CORPORATE A/CING – (Al Jamia Arts and Science College, Poopalam)

Module 1 number of members to 50,(ii)prohibits the

ACCOUNTING FOR SHARE CAPITAL invitation to the public to subscribe their
A company is an association of persons who shares or debentures and (iii) restricts the
contribute money or money’s worth to a transferability of their shares.
common stock and uses it for a common 2. Public companies – These are companies
purpose. In the words of Justice James, “a other than private companies.
company is an association of persons united SHARE CAPITAL
for a common object”. Sec 3(1) (i) of the Total capital of the company is divided into
Companies Act 1956 defines a company as units of small denominations; each one is
“company formed and registered under this called a share. According to Sec 2(46) of the
Act or an existing company”. Companies Act 1956, share has been defined
Characteristics of Company as a share in the share capital of the
1. It is a voluntary association of persons company; and includes stock except where a
2. It has a separate legal entity distinction between stock and share is
3. It has a common seal expressed or implied.
4. It has a perpetual succession. Classes of Shares
Kinds of Companies A. Preference Shares
I. On the basis of formation Shares which enjoy the preferential rights as
1. Chartered companies – Those companies to dividend and repayment of capital in the
which are incorporated under a special event of winding up of the company over the
charter by the king or sovereign such as East equity shares are called preference shares.
India Company. The holder of preference shares will get a
2. Statutory companies – These companies fixed rate o dividend.
are formed by the special Act of legislature Types of preference shares
or parliament like RBI. 1. Cumulative preference shares – In case
3. Registered companies – Such companies of these shares, the arrears of dividend are
are incorporated under the Companies Act carried forward and paid out of the profits of
1956 or were registered under any previous the subsequent years.
Companies Act. 2. Non‐cumulative preference shares – If
II. On the basis of liability dividend not to accumulate and not to
1. Limited companies‐ In these companies, carried forward to next year, these are called
the liability of each member is limited to the non‐cumulative preference shares.
extent of face value of shares held by him. 3. Participating preference shares – In
2. Guarantee companies – The liability of addition to a fixed dividend, balance of profit
member of such companies are limited to the (after meeting equity dividend) shared by
amount he has undertaken to contribute to some preference shareholders. Such shares
the assets of the company in the event of its are participating preference shares.
winding up. 4. Non‐participating preference shares –
3. Unlimited Companies – In these These shares get only a fixed rate of
companies, the liability of the members is dividend. These do not get share in the
unlimited and members are personally liable surplus profit.
to the creditors of the company fop making 5. Redeemable preference shares – If
up the deficiency. Such companies are rare preference shares are returned after a
these days. specified period to shareholders, these
On the basis of public investment preference shares e shares are called
1. Private Companies – These are redeemable preference shares.
companies by its Articles, (i) limits the 6. Convertible preference shares – These
 CORPORATE A/CING – (Al Jamia Arts and Science College, Poopalam)

shares are given the right of conversion into the members is known as paid‐up capital.
equity shares within a specified period or at Any unpaid amount of balance on the called‐
a specified date according to the terms of up capital is known as unpaid capital or calls
issue. in arrears.
B. Equity Shares 6. Reserve Capital – It is that portion of the
Equity shares are those which are not uncalled capital which is called‐up only at
preference shares. Equity shares do not the event of company’s winding up.
carry any preferential gain in respect of Issue of Share Capital
dividend or repayment of capital. So these The shares can be issued either at par,
are known as ordinary shares. There will be premium or at discount. Shares are said to be
no fixed rate of dividend to be paid to the issued at par when a shareholder is required
equity shareholders and this rate may vary to pay the face value of the shares to the
from year to year. In winding up, the equity company. Shares are said to be issued at
capital is repaid last. However, equity premium when a shareholder is required to
shareholder gets full voting power. pay more than the face value to the company.
Difference between equity shares and Shares are said to be issued at discount when
preference shares the shareholder is required to pay less
Equity shares Preference shares amount than the face value to the company.
It is an ownership It is a hybrid Allotment of shares
security security Allotment of shares means the acceptance of
Dividend rate is not Dividend rate is offer of the applicant for the purchase of
fixed fixed shares. Directors have the discretionary
Capital is repaid Capital is repaid power to reject or accept the applications.
only in winding up after a stipulated But the public company cannot allot its
period shares unless the minimum subscription has
These shares have Generally do not been subscribed by the public and the
voting rights have voting rights amount of application has been received.
Face value is lower Face value is higher After the allotment of shares to the
applicants who will become the shareholders
Types of share capital of the company.
1. Authorized (Registered or Nominal) Journal Entries for Share Issue
Capital – It is the maximum amount of 1. On receipt of application money:
capital which the company is authorized to Bank A/c Dr
raise by way of public subscription. To Share Application A/c
2. Issued Capital – The part of authorized 2. On acceptance of application:
capital which is offered to the public for Share application A/c Dr
subscription is called issued capital. To Share Capital A/c
3. Subscribed Capital – That part of the 3. On allotment money due:
issued capital for which applications are Share allotment A/c Dr
received from the public is called subscribed To Share capital A/c
capital. 4. On receipt of allotment money:
4. Called‐up Capital – That part of Bank A/c Dr
subscribed capital which has been called‐up To Share allotment A/c
or demanded by the company is called 5. On making first call due:
called‐up capital. Share first call A/c Dr
5. Paid‐up Capital – The part of called‐up To Share capital A/c
capital which is offered and actually paid by
 CORPORATE A/CING – (Al Jamia Arts and Science College, Poopalam)

6. On receipt of first call money: discount. The journal entry is

Bank A/c Dr Share allotment A/c Dr (allotment money)
To Share first call A/c Discount on issue of shares A/c Dr (disc.)
(Note: similar entries may be passed for To Share capital A/c (Total)
second call, third call, if any.) When both Preference and Equity Shares
Issue of shares at premium are issued
Shares are said to be issued at premium When a company issues both preference and
when a shareholder is required to pay more equity shares the journal entries are written
than the face value to the company. The separately for each type of share capital.
excess amount received over the face value Under subscription of shares
is called share premium. It is a capital Sometimes the applications for shares
receipt. The share premium shall be received will be less than the number of
transferred to “Securities Premium A/c”. It shares issued. This is called under
should be shown on the liability side of subscription. In such a case, the allotment
balance sheet under the head “Reserves and will be equal to the number of shares
Surplus”. subscribed and not to the shares issued.
Journal entries: Over subscription of shares
(a) If premium is received with Sometimes the applications for shares
application money: received will be more than the number of
(i) Bank A/c Dr shares issued. This is called over
To Share application A/c subscription. When there is over
subscription, it is not possible to issue shares
(ii) Share application A/c Dr (with total) to all applicants. In such a situation company
To Share capital A/c (application) shall reject some applications altogether,
To Securities premium A/c (premium) allot in full on some applications and make a
(b) If premium is received with allotment pro‐rata allotment on some applications.
money: Pro‐rata allotment means that allotment on
(i) Share allotment A/c Dr (total) every application is made in the ratio which
To Share capital A/c (allotment due) the number of shares allotted bears to
To Securities premium A/c (premium) number of shares applied. In case of
applications fully rejected will be returned to
(ii) Bank A/c A/c the applicants. In pro‐rata allotment the
To Share allotment A/c excess application will be adjusted either on
Issue of shares at discount allotment and or on calls. Any surplus left
Shares are said to be issued at discount when even after the adjustment will be refunded to
the shareholder is required to pay less the applicants. Journal entries are
amount than the face value to the company. 1. When application money is returned:
Discount on issue of shares is a capital loss Share application A/c Dr
and it should be debited to a separate To Bank A/c
account called “Discount on issue of shares 2. When excess application is adjusted
A/c”. It is shown on the assets side of balance towards allotment or call:
sheet under “Miscellaneous Expenditure”. Share application A/c Dr (total)
The rate of discount should not exceed 10% To share allotment A/c
of nominal value of shares. Generally the To Call (if any)
discount on issue is recorded at the time of Calls in Arrears and Calls in Advance
allotment. It is also noted that a newly Sometimes shareholders may fail to pay the
registered company cannot issue shares at allotment money and or call money. Such
 CORPORATE A/CING – (Al Jamia Arts and Science College, Poopalam)

dues are called calls in arrears. It is shown in 3. Forfeiture of shares which were issued
the balance sheet as a deduction from the at discount:
called‐up capital. Directors are authorized to Share Capital A/c Dr (amount called up)
charge interest on calls in arrears at a rate as To share allotment A/c (unpaid)
per Articles. In its absence, the interest does To share call A/c (unpaid)
not exceed 5% pa. To forfeited shares A/c (total paid)
When a shareholder pays more money To discount on issue of shares A/c
than called up, the excess money is called Reissue of forfeited shares
calls in advance. The company must pay Forfeited shares may be reissued by the
interest on calls in advance at a rate company either at pr, premium or discount.
prescribed by Articles. In its absence, the But the discount on reissue should not
company is liable to pay interest @6% pa. exceed the amount forfeited.
But the shareholder is not entitled to any Journal entries
dividend on calls in advance. 1. On reissue at par (issued at par or
Forfeiture of shares premium):
The cancellation of shares due to non‐ Bank A/c Dr (received on reissue)
payment of allotment money or call money To share capital A/c (paid up)
within a specified period is called forfeiture 2. On reissue of at a discount (issued at
of shares. It is the compulsory termination of par or premium):
membership of the defaulting shareholders. Bank A/c Dr (received on reissue)
He also losses whatever amount he has paid Forfeited shares A/c Dr (disc. on reissue)
to the company so far. A company can forfeit To share capital A/c (paid up)
the shares only if it is authorized by its 3. On reissue at a premium (issued at par
Articles. The forfeiting is done only after or premium):
giving 14 day notice to the defaulting Bank A/c Dr (received on reissue)
shareholders. The balance of forfeited shares To share capital A/c ( paid up)
A/c should be shown by way of an addition To security premium A/c (on reissue)
to called up capital on the liability side of 4. On reissue at a discount (issued at a
balance sheet till the shares are reissued. discount):
Journal entries Bank A/c Dr (received on reissue)
1. Forfeiture of shares - issued at par: Discount on issue of shares A/c Dr(original)
Share Capital A/c Dr (amount called up) Forfeited shares A/c Dr (over org. issue)
To share allotment A/c (unpaid) To share capital A/c (paid up)
To share call A/c (unpaid)
To forfeited shares A/c (total paid) If all forfeited shares have been reissued, the
2. Forfeiture of shares-issued at premium: credit balance in forfeited shares A/c (capital
(a) When allotment money(incl. profit) shall be transferred to capital Reserve
premium) and call money not paid A/c by passing the following entry
Share Capital A/c Dr (amount called up) Forfeited shares A/c Dr
Security premium A/c Dr (unpaid) To capital reserve A/c
To share allotment A/c (unpaid) If all forfeited shares are not reissued, only
To share call A/c (unpaid) the profit on shares which are issued is
To forfeited shares A/c (total paid) transferred to Capital reserve A/c.
(b) When call money not paid Surrender of shares
Share Capital A/c Dr (amount called up) Sometimes a shareholder is not able to pay
To share call A/c (unpaid) further calls and returns his shares to the
To forfeited shares A/c (total paid) company for cancellation. Such voluntary
 CORPORATE A/CING – (Al Jamia Arts and Science College, Poopalam)

return of shares to the company by the Accounting Procedure for Redemption

shareholder himself is called surrender of 1. Ensure that the redeemable preference
shares. The accounting treatment of shares are fully paid. If they are partly paid,
surrender of shares is the same as that of the following entries are passed to make
forfeiture of shares. them fully paid.
REDEMPTION OF PREFERENCE SHARES (a) Preference Share Final Call A/c Dr
When the preference shares are issued it is To Preference Share Capital A/c
to be paid back by the company to such
shareholders after the expiry of a stipulated (b) Bank A/c Dr
period whether the company is to be wound To Preference Share Final Call A/c
up or not. As per Sec 80 of the Companies 2. Entry for total amount due to
Act, a company limited by shares can redeem preference shareholders
the preference shares, subject to the Preference Shares Capital A/c Dr
following conditions: Premium on Redemption A/c Dr
1. The shares to be redeemed must be fully To Preference Shareholders A/c
paid up. 3. Entry for issue of equity shares either
2. Such shares can be redeemed either out of with or without premium
profit or out of the proceeds of fresh issue of Bank A/c Dr (amount received)
shares. But these cannot be redeemed out of Discount on issue of shares A/c Dr
fresh issue of debentures or out of sale To Equity share capital A/c
proceeds of any property of the company. To Security Premium A/c
3. Premium payable on redemption must be 4. Entry for providing premium on
provided out of profits of company or out of redemption
company’s security premium account. Security premium A/c
4. When shares are redeemed out of profit, a or P& L A/c or General Reserve A/c Dr
sum equal to the nominal amount of shares To Premium on Redemption A/c
so redeemed must be transferred out of 5. Entry for appropriation from divisible
profit to a reserve account namely Capital profits to meet deficiency of amount on
Redemption Reserve A/c. redemption (or if redemption is out of
5. The Capital Redemption reserve A/c can profit)
be utilized only for the issue of fully paid up P & L A/c or General Reserve A/c Dr
bonus shares. To Capital Redemption Reserve A/c
The preference shares can be redeemed 6. Entry for payment to preference shares
either at par or at premium (but not at Preference Shareholders A/c Dr
discount). Premium on redemption is To Bank A/c
provided out of existing security premium Use of equation for determining the face
account or security premium on fresh issue. value of shares to be issued
If they are not sufficient, the redemption An equation can be applied when the given
premium should be provided out of P&L A/c amount of premium in security premium A/c
or General Reserve. in the balance sheet plus amount of premium
Methods of Redemption to be obtained from fresh issue of shares is
There are three methods for redemption of not sufficient to pay premium on redemption
preference shares. They are: of preference shares. It is due to security
(a) Redemption out of fresh issue of shares premium A/c given in balance sheet cannot
(b) Redemption out of profits be used for redeeming the face value of
(c) Redemption partly out of fresh issue and shares.
partly out of profit
 CORPORATE A/CING – (Al Jamia Arts and Science College, Poopalam)

(a) When fresh issue is to be made at a 2. Buy back from the open market – A
premium: [Redeemable preference share company can also buy back its shares from
capital + premium on redemption] = the open market either through stock
[{Balance in security premium A/c in B/S} + exchanges or book building process.
{Revenue profit available for redemption} + DEBENTURES
{N} + {N x % rate of premium on fresh The term ‘debenture’ has been derived from
issue}] the Latin word ‘debere’, which means ‘to
(b) When fresh issue of shares is to be borrow’. Debenture is an instrument in
made at a discount: [Redeemable writing given by a company acknowledging
preference share capital + premium on debt received from the public. The
redemption] = [{Balance in security Companies Act defines debenture as
premium A/c in B/S} + {Revenue profit “debenture includes debenture stock, bonds
available for redemption} + {N} ‐ {N x % rate or any other securities of a company,
of discount on fresh issue}] whether constituting a charge on the assets
Note: N=Nominal value of fresh issue of of the company or not”.
shares to be made for redemption Features of Debenture
BUY BACK OF SHARES 1. It is an instrument of debt issued by
Buy back is a method of cancellation of share company under its seal.
capital. It simply means buying of own 2. It carries fixed rate of interest.
shares. It leads to reduction in the share 3. Debenture is a part of borrowed capital.
capital of a company. 4. It is repaid after a long period.
Objectives of buy back 5. It is generally secured.
1. To return surplus cash to investors Difference between shares and
2. To improve the financial health debentures
3. To increase the EPS Share Debenture
4. To increase the market price of the share The person holding The person having
Advantages of buy back share is called debenture is called
1. It helps to return the surplus cash to shareholder debenture holder
investors It is part of owned It is a part of
2. It helps to increase the EPS capital borrowed capital
3. It increases promoter’s holding in the Dividend is paid on Interest is paid on
company shares debenture
4. It helps to restructure the capital base of Rate of dividend Rate of interest is
the company varies year to year fixed
Disadvantages of buy back Shareholder has doesn’t have voting
1. It implies under valuation of company’s voting right right
stock It can’t be converted It can be converted
2. It may be used as a tool of insider trading into debenture into share
3. It may be used for manipulating the prices Classification of debentures
of shares. 1. Secured or Mortgage debentures –
Methods of buy back These debentures are secured either on a
As per SEBI guidelines, there are two particular asset or on the assets of the
methods of buy back of shares. They are: company in general.
1. Buy back through tender offer – Under 2. Unsecured or Naked debentures – These
this, a company can buy back its shares from debentures do not create any charge on the
its existing shareholders on a proportionate assets of the company.
basis.
 CORPORATE A/CING – (Al Jamia Arts and Science College, Poopalam)

3. Registered debentures – These point of view debentures can be issued

debentures are payable to the persons either at par, at premium or at discount.
recorded in the register of debenture holders a. When debentures are issued at par
of the company and these are transferable Bank A/c Dr (with face value)
only with the knowledge of the company. To debentures A/c
4. Bearer debentures – In these debentures b. When debentures are issued at
company maintains no register of debenture discount
holders and these are transferable by mere Bank A/c Dr (net amount received)
delivery. To Disc. on issue of Debentures A/c
5. Redeemable debentures – These To Debentures A/c (with face value)
debentures are repayable after a fixed period c. When debentures are issued at
either in lump sum or in installments. premium
6. Perpetual or Irredeemable debentures Bank A/c Dr (total amount)
– These debentures are not repayable during To Debentures A/c (with face value)
the life time of the company. To Security premium A/c
7. Convertible debentures – These condition of redemption
debentures can be converted into the shares There are six cases on the basis of terms of
within or after a Specified period, at the issue and conditions of redemption of
option of the holder. debentures. They are as follows:
8. Non‐Convertible debentures – These a. Issued at par and redeemable at par.
debentures can’t be converted into shares. b. Issued at premium and redeemable at par.
Issue of Debentures c. Issued at discount and redeemable at par.
Issue of debentures can be studied in the d. Issued at par and redeemable at premium.
following two points of view e. Issued at discount and redeemable at
1. From consideration point of view premium.
a. For consideration in cash: Debentures f. Issued at premium and redeemable at
can be issued either at par, at premium or at premium.
discount. The entry will be A. When issued at par and redeemable at
Bank A/c Dr par.
Discount on issue of debentures A/c Dr (if ) Bank A/c Dr
To Debentures A/c To Debentures A/c
To Security premium A/c (if any) B. When issued at premium and
b. For consideration other than cash: redeemable at par.
i. For purchase of assets Bank A/c Dr (face value+ premium)
Sundry Assets A/c Dr To Debentures A/c (face value)
To Vendor A/c To security premium A/c
ii. For issuing debentures for payment of C. When issued at discount and
purchase consideration redeemable at par.
Vendor A/c Dr Bank A/c Dr
To Debentures A/c Discount on issue of debentures A/c Dr
c. As collateral security: When debentures To Debentures A/c (face value)
are issued as subsidiary or secondary D. When issued at par and redeemable at
security in addition to the principal security premium.
against a loan or bank over draft such an Bank A/c Dr (amount received)
issue of debentures is called issue of Loss on issue of debentures A/c Dr
debentures as collateral security. To debentures A/c (face value)
2. From price point of view : From this To premium on redemption A/c
 CORPORATE A/CING – (Al Jamia Arts and Science College, Poopalam)

E. When issued at discount and ii. Security premium/ General reserve/P&L

redeemable at premium. A/c Dr
Bank A/c Dr (amount received) To Premium on redemption A/c
Loss on issue of debentures A/c Dr
To debentures A/c (face value) iii. Debenture holders A/c Dr
To premium on redemption A/c To Bank A/c
F. When issued at premium and Sources of redemption of debentures
redeemable at premium. 1. Redemption out of fresh issue.: A
Bank A/c Dr (amount received) company may issue new shares or
Loss on issue of debentures A/c Dr debentures or both for redeeming the
To debentures A/c (face value) existing debentures.
To security premium A/c 2. Redemption out of Capital: If debentures
To premium on redemption A/c are redeemed out of capital, no amount of
Discount or Loss on issue of debentures divisible profit is kept aside for Redeeming
Discount or loss on issue of debentures and debentures. Redemption out of Capital
premium on redemption are capital losses. reduces the liquid resources available to the
They are shown in the balance sheet under company. As per the guidelines issued by
the head “Miscellaneous Expenditure”. Being SEBI, a company has to create Debenture
the losses, they are to be written off against Redemption Reserve (DRR) equivalent to
capital reserve or security premium A/c. In 50% of the amount of debenture issue before
its absence it is written off to P& L A/c redemption of debentures commences. But
during the life of debentures. The entry is the creation of DRR is not required in the
following cases
Capital res./ Security prem P & L A/c Dr a. Debentures with maturity of 18 months or
To Disc. /Loss on issue of debnt. less
b. Fully convertible debentures.
REDEMPTION OF DEBENTURES 3. Redemption out of profit: When
Redemption of debentures refers to the sufficient profits are transferred from P & L
discharge of liability on account of Appropriation A/c to the Debenture
debentures. It simply means repayment of Redemption Reserve A/c at the time of
debentures. As per Companies Act, the redemption of debentures, such redemption
debentures should be redeemed in is said to be out of profits. It reduces the
accordance with the terms and conditions of profits available for dividend. The following
issue. The following entries are passed for entry is passed for transfer of profit.
redemption of debentures.
a. When debentures are redeemed at par P & L Appropriation A/c Dr
i. Debentures A/c Dr To Debenture Red. Reserve A/c
To debenture holders A/c
On the completion of redemption of all
ii. Debenture holders A/c Dr debentures, the DRR A/c is close by
To Bank A/c transferring it to general reserve. The entry
b. When debentures are redeemed at is as follows
premium Debenture Red. Reserve A/c Dr
i. Debentures A/c Dr To General Reserve A/c
Premium on redemption A/c Dr
To debenture holders A/c P & L Appropriation A/c Dr
To Debenture Red. Reserve A/c
 CORPORATE A/CING – (Al Jamia Arts and Science College, Poopalam)

(Transfer of amount for debenture Bank A/c Dr

redemption) To Interest on Sinking Fund Invt. A/c
ii. For transferring interest to sinking
8% Debentures A/c Dr fund
To Debenture holders A/c Interest on Sinking Fund Invt. A/c Dr
(amount due to debenture holders) To Sinking Fund A/c
iii. For annual amount set aside
Debenture holders A/c Dr P & L Appropriation A/c Dr
To Bank A/c To Sinking Fund A/c
(payment to debenture holders) iv. For investment of annual installment
and interest
Debenture Redemption Reserve A/c Dr Sinking Fund Investment A/c Dr
To General Reserve A/c To Bank A/c
(transfer of DRR to GR after redemption) At the end of last year:
All the entries except entry (iv) in second
Note: Amount equal to the value of and subsequent year should be passed.
debentures redeemed is transferred from i. For amount realized on sale of
P&L Appropriation A/c to DRR A/c. investment
4. Redemption by Sinking Fund: Under this Bank A/c Dr
method of redemption, every year a part of To Sinking Fund Investment A/c
the profit (fixed amount) is set aside and ii. For profit on sale of investment
sinking fund (Debenture Redemption Fund) Sinking Fund Investment A/c Dr
is created. Sinking fund is invested in outside To Sinking Fund A/c
securities. The interest received of such (Note: if loss the above entry is reversed)
investments along with the amount set aside iii. For amount due to debenture holders
from profit will again be invested as usual. It Debentures A/c Dr
continues till the date of redemption of Premium on redemption A/c Dr
debenture. The investment will be sold and To Debenture holders A/c
the cash thus realized will be used to repay iv. For amount paid to debenture holders
the debentures. Under this method, sinking Debenture holders A/c Dr
fund A/c (Debenture Redemption Fund A/c) To Bank A/c
and sinking fund investment A/c (Debenture v. For transfer of balance in sinking fund
Redemption Fund Investment A/c) will be A/c
opened. After the redemption, balance of Sinking Fund A/c Dr
sinking fund A/c is transferred to general To General Reserve A/c
reserve. The following entries are required 5. Redemption by Insurance Policy: This is
under this method. an alternative to sinking fund method. Under
At the end of first year: this method, an insurance policy is
i. For the amount set aside every year purchased by paying annual premium. Such
P & L Appropriation A/c Dr policy will mature on the date of redemption.
To Sinking Fund A/c This method provides funds for redemption
ii. For investment of sinking fund and covers the risk involved in the
Sinking Fund Investment A/c Dr transactions.
To Bank A/c 6.Redemption by Conversion: Sometimes
At the end of second and subsequent the debenture holders of a company are
years: given the option to convert their debentures
i. For interest received on investment into the shares or new debentures within a
 CORPORATE A/CING – (Al Jamia Arts and Science College, Poopalam)

stipulated period. The new shares or split the Profit and Loss Account into three
debentures can be issued either at par or at sections (Trading Account, Profit and Loss
premium or at discount. The following entry Account and Profit and Loss Appropriation
will be made for the purpose. Account). Only the Profit and Loss Account is
Old Debentures A/c Dr prepared which cover items appearing in
Disc. on issue of shares/debentures A/c Dr Trading Account and Profit and Loss
To New Share Capital/ Debenture A/c Appropriation Account. But it is desirable to
To Prem on issue of shares/ deb A/c split the Profit and Loss Account into three
sections so that Gross profit, Net profit and
Own Debentures Surplus carried to balance sheet may be
The directors can purchase debentures ascertained.
whenever they find the market price Difference between Reserves and
favorable to the company. Such purchased Provisions
debentures can be either cancelled by the Reserves Provisions
company or may be kept as an investment It is an appropriation It is a charge
called own debentures and may be utilized of profit. Hence it is against profit.
for reissue when needed afterwards. debited to Profit and Hence it is debited
Purchase of own debentures are to be Loss Appropriation to Profit and Loss
treated in account in the same way as an Account Account
ordinary investment. The entry will be:
It needs not be It must be made
Own Debentures A/c Dr (purchase price) created when profits irrespective of
To Bank A/c are inadequate. whether profit or
loss.
Module 2 It is shown on the It is usually shown
FINAL ACCOUNTS OF COMPANIES liability side of by way of
It is not obligatory to sole proprietors and balance sheet under deduction from the
partnership firms to prepare the final the head ‘Reserves amount of the item
accounts as per the statute. But, according to and Surplus’. for which it is
Section 210 of Indian Companies Act 1956 it created.
is a statutory obligation to a joint stock It can be utilized for It cannot be
company to prepare its final accounts. The distribution of utilized for
final accounts of a company consist of (a) dividend. distribution of
Balance Sheet and (b) Profit and Loss dividend.
Account. Provision for taxation
Balance Sheet A company will estimate the tax payable for
The Balance sheet of companies must be the current accounting period and on this
prepared according to the prescribed form basis it will make provision for taxation.
given in Part I of Schedule VI of the Provision for taxation is debited to Profit and
Companies Act. As per the Companies Act, loss Account and it will appear on the
the Balance sheet of companies can be liability side of balance sheet under the head
prepared in two forms – (i) Horizontal Form ‘Provisions’. When assessment completed,
and (ii) Vertical Form. the provision for tax will be adjusted. If the
Profit and Loss Account assessed tax is more than the provision
In Companies Act, there is no specified made in the previous year, the excess has to
format for preparation of Profit and Loss be shown on the debit side of Profit and Loss
Account of companies. It is not required to Appropriation Account. If the assessed tax is
 CORPORATE A/CING – (Al Jamia Arts and Science College, Poopalam)

less than the opening provision, such excess amount to the reserve at a rate not exceeding
provision should be credited to the Profit 10%. Amount of transfer to reserve depends
and Loss Appropriation Account. on the rate at which dividend is to be
Dividend declared as follows:
The divisible profit (profit available to i. If the dividend proposed exceeds 10%
shareholders) of a company is distributed but not exceed 12.5% of the paid up capital,
among the shareholders of the company on the amount to be transferred to the reserve
the basis of number of shares held. This is shall not be less than 2.5% of the current
called dividend. Dividend is usually paid on profits.
paid up capital. ii. If the dividend proposed exceeds
Proposed dividend :It is the dividend 12.5% but not exceed 15% of the paid up
recommended by Board of Directors after capital, the amount to be transferred to the
the close of the books of account. When it reserve shall not be less than 5% of the
approved by the shareholders in the annual current profits.
general meeting, it becomes final dividend. iii. If the dividend proposed exceeds 15%
Interim dividend :Interim dividend refers but not exceed 20% of the paid up capital,
to the dividend paid by the company before the amount to be transferred to the reserve
the preparation of final accounts. It is shall not be less than 7.5% of the current
declared between two annual general profits.
meetings. iv. If the dividend proposed exceeds 20% of
Final dividend :It is the dividend which is the paid up capital, the amount to be
proposed and declared at the end of the transferred to the reserve shall not be less
accounting year after the close of the books than 10% of the current profits.
of account. Module 3
Unclaimed dividend: It refers to the AMALGAMATION OF COMPANIES
dividend not yet claimed by the shareholders There are many forms of business
within 30 days of declaration of dividend. It combinations to obtain the economies of
is shown as a current liability in the balance large scale production or to avoid the cut
sheet. throat competition. They are amalgamation,
Corporate Dividend Tax (CDT) absorption, external reconstruction etc.
The companies distributing dividend are The term amalgamation is used when
required to pay tax on such dividends. It is two or more existing companies go into
called Corporate Dividend Tax (CDT). CDT is liquidation and a new company is formed to
payable on any amount declared, distributed take over the business of liquidated
or paid by a company as dividend. At companies. The term absorption is used
present, the rate of CDT is 16.995 %( 17%). when an existing company takes over the
Corporate Dividend Tax is shown on the business of one or more existing companies
debit side of Profit and Loss Appropriation which go into liquidation.
Account and on the liability side of Balance In external reconstruction, one
sheet under the head ‘Current liabilities and existing company goes into liquidation and a
Provisions’ (Provisions). new company is formed to take over the
Transfer to Reserves former company.
Generally, Board of Directors has the Definitions
discretionary power regarding the transfer a. Amalgamation – means an amalgamation
of profit to the reserve. However, as per pursuant to the provisions of the Companies
Section 205(2A) of the Act, it is compulsory Act 1956 or any other statute which may be
for a company to transfer certain minimum applicable to companies.
 CORPORATE A/CING – (Al Jamia Arts and Science College, Poopalam)

b. Transferor Company – means the to ensure uniformity of accounting policies.

company which is amalgamated into another Amalgamation in the nature of purchase
company. An amalgamation should be considered to be
c. Transferee Company – means the an amalgamation in the nature of purchase,
company to which a 6ransferor company is when any one or more of the conditions
amalgamated. specified for amalgamation in the nature of
d. Reserve – means the portion of earnings, merger is not satisfied.
receipts or other surpluses of an enterprise Difference between Amalgamation in the
(whether capital or revenue) appropriated nature of merger and Amalgamation in
by the management for a general or a the nature of purchase
specific purpose other than provision for Merger Purchase
depreciation or diminution in the value of There is a genuine One company
assets or for a known liability. pooling of assets acquires another
Types of Amalgamation and liabilities of the
As per AS‐14 there are two types of transferor
amalgamation (1) Amalgamation in the companies as well
nature of merger and (2) Amalgamation in as the share holders’
the nature of purchase. interest.
Amalgamation in the nature of Merger Assets, liabilities Assets, liabilities
(Pooling Interest Method) and reserves of the and reserves are
An amalgamation should be considered to be transferor company recorded by the
an amalgamation in the nature of merge are recorded by the transferee company
when all the following conditions are transferee company either at book value
satisfied: at their book values. or at values revised
i. All the assets and liabilities of the The balance of P&L The balance of P&L
Transferor Company or companies before A/c of the A/c of the
amalgamation should become the assets and transferor company transferor company
liabilities of the transferee company. aggregated with the is not included in
ii. Shareholders holding not less than 90% of balance of the P&L the books of the
the face value of the equity shares of the A/c of the transferee company
transferor company (excluding the transferee company
proportion held by the transferee company) All reserves Only statutory
should become the shareholders of the whether capital or reserves are taken
transferee company. revenue of in the books of
iii. The consideration payable to the above Transferor Transferee
mentioned shareholders should be Company are Company in order to
discharged by the transferee company by the merged into the preserve their
issue of the equity shares and cash can be reserves of identity.
payable in respect of fractional shares. Transferee
iv. The business of the Transferor Company/ Company
companies is intended to be carried on by It is always It may not be
the transferee company. intended to intended to
v. No adjustment is intended to be made to continue the continue the
the book values of the assets and liabilities of business of business of
the Transferor Company/ companies when transferor company Transferor
they are incorporated in the financial Company
statements of the transferee company except
 CORPORATE A/CING – (Al Jamia Arts and Science College, Poopalam)

All the assets of All the assets may or to third parties. But ‘trade liabilities’ include
Transferor may not become the only trade creditors and bills payable.
Company become assets of the e. The term ‘business’ will always means
the assets of the transferee company. both the assets and liabilities.
transferee company. 3. Net Payment method: Under this method,
Purchase Purchase purchase consideration is the aggregate of all
consideration is consideration is payments in the form of cash, shares,
usually valued at the usually valued at the securities etc. to the shareholders of the
par value of the market price of the transferor company by the transferee
shares issued. shares issued. company. The following points are
Purchase Consideration considered while calculating purchase
Purchase consideration is the amount which consideration under this method:
is paid by the transferee company for the a. The assets and liabilities taken over by the
purchase the business of Transferor transferee company are not considered.
Company. As per AS‐14, consideration for b. Purchase consideration includes the
amalgamation means the aggregate of shares payments to shareholders only.
and other securities issued and the payment c. Any payments made by the transferee
made in the form of cash or other assets by company to some other party on behalf of
the transferee company to the shareholders the transferor company are to be ignored.
of the transferor company. Purchase 4. Share exchange or Intrinsic value
consideration does not include any payment Method: Under this method purchase
to outsiders including debenture holders. consideration is calculated on the basis of
The purchase consideration may be intrinsic value of shares. The intrinsic value
calculated in the following ways: of a share is calculated by dividing g the net
1. Lump Sum Method: When the transferee assets available le for equity shareholders by
company agrees to pay a fixed sum to the the number of equity shares. This value
transferor company, it is called lump sum determines the ratio of exchange of the
payment of purchase consideration. For shares between the transferee and
example, X Ltd purchases the business of Y transferor companies.
Ltd for a consideration of 1000000. Steps in accounting procedure of
2. Net Worth (Net Assets) Method: Under amalgamation, absorption and external
this method, the net worth of the assets reconstruction
taken over by the transferee company is a. Calculation of purchase consideration.
taken as purchase consideration. Here, b. Ascertainment of discharge of purchase
Purchase consideration = Assets taken over consideration.
at agreed values – Liabilities taken over at c. Closing the books of transferor companies.
agreed values. d. Passing opening entries in the books of
The following points are noted while purchasing or transferee company.
calculating purchase consideration under his Accounting entries in the books of
method: transferor company
a. Cash balance is usually included in assets. 1. For transferring assets to Realization
But if it is not taken over, it will not be A/c:
included. Realization A/c Dr
b. Fictitious assets should never be added. To Assets A/c (individually )
c. Accumulated profits and reserves should (Note :( a). Fictitious assets should not be
not be considered. transferred to Realization A/c (b). If cash in
d. The term ‘liabilities’ include all liabilities hand and bank are not taken over by
 CORPORATE A/CING – (Al Jamia Arts and Science College, Poopalam)

transferee company should not be 8. For closing preference share capital:

transferred to Realization A/c. But it can be Preference share capital A/c Dr
taken as opening balance of cash or bank A/c Realization A/c Dr (if excess paid)
and (c). Other assets, even if they are not To Preference shareholders A/c
taken over, should be transferred to To Realization A/c (if less)
Realization A/c) 9. For paying off Preference shareholders:
2. For transferring liabilities(outside Preference shareholders A/c Dr
liabilities only) to Realization A/c: To Pref. shares in Transferee co A/c
Liabilities A/c Dr (individually) To Cash/ Bank A/c (if any)
To Realization A/c To Debentures A/c (if any)
(Note :( a). If any liability is not taken over by 10.For trans. equity capital, reserves
transferee company should not be Equity share capital A/c Dr
transferred to Realization A/c, (b). Items in General reserve A/c Dr
the nature of provisions are to be transferred P&L A/c Dr
to Realization A/c and (c). Any fund which Dividend equalization reserve A/c Dr
denotes both liability and reserve, the Security premium A/c Dr
portion of liability should be transferred to To equity shareholders A/c
Realization A/c). 11. For transferring fictitious assets:
3. For purchase consideration due from Equity shareholders A/c Dr
transferee company: To P&L A/c
Transferee Company A/c Dr To preliminary expenses
To Realization A/c To Disc./ expense on issue
4. On receiving or discharging purchase 12. For closing Realization A/c:
consideration: a. For loss on realization (if debit >
Equity shares in Transferee co. A/c Dr credit).
Pref. shares in Transferee co. A/c Dr Equity shareholders A/c Dr
Debentures in Transferee co. A/c Dr To Realization A/c
Cash/ Bank A/c Dr b. For profit on realization (if credit >
To Transferee company A/c debit).
5. For sale of assets not taken over by Realization A/c Dr
transferee company: To Equity shareholders A/c
Cash/ Bank A/c Dr (Sale proceeds) 13. For payment to equity shareholders:
To Realization A/c Equity shareholders A/c Dr
6. For discharging liabilities not taken To Equity shares in Transferee co. A/c
over by transferee company: To Cash/ Bank A/c (if any)
Liability A/c Dr After payment to equity shareholders, all
Realization A/c Dr (if excess paid) accounts in the book of transferor company
To Cash/ Bank A/c will be closed.
To Realization A/c (If less) entries in the books of transferee
7. For liquidation (realization) expenses: company (nature of purchase)
a. If liquidation expenses are met by 1. For purchase consideration due and
transferor company. assets and liabilities taken over:
Realization A/c Dr Assets A/c Dr (At revised, or book value)
To Cash/ Bank A/c Goodwill A/c Dr (if credit > debit)
b. If liquidation expenses are met by To Liabilities A/c (At revised,
transferee company. To Liquidator of transferor co.(PC)
No entry is required. To Capital reserve (if debit > credit)
 CORPORATE A/CING – (Al Jamia Arts and Science College, Poopalam)

2. For payment of purchase 2. For payment of purchase

consideration: consideration:
Liquidator of transferor company A/c Dr Liquidator of transferor company A/c Dr
To Share capital A/c To Share capital A/c
To Debenture A/c To Debenture A/c
To Bank A/c To Bank A/c
(Note: if shares are issued at premium, (Note: if shares are issued at premium,
security premium A/c is credited with security premium A/c is credited with
premium. If shares are issued at discount, premium. If shares are issued at discount,
discount on issue of shares A/c is debited discount on issue of shares A/c is debited
with discount). with discount).
3. For payment of liquidation expenses by 3. Payment of liquidation expense by
transferee company: transferee company:
Goodwill/ Capital reserve/ P&L A/c Dr General Reserve/ P & L A/c Dr
To Cash/ Bank A/c To Cash/ Bank A/c
4. For payment of formation expenses: 4. For the payment of formation expenses:
Preliminary expenses A/c Dr Preliminary expenses A/c Dr
To Cash/ Bank A/c To Cash/ Bank A/c
5. If there are both Goodwill and Capital ACCOUNTING FOR INTERNAL
reserve A/c, Goodwill may be set off RECONSTRUCTION
against Capital reserve: There are two types or reconstruction,
Capital Reserve A/c Dr namely external reconstruction and internal
To Goodwill A/c reconstruction. In external reconstruction, a
6. If any liability (including debenture) is new company is formed to take over the
discharged by transferee company: assets and liabilities of an existing company
Liability A/c Dr (Amount payable) which goes into liquidation. But in internal
To Share capital/ Deb./ Bank A/c reconstruction, there will be neither
7. To record Statutory Reserves of liquidation of an existing company nor
transferor company: formation of a new company. Internal
Amalgamation Adjustment A/c Dr reconstruction means an internal
To Statutory Reserve A/c rearrangement that gives a new look to the
(Note: Amalgamation adjustment A/c is capital structure, adjusts the rights of
shown on the assets side of the company’s shareholders, debenture holders and
Balance Sheet under the head “Miscellaneous creditors along with some adjustments in the
Expenditure”). values of assets and writing off fictitious
Accounting entries in the books of assets. Internal reconstruction may be done
transferee company (Amalgamation in due to the accumulate losses, shortage of
the nature of merger) working capital, overvaluation of assets etc.
1. For purchase consideration due and Forms or Methods of Internal
assets and liabilities taken over: reconstruction
Assets A/c Dr (Individually) 1. Alteration of share capital.
To Liabilities A/c (Individually) 2. Reduction of share capital.
To Reserves of Transferor co. A/c 3. Variation of shareholders’ rights.
To P & L A/c 4. Scheme of compromise
To Liquidtr. of transferor co A/c (PC)
(Note: The diff. between Dr and Cr is
adjusted in the reserves of Transferee Co.)
 CORPORATE A/CING – (Al Jamia Arts and Science College, Poopalam)

Difference between Internal c. For subdivision of shares:

reconstruction and External Share Capital (old) A/c Dr
reconstruction To Share Capital (New) A/c
Internal External d. For conversion of shares into stock:
reconstruction reconstruction Share Capital A/c Dr
The company does The company losses To Stock A/c
not loss its identity its identity e. For conversion of stock into shares:
The overvalued The newly formed Stock A/c Dr
assets are revalued company takes over To Share Capital A/c
at their net worth the assets and Reduction of Share Capital
and the losses liabilities of the Reduction of capital is unlawful except when
written off. liquidated company sanctioned by the court because
at agreed values. conservation of capital is one of the main
No new company is A new company is principles the Company Act. In order to
formed nor is any formed in place of reduce the share capital, the company must
existing company the old company. be authorized by its articles of association, a
liquidated. special resolution must be passed at general
Debenture holds, These parties will meeting, and confirmation of court etc. is
creditors and bank have to be settled. required. A company can reduce its share
overdraft may capital by any of the following ways:
continue a. By reducing the liability of the
Alteration of Share Capital shareholders for uncalled capital.
According to Sec. 94 of the Companies Act, a b. By paying off the surplus capital.
limited company can, if authorized by its c. By reducing paid up capital which is not
articles of association, alter the capital clause represented by available assets.
of its memorandum of association in any of Accounting entries for reduction of share
the following ways. capital
a. By increasing its share capital by issue of a. For reducing the liability in respect of
new shares. uncalled capital:
b. By consolidating existing shares of smaller Share Capital (old) A/c Dr
amounts into shares of larger amounts. To Share Capital (New) A/c
c. By subdividing the existing share into b. For paying off surplus capital:
shares of smaller amounts. i. Share Capital A/c Dr
d. By converting fully paid shares into stock To Shareholders A/c
0or stock into fully paid shares. ii. Shareholders A/c Dr
Accounting entries for alteration of To Bank A/c
capital c.For reducing or cancelling capital which
a. For increasing its share capital is not represented by available assets:
i. Bank A/c Dr i. For reducing paid up capital by
To Share Application & Allotment A/c changing its face value:
Share Capital (old) A/c Dr
ii. Share Application & Allotment A/c Dr To Share Capital (New) A/c
To Share Capital A/c To Capital Reduction A/c
b. For consolidation of shares: ii. For reducing paid up capital without
Share Capital (old) A/c Dr changing its face value:
To Share Capital (New) A/c Share Capital A/c Dr (amt of reduced capital)
To Capital Reduction A/c
 CORPORATE A/CING – (Al Jamia Arts and Science College, Poopalam)

Capital Reduction Account upon or without security

Capital Reduction Account is a new account iii. The drawing, making, accepting,
opened for transferring that part of capital discounting, buying, selling, collecting and
which is lost or not represented by the dealing in bills of exchange, hundies,
assets. It is a temporary account opened for promissory notes, coupons, drafts, bills of
carrying out internal reconstruction. This lading, railway receipts, warrants,
account will be closed as soon as the scheme debentures, certificates, scrips and other
is carried out. The balance in Capital instruments, and securities whether
Reduction A/c can be used to write off transferable or negotiable or not.
fictitious assets, past losses and excess value iv. The granting and issuing of letter of
of assets. The entry is as follows: credit, travelers cheques and circular notes
v. On receiving of all kinds of bonds, scripts
Capital Reduction A/c Dr or valuables on deposit or for safe custody or
To P&L A/c (Debit balance) otherwise.
To Goodwill A/c vi. The buying, selling and dealing in bullion
To Preliminary Expenses A/c vii. The collecting and transmitting of money
To disc. on issue of shares/ deb. A/c and securities
To Patents/ Trademarks A/c viii. Contracting for public and private loans
To Plant & Machinery A/c and negotiating and issuing the same
To other Assets A/c ix. Carrying on and transacting every kind of
To Capital Reserve A/c (Bal. Fig) guarantees and indemnity business
x. Undertaking and executing trusts, etc…
Variation of Shareholders’ rights Important provisions of the Banking
Under this, the shareholders rights are Regulation Act 1949
altered by changing the rate of dividend or 1. Statutory Reserve: As per Section 17,
changing the classes of shares. For example, banking companies incorporated in India
it can be done by changing the cumulative hall transfer every year at least 25% of its
preference shares to non‐cumulative profit before any dividend is declared to a
preference shares or from 10% preference Statutory reserve (Reserve fund) until the
shares into 7% preference shares etc. amount of the reserve together with the
Module 4 security premium Account is equal to the
FINAL ACCOUNTS OF BANKING paid up capital.
COMPANIES 2. Cash Reserve Ratio (CRR): Banks are
In India, banking companies are governed by required to maintain with the Reserve Bank
the Banking Regulation Act 1949. Section 5 of India a cash reserve of at least 3% of the
of the Act defines banking as “the accepting, total of its demand and time liabilities in
for the purpose of lending or investment, of India.
deposits of money from the public repayable 3. Statutory Liquidity Ratio (SLR): Banks
on demand or otherwise and withdrawable are also required to maintain atleas6t 25%
by cheque, draft, and order or otherwise“. of the demand and time liabilities in the form
Business of banking companies In addition of liquid assets like cash, gold or
to the business of banking, a banking unencumbered. SLR may vary in a range of
company may engage in any one or more of 25% to 40%.
the following business: 4. Non – Banking Assets: These are the
i. The borrowing, raising, or taking up of assets which are not used in the ordinary
money course of business of banking, but they are
ii. The lending or advancing of money either such immovable and movable properties
 CORPORATE A/CING – (Al Jamia Arts and Science College, Poopalam)

which come under the possession of the 4. Saving Bank Accounts Ledger.
banking company for recovering the amount 5. Fixed Deposit Accounts Ledger.
due from customers. 6. Investment ledger.
5. Minimum Capital and Reserves: In case 7. Bills Discounted and Purchased Ledger.
of a banking company incorporated in India, 8. Loan Ledger.
the sum of its paid up capital and reserves 9. Cash Credit Ledger.
shall not be less than the amount mentioned 10. Customers’ Acceptances, endorsements
below: and Guarantee Ledger.
a. If it has places of business in more than 11. Recurring Deposits Accounts Ledger, etc.
one state Rs.500000, and if any such place of The Slip System
business is situated in Mumbai or Kolkata or This is not a system of book keeping, but a
in both, Rs.1000000. method of rapidly posting entries to books
b. If it has all its places of business in one kept on double entry system. In this system,
state, none of which is Mumbai or posting is made from slips prepared inside
Kolkata,Rs.100000 in respect of its principal the organization itself or from slips filled in
place of business plus Rs.10000 for each by its customers. In a banking company, the
additional place of business in the same main slips are pay‐in‐slips, withdrawal slips
district plus Rs.25000 for each place of and cheques and all these slips are filled in
business elsewhere in the state(the by clients of the bank.
maximum amount required being Advantages of Slip system
Rs.500000). 1. It makes accounts reliable.
Accounting System 2. Slips are the basis of auditing.
The accounting system of a banking 3. The bank saves a lot of clerical labour as
company is different from that of a trading or most of the slips are filled in by its
manufacturing company. The main features customers.
of a bank’s accounting system are as follows: 4. There is no need for keeping subsidiary
1. Entries in the personal ledgers are made books.
directly from the vouchers Disadvantages of Slip system
2. From such entries in the personal ledgers 1. Slips may be lost, destroyed or
each day summary sheets in total are misappropriated as these are loose.
prepared which are posted to the control 2. In the absence of subsidiary books, books
accounts in the general ledger. cannot be verified.
3. The general ledger’s trial balance is 3. It is very difficult and expensive to keep
extracted and agreed every day. date wise record of a large number of slips.
4. All entries in the personal ledgers and 4. Customers feel difficulty on account of slip
summary sheets are checked by persons system.
other than those who have recorded entries. Final Accounts of Banks
It helps in detection of mistakes. As per Section 29, a banking comp[any
5. A trial balance of detailed personal ledgers incorporated in India, is required to prepare,
is prepared periodically and gets agreed with at the end of each accounting year, a Balance
the general ledger control accounts. sheet and profit and Loss Account as on the
6. Two vouchers are prepared for every last working day of the year.
transaction not involving cash. Profit and Loss Account
Books maintained by banks A banking company is required to prepare its
1. Receiving Cashier’s Counter Cash Book. Profit and Loss Account according to Form B
2. Paying Cashier’s Counter Cash Book. in the Third Schedule to the Banking
3. Current Accounts Ledger. Regulation Act, 1949.
 CORPORATE A/CING – (Al Jamia Arts and Science College, Poopalam)

Balance Sheet accepting bills on behalf of customers. On the

The balance sheet of a banking company is maturity of bill, the bank pays and collects
prepared according to Form A in Third the amount from its customers. At the end of
Schedule the accounting period, if tee is any
Explanation of some items relating to outstanding bills it is shown on the
Balance Sheet ‘Contingent Liability (Schedule 12)’.
1. Money at call and short notice: It Non‐Performing Assets (NPA)
represents temporary loans to bill brokers, Bank advances can be classified as
stock brokers and other banks. If the loan is Performing Assets and Non‐Performing
given for one day, it is called “money at call” Assets (NPA). An asset becomes NPA when it
and if the loan cannot be called back on ceases to generate income for the bank. NPA
demand and will require at least a notice of means a credit facility in respect of which
three days for calling back, it is called interest and/or principal repayment
“money at short notice”. installments is in arrears for more than 90
2. Advances: Advances include Bills days. Interest income from NPA is
discounted and purchased, loans, cash credit considered as income as and when it is
and overdraft. received rather than on accrual basis.
3. Inter ‐ office adjustments: Every head Asset Classification
office will have a number of transactions Bank’s loans and advances are to be
with its branches. The head office makes classified into two broad categories‐
necessary adjustments in its books on the Standard assets and Non‐Performing Assets.
receipt of information from the branches. On NPAs are subdivided into three‐
the date of balance sheet some transaction Substandard, Doubtful and Loss Assets.
may remain unadjusted in the books of the These may be explained as follows:
head office. Such entries are recorded in the 1. Standard Assets – Standard assets are
balance sheet under the sub‐heading ‘Branch those which do not carry more than the
Adjustments’ and may appear on the assets normal credit risk attached to the business.
side under the heading ‘Other Assets’ if it has These are assets which are not NPAs.
a debit balance and on t e liabilities side 2. Sub‐standard Assets – These have been
under the heading ‘Other Liabilities’ if it has classified as NPA for a period not exceeding
a credit balance. 12 months.
4. Bills for Collection: When the bank 3. Doubtful Assets ‐ Doubtful Assets are
receives bills receivables from its customers those which have remained NPA for a period
for collection, it keeps them till maturity. On exceeding 12 months.
the date of maturity when bills are collected, 4. Loss Assets – Loss assets are those assets
customers account is credited with the in which loss has been identified by the bank,
amount collected. If some bills remain auditors or RBI but the amount has not been
outstanding, such bills are treated by the written off wholly or partly. These assets are
banks as outstanding bills for collection. It is irrecoverable.
shown as ‘Contingent Liability (Schedule Rebate on bills discounted or unexpired
12)’. discounts
5. Acceptance, endorsement and other The whole amount of discount on bills
obligation: This represents bank’s liability discounted may not be related to that
on account of bills endorsed or accepted on accounting year. A part of it may be related
behalf of its customers. For greater security, to next accounting period. This is so because
the drawer of bill wants acceptance of the at the close of the accounting year, some of
drawee’s bank. The bank incurs a liability by the bills discounted may not have matured.
 CORPORATE A/CING – (Al Jamia Arts and Science College, Poopalam)

In short rebate on bills discounted means the Section 2 of Indian Insurance Act 1938
unearned amount or discount received for defines life insurance as “life insurance
those bills which mature after the date of business is the business of effecting
closing the final accounts. It is also called contracts upon human life”.
unexpired discount or discount received in 2. General Insurance :All insurance other
advance. It is carried forward to next year by than life insurance is general insurance.
passing the following entry: Under this type of insurance, the insurer
Interest and discount A/c Dr undertakes to indemnify the loss suffered by
To Rebate on bills discounted. the insured on happening of a certain event
in consideration for a fixed premium. Usually
If rebate on bills discounted is given in trial all these are short term agreements for a
balance, it should be taken to Balance sheet year. Fire insurance, marine insurance,
under “Other Liabilities and Provisions”. If it accident insurance, burglary insurance, third
is given under adjustments, it should be party insurance etc. are the examples for
deducted from “Interest and Discount” in general insurance.
Profit and loss Account and should be taken FINANCIAL STATEMENTS OF INSURANCE
to Balance sheet under “Other Liabilities and COMPANIES
Provisions”. At the commencement of next Insurance Regulatory and Development
accounting year it is transferred to Interest Authority (IRDA) has issued the regulations
and Discount Account by reversing the above regarding the preparation of financial
entry. statements.
Module 5 Final Accounts of Life Insurance
FINAL ACCOUNTS OF INSURANCE Companies
COMPANIES The final accounts of a life insurance
Insurance is a contract whereby one party company consist of (a) Revenue Account, (b)
agrees for a consideration called premium to P&L A/c and (c) Balance Sheet.
indemnify the other against a possible loss or Revenue Account (Form A‐RA)
to pay a stated sum of money on the Revenue Account is prepared as per the
happening of a particular event. This provisions of IRDA regulations 2002 and
agreement or contract when put in writing is complies with the requirements of Schedule
known as policy. The person whose risk is A as follows:
covered is called insured or assured and Profit And Loss Account (Form A‐PL)
the company or corporation which insures is The P&L A/c is prepared to calculate the
known as insurer, assurer or underwriter. overall profit of the life insurance business.
The consideration in return for which the The incomes or expenses that are not related
insurer agrees to make good the loss is to any particular fund are recorded in the
known as premium. P&L A/c.
Types of Insurance Balance Sheet (Form A‐BS)
From accounting point of view, the insurance Balance Sheet of Life Insurance Company is
may be divided into two as follows: prepared in vertical format.
1. Life Insurance : A life insurance contract Explanation of items in final accounts
is a long term contract in which the assured 1. Claims – Claim is the amount payable by
must pay the premium at stated intervals the insurance company. In life insurance
and the insurer guarantee to pay a certain business, claims may arise due to two
sum of money to the assured on the reasons i.e., by death or maturity.
happening of the event which is certain 2. Annuity – It is an annual payment which a
(either death or expiry of the fixed period). life insurance company guarantees to pay for
 CORPORATE A/CING – (Al Jamia Arts and Science College, Poopalam)

lump sum money received in the beginning. The final accounts of a general insurance
3. Surrender value – If an insured is unable company consist of (a) Revenue Account, (b)
to pay the further premium, he can get his P&L A/c and (c) Balance Sheet.
policy paid from the company. It is the Revenue Account
present cash value of the policy which a General insurance company may be doing
holder gets from the company on more than one business like fire, marine,
surrendering all the rights of the policy. accidental etc. For each type of business a
4. Bonus in reduction of premium – separate Revenue Account is to be prepared
instead of paying bonus in cash, the in the prescribed form B‐RA.
insurance company may deduct the bonus Profit And Loss Account (Form B‐PL)
from the premium due from the insured. The P&L A/c is prepared to calculate the
This is known as bonus in reduction of overall profit of the general insurance
policy. business. Operating profits (or losses) of fire,
5. Consideration for annuities granted ‐ marine and miscellaneous insurance are
Any lump sum payment received by the taken in the P&L A/c. income from
insurance company in lieu of granting investments, profit or loss on sale of
annuity is called consideration for annuity investments, bad debts, provision for
granted. doubtful debts etc. are taken in the P&L A/c.
6. Re‐insurance – When a company accepts Reserve for Unexpired Risk
a business of more value and in order to The reserve maintained to meet any possible
reduce the risk, may pass on some business liability in respect of those policies which are
to the other company, it is called not expired at the end of an accounting year
reinsurance. is called reserve for unexpired risk. Opening
7. Commission on Reinsurance Accepted balance for reserve for unexpired risk is
or Ceded – The Company which passes some added to the premium and closing balance of
business to the other company gets some reserve for unexpired risk is deducted from
commission which is known as commission the premium. The net premium should be
on reinsurance business ceded. Commission shown in revenue account. The closing
paid on reinsurance business accepted is balance of reserve for unexpired risk should
known as Commission on Reinsurance be shown in the balance sheet under the
Accepted. head ‘provisions’.
Determination of profit in life insurance
business MUHAMMED RIYAS N
A life insurance company earns profit when ASST. PROF.
the life insurance fund exceeds its net AL JAMIA ARTS AND SCIENCE COLLEGE
liability. The net liability is the excess of POOPALAM, PERINTHALMANNA
present value of future claims of current PH: 9747799772
policies over the present value of premiums E-mail : [email protected]
to be received in future in respect of current
policies. Net liability is to be compared with
life assurance fund on a particular date in
order to calculate the surplus or deficiency.
Usually this comparison is made by
Study
Well…
preparing a statement called Valuation
Balance Sheet.
Final Accounts of General Insurance
Companies