Financial Accounting and Auditing Paper VII PDF

31 T.Y.B.COM. SEMESTER - V FINANCIALACCOUNTING AND AUDITING -VII FINANCIAL ACCOUNTING SUBJECT CODE : 23101  © UNIVERSITY OF MUMBAI Prof. Suhas Pednekar Vice-Chancellor, University of...

31 T.Y.B.COM. SEMESTER - V FINANCIALACCOUNTING AND AUDITING -VII FINANCIAL ACCOUNTING SUBJECT CODE : 23101  © UNIVERSITY OF MUMBAI Prof. Suhas Pednekar Vice-Chancellor, University of Mumbai, Prof. Ravindra D. Kulkarni Prof. Prakash Mahanwar Pro Vice-Chancellor, Director, University of Mumbai, IDOL, University of Mumbai, Programme Co-ordinator : Prof. Rajashri Pandit Asst. Prof. in Economic, Incharge Head Faculty of Commerce, IDOL, University of Mumbai, Mumbai Course Co-ordinator : Mr. Vinayak Vijay Joshi Asst. Professor IDOL, University of Mumbai, Mumbai Course Writer : Mr. Vinayak Vijay Joshi Asst. Professor IDOL, University of Mumbai, Mumbai : Dr. Sarswathi Moorthy Associate Professor, Ramniranjan Jhunjhunwala College of Arts, Science and Commerce (Autonomous) Ghatkopar (W), Mumbai-86. : Dr. Sanchita Sushanta Roy Asst. Professor, Smt.K.G. Mittal, College, Malad (W), Mumbai-64. : Ms. Neha Bhatia Asst. Professor, R.D. National College, Bandra (W), Mumbai- 50. : Ms. Komal Tiwari Asst. Professor, S.M.Shetty College of Science, Commerce & Management Studies, Powai, Mumbai-76. August 2022, Print - 1 Published by : Director, Institute of Distance and Open Learning , University of Mumbai, Vidyanagari, Mumbai - 400 098. DTP Composed : Mumbai University Press Printed by Vidyanagari, Santacruz (E), Mumbai  CONTENTS Unit No. Title Page No. 1. Preparation of Final Accounts of Companies 01 2. Preparation of Final Accounts of Companies 44 3. Internal Reconstruction 71 4. Buy Back of Equity Shares 118 5. Investment Accounting (W.R.T Accounting Standred-13) 141 6. Ethical Behavior And Implications For Accounts 178   Revised Syllabus of Courses of B.Com. Programme at Semester V with Effect from the Academic Year 2022-2023 Elective Courses (EC) 1 A. Discipline Specific Elective (DSE) Courses Group A: Advanced Accountancy 1. Financial Accounting and Auditing VII - Financial Accounting Modules at a Glance Sr. Modules No. of No. Lectures 1 Preparation of Final Accounts of Companies 15 2 Internal Reconstruction 15 3 Buy Back of Shares 10 4 Investment Accounting (w.r.t. Accounting Standard- 13) 12 5 Ethical Behaviour and Implications for Accountants 08 Total 60 Sr. No. Modules / Units 1 Preparation of Final Accounts of Companies Relevant provisions of Companies Act related to preparation of Final Account (excluding cash flow statement) Preparation of financial statements as per Companies Act. (excluding cash flow statement) AS 1 in relation to final accounts of companies (disclosure of accounting policies) Adjustment for 1. Closing Stock 2. Depreciation 3. Outstanding expenses and income 4. Prepaid expenses and Pre received income 5. Proposed Dividend and Unclaimed Dividend 6. Provision for Tax and Advance Tax 7. Bill of exchange ( Endorsement, Honour, Dishonour) 8. Capital Expenditure included in Revenue expenditure and vice versa eg- purchase of furniture included in purchases 9. Unrecorded Sales and Purchases 10. Good sold on sale or return basis 11. Managerial remuneration on Net Profit before tax 12. Transfer to Reserves 13. Bad debt and Provision for bad debts 14. Calls in Arrears 15. Loss by fire ( Partly and fully insured goods) 16. Goods distributed as free samples. 17. Any other adjustments as per the prevailing accounting standard. 2 Internal Reconstruction Need for reconstruction and company law provisions Distinction between internal and external reconstructions. Methods including alteration of share capital, variation of shareholder rights, sub division, consolidation, surrender and reissue / cancellation, reduction of share capital with relevant legal provisions and accounting treatment for same. 3 Buy Back of Shares Company Law / Legal provisions (including related restrictions, power, transfer to capital redemption reserve account and prohibitions) Compliance of conditions including sources, maximum limits and debt equity ratio. Cancellation of Shares Bought back(Excluding Buy Back of minority shareholding) Sr. No. Modules / Units 4 Investment Accounting (w.r.t. Accounting Standard- 13) For shares (variable income bearing securities) For debentures/Preference. shares (fixed income bearing securities) Accounting for transactions of purchase and sale of investments with ex and cum interest prices and finding cost of investment sold and carrying cost as per weighted average method (Excl. brokerage). Columnar format for investment account. 5 Ethical Behaviour and Implications for Accountants Introduction, Meaning of ethical behavior Financial Reports What is the link between law, corporate governance, corporate social responsibility and ethics? What does the accounting profession mean by the ethical behavior? Implications of ethical values for the principles versus rule based approaches to accounting standards The principal based approach and ethics The accounting standard setting process and ethics The IFAC Code of Ethics for Professional Accountants Ethics in the accounting work environment A research report Implications of unethical behavior for financial reports Company Codes of Ethics The increasing role of whistle Blowing Why should student learn ethics?  1 PREPARATION OF FINAL ACCOUNTS OF COMPANIES Unit Structure: 1.0 Objectives 1.1 Introduction 1.2 Provisions relating to Financial Statements under the New Companies Act 1.3 AS 1 Disclosure of Accounting policies 1.4 Adjustments in Financial statements 1.5 Preparation of financial accounts in vertical format 1.6 Vertical Financial Statement 1.7 Statement of Profit and Loss 1.0 OBJECTIVES After studying this chapter, you will be able to understand  the nature of the financial statements;  the Provisions relating to financial statements  Accounting Standards 1  Various adjustments with respect to the preparation of financial statements 1.1 INTRODUCTION One of the goals of any organisation is to publish relevant information to various stakeholders so that they can make informed decisions. A stakeholder is anyone who has an interest in the company. Different stakeholders may have monetary or non-monetary stakes. The stakes can be direct or indirect, active or passive. The business owner and lenders would have financial stakes. Non-financial stakes in the company will be held by the government, consumers, or researchers. Users, also known as stakeholders, are typically classified as internal or external based on whether they are located within or outside of the company. As a result, every firm is ultimately interested in knowing the business's end result. Because these are the final accounts prepared at the end of the fiscal year, they are referred to as final accounts. They ultimately serve the purpose of maintaining records. Their goal is to investigate the impact of various incomes and expenses over the course of the year, as well as the resulting profit or loss. The trading 1 Financial Accounting account, profit and loss account, and balance sheet are all part of the final accounts. 1.2 PROVISIONS RELATING TO FINANCIAL STATEMENTS UNDER THE NEW COMPANIES ACT According to Section 128 of the Companies Act of 2013, every company must prepare and keep at its head office books of accounts and other relevant books and papers and financial statements for each year that give a true and fair view of the company's state of affairs, including that of its branch office or offices, if any, and explain the transactions effected both at the registered office and its branches, and that such books must be kept on an accrual basis and in accordance with the Companies Act of 2013. All or any of the aforementioned books of account and other relevant papers may be kept at such other location in India as the Board of Directors may decide, and where such a decision is made, the company shall file with the Registrar a notice in writing giving the full address of that other location within seven days of that decision. The corporation may store prescribed books of accounts or other relevant papers in electronic form. The books of account and other books and papers kept by the company within India shall be open for inspection by any director during business hours at the registered office of the company or at such other place in India, and copies of such financial information kept outside the country shall be kept and produced for inspection by any director subject to such conditions as may be prescribed. All assistance that the company can reasonably be expected to provide must be provided by the company's executives and other employees to the person conducting the inspection. 1.2.1 Nature of Financial Statements 1. Section 129 of companies act 2013, provides for preparation of financial statements. 2. Financial statements include the balance sheet, profit and loss account/income and expenditure account, cash flow statement, statement of changes in equity, and any accompanying explanatory notes. 3. Section 129 replaces existing Section 210. It states that the financial statements must give a true and fair picture of the company's financial situation and must adhere to the accounting standards notified under new section 133. 4. It is also stated that financial statements must be prepared in the format specified in new Schedule III of the Companies Act of 2013. 2 5. It should be noted that the provisions in the new schedule III for Preparation of final accounts preparing the balance sheet and profit and loss statement are similar to of companies those in the old schedule VI. 6. In addition, the new Schedule III includes detailed instructions for preparing consolidated financial statements, as consolidation of subsidiary company accounts is now required under section 129. 7. It should be noted that, for the first time, a provision in the new section 129(3) states that if a company has one or more subsidiaries, the company and all subsidiaries must prepare a consolidated financial statement in the form specified in the new Schedule III of the Companies Act, 2013. 8. In addition, the firm must attach to its financial statement a separate statement covering the significant aspects of the financials of the subsidiary companies in the form prescribed by the regulations. 9. If the firm owns a stake in an associate company or a joint venture, the accounts of that company and the joint venture must be merged. 10. As a result, an associate company has been defined as a company with significant influence, defined as owning 20% of the company's total share capital or having power over business decisions under an agreement. 11. The Central Government has the authority to exempt any company from any of the section's requirements. 1.2.2 Objectives of Financial Statements  Stakeholders in a company rely heavily on financial statements to understand how it operates. They represent the company's true state of affairs. Here are some examples of financial statement objectives:  These accounts accurately reflect the economic assets and liabilities of a company. External stakeholders, such as investors and governments, would not otherwise have access to this information.  They help to forecast a company's ability to generate profits. Shareholders and investors can use this information to make financial decisions.  These assertions demonstrate a corporation's management effectiveness. As evidenced by these statements, a corporation's profitability determines how well it performs.  They also help readers understand the accounting practises used in these statements. This allows for a more thorough understanding of statements. 3 Financial Accounting  These statements also include data on the company's financial flows. Investors and creditors can use this information to forecast the company's liquidity and financial needs.  Finally, they discuss the social impact of business. This is due to the fact that it demonstrates how the company's external circumstances impact its operations. 1.3 A S 1 – DISCLOSURE OF ACCOUNTING POLICIES AS 1 – Disclosure of Accounting Policies The information contained in an organization's financial statements represents its financial status. Accounting policies can have a large impact on profit or loss. Accounting policies vary from organisation to organisation. Significant accounting policies must be disclosed in order for the financial statements to be accessible. In some cases, the disclosure is required by law. In recent years, Indian organisations have begun to provide a clear explanation of their accounting policies in their annual reports to shareholders. Many organisations include their accounting standards in the notes to their financial statements, but the disclosures are inconsistent. In other words, in some cases, the disclosure is included in the accounting, whereas in others, it is provided as supplemental information. This standard's goal is to improve financial statement understanding by establishing the practise of disclosing major accounting policies followed and how they are communicated in financial statements. Transparency would also make comparing the financial statements of different organisations easier. Nature of Accounting Policies Accounting policies refer to accounting principles and the techniques used by a company to put these principles into practise in the preparation of financial statements. There is no universal set of accounting policies that applies in all circumstances. Because of the variety of contexts in which organisations operate, alternative accounting concepts are permissible. The selection of appropriate accounting principles requires considerable judgement on the part of the organization's management. In recent years, the numerous standards of the Institute of Chartered Accountants of India, combined with the efforts of the Government and other regulatory authorities, have reduced the number of permissible alternatives, particularly for corporates. While future efforts in this area are likely to reduce the number even further, the availability of alternative accounting principles is unlikely to be completely eliminated given the variety of scenarios that organisations face. 4 Areas in which differing Accounting Policies are possible Preparation of final accounts of companies The following are examples of areas in which different accounting policies may be adopted by organisations. 1. Methods of depreciation, depletion and amortisation 2. Treatment of expenditure during construction 3. Conversion or translation of foreign currency items 4. Valuation of inventories 5. Treatment of goodwill 6. Valuation of investments 7. Treatment of retirement benefits 8. Recognition of profit on long-term contracts 9. Valuation of fixed assets 10. Treatment of contingent liabilities The above list of examples is not exhaustive. Considerations in the Selection of Accounting Policies  The primary concern in the adoption of accounting policies by an organisation is that the financial statements provide a true and fair representation of the financial situation for the period. The following are the primary considerations that guide the selection and application of accounting policies for this purpose:  Prudence: Because future events are unpredictable, earnings are not anticipated but recognised only when they are earned, which is not always in cash. Nonetheless, despite the fact that the amount cannot be determined with certainty and is only an estimate, provision is made for all known liabilities and losses.  Substance Over Form: In financial statements, the accounting treatment and presentation of transactions and events should be guided by their substance rather than their legal form.  Materiality: All "material" facts, that is, items about which financial statements should be disclosed, should be disclosed. Disclosure of Accounting Policies The primary concern in the adoption of accounting policies by an organisation is that the financial statements provide a true and fair representation of the financial situation for the period. The following are the primary considerations that guide the selection and application of accounting policies for this purpose: Prudence: Because future events are unpredictable, earnings are not anticipated but recognised only when they are earned, which is not always in cash. Nonetheless, despite the fact that the amount cannot be determined with certainty and is only an estimate, provision is made for all known liabilities and losses. 5 Financial Accounting Substance Over Form: In financial statements, the accounting treatment and presentation of transactions and events should be guided by their substance rather than their legal form. Materiality: All "material" facts, that is, items about which financial statements should be disclosed, should be disclosed. If an accounting policy change is implemented that has no significant impact on the financial statements for the current period but is likely to have a significant impact in subsequent periods, the fact of the change must be appropriately declared in the period in which the change is implemented. Accounting rule or change disclosure is not a remedy for incorrect or inappropriate accounting treatment of items. Remember the following:  All key accounting policies used in the preparation and presentation of financial statements must be disclosed.  The disclosure should be included in the financial statements, ideally all at one place.  Any accounting policy change that has a significant impact on the current period or is expected to have a significant impact on subsequent periods should be declared. If accounting policies change and have a significant impact on the current period, the amount by which any item in the financial statements is impacted should be declared to the extent that it can be computed. Where such a figure cannot be determined, either completely or partially, the fact should be stated.  If financial statements are prepared using the basic accounting assumptions of Going Concern, Consistency, and Accrual, specific disclosure is not required. If an important accounting principle is not followed, a fact must be revealed. 1.4 ADJUSTMENTS IN PREPARATION OF FINANCIAL STATEMENTS The accrual concept of accounting, which states that all income earned during an accounting period should be recorded regardless of whether it has been paid or not, is where it all really begins. Similarly, regardless of the actual payment, all expenses incurred over time should be documented. This is the main reason for final accounting adjustments. If such adjustments in the compilation of financial statements are overlooked, the numbers shown by the company in their final accounts will not be precise and true. Any necessary adjusting entries are reflected in the published journal entries. 6 Need for Adjustments: Preparation of final accounts Adjustments are done to: of companies 1. To record the unrecorded transactions. 2. To provide for anticipated losses. 3. To rectify the located errors. 4. To present fair and unbiased presentation of assets and liabilities. Important Point to be Noted while passing adjustment entries:  The CGST and SGST will be levied on the sums if they are connected to an intra-state transaction.  If the sums are connected to an interstate transaction, IGST will be levied on them. List of Adjustments in Final Accounts 1. Closing Stock 2. Depreciation 3. Outstanding expenses and income 4. Prepaid expenses and Pre received income 5. Proposed Dividend and Unclaimed Dividend 6. Provision for Tax and Advance Tax 7. Bill of exchange (Endorsement, Honour, Dishonour) 8. Capital Expenditure included in Revenue expenditure and vice versa eg- purchase of furniture included in purchases 9. Unrecorded Sales and Purchases 10. Good sold on sale or return basis 11. Managerial remuneration on Net Profit before tax 12. Transfer to Reserves 13. Bad debt and Provision for bad debts 14. Calls in Arrears 15. Loss by fire (Partly and fully insured goods) 16. Goods distributed as free samples. 17. Any other adjustments as per the prevailing accounting standard. Note: Adjustments would appear outside the trial balance. 1. Closing Stock The closing stock is the inventory that was held at the end of the fiscal year. We keep an actual account called Closing Stock to obtain information on closing stock. It provides information on the value of unsold stock at the end of the fiscal period. Closing stock is valued by physically verifying it and valuing it at cost or market price, whichever is lower. Because closing stock is determined by physical verification, which takes time to bring up the value, the closing stock usually does not appear in the Trial Balance when the accounts are finalised. As a result, it appears as part of the adjustment entry, which must be completed before Final Accounts are prepared. 7 Financial Accounting If the closing stock is shown in the trial balance, it means that the closing stock adjustment has already been made, and it will be shown as a current asset in the balance sheet. The following accounting treatment is used in the preparation of the accounts: 1st Current Assets Inventories Effect Assets (c) Changes in inventories of 2nd Revenue Expenses finished goods, work-in-progress Effect Statement and stock-in-trade Journal Entry for Adjustment of Closing Stock in Final Accounts Closing Stock A/C Dr To Trading A/C (Recording ending inventory) Closing stock is valued at cost or market, whichever is less. 2. Depreciation: Depreciation occurs when the value of an asset decreases due to wear and tear or the passage of time. The amount of depreciation represents the business's operating expenses. If depreciation is not accounted for, the period's net profit will be overstated. Even on the Balance Sheet, the asset value should not be shown at its true value. The double effect of depreciation is: 1. Depreciation is shown on the debit side of Profit and Loss Account. 2. The amount of depreciation is deducted from the concerned asset, in the asset side of the Balance Sheet. A. When Provision for Depreciation is Not Maintained Journal Entry When Provision is Not Maintained Depreciation A/C Dr To Asset A/C (Charging depreciation on fixed asset) Profit and Loss A/C Dr To Depreciation A/C (Depreciation charged transferred to Profit & Loss A/C) 8 B. When Provision for Depreciation is Maintained Preparation of final accounts of companies Journal Entry When Provision is Maintained Depreciation A/C Dr To Provision for Depreciation A/C (Being provision for depreciation made) Step 2 Profit and Loss A/C Dr To Depreciation A/C (Depreciation charged transferred to Profit & Loss A/C) 3. Outstanding expenses and income A. Outstanding Expenses An expense that has been incurred but has not been paid within the current fiscal year, such as salary, rent, interest, and so on. Adjustments in final accounts are made to minimise overstating earnings. Outstanding rent, salary, wages, interest, and so forth.  It is not generally included in the Trial Balance but is provided as additional information following the trial balance.  If it is included in the Trial Balance, it signifies that the expense has already been adjusted and is thus solely presented as a liability on the Balance Sheet.  If it is given after the Trial Balance (as an adjustment), it must be accounted for as an expense for the current fiscal year and thus debited to the Trading and Profit and Loss Account by adding it to the existing amount of the respective expense. Furthermore, because such an item is payable by the entity, it is recorded as a liability in the Balance Sheet by making the following adjustment: Expenses A/c …Dr. Input CGST A/c …Dr. Input SGST A/c …Dr. or Input IGST A/c …Dr To Outstanding Expenses A/c (Being unpaid expenses now recorded in the books B. Accrued Income or Outstanding Income These expenses are sometimes known as income generated but not yet received. Accrued income is income that the company has already earned but has not yet received. Examples include accumulated rent, commission due but not received, and so forth. 9 Financial Accounting Journal Entry for Adjustment of Accrued Income in Final Accounts Accrued Income A/C Dr To Income A/C To Output CGST A/C To Output SGST A/C To Output IGST A/C (Recording income earned but not received) Treatment of Accrued Income Adjustment in Financial Statements  Trading Account: No effect  Profit & Loss Account: Show on the credit side (Add to respective income)  Balance Sheet: Show on the assets side (usually under the head current assets) 4. Prepaid expenses and Pre-received income A. Pre-paid Expenses These are also known as expenses paid in advance. Prepaid expenses are those paid in advance for a benefit that has not yet been obtained. It is critical to record profits near the conclusion of an accounting year to avoid understating them. Prepaid rent, prepaid interest, prepaid insurance, and so forth are examples. Journal Entry for Adjustment of Prepaid Expenses in Final Accounts Prepaid Expense A/C Dr To Expense A/C (Recording expenses paid in advance, GST paid is not transferred in Prepaid Expense A/C) B. Pre-received Income or Income Received in Advance It is also known as unearned income. Income received in advance is income that the company has already received but has not yet earned. Rent received in advance, commission earned in advance, and so forth. 10 Journal Entry for Adjustment of Income Received in Advance in Final Preparation of final accounts Accounts of companies Income A/C Dr To Income Received in Advance A/C To Output CGST A/C To Output SGST A/C (Recording income received but not earned) Treatment of Income Received in Advance in Financial Statements  Trading Account: No effect  Profit & Loss Account: Show on the credit side (Subtract from the respectiveincome)  Balance Sheet: Show on the liability side (usually under the head current liabilities) 5. Proposed Dividend and Unclaimed Dividend Dividends: A dividend is a share of profits and retained earnings that a company pays out to its shareholders. When a company generates a profit and accumulates retained earnings, those earnings can be either reinvested in the business or paid out to shareholders as a dividend. The annual dividend per share divided by the share price is the dividend yield. Legal Provisions regarding Dividend A company may pay dividends from any or all of the three following sources: (i) Profits of the current year (ii) Undistributed profits of previous years after providing for depreciation as per Schedule II of the Companies Act, 2013 (iii) Out of both or (iv) Moneys provided by the Central or any State Government for the payment of dividends in pursuance of a guarantee given by the government concerned. Proposed Dividend: According to Amended Accounting Standard 4 read with Schedule 3 of the Companies Act 2013, proposed dividends should only be shown as a footnote to the balance sheet. Proposed Dividend accounting treatment and presentation in the final Financial Statement shall be as follows: 11 Financial Accounting Accounting Data Entry: No accounting entry should be made for the Board of Directors' recommendation of the final Dividend if it is made after the Financial Statement's closing date. Profit and Loss Account Treatment: The proposed dividend may have no effect on the company's profit and loss statement. The effect of such dividend, however, shall be taken in the fiscal year in which it is actually declared by shareholders in the Annual General Meeting. Presentation in the Balance sheet: Dividend proposed by the Board of Directors for the financial year, 2020-21 is not a liability till it has been approved by the shareholders in the ensuing Annual General Meeting. Interim Dividend Though dividends can only be declared by a shareholder resolution, if the company's articles allow, the Directors can declare an interim dividend between two annual general meetings. When an interim dividend is paid, the payment will be recorded as follows: Interim Dividend A/c Dr. To Bank A/c The interim dividend paid during a year will appear in the Company's Trial Balance as of the end of the accounting period and will be transferred to the debit side of the profit and loss appropriation a/c as an item of profit appropriation. Unclaimed Dividend If a dividend is transferred to the Dividend Account but not claimed by the shareholder within 30 days of its declaration, the Company must transfer the unpaid amount to the 'Unpaid Dividend Account' within 37 days of its declaration. The company must transfer any amount transferred under subsection (1) to the Unpaid Dividend Account within ninety days. Any money transferred to a company's Unpaid Dividend Account in accordance with this section that remains unpaid or unclaimed for seven years (7 years and 37 days from the date of dividend declaration) from the date of such transfer shall be transferred by the company, along with any interest accrued. 6. Provision for Tax and Advance Tax A. Provision for Income Tax: The tax that the company expects to pay in the current year is calculated by making adjustments to the company's net income by temporary and permanent differences, which are then multiplied by the applicable tax rate. Income Tax Provision Formula = Income Earned Before Tax * Tax Rate Profit drives the creation of this provision. This is the entry below the line. After deducting necessary items from gross profit (for example, depreciation recorded in books of accounts and allowable under income tax rules), taxable income is calculated. On that taxable profit, we must 12 make provision for income tax at the applicable rate. The accounting entry Preparation of final accounts will be as follows: of companies Profit & Loss A/C DR (provision for income tax) To Provision for Income Tax A/C This provision being a liability, showed at “Capital & Liability” side of Balance Sheet in the bracket of “Other Liabilities”. B. Advance Income Tax: Advance tax refers to the payment of taxes in advance. In other words, "pay as you go." Advance tax is payable during the fiscal year if the tax payable is INR 10,000 or more (section 208). If the following conditions are met, the provisions of the advance tax do not apply to an individual resident in India (section 207) – 1. The resident individual has no income chargeable under the heading 'Profit and gain of business or profession'; and 2. The resident individual is 60 years of age or older at any time during the previous year. It should be noted that advance tax applies to all taxpayers; however, if the resident individual meets the above two conditions, he is exempt from making an advance tax payment. As per Income Tax Act, we have to pay advance income tax and that is showed at “Property & Assets” side of Balance Sheet in the bracket of “Other Assets”. Accounting entry will be as under : Advance Income Tax paid A/C Dr To Bank A/C In case of self-assessment tax also this entry is passed but the narration will be for self-assessment. 7. Bill of exchange (Endorsement, Honour, Dishonour) Meaning of Bill of Exchange According to the Negotiable Instruments Act 1881, a bill of exchange is defined as “an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of a certain person or to the bearer of the instrument”. ENDORSEMENT OF BILL OF EXCHANGE: "The person receiving the bill of exchange becomes the endorsee when the bill's holder signs the bill's reverse with the intention of transferring the property it contains (the right to receive money from the acceptor). "Endorsement" is the process through which a bill is moved from one person to another for the payment of debts. 13 Financial Accounting Endorsement of the bill refers to the process by which the creator or holder of the bill transfers the title of the bill in aid of his or her creditors. The person transferring the title is known as the "Endorser," while the person receiving the bill is known as the "Endorsee." Signing at the back of the bill constitutes an endorsement. Journal Entries in the Books of Endorser and Endorsee: When a bill of exchange is endorsed the following journal entries are made in the books of endorser and endorsee as the drawee will remain unaffected. Endorser's Journal (A) Endorsee's Journal (B) When a bill is endorsed: When a bill is endorsed: Endorsee's A/C......XXX Bill receivable Bill receivable A/C...........XXX A/C.........XXX Endorser's A/C..................XXX On the due date, the bill is presented to the acceptor No journal entry in the books of endorser and cash is received from when the bill is honoured at the date of him, the entry is: maturity. Cash A/C.........XXX Bill receivable A/C..........XXX Dishonour of Bill A bill is considered to be dishonoured when the drawee (the person who is obligated to pay) is unable to make the payment on the bill's maturity date. In this case, the drawee's obligation is reinstated. Bill dishonour can occur through either non-acceptance or non-payment. A dishonoured bill is the same as a bounced check. Dishonour by Non-Payment It is stated to be dishonoured of a bill of exchange by non-payment when the drawee of the bill of exchange fails to pay the bill on maturity to the drawer. Possible causes of non-payment dishonour  Because there are insufficient funds in the drawee's account.  Because of insolvency, the drawee is unable to pay.  The drawee simply refuses to pay. When a bill is dishonoured, any entries made at the time of receipt are reversed. 14 8. Capital Expenditure included in Revenue expenditure and vice Preparation of final accounts versa of companies a. Capital Expenditure incorrectly treated as Revenue Expenditure:Misclassifying a capital expenditure as a revenue expenditure has an impact on the expenditure, asset, and depreciation accounts. The initial journal entry exaggerates expenses while understating assets. A capital asset purchase journal entry, for example, debits an asset account and credits cash. An erroneous revenue expenditure journal entry debits expense while crediting cash. Because capital assets are depreciated on a regular basis, incorrectly classifying an asset understates the depreciation expense over time. An accountant can correct the error by reversing the initial journal entry, booking the correct entry, and recording any depreciation that is required. For example, furniture purchases may be included in purchases. b. Revenue Expenditure incorrectly treated as Capital Expenditure The result will be that expenses will be reduced. As a result, the profit figure for the year will be incorrect on the income statement. The non- current asset will be highlighted more. As a result, the non-current asset value in the Statement of Financial Position will be incorrect. Profit for the year will be overstated, as will non-current assets. 9. Unrecorded Sales and Purchases a. Unrecorded Sales Unrecorded Sales are revenues earned by an entity during an accounting period but not recorded during that period. The company usually records the sales in a later accounting period, which violates the matching principle, which states that revenues and related expenses should be recognised in the same accounting period. Unrecorded revenue should be accrued in the period in which it is earned, with a credit to the Accrued Revenue account and a debit to the Accounts Receivable account. You would then reverse this entry in the period when the customer is invoiced. b. Unrecorded Purchases When the purchases remain unrecorded in a financial year, the profits are overvalued as an expense item remains unrecorded. This affects the profitability as well as the position of the company is not properly reflected. The company has to now rectify it’s error by now recording the purchases and the other effect will be the trade payables will be increased. 10. Good sold on sale or return basis Goods sold on Sale on Approval is a business arrangement in which an individual or company interested in purchasing a specific item is granted permission to use the item for a set period of time. If the individual is satisfied with the item at the end of that time, they agree to purchase it. However, if the individual is dissatisfied for any reason, they have the option to return the item and are not obligated to buy it. 15 Financial Accounting If a potential customer approves the sale, the transaction is recorded as credit sales; otherwise, it is not recorded. However, if the customer has not given any approval as of the end of the fiscal year, the goods are considered unsold and must be included in the supplier's stock. 11. Managerial remuneration on Net Profit before tax A company may decide to pay its management a fixed percentage of its profits in the form of a commission. It is known as manager's commission, and it can be based on earnings before or after the commission is charged. A. Manager’s Commission Payable Before Charging the Commission In this case, the computation is as simple as multiplying the commission rate by the amount of net profit made by the business. Journal Entry for Adjustment of Manager’s Commission in Final Accounts Profit and Loss A/C Dr To Manager’s Commission Payable (Recording outstanding commission payable to managers) Treatment of Manager’s Commission in Financial Statements  Trading Account: No effect  Profit & Loss Account: Show on the debit side as an expense  Balance Sheet: Show on the liability side (usually under the head current liabilities) B. Manager’s Commission Payable After Charging the Commission In this situation, the calculation is based on the net profit remaining after deducting such a commission. The handling in the final account is the same in both circumstances. Calculation of Net Profit for Managerial Remuneration The net profit shown in financial documents such as the statement of financial performance (P&L statement) should not be used to compute director remuneration, according to the Companies Act. The Companies Act of 2013 now requires that net profit calculated in accordance with Section 198 of the Act be considered for CSR as well. In this section, we will discuss how to calculate net profit for managerial salary. 16  Preparation of final accounts Profit before tax as per P&L Statement xxxx of companies Add the following items if debited to P&L Statement before arriving profit before tax Managerial remuneration xxxx Provision for Bad doubtful debts xxxx Loss on sale/disposal/discarding of assets. xxxx Loss on sale of investments xxxx Provision for diminution in the value of investments xxxx fixed assets written off xxxx Fall in the value of foreign currency monetary assets xxxx Loss on cancellation of foreign exchange contracts xxxx Write off of investments xxxx Provision for contingencies and unascertained liabilities xxxx Lease premium written off xxxx Provision for warranty spares/supplies xxxx Infructuous project expenses written off xxxx Provision for anticipated loss in case of contracts xxxx Loss on sale of undertaking xxxx Provision for wealth tax xxxx compensation paid under VRS xxxx Less the following if credited to P&L statement for arriving at xxxx profit before tax: Capital profit on sale/disposal of fixed assets (the same should be added if the co., business comprises of buying & selling any such xxxx property or asset) and revenue profit (difference between original cost and WDV should not be deducted) Profit on sale of any undertaking or its part xxxx Profit on buy back of shares xxxx Profit/discount on redemption of shares or debentures xxxx 17 Financial Accounting Profit on sale of investments xxxx Compensation received on non-compete agreements xxxx Write back of provision for doubtful debts xxxx Write back of provision for doubtful advances xxxx Appreciation in value of any investments xxxx Compensation received on surrender of tenancy rights xxxx Profit on sale of undertaking xxxx Write back of provision for diminution in the value of xxxx investments Profit on sale of forfeited shares & shares of xxxx subsidiary/associated companies After computing the profit, the act's remuneration limits can be utilised to establish the maximum allowable remuneration. If the actual salary exceeds the maximum allowable remuneration, we must obtain approval from the Central Government. 12. Transfer to Reserves I. Section 123 (1) of the Companies Act, 2013 allows the Board of Directors to appropriate a portion of profits to the credit of a reserve or reserves. II Appropriation of a part of profit is sometimes made under law. (a) For example, the Banking Regulation Act requires that a fixed percentage of a banking company's profit be transferred to the General Reserve before any dividend can be distributed. (b) Transfer of a portion of profit to a reserve is also required where the company has agreed, at the time of loan raising, that before any portion of its profit is distributed, a specified percentage of the profit should be credited to a reserve for loan repayment and the amount should remain invested in a specified manner until the time for repayment arrives. III Apart from the aforementioned appropriations, it may also be necessary to provide for losses and depreciation arrears, as well as to exclude capital profit, as previously mentioned, in order to arrive at the amount of divisible profit. 13. Bad debt and Provision for bad debts A. Bad Debts Debts can be classified into three categories which are as under:  Bad Debts: It means which are uncollectable or irrecoverable debts. 18  Doubtful debts: It means which will be receivable or cannot be Preparation of final accounts ascertainable at the date of preparing the financial statements, in simple of companies words those debts which are doubtful to realize.  Good debts: It means which are not bad, i.e., neither there is the possibility of bad debts nor any doubt about its realization is known as good debts. Not all the debtors of a business may be able to pay 100% of their debts at all the time. This may lead to a loss to the receiving business and is termed as bad debts. Journal Entry for Adjustment of Bad Debts in Final Accounts Bad Debts A/C Dr To Debtor’s A/C (Recording bad debts) Step 2 Profit and Loss A/C Dr To Bad Debts A/C (Bad debts transferred to Profit & Loss A/C) Treatment of Bad Debts in Financial Statements Situation 1 – When bad debts are given inside the trial balance – No Adjustment, only show in P&L Situation 2 – When bad debts are given outside the trial balance as an adjustment – They are called further bad debts and adjustments in final accounts are posted.  Trading Account: No effect  Profit & Loss Account: Show on the debit side (add to bad debts already written off)  Balance Sheet: Show on the asset side (subtract from sundry debtors) Journal Entry for Adjustment of Further Bad Debts in Final Accounts Bad Debts A/C Dr To Debtor’s A/C (Recording further bad debts) B. Provision for Doubtful Debts The provision for doubtful debts is the estimated amount of bad debt that will arise from accounts receivable that have been issued but not yet collected. It is identical to the allowance for doubtful accounts. 19 Financial Accounting The accounting concept of prudence and conservatism cautions that each business should be ready to absorb all anticipated losses. Due to this, all businesses provide for possible bad debts arising due to non-payment by creditors in form of provision for doubtful debts. When Provision for Doubtful Debts does not Appear in Trial Balance Journal Entry for Adjustment of Provision for Doubtful Debts in Final Accounts Profit and Loss A/C Dr To Provision for Doubtful Debts A/C (Recording provision for doubtful debts) Treatment of Provision for Doubtful Debts in Financial Statements  Trading Account: No effect  Profit & Loss Account: Show on the debit side (calculate as % on Debtors)  Balance Sheet: Show on the asset side (subtract from sundry debtors) Note: Provisions do not reduce the amount due from debtors. Provision for Discount on Debtors Debtors are given a monetary discount as an incentive to make early payments. In some situations, the payment may be paid in the next fiscal year. This means that, according to the accrual accounting concept, such discounts should be regarded as a cost in the current year. When such a provision is made, it is referred to as a provision for discount on debtors. Journal Entry for Adjustment of Provision for Discount on Debtors in Final Accounts Profit and Loss A/C Dr To Provision for Discount on Debtors A/C (Recording provision for discount on debtors) Treatment of Provision for Discount on Debtors in Financial Statements  Trading Account: No effect  Profit & Loss Account: Show on the debit side (calculate on good debtors i.e. after adjusting bad debts & provision for doubtful debts)  Balance Sheet: Show on the asset side (subtract from sundry debtors) 14. Calls in Arrears Calls in Arrears and Calls in Advance Calls-In-Arrears If a shareholder is unable to pay the call amount due on allotment or any subsequent calls in accordance with the terms, the amount that becomes due is called Calls-In-Arrears. We have the option of transferring or not transferring the arrear amount due to allotment or calls to the Calls-in- Arrears Account. 20  Preparation of final accounts Methods of Accounting Treatment of Calls-In-Arrears of companies Without opening Calls-in-Arrears Account By opening Calls-in-Arrears Account Without opening Calls-in-Arrears Account Under this method, we credit the receipt from shareholders to the relevant call account and various call accounts will show debit balance equal to the total unpaid amount of calls.On a subsequent date, when we receive the amount of Calls-in-Arrears, we debit Bank Account and credit the relevant Call Account. 15. Loss by fire (Partly and fully insured goods) Loss by fire as well as accidental losses or abnormal losses occur when a company experiences any form of loss as a result of a fire, an accident, an earthquake, or another natural disaster. The loss is recorded in the profit and loss account and credited to the asset account. The stock of items may be destroyed, resulting in a drop in the firm's gross and net profit. GST is reversed on these items because the tax paid on them cannot be offset against the tax collected. A. If Goods are Not Insured Journal Entry for Abnormal or Accidental Loss in Final Accounts (Goods Not Insured) Profit and Loss A/C Dr To Trading A/C To Input CGST A/C To Input SGST A/C (Recording total value of abnormal loss) Treatment of Abnormal or Accidental Loss in Financial Statements (Goods Not Insured)  Trading Account: Show on the credit side (with the cost of goods destroyed)  Profit & Loss Account: Show on the debit side (with the cost of goods destroyed)  Balance Sheet: No effect 21 Financial Accounting B. If Goods are Insured Journal Entry for Abnormal or Accidental Loss in Final Accounts (Goods Insured) Accidental Loss A/C Dr To Trading A/C To Input CGST A/C To Input SGST A/C (Recording total value of abnormal loss) Step 2 Insurance Claim A/C Dr Profit and Loss A/C Dr To Accidental Loss A/C (Adjusting the insurance claim received) 1. Amount of insurance claim 2. Amount of irrecoverable loss 3. Total abnormal loss Treatment of Abnormal or Accidental Loss in Financial Statements (Goods Insured)  Trading Account: Show on the credit side (with the cost of goods destroyed)  Profit & Loss Account: Show on the debit side (with the cost of goods destroyed) Balance Sheet: No effect 16. Goods distributed as free samples: It is very common for businesses to distribute goods as free samples. Free samples are frequently used in marketing and consumer outreach programmes. The following are the primary goals of distributing goods as free samples:  Introducing a new product in the market  Introducing an existing product in a new market  Introducing a feature upgrade to an existing product  Increasing the market share of a particular product  Receiving feedback from product users The outflow of merchandise caused by free sample distribution cannot be recorded as a sale. This is because there is no monetary compensation for the distribution of goods as free samples. Instead, giving away free 22 samples to customers is viewed as an advertising expense. As a result, it is Preparation of final accounts charged to the advertisement expense account. of companies 17. Any other adjustments as per the prevailing accounting standard: As per the companies Act 2013, in case of any clash between Accounting standard and Companies Act, Accounting standard will prevail over the Companies Act provision. 1.5 PREPARATION OF FINANCIAL ACCOUNTS IN VERTICAL FORMAT SCHEDULE III OF THE COMPANIES ACT, 2013 Introduction: According to Section 129 of the Companies Act 2013, all the companies registered under this Act will have to present its financial statements in Schedule III of the Act. The Schedule III of the Companies Act 2013 has been formulated to keep pace with the changes in the economic philosophy leading to privatization and globalization and consequent desired changes/reforms in the corporate financial reporting practices. It deals with the Form of Balance sheet, Statement of Profit and Loss and disclosures to be made therein and it applies uniformly to all the companies registered under the Companies Act, 2013, for the preparation of financial statements of an accounting year. It has several new features like: – A vertical format for presentation of balance sheet with classification of Balance Sheet items into current and non-current categories. – A vertical format of Statement of Profit and Loss with classification of expenses based on nature. – Elimination the concept of “Schedules” and such information is now to be furnished in terms of “Notes to Accounts”. – It does not contain any specific disclosure for items included in Schedule VI under the head, “Miscellaneous Expenditure”. Presentation of Balance Sheet A Balance sheet is a statement of the financial position of an enterprise as at a given date, which exhibits its assets, liabilities, capital, reserves and other account balances at their respective book values Key features of Balance Sheet 1) The Schedule III permits only Vertical form of presentation. 2) It uses “Equity and Liabilities” and “Assets” as headings. 3) All assets and liabilities classified into current and non-current and presented separately on the face of the Balance Sheet. 4) Number of shares held by each shareholder holding more than 5% shares now needs to be disclosed. 5) Details pertaining to aggregate number and class of shares allotted for consideration other than cash, bonus shares and shares bought back will 23 Financial Accounting need to be disclosed only for a period of five years immediately preceding the Balance Sheet date 6) Any debit balance in the Statement of Profit and Loss will be disclosed under the head “Reserves and surplus.” Earlier, any debit balance in Profit and Loss Account carried forward after deduction from uncommitted reserves was required to be shown as the last item on the asset side of the Balance Sheet 7) Specific disclosures are prescribed for Share Application money. The application money not exceeding the capital offered for issuance and to the extent not refundable will be shown separately on the face of the Balance Sheet. The amount in excess of subscription or if the requirements of minimum subscription are not met will be shown under “Other current liabilities.” 8) The term “sundry debtors” has been replaced with the term “trade receivables.” ‘Trade receivables’ are defined as dues arising only from goods sold or services rendered in the normal course of business. Hence, amounts due on account of other contractual obligations can no longer be included in the trade receivables. 9) It requires separate disclosure of “trade receivables” outstanding for a period exceeding six months from the date the bill/invoice is due for payment.” 10) “Capital advances” are specifically required to be presented separately under the head “Loans & advances” rather than including elsewhere. 11) Tangible assets under lease are required to be separately specified under each class of asset. In the absence of any further clarification, the term “under lease” should be taken to mean assets given on operating lease in the case of lessor and assets held under finance lease in the case of lessee. 12) Under the Schedule III, other commitments also need to be disclosed. The format of balance sheet as given in Part I of Schedule III of the Companies Act 2013 is given below. Schedule III (See section - 129) GENERAL INSTRUCTION FOR PREPARATION OF BALANCE SHEET AND STATEMENT OF PROFIT AND LOSS OF A COMPANY GENERAL (1) If compliance with the Act's requirements, INSTRUCTIONS including Accounting Standards applicable to companies, necessitates any change in treatment or disclosure, including addition, amendment, substitution, or deletion in the head or sub-head or any changes, in the financial statements or statements forming part thereof, the same shall be made, and the requirements of this Schedule shall be modified accordingly. (2)The disclosure requirements specified in this Schedule supplement, rather than replace, the 24  Preparation of final accounts disclosure requirements specified in the of companies Accounting Standards prescribed under the Companies Act of 2013. Unless required to be disclosed on the face of the Financial Statements, additional disclosures specified in the Accounting Standards must be made in the notes to accounts or by way of an additional statement. Similarly, in addition to the requirements set out in this Schedule, all other disclosures required by the Companies Act must be made in the notes to accounts. (3) (i) Notes to accounts must include information in addition to what is presented in the Financial Statements, such as a) narrative descriptions or disaggregation of items recognised in those statements, and b) information about items that do not qualify for recognition in those statements. (ii) Each item on the balance sheet and profit and loss statement must be cross-referenced to any related information in the notes to accounts. In preparing the Financial Statements, including the notes to accounts, a balance must be struck between providing excessive detail that may not be useful to users of financial statements and failing to provide important information due to excessive aggregation. (4) (i) Depending on the company's turnover, the figures in the Financial Statements may be rounded off as shown below: Turnover Rounding off (a) less than one hundred’ crore To the nearest hundreds, rupees thousands, lakhsormillions, or decimals thereof (b) one hundred crore rupees or To the nearest lakhs, millions more or crores, or decimals thereof. (ii) Once a unit of measurement is established, it must be used consistently in the Financial Statements. (5)Except in the case of the first Financial Statements laid before the Company (after its 25 Financial Accounting incorporation) the corresponding amounts (comparatives) for the immediately preceding reporting period for all items shown in the Financial Statements including notes shall also be given. (6) For the purpose of this Schedule, the terms used herein shall be as per the notes applicable Accounting Note:This section of the Schedule specifies the Standards. minimum requirements for the Balance Sheet, Statement of Profit and Loss (hereinafter referred to as - Financial Statements for the purposes of this Schedule), and Notes. Line items, sub-line items, and sub-totals shall be presented as an addition or substitution on the face of the Financial Statements when such presentation is relevant to an understanding of the company's financial position or performance, or to cater to industry/sector-specific disclosure requirements, or when required for compliance with amendments to the Companies Act or under the Accounting Standards. 1.6 VERTICAL FINANCIAL STATEMENT ABC LIMITED Balance Sheet As On 31st March, 2022 Figure Figures s as at as at the end the end of Note of Particulars previo No. current us reporti reporti ng ng period Period Rs. Rs. A EQUITY AND LIABILITIES 1 Shareholders’ funds (a) Share capital 1 XX XX (b) Reserves and surplus 2 XX XX (b) Money Received against share XX XX warrants 26  Share application money pending Preparation of final accounts 2 XX XX of companies allotments 3 Non-current liabilities (a) Long-term borrowings 3 XX XX (b) Deferred tax liabilities (net) XX XX (c) Other Long Term Liabilities XX XX (d) Long term provision XX XX 4 Current liabilities (a) Short Term Borrowings 4 XX XX (b) Trade payables 5 XX XX (c) Other current liabilities 6 XX XX (d) Short-term provisions 7 XX XX Total XX XX B ASSETS 1 Non-current assets (a) Fixed Assets (i) Property, Plant and Equipment 8 XX - (ii) Intangible assets XX - (iii) Capital Work in progress XX - (iv) Intangible Assets under Development XX - (b) Non-current investments 9 XX - (c) Deferred Tax Assets XX (d) Long term loans and Advances XX (e) Other Non-Current Assets XX 2 Current assets (a) Current Investments 10 XX (b) Inventories 11 XX - (c) Trade receivables 12 XX - (d) Cash and cash equivalents 13 XX - (e) Short-term loans and advances 14 XX - (f) Other Current Assets 15 XX - Total XX XX 27 Financial Accounting GENERAL INSTRUCTIONS FOR PREPARATION OF BALANCE SHEET 1. An asset shall be classified as current when it satisfies any of the following criteria: a. It is expected to be realised in, or is intended for sale or consumption in, the company’s normal operating cycle; b. It is held primarily for the purpose of being traded; c. It is expected to be realised within twelve months after the reporting date; or d. It is cash or cash equivalent unless it is restricted from being exchanged or used to settle a liability for at least twelve months after the reporting date. All other assets shall be classified as non-current. 2. The time between the acquisition of assets for processing and their realisation in cash or cash equivalents is referred to as an operating cycle. Where the normal operating cycle cannot be determined, it is assumed to last for a period of twelve months. 3. A liability shall be classified as current when it satisfies any of the following criteria: a. It is expected to be settled during the normal operating cycle of the company; b. it is held primarily for trading purposes; c. it is due to be settled within twelve months of the reporting date; or d. The company does not have an unconditional right to postpone liability settlement for at least twelve months after the reporting date. The terms of a liability that, at the option of the counterparty, could result in its settlement through the issuance of equity instruments have no bearing on its classification. All other liabilities must be designated as non-current. 4. A receivable is classified as a "trade receivable" if the amount owed is for goods sold or services rendered in the normal course of business. 5. A payable is classified as a "trade payable" if the amount due is for goods purchased or services received in the normal course of business. A company shall disclose the following in the notes to accounts. A. Share Capital For each class of share capital (different classes of preference shares to be treated separately): a. The number and amount of shares authorised; b. The number of shares issued, subscribed and fully paid, and subscribed but not fully paid; c. Par value per share; d. A reconciliation of the number of shares outstanding at the beginning and at the end of the reporting period; 28  e. The rights, preferences and restrictions attaching to each class of Preparation of final accounts shares including restrictions on the distribution of dividends and the of companies repayment of capital; f. Shares in respect of each class in the company held by its holding company or its ultimate holding company including shares held by or by subsidiaries or associates of the holding company or the ultimate holding company in aggregate; g. Shares in the company held by each share holder holding more than 5 per cent shares specifying the number of shares held; h. Shares reserved for issue under options and contracts/commitments for the sale of shares/disinvestment, including the terms and amounts; i. For the period of five years immediately preceding the date as at which the Balance Sheet is prepared: A. Aggregate number and class of shares allotted as fully paid-up pursuant to contract(s) without payment being received in cash. B. Aggregate number and class of shares allotted as fully paid-up by way of bonus shares. C. Aggregate number and class of shares bought back. j. Terms of any securities convertible into equity/preference shares issued along with the earliest date of conversion in descending order starting from the farthest such date; k. Calls unpaid (showing aggregate value of calls unpaid by directors and officers); l. Forfeited shares (amount originally paid-up). B. Reserves and Surplus i. Reserves and Surplus shall be classified as: a. Capital Reserves; b. Capital Redemption Reserve; c. Securities Premium Reserve; d. Debenture Redemption Reserve; e. Revaluation Reserve; f. Share Options Outstanding Account; g. Other Reserves(specify the nature and purpose of each reserve and the amount in respect thereof); h. Surplus i.e., balance in Statement of Profit and Loss disclosing allocations and appropriations such as dividend, bonus shares and transfer to/ from reserves, etc.; (Additions and deductions since last balance sheet to be shown under each of the specified heads); ii. A reserve specifically represented by earmarked investments shall be termed as a “fund”. iii. The debit balance of the profit and loss statement must be shown as a negative figure under the heading "Surplus." Similarly, even if the resulting figure is negative, the balance of "Reserves and Surplus," after adjusting for any negative balance of surplus, shall be shown under the heading "Reserves and Surplus." 29 Financial Accounting C. Long-term Borrowings i. Long-term borrowings shall be classified as: a. Bonds/debentures; b. Term loans: A. From banks. B. From other parties. c. Deferred payment liabilities; d. Deposits; e. Loans and advances from related parties; f. Long-term maturities of finance lease obligations; g. Other loans and advances (specify nature). ii. Borrowings shall further be sub-classified as secured and unsecured. Nature of security shall be specified separately in each case. iii. Where loans have been guaranteed by directors or others, the aggregate amount of such loans under each head shall be disclosed. iv. Bonds/debentures (along with the rate of interest and particulars of redemption or conversion, as the case may be) shall be stated in descending order of maturity or conversion, starting from farthest redemption or conversion date, as the case may be. Where bonds/debentures are redeemable by instalments, the date of maturity for this purpose must be reckoned as the date on which the first instalment becomes due. v. Particulars of any redeemed bonds/debentures which the company has power to reissue shall be disclosed. vi. Terms of repayment of term loans and other loans shall be stated. vii. Period and amount of continuing default as on the balance sheet date in repayment of loans and interest, shall be specified separately in each case. D. Other Long-term Liabilities Other Long-term Liabilities shall be classified as: a. Trade payables; b. Others. E. Long-term provisions The amounts shall be classified as: a. Provision for employee benefits; b. Others (specify nature). F. Short-term borrowings i. Short-term borrowings shall be classified as: a. Loans repayable on demand; A. From banks. B. From other parties. b. Loans and advances from related parties; 30 c. Deposits; Preparation of final accounts d. Other loans and advances (specify nature). of companies ii. Borrowings shall further be sub-classified as secured and unsecured. Nature of security shall be specified separately in each case. iii. Where loans have been guaranteed by directors or others, the aggregate amount of such loans under each head shall be disclosed. iv. Period and amount of default as on the balance sheet date in repayment of loans and interest, shall be specified separately in each case. G. Other current liabilities The amounts shall be classified as: a. Current maturities of long-term debt; b. Current maturities of finance lease obligations; c. Interest accrued but not due on borrowings; d. Interest accrued and due on borrowings; e. Income received in advance; f. Unpaid dividends; g. Application money received for allotment of securities and due for refund and interest accrued thereon. Share application money includes advances towards allotment of share capital. The terms and conditions including the number of shares proposed to be issued, the amount of premium, if any, and the period before which shares shall be allotted shall be disclosed. It shall also be disclosed whether the company has sufficient authorised capital to cover the share capital amount resulting from allotment of shares out of such share application money. Further, the period for which the share application money has been pending beyond the period for allotment as mentioned in the document inviting application for shares along with the reason for such share application money being pending shall be disclosed. Share application money not exceeding the issued capital and to the extent not refundable shall be shown under the head Equity and share application money to the extent refundable, i.e., the amount in excess of subscription or in case the requirements of minimum subscription are not met, shall be separately shown under “Óther current liabilities”; h. Unpaid matured deposits and interest accrued thereon; i. Unpaid matured debentures and interest accrued thereon; j. Other payables (specify nature). H. Short-term provisions The amounts shall be classified as: a. Provision for employee benefits. b. Others (specify nature). I. Tangible assets i. Classification shall be given as: a. Land; b. Buildings; 31 Financial Accounting c. Plant and Equipment; d. Furniture and Fixtures; e. Vehicles; f. Office equipment; g. Others (specify nature). ii. Assets under lease shall be separately specified under each class of asset. iii. A reconciliation of the gross and net carrying amounts of each class of assets at the beginning and end of the reporting period showing additions, disposals, acquisitions through business combinations and other adjustments and the related depreciation and impairment losses/reversals shall be disclosed separately. iv. Where sums have been written-off on a reduction of capital or revaluation of assets or where sums have been added on revaluation of assets, every balance sheet subsequent to date of such write-off, or addition shall show the reduced or increased figures as applicable and shall by way of a note also show the amount of the reduction or increase as applicable together with the date thereof for the first five years subsequent to the date of such reduction or increase. J. Intangible assets i. Classification shall be given as: a. Goodwill; b. Brands/trademarks; c. Computer software; d. Mastheads and publishing titles; e. Mining rights; f. Copyrights, and patents and other intellectual property rights, services and operating rights; g. Recipes, formulae, models, designs and prototypes; h. Licences and franchise; i. Others (specify nature). ii. A reconciliation of the gross and net carrying amounts of each class of assets at the beginning and end of the reporting period showing additions, disposals, acquisitions through business combinations and other adjustments and the related amortization and impairment losses/reversals shall be disclosed separately. iii. Where sums have been written-off on a reduction of capital or revaluation of assets or where sums have been added on revaluation of assets, every balance sheet subsequent to date of such write-off, or addition shall show the reduced or increased figures as applicable and shall by way of a note also show the amount of the reduction or increase as applicable together with the date thereof for the first five years subsequent to the date of such reduction or increase. 32  K. Non-current investments Preparation of final accounts of companies i. Non-current investments shall be classified as trade investments and other investments and further classified as: a. Investment property; b. Investments in Equity Instruments; c. Investments in preference shares; d. Investments in Government or trust securities; e. Investments in debentures or bonds; f. Investments in Mutual Funds; g. Investments in partnership firms; h. Other non-current investments (specify nature). Under each classification, details shall be given of names of the bodies corporate indicating separately whether such bodies are (i) subsidiaries, (ii) associates, (iii) joint ventures, or (iv) controlled special purpose entities in whom investments have been made and the nature and extent of the investment so made in each such body corporate (showing separately investments which are partly paid). In regard to investments in the capital of partnership firms, the names of the firms (with the names of all their partners, total capital and the shares of each partner) shall be given. ii. Investments carried at other than at cost should be separately stated specifying the basis for valuation thereof; iii. The following shall also be disclosed: a. Aggregate amount of quoted investments and market value thereof; b. Aggregate amount of unquoted investments; c. Aggregate provision for diminution in value of investments. L. Long-term loans and advances i. Long-term loans and advances shall be classified as: a. Capital Advances; b. Security Deposits; c. Loans and advances to related parties (giving details thereof); d. Other loans and advances (specify nature). ii. The above shall also be separately sub-classified as: a. Secured, considered good; b. Unsecured, considered good; c. Doubtful. iii. Allowance for bad and doubtful loans and advances shall be disclosed under the relevant heads separately. iv. Loans and advances due by directors or other officers of the company or any of them either severally or jointly with any other persons or amounts due by firms or private companies respectively in which any director is a partner or a director or a member should be separately stated. 33 Financial Accounting M. Other non-current assets Other non-current assets shall be classified as: i. Long-term Trade Receivables (including trade receivables on deferred credit terms); ii. Others (specify nature); iii. Long-term Trade Receivables, shall be sub-classified as: A. i. Secured, considered good; B. Unsecured, considered good; C. Doubtful. i. Allowance for bad and doubtful debts shall be disclosed under the relevant heads separately. ii. Debts due by directors or other officers of the company or any of them either severally or jointly with any other person or debts due by firms or private companies respectively in which any director is a partner or a director or a member should be separately stated. N. Current Investments i. Current investments shall be classified as: a. Investments in Equity Instruments; b. Investment in Preference Shares; c. Investments in Government or trust securities; d. Investments in