsunpaid
Add:Sharesforfeited(Amountoriginallypaidup)
Less:Parvalueofequitysharesboughtback
Less:PreliminaryExpenses
Expensesincludingcommissionorbrokerageon
underwritingorsubscriptionofshares
Total
117
Notes:
(a) Particularsofthedifferentclassesofcapitalshouldbeseparatelystated.
(b) Theamountcapitalizedonaccountofissueofbonussharesshouldbedisclosed.
(c) Incaseanypartofthecapitalisheldbyaholdingcompany,thesameshouldbeseparately
disclosed.
SCHEDULE5APATTERNOFSHAREHOLDING
[AscertifiedbytheManagement]
CurrentYear
PreviousYear
Shareholders
No.of
%of
No.of
%of
Shares Holding
Shares
Holding
Promoters
*Indian
*Foreign
Others
Total
SCHEDULE6RESERVESANDSURPLUS
No
.
Particulars
Current
Year
(Rs.000)
Previous
Year
(Rs.000)
Current
Year
(Rs.000)
Previous
Year
(Rs.000)
CapitalReserve
CapitalRedemptionReserve
SharePremium
RevaluationReserve
GeneralReserves
Less:DebitbalanceinP&LA/c,ifany
Less:Amountutilizedforbuyback.
CatastropheReserve
OtherReserves(tobespecified)
BalanceofProfitinP&LA/c
Total
Note:Additionstoanddeductionsfromthereservesshallbedisclosedundereachofthespecified
heads.
SCHEDULE7BORROWINGS
1.
2.
3.
4.
5.
6.
7.
8.
No
.
1.
2.
3.
4.
Particulars
Debentures/Bonds
Banks
FinancialInstitutions
Total
118
No
.
1.
2.
3.
4.
5.
1.
2.
3.
4.
5
SCHEDULE8INVESTMENTSSHAREHOLDERS
Particulars
Current
Year
(Rs.000)
LongtermInvestments
GovernmentsecuritiesandGovernmentGuaranteedBonds
includingtreasurybills
Otherapprovedsecurities
Otherinvestments
(a) Shares
(aa)Equity
(bb)Preference
(b) MutualFunds
(c) DerivativeInstruments
(d) Debentures/Bonds
(e) Othersecurities(tobespecified)
(f) Subsidiaries
InvestmentPropertiesRealEstate
InvestmentsinInfrastructureandSocialsector
OtherthanApprovedInvestments
ShorttermInvestments
Otherinvestments
(a) Shares
(aa)Equity
(bb)Preference
(b) MutualFunds
(f) Subsidiaries
InvestmentPropertiesRealEstate
Total
Previous
Year
(Rs.000)
119
No
.
1.
2.
3.
4.
5.
1.
2.
3.
4.
5
SCHEDULE8AINVESTMENTSPOLICYHOLDERS
Particulars
Current
Year
(Rs.000)
LongtermInvestments
(a) Shares
(aa)Equity
(bb)Preference
(b) MutualFunds
(f) Subsidiaries
(g) InvestmentPropertiesRealEstate
(a) Shares
(aa)Equity
(bb)Preference
(b) MutualFunds
(f) Subsidiaries
Total
Previous
Year
(Rs.000)
120
No
.
1.
2.
3.
4.
5.
1.
2.
3.
4.
5
SCHEDULE8BASSETSHELDTOCOVERLINKEDLIABILITIES
Previous
Particulars
Current
Year
Year
(Rs.000) (Rs.000)
LongtermInvestments
(a) Shares
(aa)Equity
(bb)Preference
(b) MutualFunds
(f) Subsidiaries
(a) Shares
(aa)Equity
(bb)Preference
(b) MutualFunds
(f) Subsidiaries
Total
121
SCHEDULE9LOANS
No
.
1.
2.
3.
4.
Particulars
SecuritywiseClassification
Secured
(a) Onmortgageofproperty
(aa)InIndia
(bb)OutsideIndia
(b) OnShares,Bonds,Govt.Securities,etc.
(c) Loansagainstpolicies
(d) Others(tobespecified)
Unsecured
Total
BorrowerwiseClassification
(a) CentralandStateGovernments
(b) BanksandFinancialInstitutions
(c) Subsidiaries
(d) Companies
(e) Loansagainstpolicies
(e) Others(tobespecified)
Total
PerformancewiseClassification
(a) Loansclassifiedasstandard
(aa)InIndia
(bb)OutsideIndia
(b) Nonstandardloanslessprovisions
(aa)InIndia
(bb)OutsideIndia
Total
MaturitywiseClassification
(a) ShortTerm
(b) LongTerm
Total
Current
Year
(Rs.000)
Previous
Year
(Rs.000)
122
Cost/GrossBlock
Depreciation
No.
1.
2.
3.
4.
UptoLast
Year
Forthe
Year
OnSales/
Adjustmen
ToDate
Asatyear
end
Previous
Year
SCHEDULE11CASHANDBANKBALANCES
Particulars
Current
Year
(Rs.000)
Cash(includingcheques,draftsandstamps)
BankBalances
(a) DepositAccounts
(aa)Shortterm(duewithin12monthsofthedateof
BalanceSheet)
(bb)Others
(b) CurrentAccounts
(a) Withbanks
Total
Balanceswithnonscheduledbanksin2and3above
CashandBankBalances
1. InIndia
2. OutsideIndia
Total
Closing
Goodwill
Intangibles(specify)
LandFreehold
LeaseholdProperty
Buildings
Furniture&Fittings
Information
Technology
Equipment
Vehicles
OfficeEquipment
Others(Specifynature)
Total
Workinprogress
GrandTotal
PreviousYear
Deductions
Opening
NetBlock
Additions
Particulars
Previous
Year
(Rs.000)
123
SCHEDULE12ADVANCESANDOTHERASSETS
Particulars
Current
Year
(Rs.000)
Advances
1. Reservedepositswithcedingcompanies
2. Applicationmoneyforinvestments
3. Prepayments
4. AdvancestoDirectors/Officers
5. Advancetaxpaidandtaxesdeductedatsource(Net
provisionfortaxation)
Total(A)
OtherAssets
1. Incomeaccruedoninvestments
2. OutstandingPremiums
3. Agentsbalances
4. ForeignAgenciesBalances
5. Duefromotherentitiescarryingoninsurancebusiness
(includingreinsurers)
6. Duefromsubsidiaries/holdingcompany
7. DepositwithReserveBankofIndia[Pursuanttosection7of
InsuranceAct,1938]
Total(B)
Total(A+B)
SCHEDULE13CURRENTLIABILITIES
No
Particulars
Current
.
Year
(Rs.000)
1. Agentsbalances
2. Balancesduetootherinsurancecompanies
3. Depositsheldonreinsuranceceded
4. Premiumsreceivedinadvance
5. Unallocatedpremium
6. Sundrycreditors
7. Duetosubsidiaries/holdingcompany
8. Claimsoutstanding
9. Annuitiesdue
10. DuetoOfficers/Directors
Total
No
.
Previous
Year
(Rs.000)
Previous
Year
(Rs.000)
124
No
.
SCHEDULE14PROVISIONS
Particulars
Current
Year
(Rs.000)
Previous
Year
(Rs.000)
Fortaxation(lesspaymentsandtaxesdeductedatsource)
Forproposeddividends
Fordividenddistributiontax
Total
SCHEDULE15MISCELLANEOUSEXPENDITURE
(Totheextentnotwrittenofforadjusted)
No
Particulars
Current
Previous
.
Year
Year
(Rs.000) (Rs.000)
1. Discountallowedonissueofshares/debentures
Total
Explanationofsomeitemsinfinalaccounts
1. ClaimsClaimistheamountpayablebytheinsurancecompany.Inlifeinsurancebusiness,
claimsmayariseduetotworeasonsi.e.,bydeathormaturity.
2. Annuity Itis anannualpaymentwhichalifeinsurancecompany guaranteestopayfor
lumpsummoneyreceivedinthebeginning.
3. SurrendervalueIfaninsuredisunabletopaythefurtherpremium,hecangethispolicy
paidfromthecompany.Itisthepresentcashvalueofthepolicywhichaholdergetsfrom
thecompanyonsurrenderingalltherightsofthepolicy.
4. Bonusinreductionofpremiuminsteadofpayingbonusincash,theinsurancecompany
maydeductthebonusfromthepremiumduefromtheinsured.Thisisknownasbonusin
reductionofpolicy.
5. Consideration for annuities granted Any lump sum payment received by the insurance
companyinlieuofgrantingannuityiscalledconsiderationforannuitygranted.
6. ReinsuranceWhenacompanyacceptsabusinessofmorevalueandinordertoreduce
therisk,maypassonsomebusinesstotheothercompany,itiscalledreinsurance.
7. Commission on Reinsurance Accepted or Ceded The Company which passes some
businesstotheothercompanygetssomecommissionwhichisknownascommissionon
reinsurancebusinessceded.Commissionpaidonreinsurancebusinessacceptedisknown
asCommissiononReinsuranceAccepted.
Illustration1
FromthefollowinginformationprepareRevenueAccountofSafeInsuranceCo.Ltd.ason31st
March2011(figuresin000s):
ClaimsbydeathRs.152280,ClaimsbymaturityRs.60220,PremiumsRs.1411380,Transferfees
Rs.258,ConsiderationforannuitiesgrantedRs.164254,annuitiespaidRs.106922,Bonusincash
Rs.4832,ExpensesofManagementRs.63840,CommissionRs.19148,Interestanddividend
Rs.195680,IncometaxRs.11420,SurrendersRs.26280,BonusinreductionofpremiumRs.1960,
DividendstoshareholdersRs.11000andLifeAssuranceFundRs.3042000.
Solution:
1.
2.
3.
4.
125
FORMARA
Nameoftheinsurer:SafeInsuranceCo.Ltd.
RevenueAccountfortheyearended31stMarch,2011
No
Particulars
Sched Current
.
ule
Year
(Rs.000)
Premiumsearnednet
(a) Premium
1411380
1
(b) Reinsuranceceded()
(c) Reinsuranceaccepted(+)
195680
(d) Transfer/Gainonrevaluation/changein
fairvalue
Otherincome(tobespecified):
Considerationforannuitiesgranted
Transferfee
164254
Total(A)
258
Commission
1771572
2
19148
Provisionfordoubtfuldebts
3
63840
Baddebtswrittenoff
Provisionfortax
(net)
(b) Others(tobespecified):
Incometax
Total(B)
BenefitsPaid(Net)
11420
InterimBonusespaid
94408
Changeinvaluationofliabilityinrespectoflife
4
363494
policies
Total(C)
Appropriations
363494
1313670
BalancebeingFundsforFutureAppropriations
Total(D)
1313670
Previous
Year
(Rs.000)
1313670
126
SCHEDULE1PREMIUM
No
.
1.
2.
3.
Particulars
FirstYearPremiums
RenewalPremiums
SinglePremiums
TotalPremium
Current
Year
(Rs.000)
1411380
Previous
Year
(Rs.000)
1411380
SCHEDULE2COMMISSIONEXPENSES
Particulars
Commissionpaid
DirectFirstYearPremiums
RenewalPremiums
SinglePremiums
NetCommission
Current
Year
(Rs.000)
19148
Previous
Year
(Rs.000)
19148
No
.
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
Particulars
Employeesremuneration&welfarebenefits
Travel,conveyanceandvehiclerunningexpenses
Trainingexpenses
Rents,rates&taxes
Repairs
Printing&stationery
Communicationexpenses
Legal&Professionalcharges
Medicalfees
Auditorsfees,expensesetc
Interestandbankcharges
Others(tobespecified):
Expensesofmanagement
Depreciation
Total
Current
Year
(Rs.000)
63840
63840
Previous
Year
(Rs.000)
127
No
.
SCHEDULE4BENEFITSPAID[NET]
Particulars
Current
Year
(Rs.000)
Previous
Year
(Rs.000)

152280
60220
106922
26280
4832
1960
11000
363494
1. InsuranceClaims:
(a) ClaimsbyDeath
(d) Otherbenefits:
Surrenders
Bonusincash
Bonusinreductionofpremium
Dividendtoshareholders
Total
Illustration2
FromthefollowingtrialbalanceofGuaranteeLifeInsuranceco.LtdprepareRevenueAccountand
BalanceSheetasat31stMarch2011(figuresin000s).
Claimspaidandoutstanding
115200
Surrenders
3300
Reversionarybonuspaidandoutstanding
12300
Establishmentcharges
23500
Commissiontoagents
48500
Medicalfees
10100
Directorsandauditorsfees
24000
Stationeryandprinting
4800
Postageandtelegram
Officerent
1050
Sundryexpenses
4200
Bankchargesandcommission
800
Investments
950
Loansandpolicies
4047400
Outstandinginterest
174700
Outstandingpremiums
69800
Cashatbank
23200
Fineandfeesreceived
Interestanddividendreceived
29600
Premiumsreceivedandoutstanding
300
Premiumsreceivedinadvance
225300
Claimsadmittedbutnotpaid
330800
Claimsintimatedbutnotadmitted
9000
Sundrycreditors
210000
Lifefundinthebeginningoftheyear
20000
18000
3780000
4593400
4593400
128
Solution:
FORMARA
Nameoftheinsurer:GuaranteeLifeInsuranceCo.Ltd.
No
Particulars
Sched Current
.
ule
Year
(Rs.000)
Premiumsearnednet
(a) Premium
330800
1
225300
Otherincome(tobespecified):
Finesandfees
300
Total(A)
556400
Commission
2
48500
3
69400
Others(tobespecified):
Total(B)
117900
BenefitsPaid(Net)
4
130800
Total(C)
130800
307700
FORMABS
Nameoftheinsurer:GuaranteeLifeInsuranceCo.Ltd.
BalanceSheetasat31stMarch,2011
No
Particulars
Sched Current
.
ule
Year
(Rs.000)
SourcesofFunds
ShareholdersFunds:
5
ShareCapital
4087700
6
ReservesandSurplus
SubTotal
4087700
7
Borrowings
PolicyholdersFunds:
PolicyLiabilities
InsuranceReserves
ProvisionforLinkedLiabilities
Previous
Year
(Rs.000)
Previous
Year
(Rs.000)
129
SubTotal
FundsforFutureAppropriations
Total
ApplicationofFunds
Investments
Loans
FixedAssets
CurrentAssets
CashandBankBalances
SubTotal(A)
CurrentLiabilities
Provisions
SubTotal(B)
Total
8
9
10
11
12
13
14
15
SchedulesformingpartofARA
Particulars
Schedule1Premiumearnednet
Premiumreceivedandoutstanding
Schedule2Commission
Commissionpaidtoagents
Schedule3operatingexpensesrelatedtoinsurancebusiness
Establishmentcharges
Medicalfees
Stationeryandprinting
Directorsandauditorsfees
Postageandtelegram
Officerent
Sundryexpenses
Bankchargesandcommission
Schedule4Benefitspaid(Net)
Claimspaidandoutstanding
Surrenders
Reversionarybonuspaid
4087700
4047400
174700
4222100
29600
93000
122600
257000
257000
134400
4087700
Amount
23500
10100
4800
24000
1050
4200
800
950
115200
3300
12300
Amount
330800
48500
69400
130800
130
SchedulesformingpartofABS
Particulars
Amount
Amount
Nil
Schedule5ShareCapital
Schedule6ReservesandSurplus
LifeFundatthebeginning
Add:Surplus
Schedule7Borrowings
Schedule8Investments
Schedule9Loans
Schedule10FixedAssets
Schedule11CashandBankBalances
Schedule12AdvancesandOtherAssets
OutstandingInterest
OutstandingPremium
Schedule13CurrentLiabilities
SundryCreditors
Premiumsreceivedinadvance
Claimsadmittedbutnotpaid
Claimsintimatedbutnotadmitted
Schedule14Provisions
Schedule15MiscellaneousExpenditure
3780000
307700
69800
23200
18000
9000
210000
20000
4087700
Nil
4047400
174700
Nil
29600
93000
257000
Nil
Nil
Determinationofprofitinlifeinsurancebusiness
Alifeinsurancecompanyearnsprofitwhenthelifeinsurancefundexceedsitsnetliability.
Thenetliabilityistheexcessofpresentvalueoffutureclaimsofcurrentpoliciesoverthepresent
valueofpremiumstobereceivedinfutureinrespectofcurrentpolicies.Netliabilityistobe
comparedwithlifeassurancefundonaparticulardateinordertocalculatethesurplusor
deficiency.UsuallythiscomparisonismadebypreparingastatementcalledValuationBalance
Sheet.Itsformatisasfollows:
Liabilities
NetLiability
Surplus(Bal.Fig)
Amount
*****
*****
*****
Assets
LifeFund
Deficit(Bal.Fig)
Amount
*****
*****
*****
AsperSection28oftheLifeInsuranceCorporationAct1956,95%ofthesurplusmustbe
distributedtopolicyholdersintheformofbonusinrespectofwithprofitpolicies.Thebalance5%
maybeutilizedforsuchpurposeasdeterminedbythecentralgovernment.Bonuspayableto
policyholdersiscalculatedasfollows:
131
SurplusasperValuationBalanceSheet
****
Less:Actuarialexpenses
****
Dividendspayabletoshareholders
********
****
Add:Interimbonuspaid
****
NetSurplus
****
95%ofnetprofitispayableasbonustopolicyholders.Whilepayingtheabovebonus,
interimbonuspaidalreadyhastobededucted.
Illustration3
Alifeinsurancecompanygetsitsvaluationmadeonceineverytwoyears.Itslifeassurancefund
on31stDecember2011wasRs.5555000beforeprovidingfor55000beingtheshareholders
dividendfor2011.Itsactuarialvaluationon31stDecember2011disclosedanetliabilityof
Rs.3500000.aninterimbonusofRs.100000waspaidtopolicyholdersduringtheprevioustwo
years.ShowValuationBalanceSheet,NetProfitfortheperiodandDistributionofsurplus.
Solution:
ValuationBalanceSheetason31stDecember2011
Liabilities
NetLiability
Surplus(Bal.Fig)
Amount
Assets
3500000 LifeFund
2055000
5555000
Amount
5555000
5555000
CalculationofNetprofit:
SurplusasperValuationBalanceSheet
2055000
Less:Dividendspayabletoshareholders
55000

2000000
Add:Interimbonuspaid
100000
NetSurplus
2100000
Distributionofsurplus
Bonustopolicyholders(2100000x95%)
1995000
Less:interimbonusalreadypaid
100000
Balanceduetopolicyholders
1895000
FinalAccountsofGeneralInsuranceCompanies
Thefinalaccountsofageneralinsurancecompanyconsistof(a)RevenueAccount,(b)P&L
A/cand(c)BalanceSheet.
RevenueAccount(FormBRA)
Generalinsurancecompanymaybedoingmorethanonebusinesslikefire,marine,
accidentaletc.ForeachtypeofbusinessaseparateRevenueAccountistobepreparedinthe
prescribedformBRA.TheformofRevenueAccountisgivenbelow:
132
FORMBRA
Nameoftheinsurer
RevenueAccountfortheyearended31stMarch,20.
No
Particulars
Sched Current
.
ule
Year
(Rs.000)
1
1. PremiumsEarned(Net)
3. ChangeinProvisionsforunexpiredrisk
4. Interest,Dividend&RentGross
Total(A)
2
1. ClaimsIncurred
3
2. Commission
4
3. OperatingExpensesrelatedtoinsurancebusiness
Total(B)
OperatingProfit/(Loss)fromFire/Marine/
Miscellaneousbusiness(C)=(AB)
Appropriations
TransfertoCatastropheReserve
Total(C)
Previous
Year
(Rs.000)
ProfitAndLossAccount(FormBPL)
TheP&LA/cispreparedtocalculatetheoverallprofitofthegeneralinsurancebusiness.
Operatingprofits(orlosses)offire,marineandmiscellaneousinsurancearetakenintheP&LA/c.
incomefrominvestments,profitorlossonsaleofinvestments,baddebts,provisionfordoubtful
debtsetc.aretakenintheP&LA/c.
FORMBPL
Nameoftheinsurer
ProfitandLossAccountfortheyearended31stMarch,20.
Previous
No
Particulars
Sched Current
Year
.
ule
Year
(Rs.000) (Rs.000)
1. OperatingProfit/(Loss)
(a) FireInsurance
133
2.
3.
4.
5.
(b) MarineInsurance
(c) MiscellaneousInsurance
(d) Interest,dividends&rentGross
(e) Profitonsale/redemptionofinvestments
Total(A)
(net)
(b) ForDoubtfulDebts
OtherExpenses
(a) Expensesotherthanthosedirectlyrelated
totheinsurancebusiness
(b) Baddebtswrittenoff
Total(B)
Profitbeforetax
Profitaftertax
Appropriations
(f) Interimdividendspaidduringtheyear
(g) Proposedfinaldividend
(h) DividendDistributionTax
(i) TransfertoReservesorotheraccounts(to
bespecified)
BalanceofProfit/Lossbroughtforwardfrolast
year
BalancecarriedforwardtotheBalanceSheet
BalanceSheet(FormBBS)
BalanceSheetofLifeInsuranceCompanyispreparedinverticalformat.Theformof
BalanceSheetisasfollows:
FORMBBS
Nameoftheinsurer
134
No
.
No
.
1.
2.
3.
4.
5.
6.
7.
BalanceSheetasat31stMarch,20.
Particulars
Sched Current
ule
Year
(Rs.000)
SourcesofFunds
ShareholdersFunds:
ShareCapital
5
ReservesandSurplus
6
FairValueChangeAccount
Borrowings
Total
7
ApplicationofFunds
Investments
8
Loans
9
FixedAssets
10
CurrentAssets
CashandBankBalances
11
12
SubTotal(A)
CurrentLiabilities
13
Provisions
14
SubTotal(B)
15
Total
CONTINGENTLIABILITIES
Particulars
Current
Year
(Rs.000)
Partlypaidupinvestments
Claims,otherthanagainstpolicies,notacknowledgedas
debtsbythecompany
Underwritingcommitmentsoutstanding(inrespectof
sharesandsecurities)
Guaranteesgivenbyoronbehalfofthecompany
Statutorydemands/liabilitiesindispute,notprovidedfor
Reinsuranceobligationstotheextentnotprovidedforin
accounts
Total
Previous
Year
(Rs.000)
Previous
Year
(Rs.000)
135
SCHEDULESFORMINGPARTOFFINANCIALSTATEMENTS
SCHEDULE1PREMIUMEARNED[NET]
Previous
No
Particulars
Current
Year
.
Year
(Rs.000) (Rs.000)
Premiumfordirectbusinesswritten
Add:Premiumonreinsuranceaccepted
Less:premiumonreinsuranceceded
NetPremium
TotalPremiumEarned(Net)
Note:Reinsurancepremiumswhetheronbusinesscedeoracceptedaretobeboughtinto
account,beforedeductingcommissionundertheheadofreinsurancepremiums.
SCHEDULE2CLAIMSINCURRED[NET]
Previous
Particulars
Current
Year
Year
(Rs.000) (Rs.000)
Claimspaid
Direct
Add:Reinsuranceaccepted
Less:Reinsuranceceded
NetClaimspaid
Add:Claimsoutstandingattheendoftheyear
Less:Claimsoutstandingatthebeginning
TotalClaimsIncurred
SCHEDULE3COMMISSION
Previous
Particulars
Current
Year
Year
(Rs.000) (Rs.000)
Commissionpaid
Direct
NetCommission
Note:Theprofit/commission,ifany,aretobecombinedwiththeReinsuranceacceptedorRe
insurancecededfigures.
Previous
No
Particulars
Current
Year
.
Year
(Rs.000) (Rs.000)
1. Employeesremuneration&welfarebenefits
2. Managerialremuneration
3. Travel,conveyanceandvehiclerunningexpenses
4. Rents,rates&taxes
136
Repairs
Printing&stationery
Communicationexpenses
Legal&Professionalcharges
Medicalfees
Auditorsfees,expensesetc
(a) Asauditor
(b) Asadviserorinanyothercapacity,inrespectof:
(j) Taxationmatters
(ii)Insurancematters
(iii)Managementservices;and
(c) Inanyothercapacity
Interest&bankcharges
Depreciation
Total
Note:Itemsofexpensesandincomeinexcessofonepercentofthetotalpremiums(less
SCHEDULE5SHARECAPITAL
Previous
No
Particulars
Current
Year
.
Year
(Rs.000) (Rs.000)
1. Authorisedcapital
2. IssuedCapital
3. SubscribedCapital
4. CalledupCapital
Less:Callsunpaid
Add:EquitySharesforfeited(Amountoriginallypaidup)
Less:Parvalueofequitysharesboughtback
Less:PreliminaryExpenses
Expensesincludingcommissionorbrokerageon
underwritingorsubscriptionofshares
Total
Notes:
(a) Particularsofthedifferentclassesofcapitalshouldbeseparatelystated.
(b) Theamountcapitalizedonaccountofissueofbonussharesshouldbedisclosed.
(c) Incaseanypartofthecapitalisheldbyaholdingcompany,thesameshouldbeseparately
disclosed.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
137
SCHEDULE5APATTERNOFSHAREHOLDING
[AscertifiedbytheManagement]
CurrentYear
PreviousYear
Shareholders
No.of
%of
No.of
%of
Shares Holding
Shares
Holding
Promoters
*Indian
*Foreign
Others
Total
SCHEDULE6RESERVESANDSURPLUS
No
Particulars
Current
Previous
.
Year
Year
(Rs.000) (Rs.000)
1. CapitalReserve
2. CapitalRedemptionReserve
3. SecuritiesPremium
4. GeneralReserves
Less:DebitbalanceinP&LA/c,ifany
Less:Amountutilizedforbuyback.
5. CatastropheReserve
6. OtherReserves(tobespecified)
7. BalanceofProfitinP&LA/c
Total
Note:Additionstoanddeductionsfromthereservesshallbedisclosedundereachofthespecified
heads.
SCHEDULE7BORROWINGS
Previous
No
Particulars
Current
Year
.
Year
(Rs.000) (Rs.000)
1. Debentures/Bonds
2. Banks
3. FinancialInstitutions
Total
Previous
No
Particulars
Current
Year
.
Year
(Rs.000) (Rs.000)
LongtermInvestments
1. GovernmentsecuritiesandGovernmentGuaranteedBonds
2. Otherapprovedsecurities
138
3.
4.
5.
1.
2.
3.
4.
5
No
.
1.
2.
Otherinvestments
(a) Shares
(aa)Equity
(bb)Preference
(b) MutualFunds
(f) Subsidiaries
Otherinvestments
(a) Shares
(aa)Equity
(bb)Preference
(b) MutualFunds
(f) Subsidiaries
Total
SCHEDULE9LOANS
Particulars
SecuritywiseClassification
Secured
(a) Onmortgageofproperty
(aa)InIndia
(bb)OutsideIndia
(b) OnShares,Bonds,Govt.Securities,etc.
Unsecured
Total
BorrowerwiseClassification
Current
Year
(Rs.000)
Previous
Year
(Rs.000)
139
3.
4.
(a)
(b)
(c)
(d)
(e)
CentralandStateGovernments
BanksandFinancialInstitutions
Subsidiaries
IndustrialUndertakings
Total
PerformancewiseClassification
(a) Loansclassifiedasstandard
(aa)InIndia
(bb)OutsideIndia
(b) Nonperformingloanslessprovisions
(aa)InIndia
(bb)OutsideIndia
Total
MaturitywiseClassification
(a) ShortTerm
(b) LongTerm
Total
Particulars
Cost/GrossBlock
Depreciation
Deductions
Closing
UptoLast
Year
FortheYear
OnSales/
Adjustments
ToDate
Asatyear
end
Previous
Year
Goodwill
Intangibles(specify)
LandFreehold
LeaseholdProperty
Buildings
Furniture&Fittings
Information
Technology
Equipment
Vehicles
OfficeEquipment
Others(Specifynature)
Total
Workinprogress
GrandTotal
PreviousYear
Additions
Opening
NetBlock
140
No
.
1.
2.
3.
4.
No
.
1.
2.
3.
4.
5.
6.
1.
2.
3.
4.
5.
6.
7.
8.
SCHEDULE11CASHANDBANKBALANCES
Particulars
Current
Year
(Rs.000)
Cash(includingcheques,draftsandstamps)
BankBalances
(a) DepositAccounts
(aa)Shortterm(duewithin12months)
(bb)Others
(b) CurrentAccounts
(a) Withbanks
Total
Balanceswithnonscheduledbanksin2and3above
SCHEDULE12ADVANCESANDOTHERASSETS
Particulars
Current
Year
(Rs.000)
Advances
Reservedepositswithcedingcompanies
Applicationmoneyforinvestments
Prepayments
AdvancestoDirectors/Officers
Advancetaxpaidandtaxesdeductedatsource(Net
provisionfortaxation)
Total(A)
OtherAssets
Incomeaccruedoninvestments
OutstandingPremiums
Agentsbalances
ForeignAgenciesBalances
Duefromotherentitiescarryingoninsurancebusiness
(includingreinsurers)
Duefromsubsidiaries/holdingcompany
DepositwithReserveBankofIndia[Pursuanttosection7of
InsuranceAct,1938]
Total(B)
Total(A+B)
Previous
Year
(Rs.000)
Previous
Year
(Rs.000)
141
SCHEDULE13CURRENTLIABILITIES
Particulars
Current
Year
(Rs.000)
1. Agentsbalances
2. Balancesduetootherinsurancecompanies
3. Depositsheldonreinsuranceceded
4. Premiumsreceivedinadvance
5. Unallocatedpremium
6. Sundrycreditors
7. Duetosubsidiaries/holdingcompany
8. Claimsoutstanding
9. DuetoOfficers/Directors
Total
SCHEDULE14PROVISIONS
No
Particulars
Current
.
Year
(Rs.000)
1. ReserveforUnexpiredRisk
2. Fortaxation(lesspaymentsandtaxesdeductedatsource)
3. Forproposeddividends
4. Fordividenddistributiontax
Total
SCHEDULE15MISCELLANEOUSEXPENDITURE
(Totheextentnotwrittenofforadjusted)
No
Particulars
Current
.
Year
(Rs.000)
1. Discountallowedonissueofshares/debentures
Total
No
.
Previous
Year
(Rs.000)
Previous
Year
(Rs.000)
Previous
Year
(Rs.000)
ReserveforUnexpiredRisk
Thereservemaintainedtomeetanypossibleliabilityinrespectofthosepolicieswhichare
notexpiredattheendofanaccountingyeariscalledreserveforunexpiredrisk.Openingbalance
for reserve for unexpired risk is added to the premium and closing balance of reserve for
unexpired risk is deducted from the premium. The net premium should be shown in revenue
account.Theclosingbalanceofreserveforunexpiredriskshouldbeshowninthebalancesheet
undertheheadprovisions.Atpresentreserveforunexpiredriskwillbecreatedasfollows:
a. 50%ofnetpremiumforfireinsurance,marinecargobusinessandmiscellaneous
insurances.
b. 100%ofnetpremiumformarinehullbusiness.
Inadditiontotheabovereserve,acompanycanmaintainmorereserves.Thenitiscalled
AdditionalReserve.
142
Illustration4
FromthefollowingfigurestakenfromthebooksofAsiaInsuranceCo.Ltddoingthefireinsurance
business,preparethefinalaccountsfortheyear20102011.
Firefundon1stApril2010
930000
450000
GeneralReserve
3600000
Investments
2701533
Premium
602815
Claimspaid
900000
SharecapitalEquityshares@Rs.100each
330000
AdditionalReserveon1stApril2010
75000
ProfitandlossAccount(credit)
112525
Reinsurancepremium
21119
Claimsrecoveredfromreinsurers
48016
Commissiononreinsuranceceded
250000
Advanceincometax
20000
agentsbalance(Debit)
299777
Commissionondirectbusiness
60038
Commissiononreinsuranceaccepted
22300
60000
Outstandingpremium
st
431947
Claimsintimatedbutnotpaidon1 April2010
36000
5804
Auditfees(General)
67500
Rateandtax(General)
153000
Rent(General)
22500
182462
Sundrycreditors
Cashinhandandbankbalances
Thefollowingfurtherinformationmayalsobenoted:
1. ExpensesofmanagementincludesurveyfeesandlegalexpensesofRs.36000andRs.20000
relatingtoclaims
2. Claimsintimatedbutnotpaidon31stMarch2011Rs.104000
3. Incometaxtobeprovided@55%
4. Proposeddividend8%
5. TransfertogeneralreserveRs.200000
6. Reserveforunexpiredrisktobekept@40%ofnetpremium.
Solution:
FORMBRA
Nameoftheinsurer:AsiaInsuranceCo.Ltd
143
No
Particulars
Sched Current
Previous
.
ule
Year
Year
2483405
1
2483405
Total(A)
2
1. ClaimsIncurred
681696
3
2. Commission
311799
3. OperatingExpensesrelatedtoinsurancebusiness 4
375947
1369422
Total(B)
OperatingProfit/(Loss)fromFirebusiness
1113963
(C)=(AB)
Appropriations
Total(C)
1113963
FORMBPL
ProfitandLossAccountfortheyearended31stMarch,2011
No
Particulars
Sched Current
Previous
.
ule
Year
Year

(a) FireInsurance
1113963
(b) MarineInsurance
2.
153000
3.
1266963
144
4.
5.
Total(A)
Fordiminutioninthevalueof
investments(net)
ForDoubtfulDebts
OtherExpenses
(a) Expensesotherthanthosedirectly
relatedtotheinsurancebusiness
Rent67500
Ratesandtaxes5804
auditfees36000
Total(B)
Profitbeforetax
Provisionfortaxation()
Profitaftertax
Appropriations
(a) Interimdividendspaidduringthe
year
(b) Proposedfinaldividend
(900000x8%)
(c) DividendDistributionTax
(d) TransfertoReservesorother
accounts(tobespecified)
generalreserve
BalanceofProfit/Lossbroughtforwardfromlast
year
BalancecarriedforwardtotheBalanceSheet
109304
109304
1157659
636712
520947
72000
200000
272000
248947
75000
323947
FORMBBS
No
Particulars
Sched Current
Previous
.
ule
Year
Year

SourcesofFunds
ShareholdersFunds:
900000
5
ShareCapital
973947
6
ReservesandSurplus
7
Borrowings
145
1873947
Total
ApplicationofFunds
Investments
8
3600000
Loans
9
FixedAssets
10
3600000
CurrentAssets
182462
CashandBankBalances
11
292300
12
474762
SubTotal(A)
126500
CurrentLiabilities
13
2074315
Provisions
14
SubTotal(B)
2200815
1726053
15
Total
1873947
SchedulesformingpartofBRA
Particulars
Amount
2701533
Premium
112525
less:Reinsurance
Netpremium
2589008
Adjustmentforchangesforreserveforunexpiredrisk
Add:Openingbalanceofreserve(930000+330000)
1260000
3849008
less:closingbalanceofreserve:
2589008x40%=1035603
Additionalopening=330000
1365603
Schedule2Claimsincurred
Claimspaid
602815
Add:Surveyfees
36000
Legalexpenses
20000
658815
less:Claimsrecoveredfromreinsurance
21119
Netclaimspaid
637696
Add:outstandingattheend
104000
741696
less:outstandingatthebeginning
60000
Amount
2483405
681696
146
Schedule3Commission
Commissionpaid
Add:Reinsurancecommissionaccepted
Less:Reinsurancecommissionceded
ExpensesofManagement
less:surveyfeesandlegalexpenses(36000+20000)
SchedulesformingpartofBBS
Particulars
GeneralReserve
Add:Additional
BalanceinP&LA/c
Schedule7Borrowings
Schedule9Loans
Advanceincometax
Agentsbalances
outstandingpremium
SundryCreditors
Claimsintimatedbutnotpaid
Reserveforunexpiredrisk(closing)
Provisionfortax
Proposeddividend
299777
60038
359815
48016
431947
56000
Amount
450000
200000
650000
323947
250000
20000
22300
22500
104000
1365603
636712
72000
311799
375947
Amount
900000
973947
Nil
3600000
Nil
Nil
182462
292300
126500
2074315
Nil
147
Illustration5:FromthefollowingtrialbalanceofZenithInsuranceCompanyLtdprepareRevenue
AccountforFireandMarinebusinessandProfitandLossAccountfortheyearended31stMarch
2011andaBalanceSheetonthatdate:
406980
Investments
306142
Freeholdpremises
12604
Leaseholdpremises
46212
Agentsbalances
17918
Sundrydebtors
4513
Advanceincometaxoninterestanddividend
Claimspaidandoutstanding:
102412
Fire
261512
Marine
Expensesofmanagement:
96512
Fire
142218
Marine
Commission:
34921
Fire
62857
Marine
919
Interestaccrued
14761
Officefurniture
Preliminaryexpenses
90212
Cashandbankbalance
101738
400000
Sharecapital(4000shares@Rs.100each)
Claimsadmittedbutnotpaid:
Fire
4620
Marine
9808
Creditors
44962
Duetoreinsurers:
Fire
2471
Marine
4143
Interestanddividend
19512
Otherincomes
807
Premiumreceived:
Fire
356418
Marine
859960
1702701
1702701
Provisionforunexpiredriskistobemadeat50%ofthepremiumreceivedforfirebusiness
and100%ofthepremiumreceivedformarinebusiness.
Solution:
FORMBRA
Nameoftheinsurer:ZenithInsuranceCo.Ltd
148
No
Particulars
Sched
Fire
Marine
.
ule
178209
1
178209
Total(A)
2
1. ClaimsIncurred
261512
102412
3
2. Commission
62857
34921
3. OperatingExpensesrelatedtoinsurancebusiness 4
142218
96512
233845
466587
Total(B)
OperatingProfit/(Loss)fromFirebusiness
55636
466587
(C)=(AB)
Appropriations
Total(C)
55636
466587
FORMBPL
ProfitandLossAccountfortheyearended31stMarch,2011
No
Particulars
Sche Current
Previous
.
dule Year
Year

55636
(a) FireInsurance
(b) MarineInsurance
466587
2. Incomefrominvestments
19512
807
3. Otherincome(tobespecified)
Total(A)
501904
149
4.
5.
(a) Fordiminutioninthevalueof
investments(net)
(b) ForDoubtfulDebts
OtherExpenses
(a) Expensesotherthanthosedirectly
relatedtotheinsurancebusiness
Total(B)
BalancecarriedforwardtotheBalanceSheet(A)(B)
501904
FORMBBS
Sched
N
Particulars
ule
o.
SourcesofFunds
ShareholdersFunds:
5
ShareCapital
6
ReservesandSurplus
7
Borrowings
Total
ApplicationofFunds
Investments
8
Loans
9
FixedAssets
10
CurrentAssets
CashandBankBalances
SubTotal(A)
11
CurrentLiabilities
12
Provisions
SubTotal(B)
13
14
15
Total
Current
Year
Previous
Year

309788
309788
406980
333777
740757
101738
69562
171300
66004
1038169
1104173
932873
501904
309788
150
SchedulesformingpartofBRA
Particulars
Premium(Net)
less:closingbalanceofreserve:
50%offireand100%ofmarine
Schedule2Claimsincurred
Claimspaid
Schedule3Commission
Commissionpaid
ExpensesofManagement
SchedulesformingpartofBBS
Particulars
Paidupshares
less:Preliminaryexpenses
Schedule7Borrowings
Schedule9Loans
Freeholdpremises
Leaseholdpremises
Officefurniture
CashinhandandBankbalances
Advanceincometax
Agentsbalances
Sundrydebtors
Accruedinterest
SundryCreditors
Claimsadmittedbutnotpaid(4620+9808)
Duetoreinsurers
Reserveforunexpiredrisk(closing)
Fire
Marine
Fire
356418
178209
178209
102412
34921
96512
Amount
400000
90212
306412
12604
14761
4513
46212
17918
919
44962
14428
6614

178209
859960
Marine
859960
859960
261512
62857
142218
Amount
309788
Nil
Nil
406980
Nil
333777
101738
69562
66004
1038169
Nil
151
Exercises:
1. FollowingwerethebalanceextractedfromthetrialbalanceoftheSouthernLifeInsurance
Co.Ltd.at31stMarch2011:
Rs.000s
Rs.000s
Claimsadmittedbutnot
Balanceofaccountatthe
beginningoftheyear
6000
2000000 paid
Surrenders
Govt.Securities
20000
1000000
Singlepremiums
Profitonrealizationof
80000
assets
2000 Considerationforannuities
granted
Investmentfluctuation
50000
account
10000 Interest,dividendsandrent
received
Claimsunderpoliciesby
70000
death
3000
60000 Depreciationonfurniture
Administrativeexpenses
Claimsunderpoliciesby
36000
maturity
3000
100000 Salaries
Loansonmortgages
1500
560000 Auditorsfees
Loansonpolicies
300
300000 Directorsfees
Freeholdpropertyand
1000
103000 Legalexpenses
furniture
1400
3600 Advertising
Sundrycreditors
2000 Printing,stationeryand
Outstandingpremiums
10800
24000 others
Commissionpaid
168400
24000 Cashatbank
Interestaccruednotdue
3000
3000 Provisionfordepreciation
Premium(otherthan
200000
single)
PrepareaRevenueAccountandBalancesheet.
Ans:(Profit:Rs.141000andBalancesheetTotal:Rs.2151000)
2. FromthefollowingbalancesofMysoreGeneralInsuranceCo.Ltd.ason31stMarch2011,
prepareRevenueAccounts,Profit&LossAccountandBalancesheet.
Building(costRs.125000)
Claimspaidless
87000
reinsurance:
Officeequipment(cost
80000 Rs.48000)
Fire
30000
62000 Cashinhand
Marine
56000
118000 Cashatbank
Generalreserve
104000
Commissionpaid:
Premiumlessreinsurance:
48000 Fire
Fire
210000
39000 Marine
Marine
163000
Sharecapital(20000shares
Taxdeductedatsource
9000
200000 Furniture(costRs.18000)
ofRs.100each)
12000
Premiumdue:
Fire
53000 Fire
28000
Marine
36000 Marine
20000
st
Reserveforunexpiredrisk
Claimsoutstandingon1
152
April2010:
(1stApril2010):
14000
204000 Fire
Fire
2000
123000 Marine
Marine
27000
2515000 Duefromotherinsurers
Investmentsatcost
4000
21000 Directorsfees
Depreciation
st
Commissiononreinsurance
Additionalreserves(1
ceded:
April2010):
23000
132000 Fire
Fire
2000
16000 Marine
Marine
20000
25000 Dividends(Credit)
Interestaccrued
100000
39000 Interestoninvestments
Contingencyreserve
43000
47000 Duetootherinsurers
Investmentreserve
Followingfurtherinformationisalsogiven:
(a) Claimsoutstandingon31stMarch2011are:FireRs.17000,MarineRs.6000
(b) MarketvalueofinvestmentsisRs.2401000.
(c) Increaseadditionalreserveby10%ofnetpremiumfortheyearforfire.
(d) Maintainreservesforunexpiredrisksat50%ofpremiumfortheyearincaseoffire
insuranceand100%ofpremiumfortheyearincaseofmarineinsurance.
Ans:(Fireprofit:Rs.127000,Marineloss:Rs.16000,BalancecarriedtoBalancesheet:Rs.139000
andBalancesheettotal:Rs.2410000).
..
153

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CORPORATE ACCOUNTING

Sri. T.H. JAHFARALI

A company is an association of persons who contribute money or moneys worth to a

Forfeited shares may be reissued by the company either at pr, premium or

Incometax ispayable intheassessmentyear ontheincomeearnedduringtheprevious

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