FINANCIAL STATEMENTS OF A COMPANY
Financial Statements are the outcome of summarized process of accounting. Therefore, financial statements are the main source of information on the basis of which conclusion can be drawn about the profitability and the financial position of a business firm. FINANCIAL STATEMENTS Financial Statements are the end-product of accounting work done during the accounting period. Financial Statements are organized summaries of detailed information about the financial position and performance of a business firm. Financial Statements are the basis and formal means through which the corporate management communicates financial information to various user group such as shareholders, managers, creditors, debenture-holders, investors, bankers, suppliers, employees, tax authorities, government, researchers etc. Importance Importance
Financial Statements are the sources of information on the basis of which conclusions are drawn about the profitability and financial position of a company. In the case of a company financial statements are prepared by the Board of Directors to present them before the shareholders for their approval in annual general meeting of the company. Meaning of Financial Statement of a company
Financial statements are those statements which provide information about the profitability and the financial position of a business. Financial statements are the summarized statements of accounting data produced at the end of the accounting process by a business firm through which it communicates the accounting information to the internal and external users. Internal users are the owners, managers and executives, whereas external users can be investors, lenders, suppliers, trade creditors, customers, government and their agencies. The term Financial Statements as used in accounting refers to two statements which every accountant prepares at the end of a given period of time for the business firm. Financial statements normally refer to two basic statements; Position Statement Statement i.e. i.e. Balance Sheet Sheet Income Statement Statement i.e. Profit Profit and Loss Account Account
As per requirements of Accounting Standard AS-3 (revised) every company also prepares a Cash Flow Statement which shows inflow and outflow of cash. As required by the Companies Act, 1956 the annual accounts presented by the management before the shareholders in the Annual General Meeting must also include the following reports:Board of Director’s Report
Auditor’s Report
Segment Report Features of Financial Statements •
Financial statements are the end-product of accounting system.
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Financial statements are prepared on the basis of recorded facts.
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Financial statements relate to past period, therefore, called as historical documents.
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Financial statements are prepared for the accounting period.
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Financial statements are financial in nature, therefore, only monetary transactions are recorded in financial statements.
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Financial statements reflect financial position through Balance Sheet and profitability through Profit and Loss Account.
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Financial statements are prepared as per accounting concepts, conventions and practices. In fact, they are prepared as per generally accepted principles.
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The financial statements by nature are summaries of the items recorded in the business. Hence, they are summarised reports.
Objectives of financial statements •
To help in making planning.
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To assist in estimating the earning potential of the business.
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To assist in investment decision-making.
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To help the management in assessing the efficiency of the organisation.
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To serve as a media of information regarding profitability and financial health of the enterprise.
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To provide financial information about economic resources and obligations of a business enterprise.
Thus, the objective of Financial Statements is to provide information about the financial position, performance performance and changes in in financial financial position position of an enterprise enterprise that that is useful useful to wide range range of users users in making economic decisions. Nature of Financial Financial Statements Statements Financial statements are based on following facts:Based on Conventions :-Certain convention are followed while preparing the financial statements For example:-
Convention of Conservatism:Conservatism:- According to this convention provision are made for expected losses, but expected profits are ignored. Convention of Materiality:Materiality:- This convention is used for recording small value items like stationary goods , postage stamps etc. Expenditure on these items is recorded in the year in which they are purchased purchased even though though they they are assets assets in nature. nature. Based on Accounting Concepts:- A number of assumptions are followed known as accounting concepts while preparing financial statements. For example:-
Going concern concept:- According to going concern concept it is assumed that the business of the firm shall be continued for indefinite period. Money measureme measurement nt concept:concept:- According to this concept only those transactions are recorded in the books of accounts which are expressed in money term. Based on Recorded Facts:- Financial statements are prepared on the basis of recorded facts, they do not show the unrecorded facts. For example, fixed assets are shown at their cost irrespective of their market value. Provisions Provisions of Companies Companies Act regarding regarding Final Final Accounts Section Section 209 to 223 of the Companies Companies Act, 1956 1956 governs the books of accounts and publication of final accounts. The main provisions of the Act dealing with final accounts are: Section 209 it requires that every company to keep proper books of accounts at its Ø Under Section registered office. The books must disclose the receipts and expenditure of the company; its sales and purchases, assets and liabilities and also details about the utilisation of material or labour or other items of costs.
Section 209 as amended by the Companies Act, (Amended) 1988, requires that all the companies to maintain their books of accounts on Accrual Basis and according to the Double Entry System of accounting. Section 210 it has been made compulsory for the companies to present the yearly Ø Under Section Balance Sheet and Profit and Loss Account and a report by the company’s Board of Directors and a report by the Auditor of the company in the Annual General Meeting of the company. Accounting Period: Period: The period to which account relates is referred to as a financial year. It is Ø Accounting important to mention that the first financial year, may be less or more than a calendar year but it should not exceed 15 months in any case, except in special circumstances, with special permission of the Registrar of Companies, it can be extended upto 18 months. According to Section Section 211, accounts must give a true and fair view of the state of affairs of the Ø According company. Under this section the Balance Sheet shall be in the form given in Part I of Schedule VI. Though, there is no form prescribed for Profit and Loss Account, but it must be according to the requirements as detailed in the Part II of Schedule VI of the Companies Act, 1956. This section
does not cover banking, insurance and electricity companies. They are governed by their special Acts. Ø Sections Sections 212 to 214 214 contain special provisions about holding any subsidiary companies. Section 212 provides that the following documents in respect of each subsidiary shall be attached to the Balance Sheet of a holding company: (a) A copy of Balance Sheet of the subsidiary company. (b) A copy of Profit and Loss Account of the subsidiary company. (c) A copy of the report of its Board of Directors. (d) A copy of the report of its Auditors. (e) A statement of the holding company’s interest in the subsidiary company. Ø Under Section 215 , every Balance Sheet and Profit and Loss Account shall be signed by its secretary or manager, if any, and by not less than two Directors, on behalf of the Board of Directors of the company. One of the Directors must be a Managing Director, if any. Ø Under Section 216 , every company must attach an Auditor's Report with its final accounts. Such report must express the professional opinion about the state of company's financial affairs. Ø Under Section 217 , every company must attach the Director's Report with its final accounts. Such report must express profit before tax, profit after tax, creation of reserves, proposed dividend, information regarding change in the nature of company's business, etc. Ø Under Section 220 , within 30 days of the Annual General Meeting, every company has to file three copies of Balance Sheet and Profit and Loss Account and the other documents attached to Balance Sheet, with the Registrar of the Companies.
Type of financial statements
On the basis of periodicity of publication of financial statements, these may be of two types: Annual Financial Financial Statements: Statements: When financial statements are prepared on a yearly basis, they (1) Annual are called Annual Financial Statements. These are also called as ‘Annual Accounts’. These statements are presented in the annual general meeting of members of the company who in turn are required to adopt them.
These statements include Balance Sheet, Profit and Loss Account, Cash Flow Statement, Director’s Report, Auditor’s Report, Segment Report, etc. (2) Quarterly Financial Statements : When interim financial statements are prepared for a short period, period, usually usually a quarter, quarter, these are called called as Quarterly Quarterly Financial Financial Statements. Statements. These These statements statements are are
helpful in understanding the current financial performance of the companies and also helpful in making forecasts for the future. Quarterly Financial Statements/reports now have been made mandatory by SEBI and these must be submitted to the Stock Exchange where their securities are listed. While preparing quarterly reports, the same principles should be employed which are used for preparing annual statements. As per AS-25 the following components must be there in Quarterly Financial Statements: •
Condensed Balance Sheet,
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Condensed Profit and Loss Account,
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Condensed Cash Flow Statement, and
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Selected Explanatory Notes.
Contents of financial statements of a company
The annual accounts published annually by the companies did not provide the complete information about the company to the various interested parties like investors, creditors, Govt. Agencies etc. to analyse the accounting information to make informed judgments and decisions. Therefore, it was felt that all companies listed on recognised Stork Exchanges and also enterprises having turnover of more than of Rs. 50 crores shall have to prepare and attach Cash Flow Statement and Segment Report, i.e. segment wise investment and results along with the annual accounts. These statements provide all information to the investors. A complete set of financial statements include the following, which are called contents of financial statements of a company: •
A Report by the Board of Directors containing:
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Report in terms of Section 217 of the Companies Act, 1956
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Director’s Responsibility Statement
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Report on Corporate Governance
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Management Discussion and Analysis
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Auditor’s Report
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Balance Sheet
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Profit and Loss Account
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Notes to to accounts accounts containing containing
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Accounting Policies adopted by the company
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Explanatory Notes explaining significant transactions and events
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Information required to be disclosed in terms of Schedule VI of the Companies Act, 1956
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Cash Flow Statement
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Segment Report
A brief explanatio explanation n of the financial financial statements statements is as follows: follows: Board of Director’s Report:
The Board of Director’s has to report on the following matters in the Annual Report presented to the shareholders in the Annual General Meeting: •
Financial state of affairs of the company.
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Financial highlights, i.e., sales, expenses, profit before tax, tax provision, profit after tax, transfer to provisions and reserves, balance to be carried forward.
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The amount of profit to be distributed as dividend.
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Any material information with regard to changes in the nature of Company’s business.
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Research and Development.
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Foreign exchange earnings and spendings etc.
Director’s Responsibility Statement
The Board’s Report also include Director’s Responsibility Statement indicating therein: •
That the directors have followed the directions regarding preparation of annual accounts and the applicable Accounting Standards issued by ICAI.
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That the directors had selected such accounting policies and applied therein consistently so as to give a true and fair view of the state of affairs of the company.
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That the directors had taken sufficient care for the maintenance of accounting records in accordance with the provisions of the Companies Act, 1956.
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That the directors had prepared the annual accounts on a going concern concept.
Report on Corporate Governance
Corporate Governance deals with the laws that have been made and rules that have been modified so as to make the accountability of the directors transparent and to ensure that the directors work did not for their personal benefit but work for the benefit of the shareholders. Corporate governance deals with the manner in which companies are directed and controlled by the Board of Directors so as to keep a check on financial scams, battles for corporate take overs, accounting scandals etc.
SEBI (Securities and Exchange Board of India) by inserting Clause-49 has made mandatory for the listed companies to report on corporate governance. Management Discussion and Analysis : This part of the annual reports includes discussion and analysis about the industrial structure and developments, system of internal control and its efficiency, future outlooks, opportunities and threats to the business from the external environment, setting up of various committees like Audit Committee, Compensation Committee, Shareholders Grievance Committee etc. to review the various aspects of these opportunities and threats. This careful analysis helps the company to assess the future direction.
However this should not be taken as forward looking information, since much of the information relates to the past. Auditor’s Report : An Audit Report is a report submitted by the auditors on the basis of the books of accounts, records and information and explanations examined by them. Such report express the professional opinion of the auditors about the company’s financial state of affairs which is formulated by the auditors on the basis of the audit carried by them (auditors) under Section 227 of the Companies Act, 1956. The Auditor’s report must state that the Balance Sheet shows true and fair view of the state of affairs of the company and Profit and Loss Account, reveals a true and fair view of the net profit (loss) for the year and that these statements have been prepared in compliance with the applicable Accounting Standards.
It is important to note that audit report has to indicate the material/significant departures or deviations if any, and if required put qualifications to the report. If some matters are raised or questioned by the auditor in their audit report, the Board of Directors are required to give sufficient and reasonable explanation in the Director’s Report. Notes and Annexure to Financial Statements : Formal financial statements are not sufficient to give a true and fair view of the financial affairs of the business enterprise, therefore, these statements are accompanied with schedules, annexure and notes. A careful reading and study of these notes helps to understand the application of different accounting policies over a period of time concerning the recognition of revenues and matching of different expenses. Accounting Policies : According to AS-I, all significant accounting policies adopted in the preparation and presentation of financial statements should be disclosed at one place.
Accounting policies are generally given at the end of financial statements These policies explain and are related to the method of depreciation, method of valuation of stock, valuation of investments, valuation of fixed assets, treatment of goodwill, treatment of expenditure during construction, treatment of retirement benefits, treatment of contingent liabilities, etc.
Schedules: To supplement the above financial statements, certain schedules are also prepared as a part of the financial statements, for example, (i) Schedule of Fixed Assets, (ii) Schedule of Debtors, (iii) Schedule of Creditors, (iv) Schedule of Cost of Goods Sold, (v) Schedule of Inventories, etc. Explanatory Notes : Explanatory notes are now treated as an integral part of financial statements. Explanatory notes are given at the end of financial statements. Explanatory notes are given for (i) Contingent Liabilities, (ii) Depreciation Policy, (iii) Valuation of Stock, etc. Cash Flow Statement : According to Accounting Standard-3 (Revised), issued by ICAI, each company is required to make a statement showing inflows and outflows of cash during an accounting period. Such a statement is known as “Cash Flow Statement”. Segment Report:
A report carrying information about different types of products and services of a company and its operations in different geographical areas is called segment reporting. Segment reports are to be published published by two two types of companies: companies: •
Multi product company like Hindustan Lever Ltd.
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Multi market company like Infosys Technologies Ltd.
AS-17 on Segment Reporting: AS-17 has made it mandatory for the companies to publish segment performance performance informati information on so that that the shareholde shareholders rs are able able to make a better better assessment assessment about about the performance performance of the company company as a whole. An enterprise should disclose the following for each segment: •
Segment Revenue,
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Segment Results (Profit or Loss before Interest and Tax),
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Segment Expenses,
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Segment Assets,
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Segment Liabilities
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Segment Capital Employed
Essentials Essentials of good financia financiall statements statements
Interest of various parties is attached to financial statements of a business. Thus, in a business, financial statements should be prepared in such a way so that they may supply required information to all the concerned parties. A good financial statement must have following features:
1. Simplicity: Financial statements should be simple so that concerned individuals can easily understand and interpret them properly. For this, the statements must be simple and clear. 2. Right time: These must be prepared at the right time. Any delay in their presentation may decrease their usefulness. 3. Compliance with legal requirements: Financial statements must be prepared in the form and style as required by the Act. They must have subject-matter as prescribed and must be presented presented as stated stated in the the Act. 4. Adherence of accounting principles: The financial statements must be based on the Generally Accepted Accounting Principles (GAAP) so that they may have universal acceptance. 5. Disclosure: The financial statements should disclose all the relevant and material facts. It should be transparent so that the users of accounting information can draw neat conclusions. 6. Authentic: The information contained in the financial statements should be authentic supported by evidence. 7. Relevant to the purpose: Financial statements must be relevant to their purposes. Irrelevant and unnecessary information should not be included in these statements. 8. Complete and accurate information: Financial statements should include the complete and accurate information about the progress of a business and its future prospects. Information should be based on facts. False and incomplete information results in wrong interpretation. 9. Comparability: Financial statements should be comparable. The comparison can be made between between present and past as well well as between between one business business and and the other. other. It increase increasess the utility of the statements. This can be done when similar accounting principles are adopted for their presentation. 10. Facilitating the analysis: Decisions can be taken only by proper analysis of the financial statements. Thus, financial statements should be prepared in such a way that it may facilitate the analysis. For this, the various items should be classified and grouped in a proper manner, manner, so that data can be obtained easily for for analysis. analysis. 11. Systematic arrangement: The information contained in the financial statements should be arranged systematically so that they may be comparable. 12. Audited: The financial statements should have been presented to the uses after being audited by the competent chartered accountants.
Limitations Limitations of financial financial statements statements
Financial statements suffer from the following limitations:-
1. Based on traditions and conventions: Financial statements are prepared and based upon traditions and conventions which allow the usage of personal judgments. 2. Based on historical data: Financial statements are based on historical data while parties are more interested in knowing the present position and future prospects of the business enterprise. 3. Scope of manipulations: Financial statements are sometimes prepared according to the needs of the situation or whims of the management. Management can manipulate financial statements by under-valuation or over-valuation of inventory, under or over charging of depreciation etc. Sometimes window dressing is resorted to in order to show better financial position of a concern than its real position. So financial statements are not free from bias. 4. Influenced by personal judgments: Financial statements are influenced by personal judgments judgments of the account. On On many issues issues more more than one one methods are permitted permitted.. For example, method of depreciation, valuation of stock, valuation of goodwill etc. all depends upon the personal judgments of the policy-maker of the enterprise. 5. Ignore qualitative aspects: Financial statements show only those facts which can be expressed in money terms. Qualitative aspects of the business units are omitted from the books, because because they they cannot be expressed expressed in money money terms. terms. Thus, Thus, cordial employeremployeremployee relations, efficiency of management, firm’s ability to develop new products, customer satisfaction, etc. have a vital role in the profitability of the firm, but here ignored and omitted because these are qualitative in nature. 6. Ignore inflationary effects: Changes in price level make data meaningless. Financial statements record transactions at historical costs. No account is taken of the present value. 7. Ignore the interest of other parties: Financial statements are prepared with a view to take care of the interest of proprietors only and ignore the interests of all other interested parties like creditors, investors, workers, stock exchanges, taxation authorities, economists, researchers, politicians, etc. 8. Financial statements are only interim reports : Financial statements are essentially interim reports. They cannot be final. The actual profit or loss of a business can be determined only when the business is ultimately closed. The existence of contingent assets and liabilities, deferred revenue expenses make the statement less accurate and more subjective. 9. Artificial view: Financial statements do not reveal a real and correct picture of the worth of assets and their loss of value. The reason is that they are shown on historical cost. Thus, these statements provide artificial view. Market or replacement value and the effect of the changes in the price level are completely ignored. 10. Incapable : Financial statements are incapable of showing profitability, operational efficiency, financial soundness, etc. of the business.
These limitations of financial statements can be removed by efficient analysis and interpretation of the financial statements.
Division of Financial Financial Statements Statements
Traditionally, Income Statement and Financial Statement are considered as financial statements, but now a days financial financial statement statementss include:include:•
Income Statement i.e. Profit and Loss Account
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Position Statement i.e. Balance Sheet
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Statement of Retained Earnings i.e. Profit and Loss Appropriation Account
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Statements of Changes in Financial Position i.e. Cash Flow Statement and Funds Flow Statement.
Financial Statements of a Company
Financial Statements are the sources of information on the basis of which conclusions are drawn about the profitability and financial position of a company. In the case of a company financial statements are prepared by the Board of Directors to present the same before the shareholders for their approval at every annual general meeting of the company. Following are important financial statements of a company: I. Profit and Loss Account and II. Balance Sheet. Profit and Loss Loss Account: Account:
Profit and Loss Account shows the net result of the operations of the company completed during an accounting period. In case of a company Trading Account and Profit and Loss Account are prepared prepared jointly, jointly, so it is called called as ‘Income ‘Income Statement’ Statement’.. A trading concern, whose financial activities are restricted to purchases and sales of goods prepare ‘Trading and Profit and Loss Account’ in order to ascertain their net profit or loss. A manufacturing concern requires information regarding cost of production also, so it prepares also one more additional account known as ‘Manufacturing Account’. In case of a company Profit and Loss Appropriation Account is also prepared to show the disposal of profit earned by company. Purpose and Need of Profit & Loss Account
Income statements are prepared to achieve the following objectives: •
To determine the cost of production.
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To determine the gross profit or gross loss and net profit or net loss.
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To determine the operating cost and operational efficiency of the business. To determine the profitability of the business by establishing relationship between direct expenses, indirect expenses, gross profit and net profit with sales. To compare the actual performance with the desired performance and to determine the causes of variances.
Balance Balance Sheet:
Balance Sheet may be defined as a statement of company’s assets and liabilities as on a particular date. It reflects the financial position of a company, therefore it is also called as ‘Position Statement’. The prescribed format of the Balance Sheet has been given in Part-I of Schedule VI of the Companies Act, 1956. Balance Sheet must exhibit a true and fair view of the financial position of the company at the end of the accounting year.
Features of Balance Sheet or Position Statement •
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Balance Sheet is a statement and not an account. Balance Sheet is prepared on a particular date, normally on the closing date of accounting period and represents represents financial financial position position of the company company on that date.
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Balance sheet has two sides–Assets side and Liabilities side. Total of both the sides is equal.
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Assets and Liabilities are shown in the Balance Sheet of a company on the basis of liquidity or permanency.
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Going concern concept and Double Entry System are followed in preparing the Balance Sheet.
Purpose Need of Balance Sheet or Position Statement •
To determine the value of proprietor’s equity.
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To show the financial position of the business.
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To calculate the amount of working capital.
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To calculate the financial ratios.
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To help in making arrangements of probable losses.
Preparation Preparation of Final Final Accounts of a Company Company
There is no statutory obligation upon sole proprietorship or partnership firm to prepare final accounts in a prescribed form, but companies have a statutory obligation to prepare its final accounts in prescribed form. Under Section 210 of the Companies Act, 1956, it has been made compulsory for companies to prepare their final accounts and present the same before the shareholders for their approval, at every annual general meeting of the company. The Auditor’s Report and Director’s Report must be attached to the final accounts of the company. The general principles of preparing the final accounts of the sole proprietorship or partnership firm also remain the same in the case of final accounts of joint stock companies, but in addition to these principles, principles, a joint stock stock company company must must confirm confirm to certain certain legal legal provisions provisions given given in the the Act in respect of the form and contents of the final accounts. Section 211 of the Companies Act states that the Balance Sheet and Profit and Loss Account of the company must give a true and fair view of the state of affairs of the company and shall be in the prescribed form given in Part I of Schedule VI of the Companies Act, 1956. Compliance with Accounting Standards :
The Companies (Amendment) Act, 1999 which came into force w.e.f. 31.10.1998, has made it mandatory on the part of the companies to comply with the applicable accounting standards recommended by the Institute of Chartered Accountants of India and as may be prescribed by the Central Government in consultation with the National Advisory Committee on Accounting Standards. In case of non-compliance, the reason and the financial effect, arising out of such noncompliance should be disclosed. Schedule VI is divided into four parts: The structure of final accounts as prescribed in Schedule Part I Deals with disclosure of information relating to share capital, liabilities and assets in a statement known as the Balance Sheet of the company . There are two alternative forms for preparing preparing this this statement. statement. These These are Horizontal Horizontal form and and Vertical Vertical form. form. A company company has the option option to adopt any of the alternative forms. Now a day, almost all the companies prepare this statement in Vertical form. Part II of the Schedule deals with the information to be disclosed in the Profit & Loss Loss Account Account of a company but no form has been specifically prescribed for it. Part III contains interpretation and explanation of certain terminologies. Part IV requires disclosure of certain details, which are to form part of the Annual Report of the company to be published for providing information to various interested groups.
Companies prepare their final accounts according to their requirements as per the provisions of their respective regulating Acts.
Difference between the Balance Sheet of a Company and a Firm
Points of Differences
Balance Sheet of a Company
Balance Sheet of a Firm
1. Legal Provisions
There is a prescribed form for the preparation preparation of the Balance Balance Sheet of of a company under Indian Companies Act, 1956 Schedule VI, Part I.
There is no standard prescribed form for the preparation of balance sheet under the Indian Partnership Act., 1932.
2. Previous Year’s Figures
Previous year’s figures are also shown together with the figures of the current year.
Previous year’s figures are not required to be shown in the Balance Sheet.
3. Order of Assets and Liabilities
In case of the Balance Sheet of the Assets and liabilities are preferably Company assets and liabilities are shown in required to be shown in order of the order of permanency. liquidity.
4. Headings
Assets and Liabilities have to be shown under major headings in company’s Balance Sheet.
5. Audit
Company’s Balance have to be audited and Audit of Firm’s Balance Sheet is not signed by a Chartered Accountant. necessary.
There is no such restriction for Balance Sheet of Partnership firm.
Essentials Essentials of a Balance Balance Sheet Sheet
It is a theoretical foundation of the subject in hand. The student is apprised of the basics, which are an essential pre-requisite for a comprehensive understanding of the Balance Sheet of a company. Explanation Explanation of Different Different Items Items of Balance Sheet Sheet
Before going for preparation of Balance Sheet of a company, let us examine various items shown in the Balance Sheet. Balance Sheet has two sides. Its left side is Liabilities side and right side is Assets side. For details of different items, schedules are attached with the Balance Sheet. Liabilities Liabilities Side:
Liabilities shown on left side of the Balance Sheet are classified in six main heads: Balance Sheet
Liabilities
Amount Rs. Assets Am Amount Rs.
Share Capital Reserves and Surplus Secured Loans Unsecured Loans Current Liabilities and Provisions Contingent Liabilities
Items appearing on the Liabilities side (1)Share Capital:
Under this head Authorized Capital, Issued Capital, Subscribed Capital, Called-up Capital and Paid-up Capital should be shown separately. If the company has issued Preference shares and Equity shares both, they should also be shown separately under this head. If there are Calls-in-Arrears, they should be shown as a deduction from Called-up Capital, but Calls-in-Advance should be shown separately under this head. If some shares have been forfeited, the balance of “Share Forfeiture Account” should be shown by adding to the Paid-up Capital. Shares allotted for consideration other than cash orissued as Bonus Shares by the company should be separately separately stated stated under under Subscribed Subscribed Capital Capital.. 2) Reserves and Surplus: ( 2)
The items to be shown under this heading are as: •
Capital Reserve
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Capital Redemption Reserve
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Securities Premium Account
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Other Reserves: Specifying the nature of each reserve reserve and the amount in respect thereof, less debit balance of Profit and Loss A/c, if any.
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Surplus: Credit balance of Profit and Loss App. A/c after providing proposed allocations namely Dividend, Bonus or Reserves.
Proposed Additions Additions to Reserves. (3 ) Proposed
Sinking Fund Reserves must be classified under capital and revenue reserves. ‘Funds’ are those reserves which have been invested outside the business. (4)Secured Loans:
When loans are taken on the security of some assets of the company, such loans are called as ‘Secured Loans’. Following items are shown under this heading: •
Debentures.
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Loans and advances from banks.
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Loans and advances from subsidiaries.
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Other loans and advances, if any.
Information regarding nature of security given for each secured loan should be mentioned along with the respective loans. Interest accrued and due on secured loans should be shown along with the appropriate items. But interest accrued but not due on loan will be shown under the heading Current Liabilities. Loans from Directors or Managers, if any, should be shown separately. (4 ) Unsecured Unsecured Loans:
If company borrows loans without giving any security, such loans are called ‘Unsecured Loans’. Following items are shown under this heading: •
Fixed deposits.
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Loans and advances from subsidiaries.
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Short-term Loans and advances from banks and others.
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Other Loans and advances from banks and others.
Long-term and short-term loans should be shown separately. Interest accrued and due on unsecured loans should also be shown under this head.
(5) Current Liabilities and Provisions:
This heading is divided into two parts: (a) Current Liabilities and (b) Provisions. (a) Current Current Liabili Liabilitie ties: s:
These are the liabilities which are repayable in the near future (generally within one year). It includes: •
Bills Payables
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Sundry Creditors
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Outstanding Expenses
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Income Received in Advance
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Unclaimed Dividends
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Interest accrued but not due on loans
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Other liabilities etc. (b) Provisions:
Provision is an amount provided for any known liabilities whose amount cannot be determined with substantial accuracy. It includes: •
Provision for Taxation
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Provision for Provident Fund
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Provision for Insurance and Pension Scheme
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Proposed Dividend
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Other Provision
Provision is also made for known losses such as ‘Provision for Depreciation’. If any provision is more than liability, then excess will be treated as a Reserve.
(6) Contingent Liabilities:
Contingent liabilities are those liabilities which have not arisen, but may arise upon the happening of a certain event. In other words, the liability itself is uncertain. The amount of contingent liability is never shown in the amount column of the liabilities side. Contingent liabilities are always stated as a foot-note on liabilities side of the Balance Sheet. Following are the usual types of contingent liabilities:
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Claims against the company not acknowledged as debts or disputed claims: claims: For example, if anyone has filed a suit against the company for damages, the amount will only be payable if Decreed by the court, otherwise not. Uncalled liability on partly paid shares: shares: For example, if our company holds partly paid shares of some company as investment, the uncalled amount on these shares will be contingent liability. Bills discoun discounted ted but not not matured: matured: For example, if our company has discounted some bills receivable from the bank, the primary liability will be that of the acceptor. The firm will be liable only if the accepted does not pay. Guarantee for loan: For example, if company has given surety for some loan, it may become the the liability liability of the the principal principal debtor debtor to repay repay the loan. loan. Arrears of of dividends dividends on cumulative preference shares. Estimated Estimated amount amount of incomple incomplete te contracts contracts (capital expenditures), arrangement of which is not made. Other amounts for which company is contingently liable.
Assets Side: Side:
Assets shown in the right side of the Balance Sheet are classified in five main heads: Balance Sheet Liabilities
Amount Rs Assets .
Amount Rs.
Fixed Assets Investments Current Assets, Loans and Advances Miscellaneous Expenditure Debit balance of Profit and Loss A/c Items appearing appearing on the the Assets Side Fixed Assets:
Assets which are acquired for permanent use in the business and are not meant for resale are called fixed assets. The prescribed form of the Balance Sheet requires that fixed assets should be presented presented in the the following following order: order:
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Goodwill
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Land
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Building
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Leasehold
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Railway sidings
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Plant & Machinery
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Furniture & Fittings
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Development of Property
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Patents, Trade Marks and Designs
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Livestock
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Vehicles
Two things must be remembered while presenting fixed assets in the Balance Sheet: As far as possible, different assets should be shown separately. In the case of fixed assets, original cost of each asset, additions made in the asset during the year, cost of the asset sold during the year and the depreciation provided on each asset up to the end of the year are to be stated separately
Investments: Investments:
The money invested outside the business to earn income, is termed as ‘investment’. Investments by nature are fixed. Companies Act has laid down specific provisions regarding investments, for example: Investments have to be classified as follows: •
•
Investments in Government and Trust securities. Investments in shares, debentures or bonds, showing separately as fully paid-up and partly paid-up paid-up shares shares and stating stating the differe different nt classes classes of shares. shares.
•
Investments in immovable property.
•
Investments in capital of partnership firms.
It is necessary to disclose nature and mode of valuation of every investment.
Investments should further be divided into two parts: •
Quoted on the stock exchange. (Market value must be disclosed)
•
Unquoted investments.
Current Assets, Loans and Advances:
Current assets are those assets which are likely to be converted into cash within a year from the date of Balance Sheet. These are to be classified in two parts: (A) Current Assets and (B) Loans and Advances. (A)Current Assets: According to legal requirement, the following items are included under this heading: •
Interest accrued on investments
•
Stores and spare parts
•
Loose tools
•
Stock-in-trade
•
Work-in-progress (It means value of semi-finished goods)
•
Sundry Debtors
•
Debts outstanding for more than six months.
•
Other debts Less :Provision for doubtful debts.
•
Cash balance
•
Bank balance (separately with scheduled Banks and with others)
(B)Loans and Advances: It include cash loan given to different persons, advances against purchase of goods and various expenses by the company etc. In the Balance Sheet of a company, these items are shown under separate sub-heading as: Loans and advances to subsidiary companies Bills of Exchange Exchange
Advance recoverable in cash or in kind or for value to be received e.g. rates, taxes, insurances, prepaid prepaid expenses expenses etc. etc. Balance with Customs Department., Port Trust etc. (Where payable on demand)
Miscellaneous Miscellaneous Expenditure Expenditure
This refers to that part of expenses which are not written off to the date of Balance Sheet, such as •
Preliminary expenses.
•
Expenses including commission or brokerage on underwriting or subscription of shares or debentures.
•
Discount allowed on issue of shares or debentures.
•
Interest paid out of capital during construction period of the company.
•
Development expenditure
•
Other items, (specifying their nature)
Profit and Loss Loss Account Account
(Dr. Balance): The debit balance of Profit and Loss Account should appear on the assets side of the Balance Sheet. In case the company has General Reserve, it is shown by way of deduction from it. Disclosure Disclosure of Share Capital Capital in a Balance Balance Sheet Sheet
‘Share Capital’ is the first heading on the Liabilities side of the Balance Sheet. The heading ‘Share Capital’ should disclose authorized, issued, subscribed, called-up and paid-up capital separately, stating the number and nominal value of the shares. Following points should be kept into mind: If the company has issued Equity shares and Preference shares both, they should be shown separately under this head. Information regarding shares allotted for consideration other than cash and shares alloted as fully paid-up paid-up by way of bonus bonus shares shares must also be given given in notes notes under-subscr under-subscribed ibed capital. capital. Calls-in-Arrear is Calls-in-Arrear is to be shown as deduction from called-up amount. The amount due from directors is to be stated separately. Amount standing to the credit of ‘Share Forfeiture A/c’ should be shown as addition to ‘Paid-up Capital’. Amount of ‘Calls-in-Advance’ ‘Calls-in-Advance’ is is to be shown as separate item under this head.
Form of Balance Sheet :
Section 211 requires the balance sheet to be prepared in the prescribed form (except banking, insurance, electricity and other companies governed by any other special Act). Part I of Schedule VI of the Companies Act, 1956 has laid down two forms for preparation of balance sheet sheet viz: viz:
(a) Horiz (a) Horizontal ontal Form; Form; and and (b) Vertical Form of presentation of Balance Sheet. A company may adopt either horizontal form or vertical form. But, now-a-days companies follow vertical form to present balance sheet and profit and loss account. Under vertical form, share capital and long term liabilities are classified as sources of funds. Application of funds are shown under the heads fixed assets; investment; current assets, loans & advances less current liabilities & provisions and miscellaneous expenditure. Details of above mentioned heads are given in schedules which form part of the balance sheet.
CONTENTS OF BALANCE SHEET
The prescribed form of the Balance Sheet is given in Part I of Schedule VI of The Companies Act, 1956. The Companies Act has laid down two forms of the Balance Sheet known as: (i) (ii)
Horizontal form Vertical form
FORMAT OF SUMMARISED BALANCE SHEET (HORIZONTAL FORM) SCHEDULE VI PART I Balance Sheet of ….CO.LTD. As at …
Figures
Figures
Figures
for the
for the
for the
Previous year
current previous previous year year
Rs.
Liabilities
Rs.
Rs.
Assets
Figures for the current year Rs.
1. Share Capital
1. Fixed Assets
2. Reserves and surplus
2. Investments
3. Secured Loans
3. Current Assets, Loans and
4. Unsecured Loans
Advances
5. Current Liabilities and
(a) Current Assets
Provisions (a) Current Current Liabili Liabilitie tiess (b) (b) Provi Provisi sions ons
(b) Loans and Advances 4. Miscellaneous Expenditure 5. Profit and Loss A/c
Note: A footnote to the Balance Balance Sheet Sheet may be added to show show the contingent contingent liabilities. liabilities.
The format of the detailed Balance Sheet of a company in a horizontal form is given below:
FORMAT OF THE DETAILED BALANCE SHEET IN A HORIZONTAL FORM Horizontal Form of Balance Sheet Balance Balance Sheet of..... (Name of the company) as on.....
Figures
Liabilities
for the
Figure s
Figures
Assets
for the
for the
for the
Previous year
previous previous current year year Rs. Rs.
Rs.
current year Rs.
Share Capital:
Fixed Assets:
Authorized
Goodwill
…shares of Rs…each
Land
Preference
Building
Equity
Leasehold Premises
Issued :
Railway Sidings
…shares of Rs…each
Plant and Machinery
Preference
Furniture
Equity
Patents and Trademarks
Less: Calls Unpaid:
Live stock
Add: Forfeited
Vehicles
Shares
Investments:
Reserves and
Government or Trust Securities, Shares, Debentures, Bonds
Surplus:
Capital Reserve
Current Assets, Loans and Advances:
Capital Redemption Reserve
(A) Current Assets:
Securities Premium Other Reserves
Figures
Interest Accrued on investments Stores and Spare parts
Profit and Loss Account Secured Loans:
Debentures Loans and Advance from Banks Loans and Advances from subsidiary Companies
Loose Tools Stock in Trade Work in Progress Sundry Debtors Cash and Bank balances (B) Loans and Advances:
Advances and Loans to Subsidiaries Bills Receivable
Other Loans and Advances
Advance Payments and unexpired discounts
Unsecured Loans: Miscellaneous - Expenditure:
Fixed Deposits Preliminary Expenses Loans and Advances from subsidiary companies
Discount on Issue of Shares and
Short Term Loans and Advances
Profit and Loss Account
Other Loans and Advances Current Liabilities and Provisions: A. Current ent Liabilities Acceptances
Sundry Creditors Outstanding Expenses B. Provisions:
For Taxation For Dividends For Contingencies For Provident Fund Schemes
Other Deferred Expenses
(debit Balance: if any)
For Insurance, Pension and Other similar benefits
Format of the Balance Sheet in vertical form
Balance Sheet of ..... as on .....
Particulars
Schedule Figures as at Number the end of current financial year
I. Source of Funds: 1. Shareholder’s Funds:
(a) Share capital (b) Reserves and Surplus 2. Loan Funds:
(a) Secured loans (b) Unsecured loans Total (Capital Employed) II. Application of Funds 1. Fixed Assets:
(a) Gross block (b) Less: depreciation (c) Net block (d) Capital work-in-Progress 2. Investments: 3. Current Assets, Loans and Advances:
(a) Inventories
Figures as at the end of previous previous financial year
(b) Sundry Debtors (c) Cash and Bank Balances (d) Other Current Assets (e) Loans and Advances Less: Current Liabilities and Provisions:
(a) Current liabilities (b) Provisions Net Current Assets
4. (a) Miscellaneous expenditure to the extent not written-off or adjusted. (b) Profit and Loss account (debit balance, if any) TOTAL
Note: A footnote to the Balance Balance Sheet Sheet may be added to show show the contingent contingent liabilities. liabilities.
Preparation Preparation of Profit Profit and Loss Account Account
The Companies Act, 1956 has not prescribed any format for presentation of Profit and Loss Account. Therefore, the Profit and Loss Account of a company should be prepared in such a way that it furnishes as detail information as possible about each item of expense, income, loss or profit during a particul particular ar accounting accounting period. period. Although, the Companies Act, 1956 does not recognise Trading Account or Profit and Loss Appropriation Account as such, it is desirable to make out the Profit and Loss Account in three sections namely: (i) Trading Account, (ii) Profit and Loss Account, and (iii) Profit and Loss Appropriation Account so that, it is possible to know separately the gross profit or loss, the net profit or loss and the disposi disposition tion of the the net profit, profit, if if any.
Profit and Loss Loss Account: Account:
The profit and loss account: will give proper information and will give details regarding non-recurring expenditure. The profit and loss account shall set out the various items relating to the income and expenditure of the company arranged under the most convenient heads; and in particular, shall disclose the following information in respect of the period covered by the account: account:
Profit And Loss Loss Appropriation Appropriation Account: Account:
After ascertaining net profit through profit and loss account, the mode of disposal of such profit is decides by the directors in the Board Meeting. The decision of the board of directors is given effect through the preparation of a separate account known as Profit and Loss Appropriation Account, although preparation of this account is not compulsory as per law and the Companies Act does not speak about the preparation of this account. This account is debited with the items which are shown only in case of profits.
When the Profit and Loss Account is spilt up in two parts, i.e., (i) Profit and Loss Account, proper, and (ii) Profit and Loss Appropriation Account, a line of demarcation is drawn in between the two parts to separate separate the items chargeable chargeable against profits profits from the the items items of appropria appropriation tion or disposi disposition tion of profits. The items which are shown in the Profit and Loss Account proper are referred to as items appearing “Above the line” and the items which are shown in the appropriation section of the Profit and Loss Account are referred to as items appearing “Below the line”. The corresponding amounts of incomes and expenses for the immediately preceding financial year should be stated in the Profit and Loss Account except in the case of the first Profit and Loss Account after incorporation. The Profit and Loss Account should be made out in such a manner that it discloses a “true and fair” view of the profit earned or loss incurred by the company during the financial year. This implies that the items which are not related to the company’s business or the items which are related to the previous years or the items of exceptional nature should be stated separately. If there is any surplus left in the Profit and Loss Appropriation Account as undistributed, the same has to be carried forward to the next year and must be shown on the liabilities side of the Balance Sheet under the head, “Reserves and Surplus”. On the other hand, if the company incurs losses, the Profit and Loss Account proper will show a debit balance which has to be carried forward to the next year and must be shown on the assets side of the Balance Sheet under the head, “Profit and Loss Account”. If, however, there are any uncommitted reserves of the company, the same has to be deducted from such reserves.
Format of Profit & Loss Account For the year ended.....
Format of Profit & Loss Appropriation Account:
For the year ended 31st March…
PROFIT PRIOR PRIOR TO INCORPORATION
In many cases, a new company is formed exclusively to acquire an existing business unit and take it over as a going concern, from a date prior to its own incorporation . In such cases, the business business unit is is purchased purchased first, first, and the registrati registration on of the acquiring acquiring company company takes place place later. For example, AB Pvt. Ltd. is incorporated on 1st October, 2009 to take over the running business business of Das Das Bros. Bros. from 1st 1st January, January, 2009. 2009. The profit profit earned earned (or loss loss suffered) suffered) during during the the Pre-incorporation period (in our example: 1st January to 30th September 2009) is called profit (loss) (loss) prior to incorpora incorporation tion . Legally, this profit is not available for distribution as dividend, since a company cannot earn profit before it comes into existence. However, profit earned after incorporation is available for distribution as dividend. Profit earned before incorporation is a capital profit and profit earned after incorporation is a revenue profit . It is a common practice that the date of incorporation should be taken as the basis for calculation of pre-acquisition profit.
Methods Methods of Computing Computing Profit Prior to to Incorporation Incorporation
They are different methods of computing profit prior to incorporation. They are: 1. By preparing preparing separa separate te Profit & Loss Loss A/c for Pre-incor Pre-incorpor poratio ation n and Post-inco Post-incorpo rporat ration ion period. 2. By preparing a combined Trading account for pre-incorporation and Post-incorporation period. First Method Step 1 Prepare a Profit and Loss Account for the pre-incorporation period. Step 2 Prepare a Profit and Loss Account for post-incorporation period. The entries are: (i) Land & Building Account Dr. Plant & Machinery Account Dr. Sundry Debtors Account Dr. Stock Account Dr. (At the value on the date of incorporation) Cash at Bank Dr. Cash in Hand Dr. To Liabilities Account To Vendors Account
(ii)
Vendors Account Dr. To Equity Share Capital Account
(With Purchase consideration)
Second Second Method
Under this method profit is calculated as follows:
Step 1 Prepare a Trading Account for the entire period (pre- and post-incorporation periods combined). Step 2 Allocate gross profit and expenses (indirect) between pre- and post-incorporation period on the basis of the following principles : (i) Gross profit is allocated in the ratio of sales of each period. (ii) Fixed portion of expenses is allocated on the basis of time . (iii)Expenses related to sales, e.g., traveler’s commission, discount allowed; on the basis of sales . (iv)Expenses related to time, e.g., rent, rates and taxes; insurance; depreciation, salaries of general staff, to that period’s profit. Some example are:
(a) Preliminary expenses, director’s fees, fees, debenture interest, etc. etc. are to be charged post-incorpor post-incorporation ation profit. profit. (b) Partner’s salaries, interest on partners’ capital, etc are to be charged against the profit of pre-incorp pre-incorporation oration period. period. Appointment Appointment Basis may be: Allocated on Basis of Time
Allocated in Ratio of Sales
1. Rent, Rates and Taxes
1. Gross Profit
2. Depreciation
2. Bad Debts
3.Salaries of General Staff 4. Insurance
3. Discount Allowed 4. Carriage Outwards
5. Interest on Purchase Consideration
5. Selling Expenses
6. Audit Fees
6. Commission on Sales
7. General Expenses
7. Advertisement Expenses
8. Printing and Stationery
8. Delivery Expenses
9. Office Expenses
9. Free Samples
10. Fixed Expenses
10. After-sales service cost
11. Miscellaneous Expenses
11. Salaries to Salesmen
12. Fixed Distribution Expenses
12. Sales Promotion Expenses
13. Administrative Expenses
13. Variable Distribution Expenses
14. General Travelling Expenses
Step 3 Net profit/l profit/loss oss of respect respective ive periods periods are calculat calculated ed after deducting deducting apporti apportioned oned expenses and acquisition entries are passed at the end of the accounting year . Accounting Accounting Treatment Treatment of Pre-incorporatio Pre-incorporation n Profit/Loss: Profit/Loss: Profit Prior to to Incorporation Incorporation Any profit prior to incorporation may be: (a) Credited to Capital Reserve Account (b) Credited to Goodwill Account to reduce the amount of goodwill arising from acquisition
against
of business. (c) Utilized to write down the value of fixed assets acquired. Loss Prior to to Incorporation Incorporation Any loss prior to incorporation may be dealt with as follows: (a) Debited to Goodwill Account (b) Debited to Capital Reserve Account arising from acquisition of business. (c) Debited to a Suspense Account, which can be written-off later as fictitious asset. Accounting Accounting Treatment Treatment of Post-incorpora Post-incorporation tion Profit/Loss Profit/Loss
Any profit/loss after incorporation is transferred to Profit and Loss Appropriation Account. Post-incorporation profit can be distribution as dividend. A C Q U I S I T I O N O F B U S I N E S S
M e r g er er s , A m a l ga g a m a t i o n s & T a k e o v e rs rs a l l t h r o u g h t h e g l o b e h a v e b e c o m e universal practices in the corporate world covering different sectors within the nation nationss and across across their their border borderss for securi securing ng survi survival val,, growt growth, h, expan expansio sion n and glo bal iz ati on of the en ter pri se and and achie achievi ving ng mul multi titu tude de of of obje object ctive ives. s. Me Meaning ing of terms rms Mergers, consolidation, takeovers, amalgamations, acquisitions, c o m b i n a t i o n s , restr restruct uctur uring ing and recon reconst struc ructi ting ng are are some some of the the ter terms ms whic which h are are requi require red d to understand the sense these are used. In different circumstances some of these terms carry different meani meanings ngs and might might not be const constru ruct cted ed as merg merger er or take takeove overr in appl applica icati tion on of this this sens sensee underlying the term for a particular situation.
Acquisition: Acquisition Acquisition refers to the process of acquiring a company at a price called the acquisition price or acquisition premium. The price is paid in terms of cash or acquiring company's shares or both.
There are two types of business acquisitions, friendly acquisition and hostile acquisition. In a friendl friendly y acquisi acquisitio tion, n, a company company invites invites other other compani companies es to acquire acquire its business. business. In a hostil hostilee acqui acquisi siti tion, on, the comp compan any y does does not want want to sell sell its its busi busines ness. s. Howe However ver,, the other other compa company ny determined to acquire the business takes the aggressive route of buying the equity shares of the target company from its existing shareholders. The motive is to takeover someone else's business, the acquiring company offers to buy the shares at a very high premium, that is, the gaining difference between the offer price and the market price of the share. This entices the shareholders shareholders and they sell their stake to earn quick money. This way
the acquiring company gets the majority stake and takes over the ownership control of the target company.
Acquiring an existing business enables a company to speed up its expansion process because they do not have to start from the very scratch. The target company is already established and has all the processes processes in place. The acquiring acquiring company company simply simply has to focus on merging merging the business business with its own and move ahead with its growth strategies. However, in reality, it is not as simple as it seems. Most of the acquisitions fail miserably due to poor implementation attitude and strategies. Merger: Merger is defined as combination of two or more companies into a single company where one survives and the others lose their corporate existence. The survivor acquires the assets as well as liabilities of the merged company or companies. Generally, the company which survives is the buyer which which retains retains its identity identity and the seller seller company company is extinguished. extinguished. Merger Merger is also defined defined as amalgamation. Merger is the fusion of two or more existing companies. All assets, liabilities and stock of one company stand transferred to transferee company in consideration of payment in the form of equity shares of transferee company or debentures or cash or a mix of the two or three modes. Amalgamation: Amalgamation Amalgamation is an arrangement where two or more companies consolidate their business to form a new firm, or become a subsidiary of any one of the company. For practical purposes, the terms amalgamation and merger are used interchangeably. However, there is a slight difference. Merger involves the fusion of two or more companies into a single company where the identity of some of the companies gets dissolved. On the other hand, amalgamation involves dissolving the entities of amalgamating companies and forming a new company having a separate legal entity.
Normally, Normally, there are two types types of amalgamations. amalgamations. The first first one is is similar similar to a merger merger where all all the assets and liabilities and shareholders shareholders of the amalgamating companies are combined together. The second type of amalgamation involves acquisition of one company by another company. In this, the shareholders of the acquired company may not have the same equity rights as earlier, or the business business of the the acquired acquired company may be disconti discontinued. nued. This is like a purchase purchase of a business. business. Amalgamation Amalgamation vs. Merger Merger •
•
Mergers and amalgamations are procedures that are undertaken in business circle by two or more companies with a view to increase profits and to gain access to wider markets. In the case of mergers, two or more smaller companies lose their identities as they fuse into a larger company.
•
In amal amalga gama mati tion on,, all all comb combin inin ing g comp compan anie iess may may lose lose thei theirr iden identi titi ties es and and a new, new, independent company may be born.
Amalgamation Amalgamation vs. Acquisition Acquisition •
•
•
•
When a company takes over control of another company establishing itself as the owner, the transaction or process is termed as acquisition. When two or more companies decide to join hands to consolidate and form a new company in an effort to have a larger customer base, larger market and possibly more profits, the process process is termed termed as amalga amalgamation. mation. Amalga Amalgamat mation ion is often often betwee between n equals equals wherea whereass acquisi acquisitio tion n is betwee between n compani companies es of unequal sizes. Amalgamation is horizontal expansion whereas acquisition is a vertical expansion
Acquisition Acquisition vs. Merger Merger •
•
When one company takes over another and clearly established itself itself as the new owner, the purchase purchase is called called an acquisitio acquisition. n. A merger happens when two firms, often of about the same size, agree to go forward as a single new company rather than remain separately owned and operated.
PROCESS PROCES S OF ACQUISITIONOF ACQUISITIONOF BUSINESS: BUSINESS:
Acquisition process is the most challenging and most critical one when it comes to corporate restructuring. One wrong decision or one wrong move can actually reverse the effects in an unimaginable manner. It should certainly be followed in a way that a company can gain maximum benefits benefits with the the deal. Following are some of the important steps in the M&A process: 1.Business Valuation Business valuation or assessment is the first process of merger and acquisition. This step includes examination and evaluation of both the present and future market value of the target company. A thorough research is done on the history of the company with regards to capital gains, organizational structure, market share, distribution channel, corporate culture, specific business strengths, and credibility in the market. There are many other aspects that should be considered to ensure if a proposed company is right or not for a successful merger. 2. Proposal Phase Proposal phase is a phase in which the company sends a proposal for a merger or an acquisition with complete details of the deal including the strategies, amount, and the commitments. Most of
the time, this proposal is send through a non-binding offer document. 3. Planning Exit When any company decides to sell its operations, it has to undergo the stage of exit planning. The company has to take firm decision as to when and how to make the exit in an organized and profitable profitable manner. manner. In the proces processs the management management has has to evaluate evaluate all all financial financial and other other business business issues like taking a decision of full sale or partial sale along with evaluating on various options of reinvestments. 4. Structuring Business Deal After finalizing the merger and the exit plans, the new entity or the take over company has to take initiatives for marketing and create innovative strategies to enhance business and its credibility. The entire phase emphasize on structuring of the business deal. 5. Stage of Integration This stage includes both the company coming together with their own parameters. It includes the entire process of preparing the document, signing the agreement, and negotiating the deal. It also defines the parameters of the future relationship between the two. 6. Operating the Venture After signing the agreement and entering into the venture, it is equally important to operate the venture. This operation is attributed to meet the pre-defined expectations of all the companies involved in the process. The M&A transaction after the deal include all the essential measures and activities that work to fulfill the requirements and desires of the companies involved.
