ASSETS

Assets

1. The future economic benefit embodied in an asset is the potential to contribute, directly or indirectly, to the flow of cash and cash equivalents to the enterprise. The potential may be a productive one that is part of the operating activities of the enterprise. It may also take the form of convertibility into cash or cash equivalents or a capability to reduce cash outflows, such as when an alternative manufacturing process lowers the costs of production.

2. An enterprise usually employs its assets to produce goods or services capable of satisfying the wants or needs of customers; because these goods or services can satisfy these wants or needs, customers are prepared to pay for them and hence contribute to the cash flows of the enterprise. Cash itself renders a service to the enterprise because of its command over other resources.

3. The future economic benefits embodied in an asset may flow to the enterprise in a number of ways. For example, an asset may be:

(a) used singly or in combination with other assets in the production of goods or services to be sold by the enterprise;

(b) exchanged for other assets;

(c) used to settle a liability; or

(d) distributed to the owners of the enterprise.

4. Many assets, for example, plant and machinery, have a physical form. However, physical form is not essential to the existence of an asset; hence patents and copyrights, for example, are assets if future economic benefits are expected to flow from them and if they are controlled by the enterprise.

5. Many assets, for example, receivables and property, are associated with legal rights, including the right of ownership. In determining the existence of an asset, the right of ownership is not essential; thus, for example, an item held under a hire purchase is an asset of the hire purchaser since the hire purchaser controls the benefits which are expected to flow from the item. Although the capacity of an enterprise to control benefits is usually the result of legal rights, an item may nonetheless satisfy the definition of an asset even when there is no legal control. For example, know-how obtained from a development activity may meet the definition of an asset when, by keeping that know- how secret, an enterprise controls the benefits that are expected to flow from it.

6. The assets of an enterprise result from past transactions or other past events. Enterprises normally obtain assets by purchasing or producing them, but other transactions or events may also generate assets; examples include land received by an enterprise from government as part of a programme to encourage economic growth in an area and the discovery of mineral deposits. Transactions or other events expected to occur in the future do not in themselves give rise to assets; hence, for example, an intention to purchase inventory does not, of itself, meet the definition of an asset.

7. There is a close association between incurring expenditure and obtaining assets but the two do not necessarily coincide. Hence, when an enterprise incurs expenditure, this may provide evidence that future economic benefits were sought but is not conclusive proof that an item satisfying the definition of an asset has been obtained. Similarly, the absence of a related expenditure does not preclude an item from satisfying the definition of an asset and thus becoming a candidate for recognition in the balance sheet.

FINANCIAL POSITION

Financial Position

1. The elements directly related to the measurement of financial position are assets, liabilities and equity. These are defined as follows:

(a) An asset is a resource controlled by the enterprise as a result of past events from which future economic benefits are expected to flow to the enterprise.

(b) A liability is a present obligation of the enterprise arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits.

(c) Equity is the residual interest in the assets of the enterprise after deducting all its liabilities.

2. The definitions of an asset and a liability identify their essential features but do not attempt to specify the criteria that need to be met before they are recognised in the balance sheet. Thus, the definitions embrace items that are not recognised as assets or liabilities in the balance sheet because they do not satisfy the criteria for recognition discussed in paragraphs 81 to 97. In particular, the expectation that future economic benefits will flow to or from an enterprise must be sufficiently certain to meet the probability criterion in paragraph 82 before an asset or liability is recognised.

3. In assessing whether an item meets the definition of an asset, liability or equity, consideration needs to be given to its underlying substance and economic reality and not merely its legal form. Thus, for example, in the case of hire purchase, the substance and economic reality are that the hire purchaser acquires the economic benefits of the use of the asset in return for entering into an obligation to pay for that right an amount approximating to the fair value of the asset and the related finance charge. Hence, the hire purchase gives rise to items that satisfy the definition of an asset and a liability and are recognised as such in the hire purchaser’s balance sheet.

ELEMENT OF FINANCIAL STATEMENTS

The Elements of Financial Statements

1. Financial statements portray the financial effects of transactions and other events by grouping them into broad classes according to their economic characteristics. These broad classes are termed the elements of financial statements. The elements directly related to the measurement of financial position in the balance sheet are assets, liabilities and equity. The elements directly related to the measurement of performance in the statement of profit and loss are income and expenses. The cash flow statement usually reflects elements of statement of profit and loss and changes in balance sheet elements; accordingly, this Framework identifies no elements that are unique to this statement.

2. The presentation of these elements in the balance sheet and the statement of profit and loss involves a process of sub-classification. For example, assets and liabilities may be classified by their nature or function in the business of the enterprise in order to display information in the manner most useful to users for purposes of making economic decisions.

ACCRUAL BASIS

Accrual Basis

•  In order to meet their objectives, financial statements are prepared on the accrual basis of accounting.
•  Under this basis, the effects of transactions and other events are recognised when they occur (and not as cash or a cash equivalent is received or paid) and they are recorded in the accounting records and reported in the financial statements of the periods to which they relate. 
• Financial statements prepared on the accrual basis inform users not only of past events involving the payment and receipt of cash but also of obligations to pay cash in the future and of resources that represent cash to be received in the future.
•  Hence, they provide the type of information about past transactions and other events that is most useful to users in making economic decisions.

FINANCIAL POSITION, PERFORMANCE AND CASH FLOWS

Financial Position, Performance and Cash Flows

1. The economic decisions that are taken by users of financial statements require an evaluation of the ability of an enterprise to generate cash and cash equivalents and of the timing and certainty of their generation. This ability ultimately determines, for example, the capacity of an enterprise to pay its employees and suppliers, meet interest payments, repay loans, and make distributions to its owners. Users are better able to evaluate this ability to generate cash and cash equivalents if they are provided with information that focuses on the financial position, performance and cash flows of an enterprise.

2. The financial position of an enterprise is affected by the economic resources it controls, its financial structure, its liquidity and solvency, and its capacity to adapt to changes in the environment in which it operates. Information about the economic resources controlled by the enterprise and its capacity in the past to alter these resources is useful in predicting the ability of the enterprise to generate cash and cash equivalents in the future. Information about financial structure is useful in predicting future borrowing needs and how future profits and cash flows will be distributed among those with an interest in the enterprise; it is also useful in predicting how successful the enterprise is likely to be in raising further finance. Information about liquidity and solvency is useful in predicting the ability of the enterprise to meet its financial commitments as they fall due. Liquidity refers to the availability of cash in the near future to meet financial commitments over this period. Solvency refers to the availability of cash over the longer term to meet financial commitments as they fall due.

3. Information about the performance of an enterprise, in particular its profitability, is required in order to assess potential changes in the economic resources that it is likely to control in the future. Information about variability of performance is important in this respect. Information about performance is useful in predicting the capacity of the enterprise to generate cash flows from its existing resource base. It is also useful in forming judgements about the effectiveness with which the enterprise might employ additional resources.

4. Information concerning cash flows of an enterprise is useful in order to evaluate its investing, financing and operating activities during the reporting period. This information is useful in providing the users with a basis to assess the ability of the enterprise to generate cash and cash equivalents and the needs of the enterprise to utilise those cash flows.

5. Information about financial position is primarily provided in a balance sheet. Information about performance is primarily provided in a statement of profit and loss. Information about cash flows is provided in the financial statements by means of a cash flow statement.

6. The component parts of the financial statements are interrelated because they reflect different aspects of the same transactions or other events. Although each statement provides information that is different from the others, none is likely to serve only a single purpose nor to provide all the information necessary for particular needs of users.

OBJECTIVE OF FINANCIAL STATEMENTS

The Objective of Financial Statements

1. The objective of financial statements is to provide information about the financial position, performance and cash flows of an enterprise that is useful to a wide range of users in making economic decisions.

2. Financial statements prepared for this purpose meet the common needs of most users. However, financial statements do not provide all the information that users may need to make economic decisions since (a) they largely portray the financial effects of past events, and (b) do not necessarily provide non-financial information.

3. Financial statements also show the results of the stewardship of management, or the accountability of management for the resources entrusted to it. Those users who wish to assess the stewardship or accountability of management do so in order that they may make economic decisions; these decisions may include, for example, whether to hold or sell their investment in the enterprise or whether to reappoint or replace the management.

FRAMEWORK FOR THE PREPARATION AND PRESENTATION OF FINANCIAL STATEMENTS

Framework for the Preparation and Presentation of Financial Statements

Introduction 

Purpose and Status
1. This Framework sets out the concepts that underlie the preparation and presentation of financial statements for external users. The purpose of the Framework is to:

(a) assist preparers of financial statements in applying Accounting Standards and in dealing with topics that have yet to form the subject of an Accounting Standard;

(b) assist the Accounting Standards Board in the development of future Accounting Standards and in its review of existing Accounting Standards;

(c) assist the Accounting Standards Board in promoting harmonisation of regulations, accounting standards and procedures relating to the preparation and presentation of financial statements by providing a basis for reducing the number of alternative accounting treatments permitted by Accounting Standards;

(d) assist auditors in forming an opinion as to whether financial statements conform with Accounting Standards;

(e) assist users of financial statements in interpreting the information contained in financial statements prepared in conformity with Accounting Standards; and

(f) provide those who are interested in the work of the Accounting Standards Board with information about its approach to the formulation of Accounting Standards.

2 This Framework is not an Accounting Standard and hence does not define standards for any particular measurement or disclosure issue. Nothing in this Framework overrides any specific Accounting Standard.

3. The Accounting Standards Board recognises that in a limited number of cases there may be a conflict between the Framework and an Accounting Standard. In those cases where there is a conflict, the requirements of the Accounting Standard prevail over those of the Framework. As, however, the Accounting Standards Board will be guided by the Framework in the development of future Standards and in its review of existing Standards, the number of cases of conflict between the Framework and Accounting Standards will diminish through time.

4. The Framework will be revised from time to time on the basis of the experience of the Accounting Standards Board of working with it.

INSOLVENCY OF ALL PARTNERS

Insolvency of all Partners
• When the liabilities of the firm cannot be paid in full out of the firm’s assets as well as personal assets of the partners, then all the partners of the firm are said to be insolvent. Under such circumstances it is better not to transfer the amount of creditors to Realisation Account.

• Creditors may be paid the amount available including the amount contributed by the partners.

• The unsatisfied portion of creditor account is transferred to Capital Accounts of the partners in the profit sharing ratio, then Capital Accounts are closed. In doing so first close the Partners’ Capital Account which is having the worst position. The last account will be automatically closed.

CAPITAL RATIO ON INSOLVENCY

Capital Ratio on Insolvency

• The partners are free to have either fixed or fluctuating capitals in the firm.

• If they are maintaining capitals at fixed amounts then all adjustments regarding their share of profits, interest on capitals, drawings, interest on drawings, salary etc. are done through Current Accounts, which may have debit or credit balances and insolvency loss is distributed in the ratio of fixed capitals.

• But if capitals are not fixed and all transactions relating to drawings, profits, interest, etc., are passed through Capital Accounts then Balance Sheet of the business should not exhibit Current Accounts of the partners and capital ratio will be determined after adjusting all the reserves and accumulated profits to the date of dissolution, all drawings to the date of dissolution, all interest on capitals and on drawings to the date of dissolution but before adjusting profit or loss on Realisation Account.

• If some partner is having a debit balance in his Capital Account and is not insolvent then he cannot be called upon to bear loss on account of the insolvency of other partner.

LOSS ARISING FROM INSOLVENCY OF A PARTNER

 LOSS ARISING FROM INSOLVENCY OF A PARTNER

• When a partner is unable to pay his debt due to the firm he is said to be insolvent and the share of loss is to be borne by other solvent partners in accordance with the decision in the English case of Garner vs. Murray. 
• According to this decision, solvent partners have to bear the loss due to insolvency of a partner and have to categorically put that the normal loss on realisation of assets to be borne by all partners (including insolvent partner) in the profit sharing ratio but a loss due to insolvency of a partner has to be borne by the solvent partners in the capital ratio. 
• The determination of capital ratio for this has been explained below. The provisions of the Indian Partnership Act are not contrary to Garner vs. Murray rule.
•  However, if the partnership deed provides for a specific method to be followed in case of insolvency of a partner, the provisions as per deed should be applied.

CONSEQUENCES OF INSOLVENCY OF A PARTNER

CONSEQUENCES OF INSOLVENCY OF A PARTNER
If a partner goes insolvent then the following are the consequences:

1. The partner adjudicated as insolvent ceases to be a partner on the date on which the order of adjudication is made.

2. The firm is dissolved on the date of the order of adjudication unless there is a contract to the contrary.

3. The estate of the insolvent partner is not liable for any act of the firm after the date of the order of adjudication, and

4. The firm cannot be held liable for any acts of the insolvent partner after the date of the order of adjudication.

DISSOLUTION BEFORE EXPIRY OF A FIXED TERM

Dissolution before expiry of a fixed term
A partner who, on admission, pays a premium to the other partners with a stipulation that the firm will not be dissolved before the expiry of a certain term, will be entitled to a suitable refund of premium or of such part as may be reasonable, if the firm is dissolved before the term has expired.

No claim in this respect will arise if:

(1) the firm is dissolved due to the death of a partner;

(1) the dissolution is mainly due to the partner’s (claiming refund) own misconduct; and

(2) the dissolution is in pursuance of an agreement containing no provision for the return of the premium or any part of it.

The amount to be repaid will be such as is reasonable having regard to the terms upon which the admission was made and to the length of period agreed upon and that already expired. Any amount that becomes due will be borne by other partners in their profit- sharing ratio.

CONSEQUENCES OF DISSOLUTION

CONSEQUENCES OF DISSOLUTION

On the dissolution of a partnership, firstly, the assets of the firm, including goodwill, are realised. Then the amount realised, is applied first towards repayment of liabilities to outsiders and loans taken from partners; afterwards the capital contributed by partners is repaid and, if there is still surplus, it is distributed among the partners in their profit-sharing ratio.

Conversely, after payment of liabilities of the firm and repayment of loans from partners, if the assets of the firm left over are insufficient to repay in full the capital contributed by each partner, the deficiency is borne by the partners in their profit- sharing ratio.

According to the provisions contained in section 48 of the Partnership Act, upon dissolution of partnership, the mutual rights of the partners, unless otherwise agreed upon, are settled in the following manner:

(a) Losses including deficiencies of capital are paid, first out of profits, next out of capital and, lastly, if necessary, by the partners individually in the proportion in which they are entitled to share profits.

(b) The assets of the firm, including any sums contributed by the partners to make up deficiencies of capital have to be applied in the following manner and order:

     (i) in paying the debts of the firm to third parties;

     (ii) in paying to each partner rateably what is due to him from the firm in respect of advances as           distinguished from capital;

     (iii) in paying to each partner what is due to him on account of capital; and

     (iv) the residue, if any, to be divided among the partners in the proportion in which they are                   entitled to share profits.

CIRCUMSTANCES LEADING TO DISSOLUTION OF PARTNERSHIP

 CIRCUMSTANCES LEADING TO DISSOLUTION OF PARTNERSHIP

A partnership is dissolved or comes to an end on:

(a) the expiry of the term for which it was formed or the completion of the venture for which it was entered into;

(b) death of a partner;

(c) insolvency of a partner.

However, the partners or remaining partners (in case of deathor insolvency) may continue to do the business. In such case there will be a new partnership but the firm will continue. When the business comes to an end then only it will be said that the firm has been dissolved.

A firm stands dissolved in the following cases:

(i) The partners agree that the firm should be dissolved;

(ii) All partners except one become insolvent;

(iii) The business becomes illegal;

(iv) In case of partnership at will, a partner gives notice of dissolution; and

(v) The court orders dissolution.

The court has the option to order dissolution of a firm in the following circumstances :
(a) Where a partner has become of unsound mind;

(b) Where a partner suffers from permanent incapacity;

(c) Where a partner is guilty of misconduct of the business;

(d) Where a partner persistently disregards the partnership agreement;

(e) Where a partner transfers his interest or share to a third party;

(f) Where the business cannot be carried on except at a loss; and

(g) Where it appears to be just and equitable.

DISSOLUTION OF A PARTNERSHIP FIRM (INTRODUCTION )

INTRODUCTION

• Apart from readjustment of rights of partners in the share of profit by way of change in the profit sharing ratio and admission of a new partner or for retirement/death of a partner, another important aspect of partnership accounts is how to close books of accounts in case of dissolution.
•  In this Unit, we will discuss the circumstances leading to dissolution of a partnership firm and accounting treatment necessary to close its books of accounts. Also we will discuss the special problems relating to insolvency of partners and settlement of partnership’s liabilities.

MEMORANDUM STOCK AND MEMORANDUM MARK UP ACCOUNT METHOD

 MEMORANDUM STOCK AND MEMORANDUM MARK UP ACCOUNT METHOD

• Under this method, goods supplied to each department are debited to a Memorandum Departmental Stock account at cost plus a ‘mark up’ (loading) to give the normal selling price of the goods.
•  The sale proceeds of the department are credited in Memorandum Departmental Stock account and amount of ‘Mark up’ is credited to the Departmental Mark up Account. 
• When it is necessary to reduce the selling price below the normal selling price, i.e., cost plus mark up, the reduction (mark down) is entered in the Memorandum Stock account as well as in the Mark up account. 
• This method helps to achieve effective control of stock movements of various departments.

INTER DEPARTMENTAL TRANSFERS

INTER-DEPARTMENTAL TRANSFERS

Whenever goods or services are provided by one department to another, their cost should be separately recorded and charged to the department benefiting thereby and credited to that providing the goods or services. The totals of such benefits (inter-departmental transfers) should be disclosed in the departmental Profit and Loss Account, to distinguish them from other items of expenditure. 

 Basis of Inter-Departmental Transfers

Goods and services may be charged by one department to another usually on either of the following three bases:

(i) Cost,

(ii) Current market price,

(iii) Cost plus agreed percentage of profit. 

 Elimination of Unrealised Profit

When profit is added in the inter-departmental transfers the loading included in the unsold inventory at the end of the year is to be excluded before final accounts are prepared so as to eliminate any anticipatory (internal) profit included therein.

 Stock Reserve

Unrealised profit included in unsold stock at the end of accounting period is eliminated by creating an appropriate stock reserve by debiting the combined Profit and Loss Account.

TYPES OF DEPARTMENTS

TYPES OF DEPARTMENTS

There are two types of departments: Dependent and Independent Departments. 

 Independent Departments

Departments which work independently of each other and have negligible inter- department transfers are called Independent Departments. 

 Dependent Departments

Departments which transfer goods from one department to another department for further processing are called dependent departments. Here, the output of one department becomes the input for the other department. These transfers may be done at cost or some pre-decided selling price. The price at which this is done is known as transfer price. In these departments, unloading is required if the transfer price is having a profit element. The method of eliminating unrealised profit is being discussed in the succeeding para.

BASIS OF ALLOCATION OF COMMON EXPENDITURE AMONG DIFFERENT DEPARTMENTS

BASIS OF ALLOCATION OF COMMON EXPENDITURE AMONG DIFFERENT DEPARTMENTS

Expenses should be allocated among different departments on a rational basis while preparing departmental accounts.

Individual Identifiable Expenses: Expenses incurred specially for a particular department are charged directly thereto, e.g., insurance charges of stock held by the department.

Common Expenses : Common expenses, the benefit of which is shared by all the departments and which are capable of precise allocation are distributed among the departments concerned on some equitable basis considered suitable in the circumstances of the case.

METHODS OF DEPARTMENTAL ACCOUNTING

METHODS OF DEPARTMENTAL ACCOUNTING
There are two methods of keeping departmental accounts: 

 Accounts of all departments are kept in one book only
To prepare such accounts, it will be necessary first, for the income and expenditure of department to be separately recorded in subsidiary books and then for them to be accumulated under separate heads in a ledger or ledgers. This may be done by having columnar subsidiary books and a columnar ledger.

 Separate set of books are kept for each department
A separate set of books may be kept for each department, including complete stock accounts of goods received from or transferred to other departments or as also sales.

Nevertheless, even when separate sets of books are maintained for different departments, it will also be necessary to devise a basis for allocation of common expenses among the different departments, if an organisation is interested in determining the separate departmental net profit in addition to the gross profit.

ADVANTAGES OF DEPARTMENTAL ACCOUNTING

ADVANTAGES OF DEPARTMENTAL ACCOUNTING

The main advantages of departmental accounting are as follows:

1. Evaluation of performance : The performance of each department can be evaluated separately on the basis of trading results. An endeavour may be made to push up the sales of that department which is earning maximum profit.

2. Growth potential of each department : The growth potential of a department as compared to others can be evaluated.

3. Justification of capital outlay : It helps the management to determine the justification of capital outlay in each department.

4. Judgement of efficiency : It helps to calculate stock turnover ratio of each department separately, and thus the efficiency of each department can be revealed.

5. Planning and control : Availability of separate cost and profit figures for each department facilitates better control. Thus effective planning and control can be achieved on the basis of departmental accounting information.

Basically, an organisation usually divides the work in various departments, which is done on the principle of division of labour. Each department prepares its separate accounts to judge its individual performance. This can improve efficiency of each and every department of the organisation.

INTRODUCTION (DEPARTMENTAL ACCOUNTS)

INTRODUCTION

DEPARTMENTAL ACCOUNTS

• If a business consists of several independent activities, or is divided into several departments, for carrying on separate functions, its management is usually interested in finding out the working results of each department to ascertain their relative efficiencies. 
• This can be made possible only if departmental accounts are prepared. Departmental accounts are of great help and assistance to the managements as they provide necessary information for controlling the business more intelligently and effectively. 
• It is also helpful in readily identifying all types of wastages, e.g., wastage of material or of money; Also, attention is drawn to inadequacies or inefficiencies in the working of departments or units into which the business may be divided.

TERM USED IN HIRE PURCHASE AGREEMENTS

TERMS USED IN HIRE PURCHASE AGREEMENTS
1. Hire Vendor : Hire vendor is a person who delivers the goods along with its possession to the hire purchaser under a hire purchase agreement.

2. Hire Purchaser : Hire purchaser is a person who obtains the goods and rights to use the same from hire vendor under a hire purchase agreement.

3. Cash Price : Cash price is the amount to be paid by the buyer on outright purchase in cash.

4. Down Payment : Down payment is the initial payment made to the hire vendor by the hire purchaser at the time of entering into a hire purchase agreement.

5. Hire Purchase Instalment : Hire purchase instalment is the amount which the hire purchaser has to pay after a regular interval upto certain period as specified in the agreement to obtain the ownership of the asset purchased (on payment of the last installment) under a hire purchase agreement. It comprises of principal amount and the interest on the unpaid amount.

6. Hire purchase price : It means the total sum payable by the hire purchaser to obtain the ownership of the asset purchased under hire purchase agreement. It comprises of cash price and interest on outstanding balances.

SPECIAL FEATURES OF HIRE PURCHASE AGREEMENT

SPECIAL FEATURES OF HIRE PURCHASE AGREEMENT
1. Possession : The hire vendor transfers only possession of the goods to the hire purchaser immediately after the contract for hire purchase is made.

2. Installments : The goods are delivered by the hire vendor on the condition that a hire purchaser should pay the amount in periodical instalments.

3. Down Payment : The hire purchaser generally makes a down payment, i.e., an amount on signing the agreement.

4. Constituents of Hire purchase instalments : Each instalment consists of two elements- finance charge (interest on unpaid amount) and capital payment.

5. Ownership : The property in goods is to pass to the hire purchaser on the payment of the last instalment and exercising the option conferred upon him under the agreement.

6. Repossession : In case of default in respect of payment of even the last instalment, the hire vendor has the right to take the goods back without making any compensation.

NATURE OF HIRE PURCHASE AGREEMENT

NATURE OF HIRE PURCHASE AGREEMENT

• Under the Hire Purchase System, the Hire Purchaser gets possession of the goods at the outset and can use it, while paying for it in instalments over a specified period of time as per the agreement. 
• However, the ownership of the goods remains with the Hire Vendor until the hire purchaser has paid all the instalments. Each instalment paid by the hire purchaser is treated as hire charges for using the asset.
•  In case he fails to pay any of the instalments (even the last one) the hire vendor has the right to take back his goods without compensating the buyer, i.e., the hire vendor is not going to pay back a part or whole of the amount received through instalments till the date of default from the buyer. 

INTRODUCTION (HIRE PURCHASE)

INTRODUCTION

• With an increasing demand for better life, the consumption of goods has been on the expanding scale. But, this has not been backed up by adequate purchasing power, transforming it into effectual demand, i.e., actual sale at set or settled prices.
•  This has created the market for what is called hire purchase. 
• When a person wants to acquire an asset, but is not sure how to make payment within a stipulated period of time he may pay in instalments if the vendor agrees. 
• This enables the purchaser to use the asset while paying for it in instalments over an agreed period of time. This type of a business deal is known as hire purchase transaction.
•  Here, the customer pays the entire amount either in monthly or quarterly or yearly instalments, while the asset remains the property of the seller until the buyer squares up his entire liability. For the seller, the agreed instalments include his interest on the assets given on credit to the purchaser. 
• Therefore, when the total amount (being paid in instalments over a period of time) is certainly higher than the cash down price of the asset because of interest charges. Obviously, both the parties gain in the bargain.
•  By virtue of this, the purchaser has the right of immediate use of the asset without making immediate payment for the asset, by this, he gets both credit and product from the same seller. From seller’s view point, he derives the benefits by way of increase in sales and also he recovers his own cost of credit.

CLAIM FOR LOSS OF STOCK

CLAIM FOR LOSS OF STOCK
Fire insurance being a contract of indemnity, a claim can be lodged only for the actual amount of the loss, not exceeding the insured value. In dealing with problems requiring determination of the claim the following point must be noted:

a. Total Loss: If the goods are totally destroyed, the amount of claim is equal to the actual loss, provided the goods are fully insured. However, in case of under insurance(i.e. insurable value of stock insured is more than the sum insured),the amount of claim is restricted to the policy amount.

b. Partial Loss: If the goods are partially destroyed, the amount of claim is equal to the actual loss provided the goods are fully insured. However in case of under insurance,the amount of claim will depend upon the nature of insurance policy as follows:

I) Without Average clause:- Claim is equal to the lower of actual loss or the sum insured.

II) With Average Clause:- Amount of claim for loss of stock is proportionately reduced, considering the ratio of policy amount (i.e. insured amount) to the value of stock as on the date of fire (i.e insurable amount) as shown below:

Amount of claim = Loss of stock x sum insured /                                                 Insurable amount (Total Cost)

One should note that the average clause applies only where the insured value is less than the total cost and not when goods are fully insured.

MEANING OF FIRE

MEANING OF FIRE
For purposes of insurance, fire means:

1. Fire (whether resulting from explosion or otherwise) not occasioned or happening through:

(a) Its own spontaneous fomentation or heating or its undergoing any process involving the application of heat;

(b) Earthquake, subterraneans fire, riot, civil commotion, war, invasion act of foreign enemy, hostilities (whether war be declared or not), civil war, rebellion, revolution, insurrection, military or usurped power.

2. Lightning.

3. Explosion, not occasioned or happening through any of the perils specified in 1 (a) above.

      (i) of boilers used for domestic purposes only;

     (ii) of any other boilers or economisers on the premises;

     (iii) in a building not being any part of any gas works or gas for domestic purposes or used for                  lighting or heating the building.

The policy of insurance can be made to cover any of the excepted perils by agreement and payment of extra premium, if any. Damage may also be covered if caused by storm or tempest, flood, escape of water, impact and breakdown of machinery, etc., again by agreement with the insurer.

Usually, fire policies covering stock or other assets do not cover explosion of boilers used for domestic purposes or other boilers or economizers in the premises but policies in respect of profit cover such explosions.

DISPOSAL OF INVESTMENT

DISPOSAL OF INVESTMENTS

• On disposal of an investment, the difference between the carrying amount and the disposal proceeds, net of expenses is recognised in the profit and loss statement.

• When a part of the holding of an individual investment is disposed, the carrying amount is required to be allocated to that part on the basis of the average carrying amount of the total holding of the investment.

• In respect of shares, debentures and other securities held as stock-in-trade, the cost of stocks disposed of may be determined by applying an appropriate cost formula (e.g., first-in, first-out (FIFO), average cost, etc.). These cost formulae are the same as those specified in AS 2, Valuation of Inventories.

(i) Fixed Income Bearing Securities: In case the transaction is on ‘Cum-interest basis’, the amount of accrued interest from the date of last payment to the date of sale is credited in the income column and only the sale proceeds, net of accrued interest (from the date of last payment to the date of sale), is credited in the capital column of investment account.

In case the transaction is on ‘Ex-interest’ basis, entire sale proceeds is credited in the capital column and the amount of accrued interest from the date of last payment to the date of sale, separately received from the buyer will be taken to the credit side of the income column of investment account.

(ii) Variable Income Bearing Securities: In case of these securities, the entire amount of sale proceeds should be credited in the capital column of investment account, unless the amount of accrued dividend can be specifically established.

The entries in the books at the time of sale of investments will be just the reverse of the entries passed for their acquisition.

COST OF INVESTMENTS

COST OF INVESTMENTS
1. The cost of an investment includes acquisition charges such as brokerage, fees and duties.

2. If an investment is acquired, or partly acquired, by the issue of shares or other securities, the acquisition cost is the fair value of the securities issued.

The fair value may not necessarily be equal to the nominal or par value of the securities issued.

If an investment is acquired in exchange, or part exchange, for another asset, the acquisition cost of the investment is determined by reference to the fair value of the asset given up or the fair value of the investment acquired, whichever is more clearly evident.

3. A separate Investment Account should be made for each scrip purchased. The scrips purchased may be broadly divided into two categories, viz.

The entries in Investment Account for these two broad categories of scrips will be made as under :

(i) Fixed income Bearing Securities : These refer to securities having fixed return of income. Investment in Government securities or debentures comes under this category.

Transaction for fixed income bearing securities may occur on following basis:

(a) Ex-interest basis

(b) Cum- interest basis

(ii) Variable Income Bearing Securities: These refer to securities having variable return of income. Investment in equity shares comes under this category. The following points should be noted with respect to investment in equity shares:

(a) dividends from investments in shares are not recognised in the statement of profit and loss until a right to receive payment is established;

(b) the amount of dividend accruing between the date of last dividend payment and the date of purchase cannot be immediately ascertained.

LONG TERM INVESTMENT

 Long-term Investments

• A long-term investment is an investment other than a current investment.

• Long term investments are usually carried at cost.

• If there is a decline, other than temporary, in the value of a long term investment; the carrying amount is reduced to recognise the decline.

• The reduction in carrying amount is charged to the statement of profit and loss.

• The reduction in carrying amount is reversed when there is a rise in the value of the investment, or if the reasons for the reduction no longer exist.

CURRENT INVESTMENT

 Current Investments
      

 A current Investment is an investment that is by its nature readily realisable and is intended to be held for not more than one year from the date on which such investment is made.

Example : A Ltd. acquired 1,000 shares of B Ltd. on 1st April, 20X2 with an intention to hold them for a period of 15 months. Suggest the classification of such investment (in accordance with AS 13) as on 31st March, 20X3.

Investment in 1,000 shares is not a current investment because it is intended to be held for more than one year from the investment date even though the remaining period as on the reporting date may be less than one year. 

• The carrying amount for current investments is the lower of cost and fair value. 

•  Fair Value is the amount for which an asset could be exchanged between a knowledgeable, willing buyer and a knowledgeable, willing seller in an arm’s length transaction. Under appropriate circumstances, market value or net realisable value provides an evidence of fair value. 
•  Market Value is the amount obtainable from the sale of an investment in an open market, net of expenses necessarily to be incurred on or before disposal. 
•  Any reduction to fair value and any reversals of such reductions are included in the statement of profit and loss.

INVESTMENT ACCOUNT (INTRODUCTIION)

INTRODUCTION

Investments are assets held by an enterprise for earning income by way of dividends, interest and rentals, for capital appreciation, or for other benefits to the investing enterprise. Investment Accounting is done as per AS 13, Accounting for Investments which deals with accounting for investments in the financial statements and related disclosure requirements except:

(i) Bases for recognition of interest, dividends and rentals earned on investments

(ii) operating or financial leases

(iii) investment of retirement benefit plans and life insurance enterprises

(iv) mutual funds, etc.

Note : Assets held as Stock-in-trade are not ‘Investments’

DISADVANTAGES OF REDEMPTION OF PREFERENCE SHARES

 Disadvantages of redemption of preference shares by issue of fresh equity shares

The disadvantages are:

(1) There will be dilution of future earnings;

(2) Share-holding in the company is changed.

ADVANTAGES OF REDEMPTION OF PREFERENCE SHARES

 Advantages of redemption of preference shares by issue of fresh equity shares

Following are the advantages of redemption of preference shares by the issue of fresh equity shares:

(1) No cash outflow of money – now or later.

(2) New equity shares may be valued at a premium.

(3) Shareholders retain their equity interest.

REASONS FOR ISSUE OF NEW EQUITY SHARES

 Reasons for issue of New Equity Shares

A company may prefer issue of new equity shares for the following reasons:

(a) When the company has come to realise that the capital is needed permanently and it makes more sense to issue Equity Shares in place of Redeemable Preference Shares which carry a fixed rate of dividend.

(b) When the balance of profit, which would otherwise be available for dividend, is insufficient.

(c) When the liquidity position of the company is not good enough.

REDEMPTION OF PREFERENCE SHARES BY FRESH ISSUE OF SHARES

 Redemption of Preference Shares by Fresh Issue of Shares

One of the methods for redemption of preference shares is to use the proceeds of a fresh issue of shares. A company can issue new shares (equity share or preference share) and the proceeds from such new shares can be used for redemption of preference shares.

The proceeds from issue of debentures cannot be utilised for the purpose.

A problem arises when a fresh issue is made for the purpose of redemption of preference shares, at a premium. The point to ponder is that whether the proceeds of a fresh issue of shares will include the amount of securities premium for the purpose of redemption of preference shares.

For securities premium account, Section 52 of the Companies Act, 2013 provides that the securities premium account may be applied by the company;

(a) Towards issue of un-issued shares of the company to be issued to members of the company as fully paid bonus securities

(b) To write off preliminary expenses of the company

(c) To write off the expenses of, or commission paid, or discount allowed on any of the securities or debentures of the company

(d) To provide for premium on the redemption of redeemable preference shares or debentures of the company.

(e) For the purchase of its own shares or other securities.

Note : If may be noted that certain class of Companies whose financial statements comply with the Accounting Standards as prescribed under Section 133 of the Companies Act, 2013, can’t apply the securities premium account for the purposes (b) and (d) mentioned above.

Any other way, except the above prescribed ways, in which securities premium account is utilised will be in contravention of law.

Thus, the proceeds of a fresh issue of shares will not include the amount of securities premium for the purpose of redemption of preference shares.

METHODS OF REDEMPTION OF FULLY PAID UP SHARES

METHODS OF REDEMPTION OF FULLY PAID- UP SHARES

• Redemption of preference shares means repayment by the company of the obligation on account of shares issued.
•  According to the Companies Act, 2013, preference shares issued by a company must be redeemed within the maximum period (normally 20 years) allowed under the Act.
•  Thus, a company cannot issue irredeemable preference shares. Section 55 of the Companies Act, 2013, deals with provisions relating to redemption of preference shares. It ensures that there is no reduction in shareholders’ funds due to redemption and, thus, the interest of outsiders is not affected. 
• For this, it requires that either fresh issue of shares is made or distributable profits are retained and transferred to ‘Capital Redemption Reserve Account’. 
• The rationale behind these provisions is to protect the interest of outsiders to whom the amount is payable before redemption of preference share capital. The interest of outsiders is protected if the nominal value of capital redeemed is substituted, thus, ensuring the same amount of shareholders fund.
•  In case of redemption of preference shares out of proceeds of a fresh issue of shares, replacement of capital and tangible assets is obvious. But, if redemption is done out of distributable profits, replacement of capital is ensured in an indirect manner by retention of profit by transfer to Capital Redemption Reserve. 
• In this case, the amount which would have gone to shareholders in the form of dividend is retained in the business and is used for settling the claim of preference shareholders. Thus, there is no additional claim on net assets of the Company. 
• The transfer of divisible profits to Capital Redemption Reserve makes them non-distributable profits. As Capital Redemption Reserve can be used only for issue of fully paid bonus shares, profits retained in the business ultimately get converted into share capital. 
• Security cover available to outside stakeholders depends upon called-up capital as well as uncalled capital to be demanded by the company as per its requirements. 
• To ensure that the interests of outsiders are not reduced, Section 55 provides for redemption of only fully paid-up shares. 
• From the above paras, it can be concluded that the ‘gap’ created in the company’s capital by the redemption of redeemable preference shares much be filled in by: 

              (a) the proceeds of a fresh issue of shares;

              (b) the capitalisation of undistributed profits; or

              (c) a combination of (a) and (b).

PROVISIONS OF THE COMPANIES ACT (SECTION 55)

PROVISIONS OF THE COMPANIES ACT (SECTION 55)
A company limited by shares if so authorised by its Articles, may issue preference shares which at the option of the company, are liable to be redeemed within a period, normally not exceeding 20 years from the date of their issue. It should be noted that:

(a) no shares can be redeemed except out of profit of the company which would otherwise be available for dividend or out of proceeds of fresh issue of shares made for the purpose of redemption;

(b) no such shares can be redeemed unless they are fully paid;

(c)   (i) in case of such class of companies, as may be prescribed and whose financial statement comply with the accounting standards prescribed for such class of companies under Section 133, the premium, if any, payable on redemption shall be provided for out of the profits of the company, before the shares are redeemed:

 Provided also that premium, if any, payable on redemption of any preference shares issued on or         before the commencement of this Act by any such company shall be provided for out of the profits     of the company or out of the company’s securities premium account, before such shares are                  redeemed.

 (ii) in case of other companies (not falling under (i) above), the premium, if any payable on                 redemption shall be provided for out of the profits of the company or out of the company’s                 securities premium account, before such shares are redeemed.

(d) where any such shares are proposed to be redeemed out of the profits of the company, there shall, out of profits which would otherwise have been available for dividends, be transferred to a reserve account to be called Capital Redemption Reserve Account, a sum equal to the nominal amount of the shares redeemed; and the provisions of the Act relating to the reduction of the share capital of a company shall, except as provided in the Section, apply as if the Capital Redemption Reserve (CRR) Account were the paid-up share capital of the company. The utilisation of CRR Account is further restricted to issuance of fully paid-up bonus shares only.

From the legal provision outlined above, it is apparent that on the redemption of redeemable preference shares out of accumulated profits it will be necessary to transfer to the Capital Redemption Reserve Account an amount equal to the amount repaid on the redemption of preference shares on account of face value less proceeds of a fresh issue of capital made for the purpose of redemption. The object is that with the repayment of redeemable preference shares, the security for creditors/ bankers, etc. should not be reduced. At times, a part of the preference share capital may be redeemed out of accumulated profits and the balance out of a fresh issue.

PURPOSE OF ISSUING REDEEMABLE PREFERENCE SHARES

PURPOSE OF ISSUING REDEEMABLE PREFERENCE SHARES
A company may issue redeemable preference shares because of the following:

1 It is a proper way of raising finance in a dull primary market.

2. A company may face difficulty in raising share capital, as its shares are not traded on the stock exchange. Potential investors, hesitant in putting money into shares that cannot easily be sold, may be encouraged to invest if the shares are redeemable by the company.

3 The preference shares may be redeemed when there is a surplus of capital and the surplus funds cannot be utilised in the business for profitable use.

In India, the issue and redemption of preference shares is governed by Section 55 of the Companies Act, 2013.

REDEMPTION OF PREFERENCE SHARES (INTRODUCTION)

INTRODUCTION

• Redemption is the process of repaying an obligation, at prearranged amounts and timings. It is a contract giving the right to redeem preference shares within or at the end of a given time period at an agreed price. 
• These shares are issued on the terms that shareholders will at a future date be repaid the amount which they invested in the company (along with frequent payment of a specified amount as return on investment during the tenure of the preference shares). 
• The redemption date is the maturity date, which specifies when repayment takes place and is usually printed on the preference share certificate. 
• Through the process of redemption, a company can also adjust its financial structure, for example, by eliminating preference shares and replacing those with other securities if future growth of the company makes such change advantageous. 

METHODS FOR DETERMINING CASH FLOW FROM OPERATING ACTIVITIES

Methods : 

An enterprise can determine cash flows from operating activities using either :

(a) Direct Method: The direct method, whereby major classes of gross cash receipts and gross cash payments are considered; or

(b) Indirect Method: The indirect method, whereby net profit or loss is adjusted for the effects of transactions of a non-cash nature, deferrals or accruals of past or future operating cash receipts or payments, and items of income or expense associated with investing or financing activities.

FINANCING ACTIVITIES

 Financing activities

1. Definition : These are the activities that result in changes in the size and composition of the owner’s capital (including preference share capital) and borrowings of the enterprise.

2. Separate Disclosure: The separate disclosure of cash flows arising from financing activities is important because it is useful in predicting claims on future cash flows by providers of funds (both capital and borrowings) to the enterprise.

INVESTING ACTIVITIES

 Investing activities

1. Definition : These are the acquisition and disposal of long-term assets and other investments not included in cash equivalents.

2. Separate Disclosure : Separate disclosure of cash flows arising from investing activities is important because the cash flows represent the extent to which the expenditures have been made for resources intended to generate future incomes and cash flows.

OPERATING ACTIVITIES

 Operating Activities

1. Definition: These are the principal revenue generating activities of the enterprise.

2. Net Impact: Net impact of operating activities on flow of cash is reported as ‘Cash flows from operating activities’ or ‘cash from operation’.

3. Key Indicator: The amount of cash flows from operating activities is a key indicator of the extent to which the operations of the enterprises have generated sufficient cash flows to :

   (a) Maintain the operating capability of the enterprise,

   (b) Pay dividends, repay loans, and

   (c) Make new investments without recourse to external sources of financing.

4. Information Provided: It provides useful information about financing through working capital.

5. Benefits: Information about the specific components of historical operating cash flows is useful, in conjunction with other information, in forecasting future operating cash flows.

ELEMENT OF CASH

Elements of Cash

As per AS 3, issued by the Council of the ICAI, ‘Cash’ include:

(a) Cash in hand,

(b) Demand deposits with banks, and Cash equivalents include:

(a) Components

   ➢ Short term highly liquid investments that are readily convertible into known amounts of cash            and which are subject to an insignificant risk of changes in value

   ➢ Securities with short maturity period of, say, three months or less from the date of acquisition

    Objective

Deploy, for a short period, idle cash required to meet short-term cash-commitments. 

Examples

Acquisition of preference shares, shortly before their specified redemption date, bank deposits with short maturity period, etc.

Conclusion:

 Thus, cash flow statement deals with flow of cash funds but does not consider the movements among cash, bank balance payable on demand and investment of excess cash in cash equivalents. Examples are cash withdrawn from current account, cash deposited in bank for 60 days, etc.

BENEFITS OF CASH FLOW STATEMENT

Benefits:
(a) Cash flow statement provides information about the changes in cash and cash equivalents of an enterprise.

(b) Identifies cash generated from trading operations.

(c) The operating cash surplus which can be applied for investment in fixed assets.

(d) Portion of cash from operations is used to pay dividend and tax and the other portion is ploughed back.

(e) Very useful tool of planning.

INTRODUCTION OF CASH FLOW STATEMENT

INTRODUCTION

• Information about the cash flows of an enterprise is useful in providing users of financial statements with a basis to assess the ability of the enterprise to generate cash and cash equivalents and the needs of the enterprise to utilise those cash flows.
•  The economic decisions that are taken by users require an evaluation of the ability of an enterprise to generate cash and cash equivalents and the timing and certainty of their generation. 
• The Standard deals with the provision of information about the historical changes in cash and cash equivalents of an enterprise by means of a cash flow statement which classifies cash flows during the period from operating, investing and financing activities. 
• This statement provides relevant information in assessing a company’s liquidity, quality of earnings and solvency.

TRANSFER TO RESERVES

Transfer to Reserves

I The Board of Directors are free and can appropriate a part of the profits to the credit of a reserve or reserves as per section 123 (1)of the Companies Act, 2013.

II Appropriation of a part of profit is sometimes made under law.

    (A) For example, under the Banking Regulation Act, a fixed percentage of the profit of a banking           company must first be transferred to the General Reserve before any dividend can be distributed.

     (B) Transfer of a part of profit to a reserve is also necessary where the company has undertaken,           at  the time of raising of loan, that before any part of its profit is distributed, a specified                       percentage of the profit every year should be credited to a reserve for the repayment of the loan           and until the time for repayment arrives, the amount should remain invested in a specified                   manner.

III Apart from appropriations aforementioned, it may also be necessary to provide for losses and arrears of depreciation and to exclude capital profit, as mentioned earlier, to arrive at the amount of divisible profit.

DECLARATION AND PAYMENT OF DIVIDEND

Declaration and Payment of Dividend

For the purpose of second proviso to sub-section (1) of section 123, a company may declare dividend out of the accumulated profits earned by it in previous years and transferred by it to the reserves, in the event of inadequacy or absence of profits in any year, subject to the fulfilment of the following conditions as per Companies (Declaration and Payment of Dividend) Rules, 2014:

(1) The rate of dividend declared should not exceed the average of the rates at which dividend was declared by it in the three years immediately preceding that year: provided that this sub-rule should not apply to a company, which has not declared any dividend in each of the three preceding financial year.

(2) The total amount to be drawn from such accumulated profits should not exceed one-tenth of the sum of its paid-up share capital and free reserves as appearing in the latest audited financial statement.

(3) The amount so drawn should first be utilised to set off the losses incurred in the financial year in which dividend is declared before any dividend in respect of equity shares is declared.

(4) The balance of reserves after such withdrawal should not fall below 15% of its paid up share capital as appearing in the latest audited financial statement.

(5) No company should declare dividend unless carried over previous losses and depreciation not provided in previous year are set off against profit of the company of the current year the loss or depreciation, whichever is less, in previous years is set off against the profit of the company for the year for which dividend is declared or paid.

MEANING OF DIVIDEND

Meaning of Dividend
(a) A dividend is a distribution of divisible profit of a company among the members according to the number of shares held by each of them in the capital of the company and the rights attaching thereto.

(b) Such a distribution may or may not entail a release of assets; it would be where a distribution involves payment of cash.

(c) But when profits are capitalised and the amount distributed is applied towards payment of bonus shares, issued free to the shareholders, no part of the assets of the company can be said to have been released since, in such a case, profitsare only capitalised, thereby increasing the paid up capital of the company. The company does not give up any asset.

As per Section 2 (35) of the Companies Act, 2013, term “Dividend” includes interim dividend also.

Under Section 123 (1) of the Companies Act, 2013, no dividend should be declared or paid by a company for any financial year except-

(a) Out of the profits of the company for that financial year arrived at after providing for depreciation in accordance with the provisions of section 123(2), or

(b) Out of the profits for any previous financial years arrived at after providing for depreciation in accordance with the provisions of that sub section and remaining undistributed; or

(c) Out of both the above;

(d) Out of the moneys provided by the Central Government or any State Government for the payment of dividend by the Company in pursuance of any guarantee given by that government

Provided that no dividend should be declared or paid by a company from its reserves other than free reserves.

Declaration of a dividend presupposes that there is a trading profit or a surplus available for distribution, arrived at after providing for depreciation on assets, not only for the year in which the profits were earned but also for any arrears of depreciation of the past years, calculated in the manner prescribed by sub-section (2) of Section 123.

Sub-section (3) of Section 124 further states that the Board of Directors of a company may declare interim dividend during any financial year out of the surplus in the profit and loss account and out of profits of the financial year in which such interim dividend is sought to be declared : Provided that in case the company has incurred loss during the current financial year up to the end of the quarter immediately preceding the date of declaration of interim dividend, such interim dividend should not be declared at a rate higher than the average dividends declared by the company during the immediately preceding three financial years.

DIVISIBLE PROFIT

DIVISIBLE PROFIT

• One of the important functions of company accounting is to determine the amount of profits which is available for distribution to the shareholders as dividend. 
• This is necessary since the amount of profits disclosed by the Profit & Loss Account, in every case, is not available for distribution. 
• The availability of profits for distribution depends on a number of factors, e.g., their composition, the amount of provisions and appropriations that must be made out of them in priority, etc.

MANAGERIAL REMUNERATION

MANAGERIAL REMUNERATION

Managerial remuneration is calculated as a percentage of profit. Managerial remuneration payable by a company is governed by various sections of the Companies Act, 2013 and also Schedule V under the Companies Act, 2013.

The scope of the relevant sections is as below:
Section 197 prescribes the overall maximum managerial remuneration payable and also managerial remuneration in case of absence or inadequacy of profits.

As per Section 197 of the Companies Act, 2013, total managerial remuneration payable by a public company, to its directors, including managing director and whole-time director, and its manager in respect of any financial year should not exceed 11% of the net profits of that company for that financial year computed in the manner laid down in section 198 except that the remuneration of the directors should not be deducted from the gross profits. The company in general meeting may, with the approval of the Central Government, authorise the payment of remuneration exceeding 11% of the net profits of the company, subject to the provisions of Schedule V.

Provided further that, except with the approval of the company in general meeting,—

(i) the remuneration payable to any one managing director; or whole-time director or manager should not exceed 5% of the net profits of the company and if there are more than one such director, remuneration should not exceed 10% of the net profits to all such directors and manager taken together;

(ii) the remuneration payable to directors who are neither managing directors nor whole-time directors should not exceed,—

       (A) 1% of the net profits of the company, if there is a managing or whole-time director or                        manager;

       (B) 3% of the net profits in any other case.

Section 198 lays down how the net profit of the company will be ascertained for the purpose of calculating managerial remuneration.

Schedule V consists of four parts. Part I lays down conditions to be fulfilled for the appointment of a managing or whole-time director or a manager without the approval of the Central Government. Part II deals with remuneration payable to managerial person by companies having profits and also by companies having no profits or inadequate profits. Part III specifies the provisions applicable to parts 1 and 2 of this schedule and Part IV deals with Central Government’s power to relax any requirements in this Schedule.

FINAL ACCOUNT

FINAL ACCOUNTS

Under Section 129 of the Companies Act, 2013, at the annual general meeting of a company, the Board of Directors of the company should lay financial statements before the company:

Financial Statements as per Section 2(40) of the Companies Act, 2013, inter-alia include

(i) a balance sheet as at the end of the financial year;

(ii) a profit and loss account, or in the case of a company carrying on any activity not for profit, an income and expenditure account for the financial year;

(iii) cash flow statement for the financial year;

(iv) a statement of changes in equity, if applicable; and

(v) any explanatory note annexed to, or forming part of, any document referred to in (i) to (iv) above:

Provided that the financial statement, with respect to One Person Company, small company and dormant company, may not include the cash flow statement.

ANNUAL RETURN

ANNUAL RETURN

In accordance with Section 92 of the Companies Act, 2013, every company should prepare an annual return in the form prescribed by the Companies Act, 2013 signed by a director and the company secretary, or where there is no company secretary, by a company secretary in practice :

Provided that in relation to One Person Company and small company, the annual return should be signed by the company secretary, or where there is no company secretary, by the director of the company.

The annual return should be filed with the Registrar within 60 days from the day on which each of the annual general meeting (AGM) is held or where no AGM is held in any year, within 60 days from the date on which AGM should have been held along with a statement showing the reasons why AGM was not held.

STATUTORY BOOKS

STATUTORY BOOKS

The following statutory books are required to be maintained by a company under different sections of the Companies Act, 2013:

• Register of Investments of the company held in its own name (Section 187) Register of Charges (Section 85) 
• Register of Members (Sections 88) 
• Register of Debenture-holders and other Security holders (Section 88) Minute Books (Section 118) 
• Register of Contracts, or arrangements in which directors are interested (Section 189) 
• Register of directors and key managerial personnels and their shareholding (Section 170) 
• Register of Loans and Investments by Company (Section 186) 

In addition, a company usually maintains a number of statistical books to keep a record of its transactions which have resulted either in the payment of money to it or constitute the basis on which certain payments have been made by it.

Registers and documents relating to the issue of shares are:
(i) Share Application and Allotment Book

(ii) Share Call Book

(iii) Certificate Book

(iv) Register of Members

(v) Share Transfer Book

(vi) Dividend Register.

MAINTENANCE OF BOOKS OF ACCOUNT

MAINTENANCE OF BOOKS OF ACCOUNT

As per Section 128 of the Companies Act, 2013, Every company should prepare and keep at its registered office books of account and other relevant books and papers and financial statement for every financial year which give a true and fair view of the state of the affairs of the company, including that of its branch office or offices, if any, and explain the transactions effected both at the registered office and its branches and such books should be kept on accrual basis and according to the double entry system of accounting:

Provided further that the company may keep such books of account or other relevant papers in electronic mode in such manner as may be prescribed.

Maintenance at Place other than Registered Office
It is a duty of the company to inform the Registrar of Companies within seven days of the decision in case the Board of Directors decides to maintain books at the place other than the registered office.

In Case of Branch Office

Where a company has a branch office in India or outside India, it should be deemed to have complied with the provisions of the Act, if proper books of account relating to the transactions effected at the branch office are kept at that office and proper summarised returns periodically are sent by the branch office to the company at its registered office or such other place as the Board of Directors has decided.

Section 128 (3) further lays down that the books of account and other books and papers maintained by the company within India should be open for inspection at the registered office of the company or at such other place in India by any director during business hours, and in the case of financial information, if any, maintained outside the country, copies of such financial information should be maintained and produced for inspection by any director subject to such conditions as may be prescribed. Section 128(5) further states that the books of account of every company relating to a period of not less than 8 financial years immediately preceding a financial year, or where the company had been in existence for a period less than 8 years, in respect of all the preceding years together with the vouchers relevant to any entry in such books of account should be kept in good order.

MEANING OF COMPANY

MEANING OF COMPANY

As per Section 2(20) of the Companies Act, 2013, “Company” means a company incorporated under the Companies Act, 2013 or under any previous company law (e.g., the Companies Act, 1956). Different types of companies have been defined (under various sub-sections of the Companies Act, 2013) as follows:

2(21) “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 its being wound up;

2(22) “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;

2(42) “Foreign company” means any company or body corporate incorporated outside India which –

(a) has a place of business in India whether by itself or through an agent physically or through electronic mode; and

(b) conducts any business activity in India in any other manner.

2(45) “Government company” means any company in which not less than 51% of the paid-up share capital is held by the Central Government, or by any State Government or Governments, or partly by the Central Government and partly by one or more State Governments, and includes a company which is a subsidiary company of such a Government company;

2(62) “One Person Company” means a company which has only one person as a member;

2(68) “Private company” means a company having a minimum paid-up share capital as may be prescribed, and which by its articles,—

(i) restricts the right to transfer its shares;

(ii) except in case of One Person Company, limits the number of its members to two hundred: 

Provided that where two or more persons hold one or more shares in a company jointly, they should, for the purposes of this sub-clause, be treated as a single member:

Provided further that—

(A) persons who are in the employment of the company; and

(B) persons who, having been formerly in the employment of the company, were members of the company while in that employment and have continued to be members after the employment ceased, should not be included in the number of members; and

(iii) prohibits any invitation to the public to subscribe for any securities of the company;

2(71) “Public Company” means a company which—

(a) is not a private company;

(b) has a minimum paid-up share capital as may be prescribed:

Provided that a company which is a subsidiary of a company, not being a private company, should be deemed to be public company for the purposes of this Act even where such subsidiary company continues to be a private company in its articles;

2(85) “Small company” means a company, other than a public company, -

(i) paid-up share capital of which does not exceed Rs. 50 lakhs or such higher amount as may be prescribed which should not be more than Rs. 5 crores; or

(ii) turnover of which as per its last profit and loss account does not exceed Rs. 2 crores or such higher amount as may be prescribed which should not be more than Rs. 20 crores:

Provided that nothing in this clause should apply to:

(A) a holding company or a subsidiary company

(B) a company registered under section 8

(C) a company or body corporate governed by any special Act

2(92) “Unlimited company” means a company not having any limit on the liability of its members;

2(46) “Holding company”, in relation to one or more other companies, means a company of which such companies are subsidiary companies;

2(87) “Subsidiary company”, or “subsidiary”, in relation to any other company (that is to say the holding company), means a company in which the holding company-

(i) controls the composition of the Board of Directors; or

(ii) exercises or controls more than one-half of the total share capital either at its own or together with one or more of its subsidiary companies:

Provided that such class or classes of holding companies as may be prescribed should not have layers of subsidiaries beyond such numbers as may be prescribed.

Explanation – For the purposes of this clause, -

(a) a company should be deemed to be a subsidiary company of the holding company even if the control referred to in sub-clause (i) or sub-clause (ii) is of another subsidiary company of the holding company;

(b) the composition of a company’s Board of Directors should be deem (a) the composition of a company’s Board of Directors should be deemed to be controlled by another company if that other company by exercise of some power exercisable by it at its discretion can appoint or remove all or a majority of the directors;

(c) the expression “company” includes any body corporate;

(d) “layer” in relation to a holding company means its subsidiary or subsidiaries;

EXCLUSIONS FROM THE COST OF INVENTORIES

Exclusions from the cost of inventories

In determining the cost of inventories, it is appropriate to exclude certain costs and recognise them as expenses in the period in which they are incurred. Examples of such costs are:

(a) Abnormal amounts of wasted materials, labour, or other production costs;

(b) Storage costs, unless the production process requires such storage;

(c) Administrative overheads that do not contribute to bringing the inventories to their present location and condition;

(d) Selling and distribution costs.