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Section 211 (2): According to this section every Profit and Loss Account must give
true and fair view of the profit or loss of the company for the financial year and shall
comply to with the requirement of Part II of Schedule VI, so far they are applicable.
Note: It must be noted here that Schedule VI has prescribed a form in which Balance
Sheet is to be prepared; it has not prescribed any form for Profit and Loss Account.
The Companies Act, 1956 has not recognised Trading Account and Profit and Loss
Appropriation Account, yet there is no bar to prepare these accounts. It is so because
Schedule VI has not prescribed any form for Profit and Loss Account. But, it must be
remembered that the Trading Account, Profit and Loss Account and Profit and Loss
Appropriation Account must comply with the requirements of Part II of Schedule VI of
Companies Act, 1956.
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FINANCIAL STATEMENTS OF A COMPANY
Balance Sheet:
In the simplest form, a Balance Sheet may be defined to be a statement of company’s
assets and liabilities as on a particular date. The assets of the company, fixed assets
and current assets, are represented by the liabilities, long-term liabilities and short-
term liabilities, and the share holders equity, i.e., paid up share capital and reserves.
Unsecured Loans
xx
xx
Current Liabilities &
Provisions
(a) Current Liabilities
(b) Provision
Total xx Total xx
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FINANCIAL STATEMENTS OF A COMPANY
Share Capital:
The word capital in connection with a company may mean any of the following divisions
of capital:
1) Authorised capital: An authorised capital refers to that amount which is stated in the
‘Capital Clause’ of the Memorandum of Association as the share capital of the
company. This is the maximum limit of the company which it is authorised to raise
and beyond which company cannot raise unless the capital clause in the
Memorandum is altered in accordance with the provisions of Sec. 94 of the
Companies Act, 1956.
2) Issued capital: An issued capital refers to the nominal value of that part of
authorised capital, which has been (1) subscribed for by the signatories to the
Memorandum of Association, (2) allotted for cash or for consideration other than
cash and (3) allotted as Bonus shares.
3) Subscribed capital: Subscribed capital refers to the paid-up value of the issued
capital i.e. the total amount called by the company less calls-in-arrear. It is only
the actual liability for the company hence it will be only be added while totalling
the liability side.
(iv) Other Reserves: Nature and amount if each reserve should be explained
separately. If there is any debit balance in profit and loss account, it should be
deducted from the General Reserve.
(v) Surplus: It refers to the credit balance of Profit and Loss Appropriation.
Unsecured Loans: If the company borrows loans without giving any security, the loan
is termed as ‘Unsecured Loan’. Under this head ‘Unsecured Loan’ as well as the part of
secured loan which is not covered by the value of security provided are included. Short
term and long term loans should be shown separately.
Current Liabilities: These are those liabilities which are payable within the period of
12 months from the closure of last accounts.
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FINANCIAL STATEMENTS OF A COMPANY
Contingent Liabilities: These are such liabilities which are not liability for the
business on close of accounts, but may or may not become liability in future on
happening of certain event. It will never be shown in the liabilities side. These are
always stated as foot-note on the liabilities side. Following are the exampled of
contingent liabilities:
(i) Claims against the company not acknowledged as debts.
(ii) Uncalled liability on partly paid shares.
(iii) Arrears of dividends on cumulative preference shares.
(iv) Other money for which the company is contingently liable.
(v) Bills discounted but not matured.
(vi) Liabilities under a guarantee.
2) It is necessary to disclose the nature (long term or current) and mode of valuation
of every investment.
3) It is necessary to disclose the total amount of company’s quoted and unquoted
investments and market value of quoted investments in the Balance Sheet.
Current assets and Loans & Advances: These should be divided into two parts:
1) Current Assets
2) Loans and Advances
Miscellaneous Expenditure: It includes those items which are not really assets but
are recorded in the assets side because it shows debit balance, hence are called
fictitious assets. The amount of miscellaneous expenditure which is written off this year
is shown on the debit side of Profit and Loss Account and the unwritten off portion is
shown in the Balance Sheet under this head.
This includes the followings:
(i) Preliminary expenses.
(ii) Expenses including commission or brokerage on underwriting or subscription of
share or debentures.
(iii) Discount allowed on issue of shares or debentures.
(iv) Interest paid out of capital during construction.
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FINANCIAL STATEMENTS OF A COMPANY
Profit and Loss Account (Debit balance): If there is net loss in a company and
other reserves is given, then first of all such loss will be deducted from such reserves
and if such reserve is not given or the amount of reserve is not sufficient to cover the
total amount of loss then the balance amount of net loss will be shown under this head.
Reserves: Reserve means amount set aside out of profit, to meet out either an
expected or an unexpected future liability or loss. I other words any amount set aside
out of profit and other surpluses, which are not earmarked (assign) in any way to meet
any particular liability, known to exist on date of the Balance Sheet. It is provided for
meeting prospective losses or liabilities, creation of reserves to increase the working
capital in the business and strengthen its financial position. Provision in excess of the
amount considered necessary for the purpose for which it was created is treated as
reserve. Examples of reserves are General Reserves, Capital Reserve, Dividend
Equalisation Reserves, and Contingency Reserves etc.
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FINANCIAL STATEMENTS OF A COMPANY
(iv) Fulfilling some specific purpose: Sometimes, a reserve is created for a specific
purpose such as ‘Debenture Sinking Fund’ for redemption of debentures.
Types of Reserves: Basically there are two types of reserves, viz., Open Reserves and
Secret Reserves.
Open Reserves: These are the reserves which are shown in the Balance Sheet under
the heading ‘Reserve and Surplus’. These are of following two types:
Revenue Reserves: The reserve which is created setting aside the amount out
of the net profit of the business (profit which is earned in normal course of the
business) is known as revenue reserve. Therefore, the revenue reserves
represent the undistributed profits and as such are available for the distribution
as dividend.
• General reserves: A general reserve is that reserve which is created out of
profits to meet any unforeseen contingency and not for any specific purpose.
Such reserve is also called ‘Contingencies Reserve’ or ‘Free Reserve’ because
it is not created for specific purpose and can be freely used for any purpose. It
serves the following purposes:
(i) To be distributed as dividend among the shareholders.
(ii) Strengthening the general financial position of a business.
(iii)Maintaining equal rate of dividend every year.
(iv)Aid to expansion of a business.
(v) Meeting a future liability or loss.
Creation of reserve is not compulsory; it depends on the willingness of the
owner of the business or its directors. It is always shown on the liabilities side
of the balance sheet because it is created out of the profit.
• Specific Reserve: Such reserves are created out of the profit of the business
but are created for a specific purposes and the amount of such reserves
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FINANCIAL STATEMENTS OF A COMPANY
cannot be utilised for any other purpose. If there is amount left in such
reserve after the purpose has been completed then that amount will be
transferred back to the profits. Examples of such reserves are Dividend
equalisation reserve, Reserve for replacement of assets, Debenture
redemption reserve.
• Funds: The word ‘Fund’ in relation to any reserve should be used if such
reserve is specifically represented by earmarked (assign) investment for a
particular purpose. In other words, if the amount of reserve, which is created
for any specific purpose is invested outside business in securities, it is called
reserve fund otherwise it will be known as reserve.
Capital Reserves: It includes amount which are not earned during normal
operation of business, therefore the amount of such reserve is not available for
distribution as dividend, e.g., profit prior to incorporation of a company, profit on
acquisition of business, profit on sale of fixed assets, profit remaining on re-issue
of forfeited shares, profit on redemption of shares and debentures, profit on
revaluation of fixed assets and liabilities, premium of issue of shares and
debentures.
Basis of
Provisions Reserves
difference
Meaning Provision is created for some Reserve may be created for a
specific object for which it is specific purpose and it may not
created. be created for a specific purpose.
Charge Vs. A provision is a charge against A reserve is an appropriation of
Appropriation profit i.e. it will be created even profit i.e. it will not be created or
though there is no profit. the amount will not be
transferred to any reserve if
there is no profits.
Time of A provision is created before A reserve is created after
creation ascertaining the profit or los of a ascertaining the profit.
business.
Object The object of creating provision is to A reserve is created to
make arrangement for any known strengthen the financial position
liability. of the business and to increase in
the working capital.
Utilisation Provision can be utilised only for the Reserve can be used in the
purpose for which it is meant. payment of any liability or loss.
Distribution Provision cannot be utilised for Reserves can be used for
declaration of dividends. declaration of dividends.
Disclosure in It is shown as deduction form the Reserves are always shown as a
Balance value of assets concerned on the separate item under the head
Sheet assets side of the Balance Sheet. ‘Reserve and Surplus’ on the
However, it may be shown on the liabilities side of the Balance
liabilities side also. Sheet.
Investment Amount of provision cannot be Reserve can be invested outside
outside invested outside. It always remains the business but in that cased it
business in the business. is called fund.
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FINANCIAL STATEMENTS OF A COMPANY
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FINANCIAL STATEMENTS OF A COMPANY
R R
Particulars Particulars
s. s.
To Opening stock By Sales
Raw material xx xx xx
Work-in- xx Less: Return xx
progress xx By Closing stock xx
Finished goods Raw material xx
To purchase xx xx Work-in- xx
Less: Returns xx xx progress
To Expenses on xx Finished
purchase xx goods
To Manufacturing
xx xx
expenses
xx xx
To Gross Profit
xx xx
By Indirect expenses xx By Gross Profit xx
By Net Profit By Indirect incomes
R R
Particulars Particulars
s. s.
To Transfer to Reserves xx By Balance b/d xx
To Preference dividend By net Profit xx
Interim xx By Transfer form xx
Proposed xx Reserves xx
Final xx By Transfer from
Additional xx Provisions
To Equity dividend
Interim xx
Proposed xx
Final xx
Additional xx
To Provision for Dividend xx
Tax
To Balance of Profit xx
transferred xx xx
to Balance Sheet
Interim Dividend: Dividend paid by the company before the ascertainment of the
profit is called ‘Interim Dividend’. This dividend is declared by the directors at any time
during the year if they think that company will earn more profit than what is expected.
It is paid before the final dividend and in between the two annual general meetings,
without the sanction from the shareholders. However, if an interim dividend is paid and
it is found subsequently that the company’s profits are inadequate to cover the interim
dividend, it amounts to payment of dividend out of capital and hence the directors will
be liable to make good the amount.
Proposed Dividend: After ascertainment of profit directors fix the rate of dividend
which is to be paid to the shareholders. This is a type of proposal by the directors on
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FINANCIAL STATEMENTS OF A COMPANY
which the consent of the shareholders is required. Hence it can be defined as the
dividend which fixed by the shareholders on which consent of shareholders is not
received.
Additional dividend: If after the normal dividend any extra dividend is paid to the
shareholders, such a dividend is termed as additional dividend. This dividend is paid
when any surplus profit is left out of the profit set aside for distribution of the normal
dividend.
Divisible profits:
All profits are not divisible profits. Only those profits which are legally available to
shareholders for dividend are known as divisible profits. In normal course, divisible
profits are the profits left after meeting all expenses, losses, depreciation on fixed
assets, fall in the price of current assets, taxation, writing off past losses and after
transferring a reasonable amount to reserves. Divisible profits should not include
capital profits. Dividends cannot be declared except out of divisible profits.
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