corporate accounts meaning of terms authorised, registered, nominal capital: authorised capital is...
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CORPORATE ACCOUNTSMeaning of terms
•Authorised, registered, nominal capital: Authorised capital is the maximum amount which the company can issue during
it’s life and is shown on the liabilities side of the balance sheet without adding its amount in the total of the balance
sheet
•Issued capital: Issued capital is that part of the authorised capital which is actually issued by the company for public
subscription. The remainning part of the authorized capital is known as unissed capital
•Subscribed capital: Subscribed capital is that part of the issued capital which is subscribed by the public. It is that part of the authorised capiital which has actually been taken up by the shareholders who have agreed to give consideration
in kind or cash for shares issued to them.•
Terms
• Called up capital: called up capital is that part of issued capital which is called up by the company. Suppose the face value of the share is Rs. 100. If the directors called Rs. 60 per share on 10000 shares , then 10000 X 60=60000 will be the called up capital.
• Paid up capital: Paid up capital is that part of called up capital which is paid by the shareholders of the company. The amount which is due but not received or yet to be received is known as calls in arrears.
• The above mentioned classification can be understood with the help of the following
The authorised capital of Anuj Ltd. Is divided into 50000 shares of Rs. 10 each .The company issued prospectus to issue 20000 shares. 15000 were taken up by the public. Till 31st December 2008, Rs. 8 per share were called by the company. All money payable was duly received except on 100 shares @ Rs. 2 per share. All other shareholders have paid their dues.
Preference shares• Preference shares are those which carry the following two rights:1) Right to receive dividend at a specified rate before any dividend is
paid to the equity shares and2) Right to receive return on the capital in case of winding up of the
company before the capital of the equity shareholders is returned.
The limitation of the preference shares is that they do not carry voting rights, except on those issues which affect their interests such as non-payment of dividend for more that two years
Types1) Cumulative and non-cumulative2) Redeemable and irredeemable3) Convertible and non-convertible4) Participating and non-participating
Reserves and Surplus
• Reserve Capital-According to section 99 of the Indian companies Act 1956, a company may by passing special resolution decide that a certain portion of its uncalled capital shall not be called up unless the company goes into liquidation. In that case the reserved portion of the subscribed capital becomes the reserve capital. This portion may be called and made available only for the creditors on the winding up of the company.
• Capital Reserve – Capital reserve is a reserve which is not available for distribution as dividend to the shareholders. It is created out of capital profits. Capital profits are those which are not earned by the company in the normal course of business. Capital Reserve may be created out of capital profits from the following sources:
• Profit on sale of fixed asset• Profit on revaluation of fixed asset• Profit on forfeiture of shares• Profit prior to incorporation of business• Profit on redemption of debentures• Premium on issue of shares and debentures.• It is used for writing off capital losses or issue of bonus shares
reserves• General Reserve- This is created to meet any general purpose. It is
also known as uncommited reserve.
• Revaluation reserve- If the old assets are revalued and their value is found to be on the higher side than that shown in the balance sheet then the difference is credited in the revaluation account.
• Similarly there can be other reserves like P&L Adjustment, Capital redemption reserve, Debenture redemption reserve etc.
• Some of them are mandatory and have to be kept as per the provisions of the Companies Act. They can be free or non- free reseves.
Profit and loss Appropriation Account
• In case of corporate accounts , profit and loss acount forms the second part of the the financial statements and therefore there is no prescribed format for the profit and loss account so we incorporate all the items of trading as well as the P&L in the profit and loss account itself.
• After we arrive at the net profit we deduct taxes and the arrive at net profit after tax..these are actually the funds available to the company in that period from revenue profits…
• These revenue propfits will then be appropriated or allocated…this is done by creating a profit and loss appropriation account.
• Purpose• Shows distribution or disposal of profits-..please note that here we do not account for expenses
or losses, we are just appropriating the profits..• It accomodats adjustments applicable to the previous years( not the current year) e.g. tax
provision
• Items in P&L appropriation account
a) Balance b/db) Current year’s net profit after tax (Cr. Side)c) Proposed dividendd) Interim Dividende) Transfer to Reservesf) Previous Year’s Adjustmentsg) Surplus
Balance Sheet
• It is a part of final accounts but is a statement.• Date of preparation: It is prepared on a
particular date and shows the financial position of the business on that particular date.
• Sides of the balance sheet: The balance sheet has two sides. The left hand side is called libilities and the right hand side is called assets. It has no debit and credit side.
• Objective: the main objective of the balance sheet is to know the financial position of the business.
Format of balance sheet
Liabilities Assets
Share Capital Fixed Assets
Authorised Xx
Issued subscribed and paid up Investments
Reserves and surplus
Loan funds:
Secured loans
Unsecured loans
Current Assets, Loans and provisions
Current liabilities and provisions Miscelaneous expenditure
Xxxx xxxx
Vertical form
I. Sources of funds a)Shareholders funds Capital Reserves and surplus b) Loan funds SecuredLoan Unsecured Loan TOTAL
Application of funds1 Fixed Assets Gross blockLess : Depreciation Net Block Capital work-in-progress
2. Investments
3 Current Assets, Loans and Advances a) Inventories b) Sundry debtors c) Cash and bank Blances d) Other Current Assets e) Loans and Advances
Less:
Current Liabilities loans and provitsionsa) Liabilitiesb) ProvisionsNET CURRENT ASSETS
4 A) Miscellaneous expenditure to the extent not written off or adjusted5 B) Profit and loss account
6 TOTAL
LOANS• SecuredIt refers to loans secured by a fixed or floating charge on the assets of the
businessIt includesDebenturesBonds and loansBank overdraftCash CreditLoans and advances from Banks and financial institution
Unsecured LoansFixed DepositsLoans and advances from subsidiariesShort term loans and advancesOther loans and advances
Current Liabilities and provisions
• Current liabilities include• Bills payable, unclaimed dividends, sundry creditors, interest
accrued but not due, advances from customers, outstanding expenses, advance income, tax payable, tax deducted at source payable.
Provisions includeProvision for income taxProposed dividendProvision for gratuity and pensionProvident fundProvision for contingenciesProvision for corporate dividend tax etc.
Contingent liabilities• It includes the following• Uncalled liabilities on partly paid-up shares held by company
investment• Arrears of dividends on cumulative preference shares• Estimated amounts of contract remainning to be executed on capital
account• Disputed liabilities on account of income-tax,sales tax, excise duty,
custom duty for which provision has not been made.• Amount of any guarantees given by the company on behalf of
directors or other officers of the company• Workers claims not acknowledged as debts by the company• Bills receivable discounted.
Fixed AssetsAs per AS-10 “ Accounting for fixed assets” a fixed asset is an asset held with
the intention of being used for the purpose of producing or providing goods or services and is not held for sale in the normal course of business.
Fixed assets include:Goodwill,patents, trademarks,CopyrightsLand and buildings, vehicles, stock, capital work-in-progressPlant and machinery, furniture and fittings etc.Classification:Tangible assets:Those assets that can be seen or touched. i.e. they have some physical
existenceIntangible assets: Those assets that cannot be seen or touched. i.e. they do not
have some physical existence.Fixed assets need to be depreciated over a period of time. Therefore in the
balance sheet fixed assets are shown at actual cost less the accumulated depreciation.
Current assets
• It is divided in two partsA) Current assetsB) Loans and advances.These are cash and other assets that are expected to be converted into cash or consumed in te production of goods or
rendering services in the normal course of businesse.g.Cash in handCash at bankSundry debtorsStockAccrued interest on investements
E;g.s of loansLoans and advances to subsidiariesLoans and advances to partnership firmsBills of exchangeAdvances recoverable in cash or kindBalance with excise authorities, port trusts etc.Prepaid expensesAdvance taxAdvance to employees, advance to suppliersSecurity deposits and other balances with customers.
Profit and loss appropriation Account
• In the case of corporates there is no prescribed format for profit and loss which is prescribed, we therefore put all the direct expenses above and the indirect expenses below in order to arrive at the net profit. This would be the net profit after taxes.
• This amount represents the divisible profits of the company i.e. its revenue profits. • However as per Companies Act and internal company policies certain amounts are allocated or set
aside for some purposes..this is done through profit and loss appropriation account.
• Purposea) To Show the disposal or distribution of the profit depending upon the total disposable profits.
Please note that in the profit and loss adjustment account..we only have distribution of profit, we do not account for any losses or expenses in this account.
a) To accommodate any adjustments for the previous years (not the current year)
CONTENTSa) Last years closing balanceb) Current years net profit after tax (Cr. Side)c) Proposed dividendd) Interim dividende) Transfer to Reservesf) Previous year’s adjustmentsg) Surplus
Tax
• In a proprietory company, income tax is deducted form the capital of the proprietor• However in corporate accounting it is the duty of the company to pay tax and hence
forms a part of profit and loss account• We all are aware that tax assessment does not take immediately.• However a company on the basis of its profit can make its own tax assesment. This
can differ from that made by the tax authorities as they might disallow certain expenditure or include some income.. Therefore unless the assessment is complete the exact figure of tax cannot be deciphered. Since the amount is now as per that calculated as per company and not the actual amount, it is an estimate and therefore we cannot show it in the profit and loss account..we therefore show it as a provision.
• The Tax provision can be shown thus• 1 Advance Tax• As per the provisions of the Indian Income tax Act 1961, the companies are required
to pay income tax on corporate income in advance. During the year the companies deposit income tax in advance on the estimated income of the year. At the time of payment of advance tax, following entry is passed
• Advance tax A/c Dr.• To Bank A/c.2. Provision for taxAt the end of the year, provision for income tax is created by applying the
prescribed rate on taxable income. The journal endtry passed is as followsProfit and loss A/c Dr. To Provision for taxation A/c
) Completion of Assessment• On completion of the assessment in the year of assessment the gross tax liability is
decided by the Income tax officer and a copy of Assessment order is sent to the company. In this case the following steps should be taken
a) Compare the amount of gross tax liability and provision for tax and find the difference. The difference is transferred to Profit and loss appropriation a/c of the year in which assessment takes place. The difference may be either surplus or deficit which is transferred to profit and loss aaccount
Profit and Loss Appropriation A/c. Dr. To Provision for Income tax A/c. If the gross tax is less than the provision then the following entry is passed with the
difference amount Provision for tax Dr. To profit and Loss Appropriation A/c.
a) Compare the gross tax liability with the advance tax paid. The difference may be either refund or tax payable. If Advance tax paid is more than the gross tax liability , the excess is considered as refund which is shown as current assets, loans and advances till it is received. If the Advance tax paid is less than the Gross tax liability , the excess of gross tax liability over advance tax paid is considered as tax payable and is shown as Current liabilities till it is finally paid
The entry will be as follows Refund;Tax Refund A/c Dr. To provision for tax
Tax PayableProvision for tax A/c Dr. To tax payable a/c
E.g.s• Trial balance as 31st march 2009
Advance income tax 2007-08 200000
Advance income tax 2008-09 130000
Provision for income tax 2007-08 180000
Adjustments:1. Income tax assessment for 2007-08 has been completed during the year and tax Liability has been fixed at 220000. No effect has been given to this in the accounts.2. Provision for Income tax to be made for the year 2008-09 is Rs. 120000
Solution• Profit and loss Account
To provision for Income tax 120000
To prior period items:
Provision for Income tax 40000
Balance sheet as on 31st march 2009
Liabilities
Current LiabilitiesIncome tax payable 20000
AssetsLoans and Advances
Advance income tax 130000Less: provision forIncome tax 120000
The journal entries for the same are:
a) Profit and loss A/c Dr. 120000
To Provision for Income tax A/c 120000
b) Profit and loss Appropriation A/C dr. 40000
To provision for Income tax 40000
c) Provision for Income tax A/c Dr. 220000
To Advance tax A/c 200000
To Tax payable 20000
Assessment under dispute
After receipt of assessment order, the company has a right to file an appeal and challenge the order. If the assessment is disputed the Balance sheet should disclose advance tax and provision for tax for that year till the disposal of the matter. The information of tax subject to the appeal should be shown as contingent liability.
Depreciation
• SLM
• WDV
• At the rates prescibed by the I.T. authorities
• At the rates prescribed by the companies Act
The other adjusted important in company final accounts are
• Provision for dividend• Interim dividend
e.g.T.B.13.5% prefernce share capitAL 400000Fully paid equity share capital 500000AdjThe board of directors declared a dividend of 15%P&L Appropriation a/cTo Proposed dividend 54000To Proposed equity dividend 75000
B/sCurrent liabilities and provisionsPrference dividend 54000Equity dividend 75000
• Transfer to reserves• E.g. 5% of profit oafter tax is to be transferred to general
reserve. Profit after tax is 400000• P&L Appropriation a/c• Transfer to General reserve 20000
• Balance sheet• Liabilities side• Reserves and surplus• General reserve (op. bal) XAdd: transfer during the year 20000
Interest on debenturese.G if it is 10% debentures then that should be added for
the whole year