Shri Vile Parle Kelavani Mandal’s

Narsee Monjee College of Commerce and Economics(Autonomous)

A.Y 2021-22

Name of the Course:

Financial Accounting and Auditing -Paper VII
TYBCOM
Semester VI

Title of the Project/Assignment

IMPORTANCE OF DEFICIENCY ACCOUNT IN CASE OF LIQUIDATION
OF A COMPANY

Submitted by:
Full Names of SAP ID Div Roll Contact Content Contributed
the Learners Number No Number
1. Zeel Vipul 45208190622 C091 8169913933 Items Contributing to
Deficiency/Reducing
Satvara
Surplus

2. Aayushi Vikas 45208190631 C092 8779575462

Introduction, SOA,
Shah Deficiency Account.
3. Akshat Diven 45208190633 C093 9930451162 Importance Of Deficiency
Account and When Does
Shah
one Prepare a Deficiency
Account?

4. Ami 45208190635 C094 7506061610

Item Reducing Deficiency
Dharmendra or Contributing Surplus
Shah
5. Bhavya 45208190639 C095 9022720886 Sample Deficiency A/C As
Per List H And Its
Bhadresh Shah
Interpretation and
Conclusion

Teacher In Charge : KEDAR BHIDE

 AAYUSHI SHAH C092

TABLES OF CONTENT
Sr Content Page No. Disclosure Of
No. Name

1. Introduction 2 Aayushi

2. Statement Of Affairs 2 Aayushi

3. Deficiency Account 3 Aayushi

4. Importance Of Deficiency Account 4 Akshat

5. When Does One Prepare a Deficiency Account? 5 Akshat

6. Items Contributing to Deficiency or Reducing 6 Zeel

Surplus

7. Item Reducing Deficiency or Contributing 7 Bhavya

Surplus

8. Sample Deficiency A/C As Per List H And Its 8 Ami

Interpretation

9. Conclusion 9 Ami

10. Bibliography 10 -

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 AAYUSHI SHAH C092

INTRODUCTION
 A company comes into being through a legal procedure and also comes to an end by law.
Liquidation is the legal procedure by which the company comes ceases. Since, a company
being a creation of law cannot die a natural death. A company, when found needful, can be
liquidated.

COMMENCEMENT OF WINDING UP BY NCLT:

 Where, prior to the presentation of a petition for the winding up of a company by the NCLT,
a resolution has been passed by the company for voluntary winding up, the winding up of the
company should be deemed to have started at the time of the passing of the resolution, and
unless the NCLT, on evidence of fraud or error, seems to fit to direct otherwise, all
proceedings taken in the willingly liquidating should be deemed to have been validly taken.
In any other case, the winding up of a company by the NCLT should be deemed to commence
at the time of the presentation of the petition for the winding up.

STATEMENT OF AFFAIRS
 In case of winding up by NCLT, Section 272(5) of the Companies Act, 2013 provides that a
petition presented by the company for winding up before the NCLT shall be admitted only if
accompanied by a SOA in such form and in such manner as may be prescribed.
 In accordance with Section 274(1), where a petition for winding up is filed before the NCLT
by any person other than the company, the NCLT shall, if satisfied that an apparent case for
winding up of the company is made out, by an order direct the company to file its objections
along with a statement of its affairs within 30 days of the order in such form and in such
manner as may be prescribed. The NCLT may allow a further period of 30 days in a situation
of contingency or special circumstances. The broad aspects on which the SOA is prepared are
the following:
1. Including the assets on which there is no fixed charge at the value they are expected to
gain i.e. includes calls in arrear but not uncalled capital.
2. Including the assets on which there is a fixed charge. The amount expected to be
gained would be compared with the amount due to the creditor concerned. Any excess
is to be extended to the other column. A deficit is to be added to unsecured creditors.

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 AAYUSHI SHAH C092

3. The total of assets in point (1) and any surplus from assets mentioned in point (2) is
available for all the creditors (except secured creditors already covered by specifically
mortgaged assets).

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 AAYUSHI SHAH C092

4. From the total assets available, the following should be deducted one by one:-
(i) Preferential creditors,
(ii) Debentures having a floating charge, and
(iii) Unsecured creditors.
If a negative balance emerges, there would be deficiency as regards creditors,
otherwise there would be a surplus.
5. The amount of aggregate paid-up capital (giving details of all classes of shares) should
be added and the figure emerging will be deficiency or surplus as regards members.

Statement of affairs consists of eight lists:

 List A: Entire particulars of every narration of property that is not specifically pledged
and that does not included in any other list are to be set forth in this list.
 List B: Assets specifically pledged and creditors fully or partially secured.
 List C: Preferential creditors for rates, taxes, wages, salaries and otherwise.
 List D: List of debenture-holders who are secured by a floating charge.
 List E: Unsecured creditors.
 List F: List of preference shareholders.
 List G: List of equity shareholders.
 List H: Deficiency or surplus account.

DEFICIENCY ACCOUNT
The official liquidator will specify a date for period (minimum 3 years) commencing with the
date on which information is supplied for preparation of an account to explain the deficiency
or surplus. On that date, either assets would be more than capital plus liabilities, that is, there
would be a reserve or there would be a deficit or debit balance in the Profit and Loss Account.
The Deficiency account includes of two parts:

1. The initial part starts with the deficit (on the given date) and contains every item that
increases deficiency (or reduces surplus such as losses, dividends etc.).
2. The second part commences with the surplus on the given date and includes all
profits. If the aggregate of the first exceeds that of the second, there would be a
deficiency to the extent of the difference, and if the total of the second part is more
than that of the first, there would be a surplus.

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 AAYUSHI SHAH C092

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 AKSHAT SHAH C093

IMPORTANCE OF DEFICIENCY ACCOUNT

 When company become bankrupt deficiency accounts is prepared. This account manifests the
reason of company deficiency. A company deficiency is due to losses, decrease in the value
of assets or any other such reasons. This account is not created on double entry system but it
is statement of simple computation. To create the deficiency account, we have to find or
make list of items which are responsible for deficiency account.

 Before a company enters voluntary winding up, besides the statement of affairs, a pack of
explanatory information will also be given to creditors. This information will include a
reconciliation of the posture between the last set of published accounts and the statement of
affairs, known as the deficiency account. Here we will have a look over at how deficiency
account is prepared and how it is used to investigate whether wrongful trading has taken
place.

 When any company becomes

insolvent, at that time,
deficiency account is prepared.
This account shows the causes
of company's deficiency. But
this account is the statement of
simple computations. First of
all, we make the list of items
which either contribute the
deficiency or increase the
deficiency. After this, we
reduce the items which either
reduce the deficiency or contribute the surplus.

 Even after liquidation, a company has an urge to know the area due to which surplus reduced
over a period of time deficiency account helps to understand:
 whether we contributed to deficiency or contributed in reducing surplus,
 whether surplus reduced due to dividend distribution or provision creation,
 whether the loss was trading loss or other than trading loss,
 whether there was any asset devaluation or existence of contingent liability,

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 AKSHAT SHAH C093

 whether profit generated by a company was sufficient for losses other than operational
losses,

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 AKSHAT SHAH C093

 whether there was any item or product generating surplus throughout the downgrading
period of time, or
 whether there was any asset appreciation.

 This understanding gained by the help of deficiency account and helps the promoters of the
company to look at these perspectives in case they will to commence any other new
company or join hands with existing companies.

 Apart from the people related to the company it also helps general public to analyze a
company in detail even after liquidation and helps them to make decision whether to hold
investments, drawback their investments or avoid incremental investments in companies
performing in similar manner prior to its liquidation.

WHEN DO YOU PREPARE A DEFICIENCY ACCOUNT?

It should be noted that a deficiency account is only drawn up when a company is to enter an
insolvent voluntary liquidation.

It is prepared using the format below: AMT

I) Items contributing to deficiency:
1) Excess of liabilities including capital over assets XXX
2) Net dividend and bonus are declared XXX
3) Net Trading losses XXX
4) Losses written off or for which provision has been made XXX
5) Other items contributing to deficiency or reducing surplus XXX
II) Items reducing deficiency
1. Excess of assets over capital and liabilities (XXX)
2. Profit and income other than trading profit XXX)
3. Other Item reducing deficiency or contributing surplus XXX)
4. Net trading profit XXX)
DEFICIENCY AS SHOWN BY STATEMENT OF AFFAIRS XX

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 ZEEL SATVARA C091

ITEMS CONTRIBUTING TO DEFICIENCY OR REDUCING SURPLUS

1. Excess of liabilities including capital over assets as shown by balance sheet:
 Basically, this is the reserve and surplus account.
 The debit balance of profit and loss account reduces the profit of the company and hence
ends up contributing to deficiency account.

2. The period (from end of financial year to the date of statement of affair) when net dividend
and bonus is declared:
 Dividend and bonus are declared by the company on regular basis as returns to
shareholders.
 This dividend and bonus declared during the year reduces the profit of the company and
hence ends up contributing to deficiency account.

3. Net Trading losses:

 Trading directly relates to the production process. The ordinary profit and losses of
operational processes is trading profit and losses.
 The trading losses reduces the profit available with the company, this contributes to the
deficiency account.

4. Losses written off or for which provision has been made in the books during the same
period, other than trading losses:
 Excess of expenses over income leads to losses, such losses that relates to indirect
processes are losses other than trading which contributes to the deficiency account. For
example: loss by fire.
 Provisions are created from the profits available with the company and hence reduces the
surplus of the company.

5. Other items contributing to deficiency or reducing surplus:

 The value of balance sheet items keeps on changing, this change arises due to realisation
amount particular item holds.
 Changes such as decrease in value of assets, increase in value of liability or existence of
contingent liability contributes to deficiency or reduces surplus.

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 BHAVYA SHAH C095

ITEM REDUCING DEFICIENCY OR CONTRIBUTING SURPLUS

In the process of liquidation, if the statement of affairs of liquidator is showing any

deficiency, the liquidator is required to explain this deficiency by drawing up an detailed
statement called "List H- deficiency statement". In this statement preparer is required to
cover all vital financial factors contributing to /reducing the deficiency in previous minimum
3 years. (If the company is getting liquidated within 3 years of incorporation, then all the
factors from the date of incorporation till date).

1. Excess of assets over capital and liabilities

 Basically, this is the reserve and surplus account.
 The credit balance of profit and loss account increases the profit of the company and
hence ends up contributing to deficiency account.

2. Net trading profit:

 Trading directly relates to the production process. The ordinary profit and losses of
operational processes is trading profit and losses.
 The trading profit reduces the loses available with the company, this contributes to the
surplus.

3. Profit and income other than trading profit during the same period
 This are profit arising from not ordinary activity of business like sale of investment. This
type of profit helps to reduce deficiency and increase surplus
 Profit on realization of any assets is one example.

4. Other Item reducing deficiency or contributing surplus

 The value of balance sheet items keeps on changing, this change arises due to realisation
amount item holds.
 Changes such as increase in value of assets, decrease in value of liability contributes to
surplus or reduces deficiency.
 Interest on capital
 Excess of private assets over private liabilities

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 AMI SHAH C094

SAMPLE DEFICIENCY A/C AS PER LIST H AND ITS INTERPRETATION

(Rs in ‘000)

Amt (Rs) Amt (Rs)

III) Items contributing to deficiency:
1. Excess of capitals and liabilities over assets three
years ago as shown by balance sheet (5000)
2. Net dividends or bonuses declared during the (250)
period
3. Net trading losses (500)
4. Estimated losses now written off for the purpose
of estimated statement of affairs:
Bad Debts (90)
Loss on: Goodwill (45)
Plant (100)
Fixtures (25) (260)

(6010)
IV) Items reducing deficiency
5. Estimated profit on sale of land and building 200
DEFICIENCY AS SHOWN BY STATEMENT OF (5810)
AFFAIRS

 As we know, the deficiency A/c gives an estimate of the loss on liquidation that the
creditors and the shareholders will have to bear and the reasons for such deficiency. In
the given case, the deficiency a/c starts with loss according to last financial statements.
This shows that the company was already incurring losses before it started the voluntary
liquidation process.

 Items that produce a loss to the company as a direct result of the company's insolvency
are noted after the initial deduction has been made. These items are explicitly accounted
for in demonstrating the difference between the last accounts and the statement of affairs
since they arise solely as a result of the insolvency. Some examples can be found in the
narrative above, but others include:

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 AAYUSHI SHAH C092

 Money owed to employees as a result of redundancy and failure to give notice.

 Charges associated with terminating a lease or factoring deal.
 Liabilities that arise as a result of a contract's breach.

 The difference between the book value of the company's assets and the expected to
realise value in the statement of affairs is the final adjustment on the deficit account. If a
corporation goes into voluntary liquidation without being able to sell the firm, its assets
are likely to be sold on a breakup basis, lowering its value.

CONCLUSION

 In simple terms the deficiency a/c is a mere reconciliation between the last set of
published financial statements and the statement of affairs.

 The deficiency A/c starts with financial statements of company a minimum of 3 years
prior to liquidation. This gives the shareholders a holistic view of the affairs of company
at a glance.

 The List H deficiency a/c is simple in terms of format and hence is easy for a layman to
understand. One does not need accounting knowledge to understand it.
1.

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 BIBLIOGRAPHY

 https://books.google.com/books?id=w8tFEAAAQBAJ
 https://www.scribd.com/document/434569737/RTP/http://dcac.du.ac.in/documents/E-
Resource/2020/Metrial/429kishor1.pdf
 https://blog.ipleaders.in/understanding-liquidation-process-company/
 https://www.icai.org/post.html?post_id=16961
 http://dcac.du.ac.in/documents/E-Resource/2020/Metrial/429kishor1.pdf
 https://ca2013.com/274-directions-for-filing-statement-of-affairs/
 https://www.coursehero.com/file/123603302/66645bos53803-cp7pdf//
 https://www.businessrescueexpert.co.uk/what-is-a-deficiency-account/
 http://www.svtuition.org/2011/09/deficiency-account-bankruptcy.html/
 https://books.google.com/books?id=x09REAAAQBAJ

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