Final Accounts of Corporate Entities, Accounts of Banking Companies, Dibrugarh University, Corporate Accounting, B.Com 2nd Semester (CBCS) B.Com 1st Year, Notes Unit 2- Myedu365

Unit 2

Part A
Final Accounts of Corporate Entities

1. Write Short notes:

Preliminary Expenses: Preliminary expenses are those expenses which are incurred on the formation of the company. Such expenses include stamp duty and fees payable on registration of the company, legal and printing charges for preparing the Prospectus, Memorandum and Articles of Association, Accountants’ and Valuers’ fees for reports, Certificates, etc. Cost of printing and stamping letters of allotment and share certificates, cost of company seal, books of account, statutory books and statistical books etc. Such expenses are written off from the Statement of Profit and Loss in the year of their incurrence.

Capital Profits: Capital profits are not earned during the normal course of the business and arise in the following special circumstances:

a. Profit on sale of fixed assets.

b. Profits on purchase of business, such profit arises when the value of assets taken over minus the liabilities taken over is more than the amount paid for the purchase of the business.

c. Profit prior to incorporation.

d. Premium received on issue of shares or debentures.

e. Balance left in Forfeited Shares Account after the reissue of forfeited shares.

f. Profit made on redemption of debentures.

g. Profit set aside for redemption of preference shares.

Ordinarily capital profits are not available for the distribution of dividend. Such profits can be utilized for writing off capital losses and fictitious assets like preliminary expenses, goodwill, discount or commission on issue of shares or debentures etc. or for issuing bonus shares.

Capital profits can be distributed as dividend only if:

i. the articles of a company permit;

ii. they are realized in cash;

iii. surplus remains after a revaluation of all assets;

iv. capital losses have been written off.

It may be noted that securities premium account, capital redemption reserve account, profit prior to incorporation and profit on reissue of forfeited shares cannot be distributed as dividend under the Companies Act.

Provision for taxation: Statement of Profit and Loss of a company must set out the amount of charge for Indian income-tax and other Indian taxation on profits, including where practicable, with Indian Income-tax, any taxation imposed elsewhere to the extent of the relief, if any, from Indian Income-tax and distinguishing, where practicable, between income-tax and other taxation.

            A company is liable to pay income-tax or tax on profits under the Income-tax Act, 1961 and such tax is treated as charge against the profits of the accounting year, although the profits are assessed and actual liability for tax is determined in the following year. Moreover, the assessable profits (taxable profits) are seldom the same as accounting profits. As such it is not possible to determine the actual amount of tax payable at the time the financial statements are prepared. Therefore, liability for tax is estimated and provided for while preparing the final statements. Such provision is a charge against profit in the profit and loss statement and credited to provision for taxation account.

While making the estimate of provision for taxation, due consideration should be given to the following points:

a. Whether the net profit has been determined after deducting depreciation according to Income-tax Act and managerial remuneration.

b. Whether income-tax has been computed at the rates prescribed.

c. Whether profit sur-tax is payable or not.

d. Whether capital gains tax is payable or not.

e. Whether penalty is payable under any tax laws.

f. Whether rebate is available for double taxation.

g. Whether investment allowance, extra shift allowance, etc., if any, have been duly deducted or not in estimating the tax liability.

h. Whether adjustment has made for the last year’s actual tax liability or not.

Advance payment of tax and Provision for taxation: Under Income tax Act 1961, companies are required to pay advance tax on their expected profits. When advance payment of tax is made, the entry is:

  Advance Income Tax Account        Dr

          To Bank Account

Since the actual amount payable as income tax will be known long after the preparation of the Profit and Loss Account ( i.e. when the assessment is made by the Income Tax department), the liability for taxes has to be estimated while preparing the Profit and Loss Account so that dividend to shareholders may be made from revenue profits and not from capital profits. So, liability for taxes is estimated and provided for in the books. The entry is:

    Profit and Loss Account                                  Dr

           To Provision for Income Tax Account

When the actual assessment of tax is made, balances appearing in Provision for Income Tax Account, Advance Income Tax Account and tax deducted at source on income earned by the company are transferred to Income Tax Account. If the actual assessment of tax comes to be more than the provision made, the balance is deducted from the Surplus in the Balance sheet. The amount is not debited to the Profit and Loss Account because tax assessed relates to the profits of the last year. Similarly, if the actual assessment of tax is less than the amount provided for, the difference is added to the Surplus Account shown in the Balance sheet.

Corporate Dividend Tax: As per the Finance Act, 1997 dividend paid or declared were subject to corporate dividend tax @ 10% with effect from 1st June, 1997. Such corporate dividend tax is deducted from Surplus sub-head in the Balance Sheet and it is also shown under the heading current liabilities as a provision till it is paid. But as per recent Finance Act, the rate of this tax is 17.64706% plus 12% surcharge and cess 3%. Total percentage of corporate dividend tax with surcharge and education cess comes to 20.357% approximately.

Interim dividend: This dividend is declared between two annual general meetings. Section 123 of the Companies Act 2013 provides 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 interim dividend is sought to be declared. If further provides 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 shall not be declared at a rate higher than the average dividends declared by the company during the immediately preceding three financial years.

Final dividend: It is a dividend which is declared at the annual general meeting of the shareholders and is declared by the shareholders only on the recommendation of the directors. The dividend proposed by the directors is provided for in the final accounts of the company and is paid only after it has been passed at the annual general meeting of the shareholders.

2. What is Accounting Standard?

Ans: Accounting standards are authoritative standards for financial reporting and are the primary source of generally accepted accounting principles (GAAP). Accounting standards specify how transactions and other events are to be recognized, measured, presented, and disclosed in financial statements. The objective of such standards is to provide financial information to investors, lenders, creditors, contributors and others that is useful in making decisions about providing resources to the entity. Accounting standard is a selected set of accounting policies or broad guidelines issued by an accounting body, regarding the principles and methods to be chosen out of several alternatives that are followed for the preparation of financial statements.

3. What are the needs for Accounting Standard / objectives of Accounting Standard / Purposes of Accounting Standard?

Ans: Following are the needs for Accounting Standard / objectives of Accounting Standard / Purposes of Accounting Standard:

a. Uniform presentation of accounts: The users of financial statements require the accounting information which is comparable. The presence of wide variety of concepts, conventions and principles created confusion among them, rather than providing a solid and logical treatment of the transactions. The necessity to present uniform accounting information resulted in the emergence of accounting standards.

b. Avoidance of manipulation: Misusing the vagueness of accounting concepts, conventions and principles generates scandals resulting into failure of the business. Accounting Standards are needed to avoid such manipulation of accounting results.

c. Globalised business: Globalization of business has resulted in the emergence of multinational corporations in different countries with different principles, customs and currency. The global business needs standardization of accounting system for its smooth and fair flow.

d. Disclosure beyond law: There are certain areas of accounting where law does not require important information to be disclosed. Accounting standard may call for disclosure of such information beyond that required by law.

e. Simplify the accounting information: Accounting standards prevent the users from reaching any misleading conclusions and make the financial data simpler for everyone. For example, AS-3(Revised) clearly classifies the flows of cash in terms of ‘operating activities’, ‘investing activities’ and ‘financing activities’.

4. Write short notes on International Financial Reporting Standards (IFRS)

Ans: International Financial Reporting Standards constitute a globally recognized set of standards for the preparation of financial statements by business entities used in multiple countries. The IASB, or International Accounting Standards Board, work to develop these standards, creating a consistent approach to financial reporting globally. The IASB works with investors, auditors and regulators in different countries to determine the needs of each user and incorporate those needs in the standards.

5. What are the need and Importance of IFRS?

Ans: International Financial Reporting Standards (IFRS) convergence, in recent years, has gained momentum all over the world. As the capital markets become increasingly global in nature, more and more investors see the need for a common set of accounting standards. It will lower the cost of raising funds, reduce accountants’ fees and enable faster access to all major capital markets. It will facilitate companies to set targets and milestones based on global business environment rather than an inward perspective. This will eliminate the need for multiple reports and significant adjustment for preparing consolidated financial statements or filling financial statements in different stock exchanges.


Part B
Accounts of Banking Companies

1. What is Slip system of posting? What are the reasons for adoption of slip system of posting? What are the advantages and disadvantages of slip system of posting?

Ans: Slip system of posting: In this system, posting is made from slips prepared inside the organization itself or from slips filed in by its customers. So entries are not made in the books of original entry or subsidiary books, but posting of entries is done from slips. In a banking company, the main slips are pay-in-slips, withdrawal slips and cheques and all these slips are filled in by clients of the bank. These slips serve the basis of entry in the ledgers and control accounts in the general ledger are prepared on the basis of analysis of these slips.

Following are the reasons for adoption of slip system of posting:

1. The bank must have customer’s account up-to-date for a customer may present a cheque any time during hours meant for the public. Slip system helps in keeping the accounts up-to-date.

2. The number of transactions in a bank is very large. The adoption of slip system can suitably distribute the work of posting among many persons.

3. It ensures smooth flow of accounting work.

Following are the advantages of slip system of posting:

1. Saving of time and labour: The bank saves a lot of time and clerical labour as most of the slips are filed in by its customers.

2. No need of subsidiary books: Subsidiary books are avoided as posting is done from slips.

3. Minimum delay: Entries can be recorded with minimum delay as slips can easily pass from hand to hand among clerks concerned.

4. Division of labour: The slip system enables the division of work of posting among employees due to a large number of transactions in a bank.

5. Smooth accounting: The writing of the day book and posting of the ledger can be done simultaneously without loss of time.

6. Reliable accounting system: Slip system provides a basis for reliable accounting system as most of the slips are prepared by customers themselves. Moreover, each transaction is recorded in different books which are maintained on self balancing system.

7. Perfect basis of auditing: Individual slips are filled up by customers and becomes a proof for a transaction to the satisfaction of the auditor.

8. Proper evidence: Slip duly filled by a customer provides evidence of a transaction. When needed slips preserved by the banks can be shown to the customers for their satisfaction.

Following are the disadvantages of slip system of posting:

1. Risk of loss or destruction of slips: Slips may be lost, destroyed or misappropriated as these are loose.

2. Difficulty in verification: Books cannot be verified if subsidiary books are not kept.

3. Inconvenience to customers: This system causes great inconvenience to the illiterate and semi-literate customers as slips are to be filled in with the help of other customers and arrogant bank employees.

4. Risk of manipulation and misappropriation: Dishonest employees can embezzle the money by destroying the loose and large number of slips and manipulating the amounts.

5. Expensive system: Slip system becomes difficult due to large number of daily transactions in a bank and becomes expensive to keep a date-wise record of such slips.

2. Write Short notes on:

Money at call and short notice: This item appears on the assets side of a bank balance sheet and represents temporary loans to bill brokers, stock brokers and other banks. If the loan is given for one day, it is called ‘money to call’ and if the loan cannot be called back on demand and will require at least a notice of three days for calling back, it is called ‘money at short notice’. It also includes deposits repayable within 10 days or less than 15 days notice lent in the interbank call money market. The rate of interest on which money is lent fluctuates every day, sometimes very sharply (more than 30%), depending on the demand and supply of money. 

Advances: Advances appear on the assets side as fourth head and include loans, cash credits, bank overdrafts and bills discounted and purchased. Banks generally advance money to their customers in the form of loans, cash credits, overdrafts and purchasing and discounting of bills:

I. Cash Credit: It is an arrangement by which the customer is granted the right to borrow money from time to time up to a certain limit. Cash credit is usually given on hypothecation or pledge of stock. The bank usually charges a higher bank interest on the actual amount withdrawn than that charged on loan because the bank has to keep the amount allowed as cash credit always ready under the fear that money allowed may be demanded at any time. Further, in case of cash credit arrangement, the customer is required to pay a minimum interest whether the customer draws any amount or not.

      A cash credit overdraft account is treated as NPA if it remains out of order for a period of more than 90 days. An account is treated as ‘out of order’ if any of the following conditions is satisfied:

a. The outstanding balance remains continuously in excess of the sanctioned limit/drawing power.

b. Though the outstanding balance is less than the sanctioned limit/drawing power –

  i. there are no credits continuously for more than 90 days as on the date of balance sheet; or

  ii. credits during the aforesaid period are not enough to cover the interest debited during   the same period.

c. Further any amount due to the bank under any credit facility is ‘overdue’ if it is not paid on the due date fixed by the bank.

II. Overdraft: This facility is available to a customer who operates a current account with the bank. This facility is granted to customers who have high goodwill and name for honest dealings. In case of bank overdraft, customer is permitted to overdraw money up to a certain level. The facility of overdraft is beneficial to the customer as he has to pay interest only upon the sum overdrawn by him and not upon the maximum limit of the overdraft.

III. Loan: Loan is advance of a fixed amount to a customer to be withdrawn in lump sum by him. Interest is charged on the total amount of the loan agreed to be paid to a customer whether he uses the full amount of the loan or not. So, customers prefer to take cash credit and pay interest at a little higher rate as they find it inconvenient to use the whole amount of the loan immediately.

IV. Discounting of bills: Discounting of a bill means making the payment of the bill before the maturity date of the bill. While making payment of the bill, the bank deducts discount for the unexpired period for the amount of the bill discounted. The bank keeps the bill with it till the maturity date and gets its payment for the customer on the due date.

Non-banking assets: A banking company is not allowed to deal directly or indirectly in the purchase or sale or barter of goods except in connection with its legitimate banking business. But a bank can always lend against the security of the assets. The bank may have to take possession of the asset given as security if the loanee fails to repay the loans. In that case, the asset acquired in satisfaction of the claim of the bank will be shown as an asset in the balance sheet under the heading ‘other fixed assets’. Such assets acquired should be disposed of within seven years as a banking company is not allowed to hold such assets for any period exceeding seven years from the date of their acquisition. Profit or loss on sale of such assets is required to be shown separately in the Profit and Loss account of the bank.

Rebate on Bills Discounted or Unexpired Discounts: Rebate on Bills Discounted is also known as Discount received in advance, or Unexpired Discounts or, Discount received but not earned. Its treatment is same as we do in the case of interest received in advance. When a bank discounts a bill, the following entry is recorded:

    Bills Discounted Account                 Dr

                  To Customers Account

                  To Discount Account

The bank will deduct discount for the period for which it has to wait to get payment of the bill on the maturity date. At the close of the financial year, some of the bills discounted may not have matured; consequently, the total discount credited in respect of such bills cannot be treated as earned during the current year. So, discount for the unexpired period is debited to Discount Account to cancel the credit given previously and credited to Rebate on Bills Discounted Account or Unexpired Discount Account or Discount Received in Advance Account. In the Profit and Loss Account, this item is deducted from Interest and discount to get the net income of the year. In the Balance sheet, this item appears under the heading ‘other liabilities’ as unexpired discounts. At the commencement of the next year, reverse entry is passed as follows:

    Rebate on Bills Discounted Account         Dr

                    To Discount Account

Non-performing assets: A non-performing assets (such as loan, advance etc.) is in respect of which interest and/or instalment of principal due remained overdue for a period of more than 90 days. Such assets are risky and become a threat to the liquidity and profitability of a bank. Non-performing assets may arise because of defaults on the part of borrowers and bad lending practices followed by the banks to favour their near ones and friends. These assets may also arise because of recession in the market or due to natural calamities.