Welcome To The KNOWLEDGE SHARING MEET 1 CA. (Dr.) G.S. Grewal.

Welcome To The

KNOWLEDGE SHARING MEET

1CA. (Dr.) G.S. Grewal

Discussion On

AccountancyFor 2016 Examination

by

CA. (Dr.) G. S. Grewal2CA. (Dr.) G.S. Grewal

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Topics Deleted and Included in Syllabus for 2016

Examination

CA. (Dr.) G.S. Grewal

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Deleted

1.Multiple Choice Questions (MCQs)

2.Multi-Disciplinary Questions

3.Issue of Shares at Discount


Class XI - Included in Syllabus1. Under the Heading ‘Origin of Transactions’

(a) Supporting Vouchers;

(b) Debit Note; and (c) Credit Note.

2. Any appropriate Software may be used.

Scope of SyllabusIn Chapter on Not – For – Profit Organisations

3. Adjustment is a question should not exceed 3 or 4 in number and restricted to subscriptions, consumption of consumables and sale of assets / old material.

4. Entrance / admission fees and general donations are to be treated as revenue receipts.

5. Trading Account of incidental activities is not to be prepared.


Clarifications in Syllabus for Class XI1. 1 Mark Questions will have Very Short Answer Questions

2. All 8 Marks Questions will have internal choice

3. Evaluation Skills Questions Only.

4. Learning Outcomes have been added which are indicators only and do not restrict the scope of questions to be asked.

5. Question Paper to be strictly based on Question Paper Design design.


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Class XII – Included in Syllabus1. Accounting of Private Placement of Shares

2. Accounting of ESOP

3. Definitions of terms used in Chapters on Company Accounts either Introduced or Changed

4. Entries for Debenture Redemption Reserve (DRR) have changed.

Clarification3. 1 Mark Questions will have Very Short Answer Questions

4. All 8 Marks Questions will have internal choice

5. Evaluation Skills Questions Only.

6. Learning Outcomes have been added which are indicators only and do not restrict the scope of questions to be asked.

7. Question Paper to be strictly based on Question Paper Design.


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Important Issues in SyllabusPartnership Accounts

1. Interest on Partner’s loan is a charge against profits.

3. Preparation of Retiring Partner Loan Account is in Syllabus.

4. Preparation of Deceased Partner Capital Account and Executor’s Account is in Syllabus.

5. Dissolution does not include Piecemeal Distribution, Sale to a Company and Insolvency.


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Important Issues in SyllabusPartnership Accounts

6. The realised value of each asset must be given at the time of dissolution.

7. In case Realisation Expenses are borne by a partner, it should be clearly indicated regarding the payment thereof.


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Company Accounts1. Provisions of the Companies Act, 2013 will apply.

2. Provisions relating to DRR given in the Companies Act, 2013 changed and therefore, journal entries change.

3. In Debentures, Ex – Interest and Cum – Interest not in Syllabus.

4. In Statement of Profit and Loss, Exceptional items and Extraordinary items and Discontinued Operations not in Syllabus.

5. Schedule VI of the Companies Act, 1956 is renumbered as Schedule III in the Companies Act, 2013.


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Important Issues in SyllabusComparative and Common – size

StatementsUnchanged

Accounting RatiosUnchanged

Cash Flow Statement1. Only Indirect Method in Syllabus.

2. Bank Overdraft and Cash Credit are to be treated as Short term Borrowings.

3. Unless it is specified, Current Investments are to be taken as Marketable Securities.


Circular No. Acad. 43/2013


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Circular No. Acad. 43/ 2013Items that will not to be Evaluated

Attention is drawn to the following important note in the Circular:

“As you proceed reading further, you may find that there are certain items against which in bracket the clause ‘Not to be Evaluated’ is written.

It means that for these items, accounting treatment will not be asked in the Board Examination. But students must know their place in the Financial Statements as per Schedule-VI, (Read Schedule III) as line items.”CA. (Dr.) G.S. Grewal

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Items that will not to be Evaluated 1. Money Received against Share

Warrants;

2. Reserves and Surplus: (Revaluation Reserve, Share Options Outstanding and Other Reserves are not to be evaluated. However, General Reserve can be evaluated);

3. Share Application Money Pending Allotment;

4. Deferred Tax Liabilities (Net);

5. Other Long-term Liabilities;


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Items that will not to be Evaluated 6. Intangible Assets:

(Masthead and Publishing Titles, Copyrights,

Patents and Other Intellectual Property Rights, Services and Operating Rights and Licenses and Franchises;

7. Capital Work-in-Progress;

8. Intangible Assets Under Development;

9. Deferred Tax Assets (Net);


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Items that will not to be Evaluated 10. Other Non-current Assets.

11. Cash and Cash Equivalents: (Earmarked Balance with Banks, Balances with Banks held as Margin Money or Security against borrowings, guarantees, other commitments and Bank Deposits with more than 12 months maturity are not to be evaluated); and

12. Treatment of Unamortised Expenses.

Also note: Accounting Treatment of Other Current Assets is restricted to Prepaid Expenses, Accrued Incomes and Advance Tax only.


Syllabus RequirementThe realised value of each asset must be given at the time of dissolution.

What Does it Mean?

Realisation Account will be credited by the amount realised from sale of an asset.

If the question does not specify the amount realised on sale of an asset, it is to be assumed that the asset did not realise any amount.

On the other hand, if no information is given for payment of liability, it is to be paid.


Syllabus RequirementIn case Realisation Expenses are borne by a partner, it should be clearly indicated regarding the payment thereof.

What Does it Mean?

It means, in the question not only it should be clear who is to bear Realisation Expenses but also who paid these expenses i.e., firm or the partner.


Examples Entries of Dissolution Expenses

in the Books of the firm


Partner Abhi is to carry out dissolution for which the firm agrees to pay him Rs. 10,000 plus expenses. He incurs Rs. 5,000 towards dissolution expenses which are paid by the firm. Pass the necessary journal entries in the books of the firm?Entries:

CA. (Dr.) G.S. Grewal 20

Particulars Debit (Rs.) Credit (Rs.)

Realisation Exp. A/c Dr. To Abhi’s Capital A/c (Being the remuneration payable to Abhi)

10,00010,000

Realisation Exp. A/c Dr. To Cash / Bank A/c (Being the realisation expenses paid)

5,0005,000

Partner Alok carries out dissolution of the firm for which he is paid Rs. 10,000, including expenses. He incurs Rs. 3,000 towards dissolution expenses which are paid by the firm. Pass the necessary journal entries in the books of the firm?Entries


Particulars Debit (Rs.) Credit (Rs.)Realisation Expenses A/c Dr. To Alok’s Capital A/c (Being the remuneration payable credited to capital account)

10,00010,000

Alok’s Capital A/c Dr. To Bank A/c(Being the realisation expenses paid by the firm debited to capital account)

3,0003,000

Partner Alka is to carry out dissolution for which the firm will pay Rs. 25,000 plus expenses. She incurs Rs. 5,000 towards dissolution expenses which are paid by her. Pass the necessary journal entries in the books of the firm?Entries



Realisation Expenses A/c Dr. To Alka’s Capital A/c(Being the remuneration payable credited to capital account)

25,00025,000

Realisation Expenses A/c Dr. To Alka’s Capital A/c (Being the realisation expenses payable by the partner credited to her capital account)

5,0005,000

Partner Bhaskar is entrusted to carry out dissolution of the firm for which he is paid Rs. 20,000, including expenses. He incurs Rs. 6,000 towards dissolution expenses which are paid by him. Pass the necessary journal entries in the books of the firm?Entries



Realisation Expenses A/c Dr. To Bhaskar’s Capital A/c (Being the remuneration payable credited to capital account)

20,00020,000

No entry for expenses since remuneration includes expenses which are borne by the partner.

Partner Anita is to carry out dissolution of the firm for a remuneration of Rs. 25,000. She incurs Rs. 10,000 towards dissolution expenses which are paid by the firm. Pass the necessary journal entries in the books of the firm?Entries



Realisation Expenses A/c Dr. To Anita’s Capital A/c(Being the remuneration payable credited to capital account)

25,00025,000

Realisation Expenses A/c Dr. To Bank A/c (Being the realisation expenses paid by the firm)

10,00010,000

Partner Bhanu is entrusted to carry out dissolution of the firm for which he is paid Rs. 30,000. Dissolution expenses of Rs. 6,000 were paid by him. Pass the necessary journal entries in the books of the firm?Entries



Realisation Expenses A/c Dr. To Bhanu’s Capital A/c(Being the remuneration payable credited to capital account)

30,00030,000

Realisation Expenses A/c Dr. To Bhanu’s Capital A/c (Being the realisation expenses paid by Bhanu on behalf of the firm credited to his Capital Account)

10,00010,000

Partner Simran is entrusted the work of dissolving the firm and was to get 5% of the value of assets realised as remuneration, including expenses. Assets realised amounted to Rs. 10,00,000. She incurs Rs. 10,000 towards dissolution expenses which are paid by her. Pass the necessary entries in the books of the firm?Entries



Realisation Expenses A/c Dr. To Simran’s Capital A/c (Being the remuneration payable 5% of Rs. 10,00,000 credited to capital account)

50,00050,000

No entry for expenses since remuneration includes expenses which are borne by the partner.

Partner Tarun is entrusted the work of dissolving the firm and was to get 5% of the value of assets realised as remuneration, excluding expenses. Assets realised amounted to Rs. 10,00,000. He incurs Rs. 10,000 towards dissolution expenses which are paid by him. Pass the necessary entries in the books of the firm?Entries



Realisation Expenses A/c Dr. To Tarun’s Capital A/c (Being the remuneration payable 5% of Rs. 10,00,000 credited to capital account)

50,00050,000

Realisation Expenses A/c Dr. To Tarun’s Capital A/c(Being the realisation expenses payable by the firm but paid by the partner credited to his capital account)

10,00010,000

Partap, a partner of the firm is to handle dissolution of the firm for which he is to be paid 10% of the assets realised. Assets realised amounted to Rs. 5,00,000, excluding expenses. Dissolution expenses came to Rs. 10,000 which were paid by the firm. Pass the necessary entries in the books of the firm?Entries



Realisation Expenses A/c Dr. To Partap’s Capital A/c (Being the remuneration payable 10% ofRs. 5,00,000 credited to capital account)

50,00050,000

Partap’s Capital A/c Dr. To Bank A/c(Being the realisation expenses payableby the firm)

10,00010,000

Puneet, a partner of the firm is to handle dissolution of the firm for which he is to be paid 10% of the assets realised. Assets realised amounted to Rs. 5,00,000, including expenses. Dissolution expenses came to Rs. 10,000 which were paid by Amrit, another partner. Pass the necessary entries in the books of the firm?Entries



Realisation Expenses A/c Dr. To Puneet’s Capital A/c (Being the remuneration payable 10% ofRs. 5,00,000 credited to capital account)

50,00050,000

Puneet’s Capital A/c Dr. To Amrit’s Capital A/c(Being the realisation expenses payableby the firm and paid by partner creditedto his capital account)

10,00010,000

Difference Between Companies Act, 2013 and the Companies Act, 1956


The Companies Act, 2013 The Companies Act, 1956

Financial Year Companies to have their financial year ending on 31st March every year.

Companies could have their financial year as decided by them.

Format of Financial Statements

It is prescribed in Schedule III of the Companies Act, 2013.

It was prescribed in Schedule VI of the Companies Act, 1956.

Definitions of Various Terms in the Companies Act, 2013

Many terms in the Act have been defined.

Many terms in the Act were not defined.



Maximum Partners in a firm

Section 464The section empowers the Government to prescribe maximum number of partners that a firm can has. But, the number of partners that can be prescribed cannot exceed 100. The Government has made Rule 10 of Companies (Miscellaneous) Rules, 2014 and prescribed maximum number of partners of a firm to be 50.Thus, a firm with more than 50 partners, is not legal.

Section 11Maximum number of partners of a firm could be 10 in banking business and 20 in any other business.



Maximum Number of shareholders in Private Company

Section 2(68)Maximum number of shareholders in a private company can be 200, excluding its past and present employees. Shares held in joint names to be considered as one shareholder.

Section3(1)(ii)Maximum number of shareholders in a private company was 50, excluding its past and present employees.

One Person Company

Section 2(62)One Person Company is a company which has only one member.

One Person Company did not exist under the Companies Act, 1956.



Issue of Shares at Discount

Section 53 of the Act prohibits issue of shares at a discount.

However, Section 54 of the Companies Act, 2013 is an exception. it permits issue of shares at a discount to employees as ESOPs.

Section 79 of the Companies Act, 1956 permitted issue of shares at a discount.

Receipt of Money Against Securities

Amount can be received by a company by way of cheque or other instrument.

Could be received in cash also.



Articles of Association

Table F applies where Companies Limited by shares does not adopt their own Articles of Association.

Table A applied where Companies did not adopt their own Articles of Association.

Interest on Calls – in – arrears

In the absence of a clause otherwise, interest on Calls – in – arrears is 10% p.a.

In the absence of a clause otherwise, interest on Calls – in – arrears was 5% p.a.

Interest on Calls – in – advance

In the absence of a clause otherwise, interest on Calls – in – advance is 12% p.a.

In the absence of a clause otherwise, interest payable on Calls – in – advance was 6% p.a.



Minimum Subscription

Section 39:

A company shall not allot securities (shares, debentures or any securities by whatever name called) unless the amount stated in the prospectus as minimum subscription has been subscribed and the sum payable on application have been paid or received by the company by cheque or other instrument.

Section 69:

Requirement of minimum subscription was with respect to shares only and that too in respect of initial issue.

Employees Stock Option Plan (ESOP)


Employees Stock Option Plan (ESOP)What is Employees Stock Option Plan (ESOP)?

Employees Stock Option Plan is a plan drawn to issue securities (Shares etc.) to employees (including whole time directors) at a discount i.e., at a price which is lower than its market value.

The Companies Act, 2013 (Section 53) prohibits issue of shares at a discount. But, through Section 54, it permits issue of ESOPs at a discount.


Important Terms in ESOP


Term Meaning

Grant Date Date on which the Enterprise and Employees agree to the Plan.

Vesting Period

Period between the grant date and the date on which all the specified conditions of Employees Stock Option Plan (ESOP) are satisfied.

Vesting Date

Date on which an employee satisfies the specified conditions and thus, becomes entitled to the options.

Exercise It means making an application by an employee for issue of shares against the options vested in him.

Exercise Period

Period after vesting within which an employee should exercise the right to apply under the Plan.

Exercise Price

Price payable by the employee for exercising the right for option granted.

Employees Stock Option Plan (ESOP)How is it accounted in the books of accounts?

The difference between Market Value and Issue Price is the cost to the company, since, the Options are given to employees at a price lower than market price, it is an expense. The entry passed is:

Employees Compensation Expense A/c Dr.

To Shares Options Outstanding A/c

Employees Compensation Expense A/c is shown under ‘Employees Benefit Expenses’ in the Statement of Profit and Loss.

Shares Options Outstanding Account is shown as Reserves and Surplus under Shareholders’ Funds.


When the Vesting Period has Elapsed


When all Option is Exercised by the EmployeesBank A/c Dr.Shares Options Outstanding A/c Dr.

To Share Capital A/c

To Securities Premium Reserve A/c

(Being the shares allotted against ESOP)

(Amount Received)(Amount Credited to Shares Options Outstanding A/c)(Nominal Value Per Share X No. of Shares) (Amount Credited to Shares Options Outstanding A/c)

When the Vesting Period has Elapsed


When All Options are not ExercisedBank A/c Dr.Shares Options Outstanding A/c Dr.

To Share Capital A/c

To Securities Premium Reserve A/c

To General Reserve A/c

(Being the shares allotted against ESOP)

(Amount Received)(Amount Credited to Shares Options Outstanding A/c)

(Nominal Value Per Share X No. of Shares)

(Amount Credited to Shares Options Outstanding A/c relating to Options Exercised)

(Amount Credited to Shares Options Outstanding A/c relating to Options not Exercised)

IllustrationBloom Ltd. grants options to subscribe 500 shares of Rs. 10 each at a price of Rs. 30 per share to each of its employees numbering 100. Vesting period being 3 years. Fair (Market) price of the share as on the grant date was Rs. 45. Employees numbering 75 exercised the option by the exercise date.

Pass the necessary journal entries.


Solution


Date Particulars Debit (Rs.)

Credit (Rs.)

Year 1

Employees Compensation Exp. A/c Dr. To Shares Options Outstanding A/c(Being the 1/3rd amount of difference between Fair (Market) Value and Issue Price recognised as expense)

2,50,0002,50,000

Year 2


2,50,0002,50,000

Year 3


2,50,0002,50,000

Solution



Credit (Rs.)

Year 4 Bank A/c (75 X 500 X Rs. 30) Dr.Shares Options Outstanding A/c Dr. To Share Capital A/c (75 X 500 x Rs. 10) To Securities Premium Res. A/c (75 x 500 x Rs. 20 + 500 x Rs. 15) To General Reserve A/c (25 x 500 x Rs. 15) (Being 500 shares each allotted to 75 employees exercising options, related amount transferred from Shares Options Outstanding Account to Securities Premium Account . Balance amount i.e., amount relating to 25 employees who did not exercise option transferred to General Reserve)

11,25,0007,50,000

3,75,000

13,12,500

1,87,500

Debenture Redemption Reserve


Debenture Redemption Reserve (DRR)Section 71 of the Companies Act, 2013; together with

Rule 18(7) of the Companies (Share Capital and Debentures) Rules, 2014

deals with Debenture Redemption Reserve.

Section 71 of the Companies Act, 2013 requires companies to transfer amount at least equal to 25% of the nominal value of debentures to DRR before the redemption of debentures begins.

DRR is required to be created only for non – convertible part of the Debentures.


Debenture Redemption Reserve (DRR)Requirements of DRR• Section 71 of the Companies Act, 2013 requires

companies to transfer amount at least equal to 25% of the nominal value of total redeemable debentures.

• Rule 18(7) of the Companies (Share Capital and Debentures) Rules, 2014 requires companies to invest amount at least equal to15% of the value of debentures to be redeemed by 31st March of the next year in specified securities.

• Investment in specified securities to be made by 30th April of the year.

• Investment can be utilised only for redemption of debentures.


Debenture Redemption Reserve (DRR)Companies not required to create DRR

1. All India Financial Institutions (AIFIs) regulated by Reserve Bank of India.

2. Banking Companies.

3. Other Financial Institutions (LIC, IDFCI etc.)

All other Companies are required to create DRR.


Journal Entries for DRR


1. On Transfer of Amount to DRR Amount

Surplus i.e., Balance in Statement of Profit and Loss A/c Dr. To Debenture Redemption Reserve A/c(Being the amount transferred to DRR)

At least 25% of the total Redeemable Debentures

2. On Investment Made in terms of Rule 18(7)

Debenture Redemption Investment A/c Dr. To Bank A/c(Being the amount invested in Specified Securities)

Note: This amount must be invested by 30th April of the current year for the Debentures to be redeemed by 31st March of next year.

At least equal to 15% of the Debentures to be redeemed by 31st March of next year.

Journal Entries for DRR


3. When Debentures are redeemed

Bank A/c Dr. To Debenture Redemption Investment A/c(Being the investment realised at the time of redemption of debentures)

(Amt. Received)(Amount of Inv.)

4. If Investment earns Income and Tax is Deducted at Source (TDS)

Bank A/c Dr.TDS Receivable A/c Dr. To Debenture Redemption Investment A/c To Interest A/c(Being the investment realised)

(Amt. Received)(Amount of TDS)(Amount of Inv.)(Interest Earned)

5. When all the Debentures have been redeemed

Debenture Redemption Reserve A/c Dr. To General Reserve A/c(Being the balance in DRR transferred to General Reserve on redemption of all debentures)

Question on DRRAppollo Ltd. issued 21,000, 8% Debentures of Rs. 100 each on 31st March, 2008 redeemable at a premium of 8% on 30th June, 2015. The company transferred the required amount to Debenture Redemption Reserve in three equal instalments staring 31st March, 2013.The required investment was made in specified securities on 30th April, 2015.

Pass the necessary journal entries regarding transfer of amounts to Debenture Redemption Reserve, investment made and redemption of debentures.


Solution



Credit (Rs.)

2013Mar. 31 Surplus i.e., Balance in Statement

of Profit and Loss A/c Dr. To DRR A/c(Being the one – third of 25% of total redeemable debentures transferred to DRR)

1,75,0001,75,000



1,75,0001,75,000

Solution



Credit (Rs.)



1,75,0001,75,000

2015Apr. 30 Deb. Redemption Investment A/c Dr.

To Bank A/c(Being the amount equal to 15% of the redeemable debentures invested in Government Securities)

3,15,0003,15,000

Solution



Credit (Rs.)

2015June 30 Bank A/c Dr.

To Deb. Redemption Investment A/c(Being the investment encashed)

3,15,0003,15,000

2015June 30 8% Debentures A/c Dr.

Premium on Redemption of Debentures A/c Dr. To Debenture Holders A/c(Being the amount payable on redemption)

21,00,0001,68,000

22,68,000

Solution



Credit (Rs.)

2015June 30 Debenture Holders’ A/c Dr.

To Bank A/c(Being the amount paid to debenture holders)

22,68,00022,68,000

2015June 30 DRR A/c Dr.

To General Reserve A/c(Being the amount of DRR transferred to General Reserve after redemption of debentures)

5,25,000

5,25,000

Definition of a CompanySection 2(20) of the Companies Act, 2013.

“Company” means a company incorporated under this Act or any previous Company Law.”

Section 3(1)(i) of the Companies Act, 1956

“Company” means a company formed and registered under this Act or an existing company as defined in Clause (ii)”

Clause (ii)

“Existing Company” means a company formed and registered under any of the previous companies laws specified below:

(a) ………. to (g) …………..56CA. (Dr.) G.S. Grewal

Definition of Company Limited by Guarantee / Shares Section 2(21) Company Limited by Guarantee

“Company Limited by Guarantee” means a company having the liability of its members limited by the Memorandum to such amount as the members may respectively undertake to contribute to the assets of the company in the event of it being wound up.

It was not defined in the Companies Act, 1956.Section 2(22) Company Limited by Shares

“Company Limited by Shares” means a company having the liability of its members limited by the Memorandum to the amount, if any, unpaid on the shares respectively held by them.

It was not defined in the Companies Act, 1956.57CA. (Dr.) G.S. Grewal

Definition of Authorised or Nominal Capital

Section 2(8) of the Companies Act, 2013

“Authorised Capital” or “Nominal Capital” means such capital as is authorised by the memorandum of a company to be the maximum amount of share capital of the company.

It was not defined in the Companies Act, 1956.


Definitions of Issued Share Capital and Subscribed Share CapitalSection 2(50) Issued Share Capital

“Issued Share Capital” means such capital as the company issues from time to time for subscription.


Section 2(86) Subscribed Share Capital

“Subscribed Share Capital” means such part of the capital which is for the time being subscribed by the members of a company.



Definition of “Paid up Share Capital or Share Capital Paid up”Section 2(64) of the Companies Act, 2013

“Paid-up Share Capital” or “Share Capital Paid-up” means such aggregate of money credited as paid-up as is equivalent to the amount received as paid-up in respect of shares issued and also includes any amount credited as paid-up in respect of shares of the company, but does not include any other amount received in respect of such shares, by whatever name called.


“It includes capital credited as paid-up.”60CA. (Dr.) G.S. Grewal

Definition of “Called up Capital”


“Called-up Capital” means such part of the capital, which has been called for payment.

It was not defined in the Companies Act, 1956


Definition of “Share”


“Share” means a share in the share capital of a company and includes stock.

It was not defined in the Companies Act, 1956


Definition of Preference Share

Section 43, Explanation(ii) of the Companies Act, 2013

“Preference Share Capital” with reference to any company limited by shares, means that part of the issued share capital of the company which carries or would carry a preferential right with respect to:

(a) payment of dividend, either as a fixed amount or an amount calculated at a fixed rate, which may either be free of or subject to income tax; and

(b) repayment, in the case of a winding up or repayment of capital, of the amount of share capital paid-up or deemed to have been paid-up, whether or not, there is a preferential right to the payment of any fixed premium or premium on any fixed scale, specified in the memorandum or articles of the company.


Definition of Equity Share

Section 43, Explanation(i) of the Companies Act, 2013

“Equity share capital” with reference to any company limited by shares, means all share capital which is not preference share capital.


“Equity Shares” are those shares which are not preference shares.


Definition of “Securities Premium Reserve”


It prescribes the purposes for which Securities Premium Reserve can be utilised.

Sections 77A and 78 of the Companies Act, 1956

It prescribed the purposes for which Securities Premium Reserve could be utilised.

The purposes for which Securities Premium Reserve can be utilised are same.


Definition of “Debenture”


“Debenture” includes debenture stock, bonds or any other instrument of a company evidencing a debt, whether constituting a charge on assets of the company or not.

Section 2 (12) of the Companies Act, 1956

“Debenture” includes debenture stock, bonds or any other instrument of a company, whether

constituting a charge on assets of the company or not.


Operating CycleOperating Cycle is the time gap between• the acquisition of an asset for processing, and• its realisation in cash and cash equivalents.

If operating cycle cannot be identified, it is assumed to be a period of 12 months.


Operating Cycle Chart


Trade ReceivablesRealised

Cash/Bank

Purchase of RawMaterial (Say held for

2 Months)

Processing of Raw Material to manufacture Finished Goods

(Say 5 Months)

Finished Goods Held in Inventory (Say 90 Days, i.e., 3 Months)

Finished Good Sold andConverted to Trade Receivables

(Say on Credit Period of 4 Months)

Operating Cycle is 14 Months (2 Months + 5 Months + 3 Months + 4 Months)

70

Operating Cycle Chart


Trade ReceivablesRealised

Cash/Bank

Purchase of RawMaterial (Say held for

1 Month)

Processing of Raw Material to manufacture Finished Goods

(Say 4 Months)

Finished Goods Held in Inventory (Say 60 Days, i.e., 2 Months)

Finished Good Sold andConverted to Trade Receivables

(Say on Credit Period of 1 Month)

Operating Cycle is 8 Months (1 Month + 4 Months + 2 Months + 1 Month)

71

Q. How is Long – term Borrowings becoming due for payment within 12 months of the reporting date or the period of Operating Cycle, shown in the Balance Sheet?

A. It is not shown as Short – term Borrowings but Other Current Liabilities and sub - head

‘Current Maturities of Long – term Debts’.


BALANCE SHEET as at………….


Share Capital Amount (Rs.) Amount (Rs.)

Note 1: Share CapitalAuthorised Share Capital1,00,000 Equity Shares of Rs. 10 each 10,00,000

Issued Capital10,000 Equity Shares of Rs. 10 each 8,00,000

Subscribed CapitalSubscribed and fully paid up78,000 Equity Shares of Rs. 10 each (Out of the above, 10,000 fully paid Equity Shares have been issued for consideration other than cash)Subscribed but not fully paid up1,000, Equity Shares of Rs. 10 eachLess: Calls – in – arrears Add: Forfeited Shares Account*

10,0002,000

7,80,000

8,000 788,000 5,0007,93,000

Slide 73

PARTICULARS NOTE NO. Rs.

I. EQUITY AND LIABILITIES Share Capital 1 7,93,000

Discussion on Schedule VIQ. What are ‘Share Warrants’?

A. The term ‘Share Warrants’ is defined in Companies (Accounting Standards) Rules, 2006 as follows:

“Share Warrants are financial instruments which gives the holder the right to acquire equity shares”.


Discussion on Schedule VIReserves and Surplus

I. Capital ReserveII. Capital Redemption Reserve

III. Securities Premium Reserve

IV. Debenture Redemption Reserve

V. Revaluation Reserve

VI. Share Options Outstanding Account

VII. Other Reserves

VIII. Surplus i.e., Balance in Statement of Profit and Loss


76

Q. Can a Company have reserves other than those specified in Schedule VI?

A. Yes, a company can have reserves other than those specified in Schedule VI. Schedule VI of the Companies Act is made flexible by

including an entry Any Other Reserves (to specify the nature and purpose of each reserve).

Examples: Investment Fluctuation Reserve, Workmen Compensation Reserve, Subsidy Reserve, Tax Reserve, Development

Reserve, Research and Development Reserve, Asset Replacement Reserve etc.


Q. Is there a difference between Statement of Profit and Loss and Surplus i.e., Balance in Statement of Profit and Loss?A. Yes.

Statement of Profit and Loss is a statement from which profit earned or loss incurred

during the year is known.

Surplus i.e., Balance in Statement of Profit and Loss is a reserve representing balance in the reserve. It includes opening Balance and current year’s profit or loss.


Q. What is Revaluation Reserve?

A. Upward revision of Book Value of an asset is credited to ‘Revaluation Reserve’.

Revaluation Reserve cannot be distributed unless gain is realised. Also fictitious assets such as preliminary expenses, loss on issue of debentures etc. cannot be written off against it.

If the company revises the value of the asset downward, Revaluation Reserve is debited by the amount of downward revision.


Q. What is Shares Options Outstanding Account?

A. Shares are issued at a price that is lower than its market value to the employees. Companies issuing these shares have to create a reserve for the amount of difference crediting it to

Shares Options Outstanding Account.

The amount is credited in instalment over the vesting period.

if the employee exercises the option or the vesting period is over, the amount is transferred to General Reserve.


80

Q. What amount is shown under ‘Share Application Money Pending Allotment’? A. Out of the total Share Application Money received only that much amount is shown against ‘Share Application Money Pending Allotment’ against which shares will be allotted by the company.

Money received by the company as share Application Money and which is to be refunded is shown under the head Current Liabilities and sub – head Other Current Liabilities.


Comparative StatementsAnd

Common – size Statements


Format of Comparative Balance Sheet


Particulars Note No.

2012-13Rs.

2013-14Rs.

Absolute Change (Increase /Decrease)

Rs.

Percentage Change (Increase/Decrease)

%

A B (B-A)=C C/A X 100=D

I. EQUITY AND LIABILITIES1. Shareholders’ Funds

(a) Share Capital(b) Reserves and Surplus

2. Non-Current Liabilities(c) Long-term Borrowings (d) Long-term Provisions

3. Current Liabilities(e) Short-term Borrowings(f) Trade Payables(g) Other Current Liabilities(h) Short-term Provisions

TotalII. ASSETS

1. Non-Current Assets(a) Fixed Assets:

Tangible Assets Intangible Assets

(b) Non-current Investments(c) Long-terms Loans and Advances

2. Current Assets(d) Current Inventories (e) Inventories(f) Trade Receivables(g) Cash and Cash Equivalents(h) Short-term Loans and Advances(i) Other Current Assets

Total

…………

…………

……………………

………………..….

………………..…...…...….

…………

…………

……………………

………………..….

………………..…...…...….

…………

…………

……………………

………………..….

………………..…...…...….

…………

…………

……………………

………………..….

………………..…...…...….

FORMAT OF COMPARATIVE STATEMENT OF PROFIT & LOSS

COMPARATIVE STATEMENT OF PROFIT AND LOSS

for the years ended 31st March, 2013 and 2014



2012-13Rs.

2013-14Rs.

Absolute Change

(Increase or Decrease)%

Percentage Change (Increase or Decrease)%

A B (B-A)=C X 100=D

I. Revenue from Operations …… …… …… 100

II. Other Income …… …… …… ……

III. Total Revenue(I+II) …… …… …… ……

IV. Expenses:Cost of Materials ConsumedPurchases of Stock-in-TradeChanges in Inventories of Finished Goods,Work-in-Progress and Stock-in-TradeEmployees Benefit ExpensesFinance CostsDepreciation and AmortisationOther Expenses

…………………………………………

…………………………………………

…………………………………………

…………………………………………

Total Expenses …… …… …… ……

Profit before Tax(III-IV) …… …… …… ……

COMMON SIZE STATEMENT OF PROFIT AND LOSS

for the years ended 31st March, 2013 and 2014



Absolute Change Percentage of Revenue from Operations

2012-13 2013-14 2012-13 2013-14

I. Revenue from Operations …… …… 100 100

II. Other Income …… …… …… ……

III. Total Revenue(I+II) …… …… …… ……

IV. Expenses:Cost of Materials ConsumedPurchases of Stock-in-TradeChanges in Inventories of Finished Goods,Work-in-Progress and Stock-in-TradeEmployees Benefit ExpensesFinance CostsDepreciation and Amortisation ExpensesOther Expenses

…………………………………………

…………………………………………

…………………………………………

…………………………………………

Total Expenses …… …… …… ……

Profit before Tax(III-IV) …… …… …… ……

FORMAT OF COMMON-SIZE BALANCE SHEET



2012-13 Rs.

2013-14Rs.

Absolute Change (Increase /Decrease)

Rs.

Percentage Change (Increase/Decrease)

%

A B (B-A)=C C/A X 100=D

I. EQUITY AND LIABILITIES1. Shareholders’ Funds

(a) Share Capital(b) Reserves and Surplus

2. Non-Current Liabilities(c) Long-term Borrowings (d) Long-term Provisions

3. Current Liabilities(e) Short-term Borrowings(f) Trade Payables(g) Other Current Liabilities(h) Short-term Provisions

TotalII. ASSETS

1. Non-Current Assets(a) Fixed Assets:

Tangible Assets Intangible Assets

(b) Non-current Investments(c) Long-terms Loans and Advances

2. Current Assets(d) Current Inventories (e) Inventories(f) Trade Receivables(g) Cash and Cash Equivalents(h) Short-term Loans and Advances(i) Other Current Assets

Total

…………

…………

……………………

…………..…...….

………………..…...….

…………

…………

……………………

………………..….

………………..…...….

…………

…………

………………100

………………..….

………………..…...….100

…………

…………

………………100

………………..….

………………..…...….100

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