ACG 101
ADVANCED ACCOUNTING - I
YASHWANTRAO CHAVAN MAHARASHTRA OPEN UNIVERSITY
Dnyangangotri, Near Gangapur Dam, Nashik 422 222, Msharashtra
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YASHWANTRAO CHAVAN MAHARASHTRA OPEN UNIVERSITY
Vice-Chancellor : Dr. M. M. Salunkhe
Director (I/C), School of Commerce & Management : Dr. Prakash Deshmukh
State Level Advisory Committee
Dr. Pandit Palande
Hon. Vice Chancellor
Dr. B. R. Ambedkar University
Muaaffarpur, Bihar
Dr. Suhas Mahajan
Ex-Professor
Ness Wadia College of Commerce
Pune
Dr. V. V. Morajkar
Ex-Professor
B.Y.K. College, Nashik
Dr. Mahesh Kulkarni
Ex-Professor
B.Y.K. College, Nashik
Dr. J. F. Patil
Economist Kolhapur
Dr. Ashutosh Raravikar
Director, EDMU,
Ministry of Finance
New Delhi
Dr. A. G. Gosavi
Professor
Modern College, Shivaji Nagar, Pune
Dr. Madhuri Sunil Deshpande
Professor
Swami Ramanand Teerth Marathwada
University, Nanded
Dr. Prakash Deshmukh
Director (I/C)
School of Commerce & Management
Y.C.M.O.U., Nashik
Dr. Parag Saraf
Chartered Accountant Sangamner
Dist. AhmedNagar
Dr. S. V. Kuvalekar
Associate Professor and
Associate Dean (Training)(Finance )
Dr. Surendra Patole
Assistant Professor
School of Commerce & Management
National Institute of Bank Management ,
Y.C.M.O.U., Nashik
Pune
Dr. Latika Ajitkumar Ajbani
Assistant Professor
School of Commerce & Management
Y.C.M.O.U., Nashik
Author
Editor
Instructional Technology Editing &
Programme Co-ordinator
1) Dr. Suhas Mahajan
Research Guide,
NessWadiaCollege ofCommerce,
Pune - 411 001.
2) Dr. Mahesh A. Kulkarni
Research Guide,
BYK College of Commerce,
Nashik - 422 005.
Prof. V. V. Morajkar
10, Vidya Society, Shikhare Wadi,
Nashik Road - 422 101.
Dr. Latika Ajitkumar Ajbani
Assistant Professor
School of Commerce & Management
Y.C.M.O.U., Nashik
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Y.C.M. Open University, Nashik - 422 222.
Copyright © Yashwantrao Chavan Maharashtra Open University, Nashik.
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Topic 1
Unit 1
CONTENTS
Amalgamatioin, Absorption, External Reconstruction
and Internal Reconstruction of Companies
Accounting for Amalgamation, Absorption and External
Reconstruction
1-74
1.0 Introduction 1.1 Unit Objectives 1.2 Meaning of Amalgamation, Absorption and External Reconstruction
1.2.1 Distinction between Amalgamation, Absorption and External Reconstruction 1.3 Forms of Amalgamation
1.4 Accounting Standard (AS:14) and Amalgamation 1.4.1 Types of Amalgamation (I) Amalgamation in the
nature of Merger (II) Amalgamation in the nature of purchase 1.5 Purchase consideration and working
Methods (a) Lump Sum Method (b) Net Assets Method (c) Payment Basis Method (d) Combination of
Net Assets Method and Payment of Basis Method 1.6 Accounting Procedure 1.6.1 Precautions to be taken
while accounting entries to be made in the books of the Vender Company (transferor company) 1.6.2 Steps
to close the books of accounts of the transferor of company 1.6.3 Accounting Entries in the books of
Transferor Company 1.7 Illustrations 1.8 Summary 1.9 Key Terms 1.10 Questions and Exercises 1.11
Further Reading
Unit 2
Methods of Accounting : Amalgamation and External Reconstruction
75-116
2.0 Introduction 2.1 Unit Objectives 2.2 Methods of Accounting for Amalgamation (I) The Pooling of
Interest Methods (II)
The Purchase Method. 2.3 Inter Company Investments (I) When one of the
Transferor Company is holding shares of other Transferor Company. (II) When the Transferee Company
is holding shares of the Transferor Company (III) When the Transferor Company holding some shares of
the Transferee Company. (IV) Gross Holding 2.4 External Reconstruction 2.5 Illustrations 2.6 Summary
2.7 Key Terms 2.8 Questions and Exercises 2.9 Further Reading
Unit 3
Internal Reconstruction
117-156
3.0 Introduction 3.1 Unit Objectives 3.2 Meaning of Internal Reconstruction 3.2.1 Legal Requirements
i) Legal Requirements in connection with the “ Alternation of Share Capital ii) Legal Requirements for
“Reduction of Share Capital” iii) Legal Requirements for “Variation of Shareholders” Rights 3.3 Distinction
between Internal Reconstruction and External Reconstruction 3.4 Reduction of Share Capital 3.4.1 Purpose
of Capital Reduction 3.4.2 Procedure of Capital Reduction 3.4.3 Alteration of Share Capital 3.5 Accounting
Entries 3.6 Treatment of Arrears of Dividend 3.7 Scheme of Capital Reduction 3.8 Illustrations 3.9
Summary 3.10 Key Terms 3.11 Questions and Exercises 3.12 Further Reading
Topic 2
Unit 4
Profit or Loss Prior to Incorporation
Meaning and Accounting Treatment : Profit or Loss prior to
Incorporation
157-178
4.0 Introduction 4.1 Unit Objectives 4.2 Allocation of Profit or Loss into Pre-and Post Incorporation Period.
4.2.1 Meaning of Profit or Loss Prior to Incorporation 4.2.2 Steps for ascertainment of Profit or Loss Prior
to Incorporation. 4.3 Accounting Treatment 4.4 Methods of Computing Profit or Loss Profit to Incorporation
4.5 Cut - off - Date 4.6 Illustrations 4. 7 Summary 4.8 Key Terms 4.9 Questions and Exercises 4.10
Further Reading
Unit 5
Profit or loss prior to Incorporation : Basis of Apportionment
179-204
5.0 Introduction 5.1 Unit Objectives 5.2 Basis of Apportionment 5.3 Guidelines for Apportionment of
Expenses 5.4 Summary Chart 5.5 Illustrations 5.6 Summary 5.7 Key Terms 5.8 Questions and Exercises
5.9 Further Reading
Topic 3
Unit 6
Final Accounts of Banking Company
Introduction to Banking Company
207-220
6.0 Introduction 6.1 Unit Objectives 6.2 Introduction to Banking Company 6.3 Legal Provisions (a)
Restriction on Business (b) Non-Banking Assets and its Disposal (c) Capital Structure (d) Reserve Fund
(e) Statutory Reserve (f) Cash Reserve (g) Reconstruction on Loans and Advances (h) Bills for Collection
(i) Acceptance, Endorsement and Other Obligations (j) Rebate on Bills Discounted (k) Letter of Credit
and Traveller’s Cheques (l) Provision for Bad and Doubtful Debts (m) Provision for Taxation (n) Provisions
and Contingencies (o) Accounting Year 6.4 Illustrations 6.5 Summary 6.6 Key Terms 6.7 Questions and
Exercises 6.8 Further Reading
Unit 7
Non - Performing Assets (NPA)
221-242
7.0 Introduction 7.1 Unit Objectives 7.2 Non Performing Assets (NPA) 7.2.1 Meaning
7.2.2 Classification of Assets 7.2.3 Provision Against Various Assets 7.2.4 Calculation of “Income
Recognition” 7.3 Annexure I 7.4 Annexure II 7.5 The Banking Regulation Act, 1949. Schedule I - Amendments
7.5.1 Additional Disclosures by Banks in “Notes to Accounts” 7.6 Illustrations 7.7 Summary 7.8 Key terms
7.9 Questions and Exercises 7.10 Further Reading
Unit 8
Final Accounts of Banking Company
243-318
8.0 Introduction 8.1 Unit Objectives 8.2 Books of Accounts 8.3 Preparation of Final Account 8.3.1 The
Third Schedule - From ‘A’ Form of Balance Sheet 8.3 2 Form ‘B’ - From of Profit and Loss Account
8.3.3 guidelines of RBI for compilation of Financial statements 8.4 Illustrations 8.5 Abridge form of Balance
Sheet and Profit and Loss Account 8.6 Summary 8.7 Key Terms 8.8 Questions and Exercises 8.9
Further Reading
Topic 4
Unit 9
Final Accounts of General Insurance Company
Introduction, Meaning and Types of Insurance
319-334
9.0 Introduction 9.1 Unit Objectives 9.2Nature of Insurance 9.3 Meaning and Definition 9.4 Categories
of Insurance 9.5 Types of Insurance 9.5.1 Life Insurance 9.5.2 Fire Insurance9.5.3 Marine Insurance 9.6
Comparision between Life Insurance and Fire and Marine Insurnace 9.7 Summary 9.8 Key Terms 9.9
Questions and Exercises 9.10 Further Reading
Unit 10 Accounts of General Insurance Business : Revenue Account
335-348
10.0 Introduction 10.1 Unit Objectives 10.2 Preparation of Financial Statements i) Form B - RA ii) Form
B - PL iii) Form B - BS 10.3 Schedule Forming part of Financial Statements i) Schedule - 1 : Premium
Earned (Net) ii) Schedule - 2 : Claims Incurred (Net) iii) Schedule - 3 : Commission iv) Schedule - 4 :
Operating Expenses Related to Insurance Business 10.4 Illustrations 10.5 Summary 10.6 Key Terms 10.7
Questions and Exercises 10.8 urther Reading
Unit 11 Accounts of General Insurance Business : Balance Sheet 349-401
11.0 Units Objectives 11.2 Schedule forming part of Balance Sheet i) Schedule - 5 : Share Capital ii)
Schedule - 5A : Share Capital Pattern of Shareholding iii) Schedule - 6 : Reserves and Surplus iv) Schedule
- 7 : Borrowings v) Schedule - 8 ; Investment vi) Schedule - 9 : Loans vii) Schedule - 10 : Fixed Assets
viii) Schedule - 11 : Cash and Bank Balances ix) Schedule - 12 : Advances and Other Assets x) Schedule 13 : Current Liabilities xi) Schedule - 14 : Provisions xii) Schedule - 15 : Miscellaneous Expenses xiii)
Schedule - c : Auditors report 11.3 Summary 11.4 Specimens of Revenue Account 1 and 2 11.5 Illustrations
11.6 Key Terms 11.7 Questions and Exercises 11.8 Further Reading
INTRODUCTION
This book of self - instructional material is based on the syllabus for the
subject Advanced Accounting (M.Com ACG 101), This book is written as per the
revised syllabus prescribed for M.Com. Part I students of Yashwantrao Chavan
Maharashtra Open University, Nashik from June, 2015. We do hope that this
book will definitely help to meet the emmerging and growing requirements of
distance education students of Advance Accounting from the school of commerce.
This book adopts a moderate and novel approach towards the study of Advanced
Accounting in view with the specific and upcoming requirements of the readers
and practitioners of this subject.
All the topics included in the revised syllabus are explained in simple but apt
language. Equal stress is also given for neccessary basic accounting theory and
wide variety of practical problems. Authors have taken appropriate care to
incorporate basic accounting concepts, accounting control techniques and tabular
representation of classified accounting statements and reports. Proper emphasis
has also being given on graphical presentation to simplify the accounting theories
and modern practices. This book has been designed to serve as a self sufficient
text for M.Com students. Nevertheless, we do not rule out the possibility of certain
shortcomings or misprints still remaining, we will be greatful to the reader if such
errors are pointed out from time to time. Any criticism or valuable suggestions for
further improvement of this book will be greatfully acknowledged and highly
appreciated.
The authors have also kept in mind the fact that the students concerned are
the distance education students, spread over a large territory, different environment
and do not have regular interaction with the teachers. Thereofore authors have
taken ulmost efforts to simplify the matter without affecting scientific quality and
precision.
The editor and authors are greatful to the authorities of YCMOU for
guidence and co-operation.
Editor
Authors
Topic 1
Amalgamatioin, Absorption,
External Reconstruction and
Internal Reconstruction
of Companies
Unit 1
Accounting for Amalgamation,
Absorption and External
Reconstruction
Unit 2
Methods of Accounting :
Amalgamation and External
Reconstruction
Unit 3
Internal Reconstruction
Unit 1
Accounting for Amalgamation,
Absorption and External
Reconstruction
NOTES
Structure
1.0
Introduction
1.1
Unit Objectives
1.2
Meaning of Amalgamation, Absorption and External Reconstruction
1.2.1
Distinction between Amalgamation, Absorption and External
Reconstruction
1.3
Forms of Amalgamation
1.4
Accounting Standard (AS-14) and Amalgamation
1.4.1
1.5
1.6
Accounting For Amalgamation,
Absorption and External
Reconstruction
Types of Amalgamation
(I)
Amalgamation in the nature of Merger
(II)
Amalgamation in the nature of purchase
Purchase consideration and working Methods
(a)
Lump Sum Method
(b)
Net Assets Method
(c)
Payment Basis Method
(d)
Combination of Net Assets Method and Payment of Basis Method
Accounting Procedure
1.6.1
Precautions to be taken while accounting entries to be made in
the books of the Vender Company (Transferor Company)
1.6.2
Steps to close the books of accounts of the Transferor Company
1.6.3
Accounting Entries in the books of Transferor Company
1.7
Illustrations
1.8
Summary
1.9
Key Terms
1.10 Questions and Exercises
1.11 Further Reading
Advanced Accounting - I
1
Accounting For Amalgamation,
Absorption and External
Reconstruction
NOTES
1.0 Introduction
Amalgamation means formation of a new company to take over atleast
two existing companies which go into liquidation. Hence in amalgamation, there is
birth of a new company with the closure of atleast two companies which wind up
their business. The business of the companies going into liquidation are transferred
to a new company formed for this purpose, in return for a purchase consideration.
Therefore in amalgamation, there are minimum of two companies going into
liquidation simultaneously and a new company formed at the same time to take
over the business of the liquidated companies.
Amalgamation and Absorption signify the merging of two or more joint
stock companies either for eliminating competition among them or for growing in
size to get the economies of large-scale production or for controlling the market.
On the other hand, Reconstruction refers to an arrangement by which a
financially unsound and / or unprofitable and weak company is strengthened by
certain measures so that its closure may be avoided. Reconstruction may take
two forms viz. External and Internal. External Reconstruction takes place when
an existing weak company goes into liquidation and a new company is formed to
take over its business and run it under a new name. Here, one liquidation and one
formation takes place. In case of Internal Reconstruction, the capital of a company
is reorganised to infuse new life in the company. It includes both alternation and
reduction of share capital.
1.1 Unit Objectives
After studying this unit you should able to :
2
Advanced Accounting - I
•
Understand meaning of Amalgamation, Absorption and External
Reconstruction.
•
Find out distinction between Amalgamation, Absorption and External
Reconstruction.
•
Understand forms for Amalgamation
•
Understand the modified concept of Amalgamation as per Accounting
Standard 14 (A-14)
•
Describe the types of Amalgamation
•
Understand the methods of calculating purchase consideration
•
Understand the accounting procedure involved for Amalgamation,
Absorption and External Reconstruction.
Accounting For Amalgamation,
Absorption and External
Reconstruction
1.2 Meaning
Amalgamation is an event or transaction in which two or more companies,
or their net assets are brought under common control, in a single legal entity. The
concept of control relates to the ability to dictate operating and financial policies.
Amalgamation refers to a case where two or more existing companies go
into liquidation to be formed into a new company to take over the business of
those existing. Hence, two or more liquidations and one formation takes place
in the case of amalgamation. In the case of Absorption, one existing joint stock
company takes over the business of another existing company.
NOTES
The shareholders of the Transfer Company are allotted with shares in the
Transfer Company. The shareholders have a continuing interest in the risks and
benefits of the Transfer Company. The substance of amalgamation is that the
business of the transferor and the transferee companies continue to run as before,
through under a single corporate name.
Absorption means, one existing company takes over another existing
company which goes into liquidation. In absorption, there is no formation of a
new company. The companies involved in absorption are existing companies which
already have running business. Only one company goes into liquidation. Hence in
absorption, the business of an existing company is taken over by another existing
company in return for a purchase consideration.
External Reconstruction means, ‘a new company is formed to take over
the business of one existing company which goes into liquidation’. It involves
formation of a new company with the express purpose for taking over another
company which is normally not doing well. The existing company has already
incurred heavy losses and therefore reconstruction of a company becomes
necessary through the birth of a newly formed reconstructed company. The newly
formed company takes over assets and liabilities of the company at renewed
values which helps in offsetting its losses and brings back the loss making company
into successful business operation with sound financial strength.
In case
of
Amalgamation
= Two or more liquidations and one formation
Absorption
= One liquidation and no formation
External Reconstruction= One liquidation and one formation
Thus, in case of amalgamation, absorption and external reconstruction, one
or more companies are liquidated and their business is purchased by some other
company. Hence, in all the above three cases, the approach is common and the
accounting problems are similar in the sense that i) closing entries are to be made
in the books of the liquidating company to close its books and ii) opening entries
are to be made in the books of the purchasing company to incorporate the assets
and liabilities taken over.
Advanced Accounting - I
3
Accounting For Amalgamation,
Absorption and External
Reconstruction
NOTES
Suppose there are two existing companies viz. X Co. Ltd. and Y Co. Ltd.
•
Amalgamation : A new company XY Co. Ltd. is formed which takes over
the business of X Co. Ltd. and Y Co. Ltd. Both the companies X Co. Ltd.
and Y Co. Ltd. go into liquidation.
•
Absorption : An already exiting company X Co. Ltd. takes over business
of Y Co. Ltd., which goes into liquidation.
•
External Reconstruction : A new company Z Co. Ltd. is formed to take
over X Co. Ltd. (or Y Co. Ltd.) which goes into liquidation.
1.2.1. Distinction between Amalgamation, Absorption and
External Reconstruction
Points of
Amalgamation
Absorption
Difference
1) Formation of
Reconstruction
One new company
new Company. is formed .
2) Companies
going into
takeover.
No new company One new company
is formed.
is formed.
Two companies go One company
One company goes
into liquidation.
into liquidation.
liquidation.
3) Nature of
External
goes into
liquidation
A new company
One existing
A new company
takes over two
company takes
takes over an
existing companies. over another
existing company.
existing company.
1.3 Forms of Amalgamation
Amalgamation may take one of the following forms, as explained below :
a) Merger :
In this case, both the combining companies are dissolved and assets and
liabilities of both the companies are transferred to a newly created company. The
operations of the previously separate companies are carried on as a single legal
entity. Figure 1.1 illustrates the case of Merger as follows :
4
Advanced Accounting - I
Accounting For Amalgamation,
Absorption and External
Reconstruction
X Ltd.
X Y Ltd.
NOTES
Y Ltd.
Fig. 1.1 : Merger
b) Acquisition :
In this case, only one of the combining companies survives and the other
loses its separate identity. The assets and liabilities of the acquired company are
transferred to the acquiring company. The acquired company is dissolved. The
acquiring company will continue as usual. Figure 1.2 illustrates the case of
Acquisition as follows :
ABC Industries
Ltd.
ABC Industries
Ltd.
ABC Petrochemical
Ltd.
Fig. 1.2 : Acquisition
1.4
Accounting Standard (AS-14) and
Amalgamation
The Council of the Institute of Chartered Accountants of India has issued
Accounting Standard - 14, ‘Accounting for Amalgamation’ which states the
procedure for accounting for amalgamations. This standard is mandatory in nature
and effective from accounting periods commencing on or after 1-4 -1995.
The following terms are used in this statement with the meanings specified :
a)
Amalgamation means, an amalgamation pursuant to the provisions of the
Companies Act, 1956 or any other status which may be applicable to
companies.
Advanced Accounting - I
5
Accounting For Amalgamation,
Absorption and External
Reconstruction
NOTES
b)
Transferor company means, the company which is amalgamated into another
company.
c)
Transferee company means, the company into which a Transfer Company
is amalgamated.
d)
Reserve means, the portion of earnings, receipts or other surplus of an
enterprise (whether capital or revenue) appropriated by the management
for a general or a specific purpose other than a provision for depreciation or
diminution in the value of assets or for a known liability.
1.4.1 Types of Amalgamation
As per this standard there are two types of amalgamation viz.
1.
Amalgamation in the nature of merger.
2.
Amalgamation in the nature of purchase.
Figure 1.3 shows the Types of Amalgamations as follows:
Types of Amalgamation
1
2
Amalgamation
in the nature
of merger
Satisfies all five conditions
specified in sub-paragraph
(e) of AS - 14
Amalgamation
in the nature
of purchase
Does not satisfy any one
or more of the conditions
specified in sub-paragragh
(e) of AS - 14
Fig. 1.3 : Types of Amalgamation
(1) Amalgamation in the nature of merger - An amalgamation is in the nature
of merger if following conditions are satisfied :
6
Advanced Accounting - I
a)
All assets and liabilities of Transferor Company are taken over by the
Transferee Company.
b)
The shareholders holding at least 90% or more of the equity shares of the
Transferee Company become the equity shareholder of the Transferee
Company (shares already held by theTtransferee Company and its
subsidiaries are not counted for the purpose of 90% or more limit.)
c)
Consideration for the amalgamation is paid in equity shares by the Transferee
Company to the equity shareholder of the Transferor Company (except
fractional shares can be paid in cash.)
d)
Business of the Transferor Company is intended to be carried on by the
Transferee Company.
e)
No adjustment is made in the book values of the assets and liabilities of the
Transferor Company by way of revaluation or otherwise, except the
adjustments to ensure uniformity of accounting policies. For example , if
Transferor Company follows the straight lines method of depreciation for
the fixed assets whereas the Transferee Company follows the diminishing
balance method of depreciation, the Transferee Company can adjust the
book value of fixed assets of the Transfer Company only for the difference
of depreciation between straight line method and diminishing balance
method. Such adjustment in the book value of fixed assets will not be treated
as revaluation.
Accounting For Amalgamation,
Absorption and External
Reconstruction
NOTES
(2) Amalgamation in the nature of purchase - An amalgamation will be
considered in the nature of purchase if any of the conditions regarding amalgamation
in the nature of merger is not satisfied.
These are amalgamations which are in effect a mode by which one company
acquires another company and as a consequence, the shareholders of the company
which is acquired normally do not continue to have a proportionate share in the
equity of the combined company, or the business of the company which is acquired
is not intended to be continued.
1.5 Purchase Consideration and Working
Methods
It is the amount payable by the purchasing company to the Vendor Company
for taking over the business of the Vendor Company. The amount payable can
take any form (i.e. shares, debentures or cash or any combination of these.)
Determination of purchase price is therefore the crucial step in all forms of business
take overs. There are four methods of working out the amount of purchase
consideration which are shown in Figure 1.4 as follows :
Advanced Accounting - I
7
Accounting For Amalgamation,
Absorption and External
Reconstruction
Lump
sum
Method
NOTES
1
Combination
of Net Assets
Method and
Payment Basis
Method
4
Methods of
working out
the amount of
purchase
consideration
2
Net
Assets
Method
3
Payment
Basis
Method
Fig. 1.4 : Methods of Working out the Amount of
Purchase Consideration
1)
Lump Sum Method :
A lump sum amount which is payable by the Purchasing Company to the
vendor company as a consideration for taking over the business is stated. The
payment of lump sum amount comprises the complete discharge in return for the
net assets being taken over. This method is simple without any complicated workings.
2)
Net Assets Method :
Under this method, the agreed valuations of various assets and liabilities
taken over are mentioned in the problem. The values placed on various assets
taken over are added up and the amount of liabilities taken over are deducted
therefrom. The amount arrived at is the purchase consideration. The following is
the generally adopted format.
8
Advanced Accounting - I
Accounting For Amalgamation,
Absorption and External
Reconstruction
Statement Showing Calculation of Purchase Consideration
Assets taken over at the revised values
‘
•
Goodwill
..........
•
Land and Buildings
..........
•
Plant and Machinery
..........
•
Furniture
.........
•
Stock
..........
•
Debtors
..........
•
Bills Receivable
..........
•
Bank Balance
..........
•
Cash Balance
...........
‘
NOTES
(+)
Less : Liabilities taken over at agreed values
•
Creditors
..........
•
Bills Payable
..........
•
Outstanding Expenses
..........
•
Bank Overdraft
.........
(-)
 Purchase Consideration
The following points are worth nothing in this regard :
i)
All miscellaneous expenditure not written off, such as preliminary expenses,
discount on issue of shares or debentures are to be ignored.
ii)
The debit balance of Profit and Loss Account appearing in the Balance
Sheet is not to be considered.
iii)
Only the liabilities taken over are to be deducted. Liabilities which are not
taken over are not to be considered.
iv)
All funds and reserves representing undistributed profits are not to be
deducted.
v)
All provisions made (such as Depreciation Reserve and Reserve for Bad
and Doubtful Debts) are to bededucted unless their valuation are stated.
vi)
When the valuation are not stated then the assets are taken over at book
value.
Advanced Accounting - I
9
Accounting For Amalgamation,
Absorption and External
Reconstruction
NOTES
vii)
Normally, debentures are not taken over and therefore will not be deducted
from the assets.
3)
Payment Basis Method :
Under this method how the claims of the various parties are satisfied is
stated very clearly. The interests of various parties can be satisfied by issuing
shares, debentures, cash or any combinations of any of these modes. All modes of
payment made to satisfy the claimants are added up to arrive at the amount of
purchase consideration. This is explained below :
Statement showing calculation of Purchase Consideration
‘
i)
Issue of Equity Shares in the purchasing company, in discharge
........
of liabilities of Creditors and / or shareholders and / or debenture
holders etc.
ii)
Issue of Preference Shares in the purchasing company, in
........
discharge of liability of preference shareholders, and /or
Creditors and/or Debenture holders etc.
iii)
Issue of debentures in purchasing company in discharge of
........
liability of debenture holder, and /or Creditors and/or Shareholders.
iv)
Payment in cash in discharge of liability of Creditors, and / or
shareholders, debenture holders, liquidation expenses etc.
........
(+)
 Purchase Consideration
4)
Combination of Net Assets Method and Payment Basis Method :
This method of combining both the method as explained above,
(depending on the information available ) helps to find out the amount of Goodwill
or Capital Reserve.
It may be noted that the payment are made for what is taken over. And
hence the amount under the net assets method and payment method should
necessarily be similar. Therefore, if there is any difference between the two
methods, the difference represents Goodwill or Capital Reserve . If payment
made is more than the value of the net assets taken over, the difference will be
Goodwill. On the other hand, if the value of the net assets taken over is more
than payments made, the difference represents Capital Reserve. The format of
working is as follows :
10
Advanced Accounting - I
Statement of Purchase Consideration
Discharge
‘
Net Assets taken over
‘
Accounting For Amalgamation,
Absorption and External
Reconstruction
Assets:
• Issue of Equity Shares
•
Land and Buildings
• Issue of Preference Share
•
Plant and Machinery
• Issue of Debentures
•
Furniture
• Payment in Cash
•
Stock
•
Debtors
•
Bills Receivable
•
Cash/Bank Balance
NOTES
Less : Liabilities
• Capital Reserve
(Balancing Figure)
1.6
•
Creditors
•
Bills Payable
•
Outstanding Expenses
•
Bank Overdraft
•
Goodwill
(Balancing Figure)
Accounting Procedure
The accounting procedure involved for Absorption, Amalgamation and
External Reconstruction is one and the same. It involves closing the books of the
Vendor Company and accounting for taking over the business in the books of the
Purchasing Company.
Accounting, therefor consists of two parts :
1)
Closing the books of the Vendor Company whose business is being wound
up (Transferor Company)
2)
Accounting in the books of the Purchasing Company (Transferee Company.)
Advanced Accounting - I
11
Accounting For Amalgamation,
Absorption and External
Reconstruction
Closing or Liquidation Entries in the Books of Vendor Company
(Transferor Company)
Transactions
1) For transfer of various
Entry
Note
Realisation A/c.................... Dr. At Book
NOTES
assets taken over

2) For transfer of liabilities
taken over.
3) For recording of purchase
consideration
4) For receipt of purchase
consideration
To Individual Assets A/c
Values
Liabilities A/c...................... Dr. At Book
To Realisation A/c
Values
Purchasing Co. A/c............ Dr.
To Realisation A/c
Cash A/c............................. Dr.
Shares in Purchasing
Co. A/c...................... Dr.
Debentures in
Purchasing Co. A/c............. Dr.
To Purchasing Co. A/c
5) For payment of Liquidation
Expenses (which are borne
Realisation A/c................
Dr.
To Bank A/c
by Vendor Co.)
6) For sale of asset not taken
over
Bank A/c....................
Dr.
To Asset A/c
7) For payment of liability not
taken over
Liability A/c.................
Dr.
To Bank/Cash A/c
(Any other form of payment )
*8)For recording profit or loss
on sale of asset or payment
of liability.
a)
For Profit
Assets A/c.....................
Dr.
Liability A/c....................
Dr.
To Realisation A/c
b)
12
Advanced Accounting - I
For Loss
Realisation A/c.................
To Asset/Liabilities A/c
Dr.
9) For Transfer of Debentures to Debenture A/c.............
Debenture holders
10) For transfer of Preference
To Debenture holders A/c
Preference Share Capital A/cDr.
Share Capital to Preference
To Preference
Shareholders
Shareholders A/c
11)For payment of premium to
Accounting For Amalgamation,
Absorption and External
Reconstruction
Dr.
NOTES
Realisation A/c................... Dr. Premium
Debenture holders/Preference
To Debentureholders A/c
Shareholders
To Preference Shareholders than the
A/c
(More
face
value)
12)For Discount to Debenture
Debentureholder A/c........... Dr. Discount
holders /Preference Share
Pref. Shareholders A/c........ Dr. (less than
holders
To Realisation A/c
face
value)
13)For payment to Debenture
holders
Debentureholder A/c........... Dr.
To Bank / Debentures in
Purchasing Company A/c
14)For payment to Preference
Shareholders
Preference Shareholders A/c Dr.
To Bank / Shares in
Purchasing Co. A/c
15)For transfer of Profit or Loss
on Realisation Account
a)
For Profit
Realisation A/c................
Dr.
To Equity Shareholders A/c
b)
For Loss
Equity Shareholders A/c....... Dr.
To Realisation A/c
16) For transfer of Equity
Share Capital
Equity Share Capital A/ c.......Dr
To Equity Shareholders A/c
Advanced Accounting - I
13
Accounting For Amalgamation,
Absorption and External
Reconstruction
17) For transfer of accumulated
Profit and Loss A/c.........
Dr
Profits e.g. Profit and Loss
General Reserve A/c........
Dr.
Account, General Reserve,
Any Other Fund A/c.........
Dr.
any fund indicating
NOTES
To Equity Shareholders A/c
accumulated profits
18) For transfer of accumulated
Equity Shareholders A/c...... Dr.
losses. e.g. debit balance of
To Profit and Loss A/c
Profit and Loss Account,
To Preliminary Expenses A/c
Preliminary Expenses
* Alternatively treatment can also be given through Realisation A/c
19) For payment to Equity
Shareholders
Equity Shareholders A/c....... Dr.
To Bank A/c
To Shares in Purchasing
Co. A/c.
1.6.1. Precautions to be taken while accounting entries to
be made in the books of the vendor company (i.e.
Transferor Company):
14
Advanced Accounting - I
1)
Only the assets and liabilities taken over by the Purchasing Company should
be transferred to the Realisation Account.
2)
These assets and liabilities taken over should be accounted in the Realisation
Account at book figures only i.e. the values at which they appear in the
Balance Sheet.
3)
No fictitious assets should be transferred to Realisation Account. i.e.,
Preliminary Expenses, Miscellaneous expenses not written off etc.
4)
Goodwill and other intangible assets such as Trade Mark, Patents,
Copy rights etc., are transferred to Realisation Account only when they
are taken over by the Purchasing Company.
5)
Cash and Bank balance is transferred to Realisation Account only when it
has been taken over by the Purchasing Company.
6)
Reserve for Bad Debts and other provisions if any are separately recorded
in the Realisation Account and are not to be netted off against the respective
assets. For example, debtors to be recorded at gross figure.
7)
All funds account representing undistributed profits or surpluses should be
transferred to equity shareholders account and treated separately.
8)
All those liabilities which the Purchasing Company has agreed to discharge
either by payment or otherwise are not transferred to the Realisation
Account. These liabilities are treated separately by opening respective
accounts.
9)
The net amount payable to the equity shareholders after giving effect to all
adjustments should necessarily agree with the total amount of shares,
debentures (in the Purchasing Company) and cash remaining after discharge
of all liabilities in the Vender Company.
Accounting For Amalgamation,
Absorption and External
Reconstruction
NOTES
1.6.2. Steps to close the books of accounts of the Transferor
Company
To close the books of accounts of the Transferor Company, the following
steps are followed :
Step 1 : Prepare the Balance Sheet of the company on the date of liquidation.
Step 2 : Open a Realisation Account and transfer all assets and labilities
(excluding fictitious assets) to this account.
Step 3 : Calculate purchase consideration on the basis of terms and conditions
agreed upon.
Step 4 : Credit Realisation Account by purchase consideration.
Step 5 : Calculate profit or loss on realisation.
Step 6
: Transfer share capital, reserve and surplus to Sundry Shareholders
Account.
Step 7 : Transfer Profit or Loss on realisation to Sundry Shareholders Account.
Step 8
: Receiving of purchase consideration in the form of shares/ debentures
in the Transferee Company.
Step 9 :
Payment to preference shareholders .
Step 10 : Distribution of shares/debentures of Transferee Company among
existing shareholders.
Advanced Accounting - I
15
Accounting For Amalgamation,
Absorption and External
Reconstruction
1.6.3. Accounting Entries in the Books of the Transferor
Company (Alternatively)
1)
For transferring different assets to Realisation Account :
Realisation A/c..........................
NOTES
Dr. (Individually at book value)
To Sundry Assets A/c
2)
For transferring different labilities to Realisation Account :
Liabilities A/c.........................
Dr. (Individually at book value)
To Realisation A/c
3)
For transferring equity Share Capital, Reserve and Surplus etc. :
Equity Share Capital A/c.........................Dr.
General Reserve A/c................
Dr.
Profit and Loss A/c ........................
Dr.
To Sundry Shareholders A/c
4)
Preference Share Capital is closed by Transferring to Preference
Shareholders Account :
Preference Shareholders A/c.........
Dr.
To Preference Share Capital A/c
Note : If the Preference Shareholders are paid more or less than the amount
due to them as per Balance Sheet , the difference is transferred to Realisation
Account.
5)
For Purchase Consideration due from Transferee Company :
Transferee Company A/c..............
Dr. (Purchase consideration)
To Realisation A/c
6)
On receiving Purchase Consideration from the Transferee Company:
Equity Shares in Transferee Company A/c.....................Dr.
Preference Shares in Transferee Company A/c..............Dr
Debentures in Transferee Company A/c........................Dr.
To Transferee Company A/c
16
Advanced Accounting - I
7)
Entries for Liquidation Expenses are passed as follows :
i)
If the Liquidation Expenses are borne by Transferor Company
Accounting For Amalgamation,
Absorption and External
Reconstruction
Realisation A/c..................................... Dr.
To Bank A/c
ii)
8)
If the Liquidation Expenses are borne by the Transferor Company
(No entry)
NOTES
For payment to Preference Shareholders :
Preference Shareholders A/c........
Dr.
To Preference Shareholders A/c
To Bank A/c (if any)
9)
For Loss on Realisation :
Sundry Shareholders A/c...........
Dr
To Realsation A/c
10) For Profit on Realisation :
Realisation A/c..................
Dr.
To Sundry Shareholders A/c
11) For Final Payment to Equity Shareholders :
Sundry Shareholders A/c............
Dr.
To Equity Shares in Transferee Company A/c
To Bank A/c (if any)
After payment to equity shareholders, all accounts in the books of the Transferor
Company will be closed.
Students should note that the Accounting Standard deals with the accounting
procedures only in the books of the Transferee Company. So far as the books of
the Transferor Company are concerned, the normal procedures are to be followed
for closing the books of account through Realisation Account.
Calculation of Purchase Consideration :
The purchase consideration is determined as per the agreement between
the companies. While calculating purchase consideration, the provision of AS-14,
Para3(g) must be taken into consideration. It defines the expression ‘Purchase
Consideration’ as “the aggregate of the shares and other securities issued and
the payment made in the form of cash or other assets by the Transferee Company
to the shareholders of the Transferor Company”.
Advanced Accounting - I
17
Accounting For Amalgamation,
Absorption and External
Reconstruction
As per the provision of AS-14 Para 3(9)
Not included in Purchase Consideration
Included in Purchase
Consideration
NOTES
• Consideration for debentureholders
Only payment to shareholders
• Liquidation Expenses or
• Payment for Cost of Absorption
The concept of Amalgamation and Absorption can be understood with the
help of following illustration :
1.7
Illustrations
AMALGAMATION
ILLUSTRATION 1
The following is the Balance Sheet A Ltd., and S Ltd., as on 31st March, 2014
Balance Sheet as on 31st March, 2014
Liabilities
A Ltd. S Ltd.
‘
‘
Share Capital :
Shares of ‘ 10 each
Assets
1,20,000 40,000
A Ltd.
S Ltd.
‘
‘
Buildings
80,000
-
Machinery
46,000 42,000
8% Debentures
20,000
-
Stock
80,000 10,000
General Reserve
30,000
-
Debtors
40,000 12,000
-
Cash
20,000
Dividend Equalisation
Reserve
6,000
42,000
Employers Provident
Fund
Creditors
4,000
-
50,000 30,000
2,66,000 70,000
18
Advanced Accounting - I
2,66,000 70,000
The above companies have agreed to amalgamate and a new company
V Ltd., is formed. V Ltd., takes over the assets and liabilities of both the companies
on the following terms :
a)
Buildings of A Ltd., is accepted at book value and Machinery at ‘ 40,000.
The other assets are taken over at 10% depreciation.
b)
All assets and liabilities of S Ltd., are taken over at book values.
c)
Both the companies to receive 10% of net valuation of their respective
business as Goodwill.
d)
The entire purchase price of both the companies is paid in Equity Shares of
‘ 10 each.
Accounting For Amalgamation,
Absorption and External
Reconstruction
NOTES
Close the books of A Ltd., and S Ltd., and also give the opening journal
entries in the books of V Ltd.
SOLUTION
Statement of Purchase Consideration
Discharge
A Ltd. S Ltd. Net Assets taken
‘
‘
A Ltd. S Ltd.
‘
over
‘
Equity Shares of
‘ 10 each
1,91,400
44,000 Buildings
80.000
-
A Ltd 19,140 Sh.
Machinery
40,000
42,000
x ‘ 10
Cash
20,000
6,000
S Ltd. 4,400 Sh.
Stock (Less 10%)
72,000
10,000
x ‘ 10
Debtors (Less 10%)(+)
36,000
12,000
2,48,000 70,000
Less : Liabilities
taken over
8% Debentures
20,000
-
4,000
-
(+)
50,000
30,000
(-)
74,000
30,000
1,74,000
40,000
17,400
4,000
Employees
Provident Fund
Creditors
Goodwill
(+)
(Being 10% of
valuation)
1,91,400 44,000
1,91,400 44,000
Advanced Accounting - I
19
Accounting For Amalgamation,
Absorption and External
Reconstruction
In the books of A Ltd.
Dr.
Realisation Account
Particulars
NOTES
‘
Particulars
To Sundry Assets :
Cr.
‘
By Sundry Liabilities :
i) Buildings
80,000
i) 8% Debentures
ii) Machinery
46,000
ii) Employees Provident Fund
iii) Stock
80,000
iii) Creditors
iv) Debtors
40,000
By V Ltd.
v) Cash
20,000
(Purchase Consideration)
20,000
4,000
50,000
1,91,400
By Equity Shareholders
600
(Loss on Realisation)
2,66,000
Dr.
2,66,000
Equity Shareholders Account
Particulars
‘
To Realisation
Particulars
600 By Equity Share Capital
(Loss on Realisation)
‘
1,20,000
(12,000 Equity Shares)
To Equity Shares in V Ltd. 1,91,400 By General Reserve
(19,140 fully paid equity
By Dividend Equilisation
shares of ‘ 10 each)
Reserve
1,92,000
Dr.
Cr.
30,000
42,000
1,92,000
V Ltd. (Purchasing Co.) Account
Particulars
To Realisation
‘
Particulars
1,91,400 By Equity Shares in V Ltd.
(Purchase consideration)
Cr.
‘
1,91,400
(19,140 Equity Shares of
‘ 10 each )
1,91,400
20
Advanced Accounting - I
1,91,400
In the books of S Ltd.
Dr.
Realisation Account
‘
Particulars
To Sundry Assets :
Particulars
Cr.
Accounting For Amalgamation,
Absorption and External
Reconstruction
‘
By Sundry Liabilities :
i) Machinery
42,000 i) Creditors
30,000
ii) Stock
10,000 By V Ltd.
44,000
iii) Debtors
12,000 (Purchase Consideration)
iv) Cash
6,000
To Equity Shareholders
4,000
NOTES
(Profit on Realisation)
74,000
Dr.
74,000
Equity Shareholders Account
‘
Particulars
To Equity Shares in V Ltd.
Particulars
44,000 By Equity Shares Capital
(4,400 Equity Shares of
By Realisation
‘ 10 each, fully paid-up)
(Profit on Realisation)
44,000
Dr.
Cr.
‘
40,000
4,000
44,000
V Ltd. (Purchasing Co.) Account
Particulars
To Realisation
‘
Particulars
44,000 By Equity Shares in V Ltd.
(Purchase consideration)
Cr.
‘
44,000
(4,400 fully paid-up Equity
Shares of ‘ 10 each)
44,000
44,000
Advanced Accounting - I
21
Accounting For Amalgamation,
Absorption and External
Reconstruction
Opening Journal Entries in the books of V Ltd.
Date
Particulars
L. Debit Credit
31/3/14
NOTES
1)
F.
Business Purchase A/c
‘
‘
Dr. - 1,91,400
To Liquidator of A Ltd.
-
1,91,400
(Being the amount of purchase consideration
payable to A Ltd. on purchase of their business)
2)
Buildings A/c
Dr. -
80,000
Machinery A/c
Dr. -
40,000
Cash A/c
Dr. -
20,000
Stock A/c
Dr. -
72,000
Debtors A/c
Dr. -
36,000
Goodwill A/c
Dr. -
17,400
To 8% Debentures A/c
-
20,000
To Employees Provided Fund A/c
-
4,000
To Creditors A/c
-
50,000
To Business Purchase A/c
-
1,91,400
(Being the entry to record the assets and
liabilities taken over from A Ltd., at their
agreed values and the purchase consideration
thereon)
3)
Liquidator of A Ltd. A/c
To Equity Shares Capital A/c
(Being the entry to record the issue of
19,140 fully paid equity shares of ‘ 10
each to the liquidator of A Ltd. in full
settlement of the Purchase Consideration
due to them.)
22
Advanced Accounting - I
Dr. - 1,91,400
-
1,91,400
4)
Business Purchase A/c
Dr. -
To Liquidator of S Ltd. A/c
44,000
-
44,000
Accounting For Amalgamation,
Absorption and External
Reconstruction
(Being the amount of purchase consideration
payable to S Ltd., on purchase of their business)
NOTES
5)
Machinery A/c
Dr. -
42,000
Stock A/c
Dr. -
10,000
Debtors A/c
Dr. -
12,000
Cash A/c
Dr. -
6,000
Goodwill A/c
Dr. -
4,000
To Creditors A/c
-
30,000
To Liquidators of S Ltd. A/c
44,000
(Being the entry to record the assets and
labilities taken over from S Ltd., at the agreed
values and the purchase consideration thereon.)
6)
Liquidator of S Ltd. A/c
To Equity Shares Capital A/c
Dr. -
44,000
44,000
(Being the entry to record the issue of
4,400 fully paid Equity Shares of ‘ 10 each
to the liquidator of S Ltd., in full settlement
of the Purchase Consideration due to the
liquidator of S Ltd.)
Advanced Accounting - I
23
Accounting For Amalgamation,
Absorption and External
Reconstruction
ILLUSTRATION 2
The following are the Balance Sheets of A Ltd., and B Ltd., as on 31st March,
2014.
Balance Sheet of A Ltd. as on 31st March, 2014.
NOTES
Liabilities
6,000 Equity Shares of
‘
Assets
6,00,000 Land and Buildings
‘ 100 each
Plant and Machinery
1,000, 6% Preference
Furniture
Shares of ‘ 100 each
1,00,000 Stock
‘
2,00,000
3,00,000
20,000
70,000
Contingent Reserve
20,000 Debtors
90,000
Creditors
70,000 Cash at Bank
15,000
Unclaimed Dividend
5,000 Preliminary Expenses
Contingent Liability for bills
Discount on Issue of shares
discounted ‘ 4,000
- Profit and Loss
7,95,000
20,000
5,000
75,000
7,95,000
Balance Sheet of B Ltd. as on 31st March, 2014
Liabilities
• 7,000 Equity Shares of
‘
Assets
7,00,000 Freehold Premises
‘ 100 each
Plant and Machinery
General Reserve
18,000 Stock
Profit and Loss
40,000 Debtors
Workmen’s Compensation
Cash at Bank
Fund
10,000
Creditors
72,000
8,40,000
‘
4,00,000
2,10,000
29,000
1,90,000
11,000
8,40,000
A Ltd. and B Ltd., amalgamated as on 31st March, 2014 and a new
company C Ltd. was formed with an authorised capital of 20,000 Equity Shares
of ‘ 100 each . The amalgamation was agreed on the following terms:
24
Advanced Accounting - I
a)
C Ltd., took all assets of A Ltd., at book values and creditors of A Ltd. The
purchase consideration was discharged by issuing 3,000 Equity Shares of
‘ 100 each at ‘ 120 per share and the balance in cash.
b)
C Ltd., took all assets of B Ltd., at book value except cash and also took
the creditors. The purchase consideration was discharged by issuing 6,000
Equity Shares of ‘ 100 each at ‘ 120 per share and the balance in cash.
c)
A Ltd., paid its Preference Share Capital back with arrears of preference
dividend for last two years.
d)
Liability for bills discounted was settled at ‘ 2,500
e)
Out of unclaimed dividend, ‘ 2,000 was paid to the rightful shareholders.
The remaining unclaimed dividend was time-barred and transferred to the
shareholders account.
f)
Liability for workmen’s compensation of B Ltd., amounted to ‘ 7,500
g)
The cost of liquidation of A Ltd., was ‘ 5,000 and that of B Ltd., was
‘ 6000 which was paid by the respective companies.
Accounting For Amalgamation,
Absorption and External
Reconstruction
NOTES
You are required to prepare :
i)
Necessary Ledger Account in the books of A Ltd.
ii)
Opening entries in the books of C Ltd.
SOLUTION
Statement of Purchase Consideration
Discharge
A Ltd. B Ltd. Net Assets taken
‘
‘
over
A Ltd
B Ltd.
‘
‘
Issue of Equity
3,60,000 7,20,000 Freehold Premises
Shares of ‘ 100
Land and Buildings
each at ‘ 120
Plant and Machinery 3,00,000 2,10,000
per share
Furniture
20,000
-
A Ltd.:
Stock
70,000
29,000
Debtors
90,000 1,90,000
3,000Sh x ‘ 120
B Ltd.:
Cash at Bank
(+)
6,000Sh x ‘ 120
Balance in Cash
- 4,00,000
2,00,000
15,000
-
-
6,95,000 8,29,000
2,65,000 37,000 Less: Creditors
taken over
6,25,000 7,57,000
(-)
70,000
72,000
6,25,000 7,57,000
Advanced Accounting - I
25
Accounting For Amalgamation,
Absorption and External
Reconstruction
In the books of A Ltd.
Dr.
Realisation Account
Particulars
NOTES
‘
Particulars
To Sundry Assets :
‘
By Sundry Liabilities :
i) Land and Buildings
2,00,000
i) Creditors
ii) Plant and Machinery
3,00,000
By C Ltd.
iii) Furniture
20,000
iv) Stock
70,000
By Equity Shareholders
v) Debtors
90,000
(Loss on Realisation)
vi) Cash at Bank
15,000
To Cash/Bank
Cr.
70,000
6,25,000
(Purchase Consideration)
17,000
5,000
(Cost of Liquidation)
To Preference Shareholders
12,000
(Arrears of Dividend)
7,12,000
Dr.
7,12,000
Preference Shareholders Account
Particulars
To Cash/Bank
‘
Particulars
By Realisation
1,12,000
Advanced Accounting - I
‘
1,12,000 By 6% Preference Shares
Capital
26
Cr.
1,00,000
12,000
1,12,000
Dr.
Equity Shareholders Account
‘
Particulars
Cr.
‘
Particulars
To Profit and Loss
75,000
By Equity Share Capital
To Preliminary Expenses
20,000
By Contingency Reserve
17,500
To Discount on Issue of Shares
5,000
By Unclaimed Dividend
3,000
Accounting For Amalgamation,
Absorption and External
Reconstruction
6,00,000
NOTES
To Realisation
(Loss on Realisation)
17,000
To Equity Shares in C Ltd.
3,60,000
(3,000 Equity Shares of
‘ 120 each)
To Cash /Bank
1,43,500
6,20,500
Dr.
6,20,500
Unclaimed Dividend Account
‘
Particulars
Particulars
To Cash/Bank
2,000 By Balance B/D
To Equity Shareholders
3,000
5,000
Dr.
Cr.
‘
5,000
5,000
Contingent Liability for Bills Discounted Account
Particulars
To Cash
‘
Particulars
2,500 By Contingency Reserve
2,500
Cr.
‘
2,500
2,500
Advanced Accounting - I
27
Accounting For Amalgamation,
Absorption and External
Reconstruction
Dr.
Cash/Bank Account
‘
Particulars
To C Ltd.
Particulars
2,65,000 By Realisation
Cr.
‘
5,000
(Cost of Liquidation)
NOTES
By Contingent Liability
2,500
By Unclaimed Dividend
2,000
By Preference Shareholders
1,12,000
By Equity Shareholders
1,43,500
2,65,000
Dr.
2,65,000
C Ltd. (Purchasing Co.) Account
Particulars
To Realisation
‘
Particulars
Cr.
‘
6,25,000 By Equity Shares in C Ltd.
3,60,000
By Cash / Bank
2,65,000
(Purchase consideration)
6,25,000
6,25,000
In the books of B Ltd.
Dr.
Realisation Account
Particulars
‘
To Sundry Assets:
Particulars
Cr.
‘
By Sundry Liabilities :
i) Freehold Property
4,00,000 i) Creditors
72,000
ii) Plant and Machinery
2,10,000 By C Ltd.
7,57,000
iii) Stock
iv) Debtors
To Cash/Bank
29,000 (Purchase Consideration)
6,000
1,90,000 By Equity Shareholders
6,000 ( Loss on Realisation)
(Cost of Liquidation)
8,35,000
28
Advanced Accounting - I
8,35,000
Dr.
Cash/Bank Account
‘
Particulars
Cr.
‘
Particulars
To Balance B/D
11,000 By Realisation
To C Ltd.
37,000 (Cost of Liquidation)
6,000
NOTES
By Liability for Workmen’s
Compensation
By Equity Shareholders
48,000
Dr.
7,500
34,500
48,000
C Ltd. (Purchasing Company) Account
‘
Particulars
To Realisation
By Cash / Bank
7,57,000
Dr.
Cr.
‘
Particulars
7,57,000 By Equity Shares in C Ltd.
(Purchase consideration)
7,20,000
37,000
7,57,000
Equity Shareholders Account
‘
Particulars
To Realisaton
Cr.
‘
Particulars
6,000 By Equity Share Capital
(Loss on Realisation)
7,00,000
By General Reserve
18,000
To Equity Shares in C Ltd. 7,20,000 By Profit and Loss
(6,000 Equity Shares of
By Workmen’s Compensation
‘ 120 each)
Fund
To Cash/Bank
40,000
2,500
34,500
7,60,500
Dr.
7,60,500
Liability for Workmen’s Compensation Account
Particulars
To Cash/Bank
Accounting For Amalgamation,
Absorption and External
Reconstruction
‘
Particulars
7,500 By Workmen’s Compensation
Fund
7,500
Cr.
‘
7,500
7,500
Advanced Accounting - I
29
Accounting For Amalgamation,
Absorption and External
Reconstruction
Opening Entries in the books of C Ltd.
Journal
Date
NOTES
Particulars
L.
31/3/14
1)
F.
Business Purchase A/c
Debit Credit
‘
‘
Dr. - 6,25,000
To Liquidator of A Ltd. A/c
-
6,25,000
(Being the amount of purchase consideration
payable to A Ltd., on purchase of their business)
2)
Business Purchase A/c
To Liquidator of B Ltd. A/c
Dr. - 7,57,000
-
7,57,000
( Being the amount of purchase consideration
payable to B Ltd., on purchase of the their
business)
3)
Land and Buildings A/c
Dr. - 2,00,000
Plant and Machinery A/c
Dr. - 3,00,000
Furniture A/c
Dr. -
20,000
Stock A/c
Dr. -
70,000
Debtors A/c
Dr. -
90,000
Cash at Bank A/c
Dr. -
15,000
To Creditors A/c
-
70,000
To Business Purchase A/c
-
6,25,000
(Being the entry to record the assets and
liabilities taken over from A Ltd., and the
purchase consideration thereon)
30
Advanced Accounting - I
4)
Freehold Premises A/c
Dr. - 4,00,000
Plant and Machinery A/c
Dr. - 2,10,000
Stock A/c
Dr. -
Debtors A/c
Dr. - 1,90,000
Accounting For Amalgamation,
Absorption and External
Reconstruction
29,000
To Creditors A/c
-
72,000
To Business Purchase A/c
-
7,57,000
NOTES
(Being the entry to record the assets and
liabilities taken over from B Ltd., and the
purchase consideration thereon.)
5)
Liquidator of A Ltd. A/c
Dr. - 6,25,000
To Equity Shares Capital A/c
3,00,000
To Share Premium A/c
-
60,000
To Cash/Bank A/c
-
2,65,000
(Being the entry to record the issue of 3,000
Equity Shares of ‘ 100 each at a premium of
‘ 20 per share and a cash payment of
‘ 2,65,000 to the liquidator of A Ltd.,
to discharge the purchase consideration due )
6)
Liquidator of B Ltd. A/c
Dr. - 7,57,000
To Equity Shares Capital A/c
-
6,00,000
To Share Premium A/c
-
1,20,000
To Cash/Bank A/c
-
37,000
(Being the entry to record the issue of 6,000
Equity Shares of ‘ 100 each at a premium of
‘ 20 per share and cash payment of ‘ 37,000
to the liquidator of B Ltd., to discharge the
purchase consideration due)
Advanced Accounting - I
31
Accounting For Amalgamation,
Absorption and External
Reconstruction
ILLUSTRATION 3
The Balance Sheet of A Ltd., and B Ltd., as on 31st March, 2014 is as
follows. A new company was formed called C Ltd. for purchasing the business
of the above two companies as on that date.
NOTES
Balance Sheet as on 31st March, 2014
Liabilities
A Ltd. B Ltd. Assets
‘
B Ltd.
‘
‘
‘
Share Capital:
Buildings
• 1,500 Shares of ‘ 10 each 15,000
Machinery
• 800 Shares of ‘ 10 each
10,500
6,000
2,500
1,500
1,000
-
6,000
7,800
2,000 Debtors
8,200
2,100
6,000 Cash
4,300
1,800
8,000 Motor Vehicles
General Reserve
8,000
Profit and Loss
2,000
5% Debentures
-
Creditors
A Ltd.
7,500
Stock
3,200
32,500 19,200
32,500 19,200
The following are the terms of purchase of the business.
a)
Goodwill of A Ltd., and B Ltd., is to be valued at ‘ 8,000 and ‘ 3,000
respectively.
b)
All the assets and liabilities of A Ltd., are to taken over at their book value
except Motor Vehicle which is valued at ‘ 3,000.
c)
All the assets of B Ltd., are taken over at their book value except Debtors
and Cash, but not the liabilities.
d)
The Debtors of B Ltd., are to be discharged at a premium of 5% by issuing
them 9% Debentures of C Ltd., as part payment of purchase consideration.
e)
The balance of purchase price to B Ltd., and entire purchase price to A
Ltd., is paid in ‘ 10 fully paid Equity Shares of C Ltd.
Show, i) Calculation of Purchase consideration of both the companies . ii)
Close the books of accounts of A Ltd., and B Ltd., iii) Balance Sheet of C Ltd.
32
Advanced Accounting - I
Accounting For Amalgamation,
Absorption and External
Reconstruction
SOLUTION
Statement of Purchase Consideration
Discharge
A Ltd. B Ltd. Net Assets
‘
‘
‘
taken over
Issue of 3,500 Equity
Buildings
Shares of C Ltd., at
Machinery
‘ 10 each
A Ltd. B Ltd.
35,000
10,500
6,000
2,500
1,500
3,000
-
6,000
7,800
NOTES
Motor Vehicles at
Issue of 9% Debentures
revalued figure
to the Debentureholders
‘
6,300 Stock
( ‘ 6,000 + 5% premium
Debtors
8,200
-
i.e. ‘ 300)
Cash
4,300
-
8,000
3,000
Goodwill
(+)
42,500 18,300
Discharge of balance in
12,000 Less : Liabilities
1,200 Equity Shares of
taken over
C Ltd., at ‘ 10 each fully
Creditors
(-)
7,500
-
paid
35,000 18,300
35,000 18,300
In the books of A Ltd.
Dr.
Realisation Account
Particulars
‘
Particulars
To Sundry Assets :
i) Buildings
Cr.
‘
By Sundry Liabilities :
10,500 i) Creditors
7,500
ii) Machinary
2,500 By C Ltd.
35,000
iii) Motor Vehicles
1,000 (Purchase Consideration)
iv) Stock
6,000
v) Debtors
8,200
vi) Cash
4,300
To Equity Shareholders
10,000
(Profit on Realisation)
42,500
42,500
Advanced Accounting - I
33
Accounting For Amalgamation,
Absorption and External
Reconstruction
Dr.
Equity Shareholders Account
‘
Particulars
To Equity Shares in C Ltd.
NOTES
Particulars
35,000 By Equity Shares Capital
Cr.
‘
15,000
(3,500 fully paid Equity Shares
By General Reserve
8,000
of ‘ 10 each)
By Profit and Loss
2,000
By Realisation
10,000
(Profit on Realisation)
35,000
Dr.
35,000
C Ltd. ( Purchasing Co.) Account
Particulars
To Realisation
‘
Particulars
Cr.
‘
35,000 By Equity Shares in C Ltd. 35,000
(Purchase consideration)
(3,500 fully paid Equity
Shares of ‘ 10 each.)
35,000
35,000
In the books of B Ltd.
Dr.
Realisation Account
Particulars
‘
To Sundry Assets :
Particulars
By C Ltd.
i) Buildings
6,000 (Purchase Consideration)
ii) Machinary
1,500
iii) Stock
7,800
To Debenture holder’s
Cr.
‘
18,300
300
(Premium)
To Equity Shareholders
2,700
(Profit on Realisation)
18,300
34
Advanced Accounting - I
18,300
Dr.
Equity Shareholders Account
‘
Particulars
To Equity Shares in C Ltd.
Particulars
12,000 By Equity Share Capital
(1,200 Equity Shares of
(800 Equity Shares of
‘ 10 each)
‘ 10 each)
To Cash/Bank
Cr.
‘
Accounting For Amalgamation,
Absorption and External
Reconstruction
8,000
NOTES
700 By Profit and Loss
2,000
By Realisation
2,700
(Profit on Realisation)
12,700
Dr.
12,700
Debtors Account
‘
Particulars
To Balance B/D
Particulars
2,100 By Cash /Bank
2,100
Dr.
Cr.
‘
2,100
2,100
C Ltd. (Purchasing Co.)Account
‘
Particulars
To Realisaton
Particulars
Cr.
‘
18,300 By 9% Debentures in C Ltd.
6,300
By Equity Shares in C Ltd.
12,000
(Purchase Consideration)
(1,200 Equity Shares of
‘ 10 each)
18,300
Dr.
18,300
5% Debenture holders Account
Particulars
To 9% Debentures in C Ltd.
‘
Particulars
6,300 By 5% Debentures
By Realisation
Cr.
‘
6,000
300
( Premium)
6,300
6,300
Advanced Accounting - I
35
Accounting For Amalgamation,
Absorption and External
Reconstruction
Dr.
Sundry Creditors Account
‘
Particulars
To Cash /Bank
Particulars
3,200 By Balance B/D
3,200
NOTES
Dr.
3,200
3,200
‘
Particulars
To Balance B/D
1,800 By Sundry Creditors
To Debtors
2,100 By Equity Shareholders
3,900
Cr
‘
3,200
700
3,900
Balance Sheet of C Ltd., as on 31st March, 2014
Dr.
Liabilities
‘
Assets
Cr.
‘
Share Capital :
Fixed Assets :
• 4,700 fully paid Equity Shares
Goodwill
11,000
47,000 Buildings
16,500
of ‘ 10 each
Secured Loans :
• 9% Debentures
Machinery
6,300 Motor Vehicles
Current Liabilities and
Current Assets, Loans
Provisions:
and Advances :
a) Current Liabilities :
a) Current Assets:
Creditors
7,500 Stock
60,800
Advanced Accounting - I
‘
Cash/Bank Account
Particulars
36
Cr.
4,000
3,000
13,800
Sundry Debtors
8,200
Cash
4,300
60,800
ILLUSTRATION 4
The Balance Sheet of A Ltd., and B Ltd., as on 31st March,2014 was as
follows :
Accounting For Amalgamation,
Absorption and External
Reconstruction
Balance Sheet of A Ltd., as on 31st March, 2014
Liabilities
Share Capital :
‘
‘
Assets
2,70,000 Goodwill
90,000
• 2,700 Equity Shares of
Land and Buildings
‘ 100 each
Plant and Machinary
1,30,000
50,000
Dividend Equalisation Reserve
10,000 Stock
General Reserve
12,000 Debtors
Profit and Loss
18,000 Less: R.D.D.
Creditors
80,000 Cash in hand
10,000
5,000 Cash at Bank
40,000
Bills Payable
Provision for Taxation
NOTES
80,000
42,000
(-) 2,000
40,000
45,000
4,40,000
4,40,000
Balance Sheet of B Ltd., as on 31st March , 2014
Liabilities
Share Capital :
‘
‘
Assets
2,00,000 Land and Buildings
80,000
Furniture
15,000
• 2,000 Equity Shares of ‘ 100 each
Creditors
70,000 Plant and Machinary
80,000
Bills Payable
20,000 Vehicles
45,000
Stock
Debtors
50,000
14,000
Less: R.D.D. (-) 4,000
2,90,000
10,000
Cash in hand
5,000
Profit and Loss
5,000
2,90,000
A Ltd., and B Ltd., decided to amalgamate on that date and a new company
AB Ltd., was formed to carry on their business on the following terms :
a)
AB Ltd., took all assets of A Ltd., except Debtors, Cash and Bank balance,
at 10% depreciation and agreed to pay ‘ 1,00,000 for Goodwill. It also took
Advanced Accounting - I
37
Accounting For Amalgamation,
Absorption and External
Reconstruction
over Creditors and Bills Payable.
b)
Tax Liability for 2013-2014 was paid at ‘ 38,000.
c)
AB Ltd., took all assets of B Ltd., except Debtors and Cash . Land and
Buildings and Stock were taken at 20% appreciation and other assets were
taken at book value. They also agreed to take over the creditors of B Ltd.
d)
B Ltd., paid Bills Payable in full.
e)
Purchase Consideration was satisfied as follows- ‘ 20,000 to A Ltd., and
‘ 15,000 to B Ltd., The balance of Purchase Consideration was paid in
Equity Shares of ‘ 100 each.
f)
Debtors of A Ltd., and B Ltd., realised ‘ 38,000 and ‘ 12,000 respectively.
NOTES
You are required to prepare,
i)
necessary Ledger Account of A Ltd. and B Ltd.
ii)
acquisition entries and Balance Sheet of AB Ltd.
SOLUTION
Statement of Purchase Consideration
Discharge
A Ltd. B Ltd.
‘
Cash Payment
‘
Net Assets
A Ltd.
B Ltd.
taken Over
‘
‘
20,000 15,000 Goodwill
1,00,000
Issue of Equity Shares 2,29,000 2,11,000 Land and Buildings
-
1,17,000 96,000
of ‘ 100 each
Plant and Machinary
45,000 80,000
A Ltd :2,290Sh x ‘ 100
Stock
72,000 60,000
B Ltd: 2,110Shx ‘ 100
Furniture
(Balance of Purchase
Vehicles
- 15,000
(+)
Consideration)
- 45,000
334000 296000
Less:Liabilities
taken over
Creditors
80,000 70,000
Bills Payable (+)
(-)
2,49,000 226,000
38
Advanced Accounting - I
5,000
-
85,000 70,000
2,49,000 2,26,000
In the books of A Ltd.
Dr.
Realisation Account
‘
Particulars
To Sundry Assets :
Particulars
‘
By Sundry Liabilities :
i) Goodwill
90,000 i) Creditors
ii) Land and Buildings
1,30,000 ii) Bills payable
iii) Plant and Machinary
50,000 By AB Ltd.
iv) Stock
80,000 (Purchase Consideration)
To Debtors
2,000 By Equity Shareholders
(Loss)
80,000
NOTES
5,000
2,49,000
18,000
(Loss on Realisation)
3,52,000
Dr.
Cr.
Accounting For Amalgamation,
Absorption and External
Reconstruction
3,52,000
Equity Shareholders Account
Particulars
To Realisation
‘
18,000 By Equity Share Capital
(Loss on Realisation)
To Cash
Particulars
‘
2,70,000
By Dividend Equilisation
70,000
Reserve
To Equity Shares in AB Ltd. 2,29,000 By General Reserve
By Profit and Loss
By Provision for Taxation
3,17,000
Dr.
Cr.
10,000
12,000
18,000
7,000
3,17,000
AB Ltd., Account
Particulars
To Realisation
‘
2,49,000
(Purchase Consideration)
Particulars
By Cash
By Equity Shares in AB Ltd.
2,49,000
Cr.
‘
20,000
2,29,000
2,49,000
Advanced Accounting - I
39
Accounting For Amalgamation,
Absorption and External
Reconstruction
NOTES
Dr.
Cash Account
‘
Particulars
Cr.
Particulars
To Balance B/D
10,000 By Provision for Taxation
38,000
To Cash at Bank
40,000 By Equity Shareholders
70,000
To AB Ltd.
20,000
To Debtors
38,000
1,08,000
Dr.
1,08,000
Equity Shares in AB Ltd. Account
‘
Particulars
To AB Ltd.
Particulars
2,29,000 By Equity Shareholders
2,29,000
Dr.
To Cash
To Equity Shareholders
‘
2,29,000
2,29,000
‘
Particulars
38,000 By Balance B/D
Dr.
Cr.
‘
45,000
7,000
45,000
45,000
Debtors Account
Particulars
To Balance B/D
‘
Cr.
Particulars
40,000 By Cash
By Realisation
40,000
Advanced Accounting - I
Cr.
Provision for Taxation Account
Particulars
40
‘
‘
38,000
2,000
40,000
In the books of B Ltd.
Dr.
Realisation Account
‘
Particulars
To Sundry Assets:
Particulars
Cr.
Accounting For Amalgamation,
Absorption and External
Reconstruction
‘
By Sundry Liabilities :
i) Land and Buildings
80,000 i) Creditors
70,000
ii) Furniture
15,000 By AB Ltd.
2,26,000
ii) Plant and Machinary
80,000 (Purchase Consideration)
iv) Vehicles
45,000 By Debtors
v) Stock
50,000 (Profit)
To Equity Shareholders
28,000
NOTES
2,000
(Profit on Realisation)
2,98,000
Dr.
2,98,000
Equity Shareholders Account
Particulars
To Profit and Loss
To Cash
‘
Particulars
5,000 By Equity Share Capital
12,000 By Realisation
Cr.
‘
2,00,000
28,000
To Equity Shares in AB Ltd. 2,11,000 (Profit on Realisation)
2,28,000
Dr.
2,28,000
AB Ltd. Account
Particulars
To Realisation
‘
Particulars
2,26,000 By Cash
(Purchase Consideration)
Cr.
‘
15,000
By Equity Shares in
AB Ltd.
2,26,000
2,11,000
2,26,000
Advanced Accounting - I
41
Accounting For Amalgamation,
Absorption and External
Reconstruction
Dr.
Cash Account
Particulars
To Balance B/D
NOTES
‘
Cr.
Particulars
5,000 By Bills Payable
To AB Ltd.
15,000 By Equity Shareholders
To Debtors
12,000
32,000
Dr.
To AB Ltd.
12,000
32,000
‘
Particulars
2,11,000 By Equity Shareholders
2,11,000
Dr.
Cr.
‘
2,11,000
2,11,000
Debtors Account
Particulars
To Balance B/D
To Realisation
‘
Particulars
10,000 By Cash
Dr.
Cr.
‘
12,000
2,000
12,000
12,000
Bills Payable Account
Particulars
To Cash
‘
Particulars
20,000 By Balance B/D
20,000
Advanced Accounting - I
20,000
Equity Shares in AB Ltd. Account
Particulars
42
‘
Cr.
‘
20,000
20,000
Acquisition Entries in the books of AB Ltd.
Date
Particulars
L.
31/3/14
1)
F.
Business Purchase A/c
Debit Credit
‘
Accounting For Amalgamation,
Absorption and External
Reconstruction
‘
Dr. - 4,75,000
NOTES
To Liquidator of A Ltd. A/c
-
2,49,000
To Liquidator of B Ltd. A/c
-
2,26,000
(Being the amount of purchase consideration,
payable to A Ltd. and B Ltd. on purchase of
their business)
2)
Goodwill A/c
Dr. - 1,00,000
Land and Buildings A/c
Dr. - 2,13,000
Plant and Machinary
Dr. - 1,25,000
Stock A/c
Dr. - 1,32,000
Furniture A/c
Dr. -
15,000
Vehicles A/c
Dr. -
45,000
To Creditors A/c
-
1,50,000
To Bills Payable A/c
-
5,000
To Business Purchase A/c
-
4,75,000
(Being the assets and liabilities taken over from
A Ltd., and B Ltd., at their agreed value and
the purchase consideration thereon)
3)
Liquidator of A Ltd. A/c
Dr. - 2,49,000
Liquidator of B Ltd. A/c
Dr. - 2,26,000
To Cash A/c
-
35,000
To Equity Shares Capital A/c
-
4,40,000
(Being the entry to record the issue of 4,400
Equity Shares of ‘ 10 each to the liquidator
of A Ltd., and B Ltd., and a cash payment in
full settlement of Purchase consideration due
to them .)
Advanced Accounting - I
43
Accounting For Amalgamation,
Absorption and External
Reconstruction
Balance Sheet of AB Ltd., as on 31st March, 2014
Liabilities
‘
Share Capital :
NOTES
• 4,400 Equity Shares of
‘
Assets
Fixed Assets :
Goodwill
1,00,000
‘ 100 each fully called-
Land and Buildings
2,13,000
up and paid- up
Plant and Machinary
1,25,000
Unsecured Loans :
Furniture
15,000
Vehicles
45,000
Bank Overdraft
4,40,000
35,000
Current Liabilities and
Current Assets, Loans
Provisions:
and Advances :
Creditors
Bills Payable
1,50,000
Stock
1,32,000
5,000
6,30,000
6,30,000
ABSORPTION
ILLUSTRATION 1
Nuchem Ltd., sells its business to Birla Global Ltd., as on 31st March, 2014
on which date its Balance Sheet Stood as follows :
Balance Sheet of Nuchem Ltd., as on 31st March, 2014
Liabilities
‘
Share Capital :
Goodwill
Advanced Accounting - I
‘
50,000
2,000 Shares of ‘ 100 each
2,00,000
Freehold Property
6% Debentures of ‘ 100each
1,00,000
Plant and Tools
83,000
35,000
1,50,000
Sundry Creditors
30,000
Stock
Reserve Fund
50,000
Bills Receivable
4,500
Profit and Loss
20,000
Sundry Debtors
27,500
Cash at Bank
50,000
4,00,000
44
Assets
4,00,000
Birla Global Ltd., agreed to take the assets (exclusive of Cash and Goodwill)
at 10% less than the book values, to pay ‘ 75,000 for goodwill and to take over
the debentures.
The Purchase consideration was to be discharged by allotment to Nuchem
Ltd., of 1,500 Shares of ‘ 100 at a premium of ‘ 10 per share and balance in
cash.The cost of liquidation amounted to ‘ 3,000.
Accounting For Amalgamation,
Absorption and External
Reconstruction
You are required to prepare :
i)
Realisation Account, Cash Account, Shareholders Account, Purchasing Co.
Account , Creditors Account in the books of Nuchem Ltd.
ii)
Acquisition Journal Entries in the books of Birla Global Ltd
NOTES
SOLUTION
Statement of Purchase Consideration
Discharge
Allotment of 1,500 Equity
‘
Net Assets taken over
1,65,000 Freehold Property
‘
1,50,000
Shares of ‘ 100 each,
at ‘ 110 per share
Balance paid in Cash
Plant and Tools
83,000
80,000 Bills Receivables
Sundry Debtors
4,500
(+)
27,500
3,00,000
Less:10% reduction in
values
(-)
30,000
2,70,000
Goodwill
(+)
75,000
3,45,000
Less: Debentures
taken over
2,45,000
(-) 1,00,000
2,45,000
Advanced Accounting - I
45
Accounting For Amalgamation,
Absorption and External
Reconstruction
In the books of Nuchem Ltd.
Dr.
Realisation Account
‘
Particulars
NOTES
To Sundry Assets :
Particulars
Cr.
‘
By Sundry Liabilities :
i) Goodwill
50,000
ii) Freehold Property
1,50,000
i) Debentures
1,00,000
By Birla Global Ltd.
2,45,000
iii) Plant and Tools
83,000
(Purchase Consideration)
iv) Stock
35,000
By Equity Shareholders
v) Bills Receivable
4,500
vi) Sundry Debtors
27,500
To Cash /Bank
8,000
(Loss on Realisation)
3,000
(Cost of Liquidation)
3,53,000
Dr.
3,53,000
Equity Shareholders Account
Particulars
To Realisation
‘
8,000
Particulars
By Equity Share Capital
Cr.
‘
2,00,000
(Loss on Realisation)
By Reserve Fund
50,000
To Equity Shares in Birla Global Ltd.
By Profit and Loss
20,000
(1,500 Shares of ‘ 100 each
1,65,000
at ‘ 110 per share)
To Cash /Bank
97,000
2,70,000
46
Advanced Accounting - I
2,70,000
Dr.
Cash at Bank Account
‘
Particulars
Particulars
To Balance B/D
50,000
By Realisation
To Birla Global Ltd.
80,000
(Cost of Liquidation)
‘
30,000
By Equity Shareholders
97,000
To Cash/Bank
‘
30,000
Particulars
By Balance B/D
30,000
Dr.
Cr.
‘
30,000
30,000
Birla Global Ltd., Account
Particulars
To Realisation
‘
2,45,000
(Purchase Consideration)
NOTES
1,30,000
Sundry Creditors Account
Particulars
Accounting For Amalgamation,
Absorption and External
Reconstruction
3,000
By Sundry Creditors
1,30,000
Dr.
Cr.
Particulars
By Equity Shares in
Cr.
‘
1,65,000
Birla Global Ltd.
(1,500 Equity Shares
of ‘ 100 each at
‘ 110 per share)
By Cash/Bank
2,45,000
80,000
2,45,000
Advanced Accounting - I
47
Accounting For Amalgamation,
Absorption and External
Reconstruction
Acquisition Entries in the books of Birla Global Ltd.
Date
Particulars
L. Debit Credit
31/3/14
F.
‘
‘
NOTES
1)
Business Purchase A/c
Dr. - 2,45,000
To Liquidator of Nuchem Ltd. A/c
-
2,45,000
(Being the amount of purchase consideration
payable to Nuchem Ltd., on purchase of their
business)
2)
Freehold Property A/c
Dr. - 1,35,000
Plant and Tools A/c
Dr. -
74,700
Stock A/c
Dr. -
31,500
Bills Receivable A/c
Dr. -
4,050
Sundry Debtors A/c
Dr. -
24,750
Goodwill A/c
Dr. -
75,000
To Business Purchase A/c
-
2,45,000
To 6% Debenture A/c
-
1,00,000
(Being the entry for taking over the assets and
liabilities at their agreed values and the purchase
consideration payable thereon)
48
Advanced Accounting - I
3)
Liquidator of Nuchem Ltd. A/c
Dr. - 2,45,000
Accounting For Amalgamation,
Absorption and External
Reconstruction
To Equity Share Capital A/c
-
1,50,000
To Share Premium A/c
-
15,000
To Cash /Bank A/c
-
80,000
NOTES
( Being the entry for discharge of purchase
consideration by issue of 1,500 fully paid equity
shares of ‘ 100 each at a premium of ‘ 10
per share and balance payment in cash to the
liquidator of Nuchem Ltd.)
ILLUSTRATION 2
The Balance Sheet as Marson Ltd., as on 31st March, 2014 is as follows.
Balance Sheet of Marson Ltd., as on 31st March, 2014
Liabilities
‘
Share Capital :
• 6,000 Shares of ‘ 100 each
Assets
Land and Buildings
6,00,000 Plant and Machinary
6% Debentures
20,000 Vehicles
Creditors
60,000 Stock
Outstanding Expenses
4,000 Debtors
‘
2,10,000
1,60,000
1,00,000
80,000
60,000
Cash
64,000
Underwriting Commission
10,000
6,84,000
6,84,000
Nicholas Ltd., absorbed Marson Ltd., on the following terms:
a)
Nicholas Ltd., acquired only the assets of Marson Ltd., except cash balance.
Advanced Accounting - I
49
Accounting For Amalgamation,
Absorption and External
Reconstruction
NOTES
b)
The purchase consideration was fixed as 5 Equity Shares of ‘ 100 each at
‘ 140 per share for every 7 Equity Share of Marson Ltd., and 700, 6%
Preference Shares of ‘ 100 each.
c)
Realisation expenses amounted to ‘ 12,000 and were paid by Marson Ltd.
d)
The liquidator of Marson Ltd., transferred the Preference Shares to creditors
in full satisfaction of their claims.
e)
Debentures were paid at a premium of 10%.
f)
Outstanding expenses were paid in full and in addition Marson Ltd., had to
pay ‘ 4,200 as compensation to the worker.
g)
Nicholas Ltd., valued Land and Buildings , Plant and Machinary at 10%
appreciation, Vehicles at 10% depreciation, Stock was reduced to its market
value which was ‘ 64,000. Debtors were taken subject to 5% Reserve for
Doubtful Debts.
Prepare the necessary Ledger Accounts in the books of Marson Ltd., and
pass the opening entries in the books of Nicholas Ltd.
SOLUTION
Statement Showing Purchase Consideration
Discharge
‘
Net Assets taken over
‘
Equity Shares :
Land and Buildings
2,31,000
Issue of 5 Shares of ‘ 100 each
Plant and Machinary
1,76,000
at ‘ 140 per share for 7 share
Vehicles
90,000
of Marson Ltd.
Stock
64,000
i.e.
6,000
Debtors
x 5
60,000
7
Less : R.D.D.(-) 3,000 (+)57,000
= 4,285 x 5 shares
7
4,285 full shares at ‘ 140 each
6,18,000
5,99,900 Goodwill
Fraction share in cash at market
price 5 x ‘ 140
7
700, 6% Preference Shares of
‘ 100 each
(Balancing Figure)
Advanced Accounting - I
52,000
100
70,000
6,70,000
50
(+)
6,70,000
In the books of Marson Ltd.
Dr.
Realisation Account
‘
Particulars
To Sundry Assets:
Particulars
By Nicholas Ltd.
i) Land and Buildings
2,10,000 (Purchase Consideration)
ii) Plant and Machinary
1,60,000
iii) Vehicles
1,00,000
iv) Stock
80,000
v) Debtors
60,000
To Cash /Bank
12,000
Cr.
Accounting For Amalgamation,
Absorption and External
Reconstruction
‘
6,70,000
NOTES
(Realisation Expenses)
To 6% Debentureholders
2,000
To Creditors
10,000
To Bank
4,200
(Workmen’s Compensation)
To Equity Shareholders
31,800
(Profit on Realisation)
6,70,000
Dr.
6,70,000
Equity Shareholders Account
Particulars
To Underwriting Commission
To Equity Shares in Nicholas Ltd.
‘
Particulars
‘
10,000 By Equity Share Capital
6,00,000
5,99,900 (6,000 Shares x ‘ 100)
(4,285 shares of ‘ 100 each
By Realisation
at ‘ 140 per share)
(Profit on Realiasation)
To Cash/Bank
Cr.
31,800
21,900
6,31,800
6,31,800
Advanced Accounting - I
51
Accounting For Amalgamation,
Absorption and External
Reconstruction
Dr.
Nicholas Ltd., Account
‘
Particulars
To Realisation
NOTES
Particulars
Cr.
‘
6,70,000 By Equity Shares in
(Purchase Consideration)
Nicholas Ltd.
5,99,900
(Shares 4,285 x ‘ 140)
By Cash
100
(For fractional share )
By Preference Shares in
Nicholas Ltd.,
70,000
(Shares 700 x ‘ 100)
6,70,000
Dr.
6,70,000
Creditors Account
‘
Particulars
To 6% Preference Shares in
Particulars
70,000 By Balance B/D
Nicholas Ltd.
By Realisation
Cr.
‘
60,000
10,000
(700 Preference Shares of
‘ 100 each)
70,000
Dr.
70,000
6% Debentureholders Account
Particulars
To Cash/Bank
‘
Particulars
22,000 By 6% Debentures
By Realisation
22,000
Dr.
To Cash/Bank
‘
20,000
2,000
22,000
Particulars
4,000 By Balance B/D
4,000
Advanced Accounting - I
‘
Outstanding Expenses Account
Particulars
52
Cr.
Cr.
‘
4,000
4,000
Dr.
Cash /Bank Account
‘
Particulars
To Balance B/D
Cr.
‘
Particulars
64,000 By Realisation
To Nicholas Ltd.
Accounting For Amalgamation,
Absorption and External
Reconstruction
12,000
100 (Realisation Expenses)
(Part of Purchase Consideration)
By Realisation
4,200
NOTES
(Workmen’s Compensation)
By Debentureholders
22,000
By Outstanding Expenses
By Equity Shareholders
64,100
4,000
21,900
64,100
Opening Entries in the books of Nicholas Ltd.
Date
Particulars
31/3/14
1)
L.
F.
Business Purchase A/c
To Liquidator of Marson Ltd. A/c
Debit Credit
‘
‘
Dr. - 6,70,000
-
6,70,000
(Being the amount of purchase consideration
payable to Marson Ltd., on purchase of their
business)
2)
Land and Buildings A/c
Dr. - 2,31,000
Plant and Machinary A/c
Dr. - 1,76,000
Vehicles A/c
Dr. -
90,000
Stock A/c
Dr. -
64,000
Debtors A/c
Dr. -
60,000
Goodwill A/c
Dr. -
52,000
To Business Purchase A/c
To R.D.D. A/c
-
6,70,000
3,000
(Being the entry to record the taking over
of assets and liabilities from Marson Ltd.,
and purchase price payable thereon)
Advanced Accounting - I
53
Accounting For Amalgamation,
Absorption and External
Reconstruction
3)
Liquidator of Marson Ltd. A/c
NOTES
Dr. - 6,70,000
To Equity Share Capital A/c
-
4,28,500
To Share Premium A/c
-
1,71,400
To Preference Share Capital A/c
-
70,000
To Cash /Bank A/c
-
100
(Being the entry to record the discharge of
purchase consideration)
ILLUSTRATION 3
The Balance Sheet of Apple Ltd., as on 31st March,2014 was as follows:
Balance Sheet as on 31st March, 2014
Liabilities
‘
Share Capital :
2,000 Shares of ‘ 100 each
Assets
‘
Land and Buildings
1,40,000
2,00,000 Plant and Machinary
1,10,000
General Reserve
64,000 Stock
98,000
Profit and Loss
60,000 Debtors
42,000
Bills Payable
42,400 Cash in hand
14,400
Creditors
70,000 Advertising Expenses
32,000
4,36,400
4,36,400
Apple Ltd. was absorbed by Banana Ltd., on the following terms:
a)
Apple Ltd., agreed to write off Advertising Suspense against its own
reserves.
b)
Banana Ltd., revalued the assets of Apple Ltd., as under :
Land and Buildings - ‘ 1,50,000; Plant and Machinary - ‘ 1,04,000;
Stock - ‘ 1,20,000; and Debtors at Book Value.
c)
Banana Ltd., took over the assets and liabilities of Apple Ltd., and agreed
to discharge the purchase consideration in 2,600 Shares of ‘ 100 each at
‘ 110 per share and balance in cash.
d)
Apple Ltd., paid its liquidation expenses of ‘ 4,000.
Prepare Realisation Account, Banana Ltd. Account, Cash Account and
Shareholders Account in the books of Apple Ltd., and pass opening journal entries
in the books of Banana Ltd.
54
Advanced Accounting - I
Accounting For Amalgamation,
Absorption and External
Reconstruction
SOLUTION
Statement of Purchase Consideration
‘
Discharge
2,600 Equity Shares of
Net Assets taken over
2,86,000
‘
Land and Buildings
1,50,000
‘ 100 each, at ‘ 110
Plant and Machinary
1,04,000
each, at ‘ 110 per share
Stock
1,20,000
Cash
32,000
(Balancing Figure)
Debtors
NOTES
42,000
Cash in hand
(+)
14,400
4,30,400
Less: Liabilities
taken over
Creditors
70,000
Bills Payable (+) 42,400 (-)
3,18,000
1,12,400
3,18,000
In the books of Apple Ltd.
Dr.
Realisation Account
Particulars
‘
To Sundry Assets :
Particulars
Cr.
‘
By Sundry Liabilities:
i) Land and Buildings
1,40,000 i) Bills Payable
42,400
ii) Plant and Machinary
1,10,000 ii) Creditors
70,000
iii) Stock
98,000 By Banana Ltd.
iv) Debtors
42,000 (Purchase Consideration)
v) Cash
14,400
To Cash /Bank
3,18,000
4,000
(Liquidation Expenses)
To Equity Shareholders
22,000
(Profit on Realisation)
4,30,400
4,30,400
Advanced Accounting - I
55
Accounting For Amalgamation,
Absorption and External
Reconstruction
Dr.
Equity Shareholders Account
Particulars
‘
Cr.
‘
Particulars
To Equity Shares in Banana Ltd. 2,86,000 By Equity Share Capital
NOTES
(2,600 Equity Shares of
By General Reserve 64,000
‘ 110 each)
Less:
To Cash
2,00,000
Advt.
28,000 Expenses
(-) 32,000
32,000
By Profit and Loss
60,000
By Realisation
22,000
(Profit on Realisation)
3,14,000
Dr.
3,14,000
Cash /Bank
Particulars
To Banana Ltd.
‘
Particulars
32,000 By Realisation
Cr.
‘
4,000
(Liquidation Expenses)
By Equity Shareholders
32,000
Dr.
28,000
32,000
Banana Ltd. Account
Particulars
To Realisation
‘
Particulars
Cr.
‘
3,18,000 By Equity Shares in
(Purchase Consideration)
Banana Ltd.
2,86,000
(2,600 shares of ‘ 100
each , at ‘ 110 per share)
By Cash
3,18,000
56
Advanced Accounting - I
32,000
3,18,000
Accounting For Amalgamation,
Absorption and External
Reconstruction
Opening Entries in the books of Banana Ltd.
Date
Particulars
L. Debit
31/3/14
1)
F.
Business Purchase A/c
‘
Credit
‘
NOTES
Dr. - 3,18,000
To Liquidator of Apple Ltd. A/c
-
3,18,000
(Being the amount of purchase consideration
payable to A Ltd., on purchase of their
business)
2)
Land and Buildings A/c
Dr. - 1,50,000
Plant and Machinary A/c
Dr. - 1,04,000
Stock A/c
Dr. - 1,20,000
Debtors A/c
Dr. -
42,000
Cash A/c
Dr. -
14,400
To Bills Payable A /c
42,400
To Creditors A/c
70,000
To Business Purchase A/c
3,18,000
(Being the entry to record the assets and
liabilities taken over from Apple Ltd., and
purchase consideration payable thereon.)
3)
Liquidator of Apple Ltd., A/c
Dr. - 3,18,000
To Equity Share Capital A/c
-
2,60,000
To Share Premium A/c
-
26,000
To Cash/ Bank A/c
-
32,000
(Being the entry to record the issue of 2,600
Equity Shares of ‘ 100 each at a premium
of ‘ 10 per share and the balance payment
in cash of ‘ 32,000 to the Liquidator of
Apple Ltd., as part of purchase consideration)
Advanced Accounting - I
57
Accounting For Amalgamation,
Absorption and External
Reconstruction
ILLUSTRATION 4
Given below are the Balance Sheet of two companies A Ltd., and B Ltd.,
as on 31st March , 2014
Balance of Sheet A Ltd., as on 31st March , 2014
NOTES
Liabilities
‘
Assets
‘
Fixed Assets
3,20,000
2,00,000 Investments
24,000
Share Capital :
• Equity Shares of ‘ 10 each,
fully paid up
• 6% Preference Shares of
(2,000 Shares in B Ltd.)
2,00,000 Current Assets
2,00,000
‘ 100 each
Reserves
44,000
Current Liabilities
1,00,000
5,44,000
5,44,000
Balance Sheet of B Ltd., as on 31st March, 2014
Assets
‘
Share Capital :
Fixed Assets
2,40,000
• 16,000 Equity Shares of
Current Assets
Liabilities
‘ 10 each
‘
68,000
1,60,000
• 400, 6% Preference Shares
of ‘ 100 each
40,000
Reserves
40,000
400, 7% Debentures of
‘ 100 each
40,000
Current Liabilities
28,000
3,08,000
3,08,000
A Ltd., absorbs B Ltd., on the following terms:
58
Advanced Accounting - I
a)
A Ltd., will issue 7 Equity Shares of ‘ 10 each at a premium of 20% and a
cash payment of ‘ 5 for Equity Shares of B Ltd.
b)
Preference Shareholders of B Ltd., are to be given at the rate of one 6%
Preference Share in A Ltd., at a premium of 5% for every share held by
them.
c)
7% Debenture of B Ltd., ate to be redeemed at 8% premium by issue of
Accounting For Amalgamation,
Absorption and External
Reconstruction
7% Debentures of A Ltd., at 10% discount.
d)
Liquidation Expenses amounted to ‘ 5,000 to be paid by A Ltd.
e)
Fixed Assets of B Ltd., are to be valued at ‘ 3,20,000
Close the books of B Ltd., and pass journal entries in the books of A Ltd., and
NOTES
show the Balance Sheet of A Ltd., after the absorption.
SOLUTION
Calculation of Purchase Consideration :
Equity Shares held by outsiders other than A Ltd, 16,000 shares - 2,000
shares = 14,000 Share
‘
1)
Issue of Equity Shares
2,35,200
14,000 Shares x 7 x ‘ 12
5
2)
Payment in Cash
5
14,000 Shares x 5
3)
Issue of 6% Preference Shares
4)
Issue of 7% Debentures
14,000
42,000
(+) 43,200
Purchase Consideration
3,34,400
Journal Entries in the books of A Ltd.
Date
Particulars
31/3/14
1)
L.
F.
Business Purchase A/c
To Liquidator of B A/c
Debit Credit
‘
‘
Dr. - 3,34,400
-
3,34,400
(Being the amount of purchase consideration
payable to B Ltd., on purchase of their
business)
Advanced Accounting - I
59
Accounting For Amalgamation,
Absorption and External
Reconstruction
2)
NOTES
Fixed Assets A/c
Dr. - 3,20,000
Current Assets A/c
Dr. -
68,000
To Current Liabilities A/c
-
28,000
To Business Purchase A/c
-
3,34,400
To Capital Reserve A/c
-
25,600
(Being the entry for assets and liabilities taken over)
3)
Liquidator of B Ltd. A/c
Dr. - 3,34,400
Discount on issue of 7% Debentures A/c
Dr. -
4,800
To Cash A/c
-
14,000
To Equity Shares Capital A/c
-
1,96,000
To 6% Preference Share Capital A/c
-
40,000
To Share Premium A/c
-
41,200
To 7% Debentures A/c
-
48,000
(Being the entry for discharge of liquidation
consideration)
4)
Goodwill A/c
To Cash A/C
Dr. -
29,000
-
5,000
To Investment in Shares of B Ltd. A/c
24,000
(Being the entry of liquidation expenses paid
and investments in shares of B Ltd.,
cancelled)
5)
Capital Reserve A/c
Dr. -
To Goodwill A/c
-
(Being the entry for Goodwill written off
to the extent of balance in Capital Reserve)
60
Advanced Accounting - I
25,600
25,600
Accounting For Amalgamation,
Absorption and External
Reconstruction
Balance Sheet of A Ltd., as on 31st March, 2014
‘
Liabilities
Share Capital :
‘
Assets
Goodwill
3,400
Equity Share Capital
3,96,000 Fixed Assets
6,40,000
6% Preference Share Capital
2,40,000
2,49,000
Current Assets*
Share Premium
41,200
Discount on issue of
Reserve
44,000
7% Debentures
7% Debentures
48,000
Current Liabilities
NOTES
4,800
1,28,000
8,97,200
A Ltd.
8,97,200
B Ltd. L/q Exp Cash pay
Note:Current Assets = ‘ 2,00,000 + ‘ 68,000 - ‘ 5,000 - ‘ 14,000
= ‘ 2,68,000 - ‘ 19,000
= ‘ 2,49,000
In the books of B Ltd.
Dr.
Realisation Account
Particulars
‘
Particulars
To Sundry Assets :
i)
Fixed Assets
ii) Current Assets
By Equity Share Capital
2,40,000 By Current Liabilities
68,000 By A Ltd.
To 7% Debentureholders
3,200 (Purchase Consideration)
To Preference Shareholders
2,000
To Equity Shareholders
Cr.
‘
20,000
28,000
3,34,400
69,200
(Profit on Realisation)
3,82,400
3,82,400
Advanced Accounting - I
61
Accounting For Amalgamation,
Absorption and External
Reconstruction
Dr.
Equity Share Capital Account
‘
Particulars
To Realisation
NOTES
Particulars
20,000
To Equity Shareholders
By Balance B/D
‘
1,60,000
1,40,000
1,60,000
Dr.
Cr.
1,60,000
Equity Shareholders Account
‘
Particulars
To Cash
14,000
To Equity Shares in A Ltd.
3,35,200
Cr.
Particulars
‘
By Equity Share Capital
1,40,000
By Reserves
40,000
By Realisation
69,200
(Profit on Realisation)
2,49,200
Dr.
2,49,200
Preference Shareholders Account
‘
Particulars
To 6% Pref. Shares in A Ltd.
42,000
Particulars
By 6% Preference Shares
Cr.
‘
40,000
Capital
By Realisation
42,000
Dr.
42,000
7% Debentureholders Account
Particulars
To 7% Debentures in A Ltd.
‘
43,200
Particulars
By 7% Debentures
By Realisation
43,200
62
Advanced Accounting - I
2,000
Cr.
‘
40,000
3,200
43,200
Dr.
A Ltd. Account
Particulars
To Realisation
‘
Particulars
3,34,400
By Cash
By Equity Shares in A Ltd.
Cr.
‘
14,000
2,35,000
NOTES
By 6% Preference Share
Capital
42,000
By 7% Debentures
43,200
3,34,400
Dr.
3,34,400
Cash Account
Particulars
To A Ltd.
‘
14,000
Particulars
By Equity Shareholders
14,000
Dr.
Cr.
‘
14,000
14,000
Equity Shares in A Ltd., Account
Particulars
To A Ltd.
‘
2,35,200
Cr.
Particulars
‘
By Equity Shareholders
2,35,200
2,35,200
Dr.
2,35,200
6% Preference Shares in A Ltd., Account
Particulars
To A Ltd.
‘
42,000
Particulars
Cr.
‘
By 6% Preference Share
holders
42,000
Dr.
42,000
42,000
7% Debentures in A Ltd., Account
Particulars
To A Ltd.
‘
43,200
Accounting For Amalgamation,
Absorption and External
Reconstruction
Particulars
By 7% Debenture
Cr.
‘
43,200
holders
43,200
43,200
Advanced Accounting - I
63
Accounting For Amalgamation,
Absorption and External
Reconstruction
NOTES
1.8
Summary
Amalgamation and Absorption signify the merging of two of more joint
stock companies either for eliminating competition among them or for growing in
size to reap the economics of large-scale production or for controlling the market.
External Reconstruction means “a new company is formed to take over
the business of one existing company which goes into liquidation.”
Thus, in case of amalgamation, absorption and external reconstruction, one
or more companies are liquidated and their business is purchased by some other
company.
Purchase consideration is the amount payable by the Purchasing Company
to the Vendor Company for taking over the business of Vendor Company.
The accounting procedure involves for Amalgamation, Absorption and
External Reconstruction involves closing the books of the Vendor Company and
accounting for taking over the business in the books of Purchasing Company.
1.9
64
Advanced Accounting - I
Key Terms
a)
Amalgamation means formation of a new company to take over atleast
two existing companies which go into liquidation.
b)
Absorption is a process of taking over of the business of one or more
companies by a company which is already in existence.
c)
Reconstruction refers to an arrangement by which a financially unsound
and weak company is strengthened by certain measures so that its closure
may be avoided.
d)
Transferor Company means the company which is amalgamate into another
company.
e)
Transferee Company means the company into which a Transfer Company
is amalgamated.
f)
Purchase Consideration means the amount payable by the purchasing
company to the vendor company for taking over the business of such
company.
1.10 Question and Exercises
I.
Objective Questions :
A)
Multiple Choice Questions:
(1)
Amalgamation , absorption or reconstruction is the form of business ........
Accounting For Amalgamation,
Absorption and External
Reconstruction
NOTES
(a) combination
(b) accounting
(c) management
(d) organisation
(2)
Absorption is always the case of ..... but amalgamation is not always on ....
(a) reconstruction - absorption
(b) amalgamation - absorption
(c) amalgamation - reconstruction
(d) consolidation - reconstruction
(3)
Amalgamation means minimum ........ liquidations and ....... new formation
(a) two - no
(b) one - two
(c) two - one
(d) one - no
(4)
The council of the Institute of Chartered Accountants of India has issued
......... ‘Accounting for Amalgamation’.
(a) AS - 12
(b) AS - 16
(c)AS - 10
(d) AS - 14
Ans :- (1-a), (2-b), (3-c), (4-d)
II.
Long Answer Questions :
(1)
What do you understand by , “ Amalgamation”, “Absorption” and
“Reconstruction” ? Give suitable examples
(2)
Differentiate clearly between, “Amalgamation”, ”Absorption”, and
“External Reconstruction”.
Advanced Accounting - I
65
Accounting For Amalgamation,
Absorption and External
Reconstruction
(3)
What is “Amalgamation”? Explain the forms of amalgamation .
(4)
Explain in brief the type of amalgamation.
(5)
What is “Purchase consideration”? Explain the method of working out the
amount of purchase consideration.
(6)
Explain in detail the treatment of liquidation expenses if,
NOTES
a) paid by purchasing company.
b) incurred by vendor company.
c) paid by vendor company and reimbursed by purchasing company
(7)
Write short notes on :
a) Amalgamation of companies.
b) Absorption of companies.
c) External Reconstruction of company.
d) Purchase Consideration.
e) Methods of calculating Purchase Consideration.
III.
Practical
Problems :
(1)
The Balance Sheets of Pune Ltd., and Indapur Ltd., as on 31st March,
2014 were as follows :
Balance Sheet of Pune Ltd., as on 31st March, 2014
Liabilities
‘
Share Capital :
Goodwill
22,500
• 675 Equity Shares of
Land and Buildings
32,500
‘ 100 each
67,500 Plant and Machinary
3,000 Stock
20,000
Dividend Equalisation Reserve
2,500 Debtors
10,500
Profit and Loss
4,500 Less: R.D.D.
Outstanding Expenses
Provision for Taxation
(-) 500
10,000
20,000 Cash in Hand
2,500
1,250 Cash at Bank
10,000
11,250
1,10,000
Advanced Accounting - I
12,500
General Reserve
Creditors
66
‘
Assets
1,10,000
Balance Sheet of Indapur Ltd. as on 31st March, 2014
Liabilities
‘
‘
Assets
Share Capital :
Land and Buildings
20,000
500 Equity Shares of
Plant and Machinary
20,000
Furniture and Fittings
3,750
‘ 100 each
Bank Overdraft
Creditors
50,000
5,000
17,500
Vehicles
11,250
Stock
12,500
Debtors
Less: R.D.D.
NOTES
3,500
(-) 1,000
2,500
Cash in Hand
1,250
Profit and Loss
1,250
72,500
Accounting For Amalgamation,
Absorption and External
Reconstruction
72,500
The companies amalgamated as on the date of above Balance Sheet and
new company Satara Ltd., was formed to carry on the business of Pune Ltd., and
Indapur Ltd., on the following terms :
a)
Satara Ltd., took over Assets of Pune Ltd., except debtors, cash and bank
balance at 10% depreciation and agreed to pay ‘ 25,000 for goodwill. It
also took over creditors and outstanding expenses.
b)
Tax liability for 2014 was settled at ‘ 9,500.
c)
Satara Ltd., took all assets of Indapur Ltd., except cash and debtors. Land
and Buildings and Stock were taken at 20% appreciation and other assets
were taken at book value. Satara Ltd., also agreed to take over the creditors
of Indapur Ltd.
d)
Indapur Ltd., paid Bank Overdraft in full.
e)
The purchase consideration was satisfied as follows: Cash of ‘ 5,000 to
Pune Ltd., and ‘ 3,750 to Indapur Ltd., The balance amount of purchase
consideration was paid in the Equity Shares of Satara Ltd., of ‘ 100 each
f)
Debtors of Pune Ltd., and Indapur Ltd., realised ‘ 9,500 and ‘ 3,000
respectively. You are required to prepare :
Realisation Account, Cash Account, Satara Ltd., Account and Equity
Shareholders Account in the books of Pune Ltd., and Indapur Ltd.
Advanced Accounting - I
67
Accounting For Amalgamation,
Absorption and External
Reconstruction
(2)
The Balance Sheets of Anita Ltd., and Babita Ltd., as on 31st March, 2014
are as follows:
Balance Sheet of Anita Ltd., as on 31st March, 2014
Liabilities
‘
‘
Assets
NOTES
Share Capital :
Land and Buildings
1,00,000
• 3,000 Equity Shares of
Plant and Machinary
1,50,000
‘ 100 each
3,00,000
• 500 Preference Shares
Furniture
10,000
Stock
35,000
45,000
of ‘ 100 each
50,000
Debtors
Contingency Reserve
10,000
Cash at Bank
Creditors
35,000
Preliminary Expenses
Unclaimed Dividend
2,500
Contingent Liability for
7,500
10,000
Discount on issue of Shares
2,500
Profit and Loss
37,500
Bills Discounted ‘ 2,000
3,97,500
3,97,500
Balance Sheet of Babita Ltd., as on 31st March, 2014
Liabilities
‘
Assets
‘
Share Capital :
Freehold Premises
2,00,000
• 3,500 Equity Shares of
Plant and Machinary
1,05,000
‘ 100 each
General Reserve
Profit and Loss
3,50,000
9,000
20,000
Stock
14,500
Debtors
95,000
Cash at Bank
5,500
Workmen’s Compensation
Fund
5,000
Creditors
36,000
4,20,000
4,20,000
Anita Ltd. and Babita Ltd., amalgamated as on 31st March, 2014 and a new
company Sunita Ltd., was formed with an Authorised Capital of 10,000 Equity
Shares of ‘ 100 each. The amalgamation was agreed on the following conditions:
a)
68
Advanced Accounting - I
Sunita Ltd., took all assets of Anita Ltd., at book values and Creditors of
Anita Ltd., The purchase consideration was discharged by issuing 1,500
Equity Shares of ‘ 100 each at ‘ 120 per share and the balance in cash.
b)
Sunita Ltd., took all assets of Babita Ltd., at book value except cash and
also took the creditors. The purchase consideration was discharged by issuing
3,000 Equity Shares of ‘ 100 each at ‘ 120 per share and the balance in
cash.
c)
Anita Ltd., paid its preference capital back with arrears of preference
dividend for the last two years.
d)
Liability for bills discounted was settled at ‘ 1,250
e)
Out of the unclaimed dividend ‘ 1,000 was paid to the rightful shareholders.
The remaining unclaimed dividend was time barred and thus transferred to
Shareholders Account.
f)
Liability for workmen’s compensation of Babita Ltd., amounted to ‘ 3,750
g)
The cost of liquidation of Anita Ltd., was ‘ 2,500 and that of Babita Ltd.,
was ‘ 3,000 which was paid by the respective companies.
Accounting For Amalgamation,
Absorption and External
Reconstruction
NOTES
You are required to prepare Realisation Account, Sunita Ltd. Account,
Cash Account and Shareholders Account in the books of Anita Ltd., and
Babita Ltd.
(3)
The Balance Sheet of Sun Co. Ltd., and Moon Co. Ltd, as on 31st March,
2014 are as follows :
Balance Sheet of Sun Co. Ltd. as on 31st March, 2014
Liabilities
‘
Share Capital :
Machinary
1,500 Equity Shares of
Stock
‘ 20 each
30,000
Creditors
4,000
Debtors
Less : R.D.D.
Cash
34,000
‘
Assets
25,000
4,000
5,000
(-)500
4,500
500
34,000
Advanced Accounting - I
69
Accounting For Amalgamation,
Absorption and External
Reconstruction
Balance Sheet of Moon Co. Ltd., as on 31st March, 2014
Liabilities
‘
Share Capital :
NOTES
Assets
‘
Buildings
15,000
55,000
• 5,000 Shares of ‘ 10 each
50,000
Machinary
General Reserve
17,000
Stock
8,000
Reserve Fund
2,000
Debtors
7,000
Profit and Loss
1,000
Cash
1,500
6% Debentures of
‘ 100 each
10,000
Creditors
5,000
Bills Payable
1,500
86,500
86,500
The two companies agreed to amalgamate and form a new company called
Sun- Moon Co. Ltd., which takes over the assets and liabilities of both the
companies.
The assets of Sun Co. Ltd., are taken over at a reduced valuation of 10%
with the exception of Buildings, which are accepted at book values.
Both companies are to receive 5% of the net valuation of their respective
business, as goodwill. The entire purchase price is to be paid by Sun-Moon Co.
Ltd., in fully paid shares for ‘ 10 each . In return for Debentures in Moon Co. Ltd.,
Debentures of the same amount and denomination are to be issued by Sun- Moon
Co. Ltd.
Give journal entries to close the books of Sun Co. Ltd., Moon Co. Ltd., and
show the opening Balance Sheet of Sun-Moon Co. Ltd., The Authorised Capital
of Sun-Moon Co. Ltd., is ‘ 1,00,000 in shares of ‘ 10 each.
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Advanced Accounting - I
4)
B Ltd., is absorbed by A Ltd., on 31st March, 2014 on the basis of the
following Balance Sheet.
Accounting For Amalgamation,
Absorption and External
Reconstruction
Balance Sheet of A Ltd., as on 31st March, 2014
Liabilities
‘
‘
Assets
Paid-up Capital:
Fixed Assets:
8,50,000
• 2,00,000 Equity Shares 10,00,000
Factory Shed
5,00,000
of ‘ 5 each
Machinary
3,00,000
+ 50,000
General Reserve
2,50,000
Furniture
Sundry Creditors
2,50,000
Stock
2,20,000
Debtors
2,00,000
Bank Balance
NOTES
60,000
Investments :
500 shares in B Ltd.
50,000
Other Investments
70,000
Debentures in B Ltd.
50,000
15,00,000
15,00,000
Balance Sheet of B Ltd., as on 31st March, 2014
Liabilities
‘
Assets
‘
Paid-up Capital:
Current Assets :
• 5,000 Equity Shares of
Stock
5,00,000
Debtors
2,50,000
‘ 100 each, fully paid
5,00,000
6% Debentures of
Bank Balance
30,000
‘ 1,000 each
3,00,000
Investments :
Sundry Creditors
3,00,000
40,000 Shares in A Ltd.
2,00,000
Profit and Loss
1,20,000
11,00,000
11,00,000
The following is the scheme of absorption :
a)
Prior to absorption A Ltd., was to declare a dividend of 25%
b)
For every share in B Ltd., 14 fully paid up Equity Shares in A Ltd., were to
be issued.
Advanced Accounting - I
71
Accounting For Amalgamation,
Absorption and External
Reconstruction
c)
For each Debenture in B Ltd., 7.5% Preference Shares of ‘ 100 each of
A Ltd., were to be issued as fully paid.
Directors of A Ltd., decided to revalue the shares in B Ltd., according to
their intrinsic value just before absorption.
NOTES
Draw up the Balance Sheet of A Ltd., after absorption is completed. Show
necessary workings.
(5)
Ajanta Ltd., agreed to acquire the business of Ellora Ltd., as on 31st
March, 2014 when their Balance Sheet was as under :
Liabilities
‘
Assets
Paid-up Capital:
Fixed Assets :
• 10,000 6% Preference
Land and Buildings
shares of ‘ 10 each
1,00,000 Machinary
• 20,000 Equity Shares
of ‘ 10 each
‘
2,00,000
1,00,000
Current Assets :
2,00,000 Stock
2,00,000
Reserve
20,000 Debtors
50,000
Profit and Loss
30,000 Cash Bank Balance
35,000
7% Debentures
1,00,000 Miscellaneous Expenditure :
Sundry Creditors
1,50,000 i) Preliminary Expenses
ii) Debenture Discount
6,00,000
10,000
5,000
6,00,000
The consideration payable by Ajanta Ltd., was agreed as under :
i)
The Preference Shareholders of Ellora Ltd., were to be allotted at 8%
Preference Shares of ‘ 1,00,000.
ii)
Equity Shareholders to be allotted six Equity Shares of ‘ 10 each issued at
a premium of 10% and ‘ 3 cash against every five shares held.
iii)
7% Debentureholders of Ellora Ltd. to be paid 8% premium by 9%
Debentures at 10% discount.
While arriving at the agreed consideration the directors of Ajanta Ltd., valued
Land and Buildings at ‘ 2,50,000; Stock ‘ 2,20,000 and Debtors at their book
value subject to an allowance of 5% to cover doubtful debts. Debtors of Ellora
Ltd., included ‘10,000 due from Ajanta Ltd. The machinary were valued at book
value.
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Advanced Accounting - I
It was agreed that before acquisition Ellora Ltd., will pay dividend at 10%
on Equity shares. Liquidation expenses are 5,000.
Draft journal entries to close the books of Ellora Ltd., and to record
acquisition entries in the books of Ajanta Ltd.
(6)
Amar Ltd., agreed to acquire the business of Kumar Ltd., as on 31st
March, 2014. The summarised Balance Sheet of Kumar Ltd., on that date was as
under :
Liabilities
‘
Share Capital in fully paid
shares of ‘ 10 each
Assets
Goodwill
3,00,000
Land, Buildings and Machinary
NOTES
‘
50,000
3,20,000
General Reserve
85,000
Stock in Trade
84,000
Profit and Loss
55,000
Debtors
18,000
6% Debentures
50,000
Cash and Bank Balance
28,000
Creditors
10,000
5,00,000
Accounting For Amalgamation,
Absorption and External
Reconstruction
5,00,000
The consideration payable by Amar Ltd., was agreed as under:
a)
Cash payment equivalent to ‘ 2.50 for every share of ‘ 10 in Kumar Ltd.
b)
Issue of 45,000 ‘ 10 shares fully paid, in Amar Ltd., having an agreed
value of ‘ 15 per share.
c)
Issue of such an amount of fully paid 5% Debentures of Amar Ltd., at
96% as is sufficient to discharge the 6% Debentures of Kumar Ltd. at a
premium of 20%.
While arriving at the agreed consideration, the directors of Amar Ltd., valued
Buildings and Machinary at ‘ 6,00,000; the Stock-in-Trade at ‘ 71,000 and the
Debtors at their book value subject to an allowance of 5% to cover doubtful
debts. The cost of liquidation of Kumar Ltd. was ‘ 2,500.
You are required to draft journal entries required in the books of Amar Ltd.
Advanced Accounting - I
73
Accounting For Amalgamation,
Absorption and External
Reconstruction
(7) The Leemic Engineering Ltd., sells its business to the Scientific Engineering
Ltd., as on 31st March, 2014 on which date their Balance Sheet was as follows:
Balance Sheet as on 31st March , 2014
Liabilities
‘
Assets
‘
NOTES
Paid-up Share Capital
Goodwill
1,00,000
• 4,000 Shares ‘ 100 each 4,00,000
Freehold Property
3,00,000
6%, 200 Debentures of
Machinary
1,66,000
‘ 1,000 each
Creditors
Reserve Fund
Profit and Loss
2,00,000
60,000
1,00,000
40,000
8,00,000
Stock
Bills Receivable
Debtors
Cash
70,000
9,000
55,000
1,00,000
8,00,000
The Scientific Engineering Ltd. agreed to take the assets except Cash and
Goodwill at 10% less than the book values, to pay ‘ 1,50,000 for Goodwill and to
take over the debentures.
The purchase consideration was to be discharged by allotment to the Leemic
Engineering Ltd., of 3,000 shares of ‘ 100 each at Premium of ‘ 10 per share
and the balance in cash .
You are required to prepare necessary accounts in the books of Leemic
Engineering Ltd., and opening journal entries in the books of Scientific Engineering
Ltd.
1.11 Further Reading
74
Advanced Accounting - I
•
Shukla M.C., Grewal T.S. and Gupta S.C. - Advanced Accounts - New
Delhi : S. Chand and Co. Pvt. Ltd., 2013.
•
Sehgal Ashok - Taxman’s Fundaments of Corporate Accounting - New
Delhi : Texman Publications Pvt. Ltd.,2012
Unit 2
Methods of Accounting :
Amalgamation and External
Reconstruction
Structure
NOTES
2.0
Introduction
2.1
Unit Objectives
2.2
Methods of Accounting for Amalgamation
2.3
Methods Of Accounting :
Amalgamation & External
Reconstruction
(I)
The Pooling of Interest Methods
(II)
The Purchase Method.
Inter Company Investments
(I)
When one of the Transferor Company is holding shares of other
Transferor Company.
(II)
When the Transferee Company is holding shares of the transferor
company.
(III) When the Transferor Company holding some shares of the
Transferee Company.
(IV)
Gross Holding
2.4
External Reconstruction
2.5
Illustrations
2.6
Summary
2.7
Key Terms
2.8
Questions and Exercises
2.9
Further Reading
2.0
Introduction
Amalgamation in the nature of ‘Merger’ is an amalgamation which satisfy
all the following five conditions.
(a)
All assets and liabilities of Transferor Company become, after amalgamation,
the assets and liabilities of Transferee Company.
(b)
Shareholders holding at least 90% of the face value of the equity shares of
the Tansferor Company become equity shareholder of the ‘Transferee’
Company by virtue of the amalgamation.
Advanced Accounting - I
75
Methods Of Accounting :
Amalgamation & External
Reconstruction
(c)
Same business of the Transferor Company is intended to be arrived on
after the amalgamation, by the Transferee Company.
(d)
The equity shareholders of the Transferor Company, who agree to become
equity shareholders of the Transferee Company is discharged by the
Transferee Company wholly by the due of equity shares in Transferee
Company.
(e)
When assets and liabilities of Transferor Company are incorporates in the
financial statements of Transferee Company, these assets and liabilities are
recorded at book value. “ The Pooling of Interest” method should be used
in accounting for amalgamation in the nature of merger.
NOTES
On the other hand, Amalgamation in the nature of purchase is an
amalgamation which does not satisfy any one or more of the above conditions
specified for Amalgamation in the nature of merger. The ‘Purchase Method’ should
be used in accounting for amalgamation in the nature of purchase.
2.1
Unit Objectives
After studying this unit you should be able to :-
•
Understand meaning of Amalgamation in the nature of Merger.
•
Understand meaning of Amalgamation in the nature of Purchase.
•
Identify the conditions for amalgamation in the nature of Merger.
•
Describe the “Pooling of Interests Method” of accounting.
•
Describe the “Purchase Methods” of accounting.
•
Understand the characteristics of Pooling of Interest Method and Purchase
method.
•
Understand accounting treatment in the books of Transferor Company and
Transferee company (i.e. Vendor Company and Purchasing company)
2.2
Methods of Accounting for Amalgamation
There are two main methods of accounting for amalgamations :
1)
The Pooling of Interests Method; and
2)
The Purchase Method.
Figure : 2.1 indicates the Methods of Accounting for Amalgamation as
follows:
76
Advanced Accounting - I
Methods Of Accounting :
Amalgamation & External
Reconstruction
Methods of
Accounting
for
Amalgamation
The
Pooling
of Interests
Method
NOTES
The
Purchase
Method
Fig. 2.1 : Methods of Accounting for Amalgamation
1. Pooling of Interests Method
Pooling method of accounting is applicable for Amalgamation in the
Nature of Merger (i.e. When all five conditions as stated above are satisfied).
Characteristics :
i)
Pooling of interests accounting treats an amalgamation as a ‘non-event’, in
that the combining companies are viewed as if they always
had been together.
ii)
The unique attributes of pooling of interests accounting are the carry forward
of assets and liabilities at book values and the carry forward of retained
earnings.
iii)
Under pooling of interests accounting, no goodwill is recorded as arising
from the amalgamation.
iv)
All costs associated with the amalgamation or with issuing the shares used
in the amalgamation are expended as incurred; none of the costs of bringing
about the amalgamation are capitalised.
v)
Under pooling of interest accounting, the carry forward of retained earnings
of the acquired company may give management more flexibility with respect
to dividends subsequent to the amalgamation.
vi)
This methods ignores the values exchanged in an amalgamation.
vii)
Under pooling of interest accounting, no Amalgamation Adjustment Account
is opened in the books of the Transferee Company.
Advanced Accounting - I
77
Methods Of Accounting :
Amalgamation & External
Reconstruction
Accounting Entries in the Books of the Transferee Company :
1)
For amalgamation of the business :
Business Purchase A/c
Dr. (With the amount purchase
consideration)
NOTES
To Liquidator of Transferor Co. A/c
(Being the amount payable to the liquidator of ...... Ltd. under the scheme
of amalgamation)
2)
For assets, liabilities and resources taken over :
Sundry Assets A/c
Dr (Individually, at book value)
To Sundry Liabilities A/c
(Individually, at book value)
To Reserve A/c
(See Note below)
To Profit and Loss A/c
To Business Purchase A/c
(With Purchase Consideration)
(Being different assets and liabilities taken over under the scheme of
amalgamation)
(Note : After adjustment of the difference between the amount recorded as
share capital issued and the amount of share capital of the Transferor Company.)
3)
For Payment of Purchase Consideration :
Liquidator of Transferor Company A/c ......Dr.
To Share Capital A/c
(Issued)
To Securities Premium A/c
(Premium)
To Cash A/c
(For fractional shares
and for dissenting shareholders)
To Non-cash Consideration A/c
(Fair value for dissenting
shareholders in the form of
debentures etc.)
(Being the discharge of purchase consideration)
2. Purchase Method
This method of accounting is applicable for Amalgamation in the
Nature of Purchase.
Characteristics :
i)
78
Advanced Accounting - I
This method is adopted in the case of amalgamation in the Nature of
Purchase.
ii)
Under this method only assets and liabilities taken over from the Transferor
Company are incorporated in the financial statements of the Transferee
Company either at book value or agreed value.
iii)
This method provides investors with more information.
iv)
This method reflects the values exchanged in an amalgamation.
v)
This method reveals all hidden assets and liabilities of the Transferor
Company by recording them at fair value in the books of the Transferee
Company.
vi)
The difference between the purchase consideration and the net assets taken
over of the Transferor Company is recorded as goodwill or capital reserve
as the case may be.
vii)
‘All costs associated with amalgamation are capitalised’ is the feature of
this method.
viii)
Under this method, Amalgamation Adjustment Account must be opened in
the books of the Transferee Company for carry forward of any ‘Statutory
Reserve’.
Methods Of Accounting :
Amalgamation & External
Reconstruction
NOTES
Accounting Treatment :
While giving the accounting treatment under the purchase method, the
following points should be remembered :
1)
The assets and liabilities of the Transferor Company should be incorporated
in the books of the Transferee Company either at their existing carrying
amount or by allocating the consideration to individual identifiable assets
and liabilities of the Transferor Company on the basis of their fair values on
the date of amalgamation. The identifiable assets and liabilities may include
assets and liabilities not recorded in the financial statements of the Transferor
Company.
2)
The reserves of the Transferor Company, other than statutory reserves,
are not incorporated in the financial statements of the Transferee Company.
3)
If the purchase consideration is greater than the net assets taken over of
the Transferor Company, it should be treated as goodwill and debited to
Goodwill Account.
This goodwill will be amortized over a period not exceeding five years
unless some what longer period can be justified.
On the other hand, if the purchase consideration is less than the net assets
taken over of the Transferor Company, it should be treated as Capital
Reserve and credited to Capital Reserve Account.
4)
Statutory Reserves of the Transferor Company (e.g. Development
Allowance Reserve or Investment Allowance Reserve) retain their identity
in the financial statement of the Transferee Company in the same form in
Advanced Accounting - I
79
Methods Of Accounting :
Amalgamation & External
Reconstruction
which they appeared in the financial statements of the Transferor Company.
5)
Statutory Reserve are recorded in the financial statements of the Transferee
Company by passing the following entry :
Amalgamation Adjustment A/c
Dr.
(with the amount)
NOTES
To Statutory Reserve A/c
Amalgamation Adjustment Account will be shown in the Balance Sheet of
the transferee company as a part of ‘Miscellaneous Expenditure’.
When the identity of the statutory reserves is no longer required to be
maintained, both the reserves and the aforesaid accounts are reversed.
Accounting Entries in the Books of the Transferor Company :
1)
For transferring different assets to Realisation Account :
Realisation A/c
...Dr.
(Individually at book value)
To Sundry Assets A/c
2)
For transferring different liabilities to Realisation Account :
Liabilities A/c
...Dr
(Individually at book value)
To Realisation A/c
3)
For transferring Equity Share Capital, Reserve and Surplus etc. :
Equity Share Capital A/c
...Dr.
General Reserve A/c
...Dr.
Profit and Loss
...Dr.
To Sundry Shareholders A/c
Note : Profit and Loss Account debit balance, discount on issue of shares and
debentures, etc., are transferred to Sundry Shareholders Account by debiting Sundry
Shareholders Account and crediting Profit and Loss Account, Discount on Issue
of Shares Account etc.
4)
Preference Share Capital is closed by transferring to Preference
Shareholders Account :
Preference Share Capital A/c
...Dr.
To Preference Shareholders A/c
Note : If the preference shareholders are paid more or less than the amount due
to them as per Balance Sheet, the difference is transferred to Realisation Account.
5)
For purchase consideration due from transferee company :
Transferee Company A/c
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Advanced Accounting - I
To Realisation A/c
...Dr.
(Purchase Consideration)
6)
On receiving purchase consideration from the Transferee Company
Equity Shares in Transferee Company A/c
...Dr.
Preference Shares in Transferee Company A/c
...Dr.
Debentures in Transferee Company A/c
...Dr.
NOTES
To Transferee Company A/c
7)
Methods Of Accounting :
Amalgamation & External
Reconstruction
Entries for liquidation expenses are passed as follows :
i) If the liquidation expenses are borne by the Transferor Company
Realisation A/c
...Dr.
To Bank A/c
ii) If the liquidation expenses are borne by the Transferee Company
(No Entry)
8)
For realisation of assets not taken over by the Transferee Company
Bank A/c
...Dr.
To Realisation A/c
9)
For discharge of liabilities not taken over by the Transferee Company
Liabilities A/c
...Dr.
To Bank A/c
Note : Any profit or loss on discharge of liabilities are transferred to Realisation
Account.
10) For payment to preference shareholders :
Preference Shareholders A/c
...Dr.
To Preference Shares in Transferee Company A/c
To Bank A/c (if any)
11)
For Loss on Realisation :
Sundry Shareholders A/c
...Dr.
To Realisation A/c
12) For Profit on Realisation :
Realisation A/c
...Dr.
To Sundry Shareholders A/c
13) For final payment to Equity Shareholders :
Sundry Shareholders A/c
...Dr.
Advanced Accounting - I
81
Methods Of Accounting :
Amalgamation & External
Reconstruction
To Equity Shares in Transferee Company A/c
To Bank A/c (if any)
Note : After payment to equity shareholders, all accounts in the books of the
Transferor Company will be closed.
NOTES
Accounting Entries in the Books of the Transferee Company :
1)
On amalgamation of the business :
Business Purchase A/cDr. (with the purchase consideration)
To Liquidator of Transferor Company A/c
2)
For assets and liabilities taken over :
i) If the value of net acquired assets is equal to purchase
consideration :
Assets A/c
...Dr.
(Individually, at agreed value)
To Liabilities A/c
(Individually)
To Business Purchase A/c
(Purchase Consideration)
ii) If the value of net acquired assets is more than the purchase
consideration :
Assets A/c
To Liabilities A/c
...Dr.
(Individually, at agreed value)
(Individually)
To Business Purchase A/c
(Purchase consideration)
To Capital Reserve A/c
(Difference)
iii)
If the value of net acquired assets is less than the purchase
consideration :
Goodwill A/c
...Dr.
(Difference)
Assets A/c
...Dr.
(Individually, at agreed value)
To Liabilities A/c
(Individually)
To Business Purchase A/c
3)
When purchase consideration is satisfied :
Liquidator of Transferor
Company A/c
...Dr.
To Equity Share Capital A/c
To Securities Premium A/c
To Preference Share Capital A/c
82
Advanced Accounting - I
4)
When liquidation expenses are incurred :
Goodwill A/c
...Dr.
Methods Of Accounting :
Amalgamation & External
Reconstruction
To Bank A/c
5)
When Preliminary Expenses are incurred :
Preliminary Expenses A/c
...Dr.
NOTES
To Bank A/c
6)
When there are both goodwill and capital reserves, then it can be
set off against each other with lower value - only net amount will appear in
the new Balance Sheet :
Capital Reserve A/c
...Dr.
To Goodwill A/c
7)
When new shares / debentures are issued :
i) Bank A/c
...Dr.
To Share Application A/c
To Debenture Application A/c
ii) Share Application A/c
...Dr.
Debenture Application A/c
...Dr.
To Share Capital A/c
To Debentures A/c
Note : We assume that all money is payable on application and shares are issued
at par.
2.3
Inter Company Investments
Amalgamation takes place between known companies. It may be noted
that one company may hold some shares of another company. At the time of
amalgamation, (under the following circumstances) different accounting treatment
is necessary :
In connection with inter company investments, following are the situations
1)
When one of the Transferor Company is holding some shares of another
Transferor Company.
2)
When the Transferee Company is holding some shares of the Transferor
Company.
3)
When the Transferor Company is holding some shares of the Transferee
Company.
Advanced Accounting - I
83
Methods Of Accounting :
Amalgamation & External
Reconstruction
Accounting Treatment :
1)
NOTES
When one of the Transferor Company is holding shares of other
Transferor Company :
In this case, we should first close the books of accounts of that Transferor
Company whose share are held by another Transferor Company. For Example, A
Ltd. and B Ltd. decide to amalgamate into AB Ltd. A Ltd. holds 500 equity
shares of ‘ 10 each fully paid of B Ltd.
At the time of amalgamation, the books of accounts of B Ltd. are to be
closed first in the usual manner. The liquidator of B Ltd. will pay-off its shareholders
(including A Ltd. for 500 shares) in the usual manner.
However, at time of closing the books of account of A Ltd., Investment in
Shares of B Ltd. Account will not be Transferred to the Realisation Account. This
account will be closed by passing the following entry :
Shares AB Ltd. A/c
... Dr. (Shares receive from liquidator of B Ltd.)
To Investment in Shares of B Ltd. A/c
Any balance of Investments in Shares of B Ltd. Account will be Transferred
to the Sundry Shareholders Account being Profit/Loss on Realisation of Investment
in Shares of B Ltd.
2)
When the Transferee Company is holding shares of the Transferor
Company :
The Transferee Company may hold some shares of the Transferor Company.
At the time of liquidation of the Transferor Company, the Transferee Company
will get a portion of the networth of Transferor Company as a shareholders of that
company.
Generally, purchase consideration is satisfied by the issue of shares of the
Transferee Company. But the Transferee Company cannot be paid in its own
shares as per restrictions imposed by Section 77 of the Companies Act, 1956
(assuming that the Provision under Section 77A cannot be satisfied). In this case,
only shares to be given to the outside shareholders will be issued by the Transferee
Company to the liquidator of the Transferor Company.
Accounting adjustments are done in the following manner :
In the books of the Transferor Company :
1)
Transferee Company A/c
...Dr.
(Full purchase
consideration)
...Dr
.(Amount payable to
outsider shareholders)
...Dr.
(Amount payable to
outside shareholders)
To Realisation A/c
2)
Shares in Transferee Company A/c
To Transferee Company A/c
3)
84
Advanced Accounting - I
Sundry Shareholders A/c
To Shares in Transferee Company A/c
After passing the above entries whatever balance is due from the Transferee
Company is the exact amount payable to the Transferee Company as the remaining
shareholders by the liquidators of the Transferor Company.
Now, the amount is neither given by the Transferee Company as a purchase
consideration to the liquidator of the Transferor Company nor the liquidator of the
Transferor Company will pay the Transferee Company as a shareholders. However,
the following adjustment entry is to be passed :
Sundry Shareholders A/c
...Dr
Methods Of Accounting :
Amalgamation & External
Reconstruction
NOTES
(Balance amount)
To Transferee Company A/c
In the books of the Transferee Company :
a)
In case of Amalgamation in the Nature of Merger :
i)
Business Purchase A/c
...Dr.
(Net amount to outside share
holders)
To Liquidator of Transferor Company A/c
ii)
Sundry Assets A/c
...Dr.
(Individually, at agreed value)
To Sundry Liabilities A/c
(Individually, at agreed value)
To Business Purchase A/c
(Total purchase consideration)
To Capital Reserve A/c
(Balancing figure)
OR
iii)
Sundry Assets A/c
...Dr.
(Individually, at agreed value)
Goodwill A/c
...Dr.
(Balancing figure)
To Sundry Liabilities A/c
(Individually, at agreed value)
To Business Purchase A/c
(Total purchase consideration)
Liquidator of Transferor Company
Account
...Dr.
To Equity Share Capital A/c
iv)
(Net shares issued)
Liquidator of Transferor Company
Account
...Dr.
(Net shares issued)
To Investment in Shares of Transferor Company A/c
Balance of Investment in Shares of Transferor Company Account will be
closed by transferring to Goodwill Account or Capital Reserve Account.
Advanced Accounting - I
85
Methods Of Accounting :
Amalgamation & External
Reconstruction
b)
In case of Amalgamation in the Nature of Purchase :
i)
Business Purchase A/c
...Dr.
(Total purchase consideration)
To Liquidator of Transferor Company A/c
NOTES
ii)
Sundry Assets A/c
...Dr.
To Sundry Liabilities A/c
To Business Purchase A/c
To Capital Reserve A/c
(Individually, at agreed value)
(Individually, at agreed value)
(Total purchase consideration)
(Balancing figure)
OR
iii)
Sundry Assets A/c
...Dr.
(Individually, at agreed value)
Goodwill A/c
...Dr.
(Balancing Figure)
To Sundry Liabilities A/c
(Individually, at agreed value)
To Business Purchase A/c
(Net amount payable to outside
shareholders)
Liquidator of Transferor
Company A/c
...Dr.
To Equity Share Capital A/c
iv)
(Net shares issued)
Liquidatorof Transferor Company
A/c
...Dr.
(Difference between total
purchase consideration - share
capital issued)
To Investment in Shares of Transferor Company A/c
Balance of Investment in Shares of Transferor Company Account will be
closed by transferring to Goodwill Account or Capital Reserve Account.
Alternative Entries :
i)
Business Purchase A/c
...Dr.
(Net amount payable to outside
shareholders)
To Liquidator of Transferor Company A/c
ii)
Sundry Assets A/c
OR
86
Advanced Accounting - I
...Dr.
(Individually, at agreed value)
To Sundry Liabilities A/c
(Individually, at agreed value)
To Business Purchase A/c
(Net purchase consideration)
To Capital Reserve A/c
(Balancing Figure)
iii)
Sundry Assets A/c
...Dr.
(Individually, at agreed value)
Goodwill A/c
...Dr.
(Balancing Figure)
To Sundry Liabilities A/c
(Individually, at agreed value)
To Business Purchase A/c
(Net amount payable to outside
shareholders)
NOTES
Liquidator of Transferor
Company A/c
...Dr.
To Equity Share Capital A/c
iv)
Methods Of Accounting :
Amalgamation & External
Reconstruction
Goodwill/Capital Reserve A/c
(Net shares issued)
...Dr.
(Cost of Investment)
To Investment in Shares of Transferor Company A/c
3)
When the Transferor Company is holding some Shares of the
Transferee Company :
The Transferor Company may hold some shares of the Transferee Company.
At the time of amalgamation, these shares cannot be taken over alongwith other
assets by the Transferee Company (as per the provision of Section 77 of the
Companies Act.)
These shares will remain in the hands of the liquidator of the Transferor
Company. When the Transferee Company will issue its own shares against
purchase consideration, the shares already held by the liquidator will be deducted
from the total number of shares to be issued. New shares issued plus shares
already in hand are distributed amongst shareholders. Debentures held by the
Transferor Company in the Transferee Company are also similarly treated.
The cost of shares held by the Transferor Company by way of investment
may be different from the valuations at which they ate now being issued. In such
a situation, the existing shares are to be adjusted by revaluation to same values at
which they are issued at present. The entry will be :
i)
If revalued at a higher price :
Investment in Shares of Transferee Company A/c
Dr.
To Sundry Shareholders A/c
ii)
If revalued at a lower price :
Sundry Shareholders A/c
Dr.
To Investment in Shares in Transferee Company A/c
4)
Cross Holding :
When the Transferee Company holds some shares of the Transferor
Company and the Transferor Company may also hold some shares of the Transferee
Company then firstly, the purchase consideration shall be determined, by calculating
Advanced Accounting - I
87
Methods Of Accounting :
Amalgamation & External
Reconstruction
NOTES
fresh shares required for satisfying the outside shareholders after considering
shares already held by the Transferor Company, and then by adding up the value
of sacrifice of the right in liquidation of the Transferor Company.
2.4
External Reconstruction
Reconstruction may be of two types viz. External Reconstruction and
Internal Reconstruction. When one company goes in to liquidation and a new
Company is formed to take over the business of the company, which goes in to
liquidation, it is called External Reconstruction. The assets of the company are
sold to another company which specially comes into existence for the purpose of
buying the business. The new company is generally formed with a similar name
and with the same shareholders. The purpose of reconstruction is to save the
company from losses of future and to increase its working efficiency. In short,
under external reconstruction, there is liquidation of one company and formation
of another company.
Accounting Treatment :
There is no blending of two or more companies in the case of external
reconstruction. An existing company does not also take over an existing company.
As such, external reconstruction cannot be called amalgamation in the nature of
merger.
From the accounting point of view, therefore, external reconstruction may be
considered to be amalgamation in the nature of purchase.
A Realisation Account is opened in the books of the Transferor Company
and the assets and liabilities taken over by the Transferee Company are transferred
to this accounts at books values. The account is credited with purchase
consideration arrived at the same way as in the case of amalgamation in the
nature of merger and in the nature of purchase. The difference between the two
sides of this account representing loss or profit on realisation, is transferred to
Shareholders Account.
In the books of the Transferee Company, however, assets and liabilities
taken over are recorded at fair or revised values. The difference between the net
assets and the purchase consideration is either goodwill or capital reserve.
The concept of External Reconstruction can be understood with the help of
following illustrations :
88
Advanced Accounting - I
2.5
Methods Of Accounting :
Amalgamation & External
Reconstruction
Illustrations
ILLUSTRATION 1
The following was the Balance Sheet of Jitendra Ltd., Jalna as on 31st
March, 2014.
NOTES
st
Balance Sheet as on 31 March, 2014
Liabilities
‘
Assets
‘
Share Capital :
Goodwill
60,000
• 10,000 Equity Shares of
Buildings
80,000
‘ 20 each
2,00,000 Machinery
1,30,000
• 6,000, 8% Cumulative
Stock
50,000
Preference shares of
Sundry Debtors
30,000
‘ 20 each , fully paid
1,20,000 Cash
Debentures
80,000 Preliminary Expenses
Sundry Creditors
20,000 Profit and Loss
4,20,000
10,000
6,000
54,000
4,20,000
There scheme of reconstruction was agreed as follows :
a)
A new company to be formed “Virendra Ltd.” Vapi with an Authorised
Capital of ‘ 6,00,000, all in Equity Shares of ‘ 10 each.
b)
Two Equity Shares of ‘ 5 paid up in the new company issued for every one
Equity Share in the old company.
c)
Four Equity Shares of ‘ 5 paid up in the new company to be issued for
every Preference Share in the old company.
d)
Debentureholders to be allotted 8,000 Equity Shares as fully paid - up in the
new company.
e)
Sundry Creditors to be taken over by the new company.
f)
The remaining Equity Shares to be issued to the public and duly collected in
full.
g)
The Assets of the old company to be taken over subject to writing down the
value of Machinery by ‘ 10,000.
Show the necessary Ledger Accounts in the books of the Old Company
and the opening journal entries in the books of the New Company.
Advanced Accounting - I
89
Methods Of Accounting :
Amalgamation & External
Reconstruction
SOLUTION
Statement of Purchase Consideration
‘
Discharge
NOTES
Net Assets taken over
‘
Equity Shareholders :
Buildings
2 shares of ‘ 10 each
Machinery
‘ 5 paid up for every
Stock
50,000
one share in the Old Co.
Debtors
30,000
 Shares 20,000 x Rs. 5
1,00,000 Cash
80,000
1,20,000
(+)
Preference Shareholders :
2,90,000
4 Equity Shares of ‘ 10 each
Less: Creditors
(-)
‘ 5 paid up for every
20,000
2,70,000
Preference Share in the Old Co.
Shares 24,000 x ‘ 5
10,000
Goodwill
(+)
30,000
1,20,000 (Balancing Figure)
Debentureholders :
8,000 shares of ‘ 10 each
80,000
3,00,000
3,00,000
In the books of Jitendra Ltd. Jalna
Dr.
Realisation Account
Particulars
‘
To Sundry Assets :
60,000 i) Sundry Creditors
ii) Buildings
80,000 By Virendra Ltd.
20,000
3,00,000
1,30,000 (Purchase Consideration)
iv) Stock
50,000 By Equity Shareholders
v) Sundry Debtors
30,000 (Loss on Realisation)
vi) Cash
10,000
3,60,000
Advanced Accounting - I
‘
By Sundry Liabilities :
i) Goodwill
iii) Machinery
90
Particulars
Cr.
40,000
3,60,000
Dr.
Virendra Ltd. Account
‘
Particulars
To Realisation
Cr.
‘
Particulars
3,00,000 By Shares in Virendra Ltd.
(Purchase Consideration)
i) 44,000 Shares partly paid
2,20,000
NOTES
‘ 5 per share
ii) 8,000 Shares fully paid
80,000
3,00,000
Dr.
Methods Of Accounting :
Amalgamation & External
Reconstruction
3,00,000
Equity Shareholders Account
‘
Particulars
To Preliminary Expenses
Cr.
‘
Particulars
6,000 By Equity Share Capital
To Profit and Loss
54,000
To Realisation
40,000
2,00,000
(Loss on Realisation)
To Equity Shares in Virendra Ltd. 1,00,000
(20,000 Shares x ‘ 5)
2,00,000
Dr.
2,00,000
8% Cumulative Preference Shareholders Account
Particulars
To Equity Shares in .
‘
‘
Particulars
1,20,000 By 8% Cumulative
Virendra Ltd
Preference Share Capital
(24,000 shares x ‘ 5)
(6,000 shares x ‘ 20)
1,20,000
Dr.
‘
1,20,000
1,20,000
Debentureholders Account
Particulars
Cr.
Particulars
To Equity Shares in Virendra Ltd. 80,000 By Debentures
Cr.
‘
80,000
(8,000 shares x ‘ 10)
80,000
80,000
Advanced Accounting - I
91
Methods Of Accounting :
Amalgamation & External
Reconstruction
Opening Entries in the books of Virendra Ltd. Vapi
Date
Particulars
31/3/14
NOTES
1)
L.
F.
Business Purchase A/c
To Liquidator of Jitendra Ltd. A/c
Debit Credit
‘
‘
Dr. - 3,00,000
-
3,00,000
(Being the amount of purchase consideration
payable to Jitendra Ltd., on purchase of their
business)
2)
Buildings A/c
Dr. -
80,000
Machinery A/c
Dr. - 1,20,000
Stock A/c
Dr. -
50,000
Sundry Debtors A/c
Dr. -
30,000
Cash A/c
Dr. -
10,000
Goodwill A/c
Dr. -
30,000
To Business Purchase A/c
-
3,00,000
To Sundry Creditors A/c
-
20,000
(Being the entry to record the assets and
liabilities taken over and the purchase price
payable thereon.)
3)
Liquidator of Jitendra Ltd. A/c
To Equity Share Capital A/c
Dr. - 3,00,000
-
2,20,000
-
80,000
(Partly Paid up)
To Equity Share Capital A/c
(Fully paid up)
(Being the entry to record the discharge of
purchase price in the form of 44,000 partly
paid up shares and 8,000 fully paid up shares)
92
Advanced Accounting - I
4)
Bank A/c
Dr. -
To Equity Share Capital A/c
80,000
-
80,000
Methods Of Accounting :
Amalgamation & External
Reconstruction
(Being the entry to record the receipt of cash
on issue of 8,000 shares of ‘ 10 each, to the
NOTES
public)
ILLUSTRATION 2
Unlucky Ltd., Mumbai having proved unsuccessful, resolves by special
resolution to wind up for the purpose of reconstruction and sale to Lucky Ltd.,
Loni; a newly formed company for the purpose. The Balance Sheet of Unlucky
Ltd., as on 31st March, 2014 was as follows :
Balance Sheet of Unlucky Ltd., as on 31st March, 2014
Liabilities
‘
Share Capital :
• 1,00,000 Equity Shares
Land and Buildings
4,50,000
10,00,000 Machinery and Plant
of ‘ 10 each, fully paid
Sundry Debtors
Sundry Creditors
30,000 Less : R.D.D.
Bills Payable
20,000 Stock
Contingent Liability :
Workmen’s Compensation
‘
Assets
2,40,000
1,05,000
(-) 5,000 1,00,000
Cash at Bank
- Profit and Loss
50,000
10,000
2,00,000
Claim ‘ 4,000
10,50,000
10,50,000
The scheme of reconstruction assented to by all the parties was as follows :
a)
The new company to take over all the assets of the old company, but not
the liabilities .
b)
The new company was to purchase the goodwill of the business and the
assets of the old company for the sum of ‘ 8,00,000 payable as to
‘ 7,00,0000by the issue of 1,40,000 Equity Shares of ‘ 10 each, ‘ 5 per
share credited as paid up and as to ‘ 1,00,000 in cash.
c)
The members of the new company were to pay in cash the balance of ‘ 5
per share due upon the shares issued to them.
d)
The expenses of reconstruction amounted to ‘ 3,000
e)
Workmen’s Compensation Claim was settled at ‘ 2,000
Advanced Accounting - I
93
Methods Of Accounting :
Amalgamation & External
Reconstruction
NOTES
No further shares were issued beyond those forming part of the purchase
consideration as stated above.
i)
Pass the journal entries to close the books of Unlucky Ltd. Mumbai . Also
give necessary ledger accounts.
ii)
Pass the opening entries and give the opening Balance Sheet in the book of
Lucky Ltd. Loni.
SOLUTION
Journal Entries in the books of Unlucky Ltd. Mumbai
Date
Particulars
31/3/14
1)
L.
Debit
Credit
F.
‘
‘
Realisation A/c
Dr. - 8,50,000
R.D.D. A/c
Dr. -
5,000
To Land and Buildings A/c
4,50,000
To Machinery and Plant A/c
2,40,000
To Sundry Debtors A/c
1,05,000
To Stock A/c
50,000
To Bank A/c
10,000
(Being the entry for transfer of various assets
over to Realisation Account)
2)
Lucky Ltd. A/c
To Realisation A/c
Dr. - 8,00,000
-
8,00,000
(Being the entry to record the purchase
consideration payable by Lucky Ltd.)
3)
Shares in Lucky Ltd. A/c
Dr. - 7,00,000
Cash A/c
Dr. - 1,00,000
To Lucky Ltd. A/c
(Being the entry for receipt of purchase
consideration)
94
Advanced Accounting - I
-
8,00,000
4)
Sundry Creditors A/c
Dr. -
30,000
Bills Payable A/c
Dr. -
20,000
To Bank A/c
Methods Of Accounting :
Amalgamation & External
Reconstruction
50,000
(Being the entry for payment of liabilities)
5)
Realisation A/c
Dr. -
To Bank A/c
NOTES
3,000
-
3,000
(Being the entry for payment of
Reconstruction Expenses)
6)
Realisation A/c
Dr. -
To Bank A/c
2,000
-
2,000
(Being the entry for settlement of Workmen’s
Compensation for ‘ 2,000)
7)
Equity Shareholders A/c
Dr. -
To Realisation A/c
55,000
-
55,000
(Being the entry for transfer of loss on
realisation to equity shareholders)
8)
Equity Share Capital A/c
Dr. - 10,00,000
To Equity Shareholders A/c
-
10,00,000
(Being the entry for transfer of Equity Share
holders Account)
9)
Equity Shareholders A/c
Dr. - 2,00,000
To Profit and Loss A/c
-
2,00,000
(Being the entry for transfer of balance in Profit
and Loss to Equity Shareholders Account)
10)
Equity Shareholders A/c
To Shares in Lucky Ltd. A/c
To Bank A/c
Dr. - 7,45,000
-
7,00,000
45,000
(Being the entry for transfer of share and
Bank Balance to Equity Shareholders)
Advanced Accounting - I
95
Methods Of Accounting :
Amalgamation & External
Reconstruction
Ledger Accounts
Dr.
Realisation Account
‘
Particulars
NOTES
Particulars
To Sundry Assets :
By Lucky Ltd.
i) Land and Buildings
4,50,000 (Purchase Consideration)
ii) Machinery and Plant
2,40,000 By R.D.D.
iii) Sundry Debtors
1,05,000 By Equity Shareholders
iv) Stock
50,000 (Loss on Realisation)
v) Bank
10,000
To Bank
3,000
Cr.
‘
8,00,000
5,000
55,000
(Reconstruction Expenses)
To Bank
2,000
(Workmen’s Compensation claim)
8,60,000
Dr.
8,60,000
Lucky Ltd., Account
Particulars
To Realisation
‘
Particulars
8,00,000 By Shares in Lucky Ltd.
(Purchase consideration)
By Bank
8,00,000
Dr.
Cr.
‘
7,00,000
1,00,000
8,00,000
Equity Shareholders Account
Particulars
To Profit and Loss
To Realisation
‘
Particulars
2,00,000 By Equity Share Capital
Cr.
‘
10,00,000
55,000
(Loss on Realisation)
To Shares in Lucky Ltd.
To Bank
7,00,000
45,000
10,00,000
96
Advanced Accounting - I
10,00,000
Dr.
Bank Account
Particulars
To Lucky Ltd.
‘
Cr.
Particulars
1,00,000 By Sundry Creditors
By Bills Payable
By Realisation
‘
Methods Of Accounting :
Amalgamation & External
Reconstruction
30,000
20,000
3,000
NOTES
(Reconstruction Expenses)
By Realisation
2,000
(Workmen’s Compensation)
By Equity Shareholders
1,00,000
Dr.
45,000
1,00,000
Sundry Creditors Account
‘
Particulars
To Bank
Particulars
30,000 By Balance B/D
30,000
Dr.
Cr.
‘
30,000
30,000
Bills Payable Account
Particulars
To Bank
‘
Particulars
20,000 By Balance B/D
20,000
Dr.
Cr.
‘
20,000
20,000
Share in Lucky Ltd., Account
Particulars
To Lucky Ltd.
‘
Particulars
7,00,000 By Equity Shareholders
7,00,000
Cr.
‘
7,00,000
7,00,000
Advanced Accounting - I
97
Methods Of Accounting :
Amalgamation & External
Reconstruction
Opening Entries in the books of Lucky Ltd. Loni
Date
Particulars
L. Debit
31/3/14
NOTES
1)
F.
Business Purchase A/c
‘
Credit
‘
Dr. - 8,00,000
To Liquidator of Unlucky Ltd. A/c
-
8,00,000
(Being the amount of purchase consideration
payable to Unlucky Ltd., on purchase of their
business)
2)
Land and Buildings A/c
Dr. - 4,50,000
Machinery and Plant A/c
Dr. - 2,40,000
Sundry Debtors A/c
Dr. - 1,05,000
Stock A/c
Dr. -
50,000
Bank A/c
Dr. -
10,000
To R.D.D. A/c
-
5,000
To Business Purchase A/c
-
8,00,000
To Capital Reserve A/c (Balancing Figure) -
50,000
(Being the entry to record the assets taken over
from Unlucky Ltd.)
3)
Liquidator of Unlucky Ltd. A/c
Dr. - 8,00,000
To Equity Share Capital A/c
-
7,00,000
To Bank A/c
-
1,00,000
(Being the entry to record issue of 1,40,000
Equity shares of ‘ 10 each, ‘ 5 per share paid
and ‘ 1,00,000 in cash to Vendors in discharge
of purchase price)
4)
Equity Share Final Call A/c
To Equity Share Capital A/c
(Being the entry for the final call of
‘ 5 due on partly paid shares of 1,40,000)
98
Advanced Accounting - I
Dr. - 7,00,000
-
7,00,000
5)
Bank A/c
Dr. - 7,00,000
To Equity Share Final Call A/c
7,00,000
Methods Of Accounting :
Amalgamation & External
Reconstruction
(Being the entry for receipt of Final Call money)
Balance Sheet of Lucky Ltd. Loni, as on 31st March, 2014
Liabilities
‘
Share Capital :
1,40,000 Shares of ‘ 10 each
NOTES
‘
Assets
Fixed Assets :
14,00,000 Land and Buildings
4,50,000
(Issued to vendor of
Machinery and Plant
business ‘ 5 paid up. The
Current Assets :
remaining balance called
Stock
from Shareholders in full)
Debtors
1,05,000
Reserves and Surplus :
Less: R.D.D.
(-)5,000 1,00,000
Capital Reserve
2,40,000
50,000
50,000 Bank (‘ 10,000 +‘ 7,00,000
6,10,000
- ‘ 1,00,000 = ‘ 6,10,000)
14,50,000
14,50,000
ILLUSTRATION 3
Green Ltd., Gondia went into voluntary liquidation for its reconstruction on
31st March 2014, when its Balance Sheet was as follows :
Balance Sheet of Green Ltd. Gondia, as on 31st March, 2014
Liabilities
‘
Share Capital :
• 3,000; 6% Preference Shares
Freehold Property
4,15,000
3,00,000 Plant and Machinery
of ‘ 100 each
Vehicles
• 7,000 Equity Shares of
Stock
‘ 100 each
‘
Assets
7,00,000 Debtors
Share Premium
10,000 Less: R.D.D.
Unsecured Loans
50,000 Bills Receivable
Bills Payable
30,000 Cash
Creditors
70,000 Profit and Loss
11,60,000
2,15,000
40,000
1,75,000
50,000
(-)5,000
45,000
10,000
4,000
2,56,000
11,60,000
Advanced Accounting - I
99
Methods Of Accounting :
Amalgamation & External
Reconstruction
NOTES
A New Company, White Ltd., Vilaspur was formed to take over the following
assets and liabilities of the Green Ltd.
Freehold Property at ‘ 3,60,000; Plant and Machinery at ‘ 2,00,000; Vehicles
at ‘ 45,000; Stock ‘ 1,50,000, White Ltd., also took over unsecured loans and
creditors at the book value.
The Purchase Consideration was satisfied in 2,350, 7% Preference Shares
of ‘ 100 each and 10,000 Equity Shares of ‘ 100each, ‘ 40 paid-up. There was
a contingent liability for a Repair Bill amounting to ‘ 1,700 for which White Ltd.,
issued 11 Equity Shares of ‘ 100 each fully paid in full satisfaction of them claim.
The Preference Shareholders of Green Ltd., accepted Preference Shares
of White Ltd., in full satisfaction of their claims and partly paid equity shares of
White Ltd., were allotted to the Equity Shareholders of Green Ltd.
The Debtors and Bills Receivables of Green Ltd., realised ‘ 48,000 and ‘
8,000 respectively. Bills Payable were fully paid. The winding up expenses were
‘ 4,500.
White Ltd., immediately made a call of ‘ 60 on partly paid Equity Shares to
pay the unsecured loans and creditors. The call money were fully received out of
which liabilities were paid.
Preliminary expenses of White Ltd., amounted to ‘ 10,000 which were
paid immediately.
Close the books of Green Ltd. Gondia by preparing necessary Ledger
Account and pass the journal entries in the books of White Ltd. Vilaspur.
100
Advanced Accounting - I
Methods Of Accounting :
Amalgamation & External
Reconstruction
SOLUTION
Statement of Purchase Consideration
‘
Discharge
2,350, 7% Preference Share
of ‘ 100 each
Net Assets taken over
Freehold Property
3,60,000
2,35,000 Plant and Machinery
10,000 Equity Shares of
Vehicles
Rs.100 each Rs.40 per
Stock
share paid up
2,00,000
each, fully paid-up
NOTES
45,000
(+) 1,50,000
4,00,000
11 Equity Shares of Rs.100
‘
7,55,000
Less: Liabilities taken over
1,100 Unsecured Loans
Creditors
50,000
(+)70,000
1,20,000
(-) 6,35,000
Settlement of Contingent
Liability for Repairs
(+)
6,36,100
1,100
6,36,100
In the books of Green Ltd., Gondia
Dr.
Realisation Account
Particulars
‘
To Sundry Assets :
Cr.
‘
Particulars
By Sundry Liabilities :
i) Freehold Property
4,15,000
i) Unsecured Loans
50,000
ii) Plant and Machinery
2,15,000
ii) Creditors
70,000
iii) Vehicles
iv) Stock
v)
Debtors
vi) Bills Receivable
To Cash/Bank
40,000 By R.D.D.
1,75,000 By White Ltd.
6,36,100
50,000 (Purchase Consideration)
10,000 By Cash/Bank
4,500
(Winding up expenses)
To Contingent Liability for Repairs
5,000
i) Debtors
48,000
ii) Bills Receivable(+)8,000
56,000
1,100 By Preference Shareholders
65,000
By Equity Shareholders
28,500
(Loss on Realisation)
9,10,600
9,10,600
Advanced Accounting - I
101
Methods Of Accounting :
Amalgamation & External
Reconstruction
Dr.
Equity Shareholders Account
‘
Particulars
To Profit and Loss
NOTES
Particulars
2,56,000 By Equity Share Capital
To Realisation
28,500 By Share Premium
Cr.
‘
7,00,000
10,000
(Loss on Realisation)
To Cash/Bank
25,500
To Equity Shares in White Ltd.
4,00,000
(Shares of ‘ 100 each ‘ 40 paid up)
7,10,000
Dr.
7,10,000
Cash / Bank Account
‘
Particulars
To Balance B/D
Particulars
4,000 By Realisation
To Realisation
‘
4,500
(Winding up costs)
(Amount realised from Debtors
56,000 By Bills Payable
and Bills Receivable)
By Equity Shareholders
60,000
Dr.
Cr.
30,000
25,500
60,000
White Ltd., (Purchasing Co.) Account
Particulars
To Realisation
‘
Particulars
6,36,100 By Preference Shares in Ltd.
(Purchase consideration)
Cr.
‘
2,35,000
By Equity Shares in
White Ltd.
4,00,000
(10,000 Equity shares of
‘ 100 each, ‘ 40 paid-up)
By Equity Shares in White Ltd.
1,100
(11 fully paid up shares of
‘ 100 each)
6,36,100
102
Advanced Accounting - I
6,36,100
Dr.
6% Preference Shareholders Account
‘
Particulars
To Preference Shares in
Cr.
‘
Particulars
By 6% Preference Share
White Ltd.
2,35,000 Capital
To Realisation
3,00,000
NOTES
65,000
3,00,000
Dr.
3,00,000
Bills Payable Account
‘
Particulars
To Cash/Bank
Cr.
‘
Particulars
3,00,000 By Balance B/D
3,00,000
3,00,000
Dr.
Methods Of Accounting :
Amalgamation & External
Reconstruction
3,00,000
Contingent Liability for Repairs Account
‘
Particulars
Cr.
‘
Particulars
To Equity Shares in White Ltd. 1,100 By Realisation
1,100
(11 fully paid Equity Shares
of ‘ 100 each)
1,100
1,100
Opening Entries in the books of White Ltd., Visapur
Date
Particulars
F. ‘
31/3/14
1)
L. Debit
Business Purchase A/c
To Liquidator of Green Ltd. A/c
Credit
‘
Dr. - 6,36,100
-
6,36,100
(Being the amount of purchase consideration
payable to Green Ltd., on purchase of their
business)
Advanced Accounting - I
103
Methods Of Accounting :
Amalgamation & External
Reconstruction
2)
NOTES
Freehold Property A/c
Dr. - 3,60,000
Machinery and Plant A/c
Dr. - 2,00,000
Vehicles A/c
Dr. -
Stock A/c
Dr. - 1,50,000
Goodwill A/c
Dr. -
45,000
1,100
To Liquidator of Green Ltd. A/c
6,36,100
To Unsecured Loans A/c
50,000
To Creditors A/c
70,000
(Being the entry to record the assets and
liabilities taken over and the purchase
consideration thereon)
3)
Liquidator of Green Ltd. A/c
To Equity Share Capital A/c
Dr. - 6,36,100
-
4,00,000
To 7% Preference Share Capital A/c
-
2,35,000
To Equity Share Capital A/c
-
1,100
(Rs. 100 each-Rs.40 paid-up)
(11 Shares of Rs.100 each, fully paid)
(Being the entry to record the discharge of
purchase consideration)
4)
Equity Share Final Call A/c
To Equity Share Capital A/c
Dr. - 6,00,000
-
6,00,000
(Being the entry to record the final call
of ‘ 60 per share due on 10,000 shares)
5)
Bank A/c
To Equity Share Final Call A/c
(Being the entry to record the receipt
of final call money from equity shareholders)
104
Advanced Accounting - I
Dr. - 6,00,000
-
6,00,000
6)
Unsecured Loans A/c
Dr. -
50,000
Creditors A/c
Dr. -
70,000
To Cash /Bank A/c
-
Methods Of Accounting :
Amalgamation & External
Reconstruction
1,20,000
(Being the entry to record the payment
NOTES
of liabilities taken over from Green Ltd.)
7)
Preliminary Expenses A/c
Dr. -
To Cash/Bank A/c
10,000
-
10,000
(Being the entry to record the payment
of preliminary expenses)
ILLUSTRATION 4
The Balance Sheet of Moonshine Ltd., Malad as on 31st March, 2014 was
as follows :
Balance Sheet as on 31st March, 2014
Liabilities
‘
Assets
‘
Share Capital :
Land and Buildings
3,00,000
• 75,000 Equity Shares of
Plant and Machinery
2,00,000
‘ 10 each
7,50,000 Trademark and Patents
• 6,000, 6% Cumulative
6,00,000 Stock
Preference Shares of
Debtors
‘ 100 each
Cash in hand
5% Debentures of ‘ 100 each
Bank Overdraft
Creditors
2,00,000 Profit and Loss
1,20,000
80,000
1,60,000
5,000
8,95,000
60,000
1,50,000
17,60,000
17,60,000
It was decided to reconstruct the company and for this purpose Sunshine
Ltd. Surat, was registered with a capital of ‘ 18,00,000 divided into 1,00,000
Equity Shares of ‘ 10 each and 8,000, 7% Preference Shares of ‘ 100 each to
take over the liabilities of Moonshine Ltd.
The following are the main terms of the scheme.
a)
The debenture holders of Moonshine Ltd., agreed to accept 7% percent
Preference Shares in the new company in exchange of their debenture.
Advanced Accounting - I
105
Methods Of Accounting :
Amalgamation & External
Reconstruction
NOTES
b)
The preference shareholders were to receive one 7% Preference Share in
Sunshine Ltd., for every two shares held by them.
c)
The equity shareholders were to receive one Equity Share in a new company,
Rs.5 paid up for every three shares held by them in Moonshine Ltd.
Sunshine Ltd., issued 10,000 Equity Shares of Rs. 10 each at par and called
up the balance of Rs.5 on the shares issued to the shareholders of Moonshine Ltd.
Cost of Liquidation amounted to Rs. 2,500 which were paid by Sunshine Ltd.
You are required to give journal entries in the books of Moonshine Ltd.
Malad and the Balance Sheet of Sunshine Ltd., Surat.
SOLUTION
‘
Calculation of Purchase Consideration
1)
7% Preference Share
2,00,000
(to be given to Debentureholders)
2)
7% Preference Shares
3,00,000
(to be given to Preference Share holders)
3)
Equity Shares partly paid up

(+)
Purchase Consideration
1,25,000
6,25,000
Journal Entries in the books of Moonshine Ltd. Malad
Date
Particulars
31/3/14
1)
L. Debit
F.
Realisation A/c
To Land and Buildings A/c
-
3,00,000
2,00,000
To Trademark and Patents A/c
-
1,20,000
To Stock A/c
-
80,000
To Debtors A/c
-
1,60,000
To Cash in hand A/c
-
5,000
(Being the entry for assets transferred to
Realisation Account)
Advanced Accounting - I
‘
Dr. - 8,65,000
To Plant and Machinery A/c
106
‘
Credit
2)
Bank Overdraft A/c
Dr. -
Creditors A/c
Dr. - 1,50,000
To Realisation A/c
Methods Of Accounting :
Amalgamation & External
Reconstruction
60,000
-
2,10,000
(Being the entry for liabilities transferred)
3)
Sunshine Ltd. A/c
NOTES
Dr. - 6,25,000
To Realisation A/c
6,25,000
(Being the entry for purchase consideration
payable.)
4)
Equity Share in Sunshine Ltd. A/c
Dr. - 1,25,000
7% Preference Shares in Sunshine Ltd. A/c
Dr. - 5,00,000
To Sunshine Ltd. A/c
-
6,25,000
(Being the entry for satisfaction of purchase
consideration)
5)
6% Debenture A/c
Dr. - 2,00,000
To 7% Preference Share in
Sunshine Ltd. A/c
-
2,00,000
(Being the discharge of 6% debenture
by issue of 7% Preference Shares)
6)
6% Preference Share Capital A/c
Dr. - 6,00,000
To 7% Preference Share in
Sunshine Ltd. A/c
-
3,00,000
To Realisation A/c
-
3,00,000
(Being the discharge of 6% Preference shares
by issue of 7% Preference share profit being
transferred to Realisation Account)
7)
Equity Share Capital A/c
To Equity Shareholders A/c
Dr. - 7,50,000
-
7,50,000
(Being Equity Share Capital transferred to
Equity Shareholders Account)
Advanced Accounting - I
107
Methods Of Accounting :
Amalgamation & External
Reconstruction
8)
Equity Shareholders A/c
Dr. - 8,95,000
To Profit and Loss A/c
-
8,95,000
(Being debit balance of Profit and Loss A/c
transferred to Equity Shareholders Account)
NOTES
9)
Realisation A/c
Dr. - 2,70,000
To Equity Shareholders A/c
-
2,70,000
(Being profit on realisation transferred to equity
shareholders)
10)
Equity Shareholders A/c
To Equity Shares in Sunshine Ltd. A/c
(Being issue of shares in Sunshine Ltd.)
108
Advanced Accounting - I
Dr. - 1,25,000
-
1,25,000
Balance Sheet of Sunshine Ltd. Surat, as on 31st March, 2014
Liabilities
‘
Assets
‘
Share Capital :
Land and Buildings
3,00,000
A) Authorised Capital :
Plant and Machinery
2,00,000
• 1,00,000 Equity Shares of
Trade Mark and Patents
1,20,000
‘ 10 each
10,00,000
• 8,000, 7% Preference Shares
of ‘ 100 each
8,00,000
Stock
Methods Of Accounting :
Amalgamation & External
Reconstruction
NOTES
80,000
Debtors
1,60,000
Cash
1,27,500
18,00,000
B) Issued and Subscribed
Capital :
• 25,000 Equity Shares
of ‘ 10 each
2,50,000
• 5,000, 7% Preference
Shares of ‘ 100 each
5,00,000
(Out of these 25,000 Equity
Shares of ‘ 5 paid-up and
5,000 , 7% Preference shares
of ‘ 100 each, were issued
to Moonshine Ltd., for
Purchase Consideration)
Capital Reserve
27,500
Bank Overdraft
60,000
Creditors
1,50,000
9,87,500
9,87,500
Advanced Accounting - I
109
Methods Of Accounting :
Amalgamation & External
Reconstruction
2.6
Summary
There are two main methods of accounting for amalgamations :
NOTES
i) The pooling of interest method and ii) The purchase method. Pooling method of
accounting is applicable for “Amalgamation in the Nature of merger” Purchase
method of accounting is applicable for “Amalgamation in the Nature of Purchase”
At the time of amalgamation different accounting treatment is necessary.
In connection with inter company investments, following are different situations :
i)
When one of the Transferor Company is holding some shares of another
Transferor Company.
ii)
When the Transferee Company is holding some shares of the Transferor
Company.
iii)
When the Transferor Company is holding some shares of the Transferee
Company.
Reconstruction may be of two types viz External Reconstruction and Internal
Reconstruction . When one company goes into liquidation and a new company is
formed to take over the business of the company, which goes into liquidation it is
called External Reconstruction. From the accounting point of view, external
reconstruction may be considered to be amalgamation in the nature of purchase.
2.7
Key Terms
External Reconstruction : When one company goes in to liquidation and
a new company is formed to take over the business of the company, which goes
into liquidation, it is called ‘External Reconstruction’
‘Pooling’ of interest method of accounting is applicable for
Amalgamation in the nature of merger.
‘Purchase’ method of accounting is applicable for Amalgamation in the
nature of purchase.
2.8
Questions and Exercises
I.
Objective Questions
A)
Multiple Choice Questions
(1)
Under purchase method of amalgamation, if net asset value exceeds the
amount of purchase consideration, then if results into ..........
(a) Capital Reserve
110
Advanced Accounting - I
(b) Goodwill
(c) Reserve Fund
(d) General Reserve
(2)
If the acquiring company takes over all assets and liabilities at the original
book value and discharges the purchase consideration by issuing its shares,
then it is to be accounted for by using .........
Methods Of Accounting :
Amalgamation & External
Reconstruction
NOTES
(a) Purchase Method.
(b) Pooling of Interest Method.
(c) Net Asset Method.
(d) Net Payment Method.
(3)
Under purchase method of Amalgamation, if net asset value is less than the
amount of purchase consideration, then it results into .........
(a) General Reserve
(b) Capital Reserve
(c) Goodwill
(d) Revenue Reserve
(4)
Floating of a new company to take over the existing business of an
unsuccessful company is termed as ..........
(a) Internal Reconstruction
(b) Vertical Reconstruction
(c) Horizontal Reconstruction
(d) External Reconstruction
ANS . (1 - a), (2 - b), (3 - c), (4 - d)
II.
Long Answer Questions
(1)
Explain in detail the following methods of accounting for amalgamations
(a) Pooling of Interests Method
(b) Purchase Method
(2)
What is ‘Pooling of Interests Methods?’ State the important characteristics
of Pooling Method of accounting applicable for amalgamation in the nature
of merger.
(3)
What is ‘Purchase Method ?’ State the important characteristics of
Purchase Method of accounting applicable for amalgamation in the nature
of purchase.
Advanced Accounting - I
111
Methods Of Accounting :
Amalgamation & External
Reconstruction
(4)
What is ‘External Reconstruction?’ How it differs from Amalgamation?
(5)
Write Short Notes on :
a) Purchase Method
b) Inter Company Investments
NOTES
c) Cross Holidays
d) External Reconstruction
III.
Practical Problems :
1)
Following was the Balance Sheet of Dinesh Ltd. as on 31st March, 2014.
Balance Sheet of Dinesh Ltd., Gondia, as on 31st March, 2014
Liabilities
‘
Assets
‘
Share Capital :
Land and Buildings
65,000
• 2,500 Equity Shares of
Plant and Machinery
42,500
‘ 50 each
Profit prior to Incorporation
1,25,000
500
Furniture
2,500
Patents
10,000
Loans
33,250
Stock
15,000
Creditors
20,000
Debtors
12,000
Cash in hand
Profit and Loss
1,78,750
1,750
30,000
1,78,750
Dinesh Ltd., adopted a scheme of reconstruction as working capital was
badly needed .The new company, Lotus Ltd., was formed to takeover the business
of Dinesh Ltd., on the following terms :
a)
Out of Creditors, ‘ 500 were preferential creditors and they were fully paid
by the new company. The remaining creditors were given the following
option.
i)
50% of their claim will be paid in cash immediately as full settlement.
ii)
5% Debentures in the new company will be issued to them equivalent to
their claim in the old company.
Half of the creditors opted for cash payment.
b)
112
Advanced Accounting - I
One Equity Share of ‘ 100 each, ‘ 75 paid up will be issued for every four
shares of the old company.
c)
Lotus Ltd., made a final call of ‘ 25 on equity shares which was fully
received .
d)
The amount made available under the reconstruction scheme was to be
utilised to write off stock by 25%, Furniture by 50% and Plant and Machinery
by 10% The new company to write off Patents completely. Debtors were
valued at ‘ 10,000 keeping ‘ 2,000 as a Reserve for Doubtful Debts. The
value of Land and Buildings being adjusted to the extent required.
e)
Methods Of Accounting :
Amalgamation & External
Reconstruction
NOTES
Formation expenses of the new company were ‘ 6,250.
Pass the necessary journal entries in the books of Dinesh Ltd.,, and Lotus
Ltd. Also show the calculation of Purchase consideration.
2)
The following is the Balance Sheet of S.M.Ltd., as on 31st March ,2014
Balance Sheet of S.M. Ltd., as on 31st March, 2014
‘
Liabilities
A) Authorised and Issued
‘
Assets
Sundry Assets
Capital :
15,000
Compensation Fund
• 20,000 Ordinary Shares of
‘ 1 fully paid
Property :
20,000 Lucknow
• 18,000, 7% Preference
Shares of ‘ 1 fully paid
‘A’ 6% Debentures
3,000
Chennai
16,000
(+) 12,000
18,000 Profit and Loss
28,000
4,000
3,000
(secured on Lucknow Property)
‘B’ 6% Debentures
3,500
(secured on Chennai Property)
Workmen’s Compensation Fund :
• Lucknow
• Chennai
Creditors
2,000
(+) 1,000
3,000
2,500
50,000
50,000
A scheme was duly prepared and sanctioned, whereby :
a)
Ordinary Shares were to be reduced to 10%
b)
Preference Shares were to be reduced to 80%
Advanced Accounting - I
113
Methods Of Accounting :
Amalgamation & External
Reconstruction
c)
Debentureholder forgo their interest (‘ 520) which is included among Sundry
Creditors.
d)
‘B’ Debentureholders agreed to take over the Chennai property at ‘ 5,000
and to accept an allotment of ‘ 3,000 per 10 ordinary shares at par, and
upon their forming a company called M.P. Ltd., to take over the Chennai
property , they allotted S.M. Ltd., 1,800 ‘ 1 shares fully paid at par.
e)
The Chennai Workmen’s Compensation Fund disclosed the fact that there
were liabilities of ‘ 200. In consequence, the investment and the fund
were realised to the extent of the balance, the investment realising a profit
of 10 % on book value, and the proceeds used for part payment of the
creditors.
f)
The Sundry Assets were to be written down by ‘ 9,000 , any balance of
Capital Reduction Account to be applied as to three - quarters in writing
down the Lucknow property, one - quarter to a capital reserve.
NOTES
Show journal entries covering these steps and Balance Sheet after completing
the reconstruction scheme.
3) The Balance Sheet of Raman Ltd., as on at 31st March, 2014 is as follows :
Balance Sheet of Raman Ltd., as on 31st March, 2014
Liabilities
‘
Assets
Paid-up Capital :
Fixed Assets :
• 8,000 Equity Shares of
Land, Buildings and
‘ 100 each, fully paid
8,00,000 Machinery
Secured Loan :
• 8% Debentures
• Accrued Interest
Sundry Creditors
Income Tax Liability
‘
14,00,000
Current Assets :
14,00,000 Stock
70,000 Sundry Debtors
4,50,000 Investments
1,00,000
40,000
15,000
10,000 Cash at Bank
1,03,000
Cash in hand
2,000
Profit and Loss
27,30,000
10,70,000
27,30,000
The fixed assets are heavily overvalued. A scheme of re-organization was
prepared and passed. The salient points of the scheme are the following :
a)
114
Advanced Accounting - I
Each share shall be sub-divided into ten fully paid Equity Shares of ‘ 10
each.
b)
After such sub-division, each shareholders shall surrender to the Co. 90%
of their holding, for the purpose of reissue to Debentureholders and Creditors,
so far as required and otherwise for cancellation.
c)
Of those surrendered 50,000 Equity Shares of ‘ 10 each shall be converted
into 8% Preference Shares of ‘ 10 each fully paid for Debentureholders.
d)
The debenture holders total claim shall be reduced to ‘ 5,00,000. This will
be satisfied by the issue of 50,000 Preference Shares of ‘ 10 each fully
paid.
e)
The claim of Sundry Creditors shall be reduced by 80% and the balance
shall be satisfied by alloting them Equity Shares of ‘ 10 each, fully paid
from the shares surrendered.
f)
Methods Of Accounting :
Amalgamation & External
Reconstruction
NOTES
Shares surrendered and not re-issued shall be cancelled.
Assuming that the scheme is duly approved by all parties interested and by
the court, draft necessary journal entries and Balance Sheet of the company after
the scheme has been carried into effect.
2.9
Further Reading
•
Shukla M.C. - Grewal, T.S. and Gupta S.C. - Advanced Accounts - New
Delhi, S. Chand and Co. Pvt. Ltd., 2013
•
Sehgal Ashok - Taxman’s Fundamentals of Corporate Accounting New
Delhi - Taxmann Publication Pvt. Ltd., 2012
Advanced Accounting - I
115
Unit 3
Internal Reconstruction
Internal Reconstruction
Structure
3.0
Introduction
3.1
Unit Objectives
3.2
Meaning of Internal Reconstruction
NOTES
3.2.1 Legal Requirements
i) Legal Requirements in connection with the “ Alternation of Share
Capital
ii) Legal Requirements for “Reduction of Share Capital”
iii) Legal Requirements for “Variation of Shareholders” Rights
3.3
Distinction between Internal Reconstruction and External Reconstruction
3.4
Reduction of Share Capital
3.4.1 Purpose of Capital Reduction
3.4.2 Procedure of Capital Reduction
3.4.3 Alteration of Share Capital
3.5
Accounting Entries
3.6
Treatment of Arrears of Dividend
3.7
Scheme of Capital Reduction
3.8
Illustrations
3.9
Summary
3.10 Key Terms
3.11 Questions and Exercises
3.12 Further Reading
3.0
Introduction
When a company has been suffering losses continuously for any reason,
its real capital is gradually lost and will not be represented by the available
angible assets. Internal Reconstruction refers to the reduction of capital to cancel
any paid-up capital which is so lost or unpresented by available assets. This is
generally resorted is by companies by writing off the past accumulated losses
and to make a Balance Sheet which shows the true and fair value of the assets
Advanced Accounting - I
117
Internal Reconstruction
and capital. The capital written off, is used to eliminate the losses accumulated
and to bring down the assets to their true values. Thus, Internal Reconstruction
means reduction of the capital so as to reflect the assets side at its true worth and
to wipe off the accumulated losses.
NOTES
3.1
Unit Objectives
After studying this unit you should able to :
•
Understand the concept of “Internal Reconstruction”.
•
Explain the Legal Requirements in connection with the “Alteration of Share
Capital”
•
Explain the Legal Requirements for “Reduction of Share Capital”.
•
Distinguish Between Internal and External Reconstruction.
•
Discuss the concept of “Reduction of Share Capital”.
•
Understand the meaning of Alteration of Share Capital.
•
Understand the accounting treatment for Internal Reconstruction.
•
Explain the treatment of Arrears of Dividend.
•
Explain the Scheme for Capital Reduction.
3.2
Meaning
In case of Internal Reconstruction the company’s existing financial
structure is reorganised without dissolving the existing company and without forming
a new company. Taking a wider meaning of the term ‘Internal Reconstruction’ it
includes :
i)
Alteration of Share Capital under Section 94 to 97.
ii)
Reduction of Share Capital under Section 100 to 105.
iii)
Variation of Shareholders’ Right under Section 106.
iv)
Scheme of Compromise/Arrangement under section 391 to 393 and 394 A.
3.2.1 Legal Requirements
(I)
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Advanced Accounting - I
Legal Requirements in connection with the “Alteration of Share
Capital”
The main legal requirements in connection with the alteration of Share
Capital are summarised as under :
a)
Authorised by Articles : A company may alter the Capital Clause of its
memorandum only if it is authorised by its Article of Association to do so.
b)
Manner : A Company may alter the Capital Clause in the following manner:
i)
by increasing its share capital by issue of new shares : e.g. from
1 crore to 5 crores.
ii)
by consolidating the existing shares into shares of larger amount than
its existing shares : [e.g. conversion of Shares of ‘ 10 each into shares
of ‘ 100 each.]
Internal Reconstruction
NOTES
iii) by sub-dividing the existing shares into shares of smaller amount than
its existing shares; [e.g. conversion of Shares of ‘ 100 each into
shares of ‘ 10 each.]
iv) by converting fully paid shares into stock or vice-versa.
v) by cancelling is unissued shares.
c)
Ordinary Resolution : An ordinary resolution must be passed at a general
meeting.
d)
Notice : A notice specifying alternation made must be given to the Registrar
within 30 days of alteration.
II)
Legal requirements for ‘Reduction of Share Capital’
The main legal requirements for reduction of Share Capital are summarised
as follows :
a)
Authorised by Articles : A company limited by shares or of company
limited by guarantee having a Share Capital may reduce its Share Capital
only if it is authorised by its articles of association to do so.
b)
Ways : A company may reduce its Share Capital in any of the following
ways :
i) by extinguishing / reducing the liability on any of its shares in respect of
uncalled amount on shares ;
ii) by cancelling the paid-up Share Capital which is not represented by
available assets;
iii) by paying off any paid-up Share Capital which is an excess of the
requirements of the Company.
c)
Effective Date : A resolution for reducing capital as confirmed by the
order of the Court shall take effect on its registration by the Registrar.
d)
Reduced Figures : Every Balance Sheet subsequent to the reduction
must show the reduced figures with the date of reduction in place of the
original cost [Part 1 of Schedule VI].
e)
Amount of Reduction : Each Balance Sheet for the first five years
Advanced Accounting - I
119
Internal Reconstruction
NOTES
subsequent to the date of the reduction must show also the amount of the
reduction made [Part 1 of Schedule VI].
f)
Special Resolution : A Special Resolution must be passed at a general
meeting.
g)
Court’s Order : A Court’s order conforming the reduction must be obtained.
h)
Filling with ROC : A certified copy of the Court’s order and minutes
approved by the Court must be filed with the Registrar.
i)
And Reduced : A Company must add to its name as last word, the words
‘And Reduced’ for a specified time if the court orders to do so.
j)
Reasons : A Company must publish reasons for the reduction for public
information if the court orders to do so.
k)
Notice : A Company must publish a notice of registration in such manner
as the Court may direct.
III) Legal requirements for ‘Variation of Shareholders’ rights are
summerised as under :
The main legal requirements for variation of shareholders’ rights are
summarised as under :
a)
Separate Meeting : If the rights attached to the shares of any particular
class of shareholders are to be carried, a separate meeting of that particular
class of shareholders must be held.
b)
Consent of atleast 3/4th : The consent of the holders of atleast threefourth of the shares of the class concerned (or a higher proportion if so
required by the articles / memorandum) must be obtained.
c)
Right to Apply to the Court : The holders of atleast 10% of the issued
shares of the class concerned whose rights are being varied, may apply to
the Court to have the variation cancelled within 21 days after the consent
is obtained or the resolution is passed.
d)
Court’s Confirmation : If such an appeal is made, the variation will not
have effect unless it is confirmed by the Court whose decision is final,
e)
Notice : Notice of the variation must be filed with the Registrar within 15
days of the Court’s order.
3.3
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Advanced Accounting - I
Distinction Between Internal Reconstruction
and External Reconstruction
The points of distinction between Internal Reconstruction and
External Reconstruction are as follows :
1)
Internal Reconstruction means that the scheme will be carried out by means
of reduction of capital, i.e. by getting the approval of the Court, while External
Reconstruction means that the scheme will be carried out by liquidating the
existing company and incorporating immediately another company to take
over the business of the outgoing company.
2)
In Internal Reconstruction, debentureholders, creditors and bank overdraft
may continue whereas they may not if there is an external reconstruction
where these parties will have to be settled.
3)
In Internal Reconstruction, the company will be able to set off the past
losses against future profits for income tax purposes, considerably reducing
the tax liability. In the case of External Reconstruction, losses cannot be
carried forward for income tax purposes since the business technically
comes to an end with liquidation.
4)
Internal Reconstruction is a slow and tedious process since the approval of
all creditors, shareholders and confirmation by the Court are required before
the scheme is carried out. But External Reconstruction can be brought
about by the decision of the ordinary shareholders and hence is the only
way for a speedy reconstruction.
3.4
Internal Reconstruction
NOTES
Reduction of Share Capital
Reduction of Share Capital by a company would be possible if it is authorised
by its Articles and by a special resolution and conformation of the Court (Section
100 - 105). The Court confirms reduction after consulting the creditors. The Court
may also order the company to add the words ‘and reduced’ to the name of the
company for such period as it deems fit.
Reduction of Share Capital can be depicted in Figure 3.1 as follows :
Reduced to
Balance Sheet of
Bad Luck Ltd.
Balance Sheet of
Bad Luck Ltd.
Liabilities
Assets
Liabilities
Assets
‘
‘
‘
‘
80,00,000
80,00,000
45,00,000
45,00,000
Fig. 3.1 : Reduction of Share Capital
Advanced Accounting - I
121
Internal Reconstruction
NOTES
Capital Reduction is the repayment or writing down of a company’s
different classes of capital, as a result of large accumulated losses or an excess
of funds without profitable use.
Through Capital Reduction may be effected when a company accumulates
huge surplus funds far in excess of its requirements, it is more usually followed,
when a company passes through a period of financial difficulties, accumulates
losses or has its assets over-valued.
3.4.1 Purpose of Capital Reduction
When new capital has to be introduced to revive a company, the success of
a new issue would however, almost certainly be jeopardised by the existence of
accumulated losses. Therefore, it is prudent and usual to write off these accumulated
losses by introducing a reconstruction scheme into effect.
The purpose of Capital Reduction is the resumption of the payment of normal
dividends out of the expected future profits without the necessity of using these
profits to write off the debit balance of the Profit and Loss Account.
3.4.2 Procedure of Capital Reduction
In order to effect Share Capital Reduction, the following formalities must
be completed in accordance with the Companies Act, 1956 (Sections 100 to 104).
These are briefly discussed below :
(A)
Conditions and manner of reduction :
According to Section 100 of the Companies Act, a company limited by
shares can reduce its Share Capital subject to the following :
(a)
There must be an express provision in the Article of the company, permitting
such action.
(b)
Special resolution will be required for reduction of Share Capital.
The Share Capital can be reduced in one or more of the following ways :
i) Extinguish or reduce the liability on any or its shares in respect of Share
Capital not paid-up.
ii) Cancel any paid-up Share Capital which is lost or is unrepresented by
available assets.
iii) Pay off any paid-up Share Capital which is an excess of the wants of
the company.
The necessary alternation is also required to be made in the Memorandum
of the company.
(B)
122
Advanced Accounting - I
Petition to the Court for confirming the reduction :
As per Section 101 of the Companies Act, a company can apply by petition
to the Court for an order confirming the reduction.
Internal Reconstruction
Every creditor of the company whose debt or claim is not discharged or has
not been determined, is entitled to object to the reduction.
(C)
Issue of order confirming the reduction from the Court :
As per Section 102 of the Companies Act, if the Court is satisfied that such
creditor has been satisfied either by obtaining his consent or his debt or
claim has been discharged or has been determined or secured, may make
an order conforming the reduction on such terms and conditions as it thinks
fit.
NOTES
In such a case the court may direct the company to use the words “and
reduced” for a specified period of time and such words would be deemed
to be part of the name of the company.
(D)
Certificate of conclusive evidence compliance from the Register :
As per Section 103 of the Companies Act, the Registrar :
a)
On production to him of an order of the court confirming the reduction of
the Share Capital of the company, and
b)
On the delivery to him of a certified copy of the order of a minute approved
by the court showing with respect to the Share Capital of the company as
altered by the order.
i) the amount of the Share Capital,
ii) the number of shares into which is to be divided,
iii) the amount of each share, and
iv) the amount, if any, at date of registration deemed to be paid up on each
share; shall register the order and minute.
c)
On registration of the order and minute and not before, the resolution for
reducing Share Capital as confirmed by the order shall take effect.
d)
Notice of registration shall be published in such manner as the Court may
direct.
e)
The certificate issued by the registrar shall be conclusive evidence that all
the requirements of the Act with respect to reduction of Share Capital have
been duly complied with and the Share Capital of the company stands
reduced as stated in the minute.
3.4.3 Alteration of Share Capital
Internal Reconstruction involves Alteration of Share Capital, which can
take the following forms :
a)
Increase in the Share Capital.
Advanced Accounting - I
123
Internal Reconstruction
NOTES
b)
Consolidation of Shares.
c)
Sub-division of Shares.
d)
Conversion of Shares into Stock.
e)
Surrender of Shares.
f)
Cancellation of Shares.
Alteration of Share Capital in Internal Reconstruction is shown in Figure
3.2 as follows :
Increase
Consolidation
Sub-
in the
of
division
Share
Shares
of
Capital
Shares
(a)
(b)
(c)
Conversion
Surrender
Cancellation
of
of
of
Shares into
Shares
Shares
(e)
(f)
Stock
(d)
Fig. 3.2 : Alteration of Share Capital
(a)
124
Advanced Accounting - I
Increase in the Share Capital : Increase in the Share Capital means
new Shares are issued to the existing members or new members who
subscribe for the shares. This increases the share capital of the company
as more funds are infused into the business. With additional funds coming
in, they can be used for wiping of the losses and correcting the overvaluations
of the assets. However, this must be within the authorised capital limits of
the company. In the absence of authorised limits, the necessary legal
compliance is required to be made to raise the authorised capital limits of
the company. It is not easy for a company having huge losses and over
valuations in the Balance Sheet to raise additional capital or raise the limits
of authorised capital.
(b)
Consolidation of Shares : Consolidation of shares means converting shares
of smaller denomination into shares of larger denominations. For example,
100 shares of ‘ 10 each are converted into one share of ‘ 100 each.
Although the amount involved remains the same, the number of shares
involved reduces.
(c)
Sub-division of Shares : Sub-division of shares means covering shares of
larger denomination into shares of smaller denomination. This is exactly the
opposite of consolidation. For example, one share of ‘ 100 each is subdividend into shares of smaller denomination of 10 shares of ‘ 10 each.
Although the amount involved remains the same, the number of shares
involved increases. This facilitates the surrender of shares by the
shareholders and enables reduction of capital.
(d)
Conversion of Shares into Stock : Conversion of shares into stock means
that the shares are converted into bigger amount of holdings which are
called stock. Stock represents collective amount of shares. The stock can
be in fractions. Conversion of shares into stock requires necessary approval
from the Controller of capital issues.
(e)
Surrender of Shares : Shareholders are asked to surrender some of the
shares so as reduce the share capital. This facilitates reduction process.
The shares, which are surrendered, are issued to clear the outstanding
liabilities of debentureholders, creditors etc. The shares, which are
surrendered but not issued to any party, are cancelled and the amount so
realised is used to write off losses, intangible assets, excessive value of
assets etc.
(f)
Cancellation of Shares : Cancellation of shares effectively means
reduction of capital. When shares are surrendered and not re-issued to any
party in discharge of any obligation; such shares remaining unused are
cancelled. As explained above, the amount of capital so reduced is used for
writing off losses, intangible assets, excessive value of assets etc.
3.5
Internal Reconstruction
NOTES
Accounting Entries
1.
For changing the face value of shares with reduction in the amount
of share Capital :
Share Capital A/c (Old face value)
....Dr.
To Share Capital A/c (New face value)
To Capital Reduction A/c (With Difference)
2.
For reduction in Share Capital without change in the face value of
shares :
Share Capital A/c
....Dr.
Advanced Accounting - I
125
To Capital Reduction A/c (With the amount of reduction)
Internal Reconstruction
3.
For reduction in the amount of Debentureholders i.e. sacrifice made
by them :
NOTES
Debentureholders A/c
...Dr.
(with the amount
Outstanding Interest on Debentures A/c
...Dr.
reduced / or
sacrificed)
To Capital Reduction A/c
4.
For reduction in the amount of Creditors i.e. sacrifice made by
them :
Creditors A/c
To Capital Reduction A/c
5.
....Dr.
(With the amount
reduced /or
sacrificed)
....Dr.
(with the amount
of appreciation)
For appreciation in the value of assets :
Assets A/c
To Capital Reduction A/c
6.
For writing off Fictitious Assets, Debit balance of profit and Loss
Account, excessive value of Assets etc :
Capital Reduction A/c
To Profit and Loss A/c
To Goodwill A/c
To Preliminary Expenses A/c
To Underwriting Commission A/c
To Discount on Issue of Shares / Debentures A/c
To Assets A/c (Excess amount reduced)
To Capital Reserve A/c (balancing figure if any)
7.
For Consolidation of Shares :
Share Capital A/c (Existing Face Value i.e. ‘ 10)
...Dr.
To Share Capital A/c (Revised Face Value ‘ 100)
8.
For Sub-division os Shares :
Shares Capital A/c (Existing Face Value i.e. ‘ 10)
...Dr.
To Share Capital A/c (Revised Face Value ‘ 10)
9.
For Surrender of Shares :
a) Surrender of Shares -
126
Advanced Accounting - I
Share Capital A/c
......Dr.
To Shares Surrendered A/c
Internal Reconstruction
b) Surrendered Shares Converted into Preference Shares Shares Surrendered A/c
.....Dr.
To Preference Share Capital A/c
c) Surrendered Shares reissued to Creditors / Debentureholders Shares Surrendered A/c
NOTES
.....Dr.
To Share Capital A/c
d) Shares Surrendered are cancelled Shares Surrendered A/c
....Dr.
To Capital Reduction A/c
10.
For payment of Recorded Liability :
Liability A/c
....Dr.
To Bank A/c
11.
For payment of Unrecorded Liability :
i) Unrecorded Liability A/c
....Dr.
To Bank A/c
ii) Capital Reduction A/c
....Dr.
To Unrecorded Liability A/c
12.
For Selling off Recorded Assets :
Bank A/c
.....Dr.
To Assets A/c
13.
For Selling of Unrecorded Assets :
i) Bank A/c
.....Dr.
To Unrecorded Assets A/c
ii) Unrecorded Assets A/c
.....Dr.
To Capital Reduction A/c
14.
For payment of Contingent Liability :
i) Contingent Liability A/c
.....Dr.
To Bank A/c
ii) Capital Reduction A/c
.....Dr.
To Contingent Liability A/c
(N.B. : Profit or Loss on above transactions should be transferred to
Advanced Accounting - I
127
Internal Reconstruction
Capital Reduction Account)
15.
For payment of Reconstruction Expenses :
i) Reconstruction Expenses A/c
.....Dr.
To Bank Account A/c
NOTES
ii) Capital Reduction A/c
.....Dr.
To Reconstruction Expenses A/c
16.
For issue of New Shares for cash :
Bank A/c
.....Dr.
To Share Capital A/c
17.
For exchange of New Debentures for Old Debentures :
Debentures (Old) A/c
.....Dr.
To Debentures (New) A/c
18.
Provision for Taxation A/c, Capital Reserve A/c, Share Premium
A/c utilised for Capital Reduction :
Provision for Taxation A/c
.....Dr.
Capital Reserve A/c
.....Dr.
Share Premium A/c
.....Dr.
To Capital Reduction A/c
19.
For Assets given to Loan Creditors :
Loan Creditors A/c
.....Dr.
To Assets A/c
20.
For Changing the rate of dividend of Preference Shares :
(Old Rate) Preference Share Capital A/c
.....Dr.
To (New Rate) Preference Share Capital A/c
21.
For arrears of Preference Share Dividend cancelled :
No Entry.
Accounting Entries (Alternative Method)
A)
When the liability of the shareholders in respect of any unpaid amount
on the shares held by them is reduced :
This form of capital reduction benefits the shareholders in as much as they
will not be called upon to pay the uncalled amount. In this case, the paid - up
shares capital of company will remain the same.
128
Advanced Accounting - I
a) Share Capital A/c (Partly paid up)
.....Dr.
Internal Reconstruction
To Share Capital (Fully paid-up) A/c
B)
When the excess paid - up capital is paid - off :
Sometimes, it may not be possible on the part of the company to employ
profitably all the capital received. In such a case, it may decide to return
excess capital to the shareholders. It should be noted that the paid up capital
of the company will be reduced by the amount paid-off.
a) Share Capital A/c (Amount paid-off)
NOTES
....Dr.
To Shareholders A/c
b) Shareholders A/c
.....Dr.
To Bank A/c
C)
When the paid-up capital which is lost or not represented by available
assets is cancelled :
1)
For replacement of share of one denomination by the share of another
denomination :
Share Capital (Old denomination) A/c
2)
...Dr. (paid-up value of
old shares)
To Share Capital (New denomination) A/c
(paid-up value of
new shares)
To Capital Reduction / Reconstruction A/c
(Difference)
For reducing called-up Share Capital (without changing
denomination) :
Share Capital A/c
....Dr. (Amount reduced)
To Capital Reduction / Reconstruction A/c
3)
For Surplus on Revaluation of Fixed Assets :
Individual Fixed Assets A/c
To Capital Reduction / Reconstruction A/c
4)
...Dr. (Amount of
appreciation)
For waiver of preference dividend arrears by an issue of shares /
debentures:
Capital Reduction / Reconstruction A/c
...Dr.
To Share Capital A/c
To Debentures A/c
5)
For issue of shares/debenture against accrued interest already
provided in the Balance Sheet :
Accrued Interest A/c
....Dr.
To Share Capital A/c
To Debentures A/c
Advanced Accounting - I
129
To Capital Reduction / Reconstruction A/c
Internal Reconstruction
6)
For transfer of favourable balance of Reserve Accounts :
Individual Reserve A/c
.....Dr.
To Capital Reduction / Reconstruction A/c
NOTES
7)
For Expenses incurred on Reconstruction :
Capital Reduction / Reconstruction A/c
.....Dr.
To Bank A/c
8)
For writing-off the fictitious assets and other assets :
Capital Reduction / Reconstruction A/c
....Dr.
To Profit and Loss A/c
To Goodwill A/c
To Plant and Machinery A/c
To Patents A/c
To Stock A/c
9)
For capitalisation of surplus on Capital Reduction Account :
Capital Reduction / Reconstruction A/c
....Dr.
To Capital Reserve A/c
3.6
Treatment of Arrears of Dividend
The Capital Reduction Account is a temporary account opened for carrying
out external reconstruction and will be closed when the scheme is carried out. If
this account shows any balance after the scheme, it will be transferred to Capital
Reserve Account.
The Equity Shareholders bear the losses and will be agreeing to a reduction
of their capital for an internal reconstruction, since the alternative would be to
force the company into liquidation and in such an event their loss would be much
heavier because the assets may be realised on a forced sale. Further, after Internal
Reconstruction, there is every possibility of a company making sufficient profits
and in such a case it is only the ordinary shareholders who are going to be benefitted.
Hence, they generally prefer reduction of their capital to a liquidation.
If the losses accumulated are so heavy that the sacrifice made by the
ordinary shareholders alone would not be sufficient to wipe out the entire losses
from the books, then the Preference Shareholders and Debentureholders and/or
Creditors would be involved in the scheme of reconstruction and their claims
against the company would be reduced.
130
Advanced Accounting - I
If the loss is to be borne by Equity Shareholders only, there is no need for
compensating them since they will automatically be compensated by better future
earnings. But, where Preference Shareholders, Debentureholders and Creditors
are asked to bear a portion of the loss, it is only reasonable that, they are
compensated for the sacrifice which they are willing to make for the benefit of
the company. Such a compensation may be either in the form of increased
percentage of dividend, or interest, or allowing them to convert their claims into
Equity Capital or Preference Capital or by paying a part of their claim in cash.
Internal Reconstruction
NOTES
Arrears of Preference Dividend are often cancelled or a portion of the
dividend arrears may be paid either in cash or by issuing deposit certificates. In
short, the nature and the extent of compensation to be given should be such that it
does not alter existing pattern of control and is within the future capacity of the
company e.g.
If 2,000, 6% preference shares of Rs. 100 each are converted into 2,000,
7% preference shares of Rs. 60 each, the entry will be :
6% Preference Share Capital A/c
.....Dr. 2,00,000
To 7% Preference Share Capital A/c
1,20,000
To Capital Reduction A/c
80,000
In this case, the 6% Preference Shares are converted into 7% Preference
Shares and shares of Rs. 100 each are reduced to shares of ‘ 60 each. Thus,
there is a conversion and reduction.
It the Borrowed Capital is reduced, the entry will be :
Debentures / Creditors A/c
.....Dr.
To Capital Reduction A/c
If the scheme of reconstruction involves the sacrifice of debenture holders
and other creditors also, it may be more appopriately known as a Reorganisation
Scheme and the amount may be credited to a Reorganisation Account instead of
to a Capital Reduction Account.
3.7
Scheme for Capital Reduction
For business failure, when large amount of losses accumulate and the book
value of the assets show much lower than their fair market values, a Scheme of
Capital Reduction is essential, if the recovery of profitability prospects are
favourable. In fact, a scheme of capital reduction involves carrying out an internal
reconstruction of the company.
When a reduction of capital is proposed a scheme showing the amount to
be reduced from the company’s capital and the manner in which the reduction is
to be applied to the various assets is prepared.
Sometime, may be required to suggest a suitable scheme of reconstruction
i.e., a scheme acceptable to all the parties concerned, under such circumstances,
Advanced Accounting - I
131
Internal Reconstruction
the following factors should be taken into consideration before suggesting a scheme
of reconstruction :
1)
Reconstruction becomes necessary only when the company is unprofitable
commercially and / or financially unsound. But at the same, there should be
every chance of the company turning the corner and proving successful
provided a reconstruction is made. Supposing there is only very little hope
for the business to run successfully and earn adequate profits even after
the reconstruction, the only alternative will be liquidation and not
reconstruction. Hence, reconstruction is needed only when the present is
bad and it is fruitful when the future is good.
2)
The scheme of reconstruction suggested should be acceptable to all the
parties concerned, i.e. shareholders, debentureholders and creditors. The
ordinary shareholders have to bear the greatest burden as they are the real
owners of the company. The other parties will bear the loss to a smaller
extent, when compared to the loss they may have to suffer if the company
is liquidated instead of being reconstructed.
3)
The scheme should be suggested in such a way that sufficient working
capital is left in the business soon after the reconstruction so that the financial
affairs of the company can be run smoothly. Shareholders and creditors
should be willing for future contribution of capital since outsiders may not
take the risk of investing their capital in such a business.
4)
The existing control of shareholders should be preserved, otherwise they
may not decide in favour of reconstruction.
NOTES
Figure 3.3 indicates steps to be followed in formulating a Scheme of Capital
Reduction as follows :
3
or
al
ern
Int
of nal ion
ion ter ct
cis Ex nstru
De
co
Re
f
to g
en in
em ork
ng W l
r a te
Ar qua apita
e C
Ad
2
he
gt
tin ties
sa
en Par
mp us
Co rio
Va
the
off
ing ses
rit
W Los
the
ng
ati oss
tim L
Es otal
T
1
4
5
Fig. 3.3 : Step to be followed in formulating a scheme of Capital
Reduction
132
Advanced Accounting - I
1)
Estimating the Total Loss : The main purpose of reconstruction is to
eliminate the accumulated losses from the books and to bring down the assets to
their true values and, therefore, the total accumulated losses including the loss on
revaluation of the assets should be estimated. This is done by adding up the debit
in the profit and loss account, fictitious assets like discount on shares or debentures,
preliminary expenses etc. and intangible asset like goodwill which represents only
a loss in the case of a company running at a loss. To this is added any over
valuation of assets, under provision of liabilities and the contingent liabilities to be
provided for. The amount of loss to be written off thus determined should be
reduced by any profit on revaluation of assets or excess provision of liabilities.
The resulting figure is the total accumulated loss to be eliminated. The other method
to determine the loss is to add up the present values of the assets and deduct
therefrom the liabilities to find out the true value of the net assets. This, when
compared with the paid-up capital and reserves, if any, will give an estimate of the
capital that has been lost in the business.
Internal Reconstruction
NOTES
2)
Writing off the Losses : After determining the total amount to be writtenoff, the next step is to spread the burden of the losses among debentureholders,
creditors and various classes of shareholders. The main burden of the losses
should be borne primarily by the equity shareholders because ultimately they are
responsible for all residuary losses.
A fair equitable distribution of loss is the essence of successful scheme.
The equity shareholders have to bear the maximum amount of loss but they cannot
be reduced to nil because they will not agree to such a scheme.
If the value of net assets is more than the amount of preference shares
capital, the whole of the loss is to borne by the equity shareholders only. If it is less
than the preference share capital, Preferences Shareholders will also have to
bear some portion of the loss although the sacrifice made by them will be less than
that of the equity shareholders. If the total assets available are less than the liabilities
even outside liability holders like unsecured creditors and even debentureholders
will have to make a sacrifice of an portion of their claim for the reconstruction.
Generally, the loss to be borne by secured creditors like mortgage debentureholders
will be nil or the minimum.
3)
Compensating the various parties : If the loss is to be borne by ordinary
shareholders only, their is no need for compensating them. But, where other parties
are asked to bear a portion of the loss, then the following points are important.
i)
Preference Shareholders will agree to forego arrears of preference
dividend with the expectation that the capital reduction scheme would lead
to a resumption of their dividends in subsequent years. But so far as the
reduction in their capital is concerned, they may not agree to sacrifice any
amount if they are sure that they will be paid in full in forced liquidation.
When there is a little chance of getting back the entire capital in case of
forced liquidation, they may agree to sacrifice some amount of capital.
However, they may insist to increase the rate of dividend so that they receive
the same amount of dividend as they did previously.
ii)
If secured creditors are fully secured, then they will not agree to sacrifice
Advanced Accounting - I
133
Internal Reconstruction
anything. The amount not covered by security will be treated as ordinary
creditors. Alongwith the other ordinary creditors they may agree to sacrifice
a responsible amount of their claims.
iii)
Debentureholders may agree to reduce their claim if they find that the
capital reduction scheme is more favourable than the return they may recieve
on the enforced liquidation of the company. However, the debentureholders
may insist on an increase in the rate of their interest so that they receive the
same amount of interest as received previously.
iv)
Unsecured creditors will not agree to sacrifice anything if they are sure
that they will get back their entire amount in case of forced liquidation.
They may agree to sacrifice some amount if the debentureholders have
agreed to a sacrifice, since in a forced liquidation they would get little or
nothing.
4)
Arrangement of adequate Working Capital :
NOTES
For successful implementation of the scheme of capital reduction,
arrangement of adequate working capital is a must. Any or some of the
following sources can provide working capital :
i)
Issuing more shares in the market.
ii)
Converting fully paid shares into partly paid shares and collecting the balance
from the existing shareholders.
iii)
Requesting debentureholders to extend their loan.
iv)
Arranging any other short-term loan.
v)
Issue of rights shares.
vi)
By reducing the fully paid-up equity shares into partly paid-up and then
asking the equity shareholders to make these shares fully paid-up by paying
the balance money.
vii)
Issue of new debentures to existing debentureholders by offering higher
rate of interest.
viii)
Issue of commercial paper.
5)
Decision of Internal or External Reconstruction :
Finally, you have to decide whether you have to go for internal or external
reconstruction taking into consideration the pros and cons of the two methods, as
already being discussed.
The concept of Internal Reconstruction can be understood well with the
help of following illustrations.
134
Advanced Accounting - I
3.8
Internal Reconstruction
Illustrations
ILLUSTRATION 1
The following was the Balance Sheet of Bad Luck Ltd., Bandra 31st March,
2014.
NOTES
Balance Sheet As on 31st March, 2014
‘
Liabilities
Share Capital :
‘
Assets
Freehold Property
• 15,000 7% Preference
15,00,000 Plant and Machinery
8,00,000
Goodwill
3,00,000
Share of ‘ 100 each
• 2,75,000 Equity Shares
23,75,000
27,50,000 Stock
of ‘ 10 each
3,50,000
Debtors
2,25,000
Share Premium
4,00,000 Preliminary Expenses
2,50,000
Sundry Creditors
4,00,000 Profit and Loss
7,50,000
50,50,000
50,50,000
The following scheme of reconstruction was approved and duly sectioned :
a)
Preference Shares to be reduced to ‘ 80 per share.
b)
Equity Shares to be reduced to ‘ 5 per share.
c)
Write off all intangible assets and share premium account.
d)
Freehold Property to be written down to ‘ 18,50,000.
Give necessary journal entries to record the above transactions in the books
of Bad Luck Ltd., Bandra Also Prepare a revised Balance Sheet after the
scheme of reconstruction as on 31st March, 2014.
SOLUTION
In the Books of Bad Luck Ltd., Bandra
Date
Particulars
31/3/14
1.
L. Debit
F.
7% Preference Share Capital A/c
To Capital Reduction A/c
‘
Credit
‘
Dr. - 3,00,000
-
3,00,000
(Being the entry to record reduction in
the paid-up value of 15,000, 7% Preference
Shares from ‘ 100 to ‘ 80 per share)
2.
Equity Shares Capital A/c
To Capital Reduction A/c
(Being the entry to record reduction in
Dr. - 13,75,000
-
13,75,000
Advanced Accounting - I
135
Internal Reconstruction
the paid-up value of 2,75,000 Equity Shares
from ‘ 10 to ‘ 5 each)
3.
Share Premium A/c
Dr. - 4,00,000
To Capital Reduction A/c
NOTES
-
4,00,000
(Being the entry to write back Share
Premium Account by crediting Capital
Reduction Account)
4.
Capital Reduction A/c
Dr. - 20,75,000
To Profit and Loss A/c
-
7,50,000
To Preliminary Expenses A/c
-
2,50,000
To Goodwill A/c
-
3,00,000
To Freehold Property A/c
-
5,25,000
To Capital Reserve A/c
-
2,50,000
(Being the entry to write off Profit and
Loss A/c Preliminary Expenses A/c,
Goodwill A/c, Freehold Property A/c, to
the extent of ‘ 5,25,000 and the
balance of Capital Reduction amount
transferred to Capital Reserve Account)
Dr.
Capital Reduction Account
Losses to be Written Off
‘
Availability of Funds
To Profit and Loss
7,50,000 By 7% Preference
To Preliminary Expenses
2,50,000 Share Capital
To Goodwill
3,00,000 (15,000 Shares x ‘ 20)
To Freehold Property
5,25,000 By Equity Share Capital
( ‘ 23,75,000 - ‘ 18,50,000)
‘
3,00,000
13,75,000
(2,75,000 shares x ‘ 5)
By Share Premium
To Capital Reserve
Cr.
4,00,000
2,50,000
(Balancing Figure)
20,75,000
136
Advanced Accounting - I
20,75,000
Revised Balance Sheet of Bad Luck Ltd., Bandra as on 31st March2014
Internal Reconstruction
(After the Scheme of Reconstruction)
‘
Liabilities
Assets
Share Capital :
Freehold Property
• 15,000 7% Preference
12,00,000
Share of ‘ 80 each
• 2,75,000 Equity Shares
13,75,000
‘
18,50,000
Plant and Machinery
8,00,000
Stock
3,50,000
Debtors
2,25,000
NOTES
of ‘ 5 each
Capital Reserve
2,50,000
Sundry Creditors
4,00,000
32,25,000
32,25,000
ILLUSTRATION 2
Unlucky Ltd., Ujjain, presents you with their financial position as follows :
Balance Sheet as on 31st March, 2014
‘
Liabilities
Assets
‘
Share Capital :
A) Issued and Subscribed
Goodwill
Buildings
60,000
1,50,000
Capital :
Machinery
3,00,000
• 4,000 Equity Shares of ‘ 100
4,00,000 Patents
each, fully paid
• 3,000, 7% Preference Shares of
Stock
3,00,000 Debtors
‘ 100 each, fully paid
Profit Prior to Incorporation
Cash
10,000 Preliminary Expenses
6% Debentures
3,00,000 Profit and Loss
Sundry Creditors
2,00,000
12,10,000
30,000
2,20,000
1,50,000
5,000
25,000
2,70,000
12,10,000
The following scheme of reconstruction was duly approved by the court.
a)
7% Preference Shares to be converted into 9% Preference Shares, the
amount being reduced by 30%.
b)
Equity Shares to be reduced to fully paid shares of ‘ 50 each.
c)
Buildings be appreciated by 20%.
d)
Debentures be reduced by 20%.
e)
All intangible assets and fictitious amounts including patents be written off.
Utilise, profits prior to incorporation if necessary.
Pass journal entries to record the above scheme of reconstruction in the
books of Unlucky Ltd., Ujjain and a revised Balance Sheet as on 31st March, 2014
Advanced Accounting - I
137
Internal Reconstruction
SOLUTION
In the Books of Unlucky Ltd., Ujjain
Journal
NOTES
Date
Particulars
L. Debit
31/3/14
1.
F.
7% Preference Share Capital A/c
‘
Credit
‘
Dr. - 3,00,000
To 9% Preference Capital A/c
-
2,10,000
To Capital Reduction A/c
-
90,000
(Being the entry to record the conversion of
7% Preference Shares and also reducing the
value by 30% which is transferred to Capital
Reduction Account)
2.
Equity Shares Capital (‘ 100) A/c
Dr. - 4,00,000
To Equity Share Capital (‘ 50) A/c
-
2,00,000
To Capital Reduction A/c
-
2,00,000
(Being the entry to record the conversion of
equity shares of ‘ 100 to ‘ 50 each the value
thus reduced is credited to Capital Reduction
Account)
3.
Buildings A/c
Dr. -
To Capital Reduction A/c
30,000
-
30,000
(Being the entry to record appreciation of 20%
in value of Buildings and corresponding amount
credited to capital Reduction Account)
4.
6% Debentures A/c
Dr. -
To Capital Reduction A/c
(Being the entry to record reduction in the value
of debentures by 20% and corresponding amount
credited to Capital Reduction Account)
138
Advanced Accounting - I
-
60,000
60,000
5.
Profits Prior to Incorporation A/c
Dr. -
To Capital Reduction A/c
Internal Reconstruction
5,000
-
5,000
(Being Profits Prior to Incorporation utilised
for reconstruction)
NOTES
6.
Capital Reduction A/c
Dr. - 3,85,000
To Profit and Loss A/c
-
2,70,000
To Preliminary Expenses A/c
-
25,000
To Goodwill A/c
-
60,000
To Patents A/c
-
30,000
(Being the entry to write off profit and Loss
Account, Preliminary Expenses Account,
Goodwill Account, Patents Account by transferring
the amount from Capital Reduction Account)
Capital Reduction Account
Losses to be Written Off
To Profit and Loss
‘
Availability of Funds
2,70,000 By 7% Preference Share Capital
To Preliminary Expenses
25,000 (3,000 shares x ‘ 30)
To Goodwill
60,000 By Equity Share Capital
To Patents
30,000 (4,000 shares x ‘ 50)
By Buildings
‘
90,000
2,00,000
30,000
(20% of ‘ 1,50,000)
By 6% Debentures
60,000
(20% of ‘ 3,00,000)
By Profits Prior to Incorporation*
5,000
(Balancing Figure)
3,85,000
3,85,000
Advanced Accounting - I
139
Internal Reconstruction
Revised Balance Sheet of Unlucky Ltd., Ujjain as on 31st March, 2014
(After the Scheme of Reconstruction)
‘
Liabilities
NOTES
‘
Assets
Share Capital :
Buildings
1,80,000
A) Issued and Subscribed
Machinery
3,00,000
Capital :
Stock
2,20,000
• 4,000 Equity Shares of ‘ 50 each
2,00,000 Debtors
• 3,000, 9% Preference Share of
‘ 70 each
1,50,000
Cash
5,000
2,10,000
Profits Prior to Incorporation
5,000
6% Debentures
2,40,000
Sundry Creditors
2,00,000
8,55,000
8,55,000
ILLUSTRATION 3
The following is the Balance Sheet of Bad Kismat Ltd., Kanpur as on 31st
March, 2014.
Balance Sheet as on 31st March, 2014
Liabilities
‘
‘
Assets
Share Capital :
Goodwill
• 5%, 2,000 Cumulative Preference
Freehold Property
2,00,000
Plant and Machinery
3,00,000
Shares of ‘ 100 each
2,00,000
• 4,000 Equity Shares of ‘ 100
Stock in Trade
50,000
40,000
each
4,00,000
Debtors
6% Mortgage Debentures
1,00,000
Profit and Loss
Bank Overdraft
Creditors
50,000
15,000
2,40,000
Cash
5,000
1,00,000
8,50,000
8,50,000
The company got the following scheme of capital reduction approved by
the Court.
140
Advanced Accounting - I
a)
The preference Shares to be reduced to ‘ 75 per share fully paid-up and
Equity Shares to ‘ 40 fully paid-up.
b)
The Debentureholders took over the Stock-in-trade and the Book Debts in
full satisfaction of the amount due to them.
c)
The Goodwill Account be eliminated.
d)
The Freehold Property to be increased by 30%.
e)
The value of Plant and Machinery to be depreciated by 33 1/3%.
Internal Reconstruction
The Expenses of Reconstruction amounted to ‘ 3,000.
f)
Give the journal entries to record the above transactions and prepare the
revised Balance Sheet as on 31st March, 2014
SOLUTION
In the books of Bad Kismat Ltd., Kanpur
NOTES
Journal
Date
Particulars
L. Debit Credit
31/3/14
1.
F.
5% Preference Share Capital ( ‘ 100) A/c
‘
‘
Dr. - 2,00,000
To Capital Reduction A/c
-
50,000
To 5% Preference Share Capital (‘ 75) A/c
-
1,50,000
(Being the entry to record the reduction
in the paid-up value of 2,000 Preference
Shares from ‘ 100 to ‘ 75 per
share and their subsequent conversion
into 2,000 fully paid-up Preference
Shares of ‘ 75 each)
2.
Equity Share Capital (‘ 100) A/c
Dr. - 4,00,000
To Capital Reduction A/c
-
2,40,000
To Equity Share Capital ( ‘ 40) A/c
-
1,60,000
(Being the entry to record reduction in the
paid-up value of 4,000 Equity Shares from
‘ 100 to ‘ 40 per share and their
subsequent conversion into 4,000 fully
paid-up Equity Shares of ‘ 40 each)
3.
6% Mortgage Debentures A/c
To Stock A/c
Dr. - 1,00,000
-
To Debtors A/c
To Capital Reduction A/c
50,000
40,000
-
10,000
(Being the entry to record the redemption
Advanced Accounting - I
141
Internal Reconstruction
of Debentures by giving them Stock and
Debtors in full settlement of their dues)
4.
Freehold Property A/c
To Capital Reduction A/c
NOTES
Dr. -
60,000
-
60,000
(Being entry to record the appreciation
in value of Freehold Property by 30%
and the resulting profit credited to Capital
Reduction Account)
5.
Reconstruction Expenses A/c
To Cash A/c
Dr. -
3,000
-
3,000
(Being the entry to record the payment
of reconstruction expenses in cash)
6.
Capital Reduction A/c
To Profit and Loss A/c
-
2,40,000
To Goodwill A/c
-
15,000
To Plant and Machinery A/c
-
1,00,000
To Reconstruction Expenses A/c
-
3,000
To Capital Reserve A/c
-
2,000
(Being the entry for utilising the amount
of capital reduction in writing off Profit
and Loss Account, Goodwill Account,
Plant and Machinery Account,
Reconstruction Expenses Account and the
balance transferred to Capital Reserve
Account)
142
Advanced Accounting - I
Dr. - 3,60,000
Dr.
Capital Reduction Account
‘
Losses to be Written Off
To Profit and Loss
Availability of Funds
2,40,000
To Goodwill
15,000
To Plant and Machinery
1,00,000
Cr.
Internal Reconstruction
‘
By 5% Preference Share
Capital
50,000
(2,000 Shares x ‘ 25)
(33 1/3% of ‘ 3,00,000)
By Equity Shares Capital
To Reconstruction
(4,000 Shares x ‘ 60)
2,40,000
Expenses
3,000
By 6% Mortgage Debentures
10,000
To Capital Reserve*
2,000
By Freehold Property
60,000
NOTES
(Balancing Figure)
3,60,000
3,60,000
Revised Balance Sheet of Bad Kismat Ltd., as on 31st March, 2014.
(After the scheme of Reconstruction)
Liabilities
‘
Assets
‘
Share Capital :
Freehold Property
2,60,000
• 5%, 2,000 Cumulative Preference
Plant and Machinery
2,00,000
Shares of ‘ 75 each
1,50,000 Cash
• 4,000 Equity Shares of ‘ 40 each
1,60,000
Capital Reserve
2,000
Bank Overdraft
50,000
Creditors
2,000
1,00,000
4,62,000
4,62,000
ILLUSTRATION 4
A special resolution was passed by Unfortunate Ltd., Uttampur, and was
confirmed by the court to the following effects :
a)
500, 6% Preference Shares of ‘ 200 each, ‘ 160 called up to be reduced
to 500. 6% Preference Shares of ‘ 200 each, ‘ 80 per share called up.
b)
7,500 Equity Shares of ‘ 40 each fully paid-up to be reduced to ‘ 20 each
fully paid up.
c)
200, 7% Debentures of ‘ 300 each to be reduced to 200, 8% Debentures
of ‘ 270 each.
d)
The Debentureholders agree to forego the accumulated debenture interest
due to them.
e)
Sundry Creditors agreed to forego 20% of their claim in exchange of Equity
Shares for 80% of their dues.
f)
The sum available will be applied to write off Preliminary Expenses and
Profit and Loss Account balance.
Advanced Accounting - I
143
Internal Reconstruction
g)
Plant to be reduced by 25% and Patents by 40%.
h)
Balance, if any be transferred to Capital Reserve.
The Balance sheet of Unfortunate Ltd., as on 31st March, 2014 was
as follows :
NOTES
‘
Liabilities
Share Capital :
A) Authorised Capital :
8,00,000
• Equity Shares
• 6% Preference Shares
‘
Assets
Plant
2,00,000
Patents
1,00,000
5,00,000
Sundry Debtors
35,000
(+) 3,00,000
Bills Receivable
12,000
Stock
45,000
B) Issued and Subscribed Capital :
3,80,000
• 7,500 Equity Shares of ‘ 40
Cash at Bank
each fully paid-up
3,00,000
7,000
Profit and Loss
• 500,6% Preference
Preliminary
Shares of ‘ 200 each,
‘ 160 paid-up
Expenses
99,000
5,800
(+) 80,000
200,7% Debentures of ‘ 300 each
60,000
Debenture Interest
8,800
Bills Payable
5,000
Sundry Creditors
50,000
5,03,800
5,03,800
Journalise the transactions and prepare the revised Balance Sheet after the
completion of Capital Reduction Scheme as on 31st March, 2014.
SOLUTION
In the Books of Unfortunate Ltd., Uttampur
Journal
Date
Particulars
L. Debit Credit
31/3/14
1.
F.
6% Preference Share Capital A/c
Dr. -
To Capital Reduction A/c
‘
‘
40,000
-
40,000
(Being 500, 6% Preference Shares of ‘ 200 each
‘ 160 called up reduced to 500, 6% Preference
Shares of ‘ 200 each ‘ 80 per share called up)
2.
Equity Share Capital (Old ‘ 40) A/c
To Equity Share Capital (New ‘ 20) A/c
-
1,50,000
To Capital Reduction A/c
-
1,50,000
(Being 7,500 Equity Shares of ‘ 40 each,
144
Advanced Accounting - I
Dr. - 3,00,000
reduced to ‘ 20 each fully paid-up)
3.
7% Debentures (Old ‘ 300) A/c
Dr. -
Internal Reconstruction
60,000
To 8% Debentures A/c (New ‘ 270) A/c
-
54,000
To Capital Reduction A/c
-
6,000
(Being 200, 7% Debentures of ‘ 300
each reduced to 200, 8% Debentures
NOTES
of ‘ 270 each)
4.
Debenture Interest A/c
Dr. -
8,800
To Capital Reduction A/c
8,800
(Being accumulated debenture interest
waived by 7% Debentureholders)
5.
Sundry Creditors A/c
Dr. -
50,000
To Capital Reduction A/c
-
10,000
To Equity Share Capital A/c
-
40,000
(Being claim of Sundry Creditors settled by
issue of 2,000 Equity Shares of ‘ 20 each)
6.
Capital Reduction A/c
Dr. - 1,94,800
To Profit and Loss A/c
-
99,000
To Preliminary Expenses A/c
-
5,800
To Plant A/c
-
50,000
To Patents A/c
-
40,000
(Being Profit and Loss Account
Preliminary Expenses Account, Plant and
Patents written off through Capital
Reduction Account)
7.
Capital Reduction A/c
To Capital Reserve A/c
Dr. -
20,000
20,000
(Being balance in Capital Reduction
Account transferred to Capital Reserve
Account)
Advanced Accounting - I
145
Internal Reconstruction
Dr.
Capital Reduction Account
‘
Losses to be Written Off
To Profit and Loss
99,000
To Preliminary Expenses
NOTES
5,800
To Plant
Availability of Funds
Capital
40,000
(500 shares x ‘ 80)
By Equity Share Capital
To Patents
By 7% Debentures
To Capital Reserve
20,000
(Balancing Figure)
1,50,000
(7,500 shares x ‘ 20)
40,000
(40% of ‘ 1,00,000)
‘
By 6% Preference Share
50,000
(25% of ‘ 2,00,000)
Cr.
6,000
(200 Debentures x ‘ 30)
By Debenture Interest
By Sundry Creditors
8,800
10,000
(20% of ‘ 50,000)
2,14,800
2,14,800
Revised Balance Sheet of Unfortunate Ltd. Uttampur,
as on 31st March, 2014
(After the Scheme of Reconstruction)
‘
Liabilities
Share Capital :
Plant
A) Authorised Capital :
Equity Shares
6% Preference Shares
8,00,000 Patents
‘
1,50,000
60,000
5,00,000
Sundry Debtors
35,000
(+) 3,00,000
Bills Receivable
12,000
B) Issued and Subscribed Capital:
2,30,000 Stock
• 9,500 Equity Shares of ‘ 20
each fully paid-up
Assets
Cash at Bank
45,000
7,000
1,90,000
• 500, 6% Preference
Shares of 200 each
‘ 80 called up
(+) 40,000
200, 8% Debentures of ‘ 270
each
Bills Payble
Capital Reserve
54,000
5,000
20,000
3,09,000
146
Advanced Accounting - I
3,09,000
3.9
Summary
Internal Reconstruction
Internal Reconstruction refers to the reduction of capital to cancel any
paid-up capital which is so lost or unpreseuted by available assets.
Internal Reconstruction includes :
NOTES
i)Alteration of Share Capital under Sections 94 to 97.
ii) Reduction of Share Capital under Section 100 to 105.
iii) Variation of Shareholders Right under Section 106.
iv) Scheme of Compromise / Arrengement under section 391 to 393 and 394 A.
Alteration of share capital can take the following forms :
a) Increase in the Share Capital (b) Consolidation of Shares (c) Subdivision of
Shares.(d) Conversion of Shares into Stock, (e) Surrender of shares, and
(f) Cancellation of Shares.
Steps to be followed in formulating a Scheme of Capital Reduction as
follows :
i) Estimating the total loss, (ii) Writing off the losses, (iii) Compensating the various
profits, (iv) Arrengement of adequete working capital (v) Decision of Internal or
External Reconstruction.
3.10 Key Terms
a)
‘Internal Reconstruction’ means reduction of the capital so as to reflect
the assets side at its true worth and to wipe off the accumulated losses.
b)
‘Capital Reduction’ is the repayment or writing down of a company’s
different classes of capital, as a result of large accumulated losses or an excess of
funds without protable use.
c)
Scheme of Capital Reduction : A scheme of capital reduction involve
carrying out an interanl reduction of the company. For business failure, when
large amount of losses accumulate and the book values of the assets shows much
lower than their fair market values, a scheme of capital reduction is essential, if
the recovery of profitability prospects are favourable.
Advanced Accounting - I
147
Internal Reconstruction
NOTES
3.11 Questions and Exercises
I)
Objecive Questions
A)
Multiple Choice Question
1)
When the company’s existing financial structure is recognised without
dissolving the existing company and without forming a new company is
refferd to as....
a) Internal Reconstruction.
b) Amalgamation.
c) External Reconstruction.
d) Absorption.
2)
Internal Reconstruction involves alteration of share capital through......
a) Consolidation of Shares.
b) Sub-division of Shares.
c) Surrender of Shares.
d) All of the above.
3)
Converting Shares of smaller denomination into share of larger denomination
is termed as ....
a) Consolidation of Shares.
b) Sub-division of Shares.
c) Conversation of Shares.
d) Surrender of Shares.
4)
Conversion of Shares into Stock requires necessary approval from the...
a) Register of the Companies.
b) Controller of Capital Issues.
c) Shareholders.
d) Debentureholders.
Ans. (1 - a), (2 - d), (3 - a), (4 - b)
148
Advanced Accounting - I
Internal Reconstruction
II)
Long Answer Quistions :
1)
What is ‘Internal Reconstruction’ ? When does it become necessary to go
for Internal Reconstruction ?
2)
What do you understand by ‘ Internal Reconstruction’ ? How is differs
from ‘External Reconstruction’ ?
3)
What is ‘Alteration of Share Capital’ ? Explain the various ways to alter
the share capital ?
4)
What is ‘Consolidation of Shares’ ? How it differs from ‘sub-division of
shares’ ?
5)
Write short notes on :
NOTES
a) Objectives of Internal Reconstruction, (b) Purpose of Capital Reduction,
(c) Consolidation of Shares, (d) Sub-division of Shares, (e) Surrender of
Shares , (f) Conversion of Shares into Stock.
III) Practical Problems :
1)
The following are the Ledger balances of Jasmina Ltd., Jabalpur, as on
31st March, 2014.
A) Share Capital
‘
Issued and Subscribed Capital :
• 10,000, 6% Preference Shares of ‘ 10 each
1,00,000
• 16,000 Equity Shares of ‘ 10 each
1,60,000
Share Premium
30,000
Creditors
26,000
Goodwill
10,000
Patents
21,000
Freehold Property at Cost
70,000
Depreciation on Freehold Property
14,000
Plant and Machinary
Depreciation on Plant and Machinary
Discount on Issue of Shares
1,40,000
30,000
5,000
Stock in hand on 31st March, 2014
24,000
Debtors
15,000
Preliminary Expenses
20,000
Profit and Loss Account (Dr.)
55,000
Advanced Accounting - I
149
Internal Reconstruction
A Scheme of reduction of capital was passed by the court on the following
terms :
a)
6% Preference shares to be reduced to ‘ 9 per share.
b)
Equity Shares to be reduced to ‘ 1.25 per share.
c)
Share Premium Account and all intangible assets to be written off.
d)
One Equity Shares of ‘ 1.25 to be issued for each of ‘ 10 gross preference
dividend, which is in arrears since 1st April, 2013.
NOTES
Draft journal entries and prepare the revised Balance Share of Jasmina
Ltd., Jabalpur as on 31 st March, 2014.
2)
Given below is the Balance Sheet of Pushkar Ltd., Pune as on 31st
March,2014.
‘
Liabilities
Share Capital :
5,00,000
‘
Assets
Land and Buildings
80,000
• 2,000, 5% Preference Shares
Machinery
of ‘ 100 each
Fixture and Moulds
70,000
Investments
90,000
2,00,000
• 3,000 Equity Shares of
‘ 100 each
1,20,000
(Market Price ‘ 65,000)
(+) 3,00,000
Workmen’s Compensation Reserve
10,000
Stock
78,000
Loans
75,000
Debtors
58,000
Creditors
1,00,000
(Including ‘ 12,000 fully
Cash at Bank
Profit and Loss
1,000
1,88,000
secured against Machinery)
6,85,000
6,85,000
The Scheme of reconstruction is prepared and approved as under :
150
Advanced Accounting - I
a)
Land and Buildings should be brought up to the present market value of
‘ 1,50,000.
b)
Equity Shares to be reduced to ‘ 20 per share paid-up cancelling ‘ 80 per
share and Preference Shares to be reduced to ‘ 60 per share cancelling
‘ 40 per share. The face value of both of these shares remains the same.
c)
The Equity Shareholders to pay the call money of ‘ 40 per share and the
Preference Shareholders to pay the call money of ‘ 20 per share
immediately.
d)
Unsecured Creditors are paid 10% of their holdings and they accept a
reduction of 30% of their claims.
e)
Loans are paid off completely.
f)
Liability to the Workmen’s Compensation materialised to ‘ 15,000.
g)
Internal Reconstruction
Out of the funds available, the following assets are written off.
i) Profit and Loss Account and Fixtures and Moulds totally,
ii) Machinery to the extent of ‘ 80,000.
ii) Investments is reduced to its market price.
NOTES
iv) Stock is reduced to its cost price of ‘ 50,000.
v) Creating a provision of bad and doubtful debts @ 10 % of the Debtors.
Pass the necessary journal entries and prepare its Balance Sheet after
reconstruction.
3)
The Balance Sheet of Jeevanlal Jaysinghpur Ltd., Jalna as on 31st March,
2014 is as follows :
Liabilities
‘
Share Capital :
• 32,000 Preference Shares of
3,20,000
‘ 10 each
Assets
‘
Goodwill
2,24,000
Land
3,84,000
Machinery
2,80,000
• 96,000 Equity Shares of ‘ 5 each
6% Debentures
4,80,000
1,78,400
Loose Tools
Stock-in-Trade
80,000
50,400
Sundry Creditors
3,20,000
Sundry Debtors
96,000
1,600
Bills Receivable
32,000
General Reserve
Cash
Profit and Loss
9,600
1,04,000
Priliminary
Expenses
13,00,000
40,000
13,00,000
Upon revaluation of the assets it was found that Goodwill was worthless
and the other assets were overvalued to the following extent :
Land by ‘ 64,000; Machinery by ‘ 40,000; Loose Tools by ‘ 48,000.
A provision for bad and doubtful debts to the extent of ‘ 8,000 was
necessary.
A scheme of arrangement and reduction was agreed by the court and also
by a joint meeting of shareholders and creditors on the following terms and
conditions :
a)
The Sundry Creditors to accept 6% Debentures to the extent of 50% of
their dues and the balance to paid afterwards.
b)
The Preference Shares to be reduced to shares of ‘ 5 each.
c)
The assets be reduced to the revalued figures and the Profit and Loss
Account balance and Preliminary Expenses be written off immediately.
Advanced Accounting - I
151
Internal Reconstruction
d)
The Equity Share be reduced to shares of ‘ 1 each.
Draft necessary journal entries for giving effect to the above scheme of
internal reconstruction and also prepare the revised Balance Sheet as on
31st March 2014.
NOTES
4)
Rural India Ltd., Raipur was recostructed on 31st March, 2014 when its
Balance Sheet was as followes :
Balance Sheet as on 31st March, 2014
Liabilities
‘
‘
Assets
Share Capital :
Goodwill
23,000
Issued and Subscribed Capital :
Buildings
42,000
Machinery
55,200
• 5,000, 5% Preference Shares of
‘ 10 each
• 4,000 Equity Shares of ‘ 15 each
6% Debentures
Interest on Debentures due
50,000
Furniture
60,000
Stock
17,000
40,000
Debtors
16,000
4,800
1,600
Cash
Trade Creditors
20,000
Profit and Loss
Bills Payable
25,200
Preliminary
200
40,000
Expenses
2,00,000
5,000
2,00,000
The following reconstruction scheme was agreed and sanctioned :
a)
5% Preference Shares are to get equal number of 4% Preference Shares
of ‘ 6 each fully called up.
b)
Equity shareholders are to surrender 500 of their shares to the company
and they are to get 3 Equity Shares of ‘ 10 each, ‘ 7 called up, for every
5 of the remaining Equity Shares. Subsequently the company called ‘ 3 on
these shares and recieved the amount in full.
c)
6% Debentures are to waive the interest on debentures due and they are to
get 400, 4% Preference Shares of ‘ 6 each fully called up and 3,000 Equity
Shares of ‘ 10 each fully paid.
d)
Creditors are to receive ‘ 3,000 in cash and 1,200 Equity Shares of ‘ 10
each fully paid.
e)
The amount so made available is to be used to write off Goodwill, Profit
and Loss and Preliminary Expenses in full.
f)
‘ 7,000 be written off the Debtors and the balance left be used to reduce
the value of Buildings.
Pass the necessary journal entries for the scheme of reconstruction and
also prepare the Balance Sheet after the scheme of reconstruction.
152
Advanced Accounting - I
5)
The Balance Sheet of Bad Luck Ltd., Baroda as on 31 st March, 2014 is as
follows :
Internal Reconstruction
Balance Sheet as on 31st March, 2014
Liabilities
‘
‘
Assets
Share Capital :
Fixed Assets
15,00,000
A) Issued and Subscribed
Current Assets
32,00,000
Capital :
Profit and Loss
2,50,000
• 10% Cumulative Preference
Discount on issue
Shares of ‘ 10 each
1,00,000
• Equity Shares of ‘ 10 each
7,00,000
8% Debentures
3,00,000
Current Liabilities
Provision for Taxation
of 8% Debentures
NOTES
50,000
36,00,000
3,00,000
50,00,000
50,00,000
The scheme of reconstruction was agreed and sanctioned as follows :
a)
Fixed assets are to be written down by 33 1/3%.
b)
Current Assets are to be revalued at ‘ 27,00,000.
c)
10% Cumulative Preference shareholders decide to forego their right to
arrears of preference dividend which are in arrears for two years.
d)
The taxation liability of the company was settled at ‘ 4,00,000.
e)
Trade Creditors of the company amounting to ‘ 25,00,000 decide to forego
50% of their claim. They were allotted 1,00,000 Equity Shares of ‘ 5 each
in part payment of their balance due.
f)
8% Debentureholders agreed to reduce their claim by 20%.
g)
The existing Equity Shares and 10% Cumulative Preference Shares were
reduced to ‘ 5 each respectively.
h)
The Profit and Loss Account and Discount on issue of 8% Debentures be
written off immediately.
Pass the journal entries and prepare a revised Balance Sheet after the
scheme of reconstruction.
Advanced Accounting - I
153
Internal Reconstruction
6)
Galaxy Ltd., Gangapur has been suffering heavy losses in the past. Their
Balance Sheet as on 31st March, 2014 is as follows :
Balance Sheet as on 31st March, 2014
‘
Liabilities
NOTES
‘
Assets
Share Capital :
Goodwill
A) Authorised Capital :
Fixed Assets
• 20,000 Equity Shares of
Stock
95,000
Trade Debtors
50,000
Investment
20,000
Cash at Bank
12,000
‘ 100 each
20,00,000
• 5,000, 6% Preference
Shares of ‘ 100 each
(+) 5,00,000
25,00,000
B) Issued and Subscribed
Underwriting
Capital :
Commission
• 10,000 Equity shares of
Profit and Loss
‘ 100 each
• 2,000, 6% Preference
Shares of ‘ 100 each
10,00,000
(+) 2,00,000
2,40,000
15,85,000
40,000
12,50,000
Preliminary
Expenses
8,000
12,00 ,000
(Dividend for 5 years outstanding)
5% Debentures of ‘ 100 each
16,00,000
Trade Creditors
4,00,000
Income-Tax Liabilities
1,00,000
33,00,000
33,00,000
The following Scheme of reconstruction was agreed upon and duly confirmed
by the court :
a)
The Equity Shares shall be reduced to the shares of ‘ 10 each, ‘ 5 per
share being paid-up.
b)
The preference share holders shall forego 90% of their claims in shares
and the remaining shares shall be converted to 7% Preference Shares of
‘ 10 each, while their claims for arrears of preference dividend shall be
reduced to dividend for one year only and the same shall be discharged by
issue of fully paid Equity Shares.
c)
The 5% Debentureholders agreed to have 60% of their claims which shall
be descharged by the issue of 7% Debentures of ‘ 100 each.
d)
The Trade Creditors are required to forego 60% of their claims.
e)
The assets are to be revalued as under :
Fixed Assets - ‘ 12,000; Stock - ‘ 70,000; Trade Debtors - ‘ 40,000 and
Investment - ‘ 10,000.
f)
154
Advanced Accounting - I
In order to provide sufficient working capital the equity shareholders are to
pay the balance amount due against each share.
You are required to pass the necessary accounting entries and also to prepare
the Balance Sheet after the scheme of reconstruction.
3.12
Further Reading
•
Shukla M.C., Grewal T.S. and Gupta S.C. Advanced Accounts - New Delhi:
S. Chand & Co. Pvt. Ltd., 2013.
•
Sehgal Ashok - Taxmann’s Fundamentals of Corporate Accounting- New
Delhi : Taxmann Publications Pvt. Ltd., 2012.
Internal Reconstruction
NOTES
Advanced Accounting - I
155
Topic 2
Profit or Loss Prior to
Incorporation
Unit 4
Meaning and Accounting Treatment
: Profit or Loss prior to
Incorporation
Unit 5
Profit or Loss prior to Incorporation
: Basis of Apportionment
Unit 4
Meaning and Accounting Treatment
: Profit or Loss prior to Incorporation
Meaning & Accounting
Treatment : Profit Or Loss
Prior To Incorporation
Structure
NOTES
4.0
Introduction
4.1
Unit Objectives
4.2
Allocation of Profit or Loss into Pre-and Post Incorporation Period.
4.2.1
Meaning of Profit or Loss Prior to Incorporation
4.2.2
Steps for ascertainment of Profit or Loss Prior to Incorporation.
4.3
Accounting Treatment
4.4
Methods of Computing Profit or Loss Profit to Incorporation
4.5
Cut - off - Date
4.6
Illustrations
4.7
Summary
4.8
Key Terms
4.9
Questions and Exercises
4.10 Further Reading
4.0
Introduction
A developing company may acquire another business from a date prior to
its incorporation, normally from the beginning of the accounting year of the selling
concern with a view to avoid preparation of final accounts upto the date of
acquisition. In such cases, the business unit is purchased first, and the registration
of the acquiring company takes place later. For example, Better Pvt. Ltd. is
incorporated on 1st April, 2012 to take over the running business of Good Bros.
from 1st January, 2012 .The Profit earned (or loss suffered) during the pre incorporation period (i.e. 1st January to 31st March, 2012) is called Profit (Loss)
prior to incorporation. Legally, this profit is not available for dividend, since a
company cannot earn profit before it comes into existence. However, profit earned
after incorporation period (i.e. 1st April, 2012 to the date of financial close) is
available for distribution of dividend. Profit earned before incorporation is a capital
profit and profit earned after incorporation is a revenue profit. In the same
manner any loss incurred prior to incorporation is treated as capital loss and
debited to the Goodwill Account. The profit earned by the company after the
date of its incorporation is its revenue profit and is available for dividend.
Advanced Accounting - I
157
Meaning & Accounting
Treatment : Profit Or Loss
Prior To Incorporation
A pertinent point to be noted is even though a public company can earn
revenue profits only after getting the Certificate of Commencement, for all
practical purposes, the date of incorporation is taken as the basis for the calculation
of profit prior to incorporation.
NOTES
4.1
Unit Objectives
After studying this unit you should be able to :
(a)
Understand meaning of profit prior to incorporation and post incorporation
(b)
Understand steps for ascertainment of Profit Prior to Incorporation and
after Incorporation.
(c)
Appreciate the importance of apportionment of profit between - pre and
post incorporation periods
(d)
Find out method of computing Profit or Loss prior to incorporation
4.2
Allocation of Profit or Loss into Pre and Post
Incorporation Period
4.2.1 Meaning of Profit or Loss Prior to Incorporation :
When a running business is taken over by the promotor of a company as at
a date prior to the date of incorporation of company the profit or loss of a business
for period from the date of purchase of the business to the date of incorporation of
the company is called “Profit or Loss Prior to Incorporation”
As the profits earned prior to incorporation is not available for dividend, it is
necessary to separate it from divisible profits. In practice “profit and loss” account
is prepared at the end of the year and there after the profit or loss between the
two periods are allocated - (i) From the date of purchase to the date of incorporation
(pre-incorporation period and) (ii) From the date of incorporation to the closing of
the accounting year (post - incorporation period)
4.2.2 Steps for ascertainment of Profit or Loss Prior to
Incorporation :
The following steps are taken to ascertain the profit earned or loss suffered
prior to incorporation and after incorporation.
158
Advanced Accounting - I
i)
Calculation of Gross Profit : A Trading Account for the full accounting
period is prepared and Gross Profit is arrived at.
ii)
Allocation of Gross Profit in Sale Ratio : Gross profit should be allocated
between the two periods in the ratio of sales.
iii)
Allocation of Fixed Expenses in Time Ratio : All fixed expenses such
as telephone charges, bank charges, rent , rates , taxes, printing and
stationary, general expenses, office expenses, salaries, insurance, etc. are
allocated on a time basis as these expenses are related to the time factor.
iv)
Allocation of Variable Expenses relating to Sales in Sales Ratio :
Sales expenses, i.e. expenses which are directly related to sale, like
commission to salesman, discount allowed to customers, bad debts,
advertisement, travelling expenses of salesman, carriage outward, packing
charges, publicity charges, sales promotion charges, etc. should be allocated
in the ratio of sales.
v)
Charging of certain expenses for specific period : Certain expenses
which are incurred by the company for post - incorporation period e.g.
underwriting commission , company formation expenses, discount on issue
of shares and debentures, managing directors remuneration, preliminary
expenses, audit fees, debenture interest paid, director’s fees, etc. are charged
as post - incorporation period expenses, whereas bad debts relating to preincorporation period, vendors salaries, are expenses of pre - incorporation
period .
vi)
Allocation of expenses as per actual basis : Interest on purchase
consideration payable to vendors is to be allocated as per actual basis.
vii)
Accounting Entry : For transferring profit prior to incorporation the
following entry should be passed :
Meaning & Accounting
Treatment : Profit Or Loss
Prior To Incorporation
NOTES
Profit and Loss A/c
To Profit Prior to Incorporation A/c
If profit prior to incorporation is not utilised for writing off the expenses
of capital nature, then the same will appear in the Balance Sheet along
with other capital profits. If there is a loss for the period prior to incorporation
the same is either added to the value of goodwill or carried forward to post
incorporation loss or adjusted against capital reserves.
4.3
Accounting Treatment
Profit Prior to Incorporation Any profit prior to incorporation may be dealt with as follows :
i)
Credited to Capital Reserve Account
ii)
Credited to Goodwill Account to reduce the amount of goodwill from
acquisition of business.
iii)
Utilised to write down the value of fixed assets acquired.
Advanced Accounting - I
159
Meaning & Accounting
Treatment : Profit Or Loss
Prior To Incorporation
NOTES
Loss Prior to Incorporation Any loss prior to incorporation may be dealt with as follows :
i)
Debited to Goodwill Account.
ii)
Debited to Capital Reserve Account arising from acquisition of business.
iii)
Debited to a Suspense Account, which can be written-off later as a fictitious
asset.
The accounting treatment of pre-incorporation profit (or loss) is totally
different from post-incorporation profit (or loss). Thus, it is necessary to compute
both the amounts of pre and post- incorporation profit (or loss) more accurately.
Figure 4.1 shows the Method of Computing Profit or Loss Prior to Incorporation.
Methods of
Computing
Profit or Loss
Prior to
Incorporation
Separate Final
Single Final
Accounts
Accounts
Method
Methods
Fig. 4.1 Methods of Computing Profit or Loss Prior to Incorporation
4.4
Methods of computing profit or loss prior to
incorporation
The profit or loss prior to incorporation can be ascertained by any of the
following two methods :
1)
160
Advanced Accounting - I
Separate Final Account Method :
Under this method, the books of the business taken over are balanced off
and trial balance is prepared as on the date of incorporation of the company.
Then a Trading and Profit and Loss Account is prepared for the period from the
date of acquisition of business to the date of incorporation of the company to
ascertain profit or loss prior to incorporation. This method is also known as : stock
taking and balancing the books at the date of incorporation method. Accounting
treatment under-stock taking and balancing the books at the date of incorporation
is as follows :
Under this method, a separate Profit and Loss Account is prepared for the
pre-incorporation period as distinguished from Profit and Loss Account for postincorporation period. On the incorporation date, stock is taken, a Final Account is
prepared, and the old books of accounts are closed. This method of profit
determination though simple and accurate, is inconvenient and expensive because
the business activities have to be suspended for a few days for stock taking.
Meaning & Accounting
Treatment : Profit Or Loss
Prior To Incorporation
NOTES
For the above reasons, the method is not generally followed in practice. In
the books of the new company, acquisition entries are passed on the same date
after taking into consideration the assets and liabilities on the date of incorporation,
which thus include the result upto that date.
Accounting Entries are as follows :
i)
ii)
Land and Buildings A/c
Dr.
Plant and Machinery A/c
Dr.
Sundry Debtors A/c
Dr.
Stock A/c
Dr.
Cash at Bank A/c
Dr.
Cash in Hand A/c
Dr.
(At the value on the date
of incorporation)
To Liability A/c
(At the value on the date
of incorporation)
To Vendors A/c
(Purchase Consideration)
Vendors A/c
Dr.
To Equity Share Capital A/c
2)
Single Final Accounts Methods :
Under this method, a trial balance is prepared only at the end of the
accounting period and a Trading and Profit and Loss Account is prepared for the
whole period covering the pre-incorporation period and the post-incorporation
period. Then the profit or loss for whole period is apportioned between preincorporation period and post-incorporation period on some appropriate basis. This
method is also known as “Apportioning the Results Method”. Accounting treatment
under single final accounts method is as follows :
Under this method, the results for the whole accounting period are
apportioned into “pre” and “post” incorporation period. The items of profit or loss
are apportioned on suitable basis to get the required profit or loss. It provides an
estimate of ‘Pre’ and ‘Post’ incorporation period.
Under this method, profit is calculated as follows :
Step 1 : Prepare a Trading and Profit and Loss Account for the entries
Advanced Accounting - I
161
Meaning & Accounting
Treatment : Profit Or Loss
Prior To Incorporation
period (pre and post incorporation period combined)
Step 2 : Allocate gross profit and expenses (indirect) between pre and
post - incorporation period on the basis of the following principles :
i)
Gross profit is allocated in the ratio of sales of each period.
ii)
Fixed portion of an expenses is allocated on the basis of time.
iii)
Expenses related to sales, e.g. traveller’s commission, discount allowed,
advertisement, salaries of salesmen, carriage outward, after-sales service
cost, etc. are allocated on the basis of sales.
iv)
Expenses related to time, e.g. rent, rates and taxes, insurance, depreciation,
salaries of general staff, etc. are allocated on the basis of time.
v)
Expenses which are exclusively related to pre and post - incorporation period
must be charged entire to that period’s profit. e.g.
NOTES
a) Preliminary expenses, director’s fees, debenture interest, etc. are to be
charged against post - incorporation profit.
b) Partner’s salaries, interest on partners capital etc. are to be charged
against the profit of pre-incorporation period.
Step 3 : This method calculates net profit or loss for respective periods
after deduction of apportioned expenses and acquisition entries are passed
at the end of the accounting year.
4.5
Cut-off Date
A private company can commence business soon after its incorporation,
while a public company can commence business only after obtaining the certificate
of commencement of business. That is any profit made, in case of private company
before incorporation and in case of public company any profit made before
commencement of business, should be taken as capital profit . However, it should
be noted that it is the date of incorporation and not the date of commencement of
business which is taken into consideration as ‘Cut - off date’ for calculating
profit or loss prior to incorporation.
4.6
Illustrations
The concept of profit or loss prior to and post incorporation period can be
understood with the help of following illustrations :
ILLUSTRATION 1
162
Advanced Accounting - I
Abhishek Industries Ltd. was incorporated on 30th April, 2012 to acquire a
running business from 1st January, 2012. The purchase price was agreed at
‘ 90,000 payable in Equity Share of ‘ 10 each. The following is the Profit and
Loss Account for the year ended 31st December, 2012
Dr.
Profit and Loss Account for year ended 31st December, 2012
Particulars
To Opening Stock
To Purchases
To Gross Profit C/D
‘
Particulars
35,000 By Sales
2,10,000 By Closing Stock
‘
3,00,000
35,000
NOTES
90,000
3,35,000
To Salary
Cr.
Meaning & Accounting
Treatment : Profit Or Loss
Prior To Incorporation
12,000 By Gross Profit B/D
To Bad Debts
1,500 By Bad Debts
To Debenture Interest
2,500
To Directors Fees
2,400
To Audit Fees
3,100
To Discount Allowed
1,800
3,35,000
90,000
2,000
To Depreciation on Plant
and Machinery
12,000
To Interest to Vendors
1,500
To General Expenses
2,400
To Publicity Charges
12,000
To Printing and Stationary
4,800
To Commission to Travelling
Salesman
To Net Profit C/D
6,000
30,000
92,000
92,000
Additional Information :
1.
The yearly turnover amounted to ‘ 3,00,000 of which sales upto 1st May,
2012 were ‘ 1,00,000.
2.
The purchase consideration was settled on June 30, 2012
4.
Bad debts of ‘ 300 related to sales effected after incorporation and
recovery of Bad Debts was in respect of debts written off during 2011.
Prepare a columner statement showing profits prior to and post-incorporation
period.
Advanced Accounting - I
163
Meaning & Accounting
Treatment : Profit Or Loss
Prior To Incorporation
SOLUTION
1)
NOTES
2)
3)
Important Dates :
• Date of Acquisition
.....
1st January, 2012
• Date of Incorporation
.....
30th April, 2012
• Date of Final Close
.....
31st December, 2012
Pre-incorporation Time
:
Post-incorporation Time
 4 months
:
8 months
1
:
2
Calculation of Time Ratio :
Calculation of Sales Ratio :
Pre - incorporation Sales
: Post-incorporation Sales = Total Sales
‘ 1,00,000
:
‘ 2,00,000
 1
:
2
‘ 3,00,000
4)
Recovery of Bad Debts was in respect of debts written off during 2011,
hence it is treated as an income for pre-incorporation period.
5)
As Bad Debts of ‘ 300 were related to Sales effected after incorporation,
the remaining Bad Debts of ‘ 1,200 must be related to sales effected before
incorporation.
6)
Allocation of Interest to Vendors :
Interest to Vendors ‘ 1,500 is paid upto the date of settlement i.e. from
1-1-2012 to 30-6-2012 i.e. for 6 months.
 ‘ 1,500 / 6 months
164
Advanced Accounting - I
=
‘ 250 per month
Pre-incorporation
:
Post-incorporation
1-1-2012 to 30-4-2012
:
=
1-5-2012 to 30-6-2012 =
 4 months x ‘ 250
:
2 months x ‘ 250
 ‘ 1,000
:
‘ 500
=
Total
6 month
‘ 1,500
Meaning & Accounting
Treatment : Profit Or Loss
Prior To Incorporation
In the books of Abhishek Industries Ltd.
Statement showing Profits Prior to and Post Incorporation
for the year ended 31st December, 2012
Particulars
Basis of Ratio Total
Allocation
Post-
Incorporation
‘
Gross Profit
Pre-
Sales
1 : 2 90,000
Actual
-
‘
‘
Incorporation
‘
30,000
NOTES
‘
60,000
Recovery of
Bad Debts
2,000
2,000
92,000
32,000
60,000
Salary
Time
1 : 2 12,000
4,000
8,000
Bad Debts
Actual
-
1,500
1,200
300
Debenture Interest Post
-
2,500
-
2,500
Directors Fees
Post
-
2,400
-
2,400
Audit Fees
Post
-
3,100
-
3,100
Discount Allowed
Sales
1:2
1,800
600
1,200
Plant and Machinery Time
1 : 2 12,000
4,000
8,000
Interest to Vendors Actual
-
1,500
1,000
500
General Expenses
Time
1:2
2,400
800
1,600
Publicity Charges
Sales
1 : 2 12,000
4,000
8,000
Time
1:2
4,800
1,600
3,200
Travelling Salesmen Sales
1: 2
6,000
2,000
4,000
62,000
19,200
42,800
30,000
12,800
17,200
Capital
Revenue
Depreciation on
Printing and
Stationary
Commission to
 Net Profit
Nature of Profit
92,000
32,000 32,000 60,000 60,000
Advanced Accounting - I
165
Meaning & Accounting
Treatment : Profit Or Loss
Prior To Incorporation
‘
Therefore,
1)
Total Net Profit
30,000
2)
Profit Prior to Incorporation i.e. Capital Profit
12,800
3)
Profit Post Incorporation i.e. Revenue Profit
17,200
NOTES
ILLUSTRATION 2
Bloom Decor Ltd. was registered on 1st January, 2012 to purchase the
business of Star Decor as on 1st October, 2011 and obtained its certificate of
commencement of business on 31st January, 2012 .The accounts of the company
for the year ended 30th September, 2012 disclosed the following facts :
i)
The sales for the whole period amounted to ‘ 4,80,000 of which ‘ 60,000
related to the period from 1/10/2011 to 31/12/2011
ii)
The Trading Account for the year ended 30/09/2012 showed a Gross Profit
of ‘ 1,92,000 .
iii)
The following is the Profit and Loss Account for the year ended 30/09/2012
Profit and Loss Account for year ended 30th September, 2012
Dr.
Particulars
‘
Particulars
To Managing Directors
Remuneration
By Gross Profit B/D
Cr.
‘
1,92,000
10,100
To Preliminary Expenses
1,500
To Rent
9,600
To Bad Debts
4,000
(of which ‘ 1,400 related to Book
Debts created before 1/1/2012
To Administrative Salaries
24,000
To Interest on Debentures
12,000
To Depreciation on Plant
7,200
To Office Expenses
3,600
To Formation Expenses
4,800
To Commission on Sales
7,200
To Telephone Charges
4,800
To Advertisement
8,400
To Travelling Expenses
16,800
To Interest to Vendors
8,000
(@ 6% on ‘ 2,00,000
from 1/10/2011 to 31/5/2012)
To Dividend on Shares
To Net Profit C/D
166
Advanced Accounting - I
20,000
50,000
1,92,000
1,92,000
You are required to find out the profits pre and post incorporation. Also state the
accounting treatment of the same.
Meaning & Accounting
Treatment : Profit Or Loss
Prior To Incorporation
SOLUTION
Working Notes :
NOTES
1)
Important Dates :
• Date of Purchase
.....
1st October, 2011
• Date of Registration
.....
1st January, 2012
• Date of obtaining Certificate of Commencement......31st January, 2012
• Date of Financial Close ...... 30th September, 2012
N.B. :
•
In actual practice, a Public Ltd. Co. cannot start their business till they
obtain the certificate for commencement of business. However, computation
of profits prior to and post incorporation means profits earned upto and
after the date of incorporation. Hence, the date of obtaining the certificate
of commencement should not be considered for any further calculations.
2)
Calculation of Time Ratio :
Pre Incorporation Time
3)
 3 months
: 9 months
 1
: 3
Calculation of Sales Ratio :
Pre-Incorporation Sales
4)
: Post Incorporation Time
: Post Incorporation Sales = Total Sales
 ‘ 60,000
: ‘ 4,20,000
 1
: 7
‘ 4,80,000
Allocation of Bad Debts :
As Bad Debts of ‘ 1,400 were related to Book Debts created before
1/1/2012 i.e. pre-incorporation, the remaining Bad Debts of ‘ 2,600 must
be related to Book Debts created after 1/1/2012 i.e. post incorporation.
5)
Allocation of Interest to Vendors :
Interest to Vendors ‘ 8,000 is paid @ 6% on ‘ 2,00,000 from 1/10/2011
to 31/5/2012 i.e. for 8 months.

‘ 8,000 / 8 months
Pre-incorporation
01/10/2011 to 01/01/2012
= ‘ 1,000 per month
: Post Incorporation
= Total
: 01/01/2012 to 31/05/2012 : 8 months
Advanced Accounting - I
167
Meaning & Accounting
Treatment : Profit Or Loss
Prior To Incorporation

3 months x ‘ 1,000
:
5 months x ‘ 1,000

‘ 3,000
:
‘ 5,000
= ‘ 8,000
In the books of Bloom Decor Ltd.
Statement showing Profits Prior to and Post Incorporation
NOTES
for the year ended 30th September, 2012
Particulars
Basis of Ratio Total
Allocation
Sales
Post-
Incorporation
‘
Gross Profit
Pre-
1:7
‘
‘
1,92,000
Incorporation
‘
24,000
‘
1,68,000
1,92,000
Managing Directors
Post
-
10,100
-
10,100
Preliminary Expenses
Post
-
1,500
-
1,500
Rent
Time
1:3
9,600 2,400
7,200
Bad Debts
Actual
-
4,000 1,400
2,600
Time
1:3
24,000 6,000
18,000
Post
-
12,000
-
12,000
Plant
Time
1:3
7,200 1,800
5,400
Office Expenses
Time
1:3
3,600
900
2,700
Formation Expenses
Post
-
4,800
-
4,800
Commission on Sale
Sales
1:7
7,200
900
6,300
Telephone Charges
Time
1:3
4,800 1,200
3,600
Advertisement
Sales
1:7
8,400 1,050
7,350
Travelling Expenses
Sales
1:7
16,800 2,100
14,700
Interest to Vendors
Actual
-
8,000 3,000
5,000
Dividend on Shares
Post
-
Remuneration
Administrative
Salaries
Interest on
Debentures
Depreciation on
20,000
-
20,000
50,000 3,250
46,750
1,42,000
Net Profit
Nature of Profit
Capital
Revenue
1,92,000 24,000 24,000 1,68,000 1,68,000
168
Advanced Accounting - I
‘
Therefore,
1)
Total Net Profit
50,000
2)
Profit Prior to Incorporation i.e. Capital Profit
3,250
3)
Profit Post Incorporation i.e. Revenue Profit
46,750
Meaning & Accounting
Treatment : Profit Or Loss
Prior To Incorporation
Accounting Treatment :
1)
NOTES
The profits earned prior to incorporation (i.e. ‘ 3,250) are termed as
‘Capital Profit’ which may be utilised to i) Write down the value of Fixed Assets acquired,
ii) Write down Goodwill,
iii) Be credited to Capital Reserve Account
2)
The profits earned post incorporation (i.e. ‘ 46,750) are termed as
‘Revenue Profit’ which may be available for distribution of dividend.
ILLUSTRATION 3
Crystal Industries Ltd. was formed to take over running business with effect
from 1st April, 2012. The company was incorporated on 31st July, 2012 and obtained
the certificate of commencement of business on 1st October, 2012. The Profit and
Loss Account of the company for the year ended 31st March, 2013 was as follows:
Dr.
Profit and Loss Account for the year ended 31st March, 2013
Particulars
To Management Expenses
‘
12,000
To Bank Charges
1,200
To Selling Expenses
4,000
To Miscellaneous Expenses
9,000
To Carriage Outward
4,000
To Rent of Office Buildings
6,600
To Electricity Charges
To Development Expenses
To Bad Debts
By Gross Profit B/D
By Share Transfer Fees
‘
80,000
1,000
900
2,800
800
To Packing Charges
4,000
To Share Transfer Fees
2,500
To Underwriters Commission
3,750
To Interest to Vendor
1,050
To Distribution Expenses
6,000
To Depreciations on Fixed Assets
2,400
To Net Profit C/D
Particulars
Cr.
20,000
81,000
81,000
Advanced Accounting - I
169
Meaning & Accounting
Treatment : Profit Or Loss
Prior To Incorporation
The following additional information is available :
1.
The turnover for the whole period amounted to ‘ 1,12,000 of which
‘ 28,000 were related to the period from 1/4/2012 to 1/8/2012
2.
Rent of Office Buildings was paid @ ‘ 500 per month upto 1st October,
2012 and thereafter it was increased by ‘ 100 per month.
4.
Depreciation on Fixed Assets includes ‘ 150 for assets acquired in postincorporation period.
4.
Purchase consideration was discharged by the company on 30th September,
2012 by issuing Equity Shares of ‘ 10 each at a premium of ‘ 1 per share.
NOTES
Ascertain the profits available for distribution of dividends.
SOLUTION
Working Notes :
1)
Important Dates :
•
Date of Purchase
..... 1st April, 2012
•
Date of Incorporation
..... 31st July, 2012
•
Date of obtaining Certificate of Commencement...... 1st October, 2012
•
Date of Financial Close ...... 31st March, 2012
N.B. :
•
2)
3)
170
Advanced Accounting - I
Since profit prior to and post incorporation are being computed, the
date of incorporations to be considered but not the date of obtaining
certificate of commencement , for any further calculation.
Calculation of Time Ratio :
Pre-Incorporation Time
:
Post Incorporation Time
4 months
:
8 months
1
:
2
Calculation of Sales Ratio :
Pre-Incorporation Sales
: Post-Incorporation Sales = Total Sales
‘ 28,000
:
‘ 84,000
1
:
3
‘ 1,12,000
4)
Allocation of Rent of Office Buildings :
Particulars
Pre
Post
Total
‘
‘
‘
Meaning & Accounting
Treatment : Profit Or Loss
Prior To Incorporation
a) 1/4/2012 to 1/10/2012 @ ‘ 500 per month
NOTES
i.e. 6 months x ‘ 500 = ‘ 3,000
•
Pre : 4 months x ‘ 500
•
Post : 2 months x ‘ 500
2,000
-
2,000
1,000
1,000
-
-
-
-
3,600
3,600
2,000
4,600
6,600
b) 1/10/2012 to 31/3/2013 @ ‘ 600 per month
i.e. for 6 months x ‘ 600 = ‘ 3,600
•
Pre : -------
•
Post : 6 months x ‘ 600

5)
(+)
Total
Allocation of Interest to Vendors :
Interest to Vendors ‘ 1,050 is paid upto the date of settlement i.e. from
1/4/2012 to 30/9/2012 i.e. for 6 months.
6)
‘ 1,050 / 6 months
=
‘ 175 per month
Pre-Incorporation
:
Post Incorporation
1/4/2012 to 31/7/2012
:
1/8/2012 to 30/9/2012= 6 months
4 months x ‘ 175
:
2 months x ‘ 175
‘ 700
:
‘ 350
= ‘ 1,050
Allocation of Depreciation on Fixed Assets :
Particulars
i)
= Total
Pre
Post
Total
‘
‘
‘
-
150
150
750
1,500
2,250
750
1,650
2,400
Depreciation for Assets acquired in post
incorporation period
ii) Balance of Depreciation allocated in Time Ratio :
i.e. 1 : 2

(+)
Total
Advanced Accounting - I
171
Meaning & Accounting
Treatment : Profit Or Loss
Prior To Incorporation
In the books of Crystal Industries Ltd.
Statement showing Profits Prior to and Post Incorporation
for the year ended 31st March, 2013
NOTES
Particulars
Basis of Ratio Total
Allocation
Pre-
Post-
Incorporation
‘
Gross Profit
Sales
1:3
Share Transfer Fees
Post
-
‘
‘
Incorporation
‘
‘
80,000
20,000
60,000
1,000
-
1,000
81,000
Management Expenses
Time
1:2
12,000
4,000
8,000
Bank Charges
Time
1:2
1,200
400
800
Selling Expenses
Sales
1:3
4,000
1,000
3,000
Miscellaneous Expenses Time
1:2
9,000
3,000
6,000
Carriage Outward
Sales
1:3
4,000
1,000
3,000
Rent of Office Buildings
Actual -
6,600
2,000
4,600
Electricity Charges
Time
1:2
900
300
600
Development Expenses
Post
-
2,800
-
2,800
Bad Debts
Sales
1:3
800
200
600
Packing Charges
Sales
1:3
4,000
1,000
Share Transfer Fees
Post
-
2,500
-
2,500
Underwriters Commission Post
-
3,750
-
3,750
Interest to Vendor
Actual -
1,050
700
350
Distribution Expenses
Sales
6,000
1,500
4,500
2,400
750
1,650
4,150
15,850
Capital
Revenue
1:3
-
3,000
Depreciarion on
Fixed Assets
Actual -
61,000
 Net Profit
Nature of Profit
20,000
81,000 20,000 20,000 61,000 61,000
172
Advanced Accounting - I
Therefore,
‘
1)
Total Net Profit
20,000
2)
Profits Prior to Incorporation i.e. Capital Profit
4,150
3)
Profits Post Incorporation i.e. Revenue Profit
15,850
A company can pay dividends only out of profits earned during the post
incorporation period i.e. revenue profits or divisible profits amounting to ‘ 15,850,
are the profits available for distribution of dividends.
4.7
Meaning & Accounting
Treatment : Profit Or Loss
Prior To Incorporation
NOTES
Summary
“Profit or Loss prior to incorporation” - when a running business acquire by
the promoters of a company as at a date prior to the date of incorporation of
company, the profit or loss of such a business for the period from the date of
purchase of the business to the date of incorporation of the company is known as
“Profit or Loss prior to incorporation”
Steps for ascertainment of Profit or Loss prior to incorporation : (i) Calculation
of Gross Profit, (ii) Allocation of Gross Profit in Sales Ratio, (iii) Allocation of
Fixed Expenses in Time Ratio, (iv) Allocation of variables relating to sales (v)
Charging of certain expenses for special period. (vi) Allocation of expenses as
per actual basis and (vii) Accounting treatment.
Methods of computing Profit or Loss Prior to Incorporation :
The profit or loss prior to incorporation can be ascertained by any of the
following two methods- (i) Separate Final Accounts Method and (ii) Single Final
Accounts Method.
4.8
Key Terms
(i)
Profit or Loss prior to incorporation - The profit earned or loss suffer
during the pre-incorporation period is called profit or loss prior to
incorporation.
(ii)
Profit earned before incorporation is a ‘Capital Profit’ and profit earned
after incorporation is a ‘Revenue Profit’.
(iii)
Any loss occurred prior to incorporation is treated as ‘Capital Loss’ and
debited to “Goodwill Account”
(iv)
‘Separate Final Account Method’ is in which the books of the business
taken over are balance off and the trial balance is prepared as on the date
of incorporation of the company.
(v)
‘Single Final Account Method’ is in which a trial balance is prepared
only at the end of the accounting period and a Trading and Profit and Loss
Advanced Accounting - I
173
Meaning & Accounting
Treatment : Profit Or Loss
Prior To Incorporation
Account is prepared for the whole period covering the pre-incorporation
and post-incorporation period.
(vi)
NOTES
4.9
‘Cut-off-Date’ - It is the date incorporation and not the date of
commencement of business which is taken into consideration for calculation
of profit or loss prior to incorporation.
Questions and exercises
I.
Objective Questions
A)
Multiple Choice Questions
(1)
Profits earned prior to incorporation is a ........ profit
(a) Capital
(b) Revenue
(c) Cash
(d) Book
(2)
Profits earned post incorporation is a .......... Profit.
(a) Capital
(b) Cash
(c) Revenue
(d) Book
(3)
Post incorporation profits are available for distribution of......
(a) Interest
(b) Dividend
(c) Commission
(d) Incentive
(4)
A public limited company can earn ...... profits only after getting the certificate
of commencement.
(a) Capital
(b) Book
(c) Cash
(d) Revenue
ANS. (1-a), (2-c), (3-b), (4-d).
174
Advanced Accounting - I
II.
Long Answer Questions :
(1)
What is ‘profit or loss prior to incorporation?’ State in brief the method of
calculation of capital profit or capital loss.
(2)
What is ‘Profit or Loss Post Incorporation?’ State in brief the method of
calculation of revenue profit or revenue loss.
(3)
Explain the accounting treatment of : a) Capital Profit, b) Capital Loss,
Meaning & Accounting
Treatment : Profit Or Loss
Prior To Incorporation
NOTES
c) Revenue Profit , d) Revenue Loss.
(4)
Explain the need for dividing the profit into pre and post incorporation.
III.
Practical Problems:
1)
Gangotri Textiles Ltd. was incorporated on 1st May, 2008 to acquire the
running business from 1st January, 2008. The following is the Profit and Loss
Account for the year ending 31st December, 2008.
Dr.
Profit and Loss Account for year ended 31st December, 2008
Particulars
To Opening Stock
To Purchases
To Carriage
To Gross Profit C/D
‘
Particulars
80,000 By Sales
4,20,000 By Closing Stock
To Staff Salary
9,000 By Gross Profit B/D
1,00,000
7,00,000
1,80,000
15,000
4,800
To Debenture Interest
5,000
To Carriage
3,600
To Audit Fees
1,700
24,000
To Interest to Vendors
3,000
To Office Expenses
4,800
To Publicity Charges
18,000
To Printing
3,600
To Discount Allowed
6,000
To Bad Debts
1,500
To Net Profit C/D
6,00,000
1,80,000
To Directors Fees
To Depreciation on Asset
‘
20,000
7,00,000
To Office Rent
Cr.
80,000
1,80,000
1,80,000
Advanced Accounting - I
175
Meaning & Accounting
Treatment : Profit Or Loss
Prior To Incorporation
The following additional information is also available :
1)
Sales for the year were ‘ 6,00,000 of which sales upto 1st May, 2008 were
‘ 2,50,000.
2)
Purchase consideration was paid to the Vendor on 1st July, 2008.
3)
Of the total Bad Debts ‘ 500 were related to debts Prior to Incorporation.
Prepare a statement showing Profit Prior to and After Incorporation.
NOTES
2)
Hinduja Steel Ltd. was incorporated on 1st July, 2008 to take over a running
business with effect from 1st April, 2008. The following Profit and Loss Account
for the year ended 31st March, 2009 was prepared.
Dr.
Profit and Loss Account for year ended 31st March, 2009
‘
Particulars
Cr.
‘
Particulars
To Sales Commission
2,625 By Gross Profit B/D
To Advertisement
5,250 By Rent Received
98,000
300
To Managing Directors
Remunerations
9,000
To Depreciation on Plant
2,800
To Office Salary
18,000
To Insurance
600
To Company Formation Expenses
5,425
To Rent and Taxes
3,000
To Discount on Sales
To Bad Debts
To Net Profit C/D
350
1,250
50,000
98,300
98,300
The following details are available :
a)
Average monthly turnover from July, 2008 onwards was double than that of
previous months.
b)
Rent for the first three months was paid @ ‘ 200 p.m.
c)
Bad Debts of ‘ 350 related to sales effected after 1st July, 2008.
d)
Advertisement expenses were directly proportionate to the turnover.
Prepare a statement to find out the Profits Prior to and Post Incorporation.
3)
176
Advanced Accounting - I
Implex Industries Ltd. was incorporated on 1st March, 2008 to acquire the
going concern from 1st January, 2008. The purchase consideration was agreed at
‘ 60,000. The following is a Profit and Loss Account for the year ended 31st
December, 2008.
Meaning & Accounting
Treatment : Profit Or Loss
Prior To Incorporation
Profit and Loss Account for year ended 31st December, 2008
Dr.
Cr.
‘
Particulars
To Underwriting Commission
4,000 By Gross Profit B/D
To General Expenses
2,400 By Share Transfer Fees
To Taxes on Buildings and Premises
2,100
To After Sales Service Expenses
6,600
To Carriage
1,100
To Debenture Interest
1,350
NOTES
‘
Particulars
72,600
400
To Administrative Directors
Remuneration
24,000
To Interest to Vendors
900
To Audit Fees
5,000
To Share Transfer Fees
To Net Profit C/D
550
25,000
73,000
73,000
Additional Information :
a)
Sales for the year ending 31st December, 2008 were ‘ 1,50,000.
b)
Sales are of one commodity and at a fixed price. The average monthly
sales for the first two months were one-half of the average of the monthly
sales for the remaining period of the year.
c)
Interest @ 6% p.a. was paid on purchase consideration from 1st January,
2008 to the date of settlement.
You are required to prepare a statement showing the Profit Prior to and
After Incorporation. How much profit is available for distribution of dividend?
4.10 Further Reading
•
Tulsian P.E.- Accountancy - New Delhi - Tata Mc Graw - Hill Publishing
Co. Ltd. - 2010
•
Sharma R.K., Popil R.S. - Financial Accounting. New Delhi - Kitab
Mahal - 2008
Advanced Accounting - I
177
Unit 5
Profit or Loss Prior to
Incorporation : Basis of
Apportionment
Profit or Loss Prior to
Incorporation : Basis of
Apportionment
NOTES
Structure
5.0
Introduction
5.1
Unit Objectives
5.2
Basis of Apportionment
5.3
Guidelines for Apportionment of Expenses
5.4
Summary Chart
5.5
Illustrations
5.6
Summary
5.7
Key Terms
5.8
Questions and Exercises
5.9
Further Reading
5.0
Introduction
The profit or loss prior to incorporation is regarded as of capital nature
because a company cannot do any business before its incorporation . However, it
has now been accepted by the experts that when a company receives the certificate
of commencement of business, the company’s right to carry on the business relates
back to the date of incorporation. Hence, the date of incorporation should be
taken as the relevant date for the apportionment of profits between pre and post
incorporation period even in case of a public limited company.
Basis of appointment : (i) Time Basis (time ratio), (ii) Turnover Basis
(turnover or sales ratio) and (iii) Combined or Equitable Basis (variable ratio).
Advanced Accounting - I
179
Profit or Loss Prior to
Incorporation : Basis of
Apportionment
5.1
Unit Objectives
After studying this unit you should able to :
NOTES
•
Explain ‘basis of apportionment’ for profit or loss prior to incorporation.
•
Illustrate guidelines for apportionment of Expenses.
•
Identify basis for apportioment of expenses.
•
Prepare the “profit and loss account” identifying pre and post incorporation
period.
5.2
Basis of Appointment
Figure 5.1 shows the basis of Apportionment as follows :
Basis of
Apportionment
1
2
Time Basis
(Time Ratio)
Turnover
Basis
(Turnover or
Sales Ratio)
3
Combined or
Equitable
Basis(Variable
Ratio)
Fig. 5.1 : Basis of Apportionment
1)
Time Basis (Time Ratio) :
The Profit and Loss Account is prepared upto the end of the accounting
year and then the profit or loss is divided on the basis of period prior to and
subsequent to incorporation e.g. if the period is 3 months prior to and 9
months after the incorporation, the profit will be divided in the ratio of 1:3.
The assumption under this method is that there is the uniform spread of
sales throughout the year. This method can be applied where the sales are
spread evenly throughout the year. The profit for the year is ‘ 66,000 and
the ‘Pre’ and ‘Post’ incorporation period constitute 4 and 8 months, thus,
the division on the basis of time will be 4
12
2)
180
Advanced Accounting - I
x ‘ 66,000 = ‘ 22,000; and
8
12
x ‘ 6,000 = ‘ 44,000;
Turnover Basis (Turnover or Sale Ratio) :
Under this method, the turnover of ‘Pre’ and ‘Post’ incorporation period
will form the basis of apportionment. If the turnover of ‘Pre’ and ‘Post’
incorporation period is ‘ 3,00,000 and ‘ 5,00,000 respectively, then the
sales ratio will be 3:5.
This method gives exclusive weightage to turnover. All the expenses do not
vary according to turnover. Many expenses viz. rent, rates, insurance,
depreciation, salaries and office expenses are incurred irrespective of the
turnover. Hence, this basis also will be inequitable.
3)
Profit or Loss Prior to
Incorporation : Basis of
Apportionment
NOTES
Combined or Equitable Basis (Variable Ratio) :
This is the best possible method of apportionment. Under this method, a
break up is introduced in the Profit and Loss Account though no distinction
is made in the preparation of Trading Account. Under this method, division
is introduced at the gross profit. The procedure is as follows :
i) Apportion the gross profit into ‘Pre’ and ‘Post’ incorporation period
on the basis of respective turnover.
ii) Allocate expenses against the respective figures to gross profit
according to the circumstances.
a)
b)
Common Charges :
i)
Fixed Charges on the actual or time basis e.g. rent, rates, insurance,
depreciation, etc.
ii)
Variable Charges on the appropriate basis. Carriage
outwards,commission on sales according to turnover. Discount allowed
and Bad Debts may be allocated on the basis of sales. When details
are not given, the expense
relating to sales should be apportioned
according to the sales and fixed expenses should be allocated on the
basis of time.
Un - common charges :
These expenses may relate to either ‘Pre’ or ‘Post’ incorporation period.
Director’s fees, discount on issue of debentures, debenture interest, etc.
would be charged to ‘Post’ incorporation period. Preliminary expenses or
formation expenses are incurred prior to incorporation. However, they are
charged to post incorporation period. Vendor’s salaries are chargeable to
pre-incorporation period.
Advanced Accounting - I
181
Profit or Loss Prior to
Incorporation : Basis of
Apportionment
5.3
Guidelines for Apportionment of Expenses
Following guidelines may be followed for apportionment of expenses :
NOTES
a)
Item
Basis of Apportionment
Gross Profit or Gross Loss
On the basis of turnover in the
respective periods.
OR
On the basis of cost of goods sold
in the respective periods in the
absence of any information
regarding turnover.
OR
On the basis of time in the
respective periods in the absence
of any information regarding
turnover and cost of goods sold.
b)
Expenses related to Turnover :
On the basis of turnover in the
Carriage / Cartage Outward, Selling
respective period.
and Distribution Expenses, Commission
to selling agents / travelling agents,
Advertisement expenses, Bad debts
(if actual bad debts for the two periods
are not given), Brokerage, Travelling
Expenses relation to Sales Promotion
etc.
c)
Expenses related to Time :
e.g. Salaries, Office and Administration expenses , Rent , Rates
and Taxes, Printing and Stationary,
Telephone, Telegram and Postage,
Depreciation, Miscellaneous expenses
etc.
182
Advanced Accounting - I
On the basis of time in the
respective periods.
d)
Expenses exclusively relating to
Charge to Pre-incorporation
Pre-Incorporation Period
period.
Profit or Loss Prior to
Incorporation : Basis of
Apportionment
e.g. Vendor’s Salary, Interest on
Vendor’s Capital etc.
e)
Expenses exclusively relating to
Charge to Post-incorporation
Post - Incorporation Period
period.
NOTES
e.g. Interest on debentures,
Director fees, Directors Remmuneration , Preliminary expenses,
Share issue expenses, Underwriting
commission, Discount on issue of
Shares / Debentures, Formation
expenses etc.
f)
Interest on Purchase
Consideration to Vendor
i) For the period from the date of
acquisition of business to date of
• Charge to pre-incorporation
period
incorporation.
ii) For the period from the date of
incorporation to the date of payment.
g)
• Charge to post-incorporation
period.
Audit Fees :
i) For Company’s Audit under
section 227 of the Company’s
Charge to Post-incorporation
period.
Act 1956
ii) For Tax Audit under Section
44 AB of the Income Tax
On the basis of Turnover in the
respective period.
Act 1961.
Advanced Accounting - I
183
184
Advanced Accounting - I
vii)
viii)
ix)
Rates
Taxes
Insurance
Depreciation
Salaries
Repairs
Interest
iii)
iv)
v)
vi)
vii)
viii) Printing
Stationary
ii)
ix)
x)
x)
vi)
v)
iv)
iii)
ii)
i)
Rent
i)
Sales Promotion
Selling Expenses
Brokerage
Travelling Expenses
Bad Debts
Carriage Outward
Commission on Sales
Discount Allowed
Publicity Charges
ii)
i)
Capital
Interest on Partner’s
Vendor’s Salary
period only
Remuneration
Managing Directors
Shares and Debentures
Discount on issue of
Underwriting Commission
Formation Expenses
Directors Fees
Interest on Debenture
Preliminary Expenses
viii) Development Expenses
vii)
vi)
v)
iv)
iii)
ii)
i)
incorporation period only
NOTES
Advertisement
on sales basis)
expenses on time basis)
Applicable to pre-incorporation Applicable to post -
General Classification of Expenses and their basis of Allocation
Sales Ratio (Variable expenses
Summary Chart
Time Ratio (Fixed
4.4
Profit or Loss Prior to
Incorporation : Basis of
Apportionment
xvii)
xviii) Tendering Expenses
xiv)
xx)
xvii) Miscellaneous Expenses
xviii) Administration Expenses
xix) Telegram Charges
xx)
xxii) Electricity Charges.
xxi) Trunk Call Charges
xxi)
xvi)
xvi) Other Expenses
Managemen Expenses
xv)
Sundry Expenses
xv)
After Sales Service Expenses
Sales Tax
Allowances to Debtors
Freight Outward
Catalogue Expenses
Free Samples
Salary to Travelling Salesman
xiv)
Delivery Van Running Expenses
Packing Charges
xiv) General Expenses
xii)
Distribution Expenses
xiii)
Telephone Charges
xii)
xi)
xiii) Office Expenses
Bank Charges
xi)
Share Transfer Fees
Audit Fees
Reconstruction Expenses
Reorganisation Expenses
xv)
Dividend on Shares
xiv) Reserve for Bad Debts
xiii) Provision for Taxation
xii)
xi)
x)
ix)
Profit or Loss Prior to
Incorporation : Basis of
Apportionment
NOTES
Advanced Accounting - I
185
Profit or Loss Prior to
Incorporation : Basis of
Apportionment
The basis of apportionment for accurate computation of profit or loss prior to and
post incorporation can be understood with the help of following illustrations.
5.5
Illustrations
NOTES
ILLUSTRATION 1
Dabur India Ltd. was incorporated on 1st May, 2012 to take over the running
business from 1st January, 2012. The following is the Profit and Loss Account for
the year ended 31st December, 2012.
Dr. Profit and Loss Account for the year ended 31st December, 2012 Cr.
Particulars
To Rent and Taxes
‘
12,000
To Discount on Sales
3,500
To Insurance
3,000
To Discount on issue of Shares
3,000
To Electric Lighting
2,400
To Commission
6,000
To Staff Salaries
36,000
To Carriage
3,000
To Sundry Expenses
7,500
To Reorganisation Expenses
4,300
To Sales Promotion Expenses
4,000
To Bank Interest
1,500
To Irrecoverable Debts
2,000
Particulars
By Gross Profit B/D
By Interest on Investment
‘
1,55,000
2,500
To Discount on Issue of
Debentures
6,300
To Telegram Charges
3,000
To Net Profit C/D
60,000
1,57,500
1,57,500
The following details are also made available.
(1)
186
Advanced Accounting - I
The total turnover for the year ended 31st December, 2012 was as follows
•
Cash Sales
........ ‘ 1,29,000
•
Credit Sales
........ ‘ 3,71,000
Profit or Loss Prior to
Incorporation : Basis of
Apportionment
of which ‘ 2,00,000 were for the period upto 30th April, 2012
(2)
(3)
Investments were taken over by the company from the vendors as a part of
purchase consideration.
NOTES
Sales promotion expenses were directly proportionate to the turnover of
the company.
Ascertain the profit earned prior to and post incorporation period. Also
state very clearly the amount of profit available to write down goodwill.
SOLUTION
Working Notes :
1)
2)
3)
Important Dates :
•
Date of Purchase
..... 1st January, 2012
•
Date of Incorporation
..... 1st May, 2012
•
Date of Financial Close
...... 31st December, 2012
Calculation of Time Ratio :
Pre-Incorporation Time
:
Post Incorporation Time
4 months
:
8 months
1
:
2
Calculation of Sales Ratio :
Pre-Incorporation Sales
: Post-Incorporation Sales = Total Sales
‘ 2,00,000
:
2
‘ 3,00,000
‘ 5,00,000
3
4)
Interest on Investment is charged as income in total to Pre-incorporation
period as these investments were taken over by the company from the
vendors together with other assets as a part of purchase consideration on
1st January, 2012.
5)
Sales Promotion Expenses were directly proportionate to the turnover of
the company, hence allocated in Sales Ratio.
Advanced Accounting - I
187
Profit or Loss Prior to
Incorporation : Basis of
Apportionment
In the books of Dabur India Ltd.
Statement showing Profits earned Prior to and Post Incorporation
for the year ended 31st December, 2012
NOTES
Particulars
Basis of Ratio Total
Allocation
Sales
Interest on Investment Actual
Post-
Incorporation
‘
Gross Profit
Pre-
‘
‘
2:3 1,55,000
-
Incorporation
‘
62,000
2,500
‘
93,000
2,500
1,57,500
Rent and Taxes
Time
1:2
12,000
4,000
8,000
Discount on Sales
Sales
2:3
3,500
1,400
2,100
Insurance
Time
1:2
3,000
1,000
2,000
of Shares
Post
-
3,000
-
3,000
Electric Lighting
Time
1:2
2,400
800
1,600
Commission
Sales
2:3
6,000
2,400
3,600
Staff Salaries
Time
1:2
36,000
12,000
24,000
Carriage
Sales
2:3
3,000
1,200
1,800
Sundry Expenses
Time
1:2
7,500
2,500
5,000
Post
-
4,300
-
4,300
Expenses
Actual
2:3
4,000
1,600
2,400
Bank Interest
Time
1:2
1,500
500
1,000
Irrecoverable Debts Sales
2:3
2,000
800
1,200
Discount on Issue
Reorganisation
Expenses
Sales Promotion
Discount on Issue of
Debenture
Post
-
6,300
-
6,300
Telegram Charges
Time
1:2
3,000
1,000
2,000
35,500
24,700
Capital
Revenue
97,500
Net Profit
60,000
Nature of Profit
188
Advanced Accounting - I
1,57,500
64,500 64,500 93,000
93,000
‘
Therefore,
1)
Total Net Profit
60,000
2)
Profit Prior to Incorporation i.e. Capital Profit
35,300
3)
Profit Post Incorporation i.e. Revenue Profit
24,700
Profit or Loss Prior to
Incorporation : Basis of
Apportionment
Profits earned during the pre-incorporation period are the capital profits
available to write down goodwill, i.e. ‘ 35,300.
NOTES
ILLUSTRATION 2
Exide Industries Ltd. was incorporated on 30th June, 2012 to take over the
running business with effect from 1st April, 2012 . The Profit and Loss Account
for the year ended 31st March, 2013 was as follows
Dr. Profit and Loss Account for the year ended 31st March, 2013 Cr.
Particulars
‘
Particulars
To Commission on Turnover
2,100 By Gross Profit B/D
To Rent and Taxes
3,250 By Rent
To Advertisement
5,600
‘
84,000
640
To Travelling Allowances to
Administrative Directors
3,890
To Depreciation on Buildings
2,800
To Brokerage
To Management Salaries
350
16,000
To Tendering Expenses
7,000
To Repairs to Buildings
600
To Bad Debts
1,550
To Bad Debts Provision
1,080
To Allowances to Debtors
To Net Profit C/D
420
40,000
84,640
84,640
The accounts of the company disclosed the following facts :
1)
Average monthly turnover from July, 2012 was double than that of previous
months.
2)
Rent upto 30th June, 2012 was paid @ ‘ 200 per month and thereafter it
Advanced Accounting - I
189
Profit or Loss Prior to
Incorporation : Basis of
Apportionment
was increased by ‘ 50 per month.
3)
Bad Debts of ‘ 1,050 were related to sales effected before registration of
the company.
4)
Rent received were directly proportionate to time factor.
NOTES
You are required to find out profit prior to and post incorporation showing
the basis of apportionment. What accounting entry may be passed for the
transfer to profit prior to and post incorporation ?
SOLUTION
Working Notes :
1)
2)
3)
Important Dates :
•
Date of Purchase
..... 1st April, 2012
•
Date of Incorporation
..... 30th June, 2012
•
Date of Financial Close .
..... 31st March, 2013
Calculation of Time Ratio :
Pre-Incorporation Time
:
Post-Incorporation Time
3 months
:
9 months
1
:
3
Calculation of Sales Ratio :
The average monthly turnover from July, 2012 was double than that of
previous months. Let us assume that the average monthly sales from July,
2012 to be ‘ 2 per month. Hence, the average monthly sales before July,
2012 will be ‘ 1 per month. Now, the Sales Ratio will bw as follows :
Pre-Incorporation Sales
 3 months x ‘ 1
4)
190
Advanced Accounting - I
: Post-Incorporation Sales
:
9 months x ‘ 2
3
:
18
 1
:
6
Rent received were directly proportionate to time factor, hence allocated
in time ratio.
5)
Allocation of Rent and Taxes of ‘ 3,250.
Particulars
Pre
Post
‘
‘
Total
Profit or Loss Prior to
Incorporation : Basis of
Apportionment
‘
(a) Rent upto 30th June @ ‘ 200 per month
i.e. 3 months x ‘ 200
600
-
600
-
2,250
2,250
100
300
400
700
2,250
3,250
NOTES
(b) Rent after 30th June @ ‘ 250 per month
i.e. 9 months x ‘ 250
(c) Remaining balance will be Taxes which is
to be allocated in Time Ratio i.e. 1 : 3

6)
 Total
(+)
Allocation of Bad Debts of ‘ 1,550.
Bad Debts of ‘ 1,050 were related to sales effected before registration of
the company, i.e. pre-incorporation. Hence the remaining Bad Debts of ‘ 500
must be related to effected after registration of the company i.e. post-incorporation.
Advanced Accounting - I
191
Profit or Loss Prior to
Incorporation : Basis of
Apportionment
In the books of Exide Industries Ltd.
Statement showing Profits Prior to and Post Incorporation
for the year ended 31st March, 2013
NOTES
Particulars
Basis of Ratio Total
Allocation
Pre-
Post-
Incorporation
‘
‘
Incorporation
‘
‘
‘
Gross Profit
Sales
1:6
84,000
12,000
72,000
Rent received
Actual 1:3
640
160
480
84,640
Commission on Turnover Sales
1:6
2,100
300
1,800
Rent and Taxes
Actual -
3,250
700
2,550
Advertisement
Sales
1:6
5,600
800
4,800
Administrative Directors Post
-
3,890
-
3,890
Depreciation on Buildings Time
1:3
2,800
700
2,100
Brokerage
Sales
1:6
350
50
300
Management Salaries Time
1:3
16,000
4,000
12,000
Tendering Expenses
Sales
1:6
7,000
1,000
6,000
Repairs to Buildings
Time
1:3
600
150
450
Bad Debts
Actual -
1,550
1,050
500
1,080
-
1,080
420
60
360
3,350
36,650
Travelling Allowances to
Bad Debts Provision Post
-
Allowances to Debtors
1:6
Sales
44,640
Net Profit
40,000
Nature of Profit
Capital
84,640
12,160 12,160 72,480
Therefore,
192
Advanced Accounting - I
Revenue
‘
1)
Total Net Profit
40,000
2)
Profit Prior to Incorporation i.e. Capital Profit
3,350
3)
Profit Post Incorporation i.e. Revenue Profit
36,650
72,480
‘
Accounting Entry :
31st March, 2013
Profits and Loss A/c
Dr.
‘
40,000
To Profit Prior to Incorporation A/c
Profit or Loss Prior to
Incorporation : Basis of
Apportionment
3,350
To Profits Post Incorporation A/c
36,650
NOTES
(Being the transfer of profits prior to and post incorporation)
ILLUSTRATION 3
Forge India Ltd. was incorporated on 31st May, 2012 to acquire an existing
business from 1st April, 2012. The following is the Profit and Loss Account for the
year ended 31st March, 2013
Dr. Profit and Loss Account for the year ended 31st March, 2013 Cr.
Particulars
To Stock on 1/4/2012
To Purchases
‘
50,000 By Sales
1,33,000
Less:Return
Outwards
(-) 4,000
‘
Particulars
2,00,000
(i) Credit
1,82,000
(ii) Cash
(+) 21,500
1,29,000
2,03,500
To Wages
10,000 Less : Return
To Gross Profit C/D
88,000 Inward
(-) 3,500
By Stock on 31/3/2013
2,77,000
To Office Salary
18,000 By Gross Profit B/D
To Vendor’s Salary
6,000
To Telegram Charges
2,400
To Administrative Office Rent
3,600
77,000
2,77,000
88,000
To Repairs and Maintenance
of Delivery Van
3,300
To Sales Tax
2,200
To Taxation Provision
3,000
To Directors Fees
4,000
To Discount on Issue of Shares
2,850
To Interest on Purchase
Consideration
1,875
Advanced Accounting - I
193
Profit or Loss Prior to
Incorporation : Basis of
Apportionment
To Audit Fees
4,775
To Printing Charges
6,000
To Net Profit C/D
30,000
88,000
NOTES
88,000
Additional Information :
1.
Sales are of one commodity and at a fixed rate, and the average of the
monthly sales for the first two months was one-half of the average of the
monthly sales for the remaining period of the year.
2.
The purchase consideration of ‘ 90,000 was paid to vendor on 31st August,
2012. Interest @ 5% was paid on the purchase consideration to the date of
settlement.
You are required to prepare a statement showing profit or loss prior to and
post incorporation together with the accounting treatments of the same.
SOLUTION
Working Notes :
1)
2)
3)
Important Dates :
•
Date of Acquisition
..... 1st April, 2012
•
Date of Incorporation
..... 31st May, 2012
•
Date of Financial Close
..... 31st March, 2013
Calculation of Time Ratio :
Pre-Incorporation Time
:
Post Incorporation Time
2 months
:
10 months
1
:
5
Calculation of Sales Ratio :
The average monthly sales for the first two months was one - half of the
average of the monthly sales for the remaining period of the year. Let us
assume that the average monthly sales for the remaining period of the year,
to be ‘ 2 per month. Hence, the average monthly sales for the first two
months will be one-half i.e. ‘ 1 per month. Now, the Sales Ratio will be
follows :
194
Advanced Accounting - I
Pre-Incorporation Sales
:
Post-Incorporation Sales
2 months x ‘ 1
:
10 months x ‘ 2
 2
:
20
 1
:
10
4)
Allocation of Interest on Purchase Consideration :
Interest on purchase consideration (@ 5% of ‘ 90,000 for 5 months i.e.
‘ 1,875) was paid on the date of settlement i.e. upto 31st August, 2012 from
1st April, 2012 i.e. for 5 months.
 ‘ 1,875 / 5 months
=
‘ 375 per month
Pre-Incorporation
:
Post-Incorporation = Total
1/4/2012 to 31/5/2012
: 1/6/2012 to 31/8/2012 = 5 months
2 months x ‘ 375
:
3 months x ‘ 375
:
‘ 1,125
 ‘ 750
Profit or Loss Prior to
Incorporation : Basis of
Apportionment
NOTES
= ‘ 1,875
Advanced Accounting - I
195
Profit or Loss Prior to
Incorporation : Basis of
Apportionment
In the books of Forge India Ltd.
Statement showing Profits Prior to and Post Incorporation
for the year ended 31st March, 2013
NOTES
Particulars
Basis of Ratio Total
Allocation
Sales
Post-
Incorporation
‘
Gross Profit
Pre-
1:10
‘
‘
88,000
Incorporation
‘
‘
8,000
80,000
88,000
Office Salary
Time
1:5
18,000
3,000
15,000
Vendor’s Salary
Pre
-
6,000
6,000
-
Telegram Charges
Time
1:5
2,400
400
2,000
Administrative Office Rent Time
1:5
3,600
600
3,000
Repairs and Maintenance
of Delivery Van
Sales
1:10
3,300
300
3,000
Sales Tax
Sales
1:10
2,200
200
2,000
Taxation Provision
Post
-
3,000
-
3,000
Directors Fees
Post
-
4,000
-
4,000
Post
-
2,850
-
2,850
Consideration
Actual -
1,875
750
1,125
Audit Fees
Post
-
4,775
-
4,775
Printing Charges
Time
1:5
6,000
1,000
5,000
Discount on Issue of
Shares
Interest on Purchase
58,000
Net Profit
Nature of Loss/Profit
30,000
4,250 34,250
Capital Revenue
Loss Profit
88,000 12,250 8,000 80,000 80,000
196
Advanced Accounting - I
Therefore,
‘
1)
Total Net Profit
30,000
2)
Loss Prior to Incorporation i.e. Capital Loss
4,250
3)
Profit Post Incorporation i.e. Revenue Profit
34,250
Accounting Treatment :
1)
Profit or Loss Prior to
Incorporation : Basis of
Apportionment
NOTES
The loss suffered prior to incorporation (i.e. ‘ 4,250) is termed as Capital
Loss which may be (a) Debited to Goodwill Account
(b) Debited to Capital Reserve Account arising from acquisition of
business.
(c) Debited to Suspense Account, which can be written off later on as a
fictitious asset.
2)
5.6
The profits earned post incorporation (i.e. ‘ 34,250) are termed as ‘Revenue
Profit’ which may be available for distribution of dividend.
Summary
Basis Apportionment may be on (i) time basis (time ratio), (ii) turnover
basis (turnover or sales ratio) and (iii) combined or equitable basis (variable ratio)
(1) Time Basis : The profit and loss account is prepared upto the end of the
accounting year and then the profit or loss is divided on the basis of period prior to
and subsequent to incorporation.
(2) Turnover Basis : Under this method, the turnover of ‘pre’ and ‘post’
incorporation period will form the basis of apportionment. This method gives
exclusive weightage to turnover.
(3) Combined or Equitable Basis : This the best possible method of
apportionment. Under this method, a break up is introduced in the Profit and loss
Account though no distinction is made in the preparation of Trading Account.
Under this method, division is introduced at the gross profit.
5.7
Key Terms
Basis of Apportionment - (i) Time Basis (Time Ratio), (ii) Turnover Basis
(Sales Ratio) and (iii) Combined or Equitable Basis (Variable Ratio)
Advanced Accounting - I
197
Profit or Loss Prior to
Incorporation : Basis of
Apportionment
NOTES
5.8
Questions and Exercises
I.
Objective Questions
(A)
Multiple Choice Questions
(1)
Gross Profit should be allocated between two periods in the ratio of ......
while ascertaining profits prior to incorporation .
(a) Time
(b) Turnover
(c) Purchases
(d) Variables
(2)
Profits prior to incorporation are to be utilised to write off the value of....
assets acquired.
(a) Fixed
(b) Current
(c) Wasting
(d) Contingent
(3)
The audit fees paid for company audit under section 227 of the company’s
Act, 1956 must be charged to ...... incorporation period.
(a) Before
(b) Prior
(c) Pre
(d) Post
(4)
While ascertaining capital profits, vendor’s salaries are chargeable to .....
incorporation period.
(a) Next to
(b) Post
(c) Pre
(d) After
ANS : (1-b), (2-a), (3-d), (4-c)
198
Advanced Accounting - I
II.
Long Answer Questions
(1)
Explain the various basis of apportionment in computation of profit or loss
prior to and post incorporation.
(2)
What is ‘Time Basis?’ Prepare a list of at least ten items of expenses which
are to be apportioned on the basis of time ratio.
(3)
What is ‘Turnover Basis?’ Explain in brief the method of computation of
sales ratio with suitable example.
(4)
How would you allocate the following items of incomes and expenses?
Profit or Loss Prior to
Incorporation : Basis of
Apportionment
NOTES
(a) Gross Profit, (b) Interest on Debentures , (c) Discount Allowed, (d)
Share Transfer Fees, (e) Publicity Charges.
III.
Practical Problems
1.
Jog Engineering Ltd., purchased the running business from 1st October,
2011 and obtained its certificate of commencement on 1st February, 2012. The
accounts of the company for the year ended 30th September, 2012 disclosed the
following information.
a)
The turnover for the whole period amounted to ‘ 2,40,000 of which
‘ 40,000 related to the period from 1/10/2011 to 1/2/2012
b)
The Trading Account showed a profit of ‘ 96,000.
c)
The following items of expenses appeared in Profit and Loss Account.
‘
Preliminary Expenses
........
1,500
Rent
........
4,800
Reorganisation Expenses
........
750
Bad Debts
.......
2,000
(of which ‘ 700 related to debts created before 1/2/2012)
Staff Salaries
.......
12,000
Interest on Debentures
......
6,000
Depreciation on Machinary
.......
3,600
Formation Expenses
......
2,400
Other Expenses
......
1,800
Sales Commission
......
3,600
Electricity Charges
.......
2,400
Advanced Accounting - I
199
Profit or Loss Prior to
Incorporation : Basis of
Apportionment
Free Samples
.......
4,200
Travelling Expenses
.......
8,400
Interest to Vendors
.......
4,000
(@ 6% on ‘ 1,00,000 from 1/10/2011 to 31/5/2012 )
NOTES
You are required to prepare a statement showing profits prior to and
post incorporation.
2.
Kashyap Auto Ltd. was formed to take over a running business with effect
from 1st April 2012. The company was incorporated on 1st August, 2012 and the
certificate of commencement of business was received on 30 th September, 2012
The following was the Profit and Loss Account for the year ended 31st March,
2013
Dr.
Profit and Loss Account for the year ended 31st March, 2013
Particulars
To Salaries to Staff
‘
24,000 By Gross Profit B/D
To Travelling Expenses
8,400
To Stationery
2,400
To Sales Promotion
8,000
To Other Expenses
18,900
To Rent of Office Premises
13,200
To Directors Fees
5,600
To Management Expenses
2,100
To Bad Debts
1,600
To Allowances to Debtors
8,000
To Audit Fees
3,000
To Share Transfer Fees
1,500
To Interest to Vendors
2,100
To Distribution Expenses
Advanced Accounting - I
‘
1,60,000
12,600
To Depreciation
4,800
To Directors Fees
3,800
To Net Profit C/D
40,000
1,60,000
200
Particulars
Cr.
1,60,000
The following additional information is also available :
a)
The turnover for the whole period amounted to ‘ 2,24,000 of which
‘ 56,000 related to the period from 1/4/2012 to 1/8/2012
b)
Rent of Office Premises was paid @ ‘ 1,000 per month upto 30/9/2012
and thereafter, it was increased by ‘ 200 per month.
c)
Travelling expenses include ‘ 2,400 towards directors travelling expenses.
d)
Depreciation includes ‘ 300 for assets acquired in Post-Incorporation period.
e)
Purchase consideration was discharged by the company on 30/9/2012 by
issuing equity shares of ‘ 10 each at a discount of ‘ 1 per share.
Profit or Loss Prior to
Incorporation : Basis of
Apportionment
NOTES
You are required to prepare a statement showing Profits Prior to and
Post Incorporation.
3.
Lanco Global Ltd. was incorporated on 1st March, 2012 to take over the
remaining business with effect from 1st November, 2011. From the following Profit
and Loss Account for the year ended 31st October, 2012 find out the profit available
for distribution of dividends.
Advanced Accounting - I
201
Profit or Loss Prior to
Incorporation : Basis of
Apportionment
Dr.
Profit and Loss Account for the year ended 31st March, 2012
Particulars
To Opening Stock
NOTES
To Purchases
To Wages
To Gross Profit C/D
‘
Particulars
60,000 By Sales
‘
6,00,000
5,00,000 By Closing Stock
1,97,000
60,000 By Sale of Scrap
3,000
1,80,000
8,00,000
To Office Salaries
Cr.
15,000 By Gross Profit B/D
To Directors Fees
4,800 By Share Transfer Fees
To Rent and Taxes
9,000
To Audit Fees
1,500
8,00,000
1,80,000
1,000
To Discount on Issue of
Debentures
5,000
To Commission
3,600
To Depreciation on Fixed Assets
24,000
To Sundry Expenses
4,800
To Publicity Charges
18,000
To Printing Charges
3,600
To Discount on Sales
6,000
To Bad Debts
1,500
To Interest to Vendors
3,000
To Preliminary Expenses
6,200
To Net Profit C/D
75,000
1,81,000
1,81,000
Additional Information :
202
Advanced Accounting - I
a)
Turnover upto 1st March, 2012 amounted to ‘ 2,50,000.
b)
Bad Debts include ‘ 1,000 relating to debts created before incorporation.
c)
Interest to Vendors on purchase consideration was paid on 1st May, 2012.
5.9
Further Reading
•
Tulsion P. C. - Accountancy - New Delhi - Tata Mc Graw - Hill Publishing
Co. Ltd - 2010.
•
Sharma R.K., Popil R.S. - Financial Accounting - New Delhi - Kitab Mahal
- 2008.
Profit or Loss Prior to
Incorporation : Basis of
Apportionment
NOTES
Advanced Accounting - I
203
Topic 3
Final Accounts of Banking
Company
Unit 6
Introduction to Banking Company
Unit 7
Non - Performing Assets (NPA)
Unit 8
Final Accounts of Banking
Company
Unit 6
Introduction to Banking Company
Introduction to Banking
Company
Structure
6.0
Introduction
6.1
Unit Objectives
6.2
Introduction to Banking Company
6.3
Legal Provisions
(a)
Restriction on Business
(b)
Non-Banking Assets and its Disposal
(c)
Capital Structure
(d)
Reserve Fund
(e)
Statutory Reserve
(f)
Cash Reserve
(g)
Reconstruction on Loans and Advances
(h)
Bills for Collection
(i)
Acceptance, Endorsement and Other Obligations
(j)
Rebate on Bills Discounted
(k)
Letter of Credit and Traveller’s Cheques
(l)
Provision for Bad and Doubtful Debts
(m)
Provision for Taxation
(n)
Provisions and Contingencies
(o)
Accounting Year
6.4
Illustrations
6.5
Summary
6.6
Key Terms
6.7
Questions and Exercises
6.8
Further Reading
NOTES
Advanced Accounting - I
205
Introduction to Banking
Company
NOTES
6.0
Introduction
Etymologically, the word ‘Bank’ can be traced to the French word “Banque”
and the Italian word “Banco” meaning “chest” and ‘bench’ respectively. These
words sum up the two basic functions that Commercial Banks perform. Chest is
a place where valuables are kept, it denotes the safekeeping function. A modern
Bank’s chest is the portfolio of earning assets. These are the life-blood of a Bank.
The word “Banco” suggests a table, a counter or a place of transacting business.
With reference to a Bank, these benches consist of a teller’s window, a loan
officer’s desk , a Bank manager’s cabin, desk and so on. These benches provide
the customers a medium to approach the bank for conducting banking transactions.
Viewed thus, the two basic functions of Commercial Bank consist of (a) providing
safekeeping functions and (b) furnishing place for transacting business in money.
Commercial Banks are Joint Stock Companies dealing in money and credit.
Banking Companies in India are governed by the Banking Regulation Act,
1949. However, provision of the Companies Act, 1956 are also applicable to
Banking Companies, provided no special provisions are made in the Banking
Regulation Act, to that effect.
Ordinary rules and regulations of Book-keeping are also applicable in
maintaining the books of accounts of Banking Companies. However, because of
the special nature of the transaction of the Banking Company, there are some
typical items which require, explanation. Further, revised formats for preparation
of Balance Sheet and Profit and Loss Account have been introduced from the
year 1991-92. Hence, we are going to discuss important legal provisions, as well
as revised formats of Balance Sheet and Profit and Loss Account of the Banking
Companies Act, 1949 as per Banking Regulations.
6.1
Unit Objectives
After studying this unit you should able to :
206
Advanced Accounting - I
•
Know the meaning of Banking Company.
•
Understand the important legal provisions of Banking Regulation Act, 1949.
•
Know the meaning of “ Non-Banking Assets”.
•
Explain how Banking Company create a Reserve Fund.
•
Know the restriction on Loans and Advances
•
Know how to maintain “Bills for Collection Register”
•
Explain how a Bank accept bills on behalf of its customers.
•
Understand the term “ Rebate on Bills Discounted”
•
Explain the term “Provision for Bad and Doubtful Debts”.
6.2
Introduction To Banking Company
This Banking Regulation Act, 1949 defines Banking Company as any
company which transacts the business of Banking in India. Section 5 (b) defines
Banking as “ accepting for the purpose of lending or investment, of deposits of
money from the public, to be payable on demand or otherwise and withdrawable
by cheque, draft, order or otherwise”. Thus, the main functions of a banking
company are, (1) to accept deposits of money from the public, and (2) to lend or
invest these deposits.
Introduction to Banking
Company
NOTES
Section 6 of the Act, provides that in addition to the business of banking,
the Banking Company may also engage in any one or more forms of business,
viz.
(a)
the borrowing, raising or taking up of money; the lending or advancing of
money either upon or without security; the drawing, making, accepting,
discounting, buying, selling, collecting and dealing in bills of exchange,
promissory notes, coupons, drafts, bills of lading, railway receipt, warrants,
debentures, certificates and other instruments and securities whether
transferable or negotiable or not; the granting and issuing of letters of credit,
traveller’s cheques and circular notes; the buying, selling and dealing in
million and specially the buying and selling of foreign exchange including
foreign bank notes; the acquiring, holding, issuing on commission,
underwriting and dealing in stock, funds, shares, debentures, stock, bonds,
obligations, securities and investments of all kinds; the purchasing and selling
of bonds; scrips or valuables on deposit or for safe custody or otherwise;
the providing of safe deposit vaults; the collecting and transmitting of money
and securities;
(b)
acting as agents for any Government or local authority or any other person
or persons the carrying on of agency business of any description including
the clearing and forwarding of goods, giving of receipt and discharges and
otherwise acting as an attorney on behalf of customers but excluding the
business (of a Managing Agent or Secretary and Treasurer) of a company;
(c)
contracting for public and private loans and negotiating and issuing the
same;
(d)
the effecting insuring, guaranteeing, underwriting, participating in managing
and carrying out of any issue, public or private, of state, municipal or other
loans or shares, stock debentures or debenture stock of any company,
corporation or association and lending of money for the purpose of any
such issue;
(e)
carrying on the transacting of every kind of guarantee and indemnity
business;
(f)
managing, selling and realising any property which may come into the
possession of the company in satisfaction or part satisfaction of any of its
claims;
Advanced Accounting - I
207
Introduction to Banking
Company
NOTES
(g)
acquiring and holding and generally dealing with any property or any right,
title or interest in any such property which may form the security or part of
the security for any loans or advances or which may be connected with any
such security;
(h)
undertaking and executing trust;
(i)
undertaking the administration of estates as executor, trustee or otherwise.
(j)
establishing and supporting or aiding in the establishment and support of
associations, institutions, funds, trusts and conveniences calculated to benefit
employees or ex-employees of the company or the dependents, or
connections of such person; granting pensions and allowances and making
payments towards insurance subscribing to or guaranteeing money for
charitable or benevolent objects or for any exhibition or for any public,
general or useful objects;
(k)
the acquisition, construction, maintenance and alteration of any Buildings or
Works necessary or convenient for the purposes of the company;
(l)
selling, improving, managing, developing, exchanging, leasing, mortgaging,
disposing, of or turning into account or otherwise dealing with all or any part
of the property and right of the company;
(m)
acquiring and undertaking the whole or any part of the business of any
person or company, when such business is of a nature enumerated or
described in this sub-section;
(n)
doing all such other things as are incidental or conducive to the promotion
or advancement of the business or the company; or
(o)
any other form of business which the Central Government may by
notification in the Official Gazette specify as a form of business in which it
is lawful for a Banking Company to engage.
6.3
Legal Provisions
Important Legal Provisions of The Banking Regulation Act, 1949
are as follows:
a)
Restriction on Business :
Section 8 of the Act imposes certain restrictions on the business of a Banking
Company. These restrictions are as follows.
208
Advanced Accounting - I
i)
No Banking Company can, directly or indirectly, deal in the buying or
selling or bartering of goods except in connection with the realisation of
security given to it or held by it.
ii)
No Banking Company can engage in any trade, or buy or sell or barter
goods for other except in connection with bills of exchange.
iii)
b)
No Banking Company can hold shares in any company other than its
own subsidiary company, whether as pledges, mortgages or absolute
owner, of an amount exceeding 30% of the paid up share capital of the
other company or 30% of its own paid-up share capital and reserves,
whichever is less.
Non Banking Assets and its Disposal :
Introduction to Banking
Company
NOTES
A Banking Company cannot acquire certain assets, but it can lend money
against the security of such assets. Naturally, if the borrower fails to repay the
loan, the Banking Company may take possession of such assets offered as security.
Such assets are called Non - Banking Assets and must be shown separately in
the Balance - Sheet as “Non - Banking Assets” in Schedule 11. Any income
from such assets must be shown separately in the Profit and Loss Account of the
Bank.
Section 9 of the Banking Regulation Act, 1949 provides that a Banking
Company must dispose off any immovable property however acquired, except
that required for its own use, within a period of seven years from the date of
acquisition of such assets. However, the Reserve Bank can extend this time for
its disposal upto a further period of 5 years. It is important to note here that, if the
Bank acquires such assets which are allowed to be held by a bank (i.e. Government
Securities), it can continue to hold them for an indefinite period. Such assets are
not to be treated as Non-Banking Assets and need not be disposed off.
c)
Capital Structure :
Section 12 of the Banking Regulation Act, 1949 provides, that,
i)
the subscribed capital of a Banking Company must not be less than
50% of its Authorised Capital; and
ii)
its paid-up capital must not be less than 50% of its subscribed capital.
This section further provides that the share capital of a Banking Company
should consist only ordinary or equity shares and the voting right of any single
shareholders should not exceed 1% of the total voting rights.
d)
Reserve Fund :
i)
Every Banking Company incorporated in India shall create a Reserve
Fund and [* * *] shall, out of the balance of profit of each year; as
disclosed in the Profit and Loss Account prepared under Section 29
and before any dividend is declared, transfer to the Reserve Fund a
sum equivalent to not less than twenty percent of such profit.
ii)
Notwithstanding anything contained in sub - section i) the Central
Government may, on the recommendation of the Reserve Bank and
having regard to the adequacy of the paid - up capital and reserve of a
Banking Company in relation to its deposit labilities, declare by order in
writing that the provisions of sub-section i) shall not apply to the Banking
Company for such period as may be specified in the order :
Advanced Accounting - I
209
Introduction to Banking
Company
NOTES
Provided that no such order shall be made unless, at the time it is made,
the amount in the Reserve Fund under sun-section i) together with the amount in
the Share Premium Account is not less than the paid-up capital of the Banking
Company.
ii) Where a Banking Company appropriates any sum or sums from the
Reserve Fund or the Share Premium Account, it shall, within twenty-one days
from the date of such appropriation, report the fact to Reserve Bank explaining
the circumstances relating to such appropriation :
Provided that the Reserve Bank may, in any particular case, extend the
said period of twenty-one days by such period as it think fit or condone any delay
in the making of such report.
[**]
Certain words omitted by Act 36 of 1962, section 3
(w.e.f. 16/9/1962)
[*]
e)
Inserted by Act 36 of 1962, w.e.f. 1/10/1959. section 3.
Statutory Reserve :
Section 17 of the Banking Regulation Act, 1949 makes it obligatory for a
Banking Company incorporated in India to create a Reserve Fund and transfer
to it at least 20% of its annual profits as disclosed by its Profit and Loss Account
before declaration of dividend. Such transfer of profits to the Reserve Fund Account,
if any, exceeding its paid - up capital. The Central Government may, however,
grant an exemption in this regard on the recommendation of the Reserve Bank
of India. If any amount from this statutory Reserve Fund is used, it must be
reported to the Reserve Bank within 21 days of such use.
f)
Cash Reserve :
Section 42 of the Reserve Bank of India Act, 1934 requires that a scheduled
bank should maintain with the Reserve Bank of India an average daily balance of
at least 3% of its total time and demand liabilities in India. But the Reserve Bank
of India has been given power under Section 42 of the Reserve Bank of India Act
to raise the Cash Reserve upto 20%.
According to Section 18 of the Banking Act, every non - scheduled bank is
also required to maintain a Cash Reserve with itself or with Reserve Bank of
India a sum equal to at least 3% of its total time and demand liabilities in India.
Over and above the Cash Reserve, under Section 24, every Banking
Company is required to maintain in India at least 20% not exceeding 40% of its
total time and demand liabilities in cash, gold or unencumbered approved securities
valued at a price not exceeding the current market price. This is known as Statutory
Liquidity Reserve requirement. However, this percentage changes from time
to time on the basis of general economic conditions of the country.
210
Advanced Accounting - I
g)
Restriction on Loans and Advances :
Introduction to Banking
Company
Section 20 of the Banking Regulation Act, 1949 as amended by the Banking
Laws (Amendment) Act, 1968 provides that -
h)
i)
no Banking Company can grant any loans or advances on the security
of its own shares; and
ii)
no Banking Company can enter into any commitment for granting any
loan or advance to or on behalf of (a)
any of its directors, or
(b)
any firm in which any of its directors is interested as partner, manager,
employee or guarantor, or
(c)
any company (other than a subsidiary of the Banking Company or
a company registered under Section 25 of the Companies Act or a
Government Company) of which any of its directors is a director,
manager, employee or guarantor or in which he hold substantial
interest, or
(d)
any individual in respect of whom any of its directors is a partner or
guarantor.
NOTES
Bills for Collection :
Today selling is considered to be a very simple activity even though the
seller and the buyer stays at different places and are unknown to each other,
through a special service provided by the Bank to them viz. Bills for Collection
being Bills Receivables. As per the purchase order the seller will supply specific
type of goods to the buyer through railway or motor lorry or ship transport, but the
important documents viz. railway or motor lorry receipt or bill of lading together
with a bill of exchange drawn on the buyer, to their Bank. The buyer’s Bank after
receiving all these documents requests the buyer to honor the bill and deposit the
amount of bill in the Bank immediately. After receiving the necessary amount, the
Bank hands over the concerned document to the buyer who ultimately submits
these documents to the transport authority and gets the delivery of the goods. The
Bank after receiving the amount from the buyer’s Bank, pays the same to the
seller. For rendering this typical service of collecting the amount on behalf of the
seller, the bank charges a certain commission. It is more advantageous to the
buyer as well as to the seller, as the seller gets the sale amount without which
goods are not delivered to the buyer and as the buyer gets the required goods
when he pays the necessary amount to the Bank. Thus, Bills for Collection are
certain bills received by the Bank from their customers to collect them on their
due dates from the acceptors and credit the amount to their customers Current
Account. These bills are recorded separately in a special book viz. “ Bills for
Collection Register” on collection of cash from the buyer the following journal
entry is passed :
Advanced Accounting - I
211
Introduction to Banking
Company
Cash A/c
Dr. (Total amount received)
To Customer’s Current A/c (The amount of bill lags commission charged)
To Commission on Bills for collection A/c (The amount of commission
charged)
NOTES
At the end of the year the bills for collection still to be collected are shown
separately as Bills for Collection, after contingent liability as outside the Balance
Sheet.
i)
Acceptances, Endorsements and Other Obligations :
A Bank may accept bills on behalf of its customers and give advantage of
its credit to the customers. On maturity, the Bank collects the amount of such bills
from the respective customers and honors them on due dates. However, if the
Bank could not collect the amount from the customers for whom it was accepted,
the bank has to honour the bill on the due date by paying its own money.
The bank incurs the second liability either by accepting the bills on behalf of
clients, or by endorsing the bills accepted by the clients, or by standing surety or
guarantee on behalf of the client. (The term ‘ other obligations’ includes letters of
credit issued and guarantee given by the bank on behalf of its customers). This
item is shown as a Contingent Liability outside the Balance Sheet.
j)
Rebate on Bills Discounted :
A Bank may purchase a bills receivable at a discount in which case the
journal entry is passed as under :
Bills Receivable A/c
Dr.
To Customer’s Current A/c
(If on Credit)
To Bank A/c
(If for Cash)
To Discount Received A/c
Hence, as per the entry the entire amount of discount is credited to ‘Discount
Received Account’. However, it is possible that maturity date of the bills discounted
fails during the next financial year. Hence, the total amount of discount received
should not be considered as revenue income of the current year. Therefore, this
amount relating to next year, being an ‘discount received in advance’ is to be
carried forward as a ‘other liability’ and termed as ‘Rebate on Bills Discounted’
or ‘Unexpired Discount’. The following example will clarify the concept well.
A Bill of Exchange drawn and accepted on 1st January, 2010 ‘ 50,000
maturing on 31st May, 2010 is discounted @ 10%. The discounting entry will be as
follows :
Bills Receivable A/c
To Bank A/c
212
Advanced Accounting - I
To Discount Received A/c
Dr.
50,000
45,000
5,000
Out of the total discount of ‘ 5,000, ‘ 3,000 (i.e. for 3 months for January,
February and March) relates to current year, whereas for 2,000 (i.e. for 2 months
for April and May) relates to next year. Hence, out of ‘ 5,000, ‘ 2,000 being
discount received in advance must be transferred to Rebate on Bills Discounted
Account from Discount Received Account by passing the adjusting entry as
follows :
Introduction to Banking
Company
NOTES
Discount Received A/c
Dr.
2,000
To Rebate on Bills Discounted A/c
2,000
Hence, ‘ 2,000 will be deducted from Interest and Discount Account in
the Profit and Loss Account and shown as a ‘Other Liability’ in the Balance
Sheet.
Accounting Treatment :
i)
If it is given in Trial Balance, Rebate on Bills Discounted is to be
shown only on the liability side of the Balance - Sheet as ‘Other
Liabilities’.
ii)
If an opening balance is given in the Trial Balance, Rebate on Bills
Discounted is to be only added to ‘Interest and Discount Account’
in Profit and Loss Account.
iii)
If it is given for adjustment, Rebate on Bills Discounted is to be
deducted from ‘Interest and Discount Account’ in Profit and Loss
Account and shown as ‘Other Liabilities’ in the Balance-Sheet on
the liability side.
EXAMPLE
Calculate rebate on bills discounted as on 31st March, 2010 from the following
information.
Sr. No
Date of Bill
Amount
Period
‘
Rate of
Discount
a)
15.1.2010
25,000
5 Months
8%
b)
10.2.2010
15,000
4 Months
7%
c)
26.2.2010
20,000
4 Months
7%
d)
20.3.2010
30,000
3 Months
9%
Advanced Accounting - I
213
Introduction to Banking
Company
ANSWER
Statement showing Calculation of Rebate on Bills Discounted
as on 31/3/2010
NOTES
Sr.
Date of
No.
Bill
Period
Due date
Days
Amount Rate of Amount of
(after days beyond
of Bill
Discount Discount
‘
of grace) 31.3.2010
‘
a)
15.1.2010
5 Months
18.6.2010
79
25,000
8%
432.88
b)
10.2.2010
4 Months
13.6.2010
74
15,000
7%
212.88
c)
25.2.2010
4 Months
28.6.2010
89
20,000
7%
341.37
d)
20.3.2010
3 Months
23.6.2010
84
30,000
9%
621.37
Total
1,608.50
Working Notes :
i)
Calculation of Days beyond 31.3.2010
April
ii)
May
June
a)
30
+
31
+
18
=
79
b)
30
+
31
+
13
=
74
c)
30
+
31
+
28
=
89
d)
30
+
31
+
23
=
84
Journal Entry :
Interest and Discount A/c
Dr. 1,608.50
To Rebate on Bills Discounted A/c
k)
Total
1,608.50
Letters of Credit and Traveller’s Cheques :
Letters of Credit or Circular Letters or Circular Notes are Letters addressed
by a banker to correspondents certifying that a person named there in is entitled to
draw on him or his credit upto a certain sum.
A person desiring to have such instrument of credit from a Bank is required
to deposits full value of such instrument with the issuing Bank. Therefore, any of
such instruments remaining unpaid on the date of a Balance Sheet form a liability
of the Bank.
l)
214
Advanced Accounting - I
Bills Payable :
Bills Payable include the unpaid Bank drafts, telegraphic transfers, Bankers
cheque, mail transfers and travellers cheque etc. issued by a bank on another
bank or its own branch. Any such instruments remaining unpaid on the date of a
Balance Sheet form liabilities of the Bank.
m)
Interest on Doubtful Debts :
Introduction to Banking
Company
Interest earned on doubtful debts may be treated in any of the
following ways :
n)
i)
Interest Suspense Method : Such interest is credited to Interest
Suspense Account.
ii)
Cash Method : No entry is to passed till cash is received.
iii)
Accrual Method : Full amount is credited to Interest Account and a
provision for bad and doubtful debts is made with adequate amount.
NOTES
Provision for Bad and Doubtful Debts :
The amount of bad debts and provisions for bad debts is to be charged
under the heading “Provisions and Contingencies” in the Profit and Loss Account
and the Balance Sheet. The advances are shown after deduction of these items.
o)
Provision for Taxation :
The amount of Provision for Taxation has to be charged to the Profit and
Loss Account under the heading “Provisions and Contingencies” in the Profit and
Loss Account and in the Balance Sheet, it is shown under the heading “Other
Liabilities and Provisions” on the liabilities side.
p)
Provisions and Contingencies :
It includes all provisions made for bad and doubtful debts, provision for
taxation, provisions for dimunition in the value of investments, transfer to
contingencies and other similar items.
q)
Accounting Year :
Every Banking Company should prepare a Balance Sheet and Profit and
Loss Account - as on 31st March of each year in the form set out in the Third
Schedule of the Banking Regulation Act or the one as near thereto, as the
circumstances admit w.e.f. 1989. But in the case of a foreign Banking, Company,
the Profit and Loss Account may be prepared as on a date not earlier than two
months before 31st December.
The legal provisions of the Banking Regulation Act, 1949 can be understood
with the help of following illustrations :
Advanced Accounting - I
215
Introduction to Banking
Company
6.4
Illustations
ILLUSTRATION 1
NOTES
Calculation rebate on bills discounted as on 31st March, 2014 from the following
analytical information relating to bills discounted.
Date of Bill
Amount
Monthly
Rate of Discount
2014
‘
Periods
% p.a.
07.1.2014
40,000
4
10
13.2.2014
35,000
3
8
04.3.2014
45,000
3
9
24.3.2014
30,000
2
10
SOLUTION
Statement Showing Calculation of Rebate on Bills Discounted
as on 31st March, 2014
Date of Monthly Date of
of
Days
Periods Maturity Beyond
Bill
Amount Rate
‘
31/3/2014
of
Total
Calculation of
Discount
Rebate on Bills
‘
Discounted
Discount
‘
% p.a.
7/1/2014
4
13/2/2014
3
04/3/2014
3
24/3/2014
2
A M
10/5/2014 30 + 10
40,000
= 40
A M
16/5/2014 30 + 16 35,000
= 46
A M J
07/6/2014 30+31+7 45,000
= 68
A M
27/5/2014 30 + 27 30,000
40
10
4,000
4,000 x
8
2,800
46 = 352.88
2,800 x
9
4,050
68 = 754.52
4,050 x
10
3,000
3,000 x
365
= 438.36
365
365
57
365
= 468.49
= 57
2014.25
Hence, Rebate on Bills Discounted as on 31st March, 2014 is ‘ 2014.25
which will be adjusted with the help of following journal entry.
Discount Received A/c
To Rebate on Bills Discounted A/c
(Being provisions made for rebate
216
Advanced Accounting - I
on bills discounted as on 31/3/2014)
Dr.
2014.25
2014.25
6.5
Summary
•
Banking may be defined as “accepting for the purpose of lending or
investment of deposits of money from the public, to be payable on demand
or otherwise and with drawable by cheque.”
•
Banking Companies in India are governed by Banking Regulation Act 1949.
However, provisions of Companies Act, 1956 are also applicable to Banking
Companies, ordinary rules and regulations of Book-keeping are also
applicable in maintaining the ‘Books of Accounts’ of Banking Companies.
•
A revised format for preparation of Balance Sheet and Profit and Loss
Account have been introduced from the year 1991-92.
•
Because of special nature of transactions of Banking Company there are
some typical items which requires explanation.
•
Every Banking Company should prepare a Balance Sheet and Profit and
Loss Account on 31st March on each year in the form set out in the Third
Schedule of Banking Regulation Act. In the case of a foreign banking
company, the Profit and Loss Account, may be prepared as on a date not
earlier than two months before 31st December.
6.6
Introduction to Banking
Company
NOTES
Key Terms
(a) Banking Company : A banking company is a company which transact
the business of banking in India. The main function of a banking company are (i)
to accept deposit of money from the public, and (ii) to lend or insert these deposits.
(b) Statutory Reserve : A reserve created by Banking Company as per
section 17 of Banking Regulation Act 1949.
(c) Bills for Collection : The bills which are received by the banks from its
clients to collect them on their due dates from the acceptors and credit the amount
to their (clients) current account.
(d) Rebate on Bills Discounted : A banking company charges discount in
advance for the full period of the bill of exchange discounted with it.
(e) Letter of Credit : Letter of Credit is a letter addressed by a banker to
correspondent certifying that a person named there in is entitled to draw on him or
his a credit upto a certain sum.
Advanced Accounting - I
217
Introduction to Banking
Company
NOTES
6.7
Questions and Exercises
I.
Objective Questions
A)
Multiple Choice Questions
(1)
Banking companies in India are governed by the Banking Regulation Act...
(a) 1949
(b) 1961
(c) 1950
(d) 1947
(2)
Every Banking company incorporated in India shall transfer to the Reserve
Fund a sum equivalent to not less than........ out of the balance of profit of
each year.
(a) Twenty Two Percent
(b) Twenty Percent
(c) Twenty Five Percent
(d) Fifteen Percent
(3)
Banks are to recognise their income on....... basis in respect of income on
performing assets.
(a) Cash
(b) Actual
(c) Accrual
(d) Advance
(4)
Sun-standard assets are certain loan assets of a Bank which are classified
as...... asset for a period not exceeding two years.
(a) Performing
(b) Productive
(c) Wasting
(d) Non - performing
Ans. : (1- a), (2 - b), (3 - c), (4 - d)
218
Advanced Accounting - I
II.
Long Answer Questions
(1)
Explain the important provisions of The Banking Regulation Act, 1949 in
relation to Restriction on Business.
(2)
What is ‘Statutory Reserve?’ How it differs from ‘Cash Reserve’?
(3)
What are ‘Bills for Collection’? Explain in brief the accounting treatment of
Bills for collection .
(4)
Explain the legal meaning of the term ‘Bank’ and ‘Acceptances,
Endorsement and Other Obligations’
(5)
What is ‘Rebate on Bills Discounted’? State the accounting treatment of
Rebate on Bills Discounted.
III.
Practical Problems
Introduction to Banking
Company
NOTES
(1) From the following details made available by a Bank as on 31st March,
2014 calculate the Rebate on Bills Discounted and also show the accounting entries
for rebate on bills discounted.
Date of Bill
Period of Bills Amount of
(Months)
Bills
Rate of Discount
@ % - p.a.
‘
6.8
09.1.2014
4
9,000
7
03.2.2014
3
8,000
8
14.3.2014
2
7,000
9
29.3.2014
3
8,500
7
Further Reading
•
Shukla M.C., Grewal T.S. and Gupta S.C. - Advanced Accounts - New
Delhi : S. Chand and Co. Pvt. Ltd. 2013.
•
Tulsion P.C. - Accounting - New Delhi - Tata Mc Graw - Hill Publishing
Co. Ltd. 2010
Advanced Accounting - I
219
Unit 7
Non Performing Assets (NPA)
Non Performing Assets (NPA)
Structure
7.0
Introduction
7.1
Unit Objectives
7.2
Non Performing Assets (NPA)
7.2.1
Meaning
7.2.2
Classification of Assets
7.2.3
Provision Against Various Assets
7.2.4
Calculation of “Income Recognition”
7.3
Annexure I
7.4
Annexure II
7.5
The Banking Regulation Act, 1949. Schedule I - Amendments
7.5.1
NOTES
Additional Disclosures by Banks in “Notes to Accounts”
7.6
Illustrations
7.7
Summary
7.8
Key terms
7.9
Questions and Exercises
7.10 Further Reading
7.0
Introduction
An asset becomes NPA (Non Performing Assets) when expected income
from it is not received by the bank within a certain period from the end of the
quarter. There are two types of assets in Banking sector. (i) Performing Assets
and (ii) Non-Performing assets. Assets which are not non-performing are
performing assets. An asset become non-performing when it ceases to generate
income for bank.
If interest and /or instalment of principal of term loan remain over due for a
period of more than 90 days it is treated as NPA. If cash credit and overdraft
remain “out of order” it is treated as NPA. If “Bills purchased and discounted”
remain overdue and unpaid for a period of more than 90 days, they are treated
NPA. In case of agricultural advances for short duration crops” if interest and \ or
interest and installment of principal remains overdue for two harvest seasons it is
treated as NPA. If interest and/or installment of principal remains overdue for
Advanced Accounting - I
221
Non Performing Assets (NPA)
NOTES
one crop season the assets like “ Agricultural Advances for Long Duration Crops”
is treated NPA.
Actually the identification of NPA is to be done on the basis of the position
“as on the Balance Sheet” date. If an account has been regularised before the
Balance - Sheet date by payment of overdue amount through genuine sources the
account need not be treated as NPA.
7.1
Unit Objectives
After studying this unit you should be able to :
•
•
Understand the meaning of NPA.
Describe performing assets and non-performing assets.
•
Identify the classification of assets.
•
Calculate “Income Recognition”.
•
Understand IRAC ( Income Recognition and Assets Classification) norms
in connection with NPAs.
•
Know ‘Classification of Assets for provisioning’.
7.2
Non - Performing Assets (NPA)
An Asset Account becomes non- performing when it ceases to
generate income for a Bank. Assets are classified into two categories i.e.
i) Performing Assets and ii) Non- Performing Assets. A chart given below in
Figure 7.1 shows the Classification of Assets of Banking Companies.
222
Advanced Accounting - I
Non Performing Assets (NPA)
ASSETS IN BANKING SECTOR
Performing Assets
(Standard Asset)
Non Performing
Assets
(Sub-standard Assets)
Provisioning 10% of
Balance Outstanding
(Loss Assets)
Provisioning 100% of
Balance Outstanding
Doubtful Assets
NOTES
Provision Against various Assets
Secured Portion
Unsecured portion
Provision 100% of Balance Outstanding
Upto 1 year
Above 1 year and upto 3 years
Upto 3 year
Provisioning 20% of
Balance Outstanding
Provisioning 30% of
Balance Outstanding
Provisioning 50% of
Balance Outstanding
Fig. 7.1 : Classification of Assetf Banking Companies
7.2.1 Meaning
Assets which are not non performing are performing assets. An asset
become non performing when it ceases to generate income for Bank. The term
non performing asset means a credit facility in respect of which the interest or
installment remains ‘past due’ for a period of two quarters i.e. six months. An
amount under any of the credit facilities i.e. term loans, cash credit and overdrafts,
bills purchased and discounted etc. is to be treated as ‘past due’ when it has
remained outstanding for thirty days beyond the due date. Moreover, if one of the
account has become a non performing asset, all the accounts of the borrower will
be treated as non performing assets. However, credit facilities backed by
Government guarantee though ‘past due’ should not be treated as non performing
assets. Assets of the banks are classified as performing assets and non performing
assets for the purpose of “income recognition”.
Advanced Accounting - I
223
Non Performing Assets (NPA)
NOTES
Instructions from R.B.I. for ‘Income Recognition’ :
Banks have been advised by the Reserve Bank of India that they should
identify the non performing assets and ensure that interest on such non performing
assets is not recognised as income and taken to the Profit and Loss Account.
Banks are to recognise their income on Accrual Basis in respect of income on
performing assets and on Cash Basis in respect of income on non performing
assets. Any interest accrued and credited to income account must be cancelled
by a reverse entry once the credit facility comes under the category of non
performing assets.
7.2.2 Classification of Assets
Banks are required to classify the loan assets (advances) into four categories
viz.: a) Standard Assets; b) Sub-Standard Assets; c) Doubtful Assets; and d) Loss
Assets.
a) Standard Assets :
Standard Asset is one which does not disclose, any problem and which
does not carry more than normal risk attached to the business. Such asset is
considered as performing assets.
b) Sub-standard Assets :
Sub-standard Assets is one which has been classified as a non performing
asset (NPA) for a period not exceeding two years. There is no promise of
recovering the dues in full, having regard to the value of security or current networth
of the borrower or guarantor, hence the possibility of loss in realising such debts.
Term Loans in respect of which installments of principal are overdue for
more than one year are treated as sub-standard assets Also, the assets where the
terms of loans agreement regarding payment of interest and principal have been
re-negotiated or re-scheduled after commencement or production, should be treated
as sub-standard assets. These assets may again be graded upto standard asset, if
at least two years payments of principal and interest are made according to rescheduled terms to the satisfaction of the banks.
c) Doubtful Assets :
A Doubtful Asset is one which has remained as a non-performing asset
(NPA) for a period exceeding two years. Term Loans in respect of which
installments of principal remains overdue for more than two years should be treated
as doubtful. Moreover, assets rescheduling does not entitle the bank to upgrade
the quality of advance automatically.
d) Loss Assets :
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Advanced Accounting - I
A Loss Asset is one where loss has been identified by the Bank or internal
auditors or the RBI inspection but the amount has not been written off, wholly or
partly. Such an asset is not realisable, although there may be some salvage or
recovery value.
Non Performing Assets (NPA)
7.2.3 Provision Against Various Assets
The purpose of classification of Bank assets is to make adequate provision
on the basis of quality of assets, the realisation of the security and the erosion in
the value of security. It has been directed that the banks should make provision
against the various assets on the following basis:
NOTES
a) Standard Assets :
No provision is required.
b) Sub-Standard Assets :
A provision of 10% of total outstanding is made.
c) Doubtful Assets :
•
To the extent the debt is not covered by realisable value of the security,
100% provision is to be made.
•
In addition to above (a), for the secured portion of the doubtful assets,
provision is required to be made between 20% and 50% depending upon
the period of which the asset has remained doubtful as given below:
Period for which the advance has
Percentage of Provision
been considered doubtful
Upto one year
20
More than one year but upto three years
30
Above three years
50
d) Loss Assets :
The entire assets should be written off or if the assets are to be retained in
the books for any reason, 100% provision is required to be made.
7.2.4 Calculation of “Income Recognition”
It has been advised by RBI that Banks are to recognise their income on
“Accrual Basis” in respect of income on performing assets and on “Cash Basis”
in respect of income on non performing assets.
EXAMPLE
Following are the statements of interest on advances in respect of performing
and non performing assets of Samrudhi Bank Ltd. Find out the income to be
recognised for the year ended 31-3-2010.
Advanced Accounting - I
225
Non Performing Assets (NPA)
( ‘ in Lakhs)
Interest
Interest
Earned
Received
‘
‘
720
480
ii) Cash Credit and Overdrafts
2,700
1,590
iii) Bills Purchased and Discounted
1,050
725
450
60
ii) Cash Credit and Overdrafts
675
105
iii) Bills Purchased and Discounted
525
54
Particulars
NOTES
Performing Assets :
i)
Term Loans
Non Performing Assets :
i)
Term Loans
ANSWER
Interest on performing assets should be recognised on accrual basis, but
interest on non-performing assets should be recognised on cash basis.
Statement showing Calculation of Interest Income for the year
ended 31-3-2010
( ‘ in Lakhs)
Particulars
Amount
‘
Interest on :
(i) Term Loans (‘ 720 + ‘ 60)
780
(ii) Cash Credit and Overdrafts (‘ 2,700 + ‘ 105)
(iii) Bills Purchased and Discounted (‘ 1,050 + ‘ 54)
 Interest Income
2,805
(+)
1,104
4,689
Provision to be made in Profit and Loss Account on the basis of
quality of Assets :
EXAMPLE
226
Advanced Accounting - I
With the help of the following information, compute the amount of provision
to be made in the Profit and Loss Account of Samrudhi Bank Ltd. for the year
2009-2010.
( ‘ in Lakhs)
Non Performing Assets (NPA)
‘
Particulars
Assets :
Standard
16,000
Sub standard
12,000
NOTES
Doubtful:
• for one year (secured)
4,800
• for two to three years (secured)
3,600
• for more than three years
1,800
(secured by mortgage of plant and Machinery worth ‘ 1,000 lakhs)
Non-recoverable assets
3,000
 Total
41,200
ANSWER
Statement showing Calculation of Provisions against Advances
(‘ in Lakhs)
Particulars
Amount
Provisions
Provisions
‘
Percentage
‘
Standard
16,000
-
-
Sub-standard
12,000
10%
1,200
Doubtful for one year
4,800
20%
960
Doubtful for two to three years
3,600
30%
1,080
Doubtful for more than 3 years
1,800
Unsecured portion +
1,300
50% of secured portion
Loss Assets (Non-recoverable Assets)
 Total
3,000
41,200
100%
3,000
7,540
Policy-Changes in IRAC (Income Recongnition and Assets
Classification) norms in connection with NPAs As per the guidelines received from the RBI, the following policy changes
in IRAC norms are to be implemented for the year 2009-2010.
Advanced Accounting - I
227
Non Performing Assets (NPA)
Past Due Concept :
To dispense with ‘Past Due’ concept w.e.f. March 31, 2010.
Accordingly, Non Performing Asset shall be an advance where
NOTES
i)
Interest and /or installment of principal remains overdue for a period of
more than 180 days. in respect of term loan,
ii)
The amount remains ‘out of order’ for a period of more than 180 days in
respect of an overdraft or cash credit,
iii)
The bills remain overdue for a period of more than 180 days in the case of
bills purchased and discounted.
iv)
Interest and / or installment of principal remains overdue for two harvest
seasons but for a period not exceeding two and half years in the case of an
advance granted for agricultural purposes and
v)
any amount to be received remains overdue for a period of more than 180
days in respect of other accounts.
With implementation of the above guidelines, it will have to be ensured that
interest debited and installments fallen due upto September, 2005 are recovered
for maintaining performing status of the account as of 31st March, 2007.
Since it has been decided to adopt the guidelines w.e.f. December, 2005 for
identifying NPAs as per above norms, suitable changes have been made in CREAM
software provided to Regional Offices for updating the data as 31st December,
2005. This will enable the branches to identify the probable slippages and initiate
necessary measures for recovery of critical amount due/overdues.
Sub - standard Assets:
An Assets should be classified as Doubtful, if it has remained in Sub-standard
category for 18 months instead of 24 months, as at present, by March 31, 2007.
228
Advanced Accounting - I
7.3
Non Performing Assets (NPA)
ANNEXURE - I
Basis for treating a credit facility as Non-Performing Asset (NPA)
Type of Credit facility
For the year ending on ...........
31-3-1993
31-3-1994
NOTES
31-3-1995
(i) Term Loan :
If interest remain past due for a
period of
4 quarters 3 quarters 2 quarters
(ii) Cash Credit and Overdraft Accounts:
If the outstanding balance remains
continuously in excess of the sanctioned
limit/drawing power or there are no
credits continuously for six months as
on the date of Balance Sheet or credits
are not enough to cover the interest
debited during the same period (i.e.
if the account remains out of order)
for a period of
4 quarters 3 quarters 2 quarters
(iii) Bills Purchased and Discounted :
If the bill remains overdue and unpaid
for a period of
4 quarters 3 quarters 2 quarters
(iv) Any Other Credit Facility :
If any amount to be received in respect
of any other credit facility remains past
due for a period of
4 quarters 3 quarters 2 quarters
Any other income received such as fees, commission, etc, on these
accounts should be treated as income only when it is actually received by the
bank.
Advanced Accounting - I
229
Non Performing Assets (NPA)
7.4
ANNEXURE - II
Classification if Assets for provisioning
i)
NOTES
Standard Assets :
It is not a non-performing asset (NPA). It does not disclose any problems
and which does not carry more than normal risk attached to the business.
ii)
Sub-standard Assets :
It is an asset which has remained as non performing asset for a period not
exceeding two years. In such cases, the current net-worth of the borrower or
guarantor or the current market value of the security charged is not enough to
ensure recovery of the dues to the bank in full. In other words, such an asset will
have well-defined credit weaknesses that jeopardise the liquidation of the debt
and are characterised by the distinct possibility that the bank will sustain some
loss, if deficiencies are not corrected.
In the case of term loans, where installments are overdues for periods
exceeding one year but not exceeding two years should be treated as sub-standard.
An account where the terms of the loan agreement regarding interest and
principal have been renegotiated or rescheduled after commencement of production
should be classified as sub-standard and should remain in such category for atleast
two years of satisfactory performance under the renegotiated or rescheduled
terms. In other words, the classification of an asset should not be upgraded merely
as result of rescheduling unless there is satisfactory compliance of the above
condition.
iii)
Doubtful Assets :
An asset which has remained non-performing asset for a period exceeding
two years will be treated as a doubtful asset.
In the case of term loans, those where installments of principal have remained
overdue for a period exceeding two years should be treated as doubtful. As in the
case of sub-standard assets, rescheduling of the overdue loan does not entitle a
bank to upgrade the quality of the loan or advance automatically.
A loan classified as doubtful has all the weaknesses inherent in that classified
as sub-standard with the added characteristic that the weaknesses make collection
or liquidation in full, on the basis of currently known facts, conditions and values,
highly questionable and improbable.
iv)
230
Advanced Accounting - I
Loss Assets:
A loss asset is one where the loss has been identified by the bank or by
internal or external auditors or by the Co-operation Department or by the Reserve
Bank of India inspection but the amount has not been written off, wholly or partly.
In other words, such as asset is considered uncollectable and its continuance as a
bankable asset is not warranted although there may be some salvage or recovery
value.
Directives of the RBI in connection with Disclosure of Accounting Policies:
Non Performing Assets (NPA)
With a view that the financial position of banks represents a true and fair
view, the RBI has directed the banks to disclose the accounting policies regarding
the key areas of operations alongwith notes of account in their financial statements
for the accounting year ending 31st March, 1991 and onwards on a regular basis.
The accounting policies disclosed may contain the following aspects subject
to modification by individual banks:
i)
NOTES
General :
The accompanying financial statements have been prepared on the historical
cost basis and conform to the statutory provisions and practices prevailing in the
country.
ii)
Transactions involving Foreign Exchange :
a) Monetary assets and liabilities have been translated at the exchange
rates prevailing at the close of the year. Non-monetary assets have
been carried in the books at the historical cost.
b) Income and expenditure item in respect of Indian branches have been
translated at the exchange rates ruling on the date of the transaction
and in respect of overseas branches at the exchange rates prevailing at
the close of the year.
c) Profit or loss on percing forward contracts has been accounted for.
iii)
Investments :
a) Investments in Governments and other approved securities in India are
valued at the lower cost or market value.
b) Investments in subsidiary companies and associate companies (i.e.
companies in which the bank holds atleast 25% of the share capital)
have been accounted for on the historical cost basis.
c) All other investments are valued at the lower cost or market value.
iv)
Advance:
a) Provisions for doubtful advances have been made to the
satisfaction of the auditors;
i)
In respect of identified advances, based on periodic review of advances
and after taking into account the portion of advance guaranteed by the
Deposit Insurance and Credit Guarantee Corporation, the Export Credit
and Guarantee Corporation and similar statutory bodies;
ii)
In respect of general advances, as a percentage of total advances taking
into account guidelines issued by the Government of India and determined
on the basis of such revaluation made by the professional values, profit
arising on revaluation has been credited to Capital Reserve.
Advanced Accounting - I
231
Non Performing Assets (NPA)
b)
Depreciation has been provided for on the straight line or diminishing balance
method.
c)
In respect of revalued assets, depreciation is provided for on the revalued
figures and an amount equal to the additional depreciation consequent on
revaluation is transferred annually from the Capital Reserve to the General
Reserve Account or Profit and Loss Account.
NOTES
v) Staff Benefits :
Provisions for gratuity or pension benefits to staff has been made on an
accrual or cash basis. Separate funds for gratuity or pensions have been created.
vi) Net Profit :
a)
The net profit disclosed in the Profit and Loss Account if after :
i) Provisions for taxes on income in accordance with statutory
requirements.
ii) Provisions for doubtful advances.
iii) Adjustments to the value of “current” investments in Government and
the approved securities in India valued at lower of cost or market valued.
iv) Transfers to contingency funds.
v) Other usual or necessary provisions.
b)
Contingency funds have been grouped in the Balance Sheet under the head
“Other Liabilities and Provisions”.
7.5
The Banking Regulation Act, 1949
Schedule 1
( See Section 55 )
Amendments
Year No. Short Title
(1)
(2)
1934
2
(3)
Advanced Accounting - I
(4)
The Reserve (1) In Section 17, to clause (15A), the following shall
Bank of
be added namely : “and under the Banking
India Act,
Companies Act, 1949,”
1934
232
Amendments
(2) (a) Section 18 shall be renumbered as subsection (1) of that Section and in sub-section
(1), as so renumbered.
(i) in clause (3), after the words “of that
section”. thefollowing words shall be
added,“or, when the loan or advance, is
made to a Banking Company as defined in
the Banking companies Act, 1949, against
such other form of security as the Bank
may consider sufficient”.
(ii) for the words “under this section” wherever
they occur, the words “under this subsection” shall be substituted.
Non Performing Assets (NPA)
NOTES
(b) after sub-section (1) as so renumbered, the
following sub-section shall be inserted viz.:
“(2) Where a Banking Company to which a
loan or advance has been made under the
provisions of clause (3) of sub-section (1)
is wound up, any sums due to the Bank in
respect of such loan or advance, shall,
subject only to the claims, if any, loan or
advance made by such Banking
Company against any security, be a first
charge on the assets of the Banking
Company.
(3) In section 42, for sub-section (6), the
following sub-section shall be substituted,
viz:
“(6) The Bank shall, save as hereinafter
provided, bynotification in the Gazette of
India,
(a) direct the inclusion in the Second Schedule
of any Bank not already so included which
carries on the business of Banking in any
Proviance of India and which.
(i) has a paid-up capital and reserves of
an aggregate value of not less than five
lakhs of rupees, and
(ii) satisfies the Bank that its affairs are
not being conducted in manner
detrimental to the interests of its
depositors; and
(iii) is a company as defined in clause (2)
of Section 2 of the Indian Companies
Act, 1913 (7 of 1913) or a Corporation
or acompany incorporation by or under
any law in force in any place outside
by the Provinces of India;
Advanced Accounting - I
233
Non Performing Assets (NPA)
b) direct the exclusion from that schedule of
any Scheduled Bank(i)
NOTES
the aggregate value of whose paidup-capital and reserves becomes at
any time less than five lakhs of
rupees; or
(ii) which is, in the opinion of the Bank
after making an inspection under
Section 35 of the Banking
Companies Act, 1949, conducting its
affairs of the detriment of the
interests of its depositors, or
(iii) which goes into liquidation or
otherwise ceases to carry on
Banking Business;
Provided that the Bank may, on application of the
Scheduled Bank concerned and subject to such
conditions, if any, as it may impose, defer the making
of a direction under sub-clause (i) or sub-clause (ii) of
clause (b) for such period as the Bank considers
reasonable to give the Scheduled Bank an opportunity
of increasing the aggregate value of its paid-up capital
and reserves to not less than five lakhs of rupees, or
as the case may, or removing the defects in the conduct
of its affairs:
(c) alter the description in that schedule
when ever any Scheduled Bank
changes its name.
Explanation : In this sub-section the expression ‘value’
means the real or exchangeable value and not the
nominal value which may be shown in the books of
the Bank concerned; and if any dispute arises in
computing the aggregate value of the paid-up capital
and reserves of a Bank, a determination there of by
the Bank shall be final for the purposes if this subsection”.
234
Advanced Accounting - I
7.5.1 Additional Disclosures by Banks in Notes to Accounts
Non Performing Assets (NPA)
15th March, 2010
RBI / 2009-10 / 347
DBOB.BP.BC.NO. 79 / 21.04.018/2009-10
NOTES
The Chairman / Chief Executive of
All Commercial Banks
(excluding RRBs)
Dear Sir,
Additional Disclosures by banks in Notes to Accounts
The Reserve Bank has been taking several steps from time to time to
enhance the transparency in the operations of banks by stipulating comprehensive
disclosures in tune with the international best practices. On a review of the existing
disclosures, it has been decided to prescribe the following additional disclosures in
the ‘Notes to Accounts’ in the bank’s Balance Sheets, from the year ending March,
2010.
I.
Concentration of Deposits, Advances, Exposures and NPAs.
II.
Sector-wise NPAs.
III.
Movement of NPAs.
IV.
Overseas assets, NPAs and revenue.
V.
Off-Balance Sheet SPVs sponsored by banks.
The prescribed formats are furnished in Annex.
Your faithfully,
(B. Mahapatra)
Chief General Manager.
Annex
I. Concentration of Deposits, Advances, Exposures and NPAs
Concentration of Deposits.
(Amount in Rupees Crores)
Total Deposits of twenty largest depositors
Percentage of Deposits of twenty largest
depositors to Total Deposits of the bank
Advanced Accounting - I
235
Non Performing Assets (NPA)
Concentration of Advances*
(Amount in Rupees Crores)
Total Advances of twenty largest borrowers
NOTES
Percentage of Advances to twenty largest
borrowers to Total Advances of the bank
*
Advances should be computed as per definition of Credit Exposure
including derivatives furnished in our Master Circular on Exposure
Norms DBOD. No. Dir. BC. 15/13.03.00/ 2009-10 dated July 1, 2009.
Concentration of Exposures**
(Amount in Rupees Crores)
Total Exposure to twenty largest borrowers/
customers
Percentage of Exposures to twenty largest
borrowers/customers to Total Exposure of the
bank on borrowers/customers
** Exposures should be computed based on credit and investment exposure
as prescribed in our Master Circular on Exposure Norms DBOD. No. Dir. BC.
15/13.03.2009-10 dated July 1, 2009.
Concentration of NPAs
(Amount in Rupees Crores)
Total Exposure of top four NPA accounts
II. Sector-wise NPAs
Sl.
No.
Sector
1.
Agriculture and Allied Activities
2.
Industry
(Micro and small, Mediumand Large)
236
Advanced Accounting - I
3.
Services
4.
Personal Loans
Percentage of NPAs to Total
Advance in that sector
Non Performing Assets (NPA)
III. Movement of NPAs
Amount in ‘ Crores
Particulars
Gross NPAs* as on 1st April of particular year
(Opening Balance)
NOTES
Additions (Fresh NPAs) during the year
Sub- total (A)
Less :
i)
Upgradations
ii)
Recoveries (excluding recoveries made
from upgraded accounts)
iii)
Write - offs
Sub-total (B)
Gross NPAs as on 31st March of the following
year (closing balance (A - B)
*
Gross NPAs as per item 2 of Annex to DBOD Circular DBOD. BP.
BC.No. 46/21:04/048/2009-10 dated September 24,2009.
IV. Overseas Assets, NPAs and Revenue
Particulars
Amount in (Rupees
Crores)
Total Assets
Total NPAs
Total Revenue
V. Off - Balance Sheet SPVs sponsored (Which are required to be
consolidated as per accounting norms).
Name of the SPV sponsored
Domestic
Overseas
The concept of Recognition of Interest Income can be understood with the help
of following illustration.
Advanced Accounting - I
237
Non Performing Assets (NPA)
7.6
Illustrations
ILLUSTRATION I
NOTES
Following are the details of interest on advances in respect of performing
assets and non-performing assets of Indian Bank Ltd.
( ‘ in Lakhs)
Interest
Interest
Earned
Received
‘
‘
a) Term Loans
135
65
b) Cash Credit and Overdrafts
210
90
c) Bills Purchased and Discounted
375
125
a) Term Loans
85
15
b) Cash Credit and Overdrafts
100
40
c) Bills Purchased and Discounted
125
25
Particulars
A) Performing Assets :
B)
Non- Performing Assets :
Find out the interest income to be recognised for the year ended
31st March, 2014.
SOLUTION
Statement showing Recognition of interest Income for the year ended
31 March, 2014.
st
(‘ in Lakhs)
On
On non- Total
Performing Performing
Particulars
Assets
Assets
‘
‘
‘
Interest on Term Loans
135
15
150
Add Interest on Cash Credit and Overdrafts
210
40
250
Add Interest on Bills Purchased and Discounted
375
25
400
720
80
800
(+)
238
Advanced Accounting - I
 Interest Income
N.B. : Interest on performing assets should be recognised on actual basis, but
interest on non-performing assets should be recognised on cash basis.
7.7
Summary
•
Assets which are not non-performing are performing assets. An asset
become non performing when it ceases to generate income for Bank.
•
Classification Assets :- Banks are requited to classify the loan assets
(advances) into four categories viz: (a) Standard Assets (b) Sub Standard
Assets (c) Doubtful Assets and (d) Loss Assets.
•
It has been advised by RBI that Banks are to recognise their income on
“Accrual Basis” in respect of income on performing assets and on “Cash
Basis” in respect of income on non performing assets.
•
The Reserve Bank has been taking several steps from time to time to
enhance the transparency in the operations of banks by stipulating
comprehensive disclosures in tune with the international best practices. On
a review of the existing disclosures. RBI has been decided to prescribe the
additional disclosure in the “Notes to Accounts” in the banks Balance Sheets
from the year ending March, 2010.
7.8
Non Performing Assets (NPA)
NOTES
Key Terms
(a)
Non-performing Assets (NPA) : An Asset account becomes non
performing when it ceases to generate income for a bank.
(b)
Standard Assets : Standard Asset is one which does not disclose, any
problem and which does not carry more them normal risk attached to the
business.
(c)
Sub- standard Assets : Sub- standard Asset is one which has been
classified as a non-performing asset (NPA) for a period not exceeding two
years.
(d)
Doubtful Assets : A doubtful asset is one which has remained as non
performing asset (NPA) for a period exceeding two years.
(e)
Loss Assets : A Loss asset in one where loss has been identified by the
Bank or internal auditors or the RBI inspection but the amount has not been
written off wholly or partly.
Advanced Accounting - I
239
Non Performing Assets (NPA)
7.9
Questions And Exercises
I. Objective Questions
A) Multiple choice Questions
NOTES
(1)
According to Narsimham committee income from non performing asset
should not be recognised on ------------ basis.
(a) accrual
(b) cash
(c) actual
(d) advance
(2)
The loss which has been identified by the Bank or internal auditors or the
RBI inspection, but the amount has not been written off, wholly or partly, is
termed as ---------(a) Loss Assets
(b) Doubtful Assets
(c) Sub Standard Assets
(d) Standard Assets
(3)
An assets which has remained as a non-performing asset for a period
exceeding two years, is termed as-----------------.
(a) Loss Assets
(b) Sub Standard Assets
(c) Doubtful Assets
(d) Standard Assets
(4)
An assets which has been classified as a non-performing asset for a period
not exceeding two years, is termed as -------------.
(a) Loss Assets
(b) Sub Standard Assets
(c) Doubtful Assets
(d) Standard Assets
Ans :- (1 - a), (2 - d), (3 - c), (4 - b)
240
Advanced Accounting - I
Non Performing Assets (NPA)
II. Long Answer Questions
1)
What are ‘Performing Assets’? How they differs from non performing
Assets ?
2)
Define the term ‘Loan Assets’. Classify the loan assets of a Bank into
various categories.
3)
Explain in brief the ‘Past Due’ concept, as per the guidelines of RBI.
4)
Distinguish clearly between :
NOTES
a) Standard Assets and Sub Standard Assets.
b) Doubtful Assets and Loss Assets.
III. Practical Problems
1)
Calculate the interest income to be recognised for the year ended
31st March, 2014 from the information provided by Unnsti Bank Ltd.
(‘ in Lakhs)
Particulars
A)
B)
Interest
Interest
Earned
Received
‘
‘
a) Term Loans
107
34
b) Cash Credit and Overdrafts
228
57
c) Bills Purchased and Discounted
351
Performing Assets
Non - performing Assets
a) Term Loans
52
13
b) Cash Credit and Overdrafts
89
22
111
39
c) Bills Purchased and Discounted
7.10 Further Reading
•
Shukla M. C., Grewal T.S. , and Gupta S.C. - Advanced Accounts - New
Delhi : S. Chand & Co. Pvt. Ltd. - 2013
•
Tulsian P. C. - Accounting - New Delhi - Tata Mc Graw - Hill Publishing
Co. Ltd. - 2010
Advanced Accounting - I
241
Unit 8
Final Accounts of Banking Company
Final Accounts of Banking
Company
Structure
8.0
Introduction
8.1
Unit Objectives
8.2
Books of Accounts
8.3
Preparation of Final Account
8.3.1
The Third Schedule - From ‘A’ Form of Balance Sheet
8.3.2
Form ‘B’ - From of Profit and Loss Account
8.3.3
Guidelines of RBI for compilation of Financial statements
8.4
Illustrations
8.5
Abridge from of Balance Sheet and Profit and Loss Account
8.6
Summary
8.7
Key Terms
8.8
Questions and Exercises
8.9
Further Reading
8.0
NOTES
Introduction
Every Banking company is required to prepare its Balance-sheet in from
‘A’ and Profit and Loss Account in from ‘B’ given in Third Schedule at the end of
each financial year.
Twelve Schedules (i.e. 1 to 12) are required to be annexed to Balance
sheet viz : Schedule 1 - capital : Schedule 2 - Reserves and surplus; Schedule 3 Deposits; Schedule 4 - Borrowing, Schedule 5 - Other Liabilities and Provisions;
Schedule 6 - Cash and Balances with RBI; Schedule 7 - Balance with Banks and
Money at Call and Short Notice; Schedule 8 - Investments; Schedule 9 - Advances;
Schedule 10 - Fixed Assets; Schedule 11 - Other Assets; and Schedule 12 Contingent Liabilities.
Six Schedule ( i.e. 13 to 18 ) are required to be Profit and Loss Account viz.
Schedule 16 - Operating Expenses; Schedule 17 - Notes on Accounts; and Schedule
18 - Principal Accounting Policies.
Every Banking Company is required to maintain Principal Books and
Accounts alongwith subsidiary Books, Subsidiary Register, Memorandum Books
and Statistical Books.
Advanced Accounting - I
243
Final Accounts of Banking
Company
8.1
Unit Objectives
After studying this unit your should able to :
NOTES
•
List out the Books of Accounts.
•
Understand Form ‘A’ and Form ‘B’ given in Third schedule of the Act.
•
Identify the items that should be incorporated in the preparation of the Final
Accounts.
•
Prepare the Profit and Loss Account and Balance Sheet of Banking
Companies.
•
Understand the classification of different types of schedules included in
Balance Sheet and Profit and Loss Account of Banking Company.
•
Understand the guidelines of RBI for compilation of Financial Statement of
Banking Company.
8.2
Books of Accounts
A Banking Company follows the principle of double entry in recording its
transactions in the books of account. Although the Cash Book and the General
Ledger are the principal books of account of any bank, a number of subsidiary
books are maintained by the bank which are as follow:
i)
Receiving Cashier’s Counter Cash Book.
ii)
Paying Cashier’s Counter Cash Book.
iii)
Current Account Ledger.
iv)
Saving Bank Account Ledger.
v)
Fixed Deposit Account Ledger.
vi)
Fixed Deposit Interest Ledger.
vii)
Recurring Deposit Account Ledger.
viii)
Investments Ledger.
ix)
Loan Ledger.
x)
Bills Discounted and Purchased Ledger.
xi)
Consumer’s Acceptances, Endorsements and Guarantee Ledger.
In addition to the above subsidiary books, there are various other books
and registers in a bank for the day-to-day recording of different matters. These
books and registers do not, however, form part of double entry principal. These
books are as follows:
244
Advanced Accounting - I
i)
Bills for Collection Register.
ii)
Securities Register.
iii)
Demand Draft Register.
iv)
Safe Deposit Vault Register.
v)
Bills Register.
vi)
Jewellery Register.
vii)
Standing Order Register.
viii)
Dishonoured Cheques Register.
ix)
Documents Register.
x)
Letters of Credit Register, etc.
8.3
Final Accounts of Banking
Company
NOTES
Preparation of Final Accounts
The Third Schedule under Section 29 of the Banking Regulation Act, 1949,
regarding the format of Balance Sheet and Profit and Loss Account has been
amended by the Government of India by a notification on 18th January, and
subsequently on 19th December, 1991. The new formats would come into force
with effect from 19th March, 1992. Thus, as per the new format of accounting
vertical form of Balance Sheet and Profit and Loss Account should be followed
w.e.f. accounting year ending 31st March. 1992. The Balance Sheet is prepared
in From- A while the Profit and Loss Account is prepared in From B of the Third
Schedule in vertical form.
The prescribed vertical from of the Balance Sheet and Profit and Loss
Account are given below:
Advanced Accounting - I
245
Final Accounts of Banking
Company
8.3.1 The Third Schedule - Form ‘A’
(See Section 29) - Form ‘A’
Form of Balance Sheet
NOTES
Balance Sheet of ------------------------------------- (here enter the name of the
Banking Company).
Balance Sheet as on 31st March ............ (year)
(000’s Omitted)
Schedule As on 31-3-..... As on 31-3-....
No.
Capital and Liabilities :
Capital
1
Reserves and Surplus
2
Deposits
3
Borrowings
4
Other Liabilities and Provisions
5
Total
Assets :
Cash and Balances with Reserve
Bank of India
6
Balance with Banks and Money
At Call and Short Notices
7
Investments
8
Advances
9
Fixed Assets
10
Other Assets
11
Total
Contingent Liabilities
Bills for Collection
246
Advanced Accounting - I
12
(Current Year) (Previous Year)
Schedule - 1 - Capital
Final Accounts of Banking
Company
As on 31-3-... As on 31-3-...
(Current Year) (Previous Year)
I. For Nationalised Banks:
NOTES
Capital (Fully owned by Central Government)
II. For Banks Incorporated Outside India:
i) (The amount brought in by banks by way of
start-up capital as prescribed by RBI should
be shown under this head).
ii)Amount of deposit kept with the RBI under
Section 11 (2) of the Banking Regulation
Act, 1949
Total
III. For Other Banks:
Authorised Capital
(........ shares of ‘ ..... each)
Issued Capital
(........ shares of ‘ ..... each)
Subscribed Capital
(........ shares of ‘ ..... each)
Called -up Capital
(........ shares of ‘ ..... each)
Less : Calls Unpaid
Add : Forfeited shares
Advanced Accounting - I
247
Final Accounts of Banking
Company
Schedule - 2 - Reserves and Surplus
As on 31-3-..... As on 31-3-....
(Current Year)
I.
(Previous Year)
Statutory Reserves
NOTES
Opening Balance
Add: Additions during the year
Less: Deduction during the year
II.
Capital Reserves
Opening Balance
Add : Additions during the year
Less :Deduction during the year
III.
Share Premium
Opening Balance
Add : Additions during the year
Less :Deductions during the year
IV.
Revenue and Other Reserves
Opening Balance
Add : Additions during the year
Less :Deductions during the year
V.
Balance in Profit and Loss Account
Total ( I, II, III, IV and V)
Schedule - 3 - Deposits
As on 31-3-..... As on 31-3-....
(Current Year)
A. I. Demand Deposits
i)
From Bank
ii)
From Others
II. Savings Banks Deposits
III. Term Deposits
i)
From Bank
ii)
From Others
Total (I, II, and III)
B.
i) Deposits of Branches in India
ii) Deposits of Branches Outside India
248
Advanced Accounting - I
Total
(Previous Year)
Final Accounts of Banking
Company
Schedule - 4 - Borrowings
As on 31-3-..... As on 31-3-....
(Current Year)
(Previous Year)
I. Borrowings in India
i)
Reserve Bank of India
NOTES
ii) Other Banks
iii) Other institutions and agencies
II. Borrowings outside India
Total (I and II)
Secured borrowings in I and II above - ‘
Schedule - 5 - Other Liabilities and Provisions
As on 31-3-..... As on 31-3-....
(Current Year)
I.
Bills Payable
II.
Inter-office adjustments (net)
III.
Interest Accrued
IV.
Other (Including Provisions)
(Previous Year)
Total
Schedule - 6 - Cash and Balance with Reserve Bank of India
As on 31-3-..... As on 31-3-....
(Current Year)
I.
(Previous Year)
Cash in hand
(including foreign currency notes)
II. Balance with Reserve Bank of India
i) In Current Accounts
ii) In Other Accounts
Total (I and II)
Advanced Accounting - I
249
Final Accounts of Banking
Company
Schedule - 7 - Balances with Banks and Money at Call and short Notice
As on 31-3-..... As on 31-3-....
(Current Year)
I.
(Previous Year)
In India
NOTES
i) Balance with Banks
a)
in Current Accounts
b)
in Other Deposit Accounts
ii) Money at Call and Short Notice
a)
With Banks
b)
With Other Institutions
Total (I and II)
II. Outside India
i) In Current Accounts
ii) In Other Deposit Accounts
iii) Money at call and Short Notice
Total
Grand Total (I and II)
Schedule - 8 - Investments
As on 31-3-..... As on 31-3-....
(Current Year)
I.
Investments in India in
i)
Governments Securities
ii)
Other Approved Securities
ii)
Shares
iv)
Debentures and Bonds
v)
Subsidiaries and /or Joint Ventures
vi)
Others (to be specified)
Total
II.
i)
Investments Outside India in
Government Securities (including
local authorities)
ii)
Subsidiaries and /or Joint
Ventures Abroad
iii)
Others Investments
(to be specified)
Total
250
Advanced Accounting - I
Grand Total (I and II)
(Previous Year)
Final Accounts of Banking
Company
Schedule - 9 - Advances
As on 31-3-..... As on 31-3-....
(Current Year)
(Previous Year)
A. i) Bills Purchased and Discounted
ii)
Cash Credits, Overdrafts and Loans
Repayable on Demand
NOTES
Total
B. i) Secured by Tangible Assets
ii)
Covered by Bank/ Government
Guarantees
iii)
Unsecured
Total
C. I.
Advances in India
i)
Priority sectors
ii)
Public Sector
iii)
Banks
iv)
Others
Total
II.
Advances Outside India
i)
Due from Banks
ii)
Due from Others
a) Bills Purchased and Discounted
b) Syndicated Loans
c) Others
Total
Grand Total (A, B and C - I and II)
Schedule - 10 - Investments
As on 31-3-..... As on 31-3-....
(Current Year)
I.
(Previous Year)
Premises
At cost on 31st March of the
preceding year
Add : Additions during the year
Less :Deductions during the year
Less :Depreciation to date
II.
Other Fixed Assets
(Including Furniture and Fixtures)
Add : Additions during the year
Less :Deductions during the year
Less :Depreciation to date
Total (I and II)
Advanced Accounting - I
251
Final Accounts of Banking
Company
Schedule - 11 - Other Assets
As on 31-3-..... As on 31-3-....
(Current Year)
NOTES
I.
Inter-Office Adjustments (net)
II.
Interest Accrued
III.
Tax paid in Advance or
(Previous Year)
Tax deducted at source
IV.
Stationery and Stamp
V.
Non-Banking Assets acquired
in satisfaction of claims
VI.
Others @
Total
@
In cash there is any unadjusted balance of loss the same may be shown
under this item with appropriate foot-note.
Schedule - 12 - Contingent Liabilities
As on 31-3-..... As on 31-3-....
(Current Year)
I. Claims against the Bank not
Acknowledged as Debts
II. Liability for partly paid Investments
III. Liability on account of Outstanding
Forward Exchange Contracts
IV. Guarantees given on benefit of Constituents
a) In India
b) Outside India
V. Acceptances, Endorsements and Other
Obligations
VI. Other items for which the Bank is
Contingently liable
Total
252
Advanced Accounting - I
(Previous Year)
Final Accounts of Banking
Company
8.3.2 Form ‘B’
(000’s omitted)
From of Profit and Loss Account
for the year ended 31st March
Schedule Year ended Year ended
31-3-....
No.
I.
NOTES
31-3-....
(CurrentYear) (Previous Year)
Income
Interest Earned
13
Other Income
14
Total
II. Expenditure
Interest Expended
15
Operating Expenses
16
Provisions and Contingencies
Total
III. Profit or Loss
Net Profit or Loss for the year
Total
IV. Appropriations
Transfer to Statutory Reserves
Transfer to Other Reserves
Transfer to Government or
Proposed Dividend
Balance carried over to
Balance Sheet
Total
N.B. :
i)
The total income includes income of foreign branches at ‘ ...........
ii)
The Total expenditure includes expenditure of foreign branches at ‘ .....
iii)
Surplus or deficit of foreign branches ‘ .......
Advanced Accounting - I
253
Final Accounts of Banking
Company
Schedule - 13 - Interest Earned
year ended
year ended
31-3-.....
31-3-.....
(Current Year) (Previous Year)
NOTES
I. Interest or Discount on Advances or Bills
II. Income on Investments
III. Interest on Balances with Reserve Bank
of India and Other Inter-Bank Funds
IV. Others
Total
Schedule - 14 - Other Income
year ended
31-3-.....
(Current Year)
I.
II.
III.
IV.
V.
VI.
VII.
year ended
31-3-.....
(Previous Year)
Commission, Exchange and Brokerage
Profit on Sale of Investments
Less: Loss on Sale of Investments
Profit on Revaluation of Investments
Less : Loss on Revaluation of Investments
Profit on Sale of Land, Buildings, and
Other Assets
Less : Loss on Sale on Land, Buildings,
and Other Assets
Profit on Exchange Transactions
Less : Loss on Exchange Transactions
Income earned by way of Dividend etc.
form Subsidiaries or Companies and/or
Joint Ventures Abroad or in India
Miscellaneous Income
Total
Note : Under items II to V loss figure may be shown in brackets.
Schedule - 15 - Interest Expended
year ended
31-3-.....
(Current Year)
I.
Interest on Deposits
II.
Interest on Reserve Bank of India/
Inter-Bank Borrowings
III. Others
Total
254
Advanced Accounting - I
year ended
31-3-.....
(Previous Year)
Final Accounts of Banking
Company
Schedule - 16 - Operating Expenses
year ended
31-3-.....
(Current Year)
I.
Payments to and Provisions for Employees
II.
Rent, Taxes and Lighting
year ended
31-3-.....
(Previous Year)
NOTES
III. Printing and Stationery
IV. Advertisement and Publicity
V.
Depreciation on Bank’s Property
VI. Director’s Fees, Allowances and Expenses
VII. Auditor’s Fees and Expenses (including
Branch Auditor’s)
VIII. Law Charges
IX. Postage, Telegrams, Telephones etc.
X.
Repairs and Maintenance
XI. Insurance
XII. Other Expenditure
Total
8.3.3. Guidelines of RBI for Compilation of Financial
Statements :
Item Schedule
No.
Capital
1
Coverage
Notes and Instructions for
compilation
Nationalize Banks The Capital owned By Central
Government as on the date of the
(Capital Fully
Balance Sheet including contribution
owned by Central
from Government if any, for participating
Government)
in world Bank Project should be shown.
Banking Compa- (i)
nies incorporated
outside India
The amount brought in by banks by
way of start-up capital as prescribed
by RBI should be shown under this
head.
(ii) The amount of deposit kept with
RBI, under sub-section 2 of Section
11 of the Banking Regulation Act,
1949 should also be shown.
Other Banks
(Indian)
(Authorised Capital
Authorised, Issued, Subscribed, Called
-up Capital should be given separately.
Calls-in-arrears will be deducted from
Advanced Accounting - I
255
Final Accounts of Banking
Company
(....shares of ‘ ..each) Called-up Capital while the paid up value
of forfeited share should be added thus
Issued Capital
arriving at the Paid-Up Capital. Where
(....shares of ‘ ..each)
necessary items which can be combined
Subscribed Capital should be shown under one head for
(....shares of ‘ ..each) instance ‘Issued and Subscribed Capital’.
NOTES
Called-up Capital
Notes - General
The changes in the above items, if
any, during the year, say, fresh
Less : Calls unpaid
contribution made by Government, fresh
Add : Forfeited shares issue of capital, capitalisation of reserves,
paid up capital
etc. may be explained in the notes.
(....shares of ‘ ..each)
Reserves
and
2
i)
Statutory
Reserves
Reserves created in terms of section 17
or any other section of Banking
Regulation Act must be separately
disclosed.
II) Capital
Reserves
The expression ‘Capital Reserves’ shall
not include any amount regarded as free
for distribution through the Profit and
Loss Account. Surplus on revaluation
should be treated as Capital Reserves.
Surplus on translation of the financial
statements of foreign branches (which
includes fixed assets also) is not a
revaluation reserve.
III) Share Premium
Premium on issue of Share Capital may
be shown separately under this head.
Surplus
iv) Revenue and The expression ‘Revenue Reserve’ shall
mean any reserve other than capital
other Rereserve. This item will include all reserves,
serves
other than those separately classified.
The expression ‘Reserve’ shall not
include any amount written off or
retained by way of providing for
depreciation, renewals or diminution in
value of assets or retained by way of
providing for any known liability.
v) Balance of
Profit
Includes balance of profit after
appropriations. In case of loss the balance
may be shown as a deduction.
Notes - General
Movement in various categories of
reserves should be shown as indicated
in the schedule.
256
Advanced Accounting - I
Deposits
3
A)
Includes all demand deposits repayable
on demand.
Final Accounts of Banking
Company
I) Demand Includes all demand deposits of the nonDeposits bank sectors.
i) from
Banks
ii) from
Others
II) Savings
Bank Deposits
Credit balances in overdrafts, cash credit
accounts, deposits payable at call,
overdue deposits, inoperative current
accounts, matured time deposits and
cash certificates, certificates of deposits,
etc. are to be included under this
category.
NOTES
Includes all Savings Banks Deposits
(including Inoperative Saving Bank
Accounts).
III) Term Deposits
i) from
Banks
Includes all types of Bank Deposits
repayable after a specified term.
ii) from
Others
Includes all types of Deposits of NonBank sector repayable after a specified
term.Fixed deposits, cumulative and
recurring deposits, cash certificates,
certificates of deposits, annuity deposits,
deposits mobilised under various
schemes, ordinary staff deposits, foreign
currency non-resident deposits accounts
etc. are to be included under this
category.
B) i) Deposits of The total of these two items will agree
Branches with the total deposits.
in India
Notes - General
ii) Deposits a) Interest payable on deposits which
of
is accrued but not due should be
Branches
included but shown under other
outside
liabilities.
India
b) Matured time deposits and cash
certificates etc. should be treated as
demand deposits.
c) Deposits under special schemes
should be included under term
deposits if they are not payable on
demand. When such deposits have
matured for payment they should be
shown under demand deposits.
Advanced Accounting - I
257
Final Accounts of Banking
Company
NOTES
d) Deposits from banks will include
deposits form the banking system in
india, Co-operative Banks, Foreign
banks which may or may not have a
presence in india.
Borrrowings
4
I)
Borrowings
in India
i) Reserve Includes borrowings / refinance obtained
Bank of from Reserve Bank of India.
India
ii) Other
Banks
Includes borrowings / refinance obtained
from commercial banks ( including CoOperative banks)
Includes borrowings / refinance obtained
iii) Other
from Industrial Development Bank of
Institu
India. Export - Import Bank of India.
tions and
National Bank for Agriculture and Rural
Agencies
Development and other institutions,
Agencies ( including liability against
participation certificates, if any )
II) Borrowings
Outside
India Secured
borrowing
included
above
Includes borrowings of Indian branches
abroad as well as borrowings of foreign
branches.
This item will be shown separately.
Includes secured borrowings / refinance
in India and Outside India.
Notes - General
i) The total of I and II will agree with
the total borrowings shown in the
Balance Sheet.
ii) Inter-Office Transactions should not
be shown as borrowings.
iii) Funds raised by foreign branches by
way of certificates of deposits, notes,
bonds etc. should be classified
depending upon documentation as
‘deposits’ borrowing etc.
iv) Refinance obtained by Banks from
Reserve Bank of India and various
institutions are being brought under
the head ‘Borrowings’. Hence,
advances will be shown at the gross
amount on the assets side.
258
Advanced Accounting - I
Other
Liabilities
and
Provisions
5
I)
Bills Payable
Includes drafts, telegraphic transfers,
travellers’ cheques, mail transfers
payable, pay-slips, bankers cheques and
other miscellanceous items.
II) Inter-office The Inter-Office Adjustments balance,
Adjustments if in credit, should be shown under this
head. Only net position of inter-office
(net)
accounts, inland as well as foreign, should
be shown here.
III) Interest
Accrued
Final Accounts of Banking
Company
NOTES
Includes interest accrued but not due on
‘deposits’ and ‘borrowings’.
Includes net provision for income tax and
IV) Others
(including other taxes like interest tax ( less advance
provisions) payment, tax deducted at source etc.)
Surplus in aggregate in provisions for bad
debts provisions for depreciation in
securities, contingency funds which are
not disclosed as reserves but are actually
in the nature of Government. Other
liabilities which are not disclosed under
any of the major heads such as
unclaimed dividend, provisions and funds
kept for specific purposes, unexpired
discount, outstanding charges like rent,
conveyance etc. Certain types of
deposits like staff security deposit, margin
deposits etc. Where the repayment is not
free, should also be included under this
head.
Notes - General
(i) For arriving at the net balance of
inter-office adjustments all
connected inter-office accounts
should be aggregated and the net
balance only will be shown,
representing mostly items in transit
and unadjusted items.
(ii) The interest accruing in all deposits,
whether the payment is due or not,
should be treated as a liability.
(iii) It is proposed to show only pure
deposits under this head ‘deposits’
and hence all surplus provisions for
bad and doubtful debts, contingency
funds, secret reserves etc. which are
Advanced Accounting - I
259
Final Accounts of Banking
Company
NOTES
not netted off against the relative
assets, should be brought under the
head Others (including provisions).
Cash
and
Balanances
with
the
Reserve
Bank
of
India
6
I)
Cash in
hand (including foreign
currency
notes)
Included cash in hand including foreign
currency notes and also of foreign
branches in the case of banks having such
branches.
II) Balance with
Reserve
Bank of
India
i) In Current
Accounts
ii) In Other
Accounts
Balance
with
Banks
and
Money
at Call
and
short
Notice
7
I)
i)
Includes all balances with banks in India
Balance with (including co-operative banks). Balances
in Current Accounts and Deposit
Banks
Accounts should be shown separately.
a) in Current
Accounts
In India
b) in Other
Deposit
Accounts
ii)
Money at Call Includes deposits repayable within 15
days orless than 15 days notice lent in
and Short
the inter-bank call money market.
Notice
a) with
Banks
b) with
Other
Institutions
Includes balances held by foreign
branches and balances held by India
i) Current branches of the banks outside India.
Accounts Balance held with foreign branches by
other branches of the bank should not
ii) Deposits
be shown under this head but should be
Accounts
included in inter-branch accounts. The
amounts held in ‘Current Accounts’ and
‘Deposit Accounts’ should be shown
separately.
II) Outside
India
260
Advanced Accounting - I
iii) Money at Call Includes deposits usually classified in
and Short
foreign countries as money at call and
Notice
short notice
Investments
8
A) Investments Includes Central and State Government
in India
Securities and Government Treasury
bills, These securities should be shown
at the book value. However, the
difference between the book value and
market value should be given in the notes
to the Balance Sheet.
i)
Other approved
Securities
Final Accounts of Banking
Company
NOTES
Securities other then Government
securities, which according to the
Banking Regulation, Act, 1949 are
treated as approved securities, should be
included here.
ii) Shares
Investments in shares of companies and
corporations not included in item (ii)
should be included here.
iii) Debentures
and Bonds
Investments in debentures and bonds of
companies and Corporations not included
in item (ii) should be included here.
iv) Investments Investments in subsidiaries/ joint
in Subsidiar- ventures (including RRBs) should be
ies/ Joint
included here.
Ventures
v) Others
Includes residual investments, if any, like
gold, commercial paper and other
instruments in the nature of shares/
debentures/bonds.
B) Investments
Outside in
India
i) Governments All Foreign Government securities
Securities
including securities issued by local
authorities may be classified under this
(including local
authorities) head.
Advance s
9
ii) Subsidiaries
and/or Joint
Ventures
Abroad
All investments made in the share capital
of subsidiaries floated outside India and
/or joint ventures abroad should be
classified under this head.
iii) Others
All other investments outside India may
be shown under this head.
A) i) Bills pur- In classification under Section’ A’, all
chased outstandings in India as well as outside -
Advanced Accounting - I
261
Final Accounts of Banking
Company
NOTES
and
dis
counted
ii) Cash
Credits,
Overdrafts and
Loans
repayable
on
demand
iii) Term
Loans
B) i)
All advances or part of advances which
are secured by tangible assets may be
shown here. The item will include
advances in India and outside India.
ii) Covered
by Bank/
Government
Guarantee
Advances in India and outside India to
the extent they are covered by
guarantees of Indian and Foreign
Governments and Indian and foreign
banks and DICGC & ECGC are to be
included.
iii) Unsecured
All advances not classified under (i) and
(ii) will be included here. Total of ‘A’
should tally with total of ‘B’.
C) I) Ad
vances
in India
Advances should be broadly classified
into ‘Advances in ‘India and ‘Advance
outside India’. Advances in India will be
further classified on the sectoral basis
as indicated. Advances to sectors which
for the time being are classified as priority
sectors according to the instructions of
the Reserve Bank are to be classified
under the head Priority Sectors’.
iii) Banks
iv) Others
II) Advances
Outside
India
Advanced Accounting - I
Including overdue installments.
Secured
by
tangible
assets
i) Priority
Sectors
ii) Public
Sectors
262
less provisions made, will be classified
under three head as indicated and both
secured and unsecured advances will be
included under these heads.
‘Such advances should be excluded from
item (ii) i.e. advances to public sector,
Advances to Central and
i) Due from State Government and other Government
undertaking including Government
Banks
companies and corporations which are,
ii) Due from
according to the statutes, to be treated
Others
as public sector companies are to be
a) Bills
included in the category ‘Public Sector’.
purchased
and
dis
counted
b) Syndi
cated
Loans
c) Others
All advances to the banking sector
including co-operative bank will come
under the head ‘Banks’. All the
remaining advances will be included
under the head Others and typically this
category will include non-priority
advances to the private, joint and cooperative sectors.
Final Accounts of Banking
Company
NOTES
Notes - General
i) The gross amount of advances
including refinance and rediscounts
but excluding provisions made to the
satisfaction of auditors should be
shown as advances.
ii) Terms loans will be loans not
repayable on demand.
iii) Consortium advances would be
shown net of share from other
participating banks/institutions.
Fixed
Assets
10
I) Premises
Premises wholly or partly owned by
i) At cost as on banking company for the purpose of
31st March business including residential premises
of the preced- should be shown against ‘Premises’. In
the case of premises and other fixed
ing year
assets, the previous balance, additions
ii) Additions
thereto and deductions therefrom during
during the
the year as also the total depreciation
year
written off should be shown. Where sums
iii) Deductions
have been written off on reduction of
during the
capital or revaluation of assets, every
year
balance sheet after the first balance sheet
iv) Depreciation subsequent to the reduction or
revaluation should show the revised
to date
figures for a period of five years with
the date and amount of revision made.
>
II) Other Fixed
Assets
(including
furniture and
fixtures)
11
i)
At cost 31st
March of the
preceding
year
ii)
Additions
during theyear
Motor Vehicles and all Other Fixed
Assets other than premises but including
Furniture and Fixtures should be shown
under this head.
Advanced Accounting - I
263
Final Accounts of Banking
Company
iii) Deductions
during the
year
Other
Assets
NOTES
iv) Depreciation
to date
I)
Inter The Inter-Office Adjustments balance,
Office
if in debit, should be shown under this
Adjustments head. Only net position of inter-office
(net)
accounts, inland as well as foreign should
be shown here. For arriving at the net
balance of inter-office adjustment
accounts, all connected inter-office
accounts should be aggregated and the
net balance, if in debit, only should be
shown representing mostly items in
transit and unadjusted items.
II) Interest
Accrued
Interest accrued but not due on
Investment and advances and interest
due but not collected on investments will
be the main components of this item. As
banks normally debits the borrowers
account either interest due on the
balance sheet date, usually there may not
be any amount of interest due on
advances. Only such interest as can be
realised in the ordinary course should be
shown under this head.
III) Tax paid in
Advance or
Tax deducted at
source
The amount of tax deducted at source
on securities, advance tax paid etc. to
the extent that these items are not set
off against relative tax provisions should
be shown against this item.
IV) Stationery
Only exceptional items of expenditure on
and Stamps stationery like bulk purchase of security
paper, loose leaf or other ledgers etc.
which are shown as quasi-asset to be
written off over a period of time should
be shown here. The value should be on
a realistic basis and cost escalation
should not be taken into account, as these
items are for internal use.
264
Advanced Accounting - I
V) Non-banking
Assets
acquired in
satisfaction
of claim
Immovable properties/tangible assets in
satisfaction of claims acquired in
satisfaction of claims are to be shown
under this head.
VI) Others
Contingent
Liabilities
12
This will indicate items like claims which
have not been met, for instance, clearing
items, debit items representing addition to
asset or reduction in liabilities which have
not been adjusted for technical reasons,
want of particulars, etc. advances given
to staff by a bank as employer and not as
a banker etc. Items which are in the
nature or expenses which are pending
adjustments should be provided for and
the provision netted against this item so
that only realisable value is shown under
this head. Accrued income other than
interest may also be included here.
Final Accounts of Banking
Company
NOTES
I) Claims against
the bank not
acknowledged as
debts.
II) Liability for
Liabilities on partly paid shares,
debentures, etc. will be included in this
partly paid
investments. head.
III) Liability on
account of
Outstanding
forward
exchange
contracts.
IV) Guarantees
given on
behalf of
constituents
Outstanding forward exchange contracts
may be included here.
Guarantees given for constituents in India
and outside India may be shown
separately.
(i) in India
(ii) outside India
V) Acceptances, This item will include letters of credit and
endorsements bills accepted by the bank on behalf of
and other
customers.
obligations.
VI) Other items
for which the
Bank is
contingently
liable
Arrears of cumulative dividends, bills
rediscounted underwriting contracts
estimated amounts of contracts remaining
to be executed on capital account and not
provided for etc. are to be included here.
Advanced Accounting - I
265
Final Accounts of Banking
Company
NOTES
Bills
for
Collection
Interes t
Bills and other items in the course of
collection and not adjusted will be shown
against this item in the summary version
only. No separate schedule is proposed.
13
earned
PROFIT AND
LOSS ACCOUNT
I)
Interest/
discount on
advances /
bills
II) Income on
Investments
Includes interest and discount on all types
of loans and advances like cash credit,
demand loans, overdrafts, export loans.
term loans, domestic and foreign bills
purchased and discounted (including those
rediscounted), overdue interest and also
interest subsidy, if any relating to such
advances/ bills.
Includes all income derived from the
investment portfolio by way of interest
and dividend.
Includes interest on balances with RBI
III) Interest on
balances with and other banks call loans, money market
placements etc.
RBI and
other Inter
Bank Funds
IV) Others
Others
14
I)
Includes any other interest/discount
income not included in the above heads.
Commission, Includes all remuneration on services
Exchange and such as commission on collections,
commission / exchange on remittances
and transfers, commission on letters of
credit, letting out of lockers and
guarantees, commission on Government
business, commission on other permitted
agency business including consultancy
and other services, brokerage etc. on
securities. It does not include foreign
exchange income.
II) Profit on sale Include Profit or Loss on sale of
of Investment securities, furniture, land and buildings,
motor vehicle, gold, silver etc. Only the
Less : Loss on
net position should be shown. If the net
sale of
Investment position is a loss, the amount should be
shown as a deduction. The net profit or
III) Profit on
loss on revaluation of assets may also be
revaluation of
shown under this item.
Investments
266
Advanced Accounting - I
Final Accounts of Banking
Company
Less : Loss on
revaluation of
Investments
IV) Profit on sale
of land,
buildings and
other assets
Less:
NOTES
Loss : on sale of
land, buildings
and other
assets.
V) Profit on
exchange
transaction
Less : Loss
on exchange
transactions
VI) Income
earned by
way of
dividends etc.
from subsidiaries, companies, joint
ventures
abroad / in
India.
Includes Profit/loss on dealing in foreign
exchange, all income earned by way of
foreign exchange, commission and
charges on foreign exchange transactions
excluding interest which will be shown
under interest. Only the net position should
be shown. If the net position is a loss, it is
to be shown as a deduction.
VII) MiscellaIncludes recoveries from constituents for
neous Income godown rents, income form banks
properties, security charges, insurance
etc. and any other miscellaneous income.
In case any item under this head exceeds
one percent of the total income, particulars
may be given in the notes.
Interes t
Expended
15
I) Interest on
Deposits
Included interest paid on all types of
deposits including deposits from banks and
other institutions.
II) Interest on
RBI/ Inter Bank
Includes discount/interest on all
borrowings and refinance from RBI and
other banks.
III) Others
Includes discount/interest on all
borrowings/refinance from financial
institutions. All other payments like
interest on participation certificates, penal
Advanced Accounting - I
267
Final Accounts of Banking
Company
interest paid etc. may also be included.
Operating
Expenses
NOTES
16
I)
Payments to
and Provisions for
Employees
Includes staff salaries or wages,
allowances, bouns, other staff benefit like
provident fund, pension, gratuity, liveries
to staff, leave concessions, staff welfare,
medical allowances to staff etc.
II) Rent, Taxes Includes rent paid by banks on buildings
and Lighting and other municipal and other taxes paid
(excluding income tax and interest tax)
electricity and other similar charges and
levies. House rent allowances and other
similar payments to staff should appear
under the head ‘Payments to and
provisions for employees.
III) Printing and Include books and forms and stationery
used by the Bank and other printing
Stationery
charges which are not incurred by way
of publicity expenditure.
268
Advanced Accounting - I
IV) Advertisement and
publicity
Included expenditure incurred by the bank
for advertisement and publicity purpose
including printing charges of publicity
matter.
V) Depreciation
on Bank’s
Property
Included depreciation on bank’s own
property, motor cars and other vehicle,
furniture electric fittings, vaults, lifts,
leasehold properties, non-banking assets
etc.
VI) Director’s
Fees, Allowances and
Expenses
Includes sitting fees and all other items
of expenditure incurred on behalf of
directors. The daily allowances, hotel
charges, conveyance charges etc. which
though in the nature of reimbursement of
expenses of local Committee members
may also be included under this head.
VII) Auditor’s
Fees and
Expenses
(including
Branch
Author’s
Fees and
Expenses)
Includes the fees paid to the statutory
auditors and branch auditors for professional services rendered and all expenses
for performing their duties, even though
they may be in the nature of
reimbursement of expenses. If external
auditors have been appointed by banks
themselves for internal inspections and
audits and other services the expenses
incurred in that context including fees may
not be included under this head but shown
under ‘other expenditure’.
VIII) Law
Charges
All legal expenses and reimbursement of
expenses incurred in connection with legal
services are to be included here.
IX) Postage,
Telegrams,
Telephones
etc.
Includes all postal charges like stamps,
telegram, telephones, teleprinter etc.
Final Accounts of Banking
Company
NOTES
Includes repairs to bank’s property, their
X) Repairs and
maintenance
charges etc.
Maintenance
XI) Insurance
Includes insurance charges on bank’s
property, insurance premia paid to Deposit
Insurance and Credit Guarantee
Corporation etc. to the extent they are
not recovered from the concerned parties.
XII) Other
All expenses other then those not included
Expenditure in any of the other heads like, licence fees,
donations, subscriptions to papers,
periodicals, entertainment expenses travel
expenses etc. may be included under this
head. In case any particular item under
this head exceeds one percent of the total
income particulars may be given in the
notes.
Provisions
and
Contingencies
Includes all provisions made for bad and
doubtful debts, provisions for taxation,
provisions for dimunition in the value of
investments, transfers to contingencies
and other similar items.
The preparation of Final Accounts of a Banking Company as per the third
schedule under section 29 of the Banking Regulation Act, 1949 can be understood
with the help of following illustrations :
Advanced Accounting - I
269
Final Accounts of Banking
Company
8.4
Illustrations
ILLUSTRATION 1
NOTES
The following is the trial Balance of Dhanvikas Bank Ltd., Dharangaon as
on 31-03-2010.
Trial Balance as on 31-03-2010
Particulars
Debit
Credit
‘
‘
Subscribed Capital : 50,000 Equity Shares of
‘ 10 each fully paid
5,00,000
Reserve Fund
2,50,000
Loans, Cash Credits and Overdrafts
Premises
India Govt. Securities
2,58,000
50,000
4,00,000
Current Deposits
1,00,000
Fixed Deposits
1,25,000
Saving Bank Deposits
1,50,000
Salaries
28,000
General Expenses
27,400
Rent, Rates and Taxes
2,300
Director’s Fees
1,800
Profit and Loss Account on 01-04-2009
16,000
Interest and Discount
Stock of Stationery
1,28,000
8,500
Bills Purchased and Discounted
46,000
Interim dividend paid
17,000
Recurring deposits
20,000
Shares
1,50,000
Cash in Hand and with RBI
1,93,000
Money at Call and Short Notice
80,000
12,89,000 12,89,000
270
Advanced Accounting - I
Final Accounts of Banking
Company
The following information should be considered:
i)
Provision for bad and doubtful debts is required to be made at ‘ 5,000.
ii)
Interest accrued on investments was ‘ 8,000.
iii)
Unexpired discount (Rebate on bills discounted) amounted to ‘ 380.
iv)
Interim dividend declared was 4% actual.
v)
Endorsements made on behalf of customers totalled ‘ 1,15,000.
vi)
Authorised Capital was 80,000 Equity Shares of ‘ 10 each.
vii)
‘ 10,000 were added to the Premises during the year. Depreciation @ 5%
on the opening balance is required.
viii)
Market value of Indian Govt. Securities was ‘ 3,90,000.
NOTES
Prepare Profit and Loss Account for the year ending 31-03-2010 and a
Balance Sheet as at that date in the prescribed form.
SOLUTION
In the books of Dhanvikas Bank Ltd., Dharangaon
Balance Sheet as on 31-03-2010
Schedule
As on
As on
31-03-2010 31--03-2009
No.
‘
‘
Capital and Liabilities:
Capital
1
5,00,000
Reserves and Surplus
2
3,05,120
Deposit
3
3,95,000
Borrowings
4
-
Others Liabilities and Provisions
5
3,380
Total
12,03,500
Assets
Cash and balances with Reserve Bank
of India
6
1,93,000
At Call and Short Notices
7
80,000
Investments
8
5,40,000
Advances
9
3,26,000
Fixed Assets
10
48,000
Other Assets
11
16,500
Balances with Other Banks and Money
Total
Contingent Liabilities
12,03,500
12
1,15,000
Bills for collection
N.B. : (Difference between market value and book value of Indian Govt. Securities
is ‘ 10,000 as market value is ‘ 3,90,000).
Advanced Accounting - I
271
Final Accounts of Banking
Company
Schedule - 1- Capital
As on
As on
31-03-2010 31-03-2009
‘
‘
NOTES
Authorised Capital
(80,000 Shares of ‘ 10 each)
8,00,000
Issued Capital
(50,000 shares of ‘ 10 each)
5,00,000
Subscribed, Called up and Paid-up Capital :
(50,000 shares of ‘ 10 each fully called and paid)
5,00,000
Less : Calls unpaid
-
Add : Forfeited shares
Total
5,00,000
Schedule - 2- Reserves and Surplus
As on
As on
31-03-2010 31-03-2009
‘
‘
i) Statutory Reserve - Balance
2,50,000
Add : Additions during the year
13,824
ii) Capital Reserve
-
iii) Share Premium
-
iv) Other Reserves
-
v) Balance in Profit and Loss Account
41,,296
Total
3,05,120
Schedule - 3- Deposits
As on
As on
31-03-2010 31-03-2009
‘
‘
I.
Demand Deposits
i)
From Bank
ii)
From Others
1,00,000
II. Savings Bank Deposits
1,50,000
III. Term Deposits
i)
ii)
From Banks
From Others
1,45,000
Total
272
Advanced Accounting - I
3,95,000
Schedule - 4 - Borrowings
As on
As on
31-03-2010 31-03-2009
‘
‘
I.
Borrowings in India
-
II.
Borrowings outside India
-
Final Accounts of Banking
Company
NOTES
Schedule - 5 - Other Liabilities and Provisions
As on
As on
31-03-2010 31-03-2009
‘
‘
I.
Bill Payable
-
II.
Inter - Offices Adjustments
-
III.
Interest Accrued
-
IV.
Unclaimed Dividend
3,000
V.
Unexpired Discount
380
3,380
Schedule - 6 - Cash and Balances with Reserve Bank of India
As on
As on
31-03-2010 31-03-2009
‘
‘
I.
Cash in hand
II.
Balance with Reserve Bank of India
1,93,000
1,93,000
Schedule - 7- Balance with other Banks and Money at Call, and
Short Notices
As on
As on
31-03-2010 31-03-2009
‘
‘
I.
Balances with Banks
II.
Money at Call and Short Notices
80,000
80,000
Advanced Accounting - I
273
Final Accounts of Banking
Company
Schedule - 8- Investments
As on
As on
31-03-2010 31-03-2009
‘
‘
NOTES
Investments in India
•
Government Securities (Cost ‘ 4,00,000)
390,000
•
Shares
1,50,000
5,40,000
Schedule - 9- Advances
As on
As on
31-03-2010 31-03-2009
‘
‘
A.
Bills Purchased and discounted
46,000
Cash Credits, Overdrafts and Loans
2,80,000
Total
3,26,000
B.
-
C.
Total
3,26,000
Advances outside India
-
Schedule - 10- Fixed Assets
As on
As on
31-03-2010 31-03-2009
‘
‘
I.
Premises
At cost on 31st March, 2009
Add : Additions during the year
(+)
40,000
40,000
10,000
_
50,000
Less : Depreciation of date
II.
Other Fixed Assets
(-)
2,000
Total
48,000
-
-
-
48,000
274
Advanced Accounting - I
Final Accounts of Banking
Company
Schedule - 11- Others Assets
As on
As on
31-03-2010 31-03-2009
‘
‘
Interest Accrued
8,000
Stationery and Stamps
8,500
NOTES
16,500
Schedule - 12- Contingent Liabilities
As on
As on
31-03-2010 31-03-2009
‘
‘
Acceptances Endorsements and other Obligations
Total
1,15,000
1,15,000
Profits and Loss Account for the year ended 31-03-2010
I.
Schedule
Year ended
Year ended
No.
31-03-2010
31-03-2009
‘
‘
Income
Interest Earned
13
1,35,620
Other Income
14
(-10,000)
Total
II.
Expenditure
Interest Expended
15
NIL
Operating Expenses
16
61,500
Provisions and Contingencies
5,000
Total
III.
66,500
Profit or Loss
Net Profit /Loss(-) for the year
59,120
*Profit brought forward
16,000
Total
IV.
1,25,620
75,120
Appropriations
Transfer to Statutory Reserves
13,824
Transfer to Other Reserves
-
Interim Dividend
20,000
Balance carried over to Balance Sheet
41,296
Total
75,120
Advanced Accounting - I
275
Final Accounts of Banking
Company
Schedule - 13 - Interest Eared
Year ended Year ended
31-03-2010 31-03-2009
‘
R
NOTES
I.
Interest / discount on advances / bills
1,35,620
II. Income on Investments
-
III. Interest on balances with Reserve Bank of
India and other inter - bank funds
-
IV. Others
Total
1,35,620
Schedule - 14 - Others Income
Year ended Year ended
31-03-2010 31-03-2009
‘
‘
I. Commission, Exchange and Brokerage
-
II. Profit on sale of Investments
-
Less : Loss on sale of Investments
(10,000)
III. Profit on Revaluation of Investments
-
Less : Loss on Revaluation of Investments
Total
(10,000)
N.B. : Under Items II to V loss figures may be shown in brackets.
Schedule - 15- Interest Expended - NIL
Schedule - 16- Operating Expenses
276
Advanced Accounting - I
Year ended Year ended
31-03-2010 31-03-2009
‘
‘
I.
Payments to and Provisions for employees
28,000
II.
Rent, Taxes and Lighting
2,300
III. Printing and Stationery
IV. Advertisement and Publicity
V.
Depreciation on Bank’s Property
2,000
VI. Director’s Fees, Allowances and expenses
1,800
VII. Auditor’s fees expenses (Including branch auditors)
VIII. Law Charges
IX. Postage, Telegrams, Telephones etc.
X.
Repairs and Maintenance
XI. Insurance
XII. Others Expenditure
27,400
(General Expenses)
Total
61,500
Final Accounts of Banking
Company
ILLUSTRATION 2
Following is the Trial Balance of Vidya Bank Ltd., Vapi as on 31-03-2010.
Trial Balance as on 31-03-2010
Particulars
Debit
Credit
‘
‘
NOTES
Premises Less Depreciation
1,85,000
-
Money at Call and Short Notice
2,15,000
-
Furniture Less Depreciation
30,000
-
Depreciation on Bank’s Assets
11,000
-
Non Banking Assets Acquired in Settlement of Claims
20,000
-
Cash in Hand
3,00,000
-
Cash at Banks
2,50,000
-
Investments
3,50,000
-
12,65,000
-
2,00,000
-
4,500
-
40,500
-
Director’s Fees
4,000
-
Postage and Telegrams
1,350
-
Printing and Stationery
3,700
-
Others Expenditure
2,450
-
-
3,67,500
-
-
‘ 100 each fully paid
-
6,00,000
Statutory Reserve
-
1,20,000
Deposits
- 12,50,000
Provident Funds
-
1,35,000
Borrowings from Maharaja Bank Ltd.
-
2,55,000
Unclaimed Dividend
-
4,000
Commission and Exchange
-
37,500
Profit on sale of Non - Banking Assets
-
1,200
Profit and Loss Account as on 01-04-2009
-
1,12,300
Loans, Cash Credit and Overdrafts
Interest on Deposits and Borrowings
Audit Fees
Salaries and Allowances to Staff
Interest and Discounts
Share Capital :
Authorised : 7, 500 Equity Shares of ‘ 100 each
Issued and Subscribed 6,000 Equity Shares of
Total
28,82,500 28,82,500
Advanced Accounting - I
277
Final Accounts of Banking
Company
Adjustments :
i) Provide ‘ 10,000 for Bad and Doubtful Debts.
ii) Bills for collection amounted to ‘ 1,05,000.
iii) Acceptances, Endorsements and Other obligations amounted to ‘ 52,000.
NOTES
iv) Provide ‘ 1,500 for Rebate on Bills Discounted.
v) Provide ‘ 10,500 for Taxation.
vi) Postage stamps of ‘ 160 and Stationery of ‘ 700 was in hand on 31-03-2010.
Prepare Profit and Loss Account for the year ended 31-03-2010 and the
Balance Sheet as on that date as per the Banking Regulation Act.
SOLUTION
In the books of Vidya Bank Ltd., Vapi
Balance Sheet as on 31-03-2010
Schedule
No.
As on
31-03-2010 31--03-2009
‘
Capital and Liabilities:
Capital
1
6,00,000
Reserves and Surplus
2
3,49,860
Deposits
3
12,50,000
Borrowings
4
2,55,000
Others Liabilities and Provisions
5
1,51,000
Total
26,05,860
Assets :
Cash and balances with Reserve Bank of India
6
3,00,000
at Call and Short Notices
7
4,65,000
Investments
8
3,50,000
Advances
9
12,55,000
Fixed Assets
10
2,15,000
Others Assets
11
20,860
Balances with other Banks and Money
Total
Contingent Liabilities
Bills for Collection
278
Advanced Accounting - I
26,05,860
12
As on
52,000
‘
Final Accounts of Banking
Company
Schedule - 1 - Capital
As on
As on
31-03-2010 31-03-2009
‘
‘
Authorised Capital
(7,500 Shares of ‘ 100 each)
7,50,000
NOTES
Issued Capital
(6,000 Shares of ‘ 100 each)
6,00,000
Subscribed Capital
(6,000 Shares of ‘ 100 each)
6,00,000
Called-up Capital
(6,000 Shares of ‘ 100 each)
6,00,000
Less : Calls unpaid
Add : Forfeited Shares
6,00,000
Schedule - 2 - Reserves and Surplus
As on
As on
31-03-2010 31-03-2009
‘
‘
I.
Statutory Reserves
Opening Balance
Add : Additions during the year
1,20,000
23,512
Less : Deductions during the year
II.
Capital Reserves
Opening Balances
-
Add : Additions during the year
Less : Deductions during the year
III.
Share Premium
-
Opening Balance
Add : Additions during the year
Less : Deductions during the year
IV.
Revenue and Other Reserves
-
Opening Balance
Add : Additions during the year
Less : Deductions during the year
V.
Balance in Profit and Loss Account
Total (I, II, III, IV and V)
2,06,348
3,49,860
Advanced Accounting - I
279
Final Accounts of Banking
Company
Schedule - 3 - Deposits
As on
As on
31-03-2010 31-03-2009
‘
‘
NOTES
A.
I.
Demand Deposits
i)
From Banks
-
ii)
From Others
-
II. Savings Bank Deposits
12,50,000
III. Term Deposits
i)
From Banks
-
ii)
From Others
-
Total (I,II and III)
B.
12,50,000
i)
Deposits of Branches in India
ii)
Deposits of Branches Outside India
12,50,000
Schedule - 4 - Borrowings
As on
As on
31-03-2010 31-03-2009
‘
‘
I.
Borrowings in India
i)
Reserve Bank of India
ii)
Other Banks
2,55,000
-
iii) Other institutions and agencies
II.
Borrowings Outside India
Total (I and II)
2,55,000
Schedule - 5 - Others Liabilities and Provisions
As on
As on
31-03-2010 31-03-2009
‘
‘
I.
Bills Payable
II.
Others (Including Provisions)
Provident Fund
Unclaimed Dividend
Provision for Taxation
280
Advanced Accounting - I
Unexpired Discount
Total
1,35,000
4,000
10,500
(+) 1,500
1,51,000
1,51,000
Schedule - 6 - Cash and Balances with Reserve Bank of India
Final Accounts of Banking
Company
As on
As on
31-03-2010 31-03-2009
‘
‘
I.
Cash in hand
3,00,000
NOTES
(including foreign currency notes)
II.
Balances with Reserve Bank of India
i)
In Current Accounts
ii)
In Others Accounts
Total (i and ii)
3,00,000
Schedule - 7 - Balances with Banks and Money at Call and Short
Notice
As on
As on
31-03-2010 31-03-2009
‘
‘
I.
In India
i)
Balances with Banks
a)
2,50,000
in Current Accounts
b) in Others Deposit Accounts
ii)
Money at call and Short Notice
2,15,000
a) With Banks
b) With Other Institutions
Total (i and ii)
II.
4,65,000
Outside India
-
i)
In Current Accounts
-
ii)
In Others Deposit Accounts
-
iii) Money at call and Short Notice
-
Total (i and ii)
4,65,000
Advanced Accounting - I
281
Final Accounts of Banking
Company
Schedule - 8 - Investments
As on
As on
31-03-2010 31-03-2009
‘
‘
NOTES
I.
Investments in India in
i) Government Securities
ii) Other Approved Securities
iii) Shares
iv) Debentures and Bonds
v) Subsidiaries and / or Joint Ventures
vi) Others (to be specified)
3,50,000
Total
II.
3,50,000
Investments Outside India in
i) Government Securities (including local authorities)
ii) Subsidiaries and / or Joint Ventures Abroad
iii) Other Investments (to be specified)
Total
Grand Total (I and II)
3,50,000
Schedule - 9 - Advances
As on
As on
31-03-2010 31-03-2009
‘
‘
A
i)
Bill Purchased and Discounted
-
ii)
Cash Credits, Overdrafts and Loans
12,55,000
Repayble on Demand
iii) Term Loans
Total 12,55,000
B.
i)
Secured by Tangible Assets
-
ii)
Covered by Bank/ Government Guarantees
-
iii) Unsecured
Total 12,55,000
282
Advanced Accounting - I
Final Accounts of Banking
Company
Schedule - 10 - Fixed Assets
As on
As on
31-03-2010 31-03-2009
‘
‘
I. Premises
At cost on 31st March of the preceding year
NOTES
1,85,000
Add : Additions during the year
Less : Deductions during the year
Less : Depreciation to date
II. Other Fixed Assets (Including Furniture
and Fixtures)
-
Add : At cost on 31st March of the preceding year
30,000
Add : Additions during the year
Less : Deductions during the year
Less : Depreciation to date
Total (I and II)
2,15,000
Schedule - 11 - Other Assets
As on
As on
31-03-2010 31-03-2009
‘
‘
I.
Inter-Office Adjustments (net)
-
II.
Interest Accrued
-
III.
Tax paid in Advance or Tax deducted at source
-
IV.
Stationery and Stamps
V.
Non-Banking Assets Acquired in
860
Satisfaction of Claims
VI.
20,000
Other@
Total
20,860
@ In case there is any unadjusted balance of loss the same may be shown under this
item with appropriate foot-note.
Advanced Accounting - I
283
Final Accounts of Banking
Company
Schedule - 12 - Contingent Liability
As on
As on
31-03-2010 31-03-2009
‘
‘
NOTES
I.
Claims against the Bank not Acknowledged
as Debts
II. Liability for Partly paid Investments
III. Liability on account of outstanding forward
exchange contracts
IV. Guarantees given on behalf of Constituents
a) In India
b) Outside India
V. Acceptances, Endorsements and Other
Obligations
52,000
VI. Other items for which the Bank is Contingently liable
Total
52,000
Profit and Loss Account for the year ended 31-03-2010
I.
Schedule
Year ended
Year ended
No.
31-03-2010
31-03-2009
‘
‘
Income
Income Earned
13
3,66,000
Other Income
14
38,700
4,04,700
15
16
2,00,000
66,640
20,500
2,87,140
Total
II.
Expenditure
Interest Expended
Operating Expenses
Provisions and Contingencies
Total
III.
IV.
284
Profit or Loss
Net Profit /Loss(-) for the year
Net Profit B/F
Total
Appropriations
Transfer to Statutory Reserves
Transfer to Other Reserves
Interim Dividend
Transferto GovernmentorProposed Dividend
Balance carried over to Balance Sheet
Total
Advanced Accounting - I
1,17,560
1,12,300
2,29,860
23,512
-
2,06,348
2,29,860
Schedule - 13 - Interest Eared
Year ended Year ended
31-03-2010 31-03-2009
‘
‘
I.
Interest / discount on advances / bills
II.
Income on Investments
-
III.
Interest on balances with Reserve Bank
-
Total
3,66,000
Final Accounts of Banking
Company
3,66,000
NOTES
Schedule - 14 - Other Income
Year ended Year ended
31-03-2010 31-03-2009
‘
‘
I.
Commission, Exchange and Brokerage
II.
Profit on Sale of Investments
37,500
Less : Loss on sale of Investments
III.
Profit on Revaluation of Investments
Less : Loss on Revaluation of Investments
IV.
Profit on Sale of Land, Buildings, and Other
Assets (Non- Banking)
1,200
Less : Loss on Sale of Land, Buildings and
Other Assets
V.
Profit on Exchange Transaction
Less : Loss on Exchange Transactions
VI.
Income earned by way of Dividend etc.
form Subsidiaries/Companies and/ or
Joint Ventures aborad/in India
VII. Miscellaneous Income
Total
38,700
Advanced Accounting - I
285
Final Accounts of Banking
Company
Schedule - 15 - Interest Eared
Year ended Year ended
31-03-2010 31-03-2009
‘
‘
NOTES
I.
Interest on Deposits
2,00,000
II.
Interest on balances with Reserve Bank
of India and Borrowings
III.
-
Others
Total
2,00,000
Schedule - 16 - Operating Expenses
Year ended Year ended
31-03-2010 31-03-2009
‘
‘
I.
Payments to and Provisions for employees
II.
Rent, Taxes and Lighting
III.
Printing and Stationery
IV.
Advertisement and Publicity
V.
Depreciation on Bank’s Property
VI.
Director’s Fees, Allowances and Expenses
40,500
3,000
11,000
VII. Auditor’s Fees and Expenses (including
4,000
4,500
branch auditors).
VIII. Law Charges
-
IX.
Postage, Telegrams, Telephones etc.
X.
Repairs and Maintenance
-
XI.
Insurance
-
XII. Other Expenditure
2,450
Total
286
Advanced Accounting - I
1,190
66,640
Final Accounts of Banking
Company
ILLUSTRATION 3
From the following Trial Balance of Laxmi Bank Ltd. Lasalgaon on 31-03-2010
prepare Profit and Loss Account for the year ended 31-03-2010 and a Balance
Sheet as on that date as per the Banking Regulation Act.
Trial Balance as on 31-03-2010
Particulars
Debit
Credit
‘
‘
NOTES
Equity share Capital of ‘ 100 each ‘ 50 paid up
-
4,00,000
Profit and Loss on Account 01-04-2009
-
1,60,000
Current Deposit Account
- 13,64,000
Fixed Deposit Account
- 15,60,000
Savings Bank Account
- 10,26,000
Director’s Fees
Audit Fees
Furniture (Cost ‘ 4,00,000)
Interest and Discount Received
18,000
-
4,000
-
3,48,000
-
-
8,40,000
Commission and Exchange
4,00,000
Reserve Fund
1,40,000
Printing and Stationery
16,000
-
Rent and Taxes
34,000
-
Salary
2,80,000
-
Buildings (Cost ‘ 12,00,000)
9,00,000
-
Law Charges
6,000
-
Cash in Hand
64,000
Cash with RBI
14,00,000
-
Cash with other Bank
13,00,000
-
4,80,000
-
12,00,000
-
Bills Discounted and Purchased
5,60,000
-
Interest Paid
6,00,000
-
Investment at Cost
Loans, Cash Credits and Overdrafts
Borrowing from Brahmadeo Bank
8,00,000
Branch Adjustment Account
5,20,000
Total
72,10,000 72,10,000
Following additional information is available
i)
The Bank has accepted on behalf of the customers bills worth ‘ 6,00,000
Advanced Accounting - I
287
Final Accounts of Banking
Company
against the securities of ‘ 7,60,000 lodged with the bank.
ii)
Rebate on bills discounted ‘ 22,000.
iii) Provide depreciation on Buildings @ 10% and Furnitures @ 5% on cost.
iv) Provide ‘ 6,000 for Bad and Doubtful Debts.
NOTES
SOLUTION
In the books of Laxmi Bank Ltd., Lasalgaon
Balance Sheet as on 31-03-2010
Schedule
No.
As on
As on
31-03-2010 31--03-2009
‘
‘
Capital and Liabilities:
Capital
1
4,00,000
Reserves and Surplus
2
4,14,000
Deposits
3
39,50,000
Borrowings
4
8,00,000
Others Liabilities and Provisions
5
5,42,000
Total
61,06,000
Assets :
Cash and balances with Reserve
6
14,64,000
Balances with other Banks
7
13,00,000
Investments
8
4,80,000
Advances
9
17,54,000
Fixed Assets
10
11,08,000
Others Assets
11
NIL
Banks of India
Total
Contingent Liabilities
Bills for Collection
288
Advanced Accounting - I
61,06,000
12
-
-
-
Final Accounts of Banking
Company
Schedule - 1 - Capital
As on
As on
31-03-2010 31-03-2009
‘
‘
Authorised Capital
(8,000 Shares of ‘ 100 each)
8,00,000
NOTES
Issued Capital
(8,000 Shares of ‘ 100 each)
8,00,000
Subscribed Capital
(8,000 Shares of ‘ 100 each)
8,00,000
Called - up Capital
(8,000 Shares of ‘ 100 each ‘ 50 share paid)
4,00,000
Less : Calls Unpaid
Add : Forfeited Shares
Total
4,00,000
Schedule - 2 - Reserves and Surplus
As on
As on
31-03-2010 31-03-2009
‘
‘
I.
Statutory Reserves
Opening Balance
Add : Additions during the year
12,000
Less : Deductions during the year
II.
Capital Reserve
Opening Balances
-
Add : Additions during the year
Less : Deductions during the year
III.
Share Premium
Opening Balance
-
Add : Additions during the year
Less : Deductions during the year
IV.
Revenue and Other Reserve
Opening Balance
1,40,000
Add : Additions during the year
Less : Deductions during the year
V.
Balances in Profit and Loss Account
Total (I,II,III,IV, and V)
2,62,000
4,14,000
Advanced Accounting - I
289
Final Accounts of Banking
Company
Schedule - 3 - Deposits
As on
As on
31-03-2010 31-03-2009
‘
‘
NOTES
A. I.
Demand Deposits
i)
From Bank
ii)
From Others
13,64,000
II. Savings Bank Deposits
10,26,000
III. Term Deposits
i)
From Bank
ii)
From Others
15,60,000
Total (I,II, and III)
B. i)
ii)
39,50,000
Deposits of Branches in India
-
Deposits of Branches Outside India
-
Total
39,50,000
Schedule - 4 - Borrowings
As on
As on
31-03-2010 31-03-2009
‘
‘
I.
Borrowings in India
(i) Reserve Bank of India
(ii) Other Banks
8,00,000
-
8,00,000
-
(iii) Other institutions and agencies
II. Borrowings outside India
Total (I and II)
Secured Borrowings in I and II above ‘
290
Advanced Accounting - I
Schedule - 5 - Other Liabilities and Provisions
Final Accounts of Banking
Company
As on
As on
31-03-2010 31-03-2009
‘
‘
I.
Bills Payable
II. Inter-office Adjustments (Net)
5,20,000
NOTES
III. Interest Accrued
IV. Others (including provisions)
22,000
(Unexpired Discount)
Total
5,42,000
Schedule - 6 - Cash and Balances with Reserve Bank of India
As on
As on
31-03-2010 31-03-2009
‘
‘
I.
Cash in hand
64,000
(including foreign currency notes)
II. Balance with Reserve Bank of India
i) In Current Account
14,00,000
ii) In Other Accounts
Total (I and II)
14,64,000
Schedule - 7 - Balances with Banks and Money at Call and Short Notice
As on
As on
31-03-2010 31-03-2009
‘
‘
I.
In India
i) Balances with banks
a) in Current Accounts
13,00,000
b) in Other Deposit Accounts
ii) Money at Call and Short Notice
a) With Banks
b) with Other Institutions
Total (I and II)
13,00,000
II. Outside India
i) In Current Accounts
ii) In Other Deposit Accounts
-
iii) Money at Call and Short Notice
Grand Total (I and II)
13,00,000
Advanced Accounting - I
291
Final Accounts of Banking
Company
Schedule - 8 - Investments
As on
As on
31-03-2010 31-03-2009
‘
‘
NOTES
I.
Investments in India in
i) Government Securities
ii) Other Approved Securities
iii) Shares
iv) Debentures and Bonds
v) Subsidiaries and /or Joint Ventures
vi) Others
4,80,000
(to be specified)
Total
4,80,000
II. Investments outside India in
i) Governments Securities (including local authorities)
ii) Subsidiaries and /or Joint Ventures Abroad
iii) Other Investments (to be specified)
Total
Grand Total (I and II)
292
Advanced Accounting - I
4,80,000
Final Accounts of Banking
Company
Schedule - 9 - Advances
As on
As on
31-03-2010 31-03-2009
‘
‘
A. i) Bills Purchased and Discounted
5,60,000
-
NOTES
ii) Cash Credits, Overdrafts and
Loans Repayable on Demand
11,94,000
iii) Term Loans
Total
17,54,000
B. i) Secured by Tangible Assets
ii) Covered by Bank/Government Guarantees
iii) Unsecured
Total
C. I. Advances in India
i) Priority Sectors
ii) Public Sectors
iii) Banks
iv) Others
Total
II. Advances Outside india
i) Due from Banks
ii) Due from Others
a) Bills purchased and Discounted
b) Syndicated Loans
c) Others
Total
Grand Total (I and II)
17,54,000
Advanced Accounting - I
293
Final Accounts of Banking
Company
Schedule - 10 - Fixed Assets
As on
As on
31-03-2010 31-03-2009
‘
NOTES
I.
Premises
At cost on 31st March of the preceding year
Add :
‘
12,00,000
Additions during the year
Less : Deductions during the year
Less : Depreciation to date
4,20,00
Total
II.
Other Fixed Assets (Including
Furniture and Fixtures)
Add :
7,80,000
4,00,000
Additions during the year
Less : Deductions during the year
Less : Depreciation to date
72,000
Total (I and II)
3,28,000
Total
11,08,000
Profit and Loss Account for the year ended 31-03-2010
I.
Schedule
Year ended
Year ended
No.
31-03-2010
31-03-2009
‘
‘
Income
Income Earned
13
8,18,000
Other Income
14
4,00,000
Total
II.
Expenditure
Interest Expended
15
6,00,000
Operating Expenses
16
4,98,000
Provision and Contingencies
6,000
Total
III.
11,04,000
Profit or Loss
Net Profit /Loss for the year
1,14,000
Net Profit B/F
1,60,000
Total
IV.
12,18,000
2,74,000
Appropriations
Transfer to Statutory Reserves
12,000
Transfer to Other Reserves
-
Transfer to Government or Proposed
Dividend
294
Advanced Accounting - I
Balance carried over to Balance Sheet
2,62,000
Total
2,74,000
Final Accounts of Banking
Company
Schedule - 13 - Interest Eared
Year ended Year ended
31-03-2010 31-03-2009
‘
‘
I.
Interest / discount on advances / bills
II.
Income on Investments
III.
Interest on balances with Reserve Bank
8,18,000
-
-
NOTES
of India and Other Inter-bank funds
IV.
Others
Total
8,18,000
Schedule - 14 - Other Income
Year ended Year ended
31-03-2010 31-03-2009
‘
‘
I.
Commission, Exchange and Brokerage
II.
Profit on Sale of Investments
4,00,000
Less : Loss on sale of Investments
III.
Profit on Revaluation of Investments
Less : Loss on Revaluation of Investments
IV.
Profit on Sale of Land, Buildings, and Other
Assets
Less : Loss on Sale of Land, Buildings and
Other Assets
V.
Profit on Exchange Transaction
Less : Loss on Exchange Transactions
VI.
Income earned by way of Dividend etc.
form Subsidiaries/Companies and/ or
Joint Ventures aborad/in India
VII. Miscellaneous Income
Total
4,00,000
N.B. Under items II to V loss figures may be shown in brackets.
Advanced Accounting - I
295
Final Accounts of Banking
Company
Schedule - 15 - Interest Eared
Year ended Year ended
31-03-2010 31-03-2009
‘
‘
NOTES
I.
Interest on Deposits
6,00,000
II.
Interest on Reserve Bank of India/Inter-Bank Borrowings
-
III. Others
Total
6,00,000
Schedule - 16 - Operating Expenses
Year ended Year ended
31-03-2010 31-03-2009
‘
‘
I.
Payments to and Provisions for employees
II.
Rent, Taxes and Lighting
34,000
III.
Printing and Stationery
16,000
IV.
Advertisement and Publicity
V.
Depreciation on Bank’s Property
VI.
2,80,000
a) Buildings
1,20,000
b) Furniture
20,000
Direction’s Fees, Allowances and Expenses
18,000
VII. Auditor’s Fees and Expenses (including
4,000
branch auditors).
VIII. Law Charges
6,000
IX.
Postages, Telegrams, Telephones etc.
X.
Repairs and Maintenance
XI.
Insurance
XII. Other Expenditure
Total
296
Advanced Accounting - I
4,98,000
Final Accounts of Banking
Company
ILLUSTRATION 4
Following is the Trial Balance of Shri- Ganesh Co-operative Bank Ltd.,
Shahada as on 31-03-2010.
Trial Balance as on 31-03-2010
Particulars
Debit
Credit
‘
‘
NOTES
Subscribed Capital
56,250 Equity Share of ‘ 10 each fully paid
-
5,62,500
-
2,81,250
2,44,125
-
86,250
-
4,50,000
-
Current Deposits
-
1,12,500
Fixed Deposits
-
1,40,625
Saving Bank Deposits
-
86,250
Salaries
31,500
-
General Expenses
30,375
-
Reserve Fund
Loan, Cash Credit and Overdraft
Premises
Indian Government Securities
Rent and Taxes
3,375
Profit and Loss Account on 01-04-2009
2,250
-
Director’s Fees
-
20,250
Interest and Discount Received
-
1,40,625
9,000
-
Bills purchased and discounted
51,750
-
Interim Dividend paid
19,125
-
Shares of Company
56,250
-
2,13,750
-
Money at Call and Short Notice
90,000
-
Interest Paid
56,250
-
13,44,000
13,44,000
Stock of Stationery
Cash-in-hand and with Reserve Bank of India
Total
Adjustments :
i)
Provide rabate on bills discounted ‘ 1,125.
ii)
Provide ‘ 3,375 for doubtful debts.
iii)
Authorised Capital was 1,20,000 Equity Shares of ‘ 10 each.
iv)
Provide ‘ 9,000 for Taxation Reserve.
You are required to prepare Profit and Loss Account for the year ended
Advanced Accounting - I
297
Final Accounts of Banking
Company
31-03-2010 and Balance Sheet as on that date as per Banking Companies
Regulation Act with necessary Schedules.
SOLUTION
In the books of Shri Ganesh Co-operative Bank Ltd., Shahada
NOTES
Balance Sheet as on 31-03-2010
Schedule
As on
As on
31-03-2010 31--03-2009
No.
‘
‘
Capital and Liabilities:
Capital
1
5,62,500
Reserves and Surplus
2
2,85,750
Deposit
3
3,39,375
Borrowings
4
-
Others Liabilities and Provisions
5
10,125
Total
11,97,750
Assets :
Cash in Hand and with Reserve
6
2,13,750
Call and Short Notice
7
90,000
Investments
8
5,06,250
Advances
9
2,92,500
Fixed Assets
10
86,250
Others Assets
11
9,000
Bank of India
Balances with Banks and Money at
Total
Contingent Liabilities
Bills for Collection
298
Advanced Accounting - I
11,97,750
12
-
Final Accounts of Banking
Company
Schedule - 1 - Capital
As on
As on
31-03-2010 31-03-2009
‘
‘
1. For Other Banks
NOTES
Authorised Capital
(1,20,000 Share of ‘ 10 each)
12,00,000
Issued Capital
(56,250 Shares of ‘ 10 each)
5,62,500
Subscribed Capital
(56,250 Shares of ‘ 10 each)
5,62,500
Called-up Capital
(56,250 Shares of ‘ 10 each)
5,62,500
Less : Calls Unpaid
-
Add : Forfeited Shares
Total
5,62,500
Schedule - 2 - Reserves and Surplus
As on
As on
31-03-2010 31-03-2009
‘
I.
‘
Statutory Reserves
Opening Balance
Add : Additions during the year
Less : Deductions during the year
II.
Capital Reserves
Opening Balances
Add : Additions during the year
Less : Deductions during the year
III.
Share Premium
Opening Balance
Add : Additions during the year
Less : Deductions during the year
IV.
Revenue and Other Reserves
Opening Balance
2,81,250
Add : Additions during the year
Less : Deductions during the year
V.
Balance in Profit and Loss Account
4,500
Total (I,II,III,IV, and V)
2,85,750
Advanced Accounting - I
299
Final Accounts of Banking
Company
NOTES
Schedule - 3 - Deposits
As on
As on
31-03-2010 31-03-2009
‘
‘
A. I. Demand Deposits
i)
From Banks
-
ii)
From Others
1,12,500
II. Savings Bank Deposits
86,250
III.Term Deposits
i)
From Banks
-
ii)
From Others
1,40,625
Total (I,II, and III)
3,39,375
B. i) Deposits of Branches in India
ii) Deposits of Branches Outside India
Total
3,39,375
Schedule - 4 - Borrowings
As on
As on
31-03-2010 31-03-2009
‘
‘
I.
Borrowings in India
II. Borrowings Outside India
-
-
-
-
Schedule - 5 - Others Liabilities and Provisions
As on
As on
31-03-2010 31-03-2009
‘
‘
I.
Bills Payable
II.
Others
-
Unexpired Discount
1,125
Provision for Taxation
9,000
Total
300
Advanced Accounting - I
10,125
Schedule - 6 - Cash and Balances with Reserve Bank of India
Final Accounts of Banking
Company
As on
As on
31-03-2010 31-03-2009
‘
‘
I.
Cash in hand
-
NOTES
(including foreign currency notes)
II. Balances with Reserve Bank of India
i)
In Current Accounts
ii)
In Others Accounts
2,13,750
Total (I and II)
2,13,750
Schedule - 7 - Balances with Banks and Money at Call and Short
Notice
As on
As on
31-03-2010 31-03-2009
‘
‘
I.
In India
i) Balances with Banks
a) in Current Accounts
-
b) in Others Deposit Accounts
-
ii) Money at call and Short Notice
a) with Banks
-
b) With Other Institutions
Total (I and II)
90,000
90,000
II. Outside India
i) In current Accounts
ii) In other Deposit Accounts
iii) Money at call and Short Notice
Grand Total (I and II)
90,000
Advanced Accounting - I
301
Final Accounts of Banking
Company
Schedule - 8 - Investments
As on
As on
31-03-2010 31-03-2009
‘
‘
NOTES
I.
Investments in India in
i) Government Securities
4,50,000
ii) Other Approved Securities
-
iii) Shares
56,250
iv) Debentures and Bonds
-
v) Subsidiaries and /or Joint Ventures vi) Others
(to be specified)
Total
5,06,250
II. Investments outside India in
i) Governments Securities
(including local authorities)
ii) Subsidiaries and /or Joint Ventures Abroad
iii) Other Investments (to be specified)\
Total
Grand Total (I and II)
302
Advanced Accounting - I
5,06,250
Final Accounts of Banking
Company
Schedule - 9 - Advances
As on
As on
31-03-2010 31-03-2009
‘
‘
A. i) Bills Purchased and Discounted
51,750
NOTES
ii) Cash Credits, Overdrafts and
Loans Repayable on Demand
2,40,750
iii) Term Loans
Total
B. i) Secured by Tangible Assets
2,92,500
-
ii) Covered by Bank/Government Guarantees
-
iii) Unsecured
Total
C. I. Advances in India
i) Priority Sectors
-
ii) Public Sectors
-
iii) Banks
-
iv) Others
Total
II. Advances Outside india
i) Due from Banks
-
ii) Due from Others
-
a)
Bills purchased and Discounted-
b)
Syndicated Loans
-
c)
Others
Total
Grand Total (I and II)
2,92,500
Advanced Accounting - I
303
Final Accounts of Banking
Company
Schedule - 10 - Fixed Assets
As on
As on
31-03-2010 31-03-2009
‘
‘
NOTES
I.
Premises
At cost on 31st March of the preceding year
86,250
Add : Additions during the year
Less : Deductions during the year
Less : Depreciation to date
II.
Other Fixed Assets (Including Furniture
and Fixtures)
At cost on 31st March of the preceding year
Add : Additions during the year
Less : Deductions during the year
Less : Depreciation to date
Total (I and II)
86,250
Total
Schedule - 11- Other Assets
As on
As on
31-03-2010 31-03-2009
‘
‘
I.
Inter-Office Adjustments (net)
-
II. Interest Accrued
-
III. Tax paid in Advance / Tax deducted at source
-
IV. Stationery and Stamps
9,000
V. Non-Banking Assets Acquired in
Satisfaction of Claims
-
VI. Other@
Total
9,000
@ In case there is any unadjusted balance of loss, the same may be shown under this
item with appropriate foot-note.
304
Advanced Accounting - I
Final Accounts of Banking
Company
Schedule - 12- Contingent Liabilities
As on
As on
31-03-2010 31-03-2009
‘
‘
-
NOTES
Total
Profit and Loss Account for the year ended 31-03-2010
I.
Schedule
Year ended
Year ended
No.
31-03-2010
31-03-2009
‘
‘
Income
Income Earned
13
1,39,500
Other Income
14
-
Total
II.
1,39,500
Expenditure
Interest Expended
15
56,250
Operating Expenses
16
67,500
Provision and Contingencies
12,375
Total
1,36,125
III.Profit or Loss
Net Profit /Loss(-) for the year
3,375
B/F from last year
20,250
Total
IV.
23,625
Appropriations
Transfer to Statutory Reserves
-
Transfer to Other Reserves
-
Interim Dividend
Balance carried over to Balance Sheet
19,125
4,500
Total
23,625
Schedule - 13 - Interest Eared
Year ended Year ended
31-03-2010 31-03-2009
‘
‘
I.
Interest / discount on advances / Bills
II.
Income on Investments
III.
Interest on balances with Reserve Bank
IV.
1,39,500
-
of India and Other Inter-bank funds
-
Others
Total
1,39,500
Advanced Accounting - I
305
Final Accounts of Banking
Company
Schedule - 15 - Interest Expended
Year ended Year ended
31-03-2010 31-03-2009
‘
‘
NOTES
I.
Interest on Deposits
56,250
II. Interest on Reserve Bank of India/Inter-Bank
Borrowings
-
III. Others
Total
56,250
Schedule - 16 - Operating Expenses
Year ended Year ended
31-03-2010 31-03-2009
‘
‘
I.
Payments to and Provisions for employees
31,500
II.
Rent, Taxes and Lighting
III.
Printing and Stationery
-
IV.
Advertisement and Publicity
-
V.
Depreciation on Bank’s Property
-
VI.
Direction’s Fees, Allowances and Expenses
3,375
2,250
VII. Auditor’s Fees and Expenses (including
branch auditors)
VIII. Law Charges
IX.
Postage, Telegrams, Telephones etc.
X.
Repairs and Maintenance
-
XI.
Insurance
-
XII. Other Expenditure
30,375
Total
306
Advanced Accounting - I
67,500
8.3
Abridge Form of Balance Sheet and Profit and
Loss Account of a Bank
The Final Accounts of XYZ Bank as on 31st March, 2012 to be published
in newspaper is shown below to understand the items and schedules incorporated
therein very clearly.
Final Accounts of Banking
Company
NOTES
XYZ BANK
Balance Sheet as at 31st March, 2012.
Schedule
As on
As on
No.
31-03-2012
31--03-2011
‘
‘
Capital and Liabilities:
Capital
1
410,00,000
410,00,000
Reserves and Surplus
2
6722,23,58
5698,95,72
Deposit
3
116803,23,19
96795,91,86
Borrowings
4
25,82,40
114,16,42
Other Liabilities and Provisions
5
8860,56,70
7286,13,33
Total
132821,85,87 110305,17,33
Assets :
Cash and balances with Reserve Bank
of India
6
7913,99,57
4984,38,32
Call and Short Notice
7
4909,55,90
3684,34,91
Investments
8
36974,18,30
38053,88,36
Advances
9
79425,69,98
60421,40,39
Fixed Assets
10
688,47,17
672,81,43
Other Assets
11
2909,94,95
2488,33,92
Balances with Banks and money At
Total
Contingent Liabilities
132821,85,87 110305,17,33
12
54900,700,90
57607,02,68
17
4422,58,32
3957,95,79
Bills for Collection
Notes on Accounts
Advanced Accounting - I
307
Final Accounts of Banking
Company
NOTES
Profit and Loss account for the year ended 31st March, 2012.
I.
Schedule
As on
As on
No.
31-03-2012
31--03-2011
‘
‘
Income
Income Earned
13
8711,51,23
7571,96,88
Other Income
14
1377,51,49
1543,82,73
10089,02,72
9115,79,61
Total
II. Expenditure
Interest Expended
15
5130,00,69
4421,49,93
Operating Expenses
16
2347,13,54
2108,97,16
1268,66,49
1475,82,07
8745,80,72
8006,29,16
1343,22,00
1109,50,45
340,00,00
1,03,00
280,00,000
202,70,31
(-) 1208,14,82
230,00,00
1901,73,82
140,65,52
-
102,50,00
Proposed Dividend
270,60,00
123,00,00
Dividend Tax
38,00,000
30,64,62
1343,22,00
1109,50,45
32.76
28.06
Provision and Contingencies
Total
III. Net Profit for the year
IV. Appropriations/Transfers to
Statutory Reserve
Capital Reserve
Investment Fluctuation Reserve
Revenue Reserve
Interim Dividend
Total
Notes on Accounts
Earnings per share
8.6
17
Summary
•
Banking may be defined as “accepting for the purpose of lending or
investment of deposits of money from the public to be payable on demand
or otherwise and withdrawable by cheque.
•
Banking Companies in India are governed by Banking Regulation Act 1949.
However, provisions of Companies Act, 1956 are also applicable to Banking
Companies, ordinary rules and regulations of book-keeping are also
applicable in maintaining the ‘Books of Accounts’ of Banking Companies.
•
A revised format for preparation of Balance Sheet and Profit and Loss
Account have been introduced form the year 1991-92.
Because of special nature of transactions of Banking Company there are
some typical items which requires explanation.
•
308
Advanced Accounting - I
Every Banking Company should prepare a Balance Sheet and Profit and
Loss Account on 31st March of each year in the form set out in the Third
Schedule of Banking Regulation Act. In the case of a foreign banking
company, the Profit and Loss Account may be prepared as on a date not
earlier than two months before 31st December.
•
Assets or Accounts becomes ‘non-performing’ when it ceases to generate
income for a bank.
•
Bank are required to classify the loan assets (advances) into four categories
i.e. (a) Standard Assets, (b) Sub-standard Assets, (c) Doubtful Assets and
(d) Loss Assets.
•
It has been advised by RBI that Banks are to recognise their income on
“Accrual Basis” in respect of income on performing assets and on “Cash
Basis” in respect of income on non-performing assets.
•
The new format of Balance Sheet and Profit and Loss Account has been
followed w.e.f. accounting year ending 31st March 1992. The Balance Sheet
is prepared in From - A while the Profit and Loss Account is prepared in
From - B’ of the Third Schedule.
•
‘Guidelines of RBI for compilation of financial statements’s are to be
followed by Banking Company while preparing financial statements. These
guidelines are provided for each and every item incorporated in the Balance
Sheet of a Banking Company.
•
Schedule No. 1 to 5 indicate the items of liabilities side of the Balance
Sheet and schedule No. 6 to 11 indicate the items of Assets side of the
Balance Sheet. Schedule No. 12 indicate the items included in contingent
liabilities. Schedule No. 13 to 16 indicate the items of income and expenditure
of Profit and Loss Account.
8.7
Final Accounts of Banking
Company
NOTES
Key Terms
(a)
Capital Reserve : The expression “Capital Reserve” shall not include
any amount regarded as free for distribution through the profit and Loss
Account. Surplus on revaluation should be treated as capital Reserves.
(b)
Revenue Reserve : The expression ‘Revenue’ shall mean any reserve
other then capital reserve. This item will include all reserves, other than
those separately classified.
(c)
Balance of Profit : Balance of Profit after appropriations. In case of loss
the balance may be shown as a deduction.
(d)
Bills payable : Bills payable, includes draft, telegraphic transfers, travellers
cheques, mail transfers payable, pay-slip, bankers cheques and other
miscellaneous items.
(e)
Interest Accrued : Interest accrued includes interest accrued but not due
on ‘deposits’ and “borrowings”
(f)
Money at call and short notice : Money at call and short notice includes
Advanced Accounting - I
309
Final Accounts of Banking
Company
deposits usually classified in foreign countries as money at call and short
notice.
(g)
NOTES
8.8
Premises : Premises includes premises wholly or partly owned by banking
company for the purpose of business including residential premises which
should be shown against “premises”.
Questions And Exercises
I. Objective Questions :
A)
Multiple choice Questions
(1)
A Banking company follows the accounting principles of --------------- while
recording their business transactions in the books of accounts.
(a) Double entry system
(b) Mixed system
(c) Single entry system
(d) Cash system
(2)
The loans advanced by the Banks to another Bank repayable within twenty
four hours are termed as ------------------.
(a) Money at short notice
(b) Money at call
(c) Term loans
(d) Short-term loans
(3)
In the Balance-Sheet of a Banking company. investment in silver is shown
on the asset side under the heading----------------------------.
(a) Investments
(b) Fixed Assets.
(c) Other Assets
(d) Advances
(4)
Every Banking company must prepare their final accounts as on ------------------- every year as per the forms given in the Third schedule of the
Banking Regulation Act, 1949.
(a) 31st December
(b) 30th September
310
Advanced Accounting - I
(c) 31st July
Final Accounts of Banking
Company
(d) 31st March
Ans : (1 - a), (2 - b), (3 - c), ( 4 - d)
II.
Long Answer Questions
(1)
What are the ‘Final Accounts of a Banking Company’? Explain in brief the
books of accounts to be maintained by the bank.
(2)
Give the from of Balances-Sheet in from - A as per the third schedule of
Section 29
(3)
Give the form of Profit and Loss Account in form. B as per the third schedule
of Section 29.
(4)
Write short notes on :
NOTES
a) Statutory Reserves, b) Demand Deposits, c) Inter-Office Adjustments,
d) Money at Call and Short Notice, e) Bills Purchased and Discounted
f) Non-Banking Assets acquired in satisfaction of claims, g) Bills Payable.
III.
Practical Problems :
1)
The following Trial Balance was extracted from the books of Janseva Bank
Ltd., Junnar, as on 31-03-2010.
Particulars
Debit
‘
Share Capital
Cash on hand and with Banks
4,63,500
Investment in Govt. of India Bonds
19,43,700
Other Investment
15,56,300
Gold Bullion
1,51,300
Interest accrued on Investment
2,46,200
Savings Account Ledger Control Account
Current Account Balance
Fixed Deposit
Share Premium Account
Silver Bullion
20,000
Statutory Reserve
Constituents Liability for Acceptances and Endorsements 5,65,000
Security Deposits of Employees
Buildings
6,00,000
Furniture
1,00,000
Borrowings from Banks
Money at call and Short Notice
2,60,000
Profit and Loss Account
Bills Discounted and Purchased
1,25,000
Acceptances and Endorsements
Bills for Collection
Interest
79,500
Credit
‘
50,00,000
74,200
9,70,000
2,30,500
9,00,000
14,00,000
1,50,000
7,72,300
65,000
4,35,000
5,65,000
7,20,000
Advanced Accounting - I
311
Final Accounts of Banking
Company
NOTES
Commission and Brokerage
Constituent’s Liability for Bills for Collection
Discount
Audit fees
Loss in sale of Furniture
Direction’s Fees
Salaries
Postage
Rents
Profit on Bullion
Managing Director’s Remuneration
Miscellaneous Income
Loss on sale of Investments
Deposit with Reserve Bank of India
Advances
Total
2,53,000
4,35,000
4,20,000
30,000
10,000
32,000
2,10,000
2,500
6,000
12,000
1,20,000
27,000
3,00,000
7,50,000
40,00,000
1,20,00,000
1,20,00,000
You are required to prepare a Profit and Loss Account for the year ended
31 March 2010 and Balance Sheet as at that date after considering the following.
st
i)
Provide Rebate on Bills discounted ‘ 50,000.
ii)
A Security of the Current Account Ledger reveals that there are accounts
overdrawn to the extent of ‘ 2,50,000 and the total of the credit balance is
‘ 12,20,000.
iii)
Claim by employees for banks ‘ 1,80,000 is pending a word of arbitration.
iv)
Directors state that Assets are over depreciated.
2)
Syndicate Bank Ltd., Surat is incorporated with Authorised Capital of Rupees
Three Crores divided into Equity Shares of ‘ 50 each. Prepare a Balance Sheet
as at 31-03-2010 as required by the Banking Companies Act, 1949 from the following
particulars made available.
312
Advanced Accounting - I
Particulars
Share Capital in Equity Share of ‘ 50 each
‘ 29 per share paid-up (Reserve liability of shareholders
‘ 25 per share)
Reserve Fund
Profit and Loss Account as on 31-03-2009 (Cr.)
U.K. Loans (Dr.)
Saving Bank Deposits
Call Deposits
Buildings Less Depreciation
Furniture and Fixtures Less : Depreciation
Bills for Collection
Acceptances and Endorsements
on half of customers
Gold
Reserve for Doubtful Debts
Gold Ornaments (received as security for Loans)
‘
1,50,00,000
1,10,00,000
28,80,000
14,25,000
22,50,000
20,75,000
74,45,000
17,20,000
11,25,000
9,50,000
90,000
7,50,000
45,000
Cash certificates and Fixed Deposits
Loans, Cash Credits, Overdrafts etc.
Current Accounts
Bills Discounted and Purchased
Silver
Investments in fully paid Equity shares of Public Companies
Stamps and Stationery
Cash with Reserve Bank of India
Cash with Other Bank
Money at Call and Short Notice
Cash in hand
Development Rebate Reserve
Borrowings from Banks
State Governments securities (face value ‘ 20,00,000)
Unclaimed Dividends
Bills Payable
Branch Adjustments (Cr.)
Municipal Debentures (face value ‘ 9,00,000)
Share Premium
Amount owing to Subsidiary Company
Tax deducted at source on Income and Investments
12,50,000
1,58,50,000
1,20,75,000
17,50,000
6,00,000
13,50,000
4,25,000
1,15,00,000
13,00,000
63,30,000
5,45,000
5,75,000
15,10,000
13,30,000
3,80,000
90,000
17,50,000
8,75,000
7,50,000
3,45,000
1,45,000
Final Accounts of Banking
Company
NOTES
Adjustments:
i)
Rebate on Bills discounted and purchased for unexpired period amounted
to ‘ 90,000.
ii)
Transfer ‘ 7,00,000 to Reserve Fund.
iii)
Municipal Debentures are pledged as security with a Bank for loan of
‘ 8,00,000.
iv)
Advances amounting to ‘ 1,08,00,000 are fully secured.
v)
Liability in respect of outstanding forward Exchange Contract amounts to
‘ 12,70,000.
vi)
Liability on Bills of Exchanges Re-discounted amounts to ‘ 4,00,000.
3)
The following are the balances of General Ledger of Mumbai Bank Ltd.,
Malad as at 31-03-2010.
Particulars
Share Capital
Reserve
Savings Deposit
Advances
Cash in hand
Balance with Other Banks on
Current Account
Fixed Deposit (Investment)
Unclaimed Dividend
Profit and Loss Account
Loans
‘
3,50,000
1,00,000
4,16,250
2,12,140
3,16,540
1,43,000
3,00,000
340
16,160
5,03,160
Particulars
Calls in Arrears
Fixed Deposits
Current Deposit
Borrowings from Banks
Cash with Reserve Bank
Bills Discounted
Bills payable
Money at Call and Short Notice
Outstanding Expenses
Investments
Premises
‘
250
6,67,500
9,12,250
16,000
1,50,000
3,15,770
5,500
72,600
1,110
4,43,210
50,000
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Final Accounts of Banking
Company
NOTES
Furniture
Non-Banking Assets
Commission and Exchange (Cr.)
Profit on Sale of Investments
Interest (Dr.)
General Manager Allowance
Director’s Fees and Allowances
Municipal Tax
Postage, Telegrams and Stamps
Depreciation of Furniture
Stationery, Printing andAdvertisement
4,400
180
1,320
1,400
13,000
150
1,107
56
1,063
36
100
Silver
Interest and Discount (Cr.)
Rent (Cr.)
Profit on Non-Banking Assets
Transfer Fees
Salaries and Allowances
Provident Fund Contribution
Loss on Sale of Gold
Income Tax paid
Law Charges
Auditor’s Fees
Repairs
General Expenses
1,300
46,000
1,360
10
1
3,070
285
420
5,120
139
30
48
27
i)
An analysis of Investments shows that Government Securities amount to
‘ 2,00,000 at cost (market value ‘ 2,12,000) (shares ‘ 1,43,210) (cost)
(market value ‘ 1,45,000) debentures at ‘ 50,000 (cost) (market value
‘ 52,000) and gold ‘ 50,000 at cost (market value ‘ 49,000)
ii)
Advances ‘ 2,12,140 of these ‘ 1,60,000 has securities fully covering these
balance of ‘ 50,000 is granted on personal security of debtors concerned of
which again ‘ 12,400 personal security to other person over and above
those of the debtors; ‘ 2,000 is doubtful and ‘ 140 is bad and no provision
has been made for these. The loan are fully secured.
iii)
Rebate on bills discounted at 31st March, 2010 amounted to ‘ 1,060.
iv)
The Authorised Capital of the Bank is ‘ 7,00,000 divided into 7,000 Equity
shares of ‘ 100 each. All of these shares are issued and fully subscribed
and are called up to the extent of ‘ 50 per share. There is an arrears of
‘ 50 per share on 10 shares.
You are required to draw up a Profit and Loss Account of the bank for the
year ended 31-03-2010 under; Form ‘B’ of the Banking Companies Act
and a Balance Sheet as at that date under the From ‘A’ of the same Act.
4)
Following the trial balance of Sudhir Bank Ltd., Shahada as on 31-03-2010.
You are required to prepare Profit and Loss Account for the year ended
31-03-2010 and Balance Sheet as on that date.
Particulars
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Advanced Accounting - I
Share Capital
(60,000 Equity Shares of ‘ 50 each ‘ 25 paid up)
Profit and Loss Account (1st April 2009)
Current Deposits Accounts
Fixed Deposits Accounts
Savings Bank Accounts
Director’s Fees
Audit Fees
Furniture
Interest Paid
Interest and Discount
Debit
‘
Credit
‘
15,00,000
1,22,250
32,16,000
35,14,500
16,60,500
13,950
13,200
1,28,850
6,00,000
10,56,000
Commission and Exchange
6% Govt. Bonds
Shares in companies
Branch Adjustment Account
Postage and Printing
Premises
Salaries
Law Charges
Provident Fund Contribution
Cash in hand
Bills Discounted and Purchased
Unexpired Insurance
Statutory Reserve Fund
Loans, Cash credit and Overdrafts
Total
3,04,500
15,60,000
12,00,000
3,06,000
10,350
25,54,500
1,00,000
7,950
16,800
3,10,500
1,00,500
4,050
Final Accounts of Banking
Company
NOTES
1,27,500
45,73,500
1,15,01,250 1,15,01,250
Following additional information :
i)
Rebate on bills discounted amounted to ‘ 10,650.
ii)
Provide ‘ 57,750 for Doubtful Debts.
iii)
The Bank has accepted bills worth ‘ 3,75,000 on behalf of the customers
against the securities of ‘ 4,65,000 lodged with the Bank.
iv)
Provide depreciation on Premises ‘ 1,09,500 and on Furniture ‘ 8,850.
v)
Provide for Taxation ‘ 11,250.
5)
Following figures taken from the books of Honest Bank Ltd., Hinjewadi
you are required to prepare Profit and Loss Account for the year ended
31-03-2010 and Balance Sheet as on that date.
Particulars
Share Capital (Authorised and Issued)
(20,000 Shares of ‘ 50 each ‘ 25 paid up)
Reserve Fund
Fixed Deposit Account
Saving Bank Deposit
Current Account
Investments (at cost)
Interest Accrued and paid
Salaries (including Salary to General Manager
‘ 24,000 and Director’s Fees ‘ 9,000)
Rent
General expenses
(Including Stationery ‘ 4,000 and Auditors’s Fees ‘ 3,000)
Money at Call and Short Notice
Profit and Loss Account (Cr.) on 01-04-2009
Dividend for 2009
‘
5,00,000
3,50,000
9,50,000
30,00,000
80,00,000
30,00,000
2,00,000
80,000
20,000
10,000
3,00,000
2,10,000
50,000
Advanced Accounting - I
315
Final Accounts of Banking
Company
NOTES
Premises (after depreciation upto 31-03-2010 ‘ 10,00,000)
Cash in hand
Cash with Reserve Bank
Cash with other Banks
Borrowed from Banks
Interest and Discounts
Bills Discounted and purchased
Bills payable
Loans Overdrafts and Cash Credits
Unclaimed Dividend
Sundry Creditors
Bills for collection
Acceptances and Endorsements on behalf of customers
12,00,000
60,000
15,00,000
13,00,000
7,00,000
7,50,000
6,00,000
8,00,000
70,00,000
30,000
30,000
1,40,000
2,00,000
Rebate on Bills discounted and purchased for unexpired term amounted to
‘ 6,000. Allow 5% depreciation on premises on original cost. A provision for
doubtful debts amounting to ‘ 20,000 is required. The Bank has no business outside
India. create a provision of ‘ 1,00,000 for taxation.
6)
Following balances were extracted from the books of Laxmi Bank Ltd.,
Lonavala as on 31-03-2010
316
Advanced Accounting - I
Particulars
Share Capital
Share Premium
Buildings
Deposit with RBI
Cash in Hand
Cash with Other Banks
Investments in Government Securities
Other Investments
Gold Bullion
Bills for Collection
Interest Accrued on Investments
Loss on Sale of Investments
Employees Security Deposits
Saving Deposits
Current Deposits
Fixed Deposits
Profit on Bullion
Acceptances and Endorsements
Miscellanceous Income
Non-Banking Assets
Statutory Reserve
Furniture
Postage and Telegram
Managing Director’s Remuneration
Borrowing from other Banks
Money at Call and Short Notices
Director’s Fees
Interest (Dr.)
‘
8,00,000
1,80,000
1,30,000
1,50,000
22,700
50,000
5,88,000
3,12,000
30,260
87,000
49,240
60,000
30,000
14,840
1,94,000
46,100
2,400
1,13,000
5,400
4,000
2,80,000
10,000
10,100
24,000
1,54,460
52,000
2,400
15,900
Advances
Loss on Sale of Furniture
Bills Discounted and Purchased
Interest (Cr.)
Discount (Cr)
Audit Fees
Salaries
Commission and Brokerage
Rent (Cr)
Profit and Loss Account (Credit Balance)
4,00,000
2,000
25,000
1,44,000
84,000
10,000
42,400
50,600
11,200
13,000
Final Accounts of Banking
Company
NOTES
You are required prepare Profit and Loss Account for the year ended 31-03-2010
and a Balance Sheet as on that date after considering the following :
i)
Provide for Taxation ‘ 22,000.
ii)
Claim by employees for Bonus ‘ 50,000 is to be provided.
iii)
A scrutiny of current deposit reveals that there are three accounts overdrawn
to the extent of ‘ 50,000 and total of credit balances is ‘ 2,44,000.
iv)
Allow 7% depreciation on Buildings.
v)
Provision for bad and doubtful debts is required amounting to ‘ 19,000.
8.9
Further Reading
•
Shukla M. C., Grewal T. S. , and Gupta S. C. - Advanced Accounts - New
Delhi : S. Chand & Co. Pvt. Ltd. - 2013
•
Tulsian P. C. - Accounting - New Delhi - Tata Mc Graw - Hill Publishing
Co. Ltd. - 2010
Advanced Accounting - I
317
Topic 4
Final Accounts of General
Insurance Company
Unit 9
Introduction, Meaning and Types of
Insurance
Unit 10
Accounts of General Insurance
Business : Revenue Account
Unit 11
Accounts of General Insurance
Business : Balance Sheet
Unit 9
Introduction, Meaning and Types of
Insurance
Introduction, Meaning and
Types of Insurance
Structure
9.0
Introduction
9.1
Unit Objectives
9.2
Nature of Insurance
9.3
Meaning and Definition
9.4
Categories of Insurance
9.5
Types of Insurance
9.5.1
Life Insurance
9.5.2
Fire Insurance
9.5.3
Marine Insurance
9.6
Comparision between Life Insurance and Fire and Marine Insurnace
9.7
Summary
9.8
Key Terms
9.9
Questions and Exercises
NOTES
9.10 Further Reading
9.0
Introduction
Insurance is financial service for collecting the savings of the public and
providing them with a risk coverage. The risk may be certain events like death,
retirement, pension, education, marriage, etc. or uncertain events like theft, accident,
fire, ill-health, etc. Marine Insurance is one category which covers risk of sea
voyage of shipping, cargo, etc. Motorcar, scooter, two wheeler and theree wheelers
are also provided with insurance, called Vehicle Insurance. Building Insurance,
from thefts, etc. and Crop Insurance are the other categories of risk coverage,
intrroduced by General Insurance Company.
Insurance is a device by which man tries to protect himself from uncertaintly
and risk in life. Man’s life, personal and business is open to risks of various kinds.
Insurance covers such risks in life. It protects a family where the bread-winner is
snatched away prematurely. Similar is the case with the development of insurance
schemes, man is able to look ahead with some sort of security against any kind of
risk. Thus, insurance plays a role which is becoming ever important in all walks of
life. There is practically no field of activity today which is not embraced by
insurance.
Advanced Accounting - I
319
Introduction, Meaning and
Types of Insurance
NOTES
They help to provide protection to investors from some certain or uncertain
risks. These are contractual savings, which the investors are forced to provide
for. This will constitute voluntary involvement in savings, but turn into compulsory
or forced savings through contractual obligation. These are generally medium and
long-term savings and the investments of this type provide a low return but the
needed risk coverage of life, accident, fire, etc.
9.1
Unit Objectives
After studying this unit you should be able to :
•
Know the meaning of Insurance, “Life Insurance”, Fire Insurance, ‘Marine
Insurance’.
•
Understand the functional and contractual definitions of Insurance.
•
Identify the categories of Insurance.
•
Understand the classification of different types of insurance.
•
Understand the meaning and clauses of marine Insurance policy.
•
Compare Life Insurance with Fire and marine Insurance.
9.2
Nature of Insurance
Insurance is a popular means in business to protect from uncertainties. By
means of Insurance. the insured is assured that if the risk materialises and results
in a financial loss to him, he will be indemnified by the insurance company for
such loss. The Insurance Company charges premium for providing protection
against loss. The Insurance Company can not prevent the happening of risk but
can provide for losses at the happening of the risk.
Insurance is a scheme of economic co-operation by which members of the
community share the unavoidable risks and help those unfortunate people who
have to suffer unexpected calamaties. As no one can predict on whom the
misfortune will fall, everyone subscribes to common pool which is collected by the
insurer and is utilised for the indemnity of the sufferers. So the system of insurance
has emerged from the method of pooling of risks and sharing them with others.
9.3
Meaning and Definition
To know exact meaning of Insurance, it is necessary to know definition of
Insurance. Insurance can be defined by two ways i.e.
(1) Functional Definition and (2) Contractual Definition.
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Advanced Accounting - I
(1) Functional Definition :
Introduction, Meaning and
Types of Insurance
“ Insurance is a co-operative device to spread the loss caused by a particular
risk over a number of persons, who are exposed to it and who agree to insure
themselves against the risk”.
We know exact meaning of this definition with the help of following example.
NOTES
Suppose there are 1,000 houses in a village. The value of each house is
‘ 20,000. The experience is that over a year one house in a thousand is damaged
by accidental fire and that the average loss suffered amounted to ‘ 20,000. But
no one is able to predict about, who will be the actual sufferer in a year. If all
house owners agreed to share the loss of unfortunate sufferer, each has to
contribute annually ‘ 20 only. All house owneres insure their houses with Insurance
Company and pay premium of ‘ 20 each to protect themselves from future loss,
Thus, company collect ‘ 20,000 total premium amount, from which it will pay
compansation to the actual sufferer. Thus, the loss of one is spread over number
of persons, who are exposed to the same risk themselves, and no one has to
suffer heavily.
(2) Contractual Definition :
‘Insurance is a contract between two parties i.e. Insurer and Inured. Insurer
agrees to indemnify insured against a loss which may be caused by the happening
of a certain event. The contract is embodied in a document called the policy. The
insurer undertakes to indemnify the insured for a consideration in the form of
money called the Premium. The contingency insured against is called the Risk’.
From the above definition we know the following characterisitcs of Insurence :
(1) Insurance is a contract between Insurer and Insured.
(2) Insurance is a contract of indemnity.
(3) The contract is embodied in a document which is known as policy.
(4) The amount paid by insured to insurer as a consideration is known as premium.
Contract of Insurance :
Insurance is a contract either to indemnify against a loss which may arise
upon the happening of an event or to pay on the happening of some event, a sum
of money to the person insured. The instrument containing the contract to insure
is called a “ Policy of Insurance”. The perosn insured is called the “Assured” or
“Insured” and the person or company that insures is called the “Insurer”, “Assurer”
or “Underwriter”.
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Introduction, Meaning and
Types of Insurance
9.4
Categories of Insurance
The major categories of insurance are shown in Figure 9.1 as follows.
NOTES
Life
Health Medical
General
Whole Life
Endowment
Mutual Fund
Return and Risk
Coverage
Partially
Pension/Annuity Contracts
with Profit or without Profit
for Fixed Amounts on Matrurity
GIC
LIC
Fig. 9.1 : Categories of Insurance
Types Of Insurance
Insurance may be effected against any loss arising out any contingency.
The most common classification of insurance is given in the follwoing chart as
indicated in Figure 9.2
INSURANCE
Life
Insurance
General
Insurance
Social
Insurance
Health - Unemployment - Old Age
Fire - Marine
Accident
(Personal, Motor, Vehicle,
Public Liability - Riots, etc.)
Fig. 9.2 : Types of Insurance
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Advanced Accounting - I
The Insurance Act, 1938 contains the basic principles of insurance which
may apply to all types of insurance alike. All types of insurance business in India
have been nationalised. Special provisions relating to Life Assurance have been
incorporated in the Life Insurance Corporation Act, 1956, General Insurance
Business is transacted by General Insurance Corporation of India (GICI). It has
got four subsidiaries - National Insurance Co. Ltd., Kolkata. New India Assurance
Co. Ltd., Mumbai, Oriental Fire and General Insurance Co. Ltd., New Delhi and
United India Fire and General Insurance Co. Ltd., Chennai. Fire Insurance business
is governed by the Insurance Act, 1938 and General Insurance Business Act,
1972. But the contracts of marine business are administered by The Insurance
Act, 1939. The Marine Insurance Act, 1963 and The General Insurance Business
Act, 1972.
Introduction, Meaning and
Types of Insurance
NOTES
9.3.1 Life Insurance
Meaning :
Life Insurance is a contract by which the insurer in consideration of a
certain premium, either in a lumpsum or by periodical payments undertaken to pay
a certain sum money to the insured on his reaching a particular age, or to his heirs
in the event of his death. Life Insurance is not a contract of indemnity. Because
human life is precious and loss due to death of a person cannot be measured in
terms of money. Life Insurance cotracts are subject to the principle of utmost
good faith and principle of insurable interest. A person must disclose all material
facts at the time of taking out a life insurance policy. He should not hide or state
wrongly certain important facts. It is the duty of insured to fill proposal form fully
and accurately. In life insurance, insurable interest must be present at the time of
taking the policy. In life insurance, a person has insurable interest in his own life as
well as in the lives of his near relatives, i.e. wife, son, daughter, etc.
No person can take a life insurance policy of a third person, unless he has
got some financial interest in his life, Thus, a creditor can insure the debtor’s life
and partners may take joint life policy.
History :
Life Insurance was devised centuries ago. The term ‘Yogakshema’ is used
in the Rigveda suggesting some form of community insurance in India over 3000
years. However, scientific life insurance is a heritage from England. The
development of mortality tables was landmark in the history of life insurance. The
life insurance business was done by joint stock companies in the initial stage. The
Government of India took the first step towards nationalisation of life insurance.
The Life Insurance Corporation Act was passed by the parliament in June 1956
and it came into force on 1st July, 1956. By this act all the assets and liabilities of
insurers, who are related with life insurance are transferred to Life Insurance
Corporation of India. The Life Insurance Corporation of India came into existence
on the 1st September, 1956. The corporation is an autonomous body.
Advanced Accounting - I
323
Introduction, Meaning and
Types of Insurance
NOTES
Advantages :
(1)
It is better than ordinary saving scheme.
(2)
Financial protection.
(3)
Insurance encourages thrift.
(4)
Life Insurance is a good form of investment.
(5)
Tax Relief.
(6)
Means for raising loan.
(7)
Provision for future responsibilities.
(8)
Provide financial stability to partnership firm.
(9)
Check on inflation.
(10) Economic development.
9.3.2 Fire Insurance
Meaning :
A contract of fire insurance is a contract by which the insurer undertakes,
for a consideration in the form of the premium, to indemnify the insured against
damage to his property by fire or lighting during period and upto the amount specified
in the contract.
In Insurance terminology, Fire means :
(i)
Production of light and heat by actual burning of a thing.
(ii)
burning should cross the usual and proper limit.
In case of loss, the insured can claim from the insurer, the actual amount of
loss or the policy amount whichever is less. The loss due to riots. war etc. is not
covered by fire insurance. Generally fire insurance contract can be made for a
maximum period of twelve month. It is renewed after a fixed period. All principles
of insurance are applicable to fire insurance i.e. Utmost good faith, insurable
interest, indemnity, contribution subrogation, proximate cause and mitigation of
loss. Fire insurance is very popular in commerce and industry.
Definition :
324
Advanced Accounting - I
A policy of fire insurance, as the name indicated is intended to protect the
assured against loss caused by fire. It has been defined as “a contract whereby
the insurer in consideration if a premium undertakes to indemnify the assured
against loss or damage to the property by fire during a certain period aggreed
upon and upto the specified amount”. The subject - matter of the contrant of fire
may be any property in the widest sense of the term. The cause of fire is immaterial
unless. It is a deliberate act of the assured or of some one acting with his knowledge
and consent. Loss of fire by negligence of the assured may be recovered.
Contract of Fire Insurance :
In fire insurance contract, the meaning of the word should be properly
understood. Fire means that there must be actual fire or ingnition and it must be
accidental. The contract of the fire insurance is to indemnify the insured against
loss or damage occasioned by fire. If the loss is caused by heat or smoke of fire
without actual burning, then it is not loss or damage by fire.
Introduction, Meaning and
Types of Insurance
NOTES
It is a common feature in fire insurance policies to include a condition called
‘the average clause’. It penalises under - insurance by a corresponding underpayment of loss. For example, property worth ‘ 50,000 is insured for ‘ 20,000
and the loss is ‘ 10,000 the insured can recover the full loss. But under average
clause, the insured in this case can get only ‘ 20,000 / ‘ 50,000 x ‘ 10,000 i.e.
‘ 4,000 only. The main object of this clause is merely to discourage under-insurance.
In law relating to fire insurance the word ‘cover’ has more than one meaning.
Sometimes it is said that the assured is covered between one date and another. It
is also understood in the sense of a building or a property covered by insurance
effected. Strictly speaking what is covered by insurance is the risk to which the
property wherein the assured the assured has an interest is exposed.
Rights of Insurer :
A fire policy is regarded as a personal contract between the insured and the
insurer and what is insured is not the property but the interest of the insured. Thus,
if a house is insured, what is insured is not the bricks and other materials with
which the house is built but the house owner’s interest.If his interest suffers by
loss or damage to the house,then he has insurable interest in the house.This interest
must be pecuniary interest.Thus,the fire policy requires that insurable interest
must be present not only at the time of taking out the policy but also at the time of
making a claim. It may be noted that it is not only the legal but also the beneficial
owner of the property who shall possess an insurable interest therin. Thus (a)
Tenants who are liable to pay rent (b) Carriers, inn-keepers for goods entrusted to
them (c) Mortgagees (d) Offical assignees and Receivers (e) Executors and turstees
- are all held to be persons entitled to insure their property which is insurble and
which may be in their charge.
Fire policy is not freely assignable. It is already stated that the insured must
have insurable interest not only at the time of taking out a policy but also at the
time of loss. The assignment of fire policy does not automatically confer any
rights on the assignee. Assignment made with the express consent of the insurer
binds him and the assignee gets all the rights of the assignor.
The types of Fire Insurance Policy are shown in Figures 9.3 as follows :
Advanced Accounting - I
325
Av
Po era
lic ge
y
NOTES
ci fi ce p S
ycil o P
Introduction, Meaning and
Types of Insurance
mo
C
y
c
i
lo
P
ml at
e t ne
v
is
ne
h
er
p
Types of
Fire Insurance
Policy
Floating
Policy
s ni e R P
ycil o
noi
t ar
ued
Val cy
i
Pol
al c
eD
yci
lo
P
Fig. 9.3 : Types of fire Insurance Policy
9.5.3 Marine Insurance
Meaning :
Marine Insurance is a contract, whereby, in consideration of the payment
of a sum of money called premium, the insurer undertakes to indemnity the insured,
to the extent specified in the contract, against marine losses.
Marine insurance is the oldest kind of insurance. In modern era marine
insurance is of great importance in international trade. All principles of insurance
are applicable to marine insurance. In marine insurance subject-matter of insurance
are the cargo, ship or the freight money, which are exposed to maritime perils.
Maritime peril means the perils of the sea i.e. fire, pirates, captures, seizures, etc.
In marine insurance, insurable interest must be present at the time of loss of the
subject-matter.
Features :
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Advanced Accounting - I
(1)
In marine, the person to be indemnified is known as insured and the insurer
is known as the underwriter.
(2)
Subject-matter of insurance are cargo, ship and the freight money, which
are exposed to maritime perils.
(3)
In marine insurance, insurable interest must be present at the time of loss of
the subject-matter.
(4)
Marine insurance is a contract of indemnity.
(5)
In marine insurance, term of policy does not exceed more than one year.
(6)
In marine insurance, marine losses are divided into two main classes i.e.
Total loss and Partial loss. Total losses may be further divided into actual
total loss and constructive total loss. Partial losses may be further divided
into particular average loss and general average loss.
Introduction, Meaning and
Types of Insurance
NOTES
Contract of Marine Insurance :
Marine insurance is one of the olderst forms of insurance in the world.It is
said that this business was first started in Italy in the middle ages by people known
as Lombards who later on migrated to England. In India as well some form of
marine insurance was in existence in the early stages of development. This is
evident from the fact that Jokhmi Hundi was paid only on safe arrival of the ship.
Definition :
“ A contract of Marine insurance is an agreement whereby the insurer
undertakes to indemnify the assured in the manner and to the extent thereby
agreed, against marine losses, that is to say, losses incidental to the marine
adventure”.
The instrument in which the contract of marine insurance is generally
embodied is called a policy. The insurer is commonly called the underwriter. The
property insured is the subject-matter of insurance and the interest of the assured
in such subject-matter is called insurable interest. Utmost good faith should be
observed by the insured while giving information regarding the subject-matter of
insurance. The consideration for which the insurer undertakes to indemnify the
assured is called the premium. Marine insurance may cover either the ship, the
cargo or the freight money.
The Clauses of Mairne Insurance Policy are shown in Figure 9.4 as follows.
1
2
Sue and
Labour
Clause
Valuation
Clause
3
4
Touch
and
Stay
Clause
The
Inchmaree
Clause
5
6
7
F.P.A. and
FFA
Clause
Arbitrage
Clause
The
Running
Down
Clause
Fig. 9.4 : Clauses of Marine Insurance Policy
Advanced Accounting - I
327
Introduction, Meaning and
Types of Insurance
Important Terms :
(1) Bottomry and Respondetia :
NOTES
In the early stages of commercial development when the means of
communication were not developed, the captain of the ship was given certain
right to act in an emergency. If he was short of fund in the middle of the voyage,
he was authorised to borrow on the security of the vessel or the cargo, When the
money was borrowed on the security of the ship, the captain executed a bond and
it was called ‘Bottomry Bond’. The loan so obtained is repayable on the successful
completion of the voyage and if the vessel was lost, nothing was payable. When
the loan was obtained by executing a bond on the security of the cargo it was
called ‘Respondentia Bond’.
(2) Jettison :
The word jettison means throwing overboard a part of cargo or any other
goods in order to reduce the weight in the ship. A part of the goods is deliberately
thrown away with the object of preventing the ship from further damage. Loss
caused by this method is covered under general loss.
(3) Ex-gratia Payment :
This is a payment made by the insurer not out of legal liability but as an act
of grace to the insured. In certain cases underwriters do not take a legalistic view
to avoid the payment of indemnity. It cannot be claimed by the insured as a matter
of right.
(4) Maritime Losses :
Maritime losses can be divided into two main groups :
1.
Total losses and
2.
Partial losses.
Total losses may be actual or constructive. Actual loss occurs when the
ship or the cargo is completely destroyed. Constructive loss takes place when the
ship or the cargo is so damaged that recovery or repair expenses are greater than
the value of the ship or the cargo.
Partil loss may be particular Average or General Average loss. Particular
average is an accidential loss not suffered for the benefit of all parties e.g. a part
of the carggo damaged by sea water. General Average loss is an extraordinary
loss or expenditure incurred voluntarily in time of peril to save ship or the cargo.
e.g. Jettinson. This loss shall be shared by all the owners of cargoes or the shipowner.
(5)
328
Advanced Accounting - I
Salvage :
Maritime law provides that reward may be paid to any person who saves
maritime property. The person who saves the property is called salvor, the property
saved is called salvage and the reward paid is called salvage award. The salvor
has a possessory lien on the property for the reward. But if the property is not in
his possession, he can enforce a maritime lien in the Court of Admiralty.
Introduction, Meaning and
Types of Insurance
Types :
The Types of Marine Insurance Policy are shown in Figure 9.5 as follows.
NOTES
7
6
1
ycil op de ul a V
2
mi T
4
yci
l
5
op
e
Types of
Marine
Insurance
Policies
licy
ge po
Voya
Fl
oa
tin
gp
ol
icy
Open or
unvalid policy
3
M
de xi
ycil op
yci
l
o
pt
r
oP
Fig. 9.5 : Types of Marine Insurance Policies
Advanced Accounting - I
329
Introduction, Meaning and
Types of Insurance
NOTES
9.6
Comparision Between Life Insurance and Fire
and Marine Insurance
Comparision between Life Insurance and Fire and Marine Insurance is as
follows :
Life Insurance
Fire and Marine Insurance
1. Life Insurance is a contract of 1. Fire and Marine Insurance are
certainty. There is certainty about
contracts of uncertainly. The event
happening of the event insured
insured may or may not happen.
against. The uncertainty is only
Property insured against risk of fire
about the time when it would
may or may not be destroyed by fire.
happen. For example, the assured
Same is the case with goods insured
has to die some day, or period of
against risks of marine adventure.
policy ends some day, or it may so
happen that the assured dies even
before the expiry of the period of
policy.
2. Subject matter in Life Insurance is 2. Subject-matter in Fire Insurance is
life of an individual.
various types of property. Subjectmatter in marine insurance is hull,
cargo, amount of freight.
3. In Life Insurances, insurable interest 3. In Fire Insurance, insurable interest
must be present at the time of the
must be present at the time of the
contract. It need not be present
contract, as well as at the time of
when the payment becomes due.
the loss.
In Marine Insurance, insurable
interest must be present at the time
of loss.
4. The term of Life Insurance is 4. The term of Fire Insurance does not
generally very long. For example, 10
exceed generally more than one
years, 15 or 20 years.
year.
A contract of Marine insurance is
for a particular period or for a
particular voyage.
5. The Life Insurance includes the 5. Fire and Marine Insurance includes
element of protection and
only element of protection.
investment. Because sum assured
Compensation is payable only at the
is payble to insured after fix period
time of loss. If during period of policy,
or to his legal heirs after the death
loss does not occur then amout of
of insured which ever occurs
premium is not refundable to
eaarlier.
insured.
330
Advanced Accounting - I
6. Life Insurance is not a contract of 6. Fire and Marine Insurance is a
Idemnity . The Insured may insure
contract of indemnity. In the event
his life under number of policies .The
of loss, the insured can only recover
amount of policies will be paayble
the actual amount of loss or policy
at his death or after expiry of the
amount whichever is less. Proof of
fixed period whichever is earlier. For
actual loss is necessary.
this no proof of actual loss is
necessary because human life iis
precious and loss of human life
cannot be measurable in terms of
money.
Introduction, Meaning and
Types of Insurance
NOTES
7. Principles applicable to Life 7. Principles applicable to Fire and
Marine Insurance are utmost good
Insurance are utmost good faith and
faith, insurable interest, indemnity,
insurable interest.
subrogation, proximate cause,
contribution and mitigation of loss.
8. In India Life Insurance business was 8. In India, General Insurance i.e. Fire
and Marine and Others, was
nationalised in 1956. The Life
nationlised in 1973. General
Insurance Corporation of India
Insurance Corporation of India was
came into existance on 1 st
establised on 1 st January, 1973.
September 1956. The corporation is
There are four subsidiaries of this
an autonomous body. It enjoys
corporation i.e. National Insurance
privilege of carrying on Life
Co. Ltd., Kolkatta New India
insurance business in India.
Assurance Co. Ltd., Mumbai,
Oriental Fire and General Insurance
Co. Ltd., New Delhi and United
India Fire and General Insurance
Co. Ltd., Chennai.
9.7
Summary
•
Insurance is a co-operative device to spread the loss caused by a particular
risk over a number of persons, who are exposed to it and who agree to
insure themselves against the risk. Insurance is a contract between two
parties i.e. Insurer and Insured.
•
Insurance may be effected against any loss arising out of any contingency.
The most common classification of insurance is - (i) Life Insurance (ii)
General Insurance i.e. fire, marine and accident, and iii) social insurance
i.e. health, unemployment old-age etc.
•
Life Insurance is a contract by which the insurer in consideration of certain
premium either in a lumpsum or by periodical payments, undertakes to pay
a certain sum of money to insured on his reaching a particular age or to his
heirs in the event of his death.
Advanced Accounting - I
331
Introduction, Meaning and
Types of Insurance
NOTES
•
Fire insurance has been defined as “a contract where by the insurer in
consideration of a premium undertakes to indentify the assured against loss
or damage to the property by fire during a certain period agreed upon and
upto specified amount,
•
Marie Insurance is a contract whereby in consideration of the payment of
a sum of money called premium, the insurer undertakes to identify the insured
to the extent specified in the control against marine losses.
9.8
Key Terms
1) Insurance :
Insurance is a co-operative device to spread the loss caused by a particular
risk over a number of persons, who are exprosed to it and who agree to insure
themselves against the risk.
2) Life Insurance :
Life Insurance is a contract by which the insurer in consideration of a
certain premium, either in a lumpsum or by periodical payments, undertaken to
pay certain sum of money to the insured on his reaching a particular age or to his
heirs in the event of his death.
3) Fire Insurance :
Fire Insurance is a contract whereby the insurer in considerataion of a
premium undertakes to identify the assured against loss or damage to the property
by fire during a certain period agreed upon and upto the specified amount.
4) Marine Insurance :
Marine Insurance is a contract, whereby, in consideration of the payment
of sum of money called premium, the insurer undertakes to indemnify the insured,
to the extent specified in the contract, against marine losses.
5) IRDA :
The Insurance Regulatary and Development Authority has been established
on 19th April 2000. The Authority has made regulations in all major areas of
operations in the insurance industry and matters connected therewith.
6) General Insurance Business :
Means fire, marine or miscellaneous insurance business, whether carried
on singly or in combination with one or more of them.
7) Policy holder :
332
Advanced Accounting - I
‘Policy holder’ includes a person to whom the whole of the interest of the
policy holder in the policy is assigned once and for all, but does not include an
asignee thereof whose interest in the policy is defeasible or is for the time being
subject to any condition.
8) Insurance Company :
Introduction, Meaning and
Types of Insurance
Means any insurer being a company, association or partnership which may
be woundup under the companies Act 1956 or to which the Indian Partnership
Act 1932 applies.
9) Investment Company :
NOTES
Means a company whose principal business is the acquisition of shares,
stocks, debentures or other securities.
9.9
Questions And Exercices
I.
Objective Questions
A)
Multiple Choice Questions
1)
Under marine insurance, the person to be indemnified is known as insured
and the insurer is known as the ---a) Underwriter
b) Borker
c) Agent
d) Principal
2)
The document containing the terms of an insurance contract is known as
....
a) Agreement
b) Policy
c) Documentary Evidance
d) Insurance paper.
3)
The Life Insurance Corporation of India came into existance in.....
a) 1959
b) 1953
c) 1956
d) 1950
4)
Bonus payable only on the maturity of the policy is termed as ......
a) Annual Bonus
b) Cash Bonus
c) Interim Bonus
Advanced Accounting - I
333
Introduction, Meaning and
Types of Insurance
d) Reversionary Bonus
Ans : (1-a), (2-b), (3-c), (4-d)
NOTES
II.
Long Answer Questions
1)
Define the term ‘Insurance’ and explain in brief the types of insurance.
2)
What is ‘Life Insurance’? State the advantages of undertaking a life insurance
policy.
3)
What is ‘Fire Insurance’? Explain the importance of average clause in fire
insurance policies.
4)
Explain the term ‘Marine Insurance’? How it differs from life insurance.
5)
What is ‘Marine Insurance’ ? Explain in brief the clauses of marine insurance
policy.
9.10 Further Reading
334
Advanced Accounting - I
•
Shukla M. C., Greawal T. S. and Gupta S. C. - Advanced Accounts - New
Delhi : S Chand and Co. Pvt. Ltd. - 2013.
•
Maheshwari S. N. and Maheshwari S. K. Corporate Accounting - New
Delhi : Vikas Publishing House Pvt. Ltd. - 2013
Unit 10 Accounts of General Insurance
Business : Revenue Account
Accounts of General
Insurance Business :
Revenue Account
Structure
NOTES
10.0 Introduction
10.1 Unit Objectives
10.2 Preparation of Financial Statements
i)
Form B - RA
ii)
Form B - PL
iii)
Form B - BS
10.3 Schedule Forming part of Financial Statements
i) Schedule - 1 : Premium Earned (Net)
ii) Schedule - 2 : Claims Incurred (Net)
iii) Schedule - 3 : Commission
iv) Schedule - 4 : Operating Expenses Related to Insurance Business
10.4 Illustrations
10.5 Summary
10.6 Key Terms
10.7 Questions and Exercises
10.8 Further Reading
10.0 Introduction
In India, before the incorporation of IRDA which allowed private players,
General Insurance Business was conducted by General Insurance Corporation of
India and its four subsidiaries. Final Account of General Insurance Business as
per IRDA Regulations, 2002 consists of (a) Revenue Account (as per Form
B - RA); (b) Profit and Loss Account (as per Form B - PL); (c) Balance Sheet
(as per Form B - BS).
a)
Revenue Account : A Separate Revenue Account is prepared for each
type of Business e.g. fire, Marine, etc. It records the incomes and expenses of a
particular business and profit or loss is transferred to Profit and Loss Account.
b)
Profit and Loss Account : Besides, profit or loss of different business, it
records incomes and expenses of general nature and it shows how the profit has
Advanced Accounting - I
335
Accounts of General
Insurance Business :
Revenue Account
NOTES
been appropriated. Its balance is shown in the Balance sheet.
c)
Balance Sheet : It records various Assets and Liabilities of the General
Insurance Companies. It must be observed that difference in Revenue Account
does reveal profit or loss of business. The Revenue Account is closed by transfer
to Respective Fund Account, viz Fire Fund, Marine Fund, etc. The peculiar items
related to General Insurance Business are co-insurance, reinsurance, agent balances
and commission, etc.
Ascertainment of Profit under General Insurance Business : General
Insurance Contracts are normally for short-terms renewable every year. It is
quite possible that on the accounting date some of the contracts are still alive and
hence represent unexpired risk. A suitable provision made for that unexpired risk
on a generalised basis as it is impractical to create it for specific policies. Sometimes,
an additional provision is also created. The total of reserve for unexpired risk and
additional risk is collectively termed as ‘Respective Fund’ which may be Fire
Fund, Marine Fund, Motor Vehicle Fund, etc. The Revenue Account starts and
ends with respective value of the fund besides recording normal revenue and
expenditure. The difference of the account is called profit or loss and is transferred
to Profit and Loss Account.
As per the provision of Insurance Act, provision for unexpired risk in case
of fire, marine, cargo and miscellaneous business is to be created @ 40% of the
net premiums received and 100% in case for marine hull. However, income
determination of general insurance business is done as per Section 44 of IncomeTax Act, 1961 and Rule 6E of the Income-Tax Rules. They provide for reserve
for unexpired risk allowed as deduction upto 50% of net premium income in case
of Fire Insurance and Miscellaneous Insurance and 100% of net premium in case
of Marine Insurance.
10.1 Unit Objectives
After studying this unit you should able to :
•
Understand how to prepare accounts of General Insurance Company.
•
Prepare Revenue Accounts for Fire and Marine business.
•
Interprete “ Form B-RA” related to Revenue Account.
•
Interprete “ Form B - PL” related to Profit and Loss Account.
•
Interprete “Form B - BS “ related to Balance Sheet.
•
Prepare Schedule 1,2,3 and 4 of General Insurance Company’s Final
Accounts.
•
Explain schedule, 1,2,3 and 4 of General Insurance Company’s Final
Accounts.
336
Advanced Accounting - I
Accounts of General
Insurance Business :
Revenue Account
10.2 Preparation of Financial Statements
1)
An insurer shall prepare the Revenue Account, Profit and Loss Account
(Shareholders Account) and the Balance Sheet in Form B - RA, Form B-PL, and
Form B-BS, or as near there to as the circumstances permit :
Provided that an insurer shall prepare Revenue Account separately for fire,
marine and miscellaneous insurance business.
NOTES
2)
An insurer shall prepare separate Receipts and Payments Account in
accordance with the Direct Method prescribed AS 3 - “Cash Flow Statements”
issued by the ICAI.
FORM B - RA
Name of the Insurer :
Registration Number and Date of Registration with IRDA :
Revenue Account for the year ended 31st March, 20....
(To be prepared separately for Fire, Marine and Miscellaneous Insurance)
Particulars
Schedule Current Previous
year
year
( ‘ ’000) ( ‘ ’000)
1. Premiums Earned (Net)
1
2. Other (to be Specified)
3. Change in provision for Unexpired Risk
4. Interest, Dividend and Rent - Gross
Total (A)
1. Claims Incurred (Net)
2
2. Commission
3
3. Operating Expenses related to Insurance
Business
4
4. Others - to be specified
Total (B)
Operating Profit / (Loss) from Fire /
Marine / Miscellaneous Business
(A - B)
Advanced Accounting - I
337
Accounts of General
Insurance Business :
Revenue Account
NOTES
Form B - PL
Name of the Insurer :
Registration Number and Date of Registration with the IRDA :
Profit and Loss Account for the year ended 31st March, 20...
(To be prepared separately for Fire, Marine and Miscellaneous Insurance)
Particulars
Schedule Current Previous
year
year
( ‘ ’000) ( ‘ ’000)
1. Operating Profit / (Loss)
a) Fire Insurance
b) Marine Insurance
c) Miscellaneous Insurance
2. Income from Investments
a) Interest, Dividend and Rent - Gross
b) Profit on Sale of Investments
Less : Loss on Sale of Investments
3. Other Income (to be Specified)
Total (A)
4. Provisions (other than taxation)
a) For diminution in the value of investments
b) Others (to be specified)
5. Other Expenses
a) Expenses other than those related to
Insurance Business
b) Others (to be specified)
Total (B)
Profit Before Tax
Provision for Taxation
Profit After Tax
Less : Catastrophe Reserve*
Profit available for appropriation
Appropriations :
a) Interim Dividends paid during the year
b) Proposed Final Dividend
c) Dividend Distribution Tax
d) Transfer to any Reserves or
Other Accounts (to be specified)
Balance of Profit / Loss brought forward
from the last year
Balance Carried Forward to Balance Sheet
338
Advanced Accounting - I
Cumulative Shortfall in the Catastrophe Appropriation ‘ .... pending surplus.
Accounts of General
Insurance Business :
Revenue Account
FORM B - BS
Name of the Insurer :
Registration Number and Date of Registration with the IRDA :
Balance Sheet as at 31st March 20....
NOTES
(To be prepared separately for Fire, Marine and Miscellaneous Insurance)
Particulars
Schedule Current Previous
year
year
( ‘ ’000) ( ‘ ’000)
Sources of Funds
Share Capital
5
Reserves and Surplus
6
Fair Value Change Account Borrowing
7
Total
Application of Funds :
Investments
8
Loans
9
Fixed Assets
10
Current Assets
Cash and Bank Balances
11
Advances and Other Assets
12
Sub - Total (A)
Current Liabilities
13
Provisions
14
Sub - Total (B)
Net Current Assets (C) = (A - B)
Miscellaneous Expenditure (to the extent not
written off or adjusted)
15
Debit Balance in Profit and Loss Account
Total
Advanced Accounting - I
339
Accounts of General
Insurance Business :
Revenue Account
Contingent Liabilities :
Particulars
Current Previous
year
year
( ‘ ’000) ( ‘ ’000)
NOTES
1. Partly paid-up Investments
2. Claims, other than against policies,
not acknowledged as debts by the company
3. Underwriting Commitments Outstanding
4. Guarantees given by or on behalf of the Company
5. Statutory Demands / Liabilities in dispute, not
provided for
6. Reinsurance Obligations
7. Others (to be specified)
Total
10.3 Schedules Forming Part of Financial
Statements
SCHEDULE - 1
PREMIUM EARNED (NET)
Particulars
Current Previous
year
year
( ‘ ’000) ( ‘ ’000)
Premium for Direct Business Written
Add :
Premium on Reinsurance accepted
Less : Premium on Reinsurance ceded Net Premium
Adjustment for changes in Unearned Premium
Adjustment for Changes in Premium received
in advance
Total Premium Earned (Net)
Premium Income from Business Effected :
In India
Outside India
Total Premium Earned (Net)
340
Advanced Accounting - I
Notes :
a)
In, case of premiums Less Reinsurance, in respect of any segment of
insurance business exceeds 10 percent of Total Premium Earned, the same
shall be disclosed separately.
b)
Reinsurance Premiums whether on business ceded or accepted are to be
brought into account, before deducting commission, under the head of
Reinsurance Premiums.
Accounts of General
Insurance Business :
Revenue Account
NOTES
SCHEDULE - 2
CLAIMS INCURRED (NET)
Particulars
Current Previous
year
year
( ‘ ’000) ( ‘ ’000)
Claims Paid
Direct
Add :
Reinsurance Accepted
Less : Reinsurance Added
Net claims Paid
Total Claims Incurred
Claims paid to Claimants :
In India
Outside India
Total Claims Incurred
Notes :
a)
Incurred But Not Reported (IBNR), Incurred But Not Enough Reported
(IBNER) claims should be included in the amount for claims.
b)
Claims include claims settlement costs.
c)
The surveyor fees, legal and other expenses shall also form part of claims
cost.
d)
Claims cost should be adjusted for estimated salvage value if there is a
sufficient certainty of its realisation.
Advanced Accounting - I
341
Accounts of General
Insurance Business :
Revenue Account
SCHEDULE - 3
COMMISSION
Particulars
Current Previous
year
NOTES
year
( ‘ ’000) ( ‘ ’000)
Commission Paid
Direct
Add :
Reinsurance Accepted
Less:
Commission on Reinsurance Ceded
Net Commission
Notes :
The Profit or Commission, if any, are to be combined with the Reinsurance
accepted or Reinsurance Ceded figures.
SCHEDULE - 4
OPERATING EXPENSES RELATED TO INSURANCE BUSINESS
Particulars
Current Previous
year
year
( ‘ ’000) ( ‘ ’000)
1.
Employee’s Remuneration and Welfare Benefits
2.
Managerial Remuneration
3.
Travel, Conveyance and Vehicle Running Expenses
4.
Rent, Rates and Taxes
5.
Repairs
6.
Printing and Stationery
7.
Communication
8.
Legal and Professional Charges
10. Medical Fees
10. Auditors Fees, Expenses, etc.
a) As Auditor
b) As Adviser or in any other capacity, in respect of :
i)
Taxation matters
ii)
Insurance Matters
iii) Management services; and
c) In any other capacity.
11. Advertisement and Publicity
12. Interest and Bank Charges
13. Others (to be specified)
14. Depreciation
342
Advanced Accounting - I
Total
Notes :
a)
Items of expenses in excess of one percent of net premium or ‘ 5,00,000
whichever is higher, shall be shown as a separate line item.
b)
Under the sub-head, “Others”, Operating Expenses (Insurance Business)’
shall include items like foreign gains or losses and other items.
Accounts of General
Insurance Business :
Revenue Account
NOTES
The form of Revenue Account as per form B as per IRDA Regulations, 2002
can be understood with the help of following illustrations.
10.4 Illustrations
ILLUSTRATION 1
From the following accounting data relating to 2013 - 14 prepare Fire Revenue
Account
‘
Claims Unpaid on 01-04-2013
20,000
Claims unpaid on 31-03-2014
35,000
Claims paid
Legal Expenses relating to claims
Premiums received
Reinsurance premiums
2,35,000
5,000
6,00,000
60,000
Commission
1,00,000
Management Expenses
1,50,000
Provision against unexpired risk (as on 01-04-2013)
2,60,000
Advanced Accounting - I
343
Accounts of General
Insurance Business :
Revenue Account
SOLUTION
Fire Revenue Account for the year ended 31st March, 2014.
Particular
Schedule Current Previous
year
NOTES
year
( ‘ ’000) ( ‘ ’000)
1. Premiums Earned (Net)
1
5,30,000
2. Other Income
-
3. Change in provision for unexpired risk
-
4. Interest, Dividend and Rent - Gross
-
Total (A)
5,30,000
1. Claims Incurred (Net)
2
2,55,000
2. Commission
3
1,00,000
4
1,50,000
3. Operating Expenses related to Insurance
Business
4. Others
Total (B)
5,05,000
Operating Profits from Fire Business
25,000
(C = A - B)
Transfer to Shareholders Account
25,000
Total (C)
25,000
Schedule - 1 Premium Earned
‘
Particulars
Premiums Received
Less : Premium on Reinsurance Ceded
‘
6,00,000
(-)
60,000
5,40,000
Adjustment for Change in Reserve
for Unexpired risks
344
Advanced Accounting - I
(-)
10,000
Opening Provision
2,60,000
Closing Provision (50% - ‘ 5,40,000)
2,70,000
 Total Premium Earned (Net)
5,30,000
Schedule -2 Claims Incurred (Net)
‘
Particulars
Claims paid
‘
Accounts of General
Insurance Business :
Revenue Account
2,35,000
Add : Legal Expenses relating to claims
(+)
 Net Claimed Paid
5,000
NOTES
2,40,000
Add : Claims unpaid 31-3-2014
(+)
35,000
2,75,000
Less : Claims Unpaid 1-4-2013
(-)
 Claims Incurred (Net)
20,000
2,55,000
Schedule - 3 Commission
Particulars
‘
Commission
1,00,000
 Net Commission
1,00,000
‘
Schedule - 4 Operating Expenses related to Insurance Business
Particulars
‘
Management Expenses
1,50,000
 Total Operating Expenses
1,50,000
‘
10.5 Summary
•
Final Accounts of General Insurance Business as per IRDA Regulations,
2013 consists of (a) Revenue Account (as per Form B - RA), (b) Profit and
Loss Account (as per Form B - PL), (c) Balance Sheet (as per Form B BS).
•
Revenue Account is prepared for each type of business e.g. Fire, Marine,
etc. It records the income and expenses of a particular business and profit
and loss is trasferred to Profit and Loss Account.
•
Besides, profit or loss of different business, it records incomes and expenses
of general nature and it shows how the profit has been appropriated. Its
balance is shown in the Balance Sheet.
•
Balance Sheet Records Various Assets and Liabilities of General Insurance
Companies.
Advanced Accounting - I
345
Accounts of General
Insurance Business :
Revenue Account
Provided that an insurer shall prepare Revenue Account separately for
Fire, Marine and Miscellaneous insurance business. An insurer shall prepare
separate Receipts and Payments Account in accordance with the Direct
Method prescribed in AS - 3 “ Cash Flow Statements” issued by the ICAI.
NOTES
10.6 Key Terms
a)
‘Form B - RA’ : Revenue Account for the year ended 31st March, 20...
(to be prepared separately for Fire, Marine and
Miscellaneous Insurance)
b)
‘Form B - PL’ : Profit and Loss Accounts for the year ended 31st March,
20...
(to be prepared separately for Fire, Marine, and
Miscellaneous Insurance)
c)
‘Form B - BS’: Balance Sheet as at 31st March, 20...
(to be prepared separately for Fire, Marine and
Miscellaneous Insurance.)
10.7 Questions and Exercises
I)
Objective Questions
A)
Multiple Choice Questions
1)
In case of fire insurance the total of reserve for unexpired risk and additional
risk is collectively termed as....
a) Fire Fund
b) General Fund
c) Marine Fund
d) Insurance Fund
2)
In case of fire insurance as per Income-Tax Act, 1961 the reserve for
unexpired risk is allowed as deduction upto ...... of net premium.
a) 40%
b) 50%
c) 60%
d) 30%
346
Advanced Accounting - I
3)
All Insurance Companies are to close their annual accounts on ..... every
year.
Accounts of General
Insurance Business :
Revenue Account
a) 31st December
b) 30th September
c) 31st March
NOTES
d) 30th June
4)
Management Expenses not directly related to any particular insurance
business are to be shown in .... Account
a) Profit and Loss Appropriation
b) Revenue
c) Profit and Loss
d) General
Ans : (1- a), (2 - b), (3 - c), (4 - c)
II)
Long Answer Questions
1)
What are ‘Revenue Accounts’ ? Explain the need for preparing a separate
revenue account in general insurance business.
2)
What is ‘Reserve for Unexpired Risk’? Explain in brief the accounting
treatment of Reserve for Unexpired Risk.
3)
State the accounts and the statements prepared under Final Accounts by
General Insurance Company.
4)
Write short notes on :
(a) Marine Revenue Assets, (b) Profit and Loss Account, (c) Claims
Incurred, (d) Operating Expenses relating to Insurance Business.
III) Practical Problems
1)
From the following accounting information relating to General Insurance
Company prepare a Revenue Account for fire business for the year ended
31st March, 2014.
r
Claims paid
Law charges
Outstanding claims on 1-4-2013
4,47,000
3,000
17,000
Advanced Accounting - I
347
Accounts of General
Insurance Business :
Revenue Account
Premiums received
NOTES
7,49,000
Outstanding claims on 31-3-2014
32,000
Reinsurance Premiums
39,000
Commission
92,000
Expenses of Management
1,03,000
Provision against unexpired risk
1,90,000
(as on 1-4-2013)
10.9 Further Reading
348
Advanced Accounting - I
•
Shukla M. C., Grewal T. S. and Gupta S. C. - Advanced Accounts - New
Delhi - S. Chand & Co. Pvt. Ltd., - 2013
•
Maheshwari S. N. and Maheshwari S. K. - Corporate Accounting - New
Delhi - Vikas Publishing House Pvt. Ltd. - 2013
Unit 11 Accounts of General Insurance
Business : Balance Sheet
Accounts of General
Insurance Business :
Balance Sheet
Structure
11.0 Introduction
NOTES
11.1 Units Objectives
11.2 Schedule forming part of Balance Sheet
i
Schedule - 5 : Share Capital
ii)
Schedule - 5A : Share Capital Pattern of Shareholding
iii)
Schedule - 6 : Reserves and Surplus
iv)
Schedule - 7 : Borrowings
v)
Schedule - 8 ; Investment
vi)
Schedule - 9 : Loans
vii)
Schedule - 10 : Fixed Assets
viii)
Schedule - 11 : Cash and Bank Balances
ix)
Schedule - 12 : Advances and Other Assets
x)
Schedule - 13 : Current Liabilities
xi)
Schedule - 14 : Provisions
xii)
Schedule - 15 : Miscellaneous Expenses
xiii)
Schedule - c : Auditors report
11.3 Summary
11.4 Specimens of Revenue Account 1 and 2
11.5 Illustrations
11.6 Key Terms
11.7 Questions and Exercises
11.8 Further Reading
Advanced Accounting - I
349
Accounts of General
Insurance Business :
Balance Sheet
NOTES
11.0 Introduction
Preparation of financial statements by General Insurer (as per IRDA
Regulation 3) - An insurer carrying on general insurance business, after the
commencement level of IRDA regulations, must comply with the requirements of
Schedule B . Provided that this sub regulation shall apply, “Mutatis Mutandis” to
reinsurers, until separate regulations are made. Schedule ‘B’ is divided in to five
parts :
Part I :
Accounting Principles, for preparation of Financial Statements.
Part II :
Disclosures forming part of Financial Statements.
Part III : General instructions for preparation of Financial Statements.
Part IV : Contents of Managements Report.
Part V :
Preparation of Financial Statements.
1.
Revenue Account in form B-RA.
2.
Profit and Loss Account in form B-PL.
3.
Balance Sheet in form B - BS.
4.
Receipt and Payment Account as per Direct Method prescribed
in AS-3 Cash Flow Statements is issued by ICAI.
Every Balance Sheet, Receipts and Payments Account (Cash Flow
Statement) and Profit and Loss Account of the insurer shall be in confirmity with
the Accounting Standards (AS) issued by the ICAI, to the extent applicable to the
insurers carrying on general insurance business. Schedule forming part of Balance
Sheet including schedule 5,6,7,8,9,10,11,12,13,14 and 15.
11.1 Unit Objectives
After studying this unit you should be able to :-
350
Advanced Accounting - I
•
Prepare Profit and Loss Account and Balance Sheet of General Insurance
Company.
•
Interprete “Form B-BS” related to Balance Sheet and prepare the same.
•
Understand schedule relates to Balance Sheet of General Insurance
Company
•
Prepare schedule 5,5A,6,7,8,9,10,11,12,13,14 and 15 of General Insurance
Co.’s Final Account.
•
Understand Schedule -C “ Auditors Report of insurer.
•
Prepare Final Accounts of General Insurance Business as per IRDA
Regulations 2002.
•
Understand the classification of different types of schedules incorporated
in the Balance Sheet and Revenue Account of Insurance Company.
Accounts of General
Insurance Business :
Balance Sheet
11.2 Schedule Forming part of Balance-sheet
An insurer shall prepare the Balance Sheet in “Form of B- BS” with the
help of following Schedules from 5 to 11 given below :
NOTES
SCHEDULE - 5
SHARE CAPITAL
Particulars
1
Current
Previous
Year
Year
( ‘ ‘000)
( ‘ ‘0000)
Authorised Capital
Equity Shares of ‘ . .... each
2
Issued Capital
Equity Shares of ‘ . .... each
3
Subscribed Capital
Equity Shares of ‘ . ..... each
4
Called - up Capital
Equity Shares of ‘ . .... each
Less : Calls Unpaid
Add : Equity Shares Forfeited
(Amount originally paid - up)
Less : Preliminary Expenses
Expenses including Commission or
Brokerage on Underwriting or
Subscription of shares
Total
Notes :
(a)
The amount capitalised on account of issue of bonus shares should be
disclosed.
(b)
In case any part of the capital is held by a holding - company, the same
should be separately disclosed.
Advanced Accounting - I
351
Accounts of General
Insurance Business :
Balance Sheet
SCHEDULE - 5 A
SHARE CAPITAL PATTERN OF SHAREHOLDING
[As certified by the Management]
Shareholder
NOTES
Current Year
Previous Year
Number of % of Holding Number of % of Holding
Shares
Shares
Promoters
•
Indian
•
Foreign
Others
Total
SCHEDULE - 6
RESERVES AND SURPLUS
Particulars
Current
Previous
Year
Year
(‘
1.
Capital Reserve
2.
Capital Redemption Reserve
3.
Share Premium
4.
General Reserve
‘000) ( ‘ ‘000)
Less : Debt Balance in Profit and Loss Account
Less : Amount utilised for Buy-back
5.
Catastrophe Reserve
6.
Other Reserves (to be specified)
7.
Balance of Profit in Profit and Loss Account
Total
Note :
Additions to and deductions from the reserves should be disclosed under
each of the specified heads.
352
Advanced Accounting - I
Accounts of General
Insurance Business :
Balance Sheet
SCHEDULE - 7
BORROWINGS
Particulars
1
Debentures / Bonds
2
Fixed Deposits
3
Banks
4
Financial Institutions
5
Other entities carrying on Insurance Business
6
Other (to be specified)
Current
Previous
Year
Year
( ‘ ‘000)
( ‘ ‘000)
NOTES
Total
Notes :
(a)
The extent to which the borrowings are secured shall be separately disclosed
stating the nature of security under each sub-head.
(b)
Amounts due within 12 months from the date of Balance- Sheet should be
shown separately.
Advanced Accounting - I
353
Accounts of General
Insurance Business :
Balance Sheet
SCHEDULE - 8
INVESTMENTS
Particulars
NOTES
Long Term Investments :
1.
Government Securities and Government
guaranteed bonds including Treasury Bills
2.
Other Approved Securities
3.
Other Investments :
(a) Shares
(aa) Equity
(bb) Preference
(b) Mutual Funds
(c) Derivative Instruments
(d) Debentures/ Bonds
(e) Other Securities (to be specified)
(f) Subsidiaries
(g) Investment Properties - Real Estate
Short-Term Investments :
1.
Government Securities and Government
guaranteed bonds including Treasury Bills
2.
Other Approved Securities
3.
Other Investments :
(a) Shares
(aa) Equity
(bb) Performance
(b) Mutual Funds
(c) Derivative Instruments
(d) Debentures / Bonds
(e) Other Securities (to be specified)
(f) Subsidiaries
(g) Investment Properties - Real Estate
Total
Investments :
354
Advanced Accounting - I
1.
In India
2.
Outside India
Total
Current
Previous
Year
Year
( ‘ ‘000)
( ‘ ‘000)
Notes :
(a)
Investments is Subsidiary / Holding Companies, Joint Ventures and
Associates shall be separately disclosed, at cost.
(i) Holding Company and Subsidiary shall be construed as significant
influence may be exercised in several ways, for example, by
representation on the Board of Directors, Participation in the policymaking process, material inter-company transactions, interchange of
managerial defined in the Companies Act, 1956.
Accounts of General
Insurance Business :
Balance Sheet
NOTES
(ii) Joint Venture is a contractual arrangement whereby two or more parties
undertake an economic activity, which is subject to joint control.
(iii) Joint control-is the contractually agreed sharing of power to govern the
financial and operating policies of an economic activity to obtain benefits
from it.
(iv) Associate - is an enterprise in which the company has significant
influence and which is neither a subsidiary nor a joint venture of the
company.
(v) Significant influence (for the purpose of this Schedule) - means
participation in the financial and operating policy decisions of a company,
but not necessarily control of those policies personnel or dependence
on technical information. Significant influence may be gained by share
ownership, statute or agreement. As regards share ownership, if an
investor holds, directly or indirectly through subsidiaries, 20 percent or
more of the voting power of the investee, it is presumed that the investor
does have significant influence, unless it can be clearly demonstrated
that this is not the case. Conversely, if the investor holds, directly or
indirectly through subsidiaries, less than 20 percent of the voting power
of the investee, it is presumed that the investor does not have significant
influence, unless such influence is clearly demonstrated. A substantial
or majority ownership by another investor does not necessarily preclude
an investor from having significant influence.
(b)
Aggregate amount of company’s investments other than listed equity
securities and derivative instruments and also the market value thereof shall
be disclosed.
(c)
Investments made out of Catastrophe Reverse should be shown separately.
(d)
Debit Securities will be considered as “held to maturity” securities and will
be measured at historical cost subject to amortisation.
(e)
Investment Property means a property [Land or Building or part of a
Building or both] held to earn rental income or for capital appreciation or
for both, rather than for use in services or for administrative purposes.
Advanced Accounting - I
355
Accounts of General
Insurance Business :
Balance Sheet
SCHEDULE -9
LOANS
Particulars
Current
Previous
Year
Year
NOTES
(‘
1.
Security - wise Classification Secured :
Secured
(a) On Mortgage of Property
(aa) In India
(bb) Outside India
(b) On Shares, Bonds, Government Securities
(c) Other (to be specified)
Unsecured
Total
2.
Borrower-wise Classification
(a) Central and State Governments
(b) Bank and Financial Institutions
(c) Subsidiaries
(d) Industrial Undertakings
(e) Other (to be specified)
Total
3.
Performance-wise Classification
(a) Loans classified as standard
(aa) In India
(bb) Outside India
(b) Non-performing Loans
Less : Provisions
(aa) In India
(bb) Outside India
Total
4.
Maturity-wise Classification
(a) Short-Term
(b) Long-Term
Total
356
Advanced Accounting - I
‘000) ( ‘ ‘000)
Notes :
(a)
Short-term loans shall include those, which are repayable within 12 months
of the Balance Sheet date. Long-term loans shall be the loans other than
short-term loans.
(b)
Provisions against non-performing loans shall be shown separately.
(c)
The nature of the security in case of all long- term secured loans shall be
specified in each case. Secured loans for the purposes of this schedule,
means loans secured wholly or partly against an asset of the company.
(d)
Loans considered doubtful and the amount of provision created against
such loans shall be disclosed.
Accounts of General
Insurance Business :
Balance Sheet
NOTES
Advanced Accounting - I
357
358
Previous year
Office Equipement
Others (Specify nature)
Total
Information and Technology
Equipment
Vehicles
Leasehold Property
Buildings
Furniture and Fittings
Goodwill
Intangibles (Specify)
Land-Freehold
Paticulars
Net Block
year
year Adjustment
end
Opening Additions Deducations Closing Upto last For the On sales / To Date As at Year
Cost / Gross Block Deprection
Note : Assets included in Land, Building Property above exclude Investment Properties as defined in Note (e) to Schedule 8.
Advanced Accounting - I
FIX1ED ASSETS
SCHEDULE - 10
year
previous
( ‘ ‘000)
Accounts of General
Insurance Business :
Balance Sheet
NOTES
Accounts of General
Insurance Business :
Balance Sheet
SCHEDULE- 11
CASH AND BANK BALANCES
Particulars
1
Cash (including cheques, drafts and stamps)
2
Bank Balances
Current
Previous
Year
Year
( ‘ ‘000)
( ‘ ‘000)
NOTES
(a) Deposit Accounts
(aa) Short-term (due within 12 months)
(bb) Others
(b) Current Accounts
(c) Others (to be specified)
3
Money at Call and Short Notice
(a) With Banks
(b) With Other Institutions
4
Others (to be specified)
Total
(Balance with non-scheduled Banks included in
2 and 3 above)
Cash and Bank Balances
1
In India
2
Outside India
Total
Note :
Bank Balance may include remittances in transit. If so, the nature and
amount should be separately stated.
Advanced Accounting - I
359
Accounts of General
Insurance Business :
Balance Sheet
SCHEDULE - 12
ADVANCES AND OTHER ASSETS
Particulars
NOTES
Current
Previous
Year
Year
( ‘ ‘000)
( ‘ ‘000)
Advances :
1.
Reserve Deposits with ceding companies
2.
Advances to ceding companies
3.
Application money for investments
4.
Pre-payments
5.
Advances to Officers / Directors
6.
Advanced tax paid and taxed deducted at source
7.
Others (to be specified)
Total (A)
Other Assets :
1.
Income accrued on Investments
2.
Outstanding Premiums
3.
Agents Balances
4.
Foreign Agencies Balances
5.
Due from Other Insurance entities
6.
Due from Subsidiaries / Holding Company
7.
Reinsurance Claims / Balances Receivable
8.
Deposit with Reserve Bank of India
[Pursuant to Section 7 of Insurance Act, 1938]
9.
Others (to be specified)
Total (B)
Total (A + B)
Notes :
360
Advanced Accounting - I
(a)
The item under the above heads shall not be shown net of provisions for
doubtful amounts. The amount of provision against each should be shown
separately.
(b)
The term ‘officer’ should confirm to the definition of the word ‘officer’
given under the Companies Act, 1956
Accounts of General
Insurance Business :
Balance Sheet
SCHEDULE - 13
CURRENT LIABILITIES
Particulars
1.
Reserved for Licensed Premium
2.
Agents Balances
3.
Balances due to other Insurance Companies
4.
Advances from Treaty Companies
5.
Deposits held on Reinsurance ceded
6.
Premiums received in advance
7.
Sundry Creditors
8.
Due to Subsidiaries / Holding Company
9.
Claims Outstanding
11.
Due to Officers / Directors
11.
Others (to be specified)
Current
Previous
Year
Year
( ‘ ‘000)
( ‘ ‘000)
Current
Previous
Year
Year
( ‘ ‘000)
( ‘ ‘000)
NOTES
Total
SCHEDULE - 14
PREVISIONS
Particulars
1.
Reserve for Unexpired Risk
2.
For Taxation (Less : Advance Tax paid and
Taxes deducted at source)
3.
For Proposed Dividends
4.
For Dividend Distribution Tax
5.
Others (to be specified)
Total
Advanced Accounting - I
361
Accounts of General
Insurance Business :
Balance Sheet
SCHEDULE - 15
MISCELLANEOUS EXPENDITURE
Particulars
NOTES
1.
Current
Previous
Year
Year
( ‘ ‘000)
( ‘ ‘000)
Discount Allowed in Issue of Shares /
Debentures
2.
Others (to be specified)
Total
Note :
(a)
No items shall be included under the head “Miscellaneous Expenditure”
and carried forward unless :
1) Some benefit from the expenditure can reasonably be expected to be
received in future, and
2) The amount of such benefit is reasonably determinable.
(b)
The amount to be carried forward in respect of any item included under the
head “Miscellaneous Expenditure” shall not exceed the expected future
revenue / other benefits related to the expenditure.
SCHEDULE - C
(See Regulation 3)
AUDITOR’S REPORT
The report of the auditors on the financial statements of every insurer shall
deal with the matters specified herein :
1.
(a) That they have obtained all the information and explanations, which,
to the best of their knowledge and belief were necessary for the
purposes of their audit and whether they have found them satisfactory;
(b) Whether proper books of accounts have been maintained by the insurer
so far as appears from an examination of those books;
(c) Whether proper returns, audited or unaudited, from branches and other
offices have been recieved and whether they were adequate for the
purpose of audit;
(d) Whether the Balance Sheet, Revenue Account and Profit and Loss
Account dealt with by the report and the Receipts and Payments
Account are in agreement with the books of accounts and returns;
362
Advanced Accounting - I
(e) Whether the acturial valuation of liabilities is duly certified by the
appointed actuary including to the effect that the assumptions for such
valuation are in accordance with the guidelines and norms, if any,
issued by the authority, and or the Actuarial Society of India in
concurrence with the authority.
2.
Accounts of General
Insurance Business :
Balance Sheet
The Auditors shall express their opinion on :
(a) (i)
(ii)
Whether the Balance Sheet gives a true and fair view of the
insurer’s affairs as at the end of the financial year / period;
NOTES
Wether the Revenue Account gives a true and fair view of the
surplus or the deficit for the financial year / period;
(iii) Whether the Profit and Loss Account gives a true and fair view
of the profit or loss for the financial year / period;
(iv) Whether the receipts and payments Account gives a true and
fair view of the receipts and payments for the financial year /
period;
(b) The financial statements stated at (a) above are prepared in accordance
with the requirements of the Insurance Act, 1938 (4 of 1938), the
Insurance Regulatory and Developments Act, 1999 (41 of 1999) and
the Companies Act, 1956 ( 1 of 1956), to the extent applicable and in
the manner so required.
(c) Investments have been valued in accordance with the provisions of
the Act and these Regulations.
(d) The accounting policies selected by the insurer are appropriate and
are in compliance with the applicable accounting standards and with
the accounting principles, as prescribed in these Regulations or any
order or direction issued by the authority in this behalf.
3
The Auditors shall further certify that :
(a) they have reviewed the managements report and there is no apparent
mistake or material inconsistencies with the financial statements;
(b) the insurer has complied with the terms and conditions of the registration
stipulated by the authority.
4
A certificate signed by the Auditors [Which shall be in addition to any other
certificate or report which is required by law to be given with respect to the
Balance Sheet] certifying that :
(a) they have verified the Cash Balances and the securities relating to the
insurer’s loan reversions and life interests (in the case of life insurers)
and investments;
(b) to what extent, if any, they have verified the investments and
transactions relating to any trusts undertaken by the insurer as trustee;
and
(c) no part of the Assets of the Policyholders’ funds has been directly or
Advanced Accounting - I
363
Accounts of General
Insurance Business :
Balance Sheet
NOTES
indirectly applied in contravention of the provisions of the Insurance
Act, 1938 (4 of 1938) relating to the application and investments of
the policyholders’ funds.
11.3 Summary
•
Insurance is financial service for collecting the savings of the public and
providing them with a risk coverage.
•
Life Insurance, General Insurence and Social Insurance are the types of
polices which are undertaken generally.
•
Life Insurance is a device by which a man tries to protect himself from
uncertainly and risk in life.
•
Fire Insurance is a policy intended to protect the assured against the loss
caused by fire.
•
Marine Insurance is a contract whereby the insurer undertakes to indemnify
the insured against marine losses.
•
The Final Accounts of General Insurance Business as per Insurance
Companies Act, 1938 consist of (a) Revenue Accounts (as per From B-RA).
(b) Profit and Loss Account (as per Form B-PL).
(c) Balance Sheet (as per Form B-BS).
11.4 Specimens of Revenue Account of Insurance
Companies - 1 and 2
364
Advanced Accounting - I
Specimen - 1
FORM NL -1 B-RA
UNITED INDIA INSURANCE COMPANY LIMITED
Name of the Insurer :
545 / 10th March, 2010
Registration No. and Date of Registration with the IRDA
REVENUE ACCOUNT FOR THE PERIOD ENDING 31st MARCH 2011
In thousands
Particulars
Schedule
31.3.2011
31.3.2010
FIRE
For the Qr.
Upto the Qr.
For the Qr. Upto the Qr.
1
Premium eamed (Net)
NL-4 premium Schedule
1202905
4529122
985350
4104549
2
Profit/ Loss on sale / redemption
of Investments
176180
553879
108811
649112
3
Others (to be specified)
Sundary credit balances written back
575
18
60013
60015
Transfer fees etc.
0
0
0
0
Exchange Loss / Gain
215
-837
-293
-1496
4
Intrest Dividend and Rent-gross
101773
477237
148058
558214
Total (A)
1481648
5559419
1301939
5370394
1
Claims incurred (Net)
NL-5-Claim Schedule
1246965
3113836
158436
1980730
2
Commission
NL-S-Commission Schedule
30712
24022
1178
-44141
3
Operating Expenses related to
insurance Business
NL-7-Operating Expenses Schedule
416126
2180889
290944
1409531
4
Premium Deficiency
Accounts of General
Insurance Business :
Balance Sheet
NOTES
Advanced Accounting - I
365
366
Advanced Accounting - I
:
-16229
-4219
5325342
234077
234077
234077
-14348
-719
1692997
-211350
-211350
-211350
See Notes appended at the end of Form NL-2-B-PL
“ please refer Regulation 1 Part V - Preparation of Financial Statement of IRDA (Accounting) Regulation 2002
1345
14573
11125
476
3307
10478
835821
835821
835821
466118
-8240
664
879
5561
16696
NOTES
Note
Others
Expenses relating to investments
Amortisation of Premium on investments
Amount written off in respect of
depriciated Investments
Provision for Bad and Doubtful Debts
Provision for diminution in the value of
other than actively traded Equities
Total (B)
Operating Profit / (Loss) from Fire/ Marine
Miscellaneous Business = (A - B)
APPROPRIATIONS
Trasfer to Shareholders’ Account
Transfer to Catastrophe Reserve
Transfer to Other Reserve (to be specified)
Total (C)
1997474
1997474
1997474
3372920
-14838
664
1680
21214
18080
Accounts of General
Insurance Business :
Balance Sheet
31-03-2010
31-03-2011
31-03-2010
31-03-2011
31-03-2010
2452070
303740
8
0
53
261711
3017582
625805
117857
245
0
49
76928
820884
670041
47423
-546
0
30029
30272
562863
2597443
208452
-445
0
30031
242396
2117009
14514254
1467588
277
2710
3222
1898961
11141496
971861
-128
2313
394316
659043
8993166
49148507 11020588
4594453
277
10097
112
5046451
39495117
41260938
4021486
-128
8530
394332
4676331
32160390
57725508
0
46816786
0
5335401
0
0
1646289
-507
0
0
541
10097
2710
0
0
0
0
138
0
0
4042
5904070
0
0
2192998
46476309
12970206
0
5567839
0
0
484378
0
8530
0
-2069
0
4788152
0
798126
0
0
484358
0
2313
0
-967
0
1167342
0
0
12992549 49228775
38381948
10541379
Marine
Miscellaneous
Total
For the Qtr. Upto the Qtr. For the Qtr. Upto the Qtr. For the Qtr. Upto the Qtr. For the Qtr. Upto the Qtr. For the Qtr. Upto the Qtr. For the Qtr.Upto the Qtr.
31-03-2011
Accounts of General
Insurance Business :
Balance Sheet
NOTES
Advanced Accounting - I
367
368
Advanced Accounting - I
960401
960401
738
7991
6101
-8900
-2314
3269881
-252299
-252299
-252299
210385
210385
309
2447
5783
-7974
-592
833470
-12587
-12587
-12587
Source : Internate IRDA
2171195
-61695
-61695
-61695
731736
248
-2952
6209
1776
314
148359
148359
527807
-538092
-538092
-538092
31355336
248
-5542
6752
7922
628
712165
712165
2185154
-4016696
-4016696
-4016696
18530950
-9270
-132190
95973
38890
5009
4232715
4232715
13691882
-6152188
-6152188
-6152188
55300685
-38435
-147864
101361
132771
12254
14112553
14112553
38571363
4787
-106899
130249
152833
12104
9448250
9448250
29126546
-1335883
-1335883
-1335883
347693
347693
347693
12358451 40913248
4787
-57841
119960
36446
6152
2208111
2208111
6536074
0
0
0
0
-44969
-172993
118587
155335
0
0
0
0
-4240633 -6170410
-6170410
0
0
-4240633
-6170410
-4240633
21057417 83895913
-10581
-154512
112234
44644
14337
0
0
5794
17253842
0
0
4859226
17253842
43856394
0
4859226
15524900
0
5699
-127279
155081
181969
14412
0
0
0
11569946
0
11569946
33292430
0
-561757
0
0
-561757
0
-561757
1807075
0
0
1807075
0
1807075
13554305 47421704
5699
-69033
142865
43783
7345
0
0
0
26647414
0
26647414
10222317
0
NOTES
586053
Accounts of General
Insurance Business :
Balance Sheet
UNIVERSAL SOMPO GENERAL INSURANCE LIMITED
Date of Registration with the IRDA : 16 November 2007
Registration No. 134
Revenue Account for Fire Business for the Period ended June 30, 2011
Sr. Particulars
No
Schedule
1 Premiums earned (Net)
For the
Upto the Quarter
For the
Upto the Quarter
Quarter Ended Corresponding corresponding of the preceeding
June 30,2011
June 30, 2011 quarter of the
period ended
preceeding
June 30, 2010
period Ended
June 30, 2010
( ‘ ’000)
( ‘ ’000)
( ‘ ’000)
( ‘ ’000)
NL4 - Premium
65,412
65,412
53,759
53,769
Schedule
2 Profit / Loss on sale /
redemption
3 Others (to be specified)
Amortization of Discount
/ (premium)
Miscellaneous
4 Interest, Dividend and
Rent- Gross
5 Foreign Exchange (Gain) /
/ Loss
Total (A)
1 Claims Incurred (Net)
NL5 - Claims
Schedule
2 Commission
NL6 - Commi.
Schedule
3 Operating Expenses
NL7 - Operating
related to Insurance
Expenses
4 Premium Deficiency
5 Other
Total (B)
Opening Profit / (Loss)
from Fire /Marine/
Miscellneous Business
C = (A - B)
APPROPRIATIONS
Transfer to Shareholders’
Account
Transfer to Catastrophe
Reserve
Transfer to Other Reserves
(to be specified)
Total (C)
(386)
-
(386)
-
682
-
682
-
(382)
-
(382)
-
(326)
-
(326)
-
7,262
7,262
4,582
4,582
71,906
47,174
71,906
47,174
58,707
53,865
58,707
53,865
(2,943)
(2,943)
1,220
1,220
74,483
74,483
45,218
45,218
118,714
118,714
100,303
100,303
(46,808)
(46,808)
(41,596)
(41,596)
(46,808)
(46,808)
(41,596)
(41,596)
-
-
-
-
-
-
-
-
(46,808)
(46,808)
(41,596)
(41,596)
Note : See Notes appended at the end of Form NL - 2- B - PL
Please refer Regulation 1 part V - Preparation of financial statement of IRDA (Accounting) Regulation 2002
369
UNIVERSAL SOMPO GENERAL INSURANCE COMPANY LIMITED
FORM NL - 1- B- RA
Registration No. 134
Date of Registration with the IRDA : 16 November 2007
Revenue Account for Marine Business for the period ended June 30, 2011
Sr.
No
Particulars
1 Premium earned (Net)
Schedule
NL4 - Premium
Schedule
2 Profit/Loss on sale /
redemption
3 Others (to be specified)
Amortization of Discount /
(premium)
Miscellaneous
4 Interest, Dividend and Rent-Gross
5 Foreign Exchange (Gain)/Loss
TOTAL (A)
1 Claims incurred (Net)
NL5 - Claims
Schedule
2 Commission
NL6 - Commi.
Schedule
3 Operating Expenses
NL7 - Operating
related to Insurance
Expenses
4 Premium Deficiency
5 Others
TOTAL (B)
Operating Profit / (Loss)
from Fire/Marine/Miscellaneous
Business C = (A - B)
APPROPRIATIONS
Transfer to Shereholders’Account
Transfer to Catastrophe Reserve
Transfer to Other Reserves
(to be specified)
TOTAL (C)
For the
Quarter
Ended June
30, 2011
Upto the
Quarter of the
preceeding
period Ended
June 30, 2010
( ‘ ’000)
3,042
For the
corresponding
quarter of the
preceeding
period Ended
June 30, 2010
( ‘ ’000)
(257)
(47)
(47)
47
47
(47)
889
3,837
3,162
(47)
889
3,837
3,162
(22)
313
81
4,601
(22)
313
81
4,601
(2,373)
(2,373)
(1,679)
(1,679)
10,306
10,306
7,282
7,282
11,095
11,095
10,204
10,204
(7,258)
(7,258)
(10,123)
(10,123)
(7,258)
-
(7,258)
-
(10,123)
-
(10,123)
-
(7,258)
(7,258)
(10,123)
(10,123)
( ‘ ’000)
3,042
Upto the
Quarter
Ended
June 30,2011
( ‘ ’000)
(257)
Note : See Notes appended at the end of Form NL - 2 - B - PL
“Please refer Regulation 1 Part V - Preparation of IRDA (Accounting) Regulation 2002
370
UNIVERSAL SOMPO GENERAL INSURANCE COMPANY LIMITED
FORM NL -1-B-RA
Registration No. 134
Revenue Account for Miscellaneous Business for the period ended June 30, 2011
Sr. Particulars
No
1 Premium earned (Net)
Schedule
NL4 - Premium
Schedule
2 Profit/Loss on sale /
redemption of Investments
3 Others (to be specified)
Amortization of Discount /
(Premium)
Miscellaneous
4 Interest, Dividend and Rent-Gross
5 Foreign Exchange (Gain)/ Loss
TOTAL (A)
1 Claims Incurred (Net)
NL5 - Claims
Schedule
2 Commission
NL6 - Commission
Schedule
3 Operating Expenses
NL7 - Operating
related to Insurance Business
Expenses
4 Premium Deficiency
5 Others
Others (Coinsurance Admin
and Terrorism Pool charges)
Contribution to Solatium Fund
TOTAL (B)
Operating Profit / (Loss)
from Fire/Marine/Miscellaneous
Business C= (A-B)
APPROPRIATIONS
Transfer to Shereholders’Account
Transfer to Catastrophe Reserve Transfer to Other Reserves
(to be specified)
TOTAL (C)
For the
Upto the
Quarter
Quarter
Ended June
Ended
30, 2011 June 30,2011
For the
corresponding
quarter of the
preceeding
period Ended
June 30, 2010
( ‘ ’000)
339,654
Upto the
Quarter of the
preceeding
period Ended
June 30, 2010
( ‘ ’000)
473,929
( ‘ ’000)
473,929
( ‘ ’000)
339,654
(2,084)
(2,084)
2,863
2,863
(2,064)
229
39,240
509,250
(2,064)
229
39,240
509,250
(1,371)
63
18,239
360,448
(1,371)
63
18,239
360,448
412,276
412,276
282,102
282,102
25,366
25,366
16,968
16968
253,217
-
253,217
-
214,240
-
214,240
-
360
691,219
360
691,219
263
430
514,003
263
430
514,003
(181,969)
(181,969)
(153,555)
(153,555)
(181,969)
(181,969)
(153,555)
(153,555)
-
-
-
(181,969)
(181,969)
(153,555)
(153,555)
Note : See Notes appended at the end of Form NL - 2 - B- PL
“Please refer Regulation 1 Part V-Preparation of Financial Statement of IRDA (Accounting) Regulation 2002
Source : Internet : IRDA (Accounting) Regulation 2002
371
Accounts of General
Insurance Business :
Balance Sheet
The form of Balance Sheet as per Form - B as per IRDA Regulations,
2002 can be understood with the help of following illustrations.
11.5 Illustrations
NOTES
ILLUSTRATION 1
The following balances as at 31-03-2012 have been extracted from the
books of account of the General Insurance Company Ltd., Mumbai.
‘
Fire Fund Accounts
4,67,000
Commission on Re-insurance
Marine Fund Account
1,84,000
ceded :
Miscellaneous Fund Account
Additional Reserve (Fire)
68,000
•
Fire
1,20,000
•
Marine
6,200
•
Miscellaneous
3,130
Premiums :
Fire
•
Marine
1,87,000
Business
•
Miscellaneous
2,10,800
•
Fire
Re-insurance Premiums
•
Marine
15,400
paid and outstanding :
•
Miscellaneous
28,700
•
Fire
•
Marine
•
Miscellaneous
12,56,750
•
Fire
•
Marine
•
Miscellaneous
48,600
Commission on Direct
1,64,500
Expenses of Management :
7,500
•
Fire
14,800
•
Marine
37,400
•
Miscellaneous
67,300
3,47,000
54,000
1,00,600
Miscellaneous Expenses
3,24,600
5,670
Miscellaneous Income
420
Share Transfer Fees
220
Claims recovered from
General Reserve
Re-insurers :
Audit Fees
4,000
3,00,000
12,300
Director’s Fees
3,000
•
Fire
•
Marine
3,400
Rates and Taxes
3,600
•
Miscellaneous
6,300
Rents
9,400
Share Capital
372
32,400
•
Claims paid :
Advanced Accounting - I
‘
8,00,000
Profit and Loss Account
Claims intimated
Interest and Dividends
but not paid as on
Outstanding
01-04-2011
Mortgages in India
•
Fire
38,600
Income from Investments
•
Marine
16,000
Income-tax on Income
•
Miscellaneous
14,500
from Investments
46,400
5,400
4,24,000
87,400
22,940
Commission on
Government Securities
reinsurances accepted :
deposited with Reserve Bank
3,67,800
48,600
Indian Government Securities
14,23,600
2,48,500
•
Fire
•
Marine
8,700
State Government Securities
•
Miscellaneous
9,450
Agent’s Balances
78,640
Stock and Shares
Investment Reserve
12,600
2,12,700
Amount due to
Re-insurers
Outstanding Premiums
14,750
Cash and Bank Balance on
Current Account
12,300
Accounts of General
Insurance Business :
Balance Sheet
1,86,400
Cash in Hand
1,640
Amount due from
Re-insurance
Sundry Creditors
9,600
NOTES
12,870
It is proposed that out of the profit, ‘ 1,00,000 be transferred to General
Reserved and that a dividend @ 12% be provided for after making a provision of
‘ 2,00,000 for Income-Tax.
Claims intimated but not paid on 31-03-2012 were as under :
Fire ‘ 55,400; Marine ‘ 12,700; Miscellaneous ‘ 19,400.
Create 40% provision for Unexpired Risk in case of Fire and Miscellaneous
Insurance and 100% provision in case of Marine Business.
Prepare Revenue Account and Profit and Loss Account for the year ended
31 March, 2012 and Balance Sheet as on that date.
st
SOLUTION
Working Notes :
1.
Computation of change in Unexpired Risk Reserve :
Fire Insurance
Marine Insurance Miscellaneous
‘
‘
Insurance
‘
2.
Opening Balance
4,67,000
1,84,000
68,000
Closing Balance
4,33,260
(1,79,500)
(78,400)
(16,260)
4,500
(10,400)
Expenses in Profit and Loss Account :
‘
Miscellaneous Expenses
5,670
Audit Fees
4,000
Directors Fees
3,000
Rates and Taxes
3,600
Rents
(+)
Total
9,400
25,670
Advanced Accounting - I
373
Accounts of General
Insurance Business :
Balance Sheet
FORM B - RA
Name of the Insurer : General Insurance Company Limited, Mumbai.
Registration Number and Date of Registration with IRDA.
NOTES
Revenue Account for the year ended 31-03-2012
Particulars
1. Premium earned
2. Other Income
3. Change in provision for
Unexpired Risk
4. Interest, Dividend and
Rent - Gross
Total (A)
5. Claims Incurred
6. Commission
7. Operating Expenses related
to Insurance Business
8. Other Expenses
Total (B)
Opening Profit / (Loss) from
Fire / Marine / Miscellaneous
Business (A-B)
374
Advanced Accounting - I
Schedule
1
2
3
4
Fire
Marine
Miscellaneous
‘
‘
‘
12,08,150
-
1,79,500
-
1,96,000
-
(16,260)
4,500
(10,400)
11,91,890
3,51,500
1,80,700
1,84,000
47,300
17,900
1,85,600
99,200
35,020
3,24,600
8,56,800
37,400
1,02,600
67,300
2,01,520
3,35,090
81,400
(15,920)
FORM B-PL
Name of the Insurer : General Insurance Company Limited, Mumbai
Accounts of General
Insurance Business :
Balance Sheet
Registration Number and Date of Registration with the IRDA.
Profit and Loss Account for the year ended 31-03-2012
NOTES
Particulars
Amount
‘
1. Opening Profit / (Loss) from
(c) Fire Insurance
3,35,090
(d) Marine Insurance
81,400
(e) Miscellaneous Insurance
(15,920)
2. Income from Investments
87,400
3. Other Income
Miscellaneous Income
Share Transfer Fees
Total (A)
4. Provisions (Other than Taxation)
5. Other Expenses :
Total (B)
Profit Before Tax (A-B)
Less : Provision for Taxation
Profit After Tax
420
(+) 220
640
4,88,610
25,670
25,670
4,62,940
(2,00,000)
2,62,940
Add : Brought forward Reserve /
Surplus from the Balance Sheet
46,400
Less : Appropriations
- Transfer to General Reserve
- Proposed Dividend (12% of ‘ 8,00,000)
Profit Carried Forward to Balance Sheet
(1,00,000)
(96,000)
1,13,340
Advanced Accounting - I
375
Accounts of General
Insurance Business :
Balance Sheet
FORM B - BS
Name of the Insurer : General Insurance Company Limited, Mumbai.
Registration Number and Date of Registration with IRDA.
Balance Sheet as at 31-03-2012
NOTES
Schedule
Amount
‘
Source of Funds :
Share Capital
5
8,00,000
Reserves and Surplus
6
5,13,340
Credit/Debit Fair Value Change Account
-
2,12,700
Borrowings (Investment Reserve)
7
-
Total
15,26,040
Investments
8
20,52,500
Loans
9
4,24,000
Fixed Assets
10
-
Cash and Bank Balances
11
1,88,040
Advances and Other Assets
12
1,31,330
Less : Current Liabilities
13
(1,12,670)
Less : Provisions
14
(11,57,160)
15
-
Application of Funds :
Current Assets
Miscellaneous Expenditure
15,26,040
376
Advanced Accounting - I
Annexures
Fire
Marine Miscellaneous
Accounts of General
Insurance Business :
Balance Sheet
Insurance Insurance Insurance
‘
‘
‘
(Schedule 1) Premiums Earned :
NOTES
Premiums
12,54,750
1,87,000
2,10,800
(48,600)
(7,500)
(14,800)
12,08,150
1,79,500
1,96,000
Claims Paid
3,47,000
54,000
1,00,600
Less : Reinsurance Claims
(12,300)
(3,400)
(6,300)
Less : Opening Outstanding Claims
(38,600)
(16,000)
(14,500)
55,400
12,700
19,400
3,51,500
47,300
99,200
1,64,500
15,400
28,700
48,600
8,700
9,450
(32,400)
(6,200)
(3,130)
1,80,700
17,900
35,020
3,24,600
37,400
67,300
Less : Reinsurance Premium paid
(+)
(Schedule 2) Claims Incurred :
Add :
Closing Outstanding Claims
(Schedule 3) Commission :
Commission on Direct Business
Add : On Reinsurance Accepted
Less : On Reinsurance Ceded
(Schedule 4) : Opening Expenses :
Expenses of Management
‘
8,00,000
(Schedule 5) Share Capital :
8,00,000
‘
(Schedule 6) Reserves and Surplus :
General Reserve
Add : Transfers
Profit and Loss Account
3,00,000
(+) 1,00,000
4,00,000
(+)
1,13,340
5,13,340
‘
(Schedule 7) Borrowings :
NIL
NIL
Advanced Accounting - I
377
Accounts of General
Insurance Business :
Balance Sheet
‘
(Schedule 8) Investments :
Stock and shares in Companies
12,600
Government Securities deposited with RBI
NOTES
3,67,800
Indian Government Securities
14,23,600
State Government Securities
2,48,500
20,52,500
‘
(Schedule 9) Loans :
Mortgages in India
(+)
4,24,000
4,24,000
‘
(Schedule 10) Fixed Assets : :
NIL
NIL
‘
(Schedule 11) Cash and Bank Balances :
Cash with Bank
Cash in Hand
1,86,400
(+)
1,640
1,88,040
‘
(Schedule 12) Other Current Assets :
Amount due from Reinsurers
9,600
Interest and Dividend Outstanding
5,400
Income- tax on Income from Investment
22,940
Agents Balances
78,640
Outstanding Premiums
(+)
14,750
1,31,330
‘
(Schedule 13) Current Liabilities :
Sundry Creditors
12,870
Outstanding Claims
87,500
Due to Reinsurers
378
Advanced Accounting - I
(+)
12,300
1,12,670
Accounts of General
Insurance Business :
Balance Sheet
‘
(Schedule 14) Provision :
Proposed Dividend
96,000
Provision for Tax
2,00,000
Unexpired Risk Reserve
7,41,160
Additional Reserve
(+)
NOTES
1,20,000
11,57,160
‘
(Schedule 15) Miscellaneous Expenses :
NIL
NIL
ILLUSTRATION 2
The following are the balances in the books of Bharat Insurance Company
Limited, Navi Mumbai as on 31st March, 2012 in respect of Fire Insurance Business
carried on by them :
‘
Premium Less : Reinsurance
75,00,000
Reserve for Unexpired Risks as on 1-4-2011
30,00,000
Claims Less : Reinsurance
41,25,000
Claims Outstanding as on 31-3-2012
11,25,000
Commission on Direct Business
4,50,000
Commission on Reinsurance Ceded
3,00,000
Commission on Reinsurance Accepted
1,50,000
Bad Debts
22,500
Foreign Taxes
15,000
Rent, Rates and Taxes
1,80,000
Establishment Charges
7,50,000
Audit Fees
30,000
Postage and Telegrams
22,500
Printing and Stationery
37,500
Depreciation
60,000
Policy Stamps
7,500
Share Capital (Equity Shares of ‘ 100 each)
75,00,000
General Reserve
15,00,000
Advanced Accounting - I
379
Accounts of General
Insurance Business :
Balance Sheet
Profit and Loss Appropriation Account
Balance as on 1-4-2011 (Cr.)
3,00,000
Amount due to other persons carrying on
Insurance Business
NOTES
12,00,000
Amount due from other persons carrying on
Insurance Business
60,00,000
Cash on Hand
39,000
Cash at Bank
18,21,000
Deposits with Reserve Bank
30,00,000
Investment in Government Securities
37,50,000
Investments in Shares of Companies
15,00,000
Interest and Dividend Recieved (Net)
2,25,000
Director’s Fees
30,000
Minimum Remuneration of Managing Director
2,70,000
Sundry Debtors
7,50,000
Sundry Creditors
3,00,000
Investment Reserve as on 1-4-2011
9,00,000
Motor Car, Furniture, etc.
8,40,000
Additional Information :
1.
Outstanding Claims as on 1-4-2011 were ‘ 7,50,000
2.
Reserve for Unexpired Risks to be kept at 50% of the Premium Income.
3.
Market Value of Investments as on 31-3-2012 was ‘ 42,00,000.
4
Provision for Taxation is required to be made of ‘ 5,85,000.
You are required to prepare the Revenue Account, Profit and Loss Account
for the year ended 31-3-2012 and a Balance Sheet as on that date.
3840
Advanced Accounting - I
Accounts of General
Insurance Business :
Balance Sheet
SOLUTION
FORM B - RA
Name of the Insurer : Bharat Insurance Company Limited, Navi Mumbai.
Registration Number and Date of Registration with the IRDA.
Fire Insurance Revenue Account for the year ended 31st March, 2012.
Particulars
Schedule
NOTES
Amount
‘
1.
Premium Earned
1
2.
Other Income
3.
Change in Provision for Unexpired Risk
4.
Interest, Dividend and Rent - Gross
75,00,000
(7,50,000)
Total (A)
67,50,000
5.
Claims Incurred
2
41,25,000
6.
Commission
3
3,00,000
7.
Operating Expenses related to Insurance Business
4
14,25,000
8.
Other Expenses
Total (B)
58,50,000
Operating Profit / (Loss) from Fire / Marine /
Miscellaneous Business (A-B)
9,00,000
Advanced Accounting - I
381
Accounts of General
Insurance Business :
Balance Sheet
FORM B - PL
Name of the Insurer : Bharat Insurance Company Limited, Navi Mumbai.
Registration Number and Date of Registration with the IRDA.
Profit and Loss Account the year ended 31st March, 2012.
NOTES
Particulars
Amount
‘
1.
Operating Profit or (Loss) from :
(a) Fire Insurance
2.
9,00,000
(b) Marine Insurance
-
(c) Miscellaneous Insurance
-
Income from Investments :
(a) Interest Dividend and Rent-Gross
(b) Profit on Sale of Investments
3.
Other Income
Total (A)
4.
2,25,000
11,25,000
Provisions (Other than Taxation)
Other Expenses
Total (B)
Profit Before Tax (A-B)
11,25,000
Less : Provision for Taxation
5,85,000
Profit After Tax
5,40,000
Add : Brought forward Reserves/Surplus from the
Balance Sheet
3,00,000
Less : Appropriations
-
Balance Carried Forward to Balance Sheet
382
Advanced Accounting - I
8,40,000
FORM B - BS
Name of the Insurer : Bharat Insurance Company Limited, Navi Mumbai.
Accounts of General
Insurance Business :
Balance Sheet
Registration Number and Date of Registration with the IRDA.
Balance Sheet as at 31st March, 2012
Particulars
Schedule
Amount
NOTES
‘
Sources of Funds :
Share Capital
5
75,00,000
Reserves and Surplus
6
23,40,000
Credit / [Debit] Fair Value Change Account
-
(1,50,000)
Borrowings
7
-
Total
96,90,000
Application of Funds :
Investments
8
72,00,000
Loans
9
-
Fixed Assets
10
8,40,000
Cash and Bank Balances
11
18,60,000
Advances and Other Assets
12
67,50,000
Less :
Current Liabilities
13
(26,25,000)
Less :
Provisions
14
(43,35,000)
Miscellaneous Expenditure
15
-
Current Assets :
Total
96,90,000
Annexures
‘
(Schedule 1) Premiums Earned :
Premium
75,00,000
75,00,000
‘
(Schedule 2) Claims Incurred :
Claims
41,25,000
41,25,000
Advanced Accounting - I
383
Accounts of General
Insurance Business :
Balance Sheet
NOTES
‘
(Schedule 3) Commission :
Commission on Direct Business
4,50,000
Add :
Accepted
1,50,000
Less :
Reinsurance Coded
(3,00,000)
3,00,000
‘
(Schedule 4) Operating Expenses :
Foreign Taxes
15,000
Rent, Rates and Taxes
1,80,000
Establishment Charges
7,50,000
Audit Fees
30,000
Postage and Telegram
22,500
Printing and Stationery
37,500
Policy Stamps
7,500
Director Fees
30,000
Managing Directors Remuneration
2,70,000
Bad Debts
Depreciation
22,500
(+)
60,000
14,25,000
‘
(Schedule 5) Share Capital :
Share Capital
75,00,000
75,00,000
‘
(Schedule 6) Reserved and Surplus :
General Reserve
Profit and Loss Account
15,00,000
(+)
8,40,000
23,40,000
‘
(Schedule 7) Borrowings :
NIL
384
Advanced Accounting - I
NIL
Accounts of General
Insurance Business :
Balance Sheet
‘
(Schedule 8) Investments :
Less :
Deposit with Reserve Bank
30,00,000
Investment in Government Securities
37,50,000
Investment in Shares
15,00,000
Fair Value Change Account
NOTES
(10,50,000)
72,00,000
‘
(Schedule 9) Loans :
NIL
NIL
‘
(Schedule 10) Fixed Assets :
Motor Car, Furniture etc.
8,40,000
8,40,000
‘
(Schedule 11) Cash and Bank Balances :
Cash on Hand
Bank
39,000
(+)
18,21,000
18,60,000
‘
(Schedule 12) Other Current Assets :
Amount due from others
60,00,000
Debtors
7,50,000
67,50,000
‘
(Schedule 13) Current Liabilities :
Amount due to others
12,00,000
Creditors
Claims Outstanding
3,00,000
(+)
11,25,000
26,25,000
Advanced Accounting - I
385
Accounts of General
Insurance Business :
Balance Sheet
‘
(Schedule 14) Provisions :
Unexpired Risk Reserve
37,50,000
Provision for Taxation
(+)
NOTES
5,85,000
43,35,000
Working Notes :
‘
1.
Unexpired Risk Reserve :
Opening Balance
30,00,000
Closing Balance
(37,50,000)
7,50,000
2.
Investments :
Investments Reserve
9,00,000
Book Value
52,50,000
Market Value
(-) 42,00,000
(-) 10,50,000
(-) 1,50,000
ILLUSTRATION 3
The following figures are extracted from the books of Maharashtra Insurance
Company Limited, Mumbai as at 31-03,2012
‘
Claims Paid Less :
Additional Reserves :
Reinsurance
• Fire
80,000
• Marine
16,000
• Marine
62,000
Interest Accrued
25,000
1,18,000
Furniture
(Cost ‘ 18,000)
Commission paid :
• Fire
48,000
Buildings
• Marine
39,000
(Cost ‘ 1,25,000)
Share Capital (20,000 Shares
of ‘ 100 each)
12,000
87,000
Office Equipment
20,00,000
Expenses of Management :
Advanced Accounting - I
1,32,000
• Fire
General Reserve
386
‘
• Fire
53,000
• Marine
36,000
(Cost ‘ 48,000)
30,000
Cash in Hand
56,000
Cash at Bank
1,04,000
Reserved of Unexpired
Premium Less : Reinsurance :
Risks :
• Fire
2,11,000
1,62,000
• Fire
2,04,000
• Marine
• Marine
1,23,000
Tax deducted at source
9,000
Investment at Cost :
Premium Due :
• Central Government
• Fire
28,000
• Marine
20,000
Securities deposited
with RBI
19,21,000
• Other Central Government
Securities
• State Government
• Shares in Companies
NOTES
Claims Outstanding on
01-04-2011
1,23,000
Securities
• Fire
14,000
• Marine
2,22,000
Dividends
2,49,000
Interest on Investments
2,000
20,000
1,00,000
Depreciation
21,000
Dues to other Insurers
43,000
Due from Other Insurers
27,000
Contingency Reserve
39,000
Investment Reserve
47,000
Directors Fees
Accounts of General
Insurance Business :
Balance Sheet
4,000
Commission on Reinsurance
Ceded :
• Fire
23,000
• Marine
2,000
The following further information is also given :
1
Claim Outstanding as on 31-03-2012 are :
•
Fire
‘ 17,000
•
Marine
‘ 6,000
2
Market Value of Investments is ‘ 24,01,000.
3
Increase Additional Reserve by 10% of Net Premium for the year for Fire.
4
Maintain Reserve for Unexpired Risks at 50% of Premium for the year in
case of Fire Insurance and 100% of Premium for the year in case of
Marine Insurance.
Prepare Revenue Accounts, Profit and Loss Account for the year ended
31-03-2012 and Balance Sheet as on that date.
Advanced Accounting - I
387
Accounts of General
Insurance Business :
Balance Sheet
SOLUTION
FORM B - RA
NOTES
Name of the Insurer : Maharashtra Insurance Company Limited,
Mumbai.
Registration Number and Date of Registration with the IRDA.
Revenue Account for the year ended 31-03-2012
Particulars
Schedule
1. Premium Earned
1
2. Other Income
3. Change in Provision for Unexpired
Amount
Fire
Marine
Insurance
Insurance
‘
‘
2,11,000
1,62,000
-
-
98,500
Risk
4. Change in Additional Reserves
(21,100)
5. Interest, Dividend and Rent-Gross
-
Total (A)
(39,000)
2,88,400
1,23,000
6. Claims Incurred
2
83,000
66,000
7. Commission
3
25,000
37,000
4
53,000
36,000
-
-
1,61,000
1,39,000
8. Operating Expenses related to Insurance
Business
9. Other Expenses
Total (B)
Operating Profit/(Loss) from
Fire / Marine / Miscellaneous
Business (A-B)
388
Advanced Accounting - I
1,27,4000 (16,000)
Accounts of General
Insurance Business :
Balance Sheet
FORM B - PL
Name of the Insureer : Maharashtra Insurance Company Limited,
Mumbai.
Registration Number and Date of Registration with the IRDA.
profit and Loss Account for the year ended 31-03-2012
Particulars
NOTES
Amount
‘
1.
2.
Operating Profit or (Loss) from :
(a) Fire Insurance
1,27,400
(b) Marine Insurance
(16,000)
Income from Investments :
(a) Interest Dividend and Rent - Gross
3.
1,20,000
(b) Profit on Sale of Investments
-
Other Income
Total (A)
4.
Provisions (Other than Taxation)
5.
Other Expenses
2,31,400
25,000
Total (B)
Profit Before Tax (A - B)
25,000
2,06,4000
Less : Provision for Taxation
-
Profit After Tax
-
Add : Brought forward Reserves / Surplus from the
Balance Sheet
-
Less : Appropriations Dividend Paid
Balance Carried Forward to Balance Sheet
2,06,400
Advanced Accounting - I
389
Accounts of General
Insurance Business :
Balance Sheet
FORM B - BS
Name of the Insurer : Maharashtra Insurance Company Limited, Mumbai.
Registration Number and Date of Registration with the IRDA.
Balance Sheet as at 31-03-2012
NOTES
Particulars
Schedule
Amount
‘
Sources of Funds :
Share Capital
5
20,00,000
Reserves and Surplus
6
3,63,4000
-
(67,000)
Credit / [Debit] fair Value Change
Account
Borrowings
7
Total
22,96,400
Application of Funds :
Investments
8
24.01.000
Loans
9
-
Fixed Assets :
10
1,29,000
Cash and Bank Balances
Advances and Other Assets
11
12
1,60,000
1,09,000
Less :
Current Liabilities
13
(66,000)
Less :
Provisions
14
(4,36,000)
Miscellaneous Expenditure
15
-
Current Assets
Total
22,96,400
Working Notes :
(1) Computation of changes in Unexpired Risk Reserve :
Opening Balance
Closing Balance
Change
390
Advanced Accounting - I
Fire
Marine
‘
‘
2,04,000
1,23,000
(1,05,500) (1,62,000)
98,500 (39,000)
Accounts of General
Insurance Business :
Balance Sheet
(2) Expenses in Profit and Loss Account :
‘ .
Depreciation
21,000
Director’s Fees
4,000
25,000
NOTES
(3) Computation of Change in Additional Reserves :
Opening Balance
Closing Balance
Change
(4) Cost of Investment :
Fire
Marine
‘
‘
1,32,000
16,000
(1,53,100)
(16,000)
21,100
-
25,15,000
Less : Market Value of Investments
FVC Account
(24,01,000)
1,14,000
The Accounting Entry will be :
FVC A/c
Dr.
1,14,000
To Investments A/c
1,14,000
ANNEXURES
Schedule 1 Premiums Earned :
Premium
Fire
Marine
‘
‘
2,11,000
1,62,000
2,11,000
1,62,000
Schedule 2 Claims Incurred
Claims Paid
(-)
Opening Claims Outstanding
(+)
Closing Claims Outstanding
Fire
Marine
‘
‘
80,000
62,000
(14,000)
(2,000)
17,000
6,000
83,000
66,000
Advanced Accounting - I
391
Accounts of General
Insurance Business :
Balance Sheet
Schedule 3 Commission :
Fire
Marine
‘
‘
Commission Paid
NOTES
Commission on Reinsurance Ceded
48,000
39,000
(23,000)
(2,000)
25,000
37,000
Fire
Marine
‘
‘
Schedule 4 Opening Expenses :
Expenses of Management
53,000
36,000
53,000
36,000
Schedule 5 Share Capital :
‘
Share Capital
20,00,000
20,00,000
Schedule 6 Reserve and Surplus :
‘
General Reserve
1,18,000
Contingency Reserve
Profit and Loss Account
39,000
(+)
2,06,400
3,63,400
Schedule 7 Borrowings :
‘
NIL
NIL
Schedule 8 Investments :
‘
392
Advanced Accounting - I
Central Government Securities deposited with RBI
Other Central Government Securities
State Government Securities
Share in Companies
(+)
Less : FVC Account
(-)
19,21,000
1,23,000
2,22,000
2,49,000
25,15,000
1,14,000
24,01,000
Schedule 10 Fixed Assets :
‘
Furniture
12,000
Buildings
87,000
Office Equipments
(+)
Accounts of General
Insurance Business :
Balance Sheet
30,000
1,29,000
NOTES
Schedule 11 Cash and Bank Balances :
‘
Cash in Hand
Cash at Bank
56,000
(+)
1,04,000
1,60,000
Schedule 12 Other Current Assets :
‘
Due from other Insurers
27,000
Interest Accrued
25,000
Tax deducted at source
Premium Due (‘ 28,000 + ‘ 20,000)
9,000
(+)
48,000
1,09,000
Schedule 13 Current Liabilities :
‘
Claim Outstanding
(‘ 17,000 + ‘ 6,000)
Due to Others
23,000
(+)
43,000
66,000
Schedule 14 Provisions :
‘
Unexpired Risk Reserve
Additional Reserve
2,67,500
(+)
1,69,100
4,36,600
Advanced Accounting - I
393
Accounts of General
Insurance Business :
Balance Sheet
11.6 Key Terms
(a)
NOTES
Joint Venture :
Joint Venture is contractual arrangement whereby two or more parties
undertake an economic activity, which is subject to joint control.
(b)
Joint Control :
Joint control is the contractual agreed sharing power to govern the financial
and operating policies of an economic activity to obtained benefits form it.
(c)
Associate :
Associate is an enterprise in which the company has significant influence
and which is neither a subsidiary nor joint venture of the company
(d)
Significant influence :
Significant influence means participation in the financial and operating policy
decisions of a company, but not necessarily control of those policies personnel or
dependence on technical information. Significant influence may be gained by share
ownership, status or agreement.
(e)
Short-term Loans :
Short-term loans shall include those, which are repayable within 12 months
of the Balance-Sheet date. Long term loans shall be the loan other than shortterm loans.
11.7 Questions and Exercises
I.
Objective Questions
A
Multiple Choice Question
1)
For every Insurance Company carrying on exclusively the business as
reinsurer the minimum paid-up equity capital is ‘ ..... crore.
(a) 200
(b) 250
(c) 150
(d) 300
(2)
While preparing the financial statements of insurance companies the Segment
Reporting by the insurer shall be in conformity with the .....
(a) AS - 13
(b) AS - 17
394
Advanced Accounting - I
(c) AS - 3
(d) AS - 19
(3)
Accounts of General
Insurance Business :
Balance Sheet
The Financial Statements of insurance companies shall disclose premiums,
less reinsurance written from business in and outside India by way of ......
(a) Schedule 1 of Revenue Account.
NOTES
(b) Schedule 6 of Balance Sheet.
(c) Notes to Balance Sheet.
(d) Schedule 3 of Revenue Account.
(4)
A Reserve created by the General Insurance Business to meet any loss
due to natural calamity is termed as ....
(a) Secret Reserve.
(b) Capital Reserve
(c) Natural Reserve.
(d) Catastrophe Reserve.
Ans : (1 - a), (2 - b), (3 - 3c), (4 - d).
II
Long Answer Questions.
1)
State in brief the importance of preparing a Balance-Sheet as a part of
financial statements of Insurance Companies.
2)
‘The insurer while preparing the financial Statements of insurance companies
shall be in conformity with the Accounting Standards issued by the ICAI.’
Explain.
3)
Explain in brief the separate disclosures forming part of financial statements
of insurance companies by way of Notes to Balance-Sheet.
4)
Give the form B - of Balance - Sheet to be prepared by the insurer in
general Insurance Business.
III.
Practical Problems
1)
From the following ledger balances of Hindustan General Insurance Co.
Ltd, Himmatpur prepare the Balance Sheet as on 31st March, 2012
Advanced Accounting - I
395
Accounts of General
Insurance Business :
Balance Sheet
NOTES
‘
Authorised Capital :
1,00,000 Equity shares of ‘ 100 each
Subscribe end fully paid-up capital
General Reserve
Fire Department Fund
Marine Department Fund
Miscellaneous Department Fund
Amount due to other insurers
Sundry Creditors
Employee’s Security Deposit Fund
Profit and Loss Appropriation Account (Cr.)
Agent’s Balances (Dr.)
Outstanding Premiums
Interest accrued but not due
Amount due from other insurers
Employees Security Deposit Investments
Deposit with Electricity Supply Company
Sundry Debtors
Cash and Bank Balance
Furniture and Fixtures
Motor Car
Estimated Liability in respect of Outstanding Claims
1,00,00,000
28,00,000
65,000
9,50,000
5,30,000
4,10,000
9,25,300
10,11,700
6,600
5,500
1,10,000
10,18,400
4,300
26,01,000
6,600
500
14,500
8,10,000
85,000
83,800
8,70,000
The company has deposited 3% Government of Indian Loan 2016 of the
face value of ‘ 12,00,000 valued at ‘ 10,80,000 with RBI under the Insurance
Act and has on hand Preference Shares of Companies valued at ‘ 6,24,000 and
Equity Shares of Companies Valued ‘ 11,36,000.
2)
The following are the ledger balances extracted from the Books of
Maharashtra Fire Insurance Co. Ltd. Mumbai.
Particulars
Claims paid
20,000
22,000
Premium Less : Reinsurance
80,000
1,00,000
Commission on Direct Business
4,000
5,000
Commission on Reinsurance Accepted
3,000
4,000
Bad Debts
1,800
2,000
Commission on Reinsurance Ceded
6,000
7,000
42,000
48,000
700
800
2,000
3,000
800
1,000
Expenses of Management
Legal charges in respect of claims
Reinsurance recoveries
396
Advanced Accounting - I
As on
As on
31-03-2011 31-03-2012
‘
‘
Bad Debts recovered
You are required to prepare Revenue Accounts for the year ending 31-032011 and 31-03-2012 after talking into account the following additional information.
Accounts of General
Insurance Business :
Balance Sheet
a)
Total amounts of estimated liability in respect of outstanding claims as on
31-03-2010, 31-03-2011 and 31-03-2012 were ‘ 3,000, ‘ 4,000 and ‘ 5,000
respectively.
b)
Reserve for Unexpired Risk at 31-03-2010 was ‘ 60,000 and Additional
Reserves on the same date were ‘ 6,000.
NOTES
c)
Additional Reserves are to be increased by 10% of the net premia income
for the year ending 31-03-2011 and 31-03-2012.
3)
From the following ledger balances of Bharat General Insurance Company
Limited, Kolkata as on 31-03-2012 prepare a)
Separate Revenue Accounts and (b) Profit and Loss Account for the year
ended 31-03-2012.
Particulars
Insurance Fund as on 1-4-2011
Fire
Marine
‘
‘
3,75,000
12,30,000
7,500
18,000
75,000
60,000
2,00,000
4,00,000
Commission earned on Reinsurance
45,000
90,000
Claims unpaid at the end of the year
1,60,000
2,30,000
Commission Paid
1,35,000
1,62,000
75,000
-
Premium Less Reinsurance
8,00,000
16,20,000
Outstanding Premium on 31-03-2012
1,00,000
-
-
10,000
2,17,500
6,00,000
Bad Debts
Claims Outstanding at the beginning
Claims paid during the year
Additional Reserve on 1-4-2011
Survey Cost
Management Expenses
Other items of expenses and income are as follows :
‘
Depreciation
Interest and Dividends Cr.
Income - tax on above
Difference in Exchange Cr.
51,000
(Gross)
25,000
4,000
450
Audit Fees
3,300
Director Fees
7,500
Share Transfer Fees Cr.
1,200
Sundry Receipts
7,500
Advanced Accounting - I
397
Accounts of General
Insurance Business :
Balance Sheet
4)
From the following ledger balances of Nav Bharat General Insurance Co.
Ltd., Chennai prepare Revenue Accounts of Fire Dept., and Marine Dept. and
Profit and Loss Account for the year ended 31-03-2012.
‘
NOTES
Depreciation
52,500
Interest and Dividends recieved
21,000
Difference in Exchange Cr.
450
Balance of Fund as on 1-4-2011
•
Fire Fund
•
Marine Fund
3,75,000
12,30,000
Bad Debts •
Fire
•
Marine
7,500
18,000
Audit Fees
1,800
Directors Fees
7,500
Share Transfer Fees
1,200
Claims Outstanding at the beginning at the year :
•
Fire
75,000
•
Marine
60,000
Claim paid during the year •
Fire
2,00,000
•
Marine
4,00,000
Claims Outstanding at the end of the year •
Fire
1,60,000
•
Marine
2,30,000
Commission paid •
Fire
1,35,000
•
Marine
1,62,000
Additional Reserve on 1-4-2011
•
Fire
•
Marine
Miscellaneous Receipts
75,000
7,500
Premium Less Reinsurance
•
Fire
•
Marine
9,00,000
16,20,000
Management Expenses :
•
Fire
2,17,500
•
Marine
6,00,000
Commission Earned on Reinsurance Ceded -
398
Advanced Accounting - I
•
Fire
45,000
•
Marine
90,000
In addition to usual reserves of 50% (Fire Dept.) and 100% (Marine
Dept.) of premiums, Additional Reserves in case of Fire Insurance is to be
increased by 5% Net Premiums.
Accounts of General
Insurance Business :
Balance Sheet
5)
Following is the Trial Balance of Reliable Insurance Co. Ltd., Raipur as
on 31st March, 2012.
Particulars
Debit
Credit
‘
‘
NOTES
Claims Paid -
•
Fire
6,000
•
Marine
3,700
Commission •
Fire
54,800
•
Marine
44,700
Managements Expenses :
•
Fire
36,600
•
Marine
14,200
Income Tax on Investment
1,900
Director’s Fees
5,800
Depreciation on Furniture
Contribution to EPF
400
1,500
Investment in Government Securities
2,59,100
Debenture of Land Mortgage Bank
2,93,500
State Government Loan
National Savings Certificates
Shares in Companies
52,000
1,00,000
30,000
Outstanding Premium •
Fire
70,400
•
Marine
59,600
Accrued Interest
3,600
Sundry Debtors
7,300
Fixed Deposits - Employees Securities
6,500
Fixed Deposits - Employees PFI
6,800
Cash and Bank Balance
65,400
Furniture Less Depreciation
3,200
Books
1,000
Advanced Accounting - I
399
Accounts of General
Insurance Business :
Balance Sheet
Reserve for Unexpired Risk on 1-4-2011
•
Fire
•
Marine
1,20,000
22,000
Additional Reserves on 1-4-2011
NOTES
•
Fire
•
Marine
16,500
7,500
Premium Less Reinsurance
•
Fire
1,65,300
•
Marine
1,11,800
Outstanding Claims on 1-4-2011
•
Fire
•
Marine
1,900
100
Invest on Investment
19,700
Miscellaneous Receipts
100
Share Capital
35,000 Shares of Rs. 10 each
3,50,000
General Reserve
1,27,800
Employee Provident Deposits
6,800
Employee Security Fund
6,500
Sundry Creditors
1,38,000
Contingency Reserve
28,000
Investment Fluctuation Fund
Total
6,000
11,28,000
11,28,000
Additional Information :
(a)
Outstanding Claims on 31-03 2012 amounted to Fire - ‘ 300 and Marine ‘ 6,700.
(b)
Provide ‘ 10,000 for Taxation.
(c)
Create a Reserve of Unexpired Risks at 40% of premium.
(d)
Additional Reserve for Unexpired Risk @ 10% is also to be created.
You are required to prepare -
400
Advanced Accounting - I
i)
Fire Insurance and Marine Insurance, Revenue Account and
ii)
Profit and Loss Account for the year ended 31-3-2012.
11.8 Further Reading
•
Shukla M. C., Grewal T. S. and Gupta S. C. - Advanced Accounts - New
Delhi - S Chand and Co. Pvt. Ltd. - 2013
•
Maheshwari S. N. and Maheshwari S. K. - Corporate Accounting - New
Delhi - Vikas Publishing House Pvt. Ltd. - 2013.
Accounts of General
Insurance Business :
Balance Sheet
NOTES
Advanced Accounting - I
401