Corporate Financial Accounting II Accounting

Corporate Accounting

As per new B Com CBCS syllabus 2017 for CUAs per new B Com CBCS syllabus 2017 for CU

Financial Accounting II

Prelims_FM.indd 1 20-09-2019 17:17:29

Assistant ProfessorDepartment of Business Administration

The University of Burdwan

Assistant ProfessorDepartment of Commerce

Maharaja Manindra Chandra CollegeUniversity of Calcutta

Abhik Kr. MukherjeeSoumya Mukherjee

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The subject of Accounting has undergone manifold changes in the recent past, which necessitates constant updating and modifications of course content of this discipline.

The book titled ‘Corporate Accounting’, authored by Soumya Mukherjee and Abhik Kumar Mukherjee, has been written keeping an eye on the current syllabi of the University of Calcutta. The lucid presentation of the conceptual aspects and the graded illustrations are expected to develop interest of the students in the subject and also help them understand the subject easily.

I firmly believe that this book will fulfill the need of the student community and will also be of great interest to the academicians associated with this discipline.

I take this opportunity to congratulate the authors for their sincere efforts in preparing the book and I hope that such endeavor of the authors will be successful in serving the purpose for which it has been written.

Dr. Dhruba Ranjan Dandapat

Professor Department of Commerce

University of CalcuttaDean

Faculty Council for Post Graduate Studies in Commerce,Social Welfare & Business Management

University of Calcutta

Foreword


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The company form of organization is one of the most common form of business organization. Usually, the scale of operations of a company is higher and it has to enter into transactions of diverse nature as compared to the non-corporate forms of business organization. As such, a company enters into many transactions that happen to be specific to this form. This has over time led to development of a specific area of accounting study namely, Corporate Accounting, which focuses on accounting transactions and principles associated with the company form of organization. Corporate accounting happens to be one of the core subjects of any commerce and business study faculty. It deals with the various facets of accounting of a company form of business organization and is to a great extent dependent on the existing corporate statute.

ABOUT THE BOOKWe are pleased to present before the academic community our recent effort on the discipline of accounting – the book titled Corporate Accounting. This book can be looked upon as an extension of our previous contri-butions in this area titled Financial Accounting (Vol.1) and Financial Accounting (Vol.2). The aim of this book is to guide through the accounting journey of a company, help them solidify their conceptual base on this specialised dimension of accounting and improve their understanding and clarity in some of the advanced topics of corporate accounting and reporting.

This book is primarily intended to cater to the needs of the students undergoing Bachelor of Commerce course (Honours and General) in different universities, specifically University of Calcutta. It has been developed as per the newly introduced semester-based CBCS syllabus (2017) of the University of Calcutta. Moreover, it also guides the students undergoing different professional courses viz. CA, CS, CMA, and MBA.

PEDAGOGICAL FEATURESSome of the distinguishing features of the book are:• A unique ‘self-study textbook’ of Corporate Accounting for students. • Student-friendly approach in theory and worked-out problems.• Theoretical discussion in lucid language and in innovative bulleted form.• Topics and related concepts discussed as per the provisions of Companies Act, 2013, relevant Rules and

related Regulations framed thereunder.• Inclusion of Concept Note and Student Note for relevant points across all chapters.• More than 375 worked illustrations in self-understandable approach with ‘Problem Notes’ and

detailed ‘Working Notes’. • Relevant problems set at C.U. B. Com [Honours and General] examination and professional

examinations [CA, CS, CMA] of about last three decades. • Chapter-end Exercises for practicing the contents discussed in the chapter.• Ready Access Table to past examination problems.

Preface


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Preface v

CONTENT & STRUCTUREThis book covers the entire syllabus of Corporate Accounting of the University of Calcutta and other universities over 19 chapters. These chapters may be divided into the following broad areas: � Introduction to Corporate Accounting (Chapter 1 through Chapter 3): The first chapter of the book

provides an introduction to corporate accounting by discussing the provisions relating to maintenance of books of accounts by a company form of organization. Chapter 2 gives an overview of the financial statements that are required to be drafted by a company as per the provisions of the newly introduced Companies Act, 2013. Detailed discussions on various types of shares and share capital have been covered in Chapter 3.

� Accounting for issue of Shares and Debentures (Chapter 4 through Chapter 10): These seven chapters cover the accounting of transactions relating to issue of shares in different situations viz. issue of bonus shares, right shares, sweat equity shares, , and also the issue of debentures. Accounting of some transactions related to share and debenture issue like underwriting and employee stock plans have also been discussed in detail.

� Accounting for Redemption and Buy-back (Chapter 11 through Chapter 14): The securities that are issued do get redeemed or bought back in certain specific circumstances. Accounting of each such situation involves special principles and observing of the statutory provisions. Chapter 11 (Redemption of Preference shares) and Chapter 13 (Redemption of Debentures) of this title deal with the various facets of redemption of these two imp securities issued by a company. Chapter 12 titled ‘Accounting for Buy-back of securities’ focuses on the accounting of securities that are bought back by a company.

� Preparation of Corporate Financial Statements (Chapter 15): This chapter is one of the most important chapters of the curriculum and discusses, in detail, the various items and treatments of adjustments associated with drafting of three important components of corporate financial statements namely, Statement of Profit and Loss, Balance Sheet, and Notes to Accounts.

� Valuation of Goodwill and Shares (Chapter 16 and Chapter 17): Goodwill happens to be one of the most important intangible asset that has to be valued in different circumstances. The different methods associated with valuation of this intangible asset have been covered in Chapter 16. Moreover, ascertainment of the value of shares under different approaches is the topic of discussion in Chapter 17.

� Accounting for Merger and Acquisition (Chapter 18): Chapter 18 discusses the accounting of business combinations viz. merger, amalgamation, absorption in the books of acquiring and acquired companies.

� Accounting for Internal Reconstruction (Chapter 19): The final chapter of this title deal with transactions that arise in the event of alteration of share capital and on internal reconstruction of a company.

While every attempt has been made to make this title comprehensive and error free, there may remain some areas which require further development. In this regard, we expect suggestions from the readers which would help us to make the necessary improvements in future.

Any suggestion or improvement would be highly appreciated and can be sent to us directly to our e-mail address ‘[email protected]’.

Soumya MukherjeeAbhik Kr. Mukherjee


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Foreword iiiPreface ivAcknowledgements viRoad Map to CU B Com Syllabus xiiiCalcutta University Question Pattern xiv

Contents

1. Introduction to Corporate Accounting 1.1–1.8 1.1 Introduction 1.1 1.2 Company—Concept 1.1 1.3 Corporate Accounting—Concept 1.3 1.4 Books of Accounts of a Company 1.4 1.5 Statutory Registers of a Company 1.6 1.6 Annual Return [Sec. 92] 1.6

Exercises 1. 8

2. Overview of Corporate Financial Statements 2.1–2.10 2.1 Introduction 2.1 2.2 Corporate Financial Statements—Concept 2.1 2.3 Features of Corporate Financial Statements 2.1 2.4 Types of Corporate Financial Statements 2.2 2.5 Components of Corporate Financial Statements 2.2 2.6 Proforma of Financial Statements Under Companies Act, 2013 2.4

Exercises 2. 10

3. Shares and Share Capital 3.1–3.9 3.1 Introduction 3.1 3.2 Share—Concept 3. 1 3.3 Features of Shares 3. 1 3.4 Classification of Shares 3. 2 3.5 Stock—Concept 3. 2 3.6 Classification of Stock 3. 2 3.7 Preference Shares 3. 3 3.8 Equity Shares 3. 5 3.9 Equity Shares vs. Preference Shares 3. 6 3.10 Share Capital 3. 6 3.11 Reporting under Companies Act, 2013 3. 8

Exercises 3. 9

4. Accounting for Issue of Shares 4.1–4.73 Unit I: Issue of Shares 4.1 4.1 Introduction 4.1 4.2 Parties Associated with Share Issue 4.1 4.3 Stakeholders to Whom Shares are Issued 4.1 4.4 Various Purposes of Share Issue 4.2


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Contents ix

4.5 Types of Share Issue 4.3 4.6 Offer Price of Shares Issued 4.3 Unit II: Public Issue of Shares 4.3 4.7 Introduction 4.3 4.8 Methods of Pricing Public Issue of Shares 4.4 4.9 Certain Special Situations Related to Public Issue of Shares 4.5 4.10 Accounting under Fixed Price Method 4.8 Unit III: Issue of Shares other than Public Issue 4.11 4.11 Private Placement of Shares 4.11 4.12 Issue of Right Shares 4.12 4.13 Issue of Bonus Shares 4.12 4.14 Issue of Sweat Equity Shares 4.12 4.15 Issue of Stock 4.13 4.16 Issue of Shares for Consideration other than Cash 4.13

Graded Illustrations 4.14Exercises 4.69Ready Access to Examination Problems 4.73

5. Accounting for Issue of Right Shares 5.1–5.13 5.1 Introduction 5.1 5.2 Right Issue—Concept 5.1 5.3 Features of Rights Issue 5.2 5.4 Right Shares—Concept 5.2 5.5 Features of Rights Shares 5.2 5.6 Comparison Between Shares under Rights Issue and Shares under Normal Issue 5.2 5.7 Rights Issue under Companies Act, 2013 5.3 5.8 Valuation of Rights 5.3 5.9 Accounting for Issue of Right Shares 5.4

Graded Illustrations 5.5Exercises 5.11

6. Accounting for Issue of Bonus Shares 6.1–6.24 6.1 Introduction 6.1 6.2 Bonus Dividend—Concept 6.1 6.3 Bonus Shares—Concept 6.1 6.4 Issue of Bonus Shares—Concept 6.2 6.5 Comparison Between Bonus Shares and Other Categories of Shares 6.3 6.6 Issue of Bonus Shares under Companies Act, 2013 6.4 6.7 SEBI Regulations on Bonus Issue 6.4 6.8 Bonus Dividend by Conversion 6.5 6.9 Accounting for Bonus Dividend 6.5


7. Accounting for Issue of Sweat Equity Shares 7.1–7.8 7.1 Introduction 7.1 7.2 Sweat Equity Shares—Concept 7.1 7.3 Features of Sweat Equity Shares 7.1 7.4 Eligibility Conditions for Issue of Sweat Equity Shares 7.2 7.5 Accounting for issue of Sweat Equity Shares 7.3

Exercises 7.7


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x Contents

8. Accounting for Employee Stock Plans 8.1–8.23 8.1 Introduction 8.1 8.2 Employees Stock Plans 8.1 8.3 Employees Stock Option Plan (ESOP) 8.1 8.4 Provisions for Employee Stock Plans Under Companies Act, 2013 8.4 8.5 Methods of Valuation of Employees Stock Options 8.4 8.6 Accounting for ESOP/ ESOS 8.4 8.7 Employees Stock Purchase Plan/ Scheme (ESPP/ESPS) 8.6 8.8 Accounting for ESPP/ ESPS 8.6


9. Accounting for Issue of Debentures 9.1–9.32 9.1 Introduction 9.1 9.2 Debentures—Concept 9.1 9.3 Features of Debentures 9.1 9.4 Parties Associated with Debentures Issue 9.1 9.5 Types of Debentures 9.2 9.6 Offer Price of Debentures Issued 9.2 9.7 Purposes of Issue of Debentures and Accounting Thereof 9.3 9.8 Interest on Debentures 9.7

Graded Illustrations 9.8Exercises 9.29

10. Underwriting of Shares and Debentures 10.1–10.39 10.1 Introduction 10.1 10.2 Underwriting of Securities—Concept 10.1 10.3 Features of Underwriting of Securities 10.1 10.4 Parties Involved in Underwriting of Securities 10.2 10.5 Benefits of Underwriting of Securities 10.2 10.6 Types of Underwriting of Securities 10.2 10.7 Concepts Associated with Underwriting of Securities 10.3 10.8 Calculation of Underwriter’s Liability 10.5 10.9 Important Provisions Regarding Underwriting under Companies Act, 2013 10.7 10.10 Accounting for underwriting Transactions 10. 8

Graded Illustrations 10. 9Exercises 10.38Ready Access to Examination Problems 10.39

11. Redemption of Preference Shares 11.1–11.49 11.1 Introduction 11.1 11.2 Redemption of Preference Shares—Concept 11.1 11.3 Redemption Provisions under Companies Act, 2013 11.1 11.4 Conditions for Redemption of Preference Shares [Sec. 55(2) Of Companies Act, 2013 ] 11.2 11.5 Accounting for Redemption of Preference Shares 11.4 11.6 Steps for Problem Solving 11.7



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Contents xi

12. Accounting for Buy-Back of Securities 12.1–12.33 12.1 Introduction 12.1 12.2 Buy-Back of Securities—Concept 12.1 12.3 Provisions of Buy-Back under Companies Act, 2013 12.1 12.4 Parties from Whom can the Securities can be Bought-Back 12.5 12.5 Accounting for Buy-Back of Shares and Specified Securities 12.5


13. Redemption of Debentures 13.1–13.108 13.1 Introduction 13.1 13.2 Redemption of Debentures—Concept 13.1 13.3 Sources of Redemption of Debentures 13.1 13.4 Debenture Redemption Reserve and Debenture Redemption Investment 13.2 13.5 Methods of Redemption of Debentures 13.3

Graded Illustrations 13.11Exercise 13.107Ready Access to Examination Problems 13.108

14. Accounting for Changes in Capital Structure 14.1–14.26 14.1 Introduction 14.1 14.2 Concept of Capital Structure 14.1 14.3 Comprehensive accounting for Changes in Capital Structure 14.1


15. Corporate Financial Statements 15.1–15.115 15.1 Introduction 15.1 15.2 Corporate Financial Statements under Companies Act, 2013 15.1 15.4 Statement of Profit and Loss 15.2 15.5 Individual Line Items of Statement of Profit and Loss 15.3 15.6 Balance Sheet 15.7 15.7 Tiers, Headings, and Sub-Headings of Balance Sheet 15.9 15.8 Individual Sub-Heads of ‘Equity and Liabilities’ Tier and Related Notes to Accounts 15.10 15.9 Individual Sub-Heads of ‘Assets’ Tier and Related Notes to Accounts 15.13 15.10 Steps for Preparation of Statement of Profit and Loss and Balance Sheet 15.17 15.11 Treatment of Different Ledger Account Balances 15.20 15.12 Important Adjustments Regarding Corporate Financial Statements

(Statement of Profit and Loss & Balance Sheet) 15.26 15.13 Certain Important Disclosure Items in Corporate Financial Statements (Spl and Balance Sheet) 15.33


16. Valuation of Goodwill 16.1–16.36 16.1 Introduction 16.1 16.2 Concept of Goodwill 16.1 16.3 Features of Goodwill 16.1


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xii Contents

16.4 Types of Goodwill 16.1 16.5 Valuation of Goodwill 16.2 16.6 Methods of Goodwill Valuation 16.2


17. Valuation of Shares 17.1–17.36 17.1 Introduction 17.1 17.2 Valuation of Shares—Concept 17.1 17.3 Circumstances Requiring Valuation of Shares 17.1 17.4 Rationale for Valuation of Shares 17.1 17.5 Factors Affecting Valuation of Shares 17.2 17.6 Methods of Share Valuation 17.2


18. Accounting for Merger and External Reconstruction 18.1–18.121 18.1 Introduction 18.1 18.2 Merger and Reconstruction—Concept 18.1 18.3 Parties Associated with Amalgamation, Absorption and External Reconstruction Deal 18.2 18.4 Consideration of Amalgamation, Absorption or External Reconstruction Deal 18.3 18.5 Types of Amalgamation as per AS-14 (Revised) 18.4 18.6 Accounting for Amalgamation, Absorption and External Reconstruction as per AS-14 (Revised) 18.5 18.7 Certain Special Cases Arising in the Event of Merger or External Reconstruction 18.12 18.8 Reporting In Financial Statements 18.15


19. Accounting for Internal Reconstruction 19.1–19.94 19.1 Introduction 19.1 19.2 Internal Reconstruction—Concept 19.1 19.3 Purpose/ Need for Internal Reconstruction 19.1 19.4 Process of Internal Reconstruction 19.1 19.5 Changes in Capital and Liabilities 19.2 19.6 Writing off Accumulated Losses and Changes in Assets 19.6 19.7 Accounting for Internal Reconstruction 19.7



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1.1 INTRODUCTION � The Industrial revolution led to the emergence of large scale business organizations. These newly

developed organizations required huge amount of investments of various types of resources and also the risk involved happen to be very high. The existing proprietorship and partnership forms of organizations, with their limited resources, became unsuitable in such circumstances. This situation led to development of a new form of business organization called the company form of organization. Presently, the company form of business happens to be the most common form of business organization across the world.

� This new form of organization having certain specific features, brought about certain unique aspects to the field of accounting, This led to the development of a new extension to the existing body of accounting knowledge which is termed as Corporate Accounting.

1.2 COMPANY – CONCEPT � A company is a form of organization. It is a body corporate or an incorporated organization registered

under the companies act. � It refers to an association of persons, created by law to undertake activities, with a distinctive name,

having a separate legal existence, a common seal and perpetual succession of members. � As per Sec. 2(20) of Indian Companies Act, 2013, a ‘company, means a company incorporated under this

Act or under any previous company law’.

1.2.1 Features of a Company The salient features of a company form of organization are:

� Incorporated association: A company form of organization comes into existence when it is registered under the company statute of the country in which it is registered.

� Artificial legal person: A company is an artificial person created by law, which has the rights to enter into contracts in its own name, rights to acquire or dispose of property, and right to sue and be sued by others.

� Common seal: A company, being an artificial person, cannot sign documents for itself. Legally, it uses a seal as a substitute for its signature. Such a seal is usually engraved with the name of the company and sometimes its logo. Any document which bears the common seal of the company will be legally binding on the company.

� Separate legal entity: In the eyes of the law, a company has a distinct legal entity that is independent of its members.

� Perpetual existence: A company is created by law and can only be dissolved legally. As such, the members and Directors may come and go, but the company continues to exist.

� Limited liability: A company form of organization may be either a company limited by shares or a company limited by guarantee.

� Transferable shares: The shares of a company are freely transferable from one member to another person. Moreover, the Articles of Association may prescribe the manner in which such transfer of shares can be made.

� Delegated management: The shareholders happen to be the owners of a company while it is managed by the directors, who are the delegated representatives of the shareholders.

1Introduction to Corporate Accounting


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1.2 Corporate Accounting

� Separation of ownership and management: The ownership of a company lies with its shareholders, who do not remain in touch with the management of its regular affairs, thus resulting in separation of ownership from the management.

1.2.2 Types of Companies A company form of organization can be classified into different types on different bases. They are discussed as under:A. On the basis of mode of incorporation

� Chartered Company: A company incorporated by the crown in exercise of the royal prerogative by the grant of a charter is referred to as a chartered company. After India attained independence, these types of companies do not exist any more. E.g.: English East India Company.

� Statutory Company: A company that is incorporated by a special statute of the Parliament or any State Legislature is referred to as a Statutory Company. The provisions of the Companies Act, 2013 do not apply to such companies. E.g.: Life Insurance Corporation of India, Food Corporation of India etc.

� Registered/ Incorporated Company: The companies which are incorporated under the Companies Act, 2013 or under any previous company law, with Registrar of companies fall under this category.

B. On the basis of liability � Limited Company: A company which has a specific limit on the liability of its members is referred to

as a limited company. Such companies can be sub-classified into two categories as under: ○ Company limited by shares: A company limited by shares is one in which Memorandum of

Association specifies that the liabilities of the shareholders are limited to the amount unpaid on shares which they own.

○ Company limited by guarantee: A company limited by guarantee is one in which the liability of members is limited to a definite sum stated in the Memorandum of Association of the company. In other words, in a company limited by guarantee, the liability of the members is limited to the amount they had agreed upon to contribute to the assets of the company in the event of it being wound up.

� Unlimited Company: A company which does not have any limit on the liability of its members is referred to as an unlimited company.

C. On the basis of issuance of shares � Private Company: A company which cannot invite the public at large to subscribe for its shares is

referred to as a private company. � Public Company: A company which raises capital by issuing shares to the public at large is referred

to as a public company. Its shares are freely transferable and are listed on a recognized stock exchange.D. On the basis of control

� Holding Company: A company that owns majority of the shares of another company(s) or controls the management and composition of the Board of Directors of another company(s) is termed as a holding company. Such a company is also referred to as a parent company.

� Subsidiary Company: A company whose majority of the shares is owned by another company (either by itself or together with its subsidiaries) or whose composition of Board of Directors is governed by another company is called a subsidiary company.

� Associate Company: A company in which another company possess a considerable influence1 is called as an associate company.

E. On the basis of nationality1 Considerable influence implies controls a minimum 20% of total share capital, or business decisions, as per an agreement.

1.1 INTRODUCTION 11.2 COMPANY – CONCEPT 1

1.2.1 Features of a Company 11.2.2 Types of Companies 2

1.3 CORPORATE ACCOUNTING - CONCEPT 31.4 BOOKS OF ACCOUNTS OF A COMPANY 4

1.4.1 Meaning of Books of Accounts 41.4.2 Mode of Keeping Books of Accounts [Sec. 128(1)] 41.4.3 Place of Keeping Books of Accounts [Sec. 128(1) & Sec. 128(2)] 41.4.4 Manner of Keeping Books of Accounts in Electronic Form 51.4.5 Inspection of the Books of Accounts [Sec. 128(3) & Sec. 128(4)] 51.4.6 Period of keeping Books of Accounts [Sec. 128(5)] 5

1.5 STATUTORY REGISTERS OF A COMPANY 61.6 ANNUAL RETURN [Sec. 92] 6EXERCISES 8


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Introduction to Corporate Accounting 1.3

� Domestic Company: A domestic company means a company, which in respect of its income liable to tax, has made prescribed arrangements for the declaration and payment of the dividends (including dividends on preference shares) payable out of such income, within the country.

� Foreign Company: A foreign company means any company or body corporate incorporated outside India which has a place of business in India (whether by itself or through an agent) physically or through electronic mode, and conducts any business activity in India in any other manner.

Concept Note: Certain special types of companies under Companies Act, 2013

Companies Act, 2013 specifies certain special types of companies which include the following: � One Person Company: As per Sec. 2(62), one person company is a company wherein a single person incorporates

an entity. It should be noted that such a company also has separate legal existence with limited liability. � Government Company: As per Sec. 2(45), a company whose at least 51% paid up share capital is owned by Central

Government/ State Government, or partly by Central and partly by the State government. Further, it also covers a company whose holding company is a government company.

� Listed Company: As per Sec. 2(52), listed company means a company which has any of its securities listed on any recognised stock exchange.

� Not for Profit Company (Sec. 8 Company): A company that engages itself with promotion of art, science, sports, education, research, social welfare, religion, charity, protection of environment or any such other object, provided it intends to apply its profits, if any, or other income in promoting its objects and intends to prohibit the payment of any dividend to its members. Under Companies Act, 2013, such a company is referred to as ‘Sec. 8 Company’.

1.3 CORPORATE ACCOUNTING - CONCEPT � The accounting principles and practices that are followed by a company form of organization are referred

to as Corporate Accounting. � Corporate accounting, in its scope, includes the maintenance of books of accounts, drafting of corporate

financial statements, and presenting the same to various stake-holders. � Companies are required to maintain books of accounts and finalise the same following the regular

generally accepted accounting principles. However, in addition to the basic accounting principles, the statutes governing the company form of organization and related accounting standards form the backbone of corporate accounting.

� The provisions relating to corporate accounting for Indian companies are guided by the Companies Act, 2013 and related rules viz. Companies (Accounts) Rules, 2014, Companies (Indian Accounting Standards) Rules, 2015 etc. Such rules are framed to provide additional guidelines regarding maintenance of accounts, finalisation among other things.

� Companies Act, 2013: ○ This happens to the primary source which provides guidelines with respect to books of accounts and

financial statements that are required to be maintained by a company. ○ The related provisions have been provided under Chapter IX of the Act, Accounts of Companies. ○ Section 128 to Section 137 governs provisions relating to accounts.

Concept Note: National Financial Reporting Authority (NFRA) � NFRA is a quasi-judicial body that regulates matters related to accounting and auditing. � With increasing demand of non-financial reporting, it may be referred to as a national level business reporting authority

to regulate standards of all kind of reporting, both financial as well as non-financial, by the companies in future. � This body has been formed through Sec. 132 of the Companies Act, 2013 with wide powers to recommend, enforce

and monitor the compliance of accounting and auditing standards. � NFRA is responsible for monitoring and enforcing compliance of accounting standards and auditing standards and

also oversee the compliances. � National Financial Reporting Authority shall give its recommendations on accounting standards and auditing standards.


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1.4 BOOKS OF ACCOUNTS OF A COMPANY

1.4.1 Meaning of Books of Accounts � Companies Act, 2013 requires every company to prepare and maintain proper books of accounts, and

relevant books and papers. � Sec. 2(12) and Sec. 2(13) of the Act defines the terms ‘book and paper’, ‘book or paper’ and ‘books of

accounts’ respectively. � As per Sec. 2(12) the terms ‘book and paper’ and ‘book or paper’ includes books of accounts, deeds,

vouchers, writings, documents, minutes and registers maintained on paper or in electronic form.NB: It is to be noted that now companies can maintain books and/ or paper either ‘in paper form’ or ‘in electronic form’.

� Sec. 2(13) provides an inclusive definition to the term ‘Books of Accounts’. As per this section, “books of account” includes records maintained in respect of:(i) all sums of money received and expended by a company and matters in relation to which the receipts

and expenditure take place;(ii) all sales and purchases of goods and services by the company;(iii) the assets and liabilities of the company; and(iv) the items of cost as may be prescribed under section 148 in the case of a company which belongs to

any class of companies specified under that section.Analysis of definition of ‘Books of Accounts’

� The books of accounts are records that are required to be maintained by a company. � The above section does not provide specific names of the books of accounts that are required to be maintained; rather

it spells out the purposes for which books of accounts are to be maintained. � From an analysis of the specific purposes, it can be inferred that the maintenance of the following books are required:

○ For maintenance of all sums of money received and expended: Cash Book & Ledger Accounts ○ For maintenance of all sales and purchases of goods and services: Day Books, Registers & Ledger Accounts ○ For maintenance of the assets and liabilities: Assets Registers/ Schedules and Ledger Accounts (for both Assets & Liabilities)

○ For maintenance of the items of cost: Cost books of accounts (viz. cost journal, cost ledger, etc.)

1.4.2 Mode of Keeping Books of Accounts [Sec. 128(1)] � As per the Companies Act, 2013, a company can follow any of the two modes of keeping the books of

accounts etc. � Accordingly, the books of accounts, etc. can be kept either in ‘paper form’ or in ‘electronic form’.

1.4.3 Place of Keeping Books of Accounts [Sec. 128(1) & Sec. 128(2)] � The place of keeping the books of accounts, etc. of a company are:

○ Company’s registered office: Such books of accounts and books and papers are required to be kept at the registered office of the company.

○ Any other place in India: A company can, subject to communication to the Registrar, keep its books of accounts etc. at any other place in India as the Board of Directors (BOD) may decide.

� However, a company which has branch office (in or outside India) shall be deemed to have complied with the above mentioned provisions, if:

○ proper books of account relating to the transactions effected at the branch office are kept at that office; and

○ proper summarised returns are periodically sent by the branch office to the company at its registered office or the other place as decided by the BOD.


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1.4.4 Manner of Keeping Books of Accounts in Electronic Form � The provisions regarding the manner of keeping books of accounts in electronic form is provided in Rule 3

of the Companies (Account) Rules, 2014. � The provisions in this regard are highlighted hereunder:

○ The books of account and other relevant books and papers maintained in electronic mode shall remain accessible in India so as to be usable for subsequent reference.

○ The books of account and other relevant books and papers shall be retained completely in the format in which they were originally generated, sent or received, or in a format which shall present accurately the information generated, sent or received and the information contained in the electronic records shall remain complete and unaltered.

○ The information received from branch offices shall not be altered and shall be kept in a manner where it shall depict what was originally received from the branches.

○ The information in the electronic record of the document shall be capable of being displayed in a legible form.

○ There shall be a proper system for storage, retrieval, display or printout of the electronic records as the Audit Committee, if any, or the Board may deem appropriate and such records shall not be disposed of or rendered unusable, unless permitted by law.

○ The back-up of the books of account and other books and papers of the company maintained in electronic mode, including at a place outside India, if any, shall be kept in servers physically located in India on a periodic basis.

1.4.5 Inspection of the Books of Accounts [Sec. 128(3) & Sec. 128(4)]The provisions regarding inspection of books of accounts etc. depends on the fact whether such books, records, etc. are maintained in India or outside India. The provisions in this respect are stated hereunder:

� When maintained by the company within India: Such books etc. shall be open for inspection at the registered office of the company or at such other place in India by any director during business hours; and

� When maintained outside the country: The copies of financial information that are usually maintained outside India shall be maintained and produced for inspection by any director subject to prescribed conditions.

1.4.6 Period of keeping Books of Accounts [Sec. 128(5)] � The books of accounts etc. that are maintained by a company is required to be kept for a period of not less

than 8 years. In other words, every company is required to preserve its books of accounts for a minimum period of 8 years.

� However, for a company that has been in existence for less than 8 years, it should maintain the books of accounts for all the preceding years.

� Moreover, a company is required to preserve not only the books of accounts, but also the vouchers relevant to any entry in such books of accounts.

� It is to be noted that, when any investigation is ordered in respect of a company, the Central Government may direct that the books of accounts may be kept for such longer period.

1.4.7 Persons Responsible for Maintenance of Books of Accounts [Sec. 128(6)] � The following persons are responsible for keeping, maintaining and preserving the books of accounts of

a company: ○ Managing Director; or


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○ Whole-time director in charge of financial instrument; or ○ Chief Financial Officer; or ○ Any other person of the company charged by the Board.

� However, if they fail to comply with the said provisions, or contravenes the provisions, such person shall be punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees or with both.

1.5 STATUTORY REGISTERS OF A COMPANY � The registers that a company is required to maintain as per the relevant statutes are referred to as Statutory

Registers. These are the official records kept by the company relating to all legal and statutory matters. � The Companies Act, 2013 and the Rules made thereunder lay down that every Company incorporated

under the Act has to maintain Statutory Registers until its liquidation. � Such Registers should be kept at the Registered Office of the Company and are to be maintained and

updated eventually. � Some of the Registers are required to be kept open for inspection by Directors, Members, Creditors

and by other persons. Moreover, a company is required to provide the extracts from the Registers, if demanded by Directors, Members, Creditors and by other persons on payment of specified fees.

� The statutory registers that are required to be maintained by a company are listed hereunder: ○ Register of Members ○ Register of Debenture-holders ○ Register of Beneficial Owners ○ Register of any other Security Holders ○ Register of Sweat Equity Shares ○ Register of Employee Stock Options ○ Register of Shares/ Securities bought back ○ Register of Renewed and Duplicate Share

Certificates

○ Register of Charges and Instrument of Charges ○ Register of Loan and Guarantee ○ Register of Deposits ○ Index of Members ○ Index of Debenture-holders ○ Index of Beneficial Owners ○ Copies of Annual Returns

○ Books of accounts, relevant books and papers, financial statements and others ○ Attendance Registers for meeting of Board and Committee ○ Minute Books of Board of Directors and Committees of the Board ○ Minutes Books of General Meetings and Creditors Meetings ○ Register of Directors and Key Managerial Personnel including details of securities held by them ○ Register of Security and Investments ○ Register of investments of the company not held in its own name ○ Register of contracts, with directors, companies and firms in which directors are interested. ○ Contracts entered into by the company for the appointment of a Manager or Managing Director.

1.6 ANNUAL RETURN [SEC. 92] � Concept: Annual Return is a statutory document that provides comprehensive information about different

particulars of a company as at the close of a financial year. It happens to be significant document for the stakeholders as it provides a snapshot of certain company related information in a very comprehensive way.

� Nature: It is mandatory document in the sense that, in addition to the Financial Statements, it is the only document to be required to be compulsorily filed with the Registrar every year. While the Financial Statements provide information on the financial performance and position of a company, the Annual Return gives extensive disclosure and greater insight into the non-financial matters of the company and the people behind the affairs of the company.


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� Contents of Annual Return: The contents of an annual return are: ○ its registered office, principal business activities, particulars of its holding, subsidiary and associate

companies; ○ its shares, debentures and other securities and shareholding pattern; ○ its indebtedness; ○ its members and debenture-holders along with changes therein since the close of the previous financial

year; ○ its promoters, directors, key managerial personnel along with changes therein since the close of the

previous financial year; ○ meetings of members or a class thereof, board and its various committees along with attendance details; ○ remuneration of directors and key managerial personnel; ○ penalty or punishment imposed on the company, its directors or officers and details of compounding

of offences and appeals made against such penalty or punishment; ○ matters relating to certification of compliances, disclosures as may be prescribed; ○ details, as may be prescribed, in respect of shares held by or on behalf of the Foreign Institutional

Investors indicating their names, addresses, countries of incorporation, registration and percentage of shareholding held by them; and

○ such other matters as may be prescribed. � Format of Annual Return: The Annual Return must be prepared in specified format, highlighted as under:

○ Domestic Company: Annual return is to be prepared by every company in Form No. MGT-7. ○ Foreign Company: Every foreign company must prepare the Annual Return in Form No. FC-4.

All the companies must prepare the ‘Extract of Annual Return’ in Form MGT-9. � Signing of Annual Return: The provisions regarding authentication of the Annual Return are as follows:

○ For ‘One Person Company’ and Small Company: Annual Return shall be signed by ¾ Company Secretary; or ¾ Director (where there is no company secretary).

○ For all companies except ‘One Person Company’: Annual Return shall be signed by ¾ Director and Company Secretary; or ¾ Practicing Company Secretary (where there is no company secretary).

� Certification of Annual Return: Annual Return of a listed company or of a company having a paid-up share capital of `10 crores or more or turnover of `50 crores or more shall be certified by a Practicing Company Secretary in Form No. MGT-8. The certificate shall state that the Annual Return discloses the facts correctly and adequately and that the company has complied with all the provisions of this Act.

� Filing of Annual Return: Filing of Annual Return is the responsibility of the management of the company. This document has to be filed with the Registrar of Companies within the specified time limit as under:

� Time Limit for filing of Annual Return: The time within which Annual Report is required to be filed is highlighted hereunder:

○ Domestic Company: Every company is required to file the Annual Return with the Registrar of Companies within 60 days from the date on which Annual General Meeting(AGM) is actually held or from the last day on which AGM should have been held.

○ Foreign Company: Every foreign company must file its Annual Return within 60 days from the last day of its financial year.

� Preservation of Annual Return: The copies of all Annual Returns and copies of all certificates and documents required to be annexed thereto shall be preserved for a period of eight years from the date of filing with the Registrar.


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� Inspection of Annual Return: Any member/ shareholder, debenture-holder, other security holder or beneficial owner can inspect Annual Return without payment of any fees at such reasonable time, which should not be less than two hours during the business hours on any working day. Any other person can inspect Annual Return on payment of such fee as may be specified in the articles of association of the company but not exceeding fifty rupees for each inspection.

� Obtaining copies of Annual Return: Any member/ shareholder, debenture-holder, security holder or beneficial owner or any other person may obtain a copy of Annual Return after its inspection. Such a copy should be made available on payment of such fee as may be specified in the Articles of Association of the company but not exceeding ten rupees for each page. Such copy of return shall be supplied within seven days of deposit of such fee.

EXERCISES 1. What do you mean by a company? Discuss its features.

2. How do you classify companies: (a) on the basis of mode of incorporation; (b) on the basis of liability; (c) on the basis of issuance of shares; (d) on the basis of control; (e) on the basis of nationality.

3. What do you mean by (a) One person company (b) Sec. 8 Company?

4. Define ‘Books of Accounts’ as per Companies Act, 2013? Where these books should be kept?

5. Give an overview of manner of keeping books of accounts in electronic form.

6. Who is responsible for maintenance of books of accounts of a company?

7. What do you mean by Annual Return? Discuss its contents.

8. Write short notes on: (a) Statutory Registers of a company (b) Annual Return.


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Corporate Financial Accounting II Accounting

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