Corporate Accounting Unit: 1 Final Accounts Notes [Gauhati University BCom 2nd Sem. FYUGP]

In this blog post, we have provided Gauhati University BCom 2nd Semester NEP FYUGP Corporate Accounting Unit 1: Final Accounts Notes with most important questions and previous year questions (PYQs). Each question is answered perfectly to help you boost your preparation to the next level.

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Gauhati University BCom 2nd Semester

Corporate Accounting 

 Unit 1: Final Accounts of  Companies 

Syllabus: i. Incentive Equity: Right and Bonus Shares Meaning. Advantages and Disadvantages, Provisions as per Companies Act, 2013 and their Accounting Treatment. ii. Buy back of shares: Meaning, Provisions of Companies Act, 2013 and Accounting Treatment. iii. Valuation of shares and goodwill: Meaning, provision of Companies Act on Valuation of Shares and Valuation of Goodwill, Concepts and calculation: simple problem only.

1. Fill in the Blanks

1. The financial statements of a joint stock company include the _______ and the statement of profit and loss. (GU BCom 2013)
   Answer: Balance Sheet

2. The preparation of final accounts of a company is governed by the _______ Act, 2013. (GU BCom 2015)
   Answer: Companies Act, 2013

3. Expenses incurred at the time of formation of a company are termed as _______. (GU BCom 2013, 2017)
   Answer: Preliminary Expenses

4. ncome tax payable on interest on debentures is shown in the Balance Sheet under _______. (GU BCom 2015, 2017)
   Answer: Current Liabilities

5. The issue of bonus shares must be recommended by the Board of Directors and approved by the _______. (GU BCom 2023)
   Answer: Shareholders

6. Provision for taxation is shown as _______ in the balance sheet. (GU BCom 2021)
   Answer: A Current Liability

7. Prepaid expenses are recorded as _______ in the balance sheet. (GU BCom 2014)
   Answer: Current Assets

8. Depreciation on fixed assets is deducted from _______ in the final accounts. (GU BCom 2023)
   Answer: Fixed Assets

9. The balance in the sinking fund after the redemption of all debentures is transferred to _______ account. (GU BCom 2013)
   Answer: General Reserve

10. Reserve & Surplus is shown under _______ in the balance sheet. (GU BCom 2019)
    Answer: Equity & Liabilities

11. The Companies Act, 2013 follows ______ format for the preparation of Final Accounts. (GU BCom 2024)
    Answer: Schedule III

12. Income tax payable on interest on debentures is shown in the Balance Sheet under ______. (GU BCom 2015, 2017)
    Answer: Current Liabilities

13. Expenses incurred at the time of formation of a company are termed as ______ expenses.
    Answer: Preliminary Expenses

14. ______ is the fee that a company is required to pay to get its shares listed on a stock exchange.
    Answer: Listing Fee

15. ______ is a system of gradation of a company based on its relative capacity for the timely repayment of interest and principal of a particular type of debt.
    Answer: Credit Rating

16. Interest on debenture is a ______ against income.
    Answer: Charge

17. The balance of the Securities Premium Reserve Account is included in ______.
    Answer: Reserves & Surplus

18. Dividend paid on Convertible Preference Shares is an ______ of profit.
    Answer: Appropriation

19. A company is required to open a separate bank account for the payment of ______.
    Answer: Dividends

20. The financial statement of a listed company is prepared as per the format given in ______ of Schedule III of the Companies Act, 2013.
    Answer: Division II

21. Appropriation of profits is shown in the Statement of Changes in ______.
    Answer: Equity

22. Remuneration paid to an auditor is shown in the Statement of Profit and Loss as ______.
    Answer: Other Expenses

2. True or False

1. The Companies Act, 2013 does not require companies to prepare a statement of profit and loss. (GU BCom 2016)
   Answer: False

2. Closing stock is shown only in the trading account. (GU BCom 2015, 2020)
   Answer: False

3. Preliminary expenses can be shown under intangible assets in the balance sheet. (GU BCom 2017)
   Answer: True

4. Provision for tax is shown as a current liability in the balance sheet. (GU BCom 2015, 2021)
   Answer: True

5. Interest on debentures is shown as a financing activity in the cash flow statement. (GU BCom 2016, 2023)
   Answer: True

6. A company is required to open a separate bank account for the payment of dividends. (GU BCom 2015, 2020)
   Answer: True

7. Reserve arising from asset revaluation is available for issuing bonus shares. (GU BCom 2024)
   Answer: False

8. Internal reconstruction leads to a change in capital structure. (2024)
   Answer: True

9. Preliminary expenses can be shown under intangible assets in the balance sheet. (GU BCom 2017)
   Answer: True

10. Section 129 deals with the 'form and contents' of the Balance Sheet and Statement of Profit & Loss.
    Answer: True

11. Schedule III does not contain the heading "Miscellaneous Expenditure" in the Balance Sheet.
    Answer: True

12. Interim dividend is a dividend that is declared between two annual general meetings.
    Answer: True

13. A company must pay Corporate Dividend Tax or Dividend Distribution Tax as and when any dividend is declared by the company.
    Answer: False (As per amendments, DDT is abolished and tax is now paid by shareholders)

14. Preliminary expenses are those expenses that are incurred on the winding up of a company.
    Answer: False (Preliminary expenses are incurred at the time of formation of a company)

15. Debenture interest outstanding for more than 12 months from the balance sheet date is shown under the head "Non-Current Liabilities."
    Answer: True

16. Investments made by a Joint Stock Company are shown as Non-Current Assets under the sub-head 'Property, Plant, and Equipment.'
    Answer: False (Investments are shown under the head "Non-Current Investments" and not under "Property, Plant, and Equipment")

17. Appropriation of profit, such as equity dividend, is shown in the Statement of Profit and Loss.
    Answer: False (It is shown in the Statement of Changes in Equity)

18. Live Stock is treated as an intangible asset.
    Answer: False (Live Stock is treated as a tangible asset)

19. A debenture issued by a company is always shown under the head "Short-Term Borrowings."
    Answer: False (Debentures can be long-term liabilities if their tenure exceeds 12 months)

20. Outstanding dues to micro enterprises and small enterprises on account of goods purchased are required to be disclosed separately in the balance sheet.
    Answer: True

3. Multiple-Choice Questions (MCQs)

1. The financial statements of a company should be prepared as per: (GU BCom 2015)
   a) Companies Act, 1956
   b) Companies Act, 2013 ✅
   c) SEBI Guidelines
   d) None of the above
   Answer: b) Companies Act, 2013

2. Which of the following is not shown in the profit and loss account? (GU BCom 2018)
   a) Sales revenue
   b) Administrative expenses
   c) Share capital ✅
   d) Depreciation
   Answer: c) Share capital

3. The balance sheet is prepared to show: (GU BCom 2019)
   a) Profit or loss of a company
   b) Financial position of a company ✅
   c) Cash flow of a company
   d) None of the above
   Answer: b) Financial position of a company

4. Prepaid expenses are recorded under: (GU BCom 2014)
   a) Current Liabilities
   b) Current Assets ✅
   c) Shareholder’s Equity
   d) None of the above
   Answer: b) Current Assets

5. Which of the following is recorded in the Profit and Loss Account? (GU BCom 2018)
   a) Debenture Interest ✅
   b) Share Capital
   c) Fixed Assets
   d) Goodwill
   Answer: a) Debenture Interest

4. Short Answer Questions (2-3 Marks Each)

1. How would you deal with the following items while preparing the final accounts of a company? (GU BCom 2013, 2014, 2016)

a) Preliminary Expenses:

Answer: Preliminary expenses are recorded under "Other Non-Current Assets" in the Balance Sheet. They are amortized over a period and charged to the Statement of Profit and Loss under "Other Expenses."

b) Proposed Dividend:

Answer: Proposed dividend is disclosed in the Notes to Accounts as per the Companies Act, 2013. Once declared, it is recorded as a Current Liability in the Balance Sheet and reduced from retained earnings in the Statement of Changes in Equity after payment.

2. What is meant by Current Assets? When shall an asset be classified as current?

Answer: Current assets are assets that are expected to be converted into cash, sold, or consumed within the company's operating cycle or within 12 months from the reporting date. An asset is classified as current if it is expected to be realized within 12 months, held primarily for trading, or is cash or cash equivalents.

3. What is meant by Non-Current Assets? When shall an asset be classified as non-current?

Answer: Non-current assets are assets that are not expected to be converted into cash or consumed within 12 months from the balance sheet date. An asset is classified as non-current if it is held for more than 12 months, not primarily for trading, and used in operations to generate long-term economic benefits.

4. What is meant by Current Liabilities? When shall a liability be classified as current?

Answer: Current liabilities are obligations due to be settled within the company's operating cycle or within 12 months from the reporting date. A liability is classified as current if it is expected to be settled within 12 months, held primarily for trading, or the company does not have an unconditional right to defer settlement beyond 12 months.

5. Explain the meaning of the Statement of Changes in Other Equity.

Answer: The Statement of Changes in Other Equity shows movements in a company’s equity (other than share capital) over a period. It includes components such as retained earnings, reserves and surplus, share premium, and other comprehensive income. It reflects changes due to net profit, dividend payments, share issuance, and accounting policy adjustments.

6. Explain the term 'Other Comprehensive Income.'

Answer: Other Comprehensive Income (OCI) includes income and expenses that are not included in the net profit or loss but directly affect shareholders' equity. Examples include revaluation gains/losses on fixed assets, foreign currency translation differences, gains/losses on certain financial instruments, and actuarial gains/losses on defined benefit plans.

7. State the accounting treatment of Preliminary Expenses.

Answer: Preliminary expenses are recorded under "Other Non-Current Assets" in the Balance Sheet. They are written off over time by charging them to the Statement of Profit and Loss. Companies may amortize them in equal installments over five years as per the Income Tax Act.

8. Write the accounting treatment of 'Loss on Issue of Debentures' in the final accounts of a listed company.

Answer: Loss on Issue of Debentures arises when debentures are issued at a discount. It is recorded under "Other Non-Current Assets" in the Balance Sheet and written off over the tenure of the debentures by charging it to the Statement of Profit and Loss. It can also be adjusted against the Securities Premium Reserve.

9. How is depreciation treated in the final accounts of a joint stock company? (GU BCom 2019, 2021)

Answer: Depreciation is charged as an expense in the Statement of Profit and Loss under "Depreciation and Amortization Expenses." In the Balance Sheet, it is deducted from the respective fixed asset under "Property, Plant, and Equipment." The Notes to Accounts disclose details of depreciation methods and rates.

10. Explain the accounting treatment of outstanding expenses in the final accounts. (GU BCom 2017)

Answer: Outstanding expenses are added to the respective expense category in the Statement of Profit and Loss. In the Balance Sheet, they are shown under "Current Liabilities" as "Outstanding Expenses." If paid in the next accounting period, they are removed from liabilities.

11. How is unclaimed dividend treated in the final accounts of a company? (GU BCom 2016)

Answer: Unclaimed dividend refers to the dividend declared by a company but not collected by the shareholders. In the final accounts, it is shown under "Other Current Liabilities" in the Balance Sheet until it is claimed by the shareholders. If unclaimed for seven years, it is transferred to the Investor Education and Protection Fund (IEPF) as per the Companies Act, 2013.

12. What is the role of provision for tax in the final accounts? (GU BCom 2021, 2023)

Answer: Provision for tax represents the estimated tax liability of a company for the financial year. It is shown as an expense in the Statement of Profit and Loss. In the Balance Sheet, it is recorded under "Current Liabilities" if payable within 12 months. If overpaid, it appears under "Current Assets" as advance tax.

13. Explain the treatment of Proposed Dividend while preparing the final accounts. (GU BCom 2017, 2020)

Answer: Proposed dividend is the dividend recommended by the Board of Directors but not yet approved by shareholders. As per the Companies Act, 2013, it is not recorded as a liability until declared. It is disclosed in the Notes to Accounts and, once approved, is recorded under "Current Liabilities" and deducted from retained earnings in the Statement of Changes in Equity.

14. What is the significance of Provision for Taxation in company accounts? (GU BCom 2021)

Answer: Provision for taxation ensures that a company accounts for its tax liabilities in the correct financial year. It helps in reflecting the accurate net profit after tax. It prevents sudden financial burdens by setting aside funds for tax payments, ensuring compliance with tax laws and financial prudence.

15. What is the meaning of trade payables in final accounts? (GU BCom 2024)

Answer: Trade payables refer to the amount a company owes to suppliers for goods or services purchased on credit. In the final accounts, it is shown under "Current Liabilities" in the Balance Sheet. It includes accounts payable and bills payable and represents obligations that need to be settled within the operating cycle or 12 months.

16. Explain the meaning of the term 'Income from Discontinued Operations.'

Answer: Income from discontinued operations refers to the revenue, expenses, and gains or losses associated with a business segment that a company has decided to close or sell. It is reported separately in the Statement of Profit and Loss below income from continuing operations to help investors assess the company’s future earnings potential.

17. Explain how the loss incurred by a company in a particular year will be disclosed in the balance sheet.

Answer: A loss incurred by a company in a financial year is adjusted against retained earnings in the "Reserves & Surplus" section under "Equity and Liabilities" in the Balance Sheet. If the loss exceeds retained earnings, it is shown as a negative balance in retained earnings or under "Accumulated Losses." In severe cases, it may result in a reduction of share capital through restructuring.

18. Write a note on 'Corporate Dividend Tax.'

Answer: Corporate Dividend Tax (CDT) was a tax levied on companies in India on the dividends distributed to shareholders. However, it was abolished in the Finance Act, 2020. Now, dividends are taxed directly in the hands of shareholders based on their applicable income tax slab rates.

19. Write a note on 'Interim Dividend.'

Answer: Interim dividend is a dividend declared by the Board of Directors before the company's financial year-end, usually based on interim profits. It is paid before finalizing annual accounts and is recorded as an expense in the Statement of Profit and Loss. In the Balance Sheet, it is shown under "Current Liabilities" until paid.

20. Describe the treatment of proposed dividends in the final accounts of a company.

Answer: Proposed dividend is disclosed in the Notes to Accounts rather than as a liability in the Balance Sheet. Once approved by shareholders, it is recorded under "Current Liabilities" and deducted from retained earnings in the Statement of Changes in Equity. If not approved, it remains undistributed and continues as part of reserves.

5. Long Answer Questions (5-10 Marks Each)

1. Explain the format of a company's final accounts as per the Companies Act, 2013. (GU BCom 2014, 2022)

Answer: prepare its financial statements in the format prescribed under Schedule III of the Act. This ensures uniformity and comparability across companies.

Components of Final Accounts as per the Companies Act, 2013:

1. Balance Sheet: It provides a snapshot of the company’s financial position at a specific date.

2. Statement of Profit and Loss: It shows the financial performance of the company for a given period.

3. Cash Flow Statement (if applicable): It provides insights into cash inflows and outflows.

4. Statement of Changes in Equity: It records changes in the company's equity.

5. Notes to Accounts: It contains additional details and disclosures.

Format of the Balance Sheet (as per Schedule III of the Companies Act, 2013):

Given below

[Download PDF for Complete Notes]

Conclusion: The Companies Act, 2013 provides a structured format that enhances transparency and helps stakeholders analyze a company's financial health. Proper classification of assets, liabilities, and income ensures compliance with legal requirements and accounting standards.

2. How are adjustments like prepaid expenses, outstanding expenses, and depreciation treated in the final accounts? Give examples. (GU BCom 2015, 2020, 2023)

Answer: correct accounting period. Prepaid expenses, outstanding expenses, and depreciation are common adjustments that impact both the Statement of Profit and Loss and the Balance Sheet.

1. Prepaid Expenses: Prepaid expenses are payments made in advance for expenses that relate to a future accounting period.

Accounting Treatment: Statement of Profit & Loss: The portion of the expense related to the current year is recorded as an expense.

Balance Sheet: The unexpired portion is shown under Current Assets as Prepaid Expenses.

Example: If insurance of ₹10,000 is paid for 2 years, only ₹5,000 will be recorded as an expense in the current year, and the remaining ₹5,000 will be shown as a prepaid expense.

2. Outstanding Expenses: These are expenses incurred during the current period but not yet paid by the end of the year.

Accounting Treatment: Statement of Profit & Loss: The full expense is recorded in the current period.

Balance Sheet: The unpaid amount is shown under Current Liabilities as Outstanding Expenses.

Example: If salaries of ₹50,000 are due but unpaid, they are recorded as an expense and also shown as a liability in the Balance Sheet.

3. Depreciation: Depreciation is the reduction in the value of fixed assets over time due to wear and tear.

Accounting Treatment: Statement of Profit & Loss: Depreciation is recorded as an expense under "Depreciation and Amortization.

"Balance Sheet: The accumulated depreciation is deducted from the respective asset under Property, Plant & Equipment.

Example: If machinery costs ₹1,00,000 with a depreciation rate of 10%, then ₹10,000 is charged as an expense, and the net asset value in the Balance Sheet will be ₹90,000.

Conclusion: These adjustments ensure accurate financial reporting. Prepaid expenses prevent overstatement of expenses, outstanding expenses ensure proper liability recognition, and depreciation ensures that asset values reflect reality.

3. Prepare a format of a balance sheet and a statement of profit and loss for a joint stock company. (GU BCom 2015, 2017, 2019, 2023) (VVI)

Answer:

[Download PDF for Complete Notes]

Format of Balance Sheet: Format of Balance Sheet as prescribed in DIVISION II, SCHEDULE III to the Companies Act, 2013 (applicable for a company whose financial statements are required to be drawn up in compliance of the Companies (Indian Accounting Standards) Rules, 2015, has been given below:

[Download PDF for Complete Notes]

4. Discuss the significance of financial statements in corporate accounting. (GU BCom 2018)

Answer: Financial statements are records of a company's financial performance and position. They help stakeholders understand profitability, financial health, and cash flows. These statements are prepared as per accounting standards and regulatory guidelines.

Significance of Financial Statements in Corporate Accounting

1. Assessing Financial Performance
   Financial statements provide an overview of revenue, expenses, and net profit. The Statement of Profit and Loss helps analyze profitability.

2. Understanding Financial Position
   The Balance Sheet presents the company's assets, liabilities, and equity, showing its financial stability.

3. Decision-Making by Management
   Financial data helps in budgeting, investment planning, and cost control.

4. Compliance with Legal and Regulatory Requirements
   Companies must prepare financial statements under the Companies Act, 2013, and Indian Accounting Standards (Ind AS).

5. Facilitating Investments and Credit Decisions
   Investors and financial institutions assess financial statements before making investment and lending decisions.

6. Ensuring Transparency and Accountability
   Properly maintained financial statements reduce fraud and mismanagement.

7. Aiding Comparative Analysis
   Companies compare financial data over different years or with industry standards for performance evaluation.

Conclusion: Financial statements play a crucial role in corporate accounting by ensuring transparency, guiding decision-making, and complying with legal requirements.

5.  What is the importance of preparing final accounts for a joint stock company? Explain with examples. (GU BCom 2016, 2019)

Answer: Final accounts include the Balance Sheet, Statement of Profit and Loss, and cash flow statement. They provide insights into the company’s financial condition and performance.

Importance of Final Accounts for a Joint Stock Company

1. Determining Profit or Loss
   The Statement of Profit and Loss helps evaluate whether a company is making profits or incurring losses.

2. Evaluating Financial Position
   The Balance Sheet shows assets, liabilities, and shareholders' equity, giving a clear financial snapshot.

3. Legal Compliance and Regulatory Requirements
   The Companies Act, 2013, mandates the preparation of final accounts to ensure transparency.

4. Facilitating Investment and Credit Decisions
   Investors and lenders analyze financial data before making investment and credit decisions.

5. Dividend Declaration and Distribution
   Final accounts help determine the amount of profit available for dividends to shareholders.

6. Assisting in Tax Calculations
   The financial statements provide taxable income details for calculating corporate taxes.

7. Comparing Past and Present Performance
   Companies track growth and profitability by comparing financial data from different periods.

Conclusion: Final accounts help companies maintain transparency, comply with legal requirements, and make informed business decisions.

6. Prepare a Balance Sheet as per the Companies Act, 2013, from the given financial data. (GU BCom 2015, 2023)

Answer:

[Download PDF for Complete Notes]

7. Discuss the Accounting Treatment of Provisions & Reserves in Final Accounts. (GU BCom 2020)

Answer: Introduction Provisions and reserves are essential for ensuring the financial stability of a company. They help in setting aside funds for future liabilities and unforeseen expenses, ensuring compliance with accounting principles.

1. Meaning of Provisions and Reserves Provisions are amounts set aside from profits for known liabilities or expenses that may arise in the future, such as provision for doubtful debts and provision for taxation. Reserves are appropriations of profit meant to strengthen a company’s financial position, such as general reserves and capital reserves.

2. Accounting Treatment of Provisions in Final Accounts Provision for Doubtful Debts is shown as an expense in the Statement of Profit and Loss and deducted from Trade Receivables in the Balance Sheet. Provision for Taxation is recorded as a Current Liability in the Balance Sheet and shown as an expense in the Statement of Profit and Loss. Provision for Depreciation is treated as an expense in the Statement of Profit and Loss and deducted from the respective fixed asset in the Balance Sheet.

3. Accounting Treatment of Reserves in Final Accounts General Reserve is shown under "Reserves & Surplus" in the Balance Sheet and is transferred from Net Profit after tax in the Statement of Profit and Loss. Capital Reserve is created from non-operating activities like the sale of fixed assets and is shown under "Reserves & Surplus" in the Balance Sheet. Securities Premium Reserve is formed from the excess amount received over the face value of shares and is used for issuing bonus shares or writing off preliminary expenses. Dividend Reserve is created by setting aside a portion of profits for future dividend payments.

Conclusion Provisions and reserves ensure that financial obligations are met and profits are retained for growth. Their proper treatment in final accounts leads to accurate financial reporting and compliance with regulations.

8. Explain the various Adjustments in Final Accounts with examples. (GU BCom 2014)

Answer: Introduction: Adjustments in final accounts are necessary to match expenses and revenues with the correct accounting period. These adjustments affect both the Statement of Profit and Loss and the Balance Sheet, ensuring accurate financial reporting.

Common Adjustments and Their Accounting Treatment

Outstanding Expenses are expenses incurred but not yet paid. They are added to the respective expense in the Statement of Profit and Loss and shown as a Current Liability in the Balance Sheet. For example, if rent due but unpaid is ₹5,000, it is added to Rent Expense and recorded as a liability.

Prepaid Expenses are expenses paid in advance for future periods. They are deducted from the respective expense in the Statement of Profit and Loss and recorded as a Current Asset in the Balance Sheet. If ₹3,000 is paid in advance for insurance, it is deducted from the Insurance Expense and shown as an asset.

Accrued Income refers to income earned but not yet received. It is added to the respective income in the Statement of Profit and Loss and recorded as a Current Asset in the Balance Sheet. If ₹4,000 interest is receivable, it is added to Interest Income and shown as an asset.

Income Received in Advance is income received for a future period. It is deducted from the respective income in the Statement of Profit and Loss and recorded as a Current Liability in the Balance Sheet. If ₹6,000 rent is received in advance, it is deducted from Rent Income and recorded as a liability.

Depreciation is recorded as an expense in the Statement of Profit and Loss and deducted from the concerned asset in the Balance Sheet. If depreciation on machinery is ₹10,000, it is deducted from Machinery and shown as an expense.

Provision for Doubtful Debts is recorded as an expense in the Statement of Profit and Loss and deducted from Trade Receivables in the Balance Sheet. If expected bad debts are ₹2,000, it is deducted from Trade Receivables.

Closing Stock is recorded as an asset in the Balance Sheet and deducted from Purchases in the Statement of Profit and Loss. If closing stock is valued at ₹50,000, it is shown as an asset and deducted from Purchases.

Provision for Taxation is recorded as a Current Liability in the Balance Sheet and as an expense in the Statement of Profit and Loss.

Conclusion Adjustments ensure that financial statements present an accurate and fair view of a company’s financial position. They help in correct revenue and expense recognition, leading to better financial management.

9. Discuss the legal provisions under the Companies Act, 2013, regarding the preparation of financial statements. (GU BCom 2016, 2024)

Answer: The Companies Act, 2013, provides the legal framework for preparing financial statements in India. It ensures uniformity, transparency, and compliance with accounting standards. The financial statements include the Balance Sheet, Statement of Profit and Loss, Statement of Changes in Equity, and Cash Flow Statement.

Legal Provisions Under the Companies Act, 2013

Section 129 mandates that financial statements must present a true and fair view and comply with Indian Accounting Standards (Ind AS) or Accounting Standards (AS).

Section 133 states that the government, in consultation with the National Financial Reporting Authority (NFRA), prescribes accounting standards to be followed by companies.

Schedule III prescribes the format for the Balance Sheet and Statement of Profit and Loss, ensuring uniformity in financial reporting.

Financial Statements must include a Balance Sheet, Statement of Profit and Loss, Statement of Changes in Equity, and Cash Flow Statement.

For Listed Companies, SEBI regulations require quarterly disclosure of financial statements to ensure transparency for investors.

Mandatory Disclosure Requirements include disclosing significant accounting policies, related party transactions, contingent liabilities, and commitments in the financial statements.

Audit and Certification require financial statements to be audited by a qualified auditor, who provides an independent opinion on their accuracy and compliance.

The Board of Directors is responsible for approving and signing the financial statements before presenting them at the Annual General Meeting (AGM).

Penalties for Non-Compliance include fines and legal action against companies failing to comply with financial reporting standards, with directors and officers being held accountable.

Conclusion The Companies Act, 2013, ensures that financial statements are prepared accurately and transparently. Compliance with these legal provisions helps maintain investor confidence and promotes corporate accountability.

State the statutory provisions relating to the preparation and presentation of the Balance Sheet of a listed company under the Companies Act, 2013.

State the statutory provisions relating to the preparation and presentation of the Statement of Profit and Loss of a listed company under the Companies Act, 2013.

10. Statutory Provisions Relating to the Preparation and Presentation of the Balance Sheet of a Listed Company under the Companies Act, 2013

Answer: The Companies Act, 2013 lays down detailed provisions regarding the preparation and presentation of the Balance Sheet of a listed company. These provisions ensure transparency, uniformity, and compliance with legal and regulatory requirements. The key provisions are as follows:

1. Schedule III of the Companies Act, 2013

• Format: The Balance Sheet must be prepared in the format prescribed in Schedule III, which classifies assets and liabilities into current and non-current categories.

• Disclosure Requirements: The Schedule specifies detailed disclosures regarding share capital, reserves, borrowings, trade payables, investments, fixed assets, and other financial elements.

2. Section 129 – Financial Statements

• True and Fair View: The Balance Sheet must provide a true and fair view of the company’s financial position.

• Compliance with Accounting Standards: The financial statements, including the Balance Sheet, must be prepared in accordance with Indian Accounting Standards (Ind AS) or Accounting Standards (AS) as prescribed by the Institute of Chartered Accountants of India (ICAI).

3. Section 133 – Accounting Standards: Companies must comply with notified Indian Accounting Standards (Ind AS) applicable to listed companies.

4. Section 134 – Directors’ Report and Approval: The Balance Sheet must be approved by the Board of Directors, signed by at least two directors (one of whom should be the Managing Director, if applicable), and certified by the Chief Financial Officer (CFO), if present.

5. Section 136 – Right to Access: The Balance Sheet must be made available to shareholders at least 21 days before the Annual General Meeting (AGM). It must also be filed with the Registrar of Companies (ROC).

6. Section 137 – Filing with ROC: A copy of the Balance Sheet, along with other financial statements, must be filed electronically with the ROC within 30 days of the AGM using Form AOC-4.

7. Compliance with SEBI (LODR) Regulations, 2015: Listed companies must also comply with the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 (SEBI LODR), which mandate additional disclosures such as:

• Segment-wise reporting

• Related party transactions

• Notes to accounts with detailed explanations

8. Auditing Requirements: The Balance Sheet must be audited by a qualified Chartered Accountant, and the auditor’s report must be attached to the financial statements.

These statutory provisions ensure that a listed company’s Balance Sheet is prepared in a transparent, standardized, and legally compliant manner, providing stakeholders with reliable financial information.

11. Statutory Provisions Relating to the Preparation and Presentation of the Statement of Profit and Loss of a Listed Company under the Companies Act, 2013

Answer: The Statement of Profit and Loss (P&L Statement) is a key financial statement that reports a company’s financial performance over a period. The Companies Act, 2013, provides specific guidelines for its preparation and presentation, particularly for listed companies.

1. Schedule III of the Companies Act, 2013

• Format: The P&L Statement must be prepared as per Schedule III, which provides a structured format for reporting revenues, expenses, and profits.

• Classification of Expenses: Expenses should be classified into cost of goods sold, employee benefits, depreciation, finance costs, and other expenses.

• Separate Disclosure of Exceptional and Extraordinary Items: Any unusual income or expense must be disclosed separately.

2. Section 129 – Financial Statements

• The P&L Statement must present a true and fair view of the financial performance of the company.

• It must be prepared in accordance with applicable Accounting Standards (Ind AS or AS).

3. Section 133 – Accounting Standards Compliance

• The recognition, measurement, and disclosure of revenue and expenses must comply with Ind AS (for listed companies).

• Ind AS 115 (Revenue from Contracts with Customers) governs revenue recognition.

• Ind AS 16 (Property, Plant, and Equipment) and Ind AS 36 (Impairment of Assets) provide guidelines on depreciation and impairment of assets.

4. Section 134 – Approval and Directors’ Responsibility Statement

• The Board of Directors must approve the P&L Statement before presenting it in the AGM.

• It should be signed by at least two directors, including the Managing Director and CFO.

• The Directors’ Report must contain a statement of compliance with Accounting Standards.

5. Section 136 – Shareholder Access: The P&L Statement must be made available to shareholders at least 21 days before the AGM.

6. Section 137 – Filing with ROC: The audited P&L Statement must be filed with the ROC within 30 days of the AGM using Form AOC-4.
7. Compliance with SEBI (LODR) Regulations, 2015: Listed companies must comply with SEBI’s disclosure requirements, which include:

• Quarterly and annual results submission to stock exchanges

• Segment-wise revenue disclosure

• EPS (Earnings Per Share) calculation

• Disclosure of changes in accounting policies

8. Auditing Requirements: The P&L Statement must be audited by a Chartered Accountant, and the auditor’s report must be attached.

These statutory provisions ensure that a listed company’s Statement of Profit and Loss is accurate, transparent, and compliant with financial regulations, providing reliable insights into the company’s financial performance.

Additional Question Answers

1. Which Section of the Companies Act gives the format and content of the Balance Sheet and Statement of Profit & Loss?

Answer: Section 129 of the Companies Act, 2013, provides the format and content of the Balance Sheet and Statement of Profit & Loss. The financial statements must be prepared as per Schedule III of the Act.

2. What are the Financial Statements as per Sec 2(40) of the Companies Act, 2013?

Answer: According to Section 2(40) of the Companies Act, 2013, the financial statements of a company include:

1. Balance Sheet

2. Profit & Loss Statement (or Income Statement)

3. Cash Flow Statement (except for One-Person Companies, Small Companies, and Dormant Companies)

4. Statement of Changes in Equity (if applicable)

5. Explanatory Notes to Accounts

3. Give the meaning of financial statements. What are the financial statements/constituents of financial statements?

Answer: Financial statements are formal records of a company's financial activities and position over a specific period. They provide insights into the financial performance, liquidity, and profitability of a company.

Constituents of Financial Statements:

1. Balance Sheet – Shows assets, liabilities, and shareholders' equity.

2. Profit & Loss Statement – Displays revenues, expenses, and profit/loss.

3. Cash Flow Statement – Reports cash inflows and outflows.

4. Statement of Changes in Equity – Reflects changes in equity over time.

5. Notes to Accounts – Provides additional details on accounting policies and financial data.

4. Mention four objectives of preparing a financial statement.

Answer: The four objectives of preparing financial statements are:

1. To provide financial information – Helps stakeholders understand the financial position and performance.

2. To assess profitability and performance – Evaluates revenues, expenses, and overall financial results.

3. To ensure compliance – Meets legal and regulatory requirements, such as the Companies Act, 2013.

4. To support decision-making – Assists investors, management, and creditors in making informed financial decisions.

5. What is a Statement of Profit & Loss? Write its four objectives and four features.

Answer: The Statement of Profit & Loss (Income Statement) is a financial report that summarizes a company's revenues, expenses, and net profit or loss over a specific accounting period.

Objectives:

1. To measure profitability – Determines net profit or loss.

2. To analyze revenues and expenses – Provides details of income sources and expenditures.

3. To help decision-making – Guides management, investors, and stakeholders.

4. To compare financial performance – Allows comparison with past years and competitors.

Features:

1. Records revenue and expenses – Includes both operating and non-operating items.

2. Covers a specific period – Typically prepared annually or quarterly.

3. Follows accrual accounting – Records income and expenses when incurred.

4. Shows net profit/loss – Determines the company's financial outcome.

6. Give the meaning of Cash Flow Statement and Fund Flow Statement.

Answer:Cash Flow Statement: It is a financial statement that shows cash inflows and outflows from operating, investing, and financing activities during a given period. It helps in understanding the liquidity position of a company.

Fund Flow Statement: It is a statement that analyzes the sources and uses of funds between two balance sheet dates. It highlights the financial position and working capital changes of a business.

7. What are the General Instructions for Preparation of Company Financial Statements?

Answer: The General Instructions for the preparation of company financial statements as per Schedule III of the Companies Act, 2013, include:

1. Financial statements must comply with Indian Accounting Standards (Ind AS).

2. The balance sheet and profit & loss statement should follow the prescribed formats.

3. The financial statements must give a true and fair view of the company's financial position.

4. Proper notes to accounts should be attached for clarity.

5. Figures must be presented in Indian Rupees.

6. All material information must be disclosed properly.

8. Mention the General Instructions for Preparation of Statement of Profit and Loss.

Answer: The General Instructions for preparing the Statement of Profit & Loss include:

1. The format should follow Schedule III of the Companies Act, 2013.

2. Revenue and expenses should be classified as operating and non-operating.

3. The statement should be prepared using the accrual basis of accounting.

4. Expenses should be grouped under appropriate heads such as employee benefits, finance costs, and depreciation.

5. Extraordinary and exceptional items should be separately disclosed.

6. Comparative figures for the previous year must be provided.

9. Explain the meaning of: (a) Current Assets: These are assets expected to be converted into cash within one year or the normal operating cycle of a business, whichever is longer. Examples include cash, accounts receivable, and inventory.

(b) Current Liabilities: These are obligations that a company needs to settle within one year. Examples include accounts payable, short-term loans, and outstanding expenses.

(c) Working Capital: It is the difference between current assets and current liabilities. It indicates the short-term financial health of a company.

• Formula: Working Capital = Current Assets – Current Liabilities

(d) Non-Current Assets: These are long-term assets that are not expected to be converted into cash within one year. Examples include land, buildings, machinery, and patents.

10. Define Preliminary Expenses with Examples.

Answer: Preliminary expenses are the expenses incurred before the incorporation of a company or during its establishment phase. These expenses are not directly related to day-to-day business operations but are necessary for setting up the company.

Examples:

1. Company registration fees paid to the government.

2. Legal and professional charges for drafting the Memorandum & Articles of Association.

3. Underwriting commission paid to issue shares.

4. Advertisement and promotional expenses for launching the business.

11. Write a Brief Note on Corporate Dividend Tax.

Answer: Corporate Dividend Tax (CDT) was a tax levied on companies in India when they distributed dividends to shareholders. It was applicable under Section 115-O of the Income Tax Act, 1961. However, it was abolished in Budget 2020, and now, dividends are taxed in the hands of shareholders as per their applicable tax slabs.

12. What is an Interim Dividend?

Answer: An Interim Dividend is a dividend declared and paid by a company before the end of the financial year and before the finalization of annual accounts. It is usually paid out of current year profits and is declared by the Board of Directors, not the shareholders.

13. Discuss the Various Issues Relating to Declaration and Payment of Dividend by a Company.

Answer: The declaration and payment of dividends by a company are subject to various issues, such as:

1. Legal Compliance – Dividends must comply with Companies Act, 2013 and SEBI regulations.

2. Profit Availability – Dividends can only be paid from current or retained earnings.

3. Approval Process – Final dividends require shareholders' approval, while interim dividends need Board approval.

4. Tax Implications – Shareholders are liable to pay tax on dividends after the abolition of Corporate Dividend Tax.

5. Unpaid Dividends – Companies must transfer unclaimed dividends to the Investor Education and Protection Fund (IEPF) after 7 years.

14. How Would You Deal with the Following Items While Preparing Final Accounts?

Answer:
(i) Unclaimed Dividend – Shown under Current Liabilities until transferred to IEPF after 7 years.
(ii) TDS on Interest from Debentures – Deducted at source and adjusted against Advance Tax or TDS Payable.
(iii) Preliminary Expenses – Shown under Other Non-Current Assets and written off over time.
(iv) Proposed Dividend – Earlier shown under Current Liabilities, but now disclosed in Notes to Accounts.
(v) Managerial Remuneration – Shown under Employee Benefit Expenses in the Profit & Loss Statement.
(vi) Directors’ Fees – Recorded as Administrative Expenses in the Profit & Loss Statement.

15. Write a Short Note on “Tax Deducted at Source (TDS)”.

Answer: TDS is a system where a certain percentage of tax is deducted at the time of making specific payments such as salary, interest, rent, and professional fees. The deducted amount is deposited with the government by the payer and can be adjusted against the recipient’s total tax liability.

16. What is Provision for Tax? Write Its Accounting Treatment.

Answer: Provision for Tax is an estimated amount set aside to pay income tax liability of the company. It is created based on taxable income before the final tax assessment.

Accounting Treatment:

1. At the end of the financial year:

• Debit: Profit & Loss A/c

• Credit: Provision for Tax (Liability under Current Liabilities)

2. When the actual tax is paid:

• Debit: Provision for Tax

• Credit: Bank A/c

17. Name Any Three Items That Can Be Shown Under the Sub-head “Reserve & Surplus”.

Answer:

1. General Reserve

2. Capital Reserve

3. Securities Premium Reserve

18. Name Any Two Items of Current Assets.

Answer:

1. Cash and Cash Equivalents

2. Accounts Receivable (Debtors)

19. Name Any Two Items of Current Liabilities.

Answer:

1. Trade Payables (Creditors)

2. Short-term Loans & Borrowings

20. Name Any Two Items of Non-Current Liabilities.

Answer:

1. Long-term Borrowings (Debentures, Term Loans)

2. Deferred Tax Liabilities

21. Name any two items of non-current assets.

Answer:

1. Land and Buildings

2. Plant and Machinery

22. Give the major heads under which the items appearing on the Equity & Liabilities side of a Company’s Balance Sheet.

Answer: The major heads under the Equity & Liabilities side of a company’s balance sheet as per Schedule III, Part I of the Companies Act, 2013, are:

1. Shareholders’ Funds

2. Non-Current Liabilities

3. Current Liabilities

23. Give any three items that can be shown under the headings of “Reserve & Surplus” in a company’s Balance Sheet.

Answer:

1. General Reserve

2. Capital Redemption Reserve

3. Retained Earnings (Surplus in P&L A/c)

24. List the sub-headings that can be shown under the headings Current Liabilities as per Schedule III, Part I of the Companies Act.

Answer: The sub-headings under Current Liabilities are:

1. Short-term Borrowings

2. Trade Payables

3. Other Current Liabilities

4. Short-term Provisions

25. List the sub-headings that can be shown under the headings Current Assets as per Schedule III, Part I of the Companies Act.

Answer: The sub-headings under Current Assets are:

1. Inventories

2. Trade Receivables

3. Cash and Cash Equivalents

4. Short-term Loans and Advances

5. Other Current Assets

26. Name the major sub-headings of Non-Current Assets.

Answer: The sub-headings under Non-Current Assets are:

1. Fixed Assets (Tangible and Intangible)

2. Non-Current Investments

3. Deferred Tax Assets (Net)

4. Long-term Loans and Advances

5. Other Non-Current Assets

27. Name the major sub-headings of Non-Current Liabilities.

Answer: The sub-headings under Non-Current Liabilities are:

1. Long-term Borrowings

2. Deferred Tax Liabilities (Net)

3. Other Long-term Liabilities

4. Long-term Provisions

28. What are Contingent Liabilities? Mention two items of contingent liabilities.

Answer: Contingent Liabilities are potential obligations that may arise in the future depending on the outcome of an uncertain event. These liabilities are not recorded in the balance sheet but disclosed in the Notes to Accounts.

Examples:

1. Pending Legal Cases against the company.

2. Bank Guarantees issued on behalf of the company.

29. Under what headings are the following items shown?; Goodwill, Loose Tools.

Answer:

• Goodwill – Shown under Intangible Assets (Non-Current Assets).

• Loose Tools – Shown under Inventories (Current Assets).

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