SCHEDULE VI OF COMPANIES ACT,1956

Objective
To Understand: General Requirements of the Company Act Requirements of the Company Act with respect to the Profit and loss account Requirements of the Company Act with respect to the Balance sheet Accounting Treatment of Special Items in the financial Statements of a Limited Company
2

General Requirements of the Company Act

The joint stock companies, are legally required to prepare a set of financial statements to periodically assess the profits earned and to know the financial position of the company as on a specified date. date. The accounts must be statutorily audited by an external person called the auditor and it is the duty of the auditor to submit a report in the prescribed format to the shareholders. shareholders.
3

General Requirements of the Company Act

The objective of the Companies Act in laying down various provisions with respect to accounts and audit is; to ensure that adequate information is provided to is; the shareholders. shareholders. The legal requirements laid down by the Companies Act, assumes a great importance in the preparation of the financial statements of a joint stock company. company.

Books of Accounts
Section 209 of the Companies Act specifies the books of accounts to be maintained by a company. company. According to this Section, every company should keep at its registered office proper books of accounts. accounts. Companies which are engaged in manufacturing, production, processing or mining activities, should prepare a set of cost accounts in addition to the financial accounts. accounts.
5

Legal Requirements Regarding Annual Accounts

At every annual general meeting of the shareholders, the Board of Directors of the company should lay before the shareholders, a balance sheet and profit and loss account as at the end of the accounting period. period. The annual accounts of the company must be submitted in an annual general meeting within six months counted from the last day of the accounting period to which the accounts relate. relate.
6

Legal Requirements Regarding Annual Accounts

The period to which the accounts relate is known as the financial year and it may be less than, equal to or greater than 12 months but cannot exceed 15 months. months. The Companies Act provides that a statement of all significant accounting policies adopted in the preparation and the presentation of the Balance Sheet and Profit and Loss account shall be disclosed in the companys Balance Sheet. Sheet.
7

Legal Requirements with Respect to Profit and Loss Account

Part II of Schedule VI of the Companies Act 1956, 1956, does not prescribe any format for the profit and loss account but only outlines the information to be included. included. The various items of receipts and expenses should be arranged under most convenient heads. heads.

Legal Requirements with Respect to Profit and Loss Account

According to Part II of Schedule, certain information has to be provided by way of notes to profit and loss account. account. The profit and loss appropriation shows in detail the appropriations made from the profits in respect of dividends and transfer to reserves, etc. etc.
9

Legal Requirements with Respect to Balance Sheet

Part I of Schedule VI of the Companies Act specifies both the form and content of the balance sheet of a company. company. The assets of a company should be classified into; into; Fixed assets, Investments, Current assets; Loans & assets; Advances and Miscellaneous Expenditure. Expenditure.

10

Legal Requirements with Respect to Balance Sheet

The liabilities of a company should be classified into; into; Share capital, Reserves and surplus, Secured loans, unsecured loans, Current Liabilities and Provisions. Provisions. A company may prepare its balance sheet either in the horizontal specified in part I Schedule VI or may prepare it in a statement form, stating the liabilities as sources of funds in the first part and listing the assets as applications of funds in the second part. part.
11

Balance Sheet of ........................ (name of the company) .......................... As at ........................................................(date as at which it is made out)

PARTICULARS
Authorised ..... Shares of Rs....... each Issued ..... Shares of Rs....... each Subscribed ..... Shares of Rs....... each Rs. .... per share called up Less: Unpaid calls Add: Forfeited shares

AMOUNT (Rs)

12

RESERVES AND SURPLUS Capital Reserves Capital Redemption Reserve Share Premium Account Other Reserves Less: Debit balance in profit and loss account, if any Balance in the profit and loss accounts after providing for proposed allocation namely Dividend Bonus or Reserves Proposed additions to Reserves Sinking Funds

13

SECURED LOANS Debentures Loans and Advances from Banks Loans and Advances from Subsidiaries Other Loans and Advances UNSECURED LOANS Fixed Deposits Loans and Advances from Subsidiaries ShortShort-term Loans and Advances:
from Banks from others
14

Other Loans and Advances

from Banks from others

CURRENT LIABILITIES & PROVISIONS Current Liabilities

Acceptances Sundry Creditors
Total outstanding dues of small scale industrial undertaking(s). Total outstanding dues of creditors other than small scale industrial undertaking(s).

Subsidiary companies Advance payments and unexpired discounts Unclaimed Dividends

15

Other Liabilities (if any) Interest accrued but not due on loans

Provisions
Provision for Taxation Proposed Dividends For contingencies For Provident Fund Scheme For Insurance, pension and similar staff benefit schemes Other provisions

16

FIXED ASSETS Goodwill Land Buildings Leaseholds Railway Sidings Plant and Machinery Furniture and Fittings Development of Property Patents, trademarks and designs Livestock Vehicles etc.
17

INVESTMENTS Investments in Govt. or Trust Securities Investments in shares, debentures or bonds Immovable properties Investments in the capital of partnership firms Balance of unutilised monies raised by Issue

18

CURRENT ASSETS, LOANS & ADVANCES Current Assets

Interest accrued on investments Stores and spare parts Loose tools Stock-inStock-in-trade Works-inWorks-in-progress

Sundry debtors :
Debts outstanding for a period exceeding 6 months Other debts Less: Provision Cash balance on hand Bank balances :
With Scheduled Banks

19

Advances and Loans

To subsidiaries To partnership firms in which the co./its subsidiary is a partner

Bills of Exchange Advances recoverable in cash or in kind or for value to be received; e.g., Rates, Taxes, Insurance, etc. Balances with Customs, Port Trust, etc. (where payable on demand).

20

MISCELLANEOUS EXPENDITURE (to the extent not written off or adjusted)

Preliminary Expenses Expenses including commission/ brokerage on underwriting or subscription of shares or debentures Discount allowed on issue of shares or debentures Interest paid out of capital during construction Development expenditure not adjusted Other items (Specifying nature) PROFIT AND LOSS ACCOUNT (Debit Balance)

21

Accounting Treatment of Special Items in the Financial Statements of a Limited Company

22

Depreciation
The Companies Act requires the provision of adequate depreciation for the following purposes: purposes: For determination of the profits out of which dividends can be declared. declared. For determination of profits for the purpose of calculation of managerial remuneration. remuneration.

23

Depreciation
Depreciation as an expense is brought into the books by passing either one of the following entries: entries: Depreciation Account Dr. To Asset Account or Depreciation Account Dr. To Provision for Depreciation Account
24

Interest on Debentures

When a company has raised funds by floating debentures, the Profit and Loss Account must be charged with the interest on the debentures for the financial year.

25

Income Tax
Dividends to both the equity and the preference shareholders can be paid only out of profits available after taking account the income tax. tax. When advance tax is paid, the journal entry to record this would be: Advance Income Tax a/c To Bank a/c Dr.

26

Income Tax
The accounting treatment of income tax must take into account the following three stages: stages: - Payment of Advance Income Tax. Tax. - Determination of the tax liability by the company from its books of accounts, making a provision for such liability and payment of difference, if any, between advance tax and tax now computed. computed. - Completion of the assessment by the Income Tax Officer. Officer.
27

Income Tax
Tax deducted at source: As per Sections 193 and 194 source: of the Income Tax Act, 1961, it is the duty of the 1961, person, who pays interest, salaries or dividends, to deduct the tax at the prescribed rate and deposit the same within a specified period of time with the Government. Government.

28

Income Tax
The following accounting entries are made: Salaries/Dividend/Interest a/c Dr. To Bank a/c To Tax deducted at source a/c (Being the salary/dividend/interest paid after deducting the tax at source) Tax deducted at source a/c Dr. To Bank a/c (Being the amount of tax deducted at source paid to the Government)
29

Dividends
Dividends may be defined as the share of profits that is payable to each shareholder of the company. company. The Companies Act lays down that dividends can be paid out of profits only and prohibits the payment of any dividend out of capital. capital. The directors generally recommend the percentage of dividend payable on the equity shares. shares.
30

Proposed Dividend

The dividend recommended by the directors is termed as Proposed Dividend till such time it is adopted by the shareholders in the annual general meeting. The entry to record proposed dividend is: Profit and Loss a/c Dr. To Proposed Dividend a/c

31

Declared Dividend and Interim Dividend

The dividend finally decided by the shareholders in the annual general meeting as payable is termed as Declared Dividend. Dividend. If the articles of the company permit, the Directors can declare an interim dividend between two annual general meetings. When interim dividend is paid, the entry to record the payment will be, Interim Dividend a/c Dr. To Bank a/c
32

Final Dividend

Final dividend: After declaring interim dividend, the dividend: company may also declare another dividend which is termed as final dividend. This dividend declared is dividend. over and above the interim dividend. dividend.

33

Profit on Revaluation of Fixed Assets

When a company revalues its fixed assets and if there is a profit on revaluation, it should be transferred to Capital Reserve account. The entries are as follows: account. follows: i. Asset a/c Dr. Dr. (Revalued amount Book Value) To Revaluation a/c Revaluation a/c Dr. To Capital Reserve a/c
34

ii.

Interest out of Capital

Though the Companies Act provides that dividends to shareholders are payable only out of profits, in certain circumstances with the previous sanction of the Central Government, interest may be paid to shareholders out of capital. capital.

35

Suspense Account
Items which cannot be posted to the correct account for some reason or the other are shown in the suspense account. account. Suspense account may be credited with the sale proceed of the asset account. account. The entry to be made for adjustment is Suspense a/c Dr. To Asset a/c

36

Suspense Account
The entry for forfeiture is passed, but money on reissue is credited to capital suspense account. The account. entry to be made for adjustment is: is: Capital suspense a/c Dr. (Money Received) Share forfeiture a/c Dr. (Discount on Reissue) To Share capital a/c

37

Managerial Remuneration
Managerial remuneration payable to directors, managers, managing director is based on net profit. profit. A company may enter into an agreement to pay commission at a percentage of profit after charging such commission. commission.

38

Summary
The Companies Act prescribes a few provisions to prepare and present the financial statements of the joint stock companies. companies. The legal requirements laid down by the Companies Act, assumes a great importance in the preparation of the financial statements of a joint stock company. company. Section 209 of the Companies Act specifies the books of accounts to be maintained by a company. company.
39

Summary
Part II of Schedule VI of the Companies Act 1956 (Appendix II) does not prescribe any format for the profit and loss account but only outlines the information to be included. included. Part I of Schedule VI of the Companies Act specifies both the form and content of the balance sheet of a company
40