Corporate Accounting: University of Calicut

CORPORATE ACCOUNTING
CORE COURSE
BCom
(2011 Admission)
III SEMESTER

UNIVERSITY OF CALICUT
SCHOOL OF DISTANCE EDUCATION
Calicut University P.O. Malappuram, Kerala, India 673 635

329

SchoolofDistanceEducation

UNIVERSITYOFCALICUT
SCHOOLOFDISTANCEEDUCATION
StudyMaterial
CORPORATE ACCOUNTING
BCom
III SEMESTER
CoreCourse
Prepared by : Sri. T.H. JAHFARALI
Assistant Professor
P.G. Department of Commerce
Govt. College Malappuram
Scrutinized by : Dr. K. Venugopalan

Associate Professor
Department of Commerce
Government College Madappally
Layout: ComputerSection,SDE

Reserved
CORPORATE ACCOUNTING 2
CONTENTS PAGE
Module 1 5
Module 2 38
Module 3 57
Module 4 82
Module 5 112

Module1
ACCOUNTING FOR SHARE CAPITAL

A company is an association of persons who contribute money or moneys worth to a
commonstockandusesitforacommonpurpose.InthewordsofJusticeJames,acompanyisan
association of persons united for a common object. Sec 3(1) (i) of the Companies Act 1956
definesacompanyascompanyformedandregisteredunderthisActoranexistingcompany.

CharacteristicsofCompany
1. Itisavoluntaryassociationofpersons
2. Ithasaseparatelegalentity
3. Ithasacommonseal
4. Ithasaperpetualsuccession.
KindsofCompanies
I. Onthebasisofformation
1. CharteredcompaniesThosecompanieswhichareincorporatedunderaspecialcharter
bythekingorsovereignsuchasEastIndiaCompany.
2. StatutorycompaniesThesecompaniesareformedbythespecialActoflegislatureor
parliamentlikeRBI.
3. RegisteredcompaniesSuchcompaniesareincorporatedundertheCompaniesAct1956
orwereregisteredunderanypreviousCompaniesAct.
Onthebasisofliability
1. LimitedcompaniesInthesecompanies,theliabilityofeachmemberislimitedtothe
extentoffacevalueofsharesheldbyhim.
2. Guarantee companies The liability of member of such companies are limited to the
amounthehasundertakentocontributetotheassetsofthecompanyintheeventofits
windingup.
3. UnlimitedCompaniesInthesecompanies,theliabilityofthemembersisunlimitedand
membersarepersonallyliabletothecreditorsofthecompanyfopmakingupthe
deficiency.Suchcompaniesarerarethesedays.
Onthebasisofpublicinvestment
1. PrivateCompaniesThesearecompaniesbyitsArticles,(i)limitsthenumberofmembers
to50,(ii)prohibitstheinvitationtothepublictosubscribetheirsharesordebenturesand
(iii)restrictsthetransferabilityoftheirshares.
2. PubliccompaniesThesearecompaniesotherthanprivatecompanies.

SHARECAPITAL
Total capital of the company is divided into units of small denominations; each one is
calledashare.AccordingtoSec2(46)oftheCompaniesAct1956,sharehasbeendefinedasa
share in the share capital of the company; and includes stock except where a distinction
betweenstockandshareisexpressedorimplied.
ClassesofShares
A. PreferenceShares
Shareswhichenjoythepreferentialrightsastodividendandrepaymentofcapitalin
theeventofwindingupofthecompanyovertheequitysharesarecalledpreferenceshares.
Theholderofpreferenceshareswillgetafixedrateodividend.
Typesofpreferenceshares
1. CumulativepreferencesharesIncaseoftheseshares,thearrearsofdividendarecarried
forwardandpaidoutoftheprofitsofthesubsequentyears.
2. Noncumulative preference shares If dividend not to accumulate and not to carried
forwardtonextyear,thesearecallednoncumulativepreferenceshares.
3. Participating preferenceshares In additiontoafixeddividend,balanceofprofit(after
meeting equity dividend) shared by some preference shareholders. Such shares are
participatingpreferenceshares.
4. Nonparticipating preference shares These shares get only a fixed rate of dividend.
Thesedonotgetshareinthesurplusprofit.
5. RedeemablepreferencesharesIfpreferencesharesarereturnedafteraspecifiedperiod
to shareholders, these preference shares e shares are called redeemable preference
shares.
6. ConvertiblepreferencesharesThesesharesaregiventherightofconversionintoequity
shareswithinaspecifiedperiodorataspecifieddateaccordingtothetermsofissue.
B. EquityShares
Equitysharesarethosewhicharenotpreferenceshares.Equitysharesdonotcarry
anypreferentialgaininrespectofdividendorrepaymentofcapital.Sotheseareknownas
ordinary shares. There will be no fixed rate of dividend to be paid to the equity
shareholdersandthisratemayvaryfromyeartoyear.Inwindingup,theequitycapitalis
repaidlast.However,equityshareholdergetsfullvotingpower.
Typesofsharecapital
1. Authorized(RegisteredorNominal)CapitalItisthemaximumamountofcapitalwhich
thecompanyisauthorizedtoraisebywayofpublicsubscription.
2. Issued Capital The part of authorized capital which is offered top the public for
subscriptioniscalledissuedcapital.
3. Subscribed Capital That part of the issued capital for which applications are received
fromthepubliciscalledsubscribedcapital.
4. CalledupCapitalThatpartofsubscribedcapitalwhichhasbeencalledupordemanded
bythecompanyiscalledcalledupcapital.
5. Paidup Capital The part of calledup capital which is offered and actually paid by the
members is known as paidup capital. Any unpaid amount of balance on the calledup
capitalisknownasunpaidcapitalorcallsinarrears.
6. Reserve Capital It is that portion of the uncalled capital which is calledup only at the
eventofcompanyswindingup.
Differencebetweenequitysharesandpreferenceshares
Equityshares Preferenceshares
1 Itisanownershipsecurity 1. Itisahybridsecurity
2 Dividendrateisnotfixed 2. Dividendrateisfixed
3 Capitalisrepaidonlyinwinding 3. Capitalisrepaidafterastipulated
up period
4 Theseshareshavevotingrights 4 Thesesharesgenerallydonothave
5 Facevalueislower votingrights
5 Facevalueishigher
IssueofShareCapital
The shares can be issued either at par, premium or at discount. Shares are said to be
issuedatparwhenashareholderisrequiredtopaythefacevalueofthesharestothecompany.
Sharesaresaidtobeissuedatpremium whenashareholderisrequiredtopaymorethanthe
face value to the company. Shares are said to be issued at discount when the shareholder is
requiredtopaylessamountthanthefacevaluetothecompany.Forexample,acompanyissues
theshareshavingthefacevalueofRs.10atRs.10;itistheissueatpar.IfitisissuedatRs.12,the
issueisatpremium.IfitisissuedatRs.8,theissueisatdiscount.
The issue price of the shares can be received in one instalment or it can be received in
different instalments. If the issue is in different instalments, it may be paid on application,
allotmentandononeormorecalls.Theamountonapplicationiscalledapplicationmoney,the
amountduesonallotmentiscalledallotmentmoneyandtherestamountiscalledcallmoney.
AsperSEBIguidelinestheapplicationmoneyonissuemustnotbelessthan25%ofissueprice
(asperCosAct,itis5%).
Allotmentofshares
Allotment of shares means the acceptance of offer of the applicant for the purchase of
shares.Directorshavethediscretionarypowertorejectoraccepttheapplications.Butthepublic
company cannot allot its shares unless the minimum subscription has been subscribed by the
public and the amount of application has been received. After the allotment of shares to the
applicantswhowillbecometheshareholdersofthecompany.
JournalEntriesforShareIssue
1. Onreceiptofapplicationmoney:
BankA/c Dr
ToShareApplicationA/c
2. Onacceptanceofapplication:
ShareapplicationA/c Dr
ToShareCapitalA/c
3. Onallotmentmoneydue:
ShareallotmentA/c Dr
ToSharecapitalA/c
4. Onreceiptofallotmentmoney:
BankA/c Dr
ToShareallotmentA/c
5. Onmakingfirstcalldue:
SharefirstcallA/c Dr
ToSharecapitalA/c
6. Onreceiptoffirstcallmoney:
BankA/c Dr
ToSharefirstcallA/c
(Note:similarentriesmaybepassedforsecondcall,thirdcall,ifany.)
Illustration1
BharatTradingCo.Ltd.witharegisteredcapitalofRs.100000issued5000equitysharesofRs.10
each,payableRs.2onapplication,Rs.2onallotment,Rs.3onfirstcallandRs.3onfinalcall.Pass
journalentriesassumingthesharesissuedwerefullysubscribedandthemoneyhasbeen
received.
Solution:
Journal
BankA/c Dr 10000
ToShareApplicationA/c 10000
(Applicationmoneyreceived)
ShareapplicationA/c Dr 10000
ToShareCapitalA/c 10000
(Transferofapplicationmoneytosharecapital)
ShareallotmentA/c Dr 10000
ToSharecapitalA/c 10000
(Allotmentmoneydue)
BankA/c Dr 10000
ToShareallotmentA/c 10000
(Allotmentmoneyreceived)
SharefirstcallA/c Dr 15000
(Firstcallmoneydue)
BankA/c Dr 15000
ToSharefirstcallA/c 15000
(Firstcallmoneyreceived)
SharefinalcallA/c Dr 15000
(Finalcallmoneydue)
BankA/c Dr 15000
ToSharefinalcallA/c 15000
(Finalcallmoneyreceived)
Issueofsharesatpremium
Sharesaresaidtobeissuedatpremiumwhenashareholderisrequiredtopaymorethan
thefacevaluetothecompany.Theexcessamountreceivedoverthefacevalueiscalledshare
premium.Itisacapitalreceipt.ThesharepremiumshallbetransferredtoSecuritiesPremium
A/c. It should be shown on the liability side of balance sheet under the head Reserves and
Surplus.
Journalentries:
(a) Ifpremiumisreceivedwithapplicationmoney:
(i) BankA/c Dr
ToShareapplicationA/c
(ii) ShareapplicationA/c Dr (withtotal)
ToSharecapitalA/c (applicationmoney)
ToSecuritiespremiumA/c (premium)
(b) Ifpremiumisreceivedwithallotmentmoney:
(i) ShareallotmentA/c Dr (total)
ToSharecapitalA/c (allotmentmoneydue)
ToSecuritiespremiumA/c (premium)

(ii) BankA/c A/c
ToShareallotmentA/c
Issueofsharesatdiscount
Shares are said to be issued at discount when the shareholder is required to pay
lessamountthanthefacevaluetothecompany.Discountonissueofsharesisacapital
loss and it should be debited to a separate account called Discount on issue of shares
A/c.ItisshownontheassetssideofbalancesheetunderMiscellaneousExpenditure.
The rate of discount should not exceed 10% of nominal value of shares. Generally the
discount on issue is recorded at the time of allotment. It is also noted that a newly
registeredcompanycannotissuesharesatdiscount.Thejournalentryis

ShareallotmentA/c Dr (allotmentmoneydue)
DiscountonissueofsharesA/c Dr (discount)
ToSharecapitalA/c (Total)

Illustration2
ALtd.Issued5000sharesofRs.10eachatapremiumofRs.5pershare.Theamountwas
payableasRs.3onapplication,Rs.7onallotment(incl.Premium)andthebalanceonfirst
andfinalcall.Allsharesweresubscribedandmoneydulyreceived.Showthejournal
entries.

Solution:
BankA/c Dr 15000

ToSharecapitalA/c
ToSecuritiespremiumA/c 10000
(Allotmentmoneydue withpremium) 25000
BankA/c Dr
(Allotmentmoneyreceived) 35000
SharefirstandfinalcallA/c Dr
(Firstandfinalcallmoneydue) 25000
BankA/c Dr
ToSharefirstandfinalcallA/c 25000
(Firstandfinalcallmoneyreceived) 25000

Illustration3
BaluLtd.Issued20000sharesofRs.10eachatadiscountof10%payableasRs.2onapplication,
Rs.3onallotmentandRs.4onfirstandfinalcall.20000applicationswerereceivedandallwere
accepted.Passjournalentries.
Solution:
BankA/c Dr 40000

DiscountonissueofsharesA/c
Dr 20000
(Allotmentmoneydueat10%discount)
BankA/c Dr 60000
SharefirstandfinalcallA/c Dr 80000
(Firstandfinalcallmoneydue)
BankA/c Dr
ToSharefirstandfinalcallA/c 80000
(Firstandfinalcallmoneyreceived)
80000

WhenbothPreferenceandEquitySharesareissued
Whenacompanyissuesbothpreferenceandequitysharesthejournalentriesarewritten
separatelyforeachtypeofsharecapital.
Undersubscriptionofshares
Sometimes the applications for shares received will be less than the number of shares
issued.Thisiscalledundersubscription.Insuchacase,theallotmentwillbeequaltothenumber
ofsharessubscribedandnottothesharesissued.
Oversubscriptionofshares
Sometimes the applications for shares received will be more than the number of shares
issued.Thisiscalledoversubscription.Whenthereisoversubscription,itisnotpossibletoissue
shares to all applicants. In such a situation company shall reject some applications altogether,
allotinfullonsomeapplicationsandmakeaprorataallotmentonsomeapplications.Prorata
allotmentmeansthatallotmentoneveryapplicationismadeintheratiowhichthenumberof
shares allotted bears to number of shares applied. In case of applications fully rejected will be
returnedtotheapplicants.Inprorataallotmenttheexcessapplicationwillbeadjustedeitheron
allotment and or on calls. Any surplus left even after the adjustment will be refunded to the
applicants.Journalentriesare
1. Whenapplicationmoneyisreturned:
ToBankA/c
2. Whenexcessapplicationisadjustedtowardsallotmentorcall:
ShareapplicationA/c Dr (total)
ToshareallotmentA/c (amountadjustedtowardsallotment)
ToCall(ifany) (amountadjustedtowardscall)

Illustration4
SunLtd.makesanissueof100000equitysharesofRs.10eachpayableRs.3onapplication,Rs.5
onallotmentandRs.2onfirstandfinalcall.Applicationswerereceivedfor250000shares.The
company returned the applications on 24000 shares and excess application money from
remainingapplicantswascarriedforwardinpartsatisfactiononamountdueonallotmentonthe
sharesallottedtothem.Thebalanceofallotmentwasreceived.Thecompanydidnotmakethe
firstandfinalcall.Journalizethetransactions.

Solution:
BankA/c Dr 750000
(Applicationmoneyreceivedfor250000
shares) 372000
ToBankA/c 72000
(Transferofapplicationmoneytosharecapital
and24000applicantsrejectedandrefunded)
(Allotmentmoneydue)
ShareapplicationA/c 378000
Dr
BankA/c Dr 122000
(Excessapplicationmoneyadjustedand
balancereceivedincash)
CallsinArrearsandCallsinAdvance
Sometimes shareholders may fail to pay the allotment money and or call money. Such
duesarecalledcallsinarrears.Itisshowninthebalancesheetasadeductionfromthecalledup
capital.DirectorsareauthorizedtochargeinterestoncallsinarrearsatarateasperArticles.In
its absence, the interest does not exceed 5% pa. When a shareholder pays more money than
calledup,theexcessmoneyiscalledcallsinadvance.Thecompanymustpayinterestoncallsin
advanceatarateprescribedbyArticles.Initsabsence,thecompanyisliabletopayinterest@6%
pa.Buttheshareholderisnotentitledtoanydividendoncallsinadvance.
Forfeitureofshares
Thecancellationofsharesduetononpaymentofallotmentmoneyorcallmoneywithina
specifiedperiodiscalledforfeitureofshares.Itisthecompulsoryterminationofmembershipof
thedefaultingshareholders.Healsolosseswhateveramounthehaspaidtothecompanysofar.
AcompanycanforfeitthesharesonlyifitisauthorizedbyitsArticles.Theforfeitingisdoneonly
after giving 14 days notice to the defaulting shareholders. The balance of forfeited shares A/c
shouldbeshownbywayofanadditiontocalledupcapitalontheliabilitysideofbalancesheet
tillthesharesarereissued.
Journalentries
1. Forfeitureofshareswhichwereissuedatpar:
ShareCapitalA/c Dr (amountcalledup)
ToshareallotmentA/c (allotmentunpaid)
TosharecallA/c (callunpaid)
ToforfeitedsharesA/c (totalamountpaid)
2. Forfeitureofshareswhichwereissuedatpremium:
(a) Whenallotmentmoney(incl.premium)andcallmoneynotpaid
SecuritypremiumA/c Dr (premiumunpaid)
(b) Whencallmoneynotpaid
3. Forfeitureofshareswhichwereissuedatdiscount:
TodiscountonissueofsharesA/c (amountofdiscount)
Illustration5
Kerala Ltd issued 5000 shares of Rs.10 each at par payable as Rs.3 on application, Rs.2 on
allotment,Rs.3onfirstcallandRs.2onfinalcall.Mr.Aliwasallotted50sharesandwhofailedto
payallotmentmoneyandfirstcall.Givejournalentriesifthoseshareswereforfeited.
Solution:
ShareCapitalA/c Dr (50x8) 400
ToshareallotmentA/c 100
(50x2) 150
TofirstcallA/c 150
(50x3)
ToforfeitedsharesA/c
(50x3)
(forfeitureof50sharesduetononpaymentof
allotmentandfirstcall)
Illustration6
MalabarLtdissued5000sharesofRs.10eachatapremiumofRs.2payableasRs.3on
application,Rs.4onallotment(incl.premium),Rs.3onfirstcallandRs.2onfinalcall.Mr.Ajay
wasallotted50sharesandwhofailedtopayallotmentmoneyandfirstcall.Givejournalentries
ifthoseshareswereforfeited.
Solution:
ShareCapitalA/c Dr(50x8) 400
SecuritypremiumA/c 100
(50x2) 200
ToshareallotmentA/c 150
(50x4)
TofirstcallA/c 150
(50x3)
(50x3)
allotmentandfirstcall)
Illustration7
JayLtdissued5000sharesofRs.10eachatadiscountof10%payableasRs.3onapplication,Re.1
onallotment,Rs.3onfirstcallandRs.2onfinalcall.Mr.Rajuwasallotted50sharesandwho
failedtopayfirstcallandfinalcall.Givejournalentriesifthoseshareswereforfeited.
Solution:
ShareCapitalA/c Dr 500
(50x10) 150
TofirstcallA/c 100
(50x3) 200
TofinalcallA/c 50
(50x2)
(50x4)
TodiscountonissueofsharesA/c
(50x1)
firstandfinalcall)

Reissueofforfeitedshares
Forfeited shares may be reissued by the company either at pr, premium or
discount.Butthediscountonreissueshouldnotexceedtheamountforfeited.
Journalentries
1. Onreissueatpar(issuedatparorpremium):
BankA/c Dr(amountreceivedonreissue)
TosharecapitalA/c(amountpaidup)
2. Onreissueofatadiscount(issuedatparorpremium):
ForfeitedsharesA/c Dr(amountofdiscountonreissue)
TosharecapitalA/c (amountpaidup)
3. Onreissueatapremium(issuedatparorpremium):
TosecuritypremiumA/c (premiumonreissue)
4. Onreissueatadiscount(issuedatadiscount):
DiscountonissueofsharesA/c Dr(amountoforiginaldiscount)
ForfeitedsharesA/c Dr(excessofdiscountonreissueoveroriginalissue)
Ifallforfeitedshareshavebeenreissued,thecreditbalanceinforfeitedsharesA/c
(capitalprofit)shallbetransferredtocapitalReserveA/cbypassingthefollowingentry
ForfeitedsharesA/c Dr
TocapitalreserveA/c
Ifallforfeitedsharesarenotreissued,onlytheprofitonshareswhichareissuedis
transferredtoCapitalreserveA/c.
Illustration8
ThedirectorsofALtdresolvedthat2000equitysharesofRs.10each,Rs.7.50paid,beforfeited
fornonpaymentoffinalcallofRs.2.50.1800oftheaboveshareswerereissuedforRs.6per
share.Showthejournalentries.
Solution:
SharecapitalA/cDr 20000
(2000x10) 5000
TofinalcallA/c 15000
(2000x2.50)
ToForfeitedsharesA/c
(2000x7.50) 10800
(2000sharesforfeitedduetononpaymentof 7200
finalcall) 18000
BankA/c Dr(1800x6)
ForfeitedsharesA/cDr(1800x4) 6300
(1800x10)
([email protected])
ForfeitedsharesA/c Dr
ToCapitalReserveA/c(1800x7.5))
(1800x4)
(surplusreceivedonforfeiture&reissue
transferred)
Illustration9
Arjun Ltd invited applications for 10000 shares of Rs.100 each at a premium of 5% payable as
Rs.25 on application, Rs.45 on allotment (incl. premium) and Rs.35 on first and final call. The
applicationsreceivedfor9000sharesandalloftheseshareswereaccepted.Allmoneydueswere
receivedexceptthecallon100shareswhichwereforfeited.Ofthese50shareswerereissued@
Rs.90asfullypaid.Passjournalentries.
Solution:
BankA/c Dr 225000
ToSecuritypremiumA/c 45000
(Allotmentmoneydue)
BankA/c Dr 405000
SharefinalcallA/c Dr 315000
(Finalcallmoneydue)
BankA/c Dr 311500
ToSharefinalcallA/c 311500
SharecapitalA/c 10000
Dr 3500
TosharefinalcallA/c 6500
ToForfeitedsharesA/c
(100sharesforfeited) 4500
BankA/c 500
Dr 5000
ForfeitedsharesA/c
Dr 2750
TosharecapitalA/c 2750
([email protected])
ForfeitedsharesA/c
Dr
ToCapitalreserveA/c(65x50)(500)
(BalanceofforfeitedsharesA/ctransferred)

Surrenderofshares
Sometimesashareholderisnotabletopayfurthercallsandreturnshissharestothe
companyforcancellation.Suchvoluntaryreturnofsharestothecompanybytheshareholder
himselfiscalledsurrenderofshares.Theaccountingtreatmentofsurrenderofsharesisthe
sameasthatofforfeitureofshares.
REDEMPTIONOFPREFERENCESHARES
When the preference shares are issued it is to be paid back by the company to such
shareholdersaftertheexpiryofastipulatedperiodwhetherthecompanyistobewoundupor
not.
As per Sec 80 of the Companies Act, a company limited by shares can redeem the
preferenceshares,subjecttothefollowingconditions

1. Thesharestoberedeemedmustbefullypaidup.
2. Such shares can be redeemed either out of profit or out of the proceeds of fresh issue of
shares. But these cannot be redeemed out of fresh issue of debentures or out of sale
proceedsofanypropertyofthecompany.
3. Premium payable on redemption must be provided out of profits of company or out of
companyssecuritypremiumaccount.
4. Whensharesareredeemedoutofprofit,asumequaltothenominalamountofsharesso
redeemed must be transferred out of profit to a reserve account namely Capital
RedemptionReserveA/c.
5. TheCapitalRedemptionreserveA/ccanbeutilizedonlyfortheissueoffullypaidupbonus
shares.
Thepreferencesharescanberedeemedeitheratparoratpremium(butnotatdiscount).
Premium on redemption is provided out of existing security premium account or security
premiumonfreshissue.Iftheyarenotsufficient,theredemptionpremiumshouldbeprovided
outofP&LA/corGeneralReserve.
MethodsofRedemption
Therearethreemethodsforredemptionofpreferenceshares.Theyare:
(a) Redemptionoutoffreshissueofshares
(b) Redemptionoutofprofits
(c) Redemptionpartlyoutoffreshissueandpartlyoutofprofit

AccountingProcedureforRedemption
1. Ensurethattheredeemablepreferencesharesarefullypaid.Iftheyarepartlypaid,the
followingentriesarepassedtomakethemfullypaid.
(a) PreferenceShareFinalCallA/c Dr
ToPreferenceShareCapitalA/c
(b) BankA/c Dr
ToPreferenceShareFinalCallA/c
2. Entryfortotalamountduetopreferenceshareholders
PreferenceSharesCapitalA/c Dr(facevalue)
PremiumonRedemptionA/c Dr(premiumonredemption)
ToPreferenceShareholdersA/c (totalamountpayableon
redemption)
3. Entryforissueofequityshareseitherwithorwithoutpremium
BankA/c Dr(amountreceived)
DiscountonissueofsharesA/c Dr(ifsharesissuedatdiscount)
ToEquitysharecapitalA/c (facevalueofsharesissued)
ToSecurityPremiumA/c (ifsharesissuedatpremium)
4. Entryforprovidingpremiumonredemption
SecuritypremiumA/corP&LA/corGeneralReserveA/cDr
ToPremiumonRedemptionA/c
5. Entryforappropriationfromdivisibleprofitstomeetdeficiencyofamounton
redemption
(orifredemptionisoutofprofit)
P&LA/corGeneralReserveA/c Dr
ToCapitalRedemptionReserveA/c
6. Entryforpaymenttopreferenceshares
PreferenceShareholdersA/c Dr
ToBankA/c
Illustration10
SunLtdhad8000,8%redeemablepreferencesharesofRs.25each,Rs.20calledup.Thecompany
decided to redeem the preference shares at 5% premium by the issue of sufficient number of
equity shares of Rs.10 each fully paid up at a premium of 10%. Pass journal entries relating to
redemption.
Solution:
Nominalvalueofsharestoberedeemed 200000
Premiumonredemption 10000
Totalamountrequiredforredemption 210000
No.ofsharestobeissued(exceptpremium)200000=20000
10
PreferencesharefinalcallA/c Dr 40000
To8%preferencesharecapitalA/c 40000
(prefsharefinalcalldue)
BankA/c Dr 40000
TopreferencesharefinalcallA/c 40000
(finalcallmoneyreceived)
BankA/c Dr 220000
ToequitysharecapitalA/c 200000
TosecuritypremiumA/c 20000
(issueof20000equitysharesofRs.10eachat
10%premium)
SecuritypremiumA/c Dr 10000
TopremiumonredemptionA/c 10000
(providedpremiumonredemptionat5%outof
securitypremiumA/c)
8%preferencesharecapitalA/c Dr 200000
PremiumonredemptionA/cDr 10000
TopreferenceshareholdersA/c 210000
(amountduetopreferenceshareholders)
PreferenceshareholdersA/c 210000
Dr 210000
ToBankA/c
(paymenttopreferenceshareholders)

Illustration11
:ThefollowingaretakenfromthebalancesheetofRajaLtdason31December2011.
10000equitysharesofRs.10eachRs.100000
10000,8%preferencesharesofRs.10eachRs.100000
CapitalreserveRs.50000
GeneralreserveRs.30000
P&LA/cRs.85000
Thecompanyredeemsthepreferenceshareson1January2012.Givejournalentries.

Solution:
GeneralreserveA/c 30000
Dr 70000
P&LA/c 100000
Dr
TocapitalredemptionreserveA/c
(transferofanamountequaltonominalvalue 100000
ofsharesredeemedtoCRRA/c) 100000
8%preferencesharecapitalA/c
Dr 100000
TopreferenceshareholdersA/c 100000
PreferenceshareholdersA/c
Dr
ToBankA/c
Illustration12
:Acompanyhas10000,11%redeemablepreferencesharesofRs.100eachfullypaid.The
companyredeemsthesharesatpar.Forthepurposeitissued50000equitysharesofRs.10each
andbalanceismadeavailablefromtheaccumulatedprofit(P&LA/c).Theissuewasfully
subscribed.Givejournalentries.
Solution:
BankA/c Dr 500000
ToequitysharecapitalA/c 500000
(freshissueof50000sharesatRs.10)
P&LA/c 500000
Dr 500000
TocapitalredemptionreserveA/c

(amounttransferredtoCRR)
11%PreferencesharecapitalA/c 1000000
Dr 1000000
TopreferenceshareholdersA/c
PreferenceshareholdersA/c 1000000
Dr 1000000
ToBankA/c

Useofequationfordeterminingthefacevalueofsharestobeissued
AnequationcanbeappliedwhenthegivenamountofpremiuminsecuritypremiumA/cin
the balance sheet plus amount of premium to be obtained from fresh issue of shares is not
sufficienttopaypremiumonredemptionofpreferenceshares.ItisduetosecuritypremiumA/c
giveninbalancesheetcannotbeusedforredeemingthefacevalueofshares.
(a) Whenfreshissueistobemadeatapremium:
[Redeemablepreferencesharecapital+premiumonredemption]=[{Balanceinsecurity
premiumA/cinB/S}+{Revenueprofitavailableforredemption}+{N}+{Nx%rateof
premiumonfreshissue}]
(b) Whenfreshissueofsharesistobemadeatadiscount:
premiumA/cinB/S}+{Revenueprofitavailableforredemption}+{N}{Nx%rateof
discountonfreshissue}]
Note:N=Nominalvalueoffreshissueofsharestobemadeforredemption
Illustration13
DeterminetheamountoffreshissueofsharesfromthefollowinginformationrelatingtoALtd.
RedeemablepreferencesharesRs.200000,premiumonredemption10%,divisibleprofits
availableRs.60000,balanceingeneralreserveRs.40000andsecuritypremiumA/cRs.15000.if
freshissueismade(i)atapremiumof5%and(ii)atadiscountof10%.
Solution
(i)iffreshissueismadeatapremiumof5%:
premiumA/cinB/S}+{Revenueprofitavailableforredemption}+{N}+{Nx%rateofpremium
onfreshissue}]
[200000+20000]=[15000+60000+40000+N+0.05N]
1.05N=220000115000
N=105000=Rs.100000
1.05
(ii)Iffreshissueismadeatadiscountof10%:
premiumA/cinB/S}+{Revenueprofitavailableforredemption}+{N}{Nx%rateofdiscounton
freshissue}]
[200000+20000]=[15000+60000+40000+N0.1N]
0.9N=220000115000
N=105000=Rs.116667
0.9
BUYBACKOFSHARES
Buy back is a method of cancellation of share capital. It simply means buying of own
shares.Itleadstoreductioninthesharecapitalofacompany.
Objectivesofbuyback
1. Toreturnsurpluscashtoinvestors
2. Toimprovethefinancialhealth
3. ToincreasetheEPS
4. Toincreasethemarketpriceoftheshare
Advantagesofbuyback
1. Ithelpstoreturnthesurpluscashtoinvestors
2. IthelpstoincreasetheEPS
3. Itincreasespromotersholdinginthecompany
4. Ithelpstorestructurethecapitalbaseofthecompany
Disadvantagesofbuyback
1. Itimpliesundervaluationofcompanysstock
2. Itmaybeusedasatoolofinsidertrading
3. Itmaybeusedformanipulatingthepricesofshares.
Methodsofbuyback
AsperSEBIguidelines,therearetwomethodsofbuybackofshares.Theyare:
1. BuybackthroughtenderofferUnderthis,acompanycanbuybackitssharesfromits
existingshareholdersonaproportionatebasis.
2. BuybackfromtheopenmarketAcompanycanalsobuybackitssharesfromtheopen
marketeitherthroughstockexchangesorbookbuildingprocess.
DEBENTURES
ThetermdebenturehasbeenderivedfromtheLatinworddebere,whichmeansto
borrow.Debentureisaninstrumentinwritinggivenbyacompanyacknowledgingdebtreceived
fromthepublic.
TheCompaniesActdefinesdebentureasdebentureincludesdebenturestock,bondsor
anyothersecuritiesofacompany,whetherconstitutingachargeontheassetsofthecompanyor
not.
FeaturesofDebenture
1. Itisaninstrumentofdebtissuedbycompanyunderitsseal.
2. Itcarriesfixedrateofinterest.
3. Debentureisapartofborrowedcapital.
4. Itisrepaidafteralongperiod.
5. Itisgenerallysecured.
Differencebetweensharesanddebentures
Share Debenture
1. Thepersonholdingshareiscalled 1. Thepersonhavingdebentureis
shareholder calleddebentureholder
2. Itispartofownedcapital 2. Itisapartofborrowedcapital
3. Dividendispaidonshares 3. Interestispaidondebenture
4. Rateofdividendvariesyeartoyear 4. Rateofinterestisfixed
5. Shareholderhasvotingright 5. Debentureholderdoesnthave
votingright
6. Itcantbeconvertedintodebenture 6. Itcanbeconvertedintoshare
Classificationofdebentures
1. SecuredorMortgagedebenturesThesedebenturesaresecuredeitheronaparticular
assetorontheassetsofthecompanyingeneral.
2. UnsecuredorNakeddebenturesThesedebenturesdonotcreateanychargeonthe
assetsofthecompany.
3. RegistereddebenturesThesedebenturesartepayabletothepersonsrecordedinthe
registerofdebentureholdersofthecompanyandthesearetransferableonlywiththe
knowledgeofthecompany.
4. BearerdebenturesInthesedebenturescompanymaintainsnoregisterofdebenture
holdersandthesearetransferablebymeredelivery.
5. RedeemabledebenturesThesedebenturesarerepayableafterafixedperiodeitherin
lumpsumorininstalments.
6. PerpetualorIrredeemabledebenturesThesedebenturesarenotrepayableduringthe
lifetimeofthecompany.
7. ConvertibledebenturesThesedebenturescanbeconvertedintotheshareswithinor
afteraSpecifiedperiod,attheoptionoftheholder.
8. NonConvertibledebenturesThesedebenturescantbeconvertedintoshares.

IssueofDebentures
Issueofdebenturescanbestudiedinthefollowingtwopointsofview
1. Fromconsiderationpointofview
a. Forconsiderationincash:Debenturescanbeissuedeitheratpar,atpremiumorat
discount.Theentrywillbe
BankA/c Dr
DiscountonissueofdebenturesA/c Dr(ifissueatdiscount)
ToDebenturesA/c
ToSecuritypremiumA/c (ifissueatpremium)
b. Forconsiderationotherthancash:Theentriesare
i. Forpurchaseofassets
SundryAssetsA/c Dr
ToVendorA/c
ii. Forissuingdebenturesforpaymentofpurchaseconsideration
VendorA/c Dr
ToDebenturesA/c
c. Ascollateralsecurity:Whendebenturesareissuedassubsidiaryorsecondarysecurity
inadditiontotheprincipalsecurityagainstaloanorbankoverdraftsuchanissueof
debenturesiscalledissueofdebenturesascollateralsecurity.
2. Frompricepointofview
Fromthispointofviewdebenturescanbeissuedeitheratpar,atpremiumorat
discount.
a. Whendebenturesareissuedatpar
BankA/c Dr(withfacevalue)
TodebenturesA/c
b. Whendebenturesareissuedatdiscount
BankA/c Dr(netamountreceived)
ToDiscountonissueofDebenturesA/c(amountofdiscount)
ToDebenturesA/c (withfacevalue)
c. Whendebenturesareissuedatpremium
BankA/c Dr(totalamount)
ToDebenturesA/c (withfacevalue)
ToSecuritypremiumA/c (amountofpremium)
Illustration14
:XLtdissued1000,9%debenturesofRs.100each.Writejournalentrieswhentheyareissued(a)
atpar,(b)at20%premiumand(c)at10%discount.
Solution:
(a) BankA/c 100000
Dr 100000
To9%debenturesA/c

(issueof1000,9%debenturesatRs.100)
BankA/c Dr 120000
(b) To9%debenturesA/c 100000
(issueof1000,9%debenturesatRs.100at
20%premium)
(c)
BankA/cDr 90000
DiscountonissueofdebenturesA/cDr 10000
To9%debenturesA/c 100000
(issueof1000,9%debenturesatRs.100at
10%discount)
Illustration15
A company issued 10000 debentures of R.100 each for subscription. Debenture moneys are
payableasRs.30onapplication,Rs.40onallotment,Rs.20onfirstcallandRs.10onsecondcall.
Apersonwho9holds200debenturesfailstopaytheamountdueatthetimeofallotment.He
however pays this amount with the first call money. Another person, who is holding 400
debentures,haspaidallthecallsinadvanceatthetimeofallotment.Givejournalentriesinthe
booksofcompany.
Solution:
BankA/c Dr 300000
ToDebentureApplicationA/c 300000
DebentureapplicationA/c Dr 300000
ToDebenturesA/c 300000
(Transferofapplicationmoneytodebentures
A/c) 400000
DebentureallotmentA/c Dr 400000
ToDebenturesA/c
(Allotmentmoneydue) 404000
BankA/c Dr 392000
ToDebentureallotmentA/c 12000
ToDebenturescallsinadvance
(Allotmentmoneyon9800debenturesandcall
on400debenturesasadvancereceived) 200000
DebenturefirstcallA/c 200000
Dr
(Firstcallmoneydue) 8000
DebenturescallsinadvanceA/c
Dr 200000
ToDebenturesfirstcallA/c 8000
(transferofcallsinadvancetofirstcallA/c) 192000
BankA/c Dr
ToDebentureallotmentA/c
ToDebenturefirstcallA/c 100000
(Firstcallmoneyreceivedalongwithallotment 100000
dueon200debentures)
DebenturefinalcallA/c Dr
(Finalcallmoneydue) 4000
BankA/c Dr 100000
DebenturescallsinadvanceA/c
Dr
ToSharefinalcallA/c

3.Fromconditionofredemptionpointofview
Therearesixcasesonthebasisoftermsofissueandconditionsofredemptionof
debentures.Theyareasfollows:
a. Issuedatparandredeemableatpar.
b. Issuedatpremiumandredeemableatpar.
c. Issuedatdiscountandredeemableatpar.
d. Issuedatparandredeemableatpremium.
e. Issuedatdiscountandredeemableatpremium.
f. Issuedatpremiumandredeemableatpremium.
A. Whenissuedatparandredeemableatpar.
BankA/c Dr
ToDebenturesA/c
B. Whenissuedatpremiumandredeemableatpar.
BankA/c Dr (facevalue+premium)
ToDebenturesA/c (facevalue)
TosecuritypremiumA/c (premium)
C. Whenissuedatdiscountandredeemableatpar.
BankA/c Dr (amountreceived)
DiscountonissueofdebenturesA/c Dr (discount)
ToDebenturesA/c (facevalue)
D. Whenissuedatparandredeemableatpremium.
LossonissueofdebenturesA/c Dr (premiumonredemption)
TodebenturesA/c (facevalue)
TopremiumonredemptionA/c (premiumonredemption)
E. Whenissuedatdiscountandredeemableatpremium.
LossonissueofdebenturesA/c Dr (issuediscount+redemption
premium)
TopremiumonredemptionA/c (redemptionpremium)
F. Whenissuedatpremiumandredeemableatpremium.
LossonissueofdebenturesA/c Dr (redemptionpremium)
TosecuritypremiumA/c (issuepremium)
TopremiumonredemptionA/c (redemptionpremium)
Illustration16
JournalizethefollowingtransactionsatthetimeofissueofdebentureofRs.100.
a. AdebentureissuedatRs.95,repayableatRs.100.
b. AdebentureissuedatRs.95,repayableatRs.105.
c. AdebentureissuedatRs.100,repayableatRs.105.
d. AdebentureissuedatRs.105,repayableatRs.100.
e. AdebentureissuedatRs.102,repayableatRs.105.
Solution:
a. BankA/c Dr 95
DiscountonissueofdebenturesA/c Dr 5
ToDebenturesA/c 100

(issueofdebentureatRs.95,repayableat
Rs.100)
b. BankA/c Dr 95
LossonissueofdebenturesA/c Dr 10
TodebenturesA/c 100

(issueofdebentureatRs.95,repayableat
c. Rs.105)
BankA/c Dr 100
TodebenturesA/c 100
d. TopremiumonredemptionA/c 5
(issueofdebentureatRs.100,repayable

atRs.105)
e. BankA/c Dr 105
ToDebenturesA/c 100
(issueofdebentureatRs.105,repayable
atRs.100)
BankA/c Dr 102
TodebenturesA/c
(issueofdebentureatRs.102,repayable 3
atRs.105)

DiscountorLossonissueofdebentures
Discountorlossonissueofdebenturesandpremiumonredemptionarecapitallosses.Theyare
showninthebalancesheetundertheheadMiscellaneousExpenditure.Beingthelosses,they
aretobewrittenoffagainstcapitalreserveorsecuritypremiumA/c.Initsabsenceitiswritten
offtoP&LA/cduringthelifeofdebentures.Theentryis
Capitalreserve/SecuritypremiumA/c/P&LA/c Dr
ToDiscount/LossonissueofdebenturesA/c.
REDEMPTIONOFDEBENTURES
Redemptionofdebenturesreferstothedischargeofliabilityonaccountofdebentures.Itsimply
meansrepaymentofdebentures.AsperCompaniesAct,thedebenturesshouldberedeemedin
accordancewiththetermsandconditionsofissue.
Thefollowingentriesarepassedforredemptionofdebentures.
a. Whendebenturesareredeemedatpar
i. DebenturesA/c Dr
TodebentureholdersA/c
ii. DebentureholdersA/c Dr
ToBankA/c
b. Whendebenturesareredeemedatpremium
i. DebenturesA/c Dr
PremiumonredemptionA/c Dr
TodebentureholdersA/c
ii. Securitypremium/Generalreserve/P&LA/c Dr
ToPremiumonredemptionA/c
iii. DebentureholdersA/c Dr
ToBankA/c
Sourcesofredemptionofdebentures
Debenturescanbedeemedoutofthefollowingsources
1. Redemptionoutoffreshissue.
A company may issue new shares or debentures or both for redeeming the
existingdebentures.
Illustration17
MoonLtd10%,5000debenturesofRs.100each,redeemableat5%premium.Thecompany
issued40000equitysharesofRs.10eachat10%premiumand1000,9%debenturesofRs.100
eachatparforthepurposeofredemption.Passjournalentries.
Solution
10%DebenturesA/c Dr 500000
PremiumonredemptionA/c Dr 25000
ToDebentureholdersA/c 525000

(10%debenturesdueforredemption)
BankA/c Dr 440000
ToEquitysharecapitalA/c 400000
(issueof40000equitysharesat10%premium
forredemption)

BankA/c Dr 100000
To9%DebenturesA/c 100000
(issueof1000debenturesofRs.100each)
SecuritypremiumA/c Dr
ToPremiumonredemptionA/c 25000
(provisionforredemptionpremium) 25000
DebentureholdersA/c Dr
ToBankA/c 525000
(paymenttodebentureholders) 525000

2. RedemptionoutofCapital
Ifdebenturesareredeemedoutofcapital,noamountofdivisibleprofitiskeptasidefor
Redeemingdebentures.RedemptionoutofCapitalreducestheliquidresourcesavailableto
thecompany.AspertheguidelinesissuedbySEBI,acompanyhastocreateDebenture
RedemptionReserve(DRR)equivalentto50%otheamountofdebentureissuebefore
redemptionofdebenturescommences.ButthecreationofDRRisnotrequiredinthe
followingcases
a. Debentureswithmaturityof18monthsorless
b. Fullyconvertibledebentures.
3. Redemptionoutofprofit
WhensufficientprofitsaretransferredfromP&LAppropriationA/ctotheDebenture
RedemptionReserveA/catthetimeofredemptionofdebentures,suchredemptionissaid
to be out of profits. It reduces the profits available for dividend. The following entry is
passedfortransferofprofit
P&LAppropriationA/c Dr
ToDebentureRedemptionReserveA/c
AsperguidelinesofSEBI,creationofDRR(50%ofamountofdebenturesissued)is
compulsory for debentures with maturity period of more than 18 months. On the
completion of redemption of all debentures, the DRR A/c is close by transferring it to
generalreserve.Theentryisasfollows
DebentureRedemptionReserveA/c Dr
ToGeneralReserveA/c
Illustration18
AbinLtdissued12000debenturesofRs.100eachon1October2010inthetermsofredemption
that1/3ofdebenturesareredeemableeverysixmonths.Journalizethetransaction.
Solution:

2010 BankA/c Dr 1200000
Oct1 To8%DebenturesA/c 1200000
(issueof12000,8%debentures)
2011 P&LAppropriationA/c Dr 400000
Mar ToDebentureRedemptionReserveA/c 400000
31 (Transferofamountfordebenture
redemption)
8%DebenturesA/c Dr
ToDebentureholdersA/c
(amountduetodebentureholders) 400000
DebentureholdersA/c Dr 400000
ToBankA/c
2011 ToDebentureholdersA/c
Sep (amountduetodebentureholders) 400000
30 DebentureholdersA/c Dr 400000
ToBankA/c
P&LAppropriationA/c Dr 400000
ToDebentureRedemptionReserveA/c
2012 (Transferofamountfordebenture
Mar redemption) 800000
31 8%DebenturesA/c Dr 800000
DebentureholdersA/c Dr 400000
ToBankA/c
DebentureRedemptionReserveA/c Dr 400000
ToGeneralReserveA/c
(transferofDRRtoGRafterredemption) 1200000
1200000
Note:AmountequaltothevalueofdebenturesredeemedistransferredfromP&LAppropriationA/ctoDRRA/c.
4. RedemptionbySinkingFund
Underthismethodofredemption,everyyearapartoftheprofit(fixedamount)issetaside
andsinkingfund(DebentureRedemptionFund)iscreated.SinkingfundIinvestedinoutside
securities. The interest received o such investments along with the amount set aside from
profitwillagainbeinvestedasusual.Itcontinuestillthedateofredemptionofdebenture.
Theinvestmentwillbesoldandthecashthusrealizedwillbusedtorepaythedebentures.
Under this method, sinking fund A/c (Debenture Redemption Fund A/c) and sinking fund
investment A/c (Debenture Redemption Fund Investment A/c) will be opened. After the
redemption, balance of sinking fund A/c is transferred to general reserve. The following
entriesarerequiredunderthismethod.
Attheendoffirstyear:
i. Fortheamountsetasideeveryyear
ToSinkingFundA/c
ii. Forinvestmentofsinkingfund
SinkingFundInvestmentA/c Dr
ToBankA/c

Attheendofsecondandsubsequentyears:
i. Forinterestreceivedoninvestment
BankA/c Dr
ToInterestonSinkingFundInvestmentA/c
ii. Fortransferringinteresttosinkingfund
InterestonSinkingFundInvestmentA/c Dr
ToSinkingFundA/c
iii. Forannualamountsetaside
ToSinkingFundA/c
iv. Forinvestmentofannualinstallmentandinterest
ToBankA/c
Attheendoflastyear:
Alltheentriesexceptentry(iv)insecondandsubsequentyearshouldbepassed.
i. Foramountrealizedonsaleofinvestment
BankA/c Dr
ToSinkingFundInvestmentA/c
ii. Forprofitonsaleofinvestment
ToSinkingFundA/c
(Note:iflosstheaboveentryisreversed)
iii. Foramountduetodebentureholders
DebenturesA/c Dr
PremiumonredemptionA/c Dr(ifredemptionatpremium)
iv. Foramountpaidtodebentureholders
ToBankA/c
v. FortransferofbalanceinsinkingfundA/c
SinkingFundA/c Dr
ToGeneralReserveA/c
Illustration19
On1January2007,BaluLtdissued1000,6%debenturesofRs.100eachrepayableatthe
end of 4 year at a premium of 10%. It is decided to create a sinking fund for the purpose; the
investment is expected to yield 5% net. Sinking fund table shows that Re.0.232012 invested
annuallyamountstoRe.1at5%in4years.Investmentsweremadeinmultiplesof100only.On31
December2010,thebalanceatthebankwasRs.40000andtheinvestmentrealizedRs.82000.the
debentureswerepaidoff.Givejournalentriesand showledgeraccountsexceptfordebenture
interest.
Solution:
Amountsannuallysetaside=(100000+10%premium)x0.232012=Rs.25521
2007 BankA/c Dr 100000
Jan1 LossonissueofdebenturesA/cDr 10000
Topremiumonredemptionof 10000
debenturesA/c
(issueof1000,6%debenturesofRs.100each
redeemableat10%premium)
Dec P&LAppropriationA/c Dr 25521
31 ToSinkingFundA/c 25521

(Transferofprofittosinkingfund)
25500
25500
2008 ToBankA/c 1275
Dec (investmentmadetonearestmultipleof100) 1275
31 BankA/c Dr
ToInterestonSinkingFundInvestmentA/c 1275
(interestreceived@5%oninvestment) 1275
InterestonSinkingFundInvestmentA/cDr
ToSinkingFundA/c 25521
(transferofinteresttosinkingfund) 25521
(Transferofprofittosinkingfund) 26800
ToBankA/c 2615
(investmentwithinterest25521+1275) 2615
BankA/c Dr
2009 ToInterestonSinkingFundInvestment
Dec A/c 2615
31 (interestreceived@5%oninvestment) 2615
InterestonSinkingFundInvestmentA/cDr
(transferofinteresttosinkingfund) 25521
ToBankA/c 4020
(investmentwithinterest25521+2615) 4020
BankA/c Dr
ToInterestonSinkingFundInvestmentA/c 4020
(interestreceived@5%oninvestment) 4020
2010 InterestonSinkingFundInvestmentA/c Dr
Dec ToSinkingFundA/c 25521
31 (transferofinteresttosinkingfund) 25521
ToSinkingFundA/c
BankA/c Dr 82000
ToSinkingFundInvestmentA/c
(saleofinvestment) 1600
SinkingFundInvestmentA/c Dr 1600
ToSinkingFundA/c
(transferofprofitonsaleofinvestment) 100000
PremiumonredemptionofdebenturesA/cDr 110000
ToDebentureholdersA/c 110000
ToBankA/c 10000
(amountpaidtodebentureholders) 10000
SinkingFundA/cDr
TolossonissueofdebenturesA/c 101594
(redemptionprovidedoutofsinkingfund) 101594
SinkingFundA/c Dr
ToGeneralReserveA/c
(transferofbalanceinsinkingfundA/ctoGR)

6%DebenturesA/c
2007 2007
Dec31 Jan1
2008 ToBalancec/d 100000 2008 ByBank 100000
Dec31 ToBalancec/d 100000 Jan1 ByBalanceb/d 100000
2009 2009
Dec31 Jan1
2010 ToBalancec/d 100000 2010 ByBalanceb/d 100000
Dec31 ToDebentureholders 100000 Jan1 ByBalanceb/d 100000
A/c

PremiumonRedemptionofdebenturesA/c
2007 2007 Bylossonissueof
Dec31 Jan1
2008 ToBalancec/d 10000 2008 debenturesA/c 10000
Dec31 ToBalancec/d 10000 Jan1 ByBalanceb/d 10000
2009 2009
Dec31 Jan1
2010 ToBalancec/d 10000 2010 ByBalanceb/d 10000
Dec31 ToDebentureholders 10000 Jan1 ByBalanceb/d 10000
A/c

DebentureholdersA/c
2010 2010 By6%Debentures
Dec ToBankA/c 110000 Dec31 A/c 100000
31 Bypremiumon
redemptionof 10000
debenturesA/c
110000 110000

SinkingFundA/c
2007 ToBalancec/d 25521 2007 ByP&LAppnA/c 25521
Dec Jan1 ByBalanceb/d 25521
31

ByinterestonS.F.I 1275
ToBalancec/d 52317 ByP&LAppnA/c 25521

52317 52317

52317
2008 2008
Dec 80453 ByBalanceb/d 2615
Jan1
31 ToBalancec/d
ByinterestonS.F.I 25521
Dec31 ByP&LAppnA/c

80453
80453

2009 80453
Tolossonissueof ByBalanceb/d
10000 Jan1 4020
2009 debentures ByinterestonS.F.I
25521
Dec31 Togeneralreserve ByP&LAppnA/c
101594 Dec31 1600
(balancetransferred) ByS.F.I(profiton
111594 111594
sale)

SinkingFundInvestmentA/c
2007
Dec31
ToBank 25500 2007
Dec31
ByBalancec/d 25500
2008 ToBalanceb/d 25500
Jan1 2008
Dec31 ToBank 26800 Dec31 ByBalancec/d 52300

52300 52300
52300
2009
Jan1
ToBalanceb/d 28100 2009 80400
Dec31 ToBank Dec31 ByBalancec/d
80400 80400
2010
80400
Jan1 ToBalanceb/d
Dec31 1600 2010 82000
ToSinkingFundA/c ByBank
82000 Dec31 82000
(profit)

BankA/c
2010 2010 ByDebenture
Dec31
ToBalanceb/d 40000 Dec31 holdersA/c 110000

ToS.F.IA/c 82000 ByBalanceb/d 12000
122000 122000
5. RedemptionbyInsurancePolicy
This is an alternative to sinking fund method. Under this method, an insurance policy is
purchased by paying annual premium. Such policy will mature on thedate of redemption.
Thismethodprovidesfundsforredemptionandcoverstheriskinvolvedinthetransactions.
Underthismethodthefollowingentriesarepassed.
Duringalltheyearstillthepolicymaturity:
i. Foramountofpremiumpaidatthebeginningoftheyear
DebentureRedemptionPolicyA/c Dr
ToBankA/c
ii. Forsettingasidetheprofitattheendoftheyear
ToDebentureRedemptionFundA/c
Duringthelastyearinadditiontotheabovetwoentries
i. Forrealizingtheinsurancepolicy
BankA/c Dr
ToDebentureRedemptionPolicyA/c
ii. Forthetransferofprofitonrealization
DebentureRedemptionPolicyA/c Dr
ToDebentureRedemptionFundA/c
(Note:iflosstheentryisreversed)
iii. Foramountduetodebentureholders
DebenturesA/c Dr
PremiumonredemptionA/c Dr(ifredemptionatpremium)
iv. Foramountpaidtodebentureholders
ToBankA/c
v. FortransferofbalanceinDebentureRedemptionFundA/c
DebentureRedemptionFundA/c Dr
ToGeneralReserveA/c
Illustration20
Athul Ltd issued 1000, 6% debentures of Rs.100 each at par redeemable after 5 years at
premium of 10%. An insurance policy was taken at the time of issue of debentures on 1 April
2006 for the amount in order to provide for the necessary funds required for the redemption.
The annual premium paid at the beginning of every year Rs.18280. show the accounts for
redemption.
Solution:
6%DebenturesA/c
2007 2006
Mar31 ToBalancec/d 100000 Apr1 ByBank(firstyear) 100000
2011 2010
Mar31 ToDebentureholdersA/c 100000 Apr1 ByBalanceb/d 100000

PremiumonredemptionofdebenturesA/c
2007 2006 Bylossonissueof
Mar31 ToBalancec/d 10000 Apr1 debenturesA/c 10000
2011 2010
Mar31 ToDebentureholdersA/c 10000 Apr1
ByBalanceb/d 10000
DebentureRedemptionFundA/c
2007
Mar31
ToBalancec/d 18280 2007 ByP&LAppnA/c 18280
Mar31
Apr1 ByBalanceb/d 18280
2008 2008
Mar31 ToBalancec/d 36560 Mar31 ByP&LAppnA/c 18280
36560 36560

2008 36560
Apr1 ByBalanceb/d
2009 18280
2009 ToBalancec/d ByP&LAppnA/c
Mar31 54840 Mar31

54840 54840
2009
2010
ToBalancec/d 73120 2010 ByP&LAppnA/c 18280
Dec31 Mar31
73120 73120
2010
2011
Mar31 Tolossonissueof ByP&LAppnA/c 18280
debenturesA/c 10000 2011 ByDebenture
Mar31
ToGeneralReserve 100000 RedemptionPolicy 18600
(profitonrealizationB.F)
110000 110000

DebentureRedemptionPolicyA/c(Investment)
2006
Apr1
ToBank 18280 2007 ByBalancec/d 18280
Mar31
2007 ToBalanceb/d 18280
Apr1 2008

ToBank 18280 Mar31 ByBalancec/d 36560
36560 36560
2008 ToBalanceb/d
Apr1 36560 2009
ToBank ByBalancec/d
18280 Mar31 54840

54840 2010 54840
2009
Apr1 ToBalanceb/d 54840 Mar31

ByBalancec/d
ToBank 18280 73120

2010
73120 73120
2011
Apr1 ToBalanceb/d 73120 Mar31 ByBank 110000
ToBank 18280 (realizationofpolicy)
2011
Mar31 ToDeb.Red.Fund(profitB.F) 18600
110000 110000
DebentureholdersA/c
2011 By6%Debentures
2011 ToBankA/c 110000 Mar31 A/c 100000
Mar31
Bypremiumon

redemptionof 10000
debenturesA/c
110000 110000
6.RedemptionbyConversion
Sometimesthedebentureholdersofacompanyaregiventheoptiontoconverttheir
debentures into the shares or new debentures within a stipulated period. The new shares or
debenturescanbeissuedeitheratparoratpremiumoratdiscount.Thefollowingentrywillbe
madeforthepurpose.

OldDebenturesA/c Dr

Discountonissueofshares/debenturesA/cDr (ifissueatdiscount)
ToNewShareCapital/DebentureA/c
ToPremiumonissueofshares/debenturesA/c(ifissueatpremium)

Illustration22

On1April2009,FastLtdissued800,12%debenturesofRs.1000eachatRs.950each.Debenture
holders had an option to convert their holdings into 6% preference shares of Rs.100 each at a
premium of Rs.25 per share. On 31 March 2010, one years interest had accrued on these
debentureswhichwerenotpaid.Aholderof50debenturesnotifiedhisintentiontoconverthis
holdinginto13%preferenceshares.JournalizethetransactionsandpreparetheBalancesheetas
on31March2010.

Solution:
2009 BankA/c Dr 760000

Apr1 DiscountonissueofdebenturesA/c Dr 40000
(issueof800,12%debenturesofRs.1000each
2010
atRs.950)
Mar InterestondebenturesA/c Dr 96000
B31 TosundrydebentureholdersA/c 96000
(interestdueondebentures)
B
alanc To13%PreferenceShareCapitalA/c 40000
e TosecuritypremiumA/c 10000
Sheet
ason (conversionof50debenturesto400,13%
31 preferencesharesofRs.100eachata
Marc
h premiumofRs.25)
2011 SundrydebentureholdersA/c Dr 6000
ToBankA/c 6000
(intereston50,12%debenturespaidon
conversion)
P&LA/c Dr 96000
TointerestondebenturesA/c 96000
(interestondebenturestransferredtoP&L
A/c)
Liabilities Rs. Assets Rs.
Sharecapital: Bank(7600006000) 754000
40013% Discountonissueof 40000
preferenceshares 40000 debentures 96000

ofRs.100each P&LA/c
75012%Debentures 750000
of 90000
Rs.1000each 10000
Sundrydebenture 890000 890000
holders
Securitypremium
OwnDebentures
Thedirectorscanpurchasedebentureswhenevertheyfindthemarketpricefavorabletothe
company.Suchpurchaseddebenturescanbeeithercancelledbythecompanyormaybekept
asaninvestmentcalledowndebenturesandmaybeutilizedforreissuewhenneeded
afterwards.
Purchaseofowndebenturesaretobetreatedinaccountinthesamewayasanordinary
investment.Theentrywillbe:
OwnDebenturesA/c Dr (withpurchaseprice)
ToBankA/c
TheowndebenturesA/cwillappearontheassetssideofB/S(underinvestments)untilitis
cancelledorreissued
Asandwhenthecompanywantstocancelinvestmentinowndebenturesthefollowingentry
willbepassed
DebenturesA/c Dr (withfacevalue)
LossonredemptionofdebenturesA/c Dr (forloss)
ToowndebenturesA/c (withpurchaseprice)
ToProfitonredemptionofdebenturesA/c(forprofit)
Fortransferofprofitonredemption:
ProfitonredemptionofdebenturesA/cDr
ToCapitalReserve
Illustration23
:AcompanypurchasedRs.30000,6%DebenturesofRs.100eachatRs.95eachforinvestment.
Aftersixmonthsthedebentureswerecancelled.Showjournalentries.
Solution:
OwnDebenturesA/c Dr 28500
ToBankA/c 28500
(300owndebenturespurchasedfor
investmentatRs.95)
ToowndebenturesA/c 28500
ToProfitonredemptionof 1500
debenturesA/c
(cancellationofdebenturesheldas
investment)
ProfitonredemptionofdebenturesA/cDr 1500
ToCapitalReserve
(transferofprofitonredemptiontoC.R) 1500

Module2
FINALACCOUNTSOFCOMPANIES

Itisnotobligatorytosoleproprietorsandpartnershipfirmstopreparethefinalaccounts
as per thestatute. But, according to Section 210 of Indian Companies Act 1956 it is a statutory
obligationtoajointstockcompanytoprepareitsfinalaccounts.Thefinalaccountsofacompany
consistof(a)BalanceSheetand(b)ProfitandLossAccount.
BalanceSheet
TheBalancesheetofcompaniesmustbepreparedaccordingtotheprescribedformgiven
in Part I of Schedule VI of the Companies Act. As per the Companies Act, the Balance sheet of
companiescanbepreparedintwoforms(i)HorizontalFormand(ii)VerticalForm.
HorizontalForm
SCHEDULEVI,PARTI
FORMOFBALANCESHEET
HORIZONTALFORM
BalanceSheetof.(hereenterthenameofthecompany)
Ason..(hereenterthedateatwhichthebalancesheetismadeout)
Figures Figures Figures Figures
forthe forthe forthe forthe
previous Liabilities current previous Assets current
year year year (5) year
Rs. Rs. Rs. Rs.
(1) (2) (3) (4) (6)
ShareCapital: FixedAssets:
AuthorizedSharesof Distinguishingasfaras
Rs.Each possiblebetween
Issued:(distinguishing expenditureupon:
betweenthevarious (a) Goodwill
classesofcapitaland (b) Land
statingtheparticulars (c) Buildings
specifiedbelow,in (d) Leaseholds
respectofeach (e) Railwaysidings
class)SharesofRs (f) Plantand
each. machinery
Subscribed: (g) Furnitureand
(distinguishingbetween fittings
thevariousclassesof (h) Developmentof
capitalandstatingthe property
particularsspecified (i) Patents,
below,inrespectof trademarksand
eachclass)Sharesof designs
Rseach..Rscalled (j) Livestock,and
up. (k) Vehicles,etc.
(oftheabove (Undereachheadthe
shares.sharesare originalcostandthe
allottedasfullypaidup additionstheretoand
pursuanttoacontract deductionstherefrom
withoutpaymentbeing duringtheyear,andthe
receivedincash) totaldepreciations
(oftheabove writtenofforprovided
shares.sharesare uptotheendoftheyear
allottedasfullypaidup istobestated.
bywayofbonusshares) Depreciationwrittenoff
(Specifythesource orprovidedshallbe
fromwhichbonus allottedunderthe
sharesareissued,e.g. differentassetheads
capitalizationofprofits anddeductedinarriving
orreservesorfrom tthevalueoffixedassts.
Sharespremium Ineverycasewherethe
Account. originalcostcannotbe
Less:Callsunpaid: ascertained,without
(i)bydirectors unreasonableexpense
(ii)Byothers. ordelay,thevaluation
Add:Forfeitedshares: shownbythebooksisto
(amountoriginallypaid begiven.Forthe
up) purposeofthis
(anycapitalprofiton paragraph,stock
issueofforfeitedshares valuationshallbethe
shouldbetransferred netamountatwhichan
tocapitalreserve) assetstoodinthe
Notes: companysbooksatthe
1. Termsof commencementofthis
redemptionor Actafterdeductionof
conversion(ifany)) theamountspreviously
redeemable providedorwrittenoff
preferencecapital fordepreciationor
istobestated diminutioninvalues,
togetherwith andwhereanysuch
earliestdateof assetissold,theamount
redemptionor ofsaleproceedsshallbe
conversion. shownasdeduction
2. Particularsofany Wheresumhavebeen
optiononunissued writtenoffona
sharecapitalareto reductionofcapita;ora
bespecified. revaluationofassets,
3. [particularstothe everybalance
differentclassesof sheet,(afterthefirst
preferenceshares balancesheet)
aretobegiven subsequenttothe
Theseparticularsareto reductionorrevaluation
begivenalongwith shallshowthereduced
Sharecapital. figureswiththedateof
Inthecaseofsubsidiary thereductioninthe
companies,thenumber placesoftheoriginal
ofshareheldbythe cost.
holdingcompanyas Eachbalancesheetfor
wellasbytheultimate thefirstfiveyears
holdingcompanyand subsequenttothedate
itssubsidiariesshallbe ofreductionshallsow
separatelystatedin alsothemountofthe
respectofSubscribed reductionmade.
sharecapital.The Similarly,wheresums
auditorisnotrequired havebeenaddedby
tocertifythe writinguptheassets,
correctness everybalancesheet
shareholdingsas subsequenttosuch
certifiedbythe writingupshallshowthe
management) increasedfigureswith
ReservesandSurplus: thedateofincreasein
1. CapitalReserves theplaceoftheoriginal
2. Capitalredemption cost.Eachbalancesheet
Reserve forthefirstfiveyears
3. SecuritiesPremium subsequenttothedate
Account(showing ofwritingupshallalso
detailsofits showtheamountof
utilizationinthe increasemade)
mannerprovided Investments:
inSection78inthe Showingnatureof
yearofutilization). investmentsandmode
4. Otherreserves ofvaluation,for
specifyingthe example,costormarket
natureofeach value,anddistinguishing
Reserveandthe between:
amountinrespect 1. Investmentsin
thereof. Governmentor
Less:Debitbalancein trustsecurities
ProfitandLossaccount 2. Investmentsin
(ifany). shares,
(Thedebitbalancein debenturesor
theProfitandloss bonds.
Accountshallbeshown (Showingseparately
asadeductionfromthe sharesfullypaidupand
uncommittedreserves, partlypaidupandalso
ifany). distinguishingdifferent
5. Surplus,i.e., classesofsharesand
balanceinProfit showingalsoinsimilar
andLossAccount detailsofinvestmentsin
afterprovidingfor shares,debenturesor
proposed bondsofsubsidiary
allocationsnamely; companies).
dividend,bonusor 3. Immovable
reserves. properties
6. Proposedadditions 4. Investmentsinthe
toreserves. capitalof
7. Sinkingfunds. partnershipfirm.
(Additionsand 5. Balanceof
deductionssincelast unutilizedmoney
balancesheettobe raisedbyissues.
shownundereachof (Aggregateamountof
thespecifiedheads.The companysquoted
wordfundinrelation investmentsandalsothe
toanyReserveshould marketvaluethereof
beusedonlywhere shallbeshown).
suchreserveis (Aggregateamountof
specificallyrepresented companysunquoted
byearmarked investmentsshallalsobe
investments). shown).
SecuredLoans: CurrentAssets,Loans
1. Debentures andAdvances:
2. Loansand (A) CurrentAssets
advancesfrom 1. Interestaccruedon
banks investments
3. Loansand 2. Storesandspare
advancesfrom parts
subsidiaries 3. Loosetools
4. Otherloansand 4. Stockintrade
advances 5. Workinprogress.
(Loansfromdirectors [Inrespectof(2)and(4),
and/ormanagershould modeofvaluationof
beshownseparately). stockshallbestatedand
Interestaccruedand theamountinrespectof
dueonSecuredloans rawmaterialsshallalso
shouldbeincluded bestatedseparately
undertheappropriate wherepracticable.Mode
subheadsunderthe ofvaluationofworkin
headSecuredLoans progressshallbestated].
Thenatureofsecurity 6. Sundrydebtors
tobespecifiedineach (a) Debtsoutstanding
case. foraperiod
Whereloanshavebeen exceedingsix
guaranteedby months
managersand/orby (b) Otherdebts
directorsamention Less:Provision
thereofshallalsobe (theamountstobe
madeandalsothe shownundersundry
aggregateamountof debtorsshallincludethe
suchloansundereach amountsdueinrespect
head. ofgoodssoldorservices
Incaseofdebentures, renderedorinrespectof
termsofredemptionor othercontractual
conversion(ifany)are obligationsbutshallnot
tobestatedtogether includetheamounts
withearliestdateof whichareinthenature
redemptionor ofloansoradvances)
conversion. Inregardtosundry
UnsecuredLoans: debtorsparticularstobe
1. Fixeddeposits givenseparatelyof:
2. Loansand (a) Debtsconsidered
advancesfrom goodandinrespect
subsidiaries ofwhichthe
3. Shorttermloans companyisfully
andadvances: secured
(a) Frombanks (b) Debtsconsidered
(b) Fromothers. goodforwhichthe
(loansfromdirectors companyholdsno
and/ormanagershould securityotherthan
beshownseparately. thedebtorspersonal
).Interestaccruedand securityand
dueonUnsecuredloans (c) Debtsconsidered
shouldbeincluded doubtfulorbad.
undertheappropriate Debtsduebydirectors
subheadsunderthe orotherofficersofthe
headUnsecured companyoranyofthem
Loans eitherseverallyorjointly
Whereloanshavebeen withanyotherpersonor
guaranteedby debtsduebyfirmsor
managersand/orby privatecompanies
directorsamention respectivelyinwhichany
thereofshallalsobe directorisapartnerora
madetogetherwiththe directororamemberto
aggregateamountof beseparatelystated.
suchloansundersuch Debtsduefromother
head.Thisdoesnot companiesunderthe
applytofixeddeposits) samemanagement
CurrentLiabilitiesand withinthemeaningof
Provisions: subsection(IB)of
A. CurrentLiabilities Section370tobe
1. Acceptances disclosedwiththe
2. Sundrycreditors namesofthe
(i) Total companies.
outstanding Themaximumamount
duesof duebydirectorsorother
smallscale officersofthecompany
industrial atanytimeduringthe
undertakings yeartobeshownbyway
(ii) Totaloutstanding ofanote.
duesofcreditors Theprovisiontobe
otherthansmall shownunderthishead
scaleindustrial shouldnotexceedthe
undertakings amountofdebtstated
3. Subsidiary tobeconsidered
companies doubtfulorbadandany
4. Advancepayments surplusofsuch
andunexpired provision,ifalready
discountsforthe createdshouldbe
portionforwhich shownateveryclosing
valuehasstilltobe underReservesand
given,i.e.,inthe Surplus(inliabilities
caseofthe side)underaseparate
following subheadReservefor
companies: DoubtfulorBadDebts.
Newspaper,Fire 7A.Cashbalanceon
insurance,Theatres, hand.
Clubs,Banking,Steam 7B.Bankbalance:
shipcompaniesetc. (a) Withscheduled
5. Unclaimed banks
dividends. (b) Withothers
6. Otherliabilities(if (inregardtobank
any) balancesparticularsto
7. Interestaccrued
butnotdueon begivenseparatelyof:
loans. (a) Thebalancelying
B. Provisions withscheduled
8. Provisionfor banksoncurrent
taxation accounts,call
9. Proposed accountsand
dividends depositaccounts
10. Forcontingencies (b) Thenamesofthe
11. Forprovidentfund bankersotherthan
scheme scheduledbanksand
12. Forinsurance, thebalanceslying
pensionandsimilar witheachsuch
staffbenefit bankerbankson
schemes currentaccounts,
13. Otherprovisions. callaccountsand
Afootnotetothe depositaccounts
balancesheetanybe andthemaximum
addedtoshow amountoutstanding
separately: atanytimeduring
1. Claimagainstthe theyearwitheach
companynot suchbankerand
acknowledgedas (c) Thenatureof
debts interest,ifany,ofany
2. Uncalledliabilityon directororhisrelative
sharespartlypaid. ineachofthe
3. Arrearsoffixed bankers(otherthan
cumulative scheduledbanks
dividends. referredtoin(b)
(theperiodforwhich above)
thedividendsarein (B) Loansand
arrearsorifthereis Advances:
morethanoneclassof 8.(a)advancesand
shares,thedividends loanstosubsidiaries
oneachsuchclassthat (b)Advancesand
areinarrearsshallbe loanstopartnership
sated.Theamountshall firminwhichthe
bestatedbefore companyoranyofits
deductionofincome subsidiariesisa
tax,exceptthatinthe partner.
caseoftaxfree 9.Billsofexchange
dividendstheamount 10.Advances
shallbeshownfreeof recoverableincash
incometaxandthefact orionkindorfor
thatitisshownshallbe valuetobereceived,
stated) e.g.,Rates,taxes,
4. Estimatedamountof insuranceetc.
contractsremaining 11.Balanceswith
tobeexecutedon customs,porttrust
capitalaccountand etc.(wherepayable
notprovidefor. ondemand)
5. Othermoneysfor [Theinstructions
whichthecompany regardingsundry
iscontingentlyliable. debtorsapplyto
Theamountofany loansand
guaranteesgivenbythe advancesalso.The
companyonbehalfof amountsduefrom
directorsorother othercompanies
officersofthecompany underthesame
shallbestatedand managementwithin
whereepracticable, themeaningofsub
thegeneralnatureand section(IB)ofsection
amountofeachsuch 370shouldalsobe
contingentliability,if givenwiththe
material,shallalsobe namesofcompanies;
specified) themaximum
amountduefrom
everyonethoseat
anytimeduringthe
yearmustbshown]
Miscellaneous
Expenditure
(Totheextentnot
writtenofforadjusted).
1. Preliminary
expenses
2. Expensesincluding
commissionor
brokerageor
underwritingor
subscriptionof
sharesor
debentures.
3. Discountallowedon
theissueofshares
ordebentures
4. Interestpaidoutof
capitalduring
construction(also
statingtherateof
interest).
5. Development
expenditurenot
adjusted.
6. Other
sums(specifying
nature)
ProfitandLossAccount
(Showherethedebit
balanceofprofitand
lossaccountcarried
forwardafterdeduction
oftheuncommitted
reserves,ifany).
VerticalForm
VerticalformofbalancesheetinsertsasPartBofPartIofScheduleVItotheCompanies
Act,1956byGSRNo.220(E)dated1231979isasfollows:
VERTICALFORM
NameoftheCompany..
BalanceSheetat
Schedule Figuresat Figuresatthe
No. theendof endof
current previous
financialyear financialyear
1 2 3 4
I. SourcesofFunds
(1) Shareholdersfunds:
(a) Capital
(b) ReservesandSurplus
(2) Loansfunds:
(a) Securedloans
(b) Unsecuredloans
Total
II. ApplicationofFunds
(1) Fixedassets:
(a) Grossblock
(b) Less:depreciation
(c) Netblock
(d) Capitalworkinprogress
(2) Investments
(3) Currentassets,loansand
advances
(a) Inventories
(b) Sundrydebtors
(c) Cashandbankbalances
(d) Othercurrentassets
(e) Loansandadvances
Less:
Currentliabilities&Provisions
(a) Currentliabilities
(b) Provisions
NetCurrentAssets
(4) (a)Miscellaneousexpenditureto
theextentnotwrittenoffor
adjusted
(b)ProfitandLossAccount
Total
InCompaniesAct,thereisnospecifiedformatforpreparationofProfitandLossAccount
ofcompanies.ItisnotrequiredtosplittheProfitandLossAccountintothreesections(Trading
Account,ProfitandLossAccountandProfitandLossAppropriationAccount).OnlytheProfitand
Loss Account is prepared which cover items appearing in Trading Account and Profit and Loss
AppropriationAccount.ButitisdesirabletosplittheProfitandLossAccountintothreesections
sothatGrossprofit,NetprofitandSurpluscarriedtobalancesheetmaybeascertain\ed.Under
thisTradingandProfitandLossAccountitemsarecalledasitemsabovethelineandtheProfit
and Loss Appropriation Account items are called as items below the line. The section of Profit
andLossAppropriationAccountispreparedinthefollowingmanner.
ToTransfertoReserves ByLastYearsBalanceb/d
ToIncometaxfor ByNetProfitfortheyearb/d
previousyearnot ByAmountwithdrawnfrom
providedfor GeneralReserveoranyOther
ToInterimdividend Reserves
ToProposeddividend ByProvisionsuchasincome
ToCorporateDividend taxprovisionnolonger
Tax required
ToSurplus(Bal.Fig)
carriedtoBalanceSheet
Thus the account showing the disposal of divisible profits is called Profit and Loss
AppropriationAccount.ThecreditbalanceofProfitandLossAppropriationAccountisshownon
the liability side of the Balance sheet under the head Reserves and Surplus. Debit balance is
shownontheassetssideofthebalancesheetundertheheadMiscellaneousexpenditure.
Illustration1
Fortheyearended31stDecember2011,theprofitofSunderLtd.beforechargingdepreciationon
fixed assets and managerial commission amounted to Rs.300000. De3preciatio for the year
charged Rs.60000 and a commission of 10% of profit(before charging such commission) was
payabletothemanager.
The paid up capital of the company consisted Rs.1000000 divided into 5000, 6%
preference shares of Rs.100 each and 50000 equity shares of Rs.10 each. Interim dividend at
Re.0.5persharewaspaidduringtheyear.TherewasacreditbalanceofRs.35000intheProfit
andLossAccountbroughtfromthepreviousyear.Tefollowingproposalswaspassed:
a. Topaytheyearsdividendonthepreferenceshares
b. TopayafinaldividendonequitysharesatRe.0.50persharetopmakeatotaldividendof
Re.1pershareforthatyear.
c. Toprovidefortaxation@50%onthenetprofit
d. TotransferRs.25000toGeneralReserve.
e. Tocarryforwardthebalance.
ShowtheProfitandLossAppropriationAccount.
Solution:
Netprofitbeforechargingdepreciationandmanagerialcommission 300000
LessDepreciation 60000
240000
LessManagerialcommission(10%) 24000
216000
LessProvisionfortaxation(50%) 108000
108000

ProfitandLossAppropriationAccount
ToTransfertoGeneral ByLastYearsBalanceb/d 35000
Reserves 25000 ByNetProfitfortheyearb/d 108000
ToInterimdividendpaid
onequityshares 25000
(50000x.50)
ToPreferencedividend 30000
(500000x6%)
Tofinaldividendpaidon 25000
equityshares(50000x.50)
ToSurplus(Bal.Fig) 38000
carriedtoBalanceSheet 143000 143000

DifferencebetweenReservesandProvisions
Reserves Provisions
1. Itisanappropriationofprofit.Hence 1. Itisachargeagainstprofit.
itisdebitedtoProfitandLoss HenceitisdebitedtoProfitand
AppropriationAccount LossAccount
2. Itneedsnotbecreatedwhenprofits
areinadequate. 2. Itmustbemadeirrespectiveof
3. Itisshownontheliabilitysideof whetherprofitorloss.
balancesheetunderthehead 3. Itisusuallyshownbywayof
ReservesandSurplus. deductionfromtheamountof
4. Itcanbeutilizedfordistributionof theitemforwhichitiscreated.
dividend. 4. Itcannotbeutilizedfor
distributionofdividend.
Provisionfortaxation
Incometax ispayable intheassessmentyear ontheincomeearnedduringtheprevious

year.Acompanywillestimatethetaxpayableforthecurrentaccountingperiodandonthisbasis
itwillmakeprovisionfortaxation.ProvisionfortaxationisdebitedtoProfitandlossAccountand
itwillappearontheliabilitysideofbalancesheetundertheheadProvisions.Whenassessment
completed,theprovisionfortaxwillbeadjusted. Iftheassessedtaxis morethantheprovision
made in the previous year, the excess has to be shown on the debit side of Profit and Loss
Appropriation Account. If the assessed tax is less than the opening provision, such excess
provisionshouldbecreditedtotheProfitandLossAppropriationAccount.
Dividend
Thedivisibleprofit(profitavailabletoshareholders)ofacompanyisdistributedamongthe
shareholdersofthecompanyonthebasisofnumberofsharesheld.Thisiscalleddividend.The
Board of Directors recommends the amount of dividend and the shareholders in their annual
generalmeetingdeclarethedividendrecommendedbytheBoardofDirectors.Dividendisusually
paidonpaidupcapital.
Proposeddividend
It is the dividend recommended by Board of Directors after the close of the books of
account.WhenitIapproverbytheshareholdersintheannualgeneralmeeting,itbecomesfinal
dividend.
Interimdividend
Interim dividend refers to the dividend paid by the company before the preparation of
finalaccounts.Itisdeclaredbetweentwoannualgeneralmeetings.
Finaldividend
Itisthedividendwhichisproposedanddeclaredattheendoftheaccountingyearafter
thecloseofthebooksofaccount.
Unclaimeddividend
Itreferstothedividendnotyetclaimedbytheshareholderswithin30daysofdeclaration
ofdividend.Itisshownasacurrentliabilityinthebalancesheet.
CorporateDividendTax(CDT)
Thecompaniesdistributingdividendarerequiredtopaytaxonsuchdividends.Itiscalled
Corporate Dividend Tax (CDT). CDT is payable on any amount declared, distributed or paid bya
company as dividend. At present, the rate of CDT is 16.995 %( 17%). Corporate Dividend Tax is
shown on the debit side of Profit and Loss Appropriation Account and on the liability side of
BalancesheetundertheheadCurrentliabilitiesandProvisions(Provisions).
TransfertoReserves
Generally,BoardofDirectorshasthediscretionarypowerregardingthetransferofprofit
to the reserve. However, as per Section 205(2A) of the Act, it is compulsory for a company to
transfercertainminimumamounttothereserveataratenotexceeding10%.Amountoftransfer
toreservedependsontherateatwhichdividendistobedeclaredasfollows:
i. Ifthedividendproposedexceeds10%butnotexceed12.5%ofthepaidupcapital,the
amounttobetransferredtothereserveshallnotbelessthan2.5%ofthecurrentprofits.
ii. Ifthedividendproposedexceeds12.5%butnotexceed15%ofthepaidupcapital,the
amounttobetransferredtothereserveshallnotbelessthan5%ofthecurrentprofits.
iii. Ifthedividendproposedexceeds15%butnotexceed20%ofthepaidupcapital,the
amounttobetransferredtothereserveshallnotbelessthan7.5%ofthecurrentprofits.
iv. Ifthedividendproposedexceeds20%ofthepaidupcapital,theamounttobetransferred
tothereserveshallnotbelessthan10%ofthecurrentprofits.
Illustration2
ThefollowingisthetrialbalanceoftheGoodHopeLtd.ason31stDecember2011.
DebtorsandCreditors 250000 200000
PurchasesandSales 647000 983500
Returns 4700 3500
FixedAssetsatcost 1597900
Promotionexpenses 13520
Sharecapital(Rs.100pershare) 1250000
Sinkingfund 250000
Reservefund 47600
BaddebtReserve 10000
Cash 17750
Manufacturingexpenses 21000
Wages 75000
Unclaimeddividends 1700
Interestoninvestments 11400
Depreciation 70000
Administrativeexpenses 34680
4%Debentures 300000
Interestondebentures 6000
Salesexpenses 8000
Baddebts 3400
Depreciationfund 202400
Billspayable 9300
ProfitandLossAccount 10600
Investments 350000
Sundryexpenses 1050
Stockon1stJanuary2011 130000
Goodwillatcost 50000
3280000 3280000
Adjustments:
a. ClosingstockamountedtoRs.137000
b. Maintainthereservefordebtors@5%
c. Writeoffpreliminaryexpenses.
d. AddRs.10000tosinkingfund
e. Providefordebentureinterest.
Solution:
GoodHopeLtd.
Fortheyearended31stDecember2011
ToOpeningstock 130000 BySales 983500
ToPurchases647000 less:Returns4700 978800
Less:Returns3500 643500 ByClosingstock 137000
ToManufacturingexpenses 21000
ToWages 75000
ToGrossProfitc/d 246300

ToPreliminaryexpenses ByGrossprofitb/d
1115800 ByInterestoninvestment 1115800
ToDepreciation 13520 246300
ToAdministrativeexpense 70000 11400
Interestondebentures6000 34680
Add:Outstanding6000
ToSalesexpense
12000
ToBaddebt3400 8000
Add:Newprovision12500
15900
Less:OldProvision10000
ToSundryexpenses
5900
ToNetprofitc/d 1050
112550

ToTransfertosinkingfund
257700 257700
ToSurpluscarriedtoB/S 10000 ByLastyearbalanceb/d 10600
113150 ByProfitfortheyear 112550
123150 123150
GoodHopeLtd.
BalanceSheet
Ason31stDecember2011
ShareCapital FixedAssets
12500sharesofRs.100each 1250000 Fixedassets 1597900
Reserves&Surplus Goodwill 50000
Sinkingfund250000 Investments 350000
Add:Additions10000 260000 CurrentAssets
Reservefund 47600 SundryDebtors250000
Depreciationfund 202400 Less:Provision12500 237500
P&LA/c 113150 Cash 17750
SecuredLoan Closingstock 137000
4%Debentures 300000 MiscellaneousExpenditure Nil
Unsecuredloan Nil
Currentliabilities&Provisions
Sundrycreditors 200000
Unclaimeddividend 1700
BillsPayable 9300
Debentureinterestoutstanding 6000
2390150 2390150
Illustration3
FollowingisthetrialbalanceofStandardLtdason31stMarch2011:
Stockon31stMarch2010 75000
Sales 350000
Purchases 245000
Wages 50000
Discount 5000
Furnitureandfittings 17000
Salaries 7500
Rent 4950
Sundryexpenses 7050
ProfitandlossappropriationAccounton31stMarch2010 15030
Dividendpaid 9000
Sharecapital 100000
Debtorsandcreditors 37500 17500
Plantandmachinery 29000
Cashandbank 16200
Reserve 15500
Patentandtrademark 4830
______ _______
503030 503030
______ _______
PrepareProfitandlossaccountfortheyearended31stMarch2011andbalancesheetas
onthatdateaftertakingintoconsiderationthefollowingadjustments:
a. Stockon31stMarch2011wasvaluedatRs.82000
b. Depreciationonfixedassets@10%
c. Makeaprovisionforincometax@50%
d. Providecorporatedividendtax@10%.

Solution:
StandardLtd
Fortheyearended31stMarch2011
ToOpeningstock 75000 BySales 350000
ToPurchases 245000 ByClosingstock 82000
ToWages 50000
ToGrossprofitc/d 62000
432000 432000
7500
ToSalaries 4950 ByGrossprofitb/d 62000
ToRent 7050 ByDiscount 5000
ToSundryexpenses
ToDepreciationon
plantandmachinery 2900
patentsandtrademark 483
furnitureandfittings 1700
ToprovisionforIncometax 21209
ToNetProfitc/d 21208
67000 67000
15030
ToDividendpaid 9000 ByBalanceb/d 21208
ToCorporatedividendtax 900 ByNetProfitforcurrentyear
(10%ofdividend9000)
ToBalancec/d(Surplus 26338
carriedtoBalancesheet) 36238 36238

BalanceSheetofstandardLtd
Ason31stMarch2011

ShareCapital 100000 Fixedassets:
Reserves&Surplus: Plantandmachinery29000
Reserve 15500 LessDepreciation2900 26100
ProfitandlossAccount 26338 Furnitureandfittngs17000
Current liabilities and LessDepreciation1700 15300
provisions: Patentsandtrademark4830
Creditors 17500 LessDepreciation483 4347
Provisionfortaxation 21209 Currentassets:
Corporatedividendtax 900 Stock 82000
Debtors 37500
Cashatbank 16200
181447 181447
Illustration4
PreparethefinalaccountsofJanakiLtd.fortheyearended31stMarch2011andtheBalance
sheetasonthatdate.Thebalancesinthebooksafterclosingthetradingaccountaregivenbelow:
Equitysharecapital(Authorizedandsubscribedin
sharesofRs.100each) 400000
8%PreferenceShareCapital(Authorizedand a.
200000 b.
subscribedinsharesofRs.100each)
c.
Plantatcost 300000
d.
Landandbuildingatcost 500000
e.
Depreciationupto31stMarch2010: f.
Onplant 100000 g.
Onlandandbuilding 150000 h.
Dividendequalizationreserve 10000 i.
Investmentinshares 200000 j.
Stock 70000 k.
60000 l.
Cashatbank
50000 m.
Debtors n.
ProfitandlossAccounton1stApril2010 25000
o.
Creditors 30000
p.
2200
Incometaxdeductedatsourceondividend q.
15000 r.
Establishmentexpenses
6000 s.
Rentsandtaxes
2500 t.
Auditfee(includingRs.1000paidforotherservices)
12000 u.
ManagingDirectorsminimumremuneration
2000 v.
Directorsfees
6000 w.
Sundryexpenses x.
10000
Dividend(Gross) 2300 y.
Miscellaneousreceipts 304400 z.
TradingAccountBalance 6000 aa.
Incometaxforpreviousyearnotprovidedfor bb.
1231700 1231700
cc.
1. Depreciationistobechargedonthewrittendownvalueofplant@10%andlandandbuilding
@5%.
2. Thedirectorsproposetorecommendadividendof15%onequityshares.
3. Provisionfortaxationistobemade@55%.
4. Themanagingdirectorisentitledto5%ofthenetprofitssubjecttoaminimumofRs.12000
perannum.
5. AsumofRs.15000istobetransferredtoDividendequalizationreserve.
6. Providecorporatedividendtax@10%.

Solution:

JanakiLtd
ToEstablishmentexpenses 15000 ByGrossprofitb/d 304400
ToRentandtaxes 6000 ByDividend 10000
ToauditorsFee: ByMiscellaneousreceipts 2300
Auditfee1500
Otherservices1000 2500
ToDirectorsfees 2000
ToSundryexpenses 6000
ToDepreciation:
Plant(200000x10%) 20000
Land&building
(350000x5%) 17500
ToMDsremuneration@5% 12385
ToProvisionfortaxation
(235315x55%) 129423
ToNetProfitc/d 105892
316700 316700
ToProposeddividend:
8%onpreferenceshare 16000 ByBalanceb/d 25000
capital ByNetProfitb/d 105892
15%onequityshare
capital 60000
ToCorporateDividendTax
(10%onproposeddividend) 7600
Totransfertodividend
EqualizationReserve 15000
Toincometaxforprevious
yearnotprovidedfor 6000
TosurpluscarriedtoB/S 26292
130892 130892

BalanceSheetofJanakiLtd
Ason31stMarch2011
ShareCapital Fixedassets:
Authorized, Subscribed and Land&Building500000
PaidupCapital: Less:Depreciation167500 332500
4000 Equity shares of Plant300000
Rs.100eachfullypaidup. 400000 LessDepreciation120000 180000
2000 Preference shares of Investmentsinshares 200000
Rs.100eachfullypaidup 200000 Currentassets,Loansand
Reserves&Surplus: Advances:
DividendEqualization A. Currentassets
Reserve(01.04.10)10000 Stock 70000
Providedforyear15000
ProfitandlossAccount 25000 Debtors 50000
Current liabilities and 26292 Cashatbank 60000
provisions: B. LoansandAdvances:
A. CurrentLiabilities: Incometaxdeductedat
Creditors source 2200
MDsremuneration 30000
payable(1238512000)
B. Provisions: 385
ProposedDividend 129423
Corporatedividendtax 76000
7600
894700 894700
Exercise:
1.AmulyaLtd.wasregisteredwithanauthorizedcapitalofRs.3000000inequitysharesofRS.10
st
each.Followingisthelistofbalancestakenfromitsbookson31

March2011:
Purchases 925000 Generalexpenses 84175
Wages 424325 Stockon1stApril2010 375000
Manufacturingexpenses 65575 Goodwill 100000
Salaries 70000 Cashinhand 28750
Baddebts 10550 Cashatbank 199500
Directorsfee 31125 Subscribedandfullypaid
Debentureinterestpaid 45000 capital 2000000
Preliminaryexpenses 25000 Profitandlossaccount(cr.) 72500
Callsinarrears 37500 6%debentures 1500000
Plantandmachinery 1500000 Sundrycreditors 290000
Premises 1650000 Billspayable 167500
Interimdividendpaid 187500 Sales 2075000
Furnitureandfixtures 35000 Generalreserve 125000
Sundrydebtors 436000
PrepareProfitandLossAccountfortheyearended31stMarch2011andtheBalancesheet
asonthatdateaftermakingthefollowingadjustments:
a. Depreciateplantandmachineryby10%.
b. Providehalfyearsinterestondebentures.
c. WriteoffRs.2500frompreliminaryexpenses.
d. MaketheprovisionforbadanddoubtfuldebtsRs.4250onsundrydebtors.
e. Stockon31stMarch2011wasRs.455000.
f. IgnoreCorporateDividendTax.
Ans:(GrossprofitRs.740100,NetprofitRs.297500,SurpluscarriedtobalancesheetRs.182500
andBalancesheettotalRs.4272500).

Module3
AMALGAMATIONOFCOMPANIES

There are many forms of business combinations to obtain the economies of large scale
productionortoavoidthecutthroatcompetition.Theyareamalgamation,absorption,external
reconstructionetc.
Thetermamalgamationisusedwhentwoormoreexistingcompaniesgointoliquidation
and a new company is formed to take over the business of liquidated companies. The term
absorption is used when an existing company takes over the business of one or more existing
companieswhichgointoliquidation.Inexternalreconstruction,oneexistingcompanygoesinto
liquidationandanewcompanyisformedtotakeovertheformercompany.

DefinitionsasperAccountingStandard14(AS14)
a. AmalgamationmeansanamalgamationpursuanttotheprovisionsoftheCompaniesAct
1956oranyotherstatutewhichmaybeapplicabletocompanies.
b. TransferorCompanymeansthecompanywhichisamalgamatedintoanothercompany.
c. TransfereeCompanymeansthecompanytowhicha6ransferorcompanyis
amalgamated.
d. Reservemeanstheportionofearnings,receiptsorothersurplusesofanenterprise
(whethercapitalorrevenue)appropriatedbythemanagementforageneraloraspecific
purposeotherthanprovisionfordepreciationordiminutioninthevalueofassetsorfora
knownliability.

TypesofAmalgamation
As per AS14 there are two types of amalgamation (1) Amalgamation in the nature of
mergerand(2)Amalgamationinthenatureofpurchase.

AmalgamationinthenatureofMerger(PoolingInterestMethod)
An amalgamation should be considered to be an amalgamation in the nature of merge
whenallthefollowingconditionsaresatisfied:
i. AlltheassetsandliabilitiesoftheTransferorCompanyorcompaniesbeforeamalgamationshould
becometheassetsandliabilitiesofthetransfereecompany.
ii. Shareholders holding not less than 90% of the face value of the equity shares of the transferor
company (excluding the proportion held by the transferee company) should become the
shareholdersofthetransfereecompany.
iii. The consideration payable to the above mentioned shareholders should be discharged by the
transferee company by the issue of the equity shares and cash can be payable in respect of
fractionalshares.
iv. The business of the Transferor Company/ companies is intended to be carried on by the
transfereecompany.
v. No adjustment is intended to be made to the book values of the assets and liabilities of the
Transferor Company/ companies when they are incorporated in the financial statements of
thetransfereecompanyexcepttoensureuniformityofaccountingpolicies.

Amalgamationinthenatureofpurchase
Anamalgamationshouldbeconsideredtobeanamalgamationinthenatureofpurchase,
whenanyoneormoreoftheconditionsspecifiedforamalgamationinthenatureofmergerisnot
satisfied.
DifferencebetweenAmalgamationinthenatureofmergerandAmalgamationinthenatureof
purchase
Merger Purchase
1. Thereisagenuinempooli9ngof 1. Onecompanyacquiresanother.Asa
assetsandliabilitiesofthetransferor consequencx3,theshareholdersofthe
companiesaswellastheshare transferorcompanynormallydonot
holdersinterest.Assuchthe continuetohaveaproportionateshare
shareholdersofallthetransferor intheequitymanagementofthe
companiesconti9nuetohave transfereecompany.
substantialorproportionatesharein
theequityormanagementof
TransfereeCompany. 2. Assets,liabilitiesandreservesofthe
2. Assets,liabilitiesandreservesofthe transferorcompanyarerecordedby
transferorcompanyarerecordedby thetransfereecompanyeitheratbook
thetransfereecompanyattheir valueoratvaluesrevisedonthebasis
bookvalues. oftheirfairvalues.
3. ThebalanceofP&LA/cofthe
3. ThebalanceofP&LA/cofthe transferorcompanyisnotincludedin
transferorcompanyaggregatedwith thebooksofthetransfereecompany.
thebalanceoftheP&LA/cofthe
transfereecompany. 4. OnlystatutoryreservesofTransferor
4. Allreserveswhethercapitalor Companyaretakeninthebooksof
revenue0ofTransferorCompanyare TransfereeCompanyinorderto
mergedintothereservesof preservetheiridentity.
TransfereeCompany. 5. Itmaynotbeintendedtocontinuethe
5. Itisalwaysintendedtocontinuethe businessofTransferorCompany.
businessoftransferorcompany. 6. AlltheassetsofTransferorCompany
6. AlltheassetsofTransferorCompany mayormaynotbecometheassetsof
becometheassetsofthetransferee thetransfereecompany.
company. 7. Purchaseconsiderationisusually
7. Purchaseconsiderationisusually valuedatthemarketpriceofthe
valuedattheparvalueoftheshares sharesissued.
issued.
PurchaseConsideration
Purchaseconsiderationistheamountwhichispaidbythetransfereecompanyforthe
purchasethebusinessofTransferorCompany.AsperAS14,considerationforamalgamation
meanstheaggregateofsharesandothersecuritiesissuedandthepaymentmadeintheformof
cashorotherassetsbythetransfereecompanytotheshareholdersofthetransferorcompany.
Purchaseconsiderationdoesnotincludeanypaymenttooutsidersincludingdebentureholders.
Thepurchaseconsiderationmaybecalculatedinthefollowingways:
1. LumpSumMethod:Whenthetransfereecompanyagreestopayafixedsumtothe
transferorcompany,itiscalledlumpsumpaymentofpurchaseconsideration.For
example,XLtdpurchasesthebusinessofYLtdforaconsiderationof1000000.
2. NetWorth(NetAssets)Method:Underthismethod,thenetworthoftheassetstaken
overbythetransfereecompanyistakenaspurchaseconsideration.Here,Purchase
consideration=AssetstakenoveratagreedvaluesLiabilitiestakenoveratagreedvalues.
Thefollowingpointsarenotedwhilecalculatingpurchaseconsiderationunderhismethod:
a. Cashbalanceisusuallyincludedinassets.Butifitisnottakenover,itwillnotbe
included.
b. Fictitiousassetsshouldneverbeadded.
c. Accumulatedprofitsandreservesshouldnotbeconsidered.
d. Thetermliabilitiesincludeallliabilitiestothirdparties.Buttradeliabilitiesinclude
onlytradecreditorsandbillspayable.
e. Thetermbusinesswillalwaysmeansboththeassetsandliabilities.
Illustration1
ThefollowingistheBalanceSheetofAmritaLtd
Sharecapital 60000 Goodwill 28000
Debentures 10000 Land&building 16000
Sundrycreditors 6000 Plant&Machinery 28000
Generalreserve 4000 Stock 16000
Profit&LossA/c 20000 Debtors 8000
Cash 2000
Preliminaryexpenses 2000
100000 100000
BangaloreLtdtakesoverthebusinessofAmritaLtd.thevalueagreedforvariousassets
are:GoodwillRs.22000,Land&BuildingRs.25000,PlantandMachineryRs.24000,StockRs.13000
andDebtorsRs.8000.BangaloreLtddoesnottakeovercashbutagreestoassumetheliabilityof
sundrycreditorsatRs.5000.Calculatethepurchaseconsideration.
Solution:
Calculationofpurchaseconsideration
Valueofassetstakenover:
Goodwill 22000
Land&Building 25000
PlantandMachinery 24000
Stock 13000
Debtors 8000
92000
Less:Liabilitiestakenover:
Debentures 10000 15000
Purchaseconsideration 77000
3. NetPaymentmethod:Underthismethod,purchaseconsiderationistheaggregateofall
paymentsintheformofcash,shares,securitiesetc.totheshareholdersofthetransferor
companybythetransfereecompany.Thefollowingpointsareconsideredwhilecalculating
purchaseconsiderationunderthismethod:
a. Theassetsandliabilitiestakenoverbythetransfereecompanyarenotconsidered.
b. Purchaseconsiderationincludesthepaymentstoshareholdersonly.
c. Anypaymentsmadebythetransfereecompanytosomeotherpartyonbehalfofthe
transferorcompanyaretobeignored.
Illustration2
ThebalancesheetofJayLtdason31March2011isasfollows:
Sharecapital 200000 Goodwill 40000
Generalreserve 35000 Land&building 90000
Profit&LossA/c 20000 Plant&Machinery 75000
Debentures 50000 Stock 52000
Sundrycreditors 25000 Debtors 58000
Cash 15000
330000 330000
JayLtddecidestoamalgamateintoanewcompanyNewLtdwhichwilltakeoverthe
assetsandliabilitiesofJayLtdinthetermthatholdersofeachshareofRs.10inthecompany
wouldreceiveoneshareofRs.10each,Rs.5paidupandRs.4incash.Theliquidationexpenseof
Rs.5000ismetbyNewLtd.calculatepurchaseconsideration.
Solution:
HolderofeachshareofRs.10eachwillgetoneshareofRs.10eachRs.5paidup=100000
HolderofeachequitysharewillgetRs.4incash(2000x4) =80000
Purchaseconsideration =180000
(Note:Liquidationexpenseisnotincludedinpurchaseconsideration)
4. Share exchange or Intrinsic value Method: Under this method purchase consideration is
calculatedonthebasisofintrinsicvalueofshares.Theintrinsicvalueofashareiscalculated
by dividing g the net assets available le for equity shareholders by the number of equity
shares.Thisvaluedeterminestheratioofexchangeofthesharesbetweenthetransfereeand
transferorcompanies.
Stepsinaccountingprocedureofamalgamation,absorptionandexternalreconstruction
a. Calculationofpurchaseconsideration.
b. Ascertainmentofdischargeofpurchaseconsideration.
c. Closingthebooksoftransferorcompanies.
d. Passingopeningentriesinthebooksofpurchasingortransfereecompany.
Accountingentriesinthebooksoftransferorcompany
1. FortransferringassetstoRealizationA/c:
RealizationA/c Dr
ToAssetsA/c (individuallyatbookvalue)
(Note:(a).FictitiousassetsshouldnotbetransferredtoRealizationA/c(b).Ifcashinhandand
bankarenottakenoverbytransfereecompanyshouldnotbetransferredtoRealizationA/c.But
itcanbetakenasopeningbalanceofcashorbankA/cand(c).Otherassets,eveniftheyarenot
takenover,shouldbetransferredtoRealizationA/c)
2. Fortransferringliabilities(outsideliabilitiesonly)toRealizationA/c:
LiabilitiesA/c Dr(individuallyatbookvalue)
ToRealizationA/c
(Note:(a).Ifanyliabilityisnottakenoverbytransfereecompanyshouldnotbetransferredto
RealizationA/c,(b).ItemsinthenatureofprovisionsaretobetransferredtoRealizationA/cand
(c).Anyfundwhichdenotesbothliabilityandreserve,theportionofliabilityshouldbetransferred
toRealizationA/c).
3. Forpurchaseconsiderationduefromtransfereecompany:
TransfereeCompanyA/c Dr
ToRealizationA/c
4. Onreceivingordischargingpurchaseconsideration:
EquitysharesinTransfereecompanyA/c Dr
PreferencesharesinTransfereecompanyA/c Dr
DebenturesinTransfereecompanyA/c Dr
Cash/BankA/c Dr
ToTransfereecompanyA/c
5. Forsaleofassetsnottakenoverbytransfereecompany:
Cash/BankA/c Dr(Saleproceeds)
ToRealizationA/c
6. Fordischargingliabilitiesnottakenoverbytransfereecompany:
LiabilityA/c Dr
RealizationA/c Dr(ifexcessamountpaid)
ToCash/BankA/c
ToRealizationA/c (Iflesspaymentismade)
7. Forliquidation(realization)expenses:
a. Ifliquidationexpensesaremetbytransferorcompany.
RealizationA/c Dr
ToCash/BankA/c
b. Ifliquidationexpensesaremetbytransfereecompany.
Noentryisrequired.
8. Forclosingpreferencesharecapital:
PreferencesharecapitalA/c Dr
RealizationA/c Dr(ifexcessamountpaid)
ToPreferenceshareholdersA/c
ToRealizationA/c (iflessamountpaid)
9. ForpayingoffPreferenceshareholders:
PreferenceshareholdersA/c Dr
ToPreferencesharesinTransfereecompanyA/c
ToCash/BankA/c(ifany)
ToDebenturesA/c(ifany)
10. Fortransferringequitysharecapital,reservesetc.
EquitysharecapitalA/c Dr
GeneralreserveA/c Dr
P&LA/c Dr
DividendequalizationreserveA/c Dr
SecuritypremiumA/c Dr
ToequityshareholdersA/c
11. Fortransferringfictitiousassets:
EquityshareholdersA/c Dr
ToP&LA/c
Topreliminaryexpenses
ToDiscount/expenseonissueofshares/debentures
12. ForclosingRealizationA/c:
a. Forlossonrealization(ifdebit>credit).
ToRealizationA/c
b. Forprofitonrealization(ifcredit>debit).
RealizationA/c Dr
ToEquityshareholdersA/c
13. Forpaymenttoequityshareholders:
ToEquitysharesinTransfereecompanyA/c
ToCash/BankA/c(ifany)
Afterpaymenttoequityshareholders,allaccountsinthebookoftransferorcompanywill
beclosed.
Accountingentriesinthebooksoftransfereecompany
(Amalgamationinthenatureofpurchase)
1. Forpurchaseconsiderationdueandassetsandliabilitiestakenover:
AssetsA/c Dr(Atrevised,otherwiseatbookvalue)
GoodwillA/c Dr(ifcredit>debit)
ToLiabilitiesA/c (Atrevised,otherwiseatbookvalue)
ToLiquidatoroftransferorcompany(purchaseconsideration)
ToCapitalreserve(ifdebit>credit)
2. Forpaymentofpurchaseconsideration:
LiquidatoroftransferorcompanyA/c Dr
ToSharecapitalA/c
ToDebentureA/c
ToBankA/c
(Note:ifsharesareissuedatpremium,securitypremiumA/ciscreditedwithpremium.If
sharesareissuedatdiscount,discountonissueofsharesA/cisdebitedwithdiscount).
3. Forpaymentofliquidationexpensesbytransfereecompany:
Goodwill/Capitalreserve/P&LA/c Dr
ToCash/BankA/c
4. Forpaymentofformationexpenses:
PreliminaryexpensesA/c Dr
ToCash/BankA/c
5. IftherearebothGoodwillandCapitalreserveA/c,GoodwillmaybesetoffagainstCapital
reserve:
CapitalReserveA/c Dr
ToGoodwillA/c
6. Ifanyliability(includingdebenture)isdischargedbytransfereecompany:
LiabilityA/c Dr(Amountpayable)
ToSharecapital/Debenture/BankA/c
7. TorecordStatutoryReservesoftransferorcompany:
AmalgamationAdjustmentA/c Dr
ToStatutoryReserveA/c
(Note:AmalgamationadjustmentA/cisshownontheassetssideofthecompanys
BalanceSheetundertheheadMiscellaneousExpenditure).
Illustration3
XLtdacquiredthebusinessofYLtdon31March2011forapurchaseconsiderationofRs.
55000tobepaidbyfullypaidequitysharesofRs.10each.Thebalancesheetsofboththe
companiesonthedateofacquisitionwereasfollows:

XLtd YLtd XLtd YLtd
EquitysharesofRs.10 Land&Building 21500 13500
each 55000 32500 Plant&Machinery 40000 25000
10%Preferenceshares .. 6000 Furniture 7500 5000
ofRs.10each Investment 12500 8000
GeneralReserve 17000 11000 Inventories 25000 22500
Development .. 4000 SundryDebtors 8500 5000
AllowanceReserve Cash&Bank 3000 1500
P&LA/c 7000 5000 AdvanceTax 3500 3000
Workmen
CompensationFund 3000 1500
10%Debentures 20000 10000
Fixed 7500 5000
Deposit(unsecured) 5000 5500
Sundrycreditors 3000 ..
BillsPayable 4000 3000
Provisionfortax 121500 83500 121500 83500
Debenture holders of Y Ltd will be issued equity shares in X Ltd. Journalize the
transactions in the books of X Ltd sand the Balance sheet after amalgamation assuming
thattheamalgamationisinthenatureofpurchase.Alsogivejournalentriesinthebooks
ofthetransferorcompanytoclosethebooks.
Solution:
InthebooksofYLtd(Transferorcompany)
Closingentries

RealizationA/c Dr 83500
ToLand&BuildingA/c 13500
ToPlant&MachineryA/c 25000
ToFurnitureA/c 5000
ToInvestmentA/c 8000
ToInventoriesA/c 22500
ToSundryDebtorsA/c 5000
ToCash&BankA/c 1500
ToAdvanceTaxA/c 3000
(transferofvariousassetstoRealizationA/c)
FixedDepositA/cDr 5000
SundrycreditorsA/cDr 5500
ProvisionfortaxA/cDr 3000
ToRealizationA/c 23500
(transferofvariousliabilitiestoRealizationA/c)
XLtdA/c Dr
ToRealizationA/c 55000
(purchaseconsiderationduefromXLtd) 55000
EquitySharesinXLtdA/cDr
ToXLtdA/c 55000
(purchaseconsiderationreceived) 55000
10%PreferencesharecapitalA/c Dr 6000
ToPreferenceshareholdersA/c 6000
(amountpayabletoPreferenceshareholders
PreferenceshareholdersA/c Dr 6000
ToEquitySharesinXLtdA/c 6000
(distributionofequitysharesreceivedfromX
Ltd) 32500
EquitysharecapitalA/c Dr 11000
GeneralreserveA/c Dr 4000
DevelopmentAllowancereserveA/cDr 5000
P&LA/c Dr 1500
WorkmencompensationFundA/cDr 54000
ToequityshareholdersA/c
(transferofequityshareholdersfunds) 5000
EquityshareholdersA/c Dr 5000
ToRealizationA/c
(transferoflossonrealization) 49000
EquityshareholdersA/c Dr 49000
ToEquitysharesinXLtdA/c
(distributionofequitysharesreceivedfromX
Ltd)
RealizationA/c
ToLand&BuildingA/c 13500 By10%DebenturesA/c 10000
ToPlant&MachineryA/c 25000 ByFixedDepositA/c 5000
ToFurnitureA/c 5000 BySundrycreditorsA/c 5500
ToInvestmentA/c 8000 ByProvisionfortaxA/c 3000
ToInventoriesA/c 22500 ByXLtd(PC)A/c 55000
ToSundryDebtorsA/c 5000 ByEquityshareholdersA/c 5000
ToCash&BankA/c 1500 (realizationloss)Bal.figure
ToAdvanceTaxA/c 3000
83500 83500
XLtdA/c
ToRealisationA/c 55000 ByEquitysharesinXLtd.A/c 55000
55000 55000
PreferenceshareholdersA/c
ToEquitysharesinXLtdA/c 6000 By10%Preferencesharecapital 6000
6000 A/c 6000

EquityshareholdersA/c
ToRealisationA/c(loss) 5000 ByEquitysharecapitalA/c 32500
ToEquitysharesinXLtd.A/c 49000 ByGeneralreserveA/c 11000
ByDevelopmentAllowance 4000
reserve
ByP&LA/c 5000
ByWorkmencompensationFund 1500
A/c
54000 54000
OpeningEntriesinthebooksofXLtd(TransfereeCompany)
Land&BuildingA/cDr 13500
Plant&MachineryA/cDr 25000
FurnitureA/cDr 5000
InvestmentA/cDr 8000
InventoriesA/cDr 22500
SundryDebtorsA/cDr 5000
Cash&BankA/cDr 1500
AdvanceTaxA/cDr 3000
ToFixedDepositA/c 5000
ToSundrycreditorsA/c 5500
ToProvisionfortaxA/c 3000
ToLiquidatorsofYLtdA/c 55000
ToCapitalReserve(Bal.figure) 5000
(purchaseconsiderationdueandassetsand
liabilitiestakenover)
LiquidatorsofYLtdA/c Dr
ToEquitySharecapitalA/c 55000
(paymentofpurchaseconsiderationinequity 55000
shares)
10%DebenturesA/c Dr
(dischargeofdebenturesbyissuingequity 10000
shares)
AmalgamationAdjustmentA/cDr
ToDevelopmentAllowancereserveA/c 5500
ToWorkmencompensationFundA/c 4000
(statutoryreservesincorporated) 1500

BalanceSheetofXLtdason1April2011(afteramalgamation)
12000equitysharesof Land&Building 35000
Rs.10Each 120000 Plant&Machinery 65000
Reserves&Surplus Furniture 12500
CapitalReserve 5000 Investments 20500
GeneralReserve 17000 CurrentAssets
DevelopmentAllowance Inventories 47500
reserve 4000 SundryDebtors 13500
Workmencompensation Cash&Bank 4500
Fund 4500 AdvanceTax 6500
P&LA/c 7000 MiscellaneousExpenditure
SecuredLoan AmalgamationAdjustmentA/c 5500
10%Debentures 20000
Unsecuredloan
FixedDeposit 12500
Currentliabilities&
Provisions
BillsPayable 3000
Provisionfortax 7000
210500 210500
Accountingentriesinthebooksoftransfereecompany
(Amalgamationinthenatureofmerger)
1. Forpurchaseconsiderationdueandassetsandliabilitiestakenover:
AssetsA/c Dr(Individuallyatbookvalue)
ToLiabilitiesA/c (Individuallyatbookvalue)
ToReservesofTransferorCompanyA/c
ToP&LA/c
ToLiquidatoroftransferorcompanyA/c(purchaseconsideration)
(Note:ThedifferencebetweendebitandcreditisadjustedinthereservesofTransferee
Company)
2. Forpaymentofpurchaseconsideration:
LiquidatoroftransferorcompanyA/c Dr
ToSharecapitalA/c
ToDebentureA/c
ToBankA/c
(Note:ifsharesareissuedatpremium,securitypremiumA/ciscreditedwithpremium.
Ifsharesareissuedatdiscount,discountonissueofsharesA/cisdebitedwith
discount).
3. Paymentofliquidationexpensebytransfereecompany:
GeneralReserve/P&LA/c Dr
ToCash/BankA/c
4. Forthepaymentofformationexpenses:
PreliminaryexpensesA/c Dr
ToCash/BankA/c

Illustration4
ThefollowingisthesummarizedBalancesheetofMoonLtdason31March2012.
Rs.10Each 400000 Plant&Machinery 100000
CapitalReserveA/c 180000 Investments
P&LA/c 60000 CurrentAssets
SecuredLoan Stock 40000
10%Debentures 200000 SundryDebtors 60000
Currentliabilities& Bank 300000
Provisions Cash 80000
860000 860000
On1April2012SunLtdtookoverthebusinessofMoonLtdasperthefollowingterms:
a. Debenturesaretobedischargedatapremiumof5%inSunLtd.
b. CreditorsaretobepaidoffbySunLtd.
c. SunLtdwillissue5equitysharesofRs.10eachatamarketvalueofRs.11forevery4
equitysharesofMoonLtd.
d. CostofliquidationRs.10000istobepaidbySunLtd.
ClosethebooksofMoonLtdandpassopeningentriesinthebooksofSunLtdassumingthatthe
amalgamationsinthenaturefmerger.
Solution:
Purchaseconsideration(inEquityshares)=40000x5/4x11=Rs.550000
InthebooksofMoonLtd.
RealisationA/c
ToLand&BuildingA/c 200000 By10%DebenturesA/c 200000
ToPlant&MachineryA/c 100000 BySundrycreditorsA/c 20000
ToFurnitureA/c 80000 BySunLtd(PC) 550000
ToStockA/c 40000 ByEquityshareholdersA/c 90000
ToSundryDebtorsA/c 60000 (realisationloss)Bal.figure
ToBankA/c 300000
ToCashA/c 80000
860000 860000
SunLtdA/c
ToRealisationA/c 550000 ByEquitysharesinSunLtd. 550000
550000 550000
EquitySharesinSunLtdA/c
ToSunLtdA/c 550000 ByEquityshareholdersA/c 550000
550000 550000

EquityshareholdersA/c
ToRealisationA/c(loss) 90000 ByEquitysharecapitalA/c 400000
ToEquitysharesinSunLtd. 550000 ByCapitalReserveA/c 180000
ByP&LA/c 60000
640000 640000
EntriesInthebooksofSunLtd
Land&BuildingA/c Dr 200000
FurnitureA/cDr 80000
StockA/cDr 40000
BankA/cDr 300000
CashA/cDr 80000
ToSundrycreditorsA/c 20000
ToCapitalReserveA/c(Bal.Fig) 30000
ToP&LA/c 60000
ToLiquidatorsofMoonLtdA/c 550000
LiquidatorsofMoonLtdA/c Dr 550000
ToSecurityPremiumA/c 50000
(paymentofpurchaseconsiderationin50000
equitysharesofRs.10atRs.11)
PremiumonRedemptionofDebenturesA/cDr 10000
ToBankA/c 210000
(dischargeofdebenturesat5%premium)
CapitalReserveA/c Dr 10000
ToPremiumonRedemptionof
DebenturesA/c 10000
(PremiumonRedemptionofDebentures
adjusted)
CapitalReserveA/cDr 10000
ToBankA/c 10000
(liquidationexpensespaid)
WorkingNote:CalculationofReserve:
Purchaseconsideration 550000
Less:SharecapitalofMoonLtd 400000
Differencetobeadjusted 150000
CapitalReserveinMoonLtd 180000
Less:Differenceadjusted 150000
BalanceofCapitalReserve 30000
Illustration5
ALtdacquiredthebusinessofBLtdon31March2012forapurchaseconsiderationof
Rs.2,50,00,000tobepaidbyfullypaidequitysharesofRs.10each.Thebalancesheetsof
twocompaniesonthedateofacquisitionwereasfollows:

ALtd BLtd ALtd BLtd
Equitysharesof Land&Building 12000000 8000000
Rs.10eachfully Plant&Machinery 20000000 18000000
paid 25000000 15000000 Furniture 1000000 2000000
GeneralReserve 12000000 1800000 Stock 5500000 4000000
Development SundryDebtors 4500000 4000000
RebateReserve 1000000 3700000 Bank 2000000 1700000
P&LA/c 1000000 5300000
Workmen
Compensation
Fund 1500000 2400000
CurrentLiabilities 4500000 9500000
45000000 37700000 45000000 37700000
PassthenecessaryjournalentriesinthebooksofALtdwhenamalgamationisin
thenatureof(i)mergerand(ii)purchase.
AlsopreparetheBalancesheetofALtdafteramalgamationassumingthatDevelopment
RebateReserveandWorkmenCompensationFundofBLtdarerequiredtobecontinuedin
thebooksofALtd.
Solution:
(i) Whenamalgamationisinthenatureofmerger:
EntriesinthebooksofALtd.
2012 Land&BuildingA/cDr 8000000
Mar Plant&MachineryA/cDr 18000000
31 FurnitureA/cDr 2000000
StockA/cDr 4000000
BankA/cDr 1700000
GeneralReserveA/c(Bal.Fig)Dr 2900000
ToDevelopmentRebateReserveA/c 3700000
ToWorkmenCompensationFundA/c 2400000
ToCurrentliabilitiesA/c 9500000
ToLiquidatorsofBLtdA/c 25000000
LiquidatorsofBLtdA/c Dr 25000000
(paymentofpurchaseconsiderationinequity
shares)

BalanceSheetofALtdason1April2012(afteramalgamation)
Rs.10Each,fullypaidup 50000000 Plant&Machinery 38000000
GeneralReserve 9100000 CurrentAssets
DevelopmentRebate 4700000 Stock 9500000
Reserve 3900000 SundryDebtors 8500000
WorkmenCompensation Bank 3700000
Fund 1000000
P&LA/c 14000000
Currentliabilities 82700000 82700000
(ii) Whenamalgamationisinthenatureofpurchase:
EntriesinthebooksofALtd.
2012 Land&BuildingA/c Dr 8000000
Mar Plant&MachineryA/cDr 18000000
31 FurnitureA/c Dr 2000000
StockA/c Dr 4000000
BankA/cDr 1700000
ToCurrentliabilitiesA/c 9500000
ToLiquidatorsofBLtdA/c 25000000
ToCapitalReserveA/c(Bal.Fig)
3200000


LiquidatorsofBLtdA/c Dr
25000000
ToEquitySharecapitalA/c
25000000
(paymentofpurchaseconsiderationinequity

shares)

AmalgamationAdjustmentA/cDr
ToDevelopmentRebateReserveA/c 6100000
ToWorkmencompensationFundA/c 3700000
(statutoryreservesincorporated) 2400000
BalanceSheetofALtdason1April2012(afteramalgamation)
CapitalReserve 3200000 CurrentAssets
GeneralReserve 12000000 Stock 9500000
DevelopmentRebate 4700000 SundryDebtors 8500000
Reserve Bank 3700000
WorkmenCompensation MiscellaneousExpenditure
Fund 3900000 AmalgamationAdjustmentA/c 6100000
P&LA/c 1000000
Currentliabilities 14000000
88800000 88800000
Illustration6
ALtdagreestoselltheirundertakingtoBLtdonthefollowingterms.BLtdwillpaythem
Rs.600000incashandallotthemtwofullypaidshareofRs.6each(marketvalueRs.7.50per
share)inexchangeofeverythreesharesintheirowncompany.TheBalancesheetofALtdon
thedateofamalgamationstoodasfollows:
Reserves&Surplus CurrentAssets
GeneralReserve 360000 Stock 273450
P&LA/c 34168 SundryDebtors 229500
Creditors 132500 Bank 74280
Cash 738
1246668 1246668
AltdwillpaytheirliquidationexpensesthemselveswhichamountedtoRs.9000.closethe
booksofALtdandgiveopeningentriesinthebooksofBLtdassumingthattheamalgamationis
inthenatureofpurchase.
Solution:
Incash 600000
Inequityshares(120000x2/3x7.50) 600000
PurchaseConsideration 1200000
ClosingentriesinthebooksofALtd
RealisationA/c Dr 1246668
ToLand&BuildingA/c 450000
ToStockA/c 273450
ToSundryDebtorsA/c 229500
ToBankA/c 74280
ToCashA/c 738
(transferofvariousassetstoRealisationA/c)
SundrycreditorsA/cDr 132500
ToRealisationA/c 132500
(transferofsundrycreditorstoRealisationA/c)
BLtdA/c Dr 1200000
ToRealisationA/c 1200000
(purchaseconsiderationduefromBLtd)
CashA/cDr 600000
EquitySharesinBLtdA/cDr 600000
ToBLtdA/c 1200000
(purchaseconsiderationreceived)
EquitysharecapitalA/c Dr 720000
GeneralreserveA/c Dr 360000
P&LA/c Dr 34168
ToequityshareholdersA/c 1114168
(transferofequityshareholdersfunds)
RealisationA/cDr 9000
ToCashA/c 9000
(liquidationexpensespaid)
RealisationA/cDr 76832
ToEquityshareholdersA/c 76832
(transferofprofitonrealisation)
EquityshareholdersA/cDr 1191000
ToEquitysharesinBLtdA/c 600000
ToCashA/c 591000
(distributionofequitysharesandcash
received)
OpeningentriesinthebooksofBLtd
Land&BuildingA/cDr 450000
StockA/cDr 273450
BankA/cDr 74280
CashA/cDr 738
GoodwillA/c(Bal.Fig)Dr 85832
ToSundryCreditorsA/c 132500
ToLiquidatorsofALtdA/c 1200000
LiquidatorsofALtdA/c Dr 1200000
ToCashA/c 600000
(paymentofpurchaseconsideration)
ACCOUNTINGFORINTERNALRECONSTRUCTION
There are two types or reconstruction, namely external reconstruction and internal
reconstruction.Inexternalreconstruction,anewcompanyisformedtotakeovertheassetsand
liabilitiesofanexistingcompanywhichgoesintoliquidation.Butininternalreconstruction,there
willbeneitherliquidationofanexistingcompanynorformationofanewcompany.
Internalreconstructionmeansaninternalrearrangementthatgivesanewlooktothecapital
structure,adjuststherightsofshareholders,debentureholdersandcreditorsalongwithsome
adjustmentsinthevaluesofassetsandwritingofffictitiousassets.Internalreconstructionmaybe
doneduetotheaccumulatelosses,shortageofworkingcapital,overvaluationofassetsetc.
DifferencebetweenInternalreconstructionandExternalreconstruction
Internalreconstruction Externalreconstruction
1. Thecompanydoesnotlossits 1. Thecompanylossesitsidentity
identity 2. Thenewlyformedcompanytakes
2. Theovervaluedassetsarerevalued overtheassetsandliabilitiesofthe
attheirnetworthandthelosses liquidatedcompanyatagreed
writtenoff. values.
3. Nonewcompanyisformednoris 3. Anewcompanyisformedinplace
anyexistingcompanyliquidated.It oftheoldcompany.
istheinternalmatterofasingle
company. 4. Thesepartieswillhavetobe
4. Debentureholds,creditorsandbank settled.
overdraftmaycontinue.
FormsorMethodsofInternalreconstruction
1. Alterationofsharecapital.
2. Reductionofsharecapital.
3. Variationofshareholdersrights.
4. Schemeofcompromise.
AlterationofShareCapital
AccordingtoSec.94oftheCompaniesAct,alimitedcompanycan,ifauthorizedbyits
articlesofassociation,alterthecapitalclauseofitsmemorandumofassociationinanyofthe
followingways.
a. Byincreasingitssharecapitalbyissueofnewshares.
b. Byconsolidatingexistingsharesofsmalleramountsintosharesoflargeramo9unts.
c. Bysubdividingtheexistingshareintosharesofsmalleramounts.
d. Byconvertingfullypaidsharesintostock0orstockintofullypaidshares.
Accountingentriesforalterationofcapital
a. Forincreasingitssharecapital
i. BankA/c Dr
ToShareApplication&AllotmentA/c
ii. ShareApplication&AllotmentA/c Dr
ToShareCapitalA/c
b. Forconsolidationofshares:
ShareCapital(old)A/c Dr
ToShareCapital(New)A/c

c. Forsubdivisionofshares:
d. Forconversionofsharesintostock:
ShareCapitalA/c Dr
ToStockA/c
e. Forconversionofstockintoshares:
StockA/c Dr
ToShareCapitalA/c
Illustration7
ALtdhavingasharecapitalofRs.500000dividedinto5000sharesofRs.100each,resolvesto
subdividethesharesinto50000sharesofRs.10each.Passthejournalentry.
Solution
ShareCapital(Rs.100)A/c Dr 500000
ToShareCapital(Rs.10)A/c 500000
Illustration8
XLtdresolvestoconvertits50000equitysharesofRs.10eachfullypaidintoRs.500000worthof
equitystock.Journalizethetransaction.
Solution:
EquityShareCapitalA/c Dr 500000
ToEquityStockA/c 500000
Illustration9
BLtdhavinganequitysharecapitalofRs.100000dividedinto10000sharesofRs.10eachresolves
toconsolidatethesharesinto1000sharesofRs.100each.Passthejournalentry.
Solution:
EquityShareCapital(Rs.10)A/c Dr 100000
ToEquityShareCapital(Rs.100)A/c 100000
ReductionofShareCapital
Reductionofcapitalisunlawfulexceptwhensanctionedbythecourtbecause
conservationofcapitalisoneofthemainprinciplestheCompanyAct.Inordertoreducethe
sharecapital,thecompanymustbeauthorizedbyitsarticlesofassociation,aspecialresolution
mustbepassedatgeneralmeeting,andconfirmationofcourtetc.isrequired.Acompanycan
reduceitssharecapitalbyanyofthefollowingways:
a. Byreducingtheliabilityoftheshareholdersforuncalledcapital.
b. Bypayingoffthesurpluscapital.
c. Byreducingpaidupcapitalwhichisnotrepresentedbyavailableassets.
Accountingentriesforreductionofsharecapital
a. Forreducingtheliabilityinrespectofuncalledcapital:
b. Forpayingoffsurpluscapital:
i. ShareCapitalA/c Dr
ToShareholdersA/c
ii. ShareholdersA/c Dr
ToBankA/c
c. Forreducingorcancellingpaidupcapitalwhichisnotrepresentedbyavailableassets:
i. Forreducingpaidupcapitalbychangingitsfacevalue:
ToCapitalReductionA/c
ii. Forreducingpaidupcapitalwithoutchangingitsfacevalue:
ShareCapitalA/c Dr(amountofreducedcapital)
CapitalReductionAccount
CapitalReductionAccountisanewaccountopenedfortransferringthatpartofcapital
whichislostornotrepresentedbytheassets.Itisatemporaryaccountopenedforcarryingout
internalreconstruction.Thisaccountwillbeclosedassoonastheschemeiscarriedout.The
balanceinCapitalReductionA/ccanbeusedtowriteofffictitiousassets,pastlossesandexcess
valueofassets.Theentryisasfollows:
CapitalReductionA/c Dr
ToP&LA/c(Debitbalance)
ToGoodwillA/c
ToPreliminaryExpensesA/c
Todiscountonissueofshares/debenturesA/c
ToPatents/TrademarksA/c
ToPlant&MachineryA/c
TootherAssetsA/c
ToCapitalReserveA/c(Bal.Fig)
Illustration10
ThefollowingisthebalancesheetofBrahmaLtdason31March2011.
Liabilities Amount Assets Amount
5000EquitysharesofRs.100 Plant&Machinery 173000
eachfullypaid 500000 Patents 850000
750010%Preferenceshares Stockintrade 55000
ofRs.100eachfullypaid 750000 Sundrydebtors 77000
Sundrycreditors 50000 Profit&LossA/c 145000
1300000 1300000
Thecompanysufferedlossesandthefollowingschemewasadopted:
i. EquitysharesaretobereducedtoanequalnumberofsharesofRs.25each.
ii. ThepreferencesharestobereducedtoanequalnumberofsharesofRs.50each.
iii. TheamountavailabletobeusedtowriteoffRs.39240ofplantandmachineryand
Rs.15000ofstockintrade.
iv. MadeaprovisionofRs.15300fordoubtfuldebt.
v. Thebalancebeingusedtowriteoffpatents.
Journalisethetransactionsandpreparethebalancesheetafterreconstruction.
Solution:
Journal
2011 EquityShareCapital(Rs.100)A/c Dr 500000
Mar ToEquityShareCapital(Rs.25)A/c 125000
31 ToCapitalReductionA/c 375000
(reductionofequitysharecapitaltoRs.25
each)
10%PreferenceShareCapital(Rs.100)A/cDr 750000
ToPreferenceShareCapital(Rs.50)A/c 375000
ToCapitalReductionA/c 375000
(reductionofpreferencesharecapitalto
Rs.50)
CapitalReductionA/c Dr 750000
ToP&LA/c 145000
ToStockintradeA/c 15000
ToProvisionfordoubtfuldebtsA/c 15300
ToPatents(Bal.Fig) 535460
(utilizationofcapitalreductionA/c)
BalanceSheetason1April2011(afterreconstruction)
5000Equitysharesof Plant&Machinery(173000 133760
Rs.25eachfullypaid 125000 39240) 314540
750010%Preferenceshares Patents(850000535460) 40000
ofRs.50eachfullypaid 375000 Stockintrade(5500015000) 61700
Sundrycreditors 50000 Sundrydebtors(7700015300)
550000 550000
Illustration5
ThefollowingisthebalancesheetofJayRamLtdason31March2011
10000EquitysharesofRs.10 Goodwill 25000
eachfullypaid 100000 OtherFixedassets 104000
10007%Preferencesharesof Currentassets 95000
Rs.100eachfullypaid 100000 ProfitandlossA/c 26000
250000 250000

ItwasdecidedthatequitysharesofRs.10eachbereducedtosharesofRs.7eachand7%
preferencesharesofRs.100eachbereducedto8%preferencesharesofRs.75each.Thenumber
ofsharesineachcaseistoremainthesame.Itwasdecidedthattheamountsoavailablebeused
forwritingofthedebitbalanceinP&LA/c,goodwillA/candwiththebalanceforwritingdownthe
fixedassts.Journalisethetransactionsandpreparethebalancesheetafterreconstruction.
Solution:
Journal
each)
To8%PreferenceShareCapital(Rs.75)A/c 75000
Rs.75)
CapitalReductionA/c Dr 55000
ToP&LA/c 26000
ToGoodwillA/c 25000
ToFixedassetsA/c 4000
(utilizationofcapitalreductionA/c)
10000Equitysharesof Fixedassets(1040004000) 100000
Rs.7eachfullypaid 70000 Currentassets 95000
10008%Preferencesharesof
Rs.75eachfullypaid 75000
195000 195000
VariationofShareholdersrights
Under this, the shareholders rights are altered by changing the rate of dividend or
changingtheclassesofshares.Forexample,itcanbedonebychangingthecumulativepreference
shares to noncumulative preference shares or from 10% preference shares into 7% preference
sharesetc.
Schemeofcompromiseorarrangement
Hereacompromiseorarrangementismadewithcreditorsordebentureholderswhile
settlingtheirliabilities.Thisschemeinvolvesthefollowing:
a. Forsacrificebydebentureholders:
DebenturesA/c Dr(withamountsacrificed)
b. Forexchangeofdebenturesfornewdebenturesorshares:
DebenturesA/c (old) Dr
ToDebentures/ShareCapitalA/c(New)
c. Forsacrificebycreditors:
CreditorsA/c Dr(withamountsacrificed)
d. Foragreementtoreceivesharesordebenturesinsettlementofclaimsofcreditors:
CreditorsA/c Dr
ToShareCapital/debenturesA/c
Miscellaneousjournals
a. Forappreciationoffixedassets:
FixedassetsA/c Dr(withamountofappreciation)
b. Forexpenseincurredonreconstruction:
ToBankA/c
Illustration6
:ThebalancesheetofGloomyLtdason31March2011wasasfollows:
4000EquitysharesofRs.100 Goodwill 15000
eachfullypaid 400000 Freeholdpremises 200000
20005%Preferencesharesof Plant&Machinery 300000
Rs.100eachfullypaid 200000 Stockintrade 50000
6%Debentures 100000 Sundrydebtors 40000
Bankoverdraft 35000 Cashinhand 5000
Sundrycreditors 100000 Profit&LossA/c 225000
835000 835000

Thecompanyhasgotthefollowingschemeofcapitalreductionapprovedbythecourt.
a. PreferencesharestobereducedtoRs.60persharefullypaidupandequitysharestoRs.40
persharefullypaidup.
b. Thedebentureholderstotakeoverstockintradeandbookdebtsinfullsatisfactionofthe
amountduetothem.
c. Thevalueoffreeholdpremisestobeincreasedby10%.
d. Thevalueofplantandmachinerytobedepreciatedby331/3%.
e. Thegoodwillaccounttobeeliminated.
f. ExpensesofreconstructionamountedtoRs.4000.
Journalizethetransactionsandpreparethebalancesheetafterreconstruction.
Solution:
Journal
each)
To5%PreferenceShareCapital(Rs.60)A/c 120000
Rs.60)
6%DebenturesA/cDr
ToStockintradeA/c
ToSundrydebtorsA/c 100000
ToCapitalReductionA/c(Bal.Fig) 50000
(stockanddebtorstakenoverbydebenture 40000
holders) 10000
FreeholdpremisesA/cDr
(Freeholdpremisesappreciatedby10%)
20000 20000
ToP&LA/c
ToGoodwillA/c 15000
ToPlantandmachineryA/c 350000 225000
ToBankA/c(expenses) 100000
ToCapitalReserveA/c 4000
(utilizationofcapitalreductionA/c) 6000
4000Equitysharesof Freehold
Rs.40eachfullypaid 160000 premises(200000+20000) 220000
20005%Preferencesharesof Plant&Machinery(300000 200000
Rs.60eachfullypaid 120000 100000)
CapitalReserve 6000 Cashinhand(50004000) 1000
Bankoverdraft 35000
421000 421000
Surrenderofshares
Underreconstruction,theshareholdersmayberequiredtosurrenderapartoftheirshare
holdings.Suchsurrenderedsharesmaybereissuedtootherparties(creditors,debentureholders
etc.)inwholeorinpartsatisfactionoftheirclaims.Theentriesrequiredareasfollows:
i. Onsurrenderofshares:
SharecapitalA/c Dr
ToSurrenderedsharesA/c
ii. Onreissueofsurrenderedshares:
SurrenderedsharesA/c Dr
ToSharecapitalA/c
iii. Oncancellationofunissuedsurrenderedshares:
SurrenderedsharesA/c Dr
Illustration7
AcompanyhasequitysharecapitalofRs.1000000consisting10000sharesofRS.100each.Itis
resolved
a. TosubdividethesharesintosharesofRs.10each
b. Toasktheirshareholderstosurrender50%oftheirshares
c. Toissue60%ofthesurrenderedsharesto15%debentureholdersofRs.400000infull
settlementoftheirclaims
d. Tocanceltheunissuedsurrenderedshares.
Giveentriesinthebooksofthecompany.
Solution:
Journal
EquityShareCapital(Rs.100)A/c Dr 1000000
ToEquityShareCapital(Rs.10)A/c 1000000
(subdivisionofequitysharesintoRs.10each)
EquitySharecapitalA/c Dr 500000
ToSurrenderedsharesA/c 500000
(50%ofsharessurrendered)
SurrenderedsharesA/c Dr 300000
15%DebenturesA/cDr 400000
(issueof60%surrenderedsharesto
debentureholdersinfullsettlementoftheir
claims)

SurrenderedSharesA/c Dr 200000
(cancellationofunissuedsurrendered
shares)
Module4
FINALACCOUNTSOFBANKINGCOMPANIES
InIndia,bankingcompaniesaregovernedbytheBankingRegulationAct1949.Section5of
theActdefinesbankingastheaccepting,forthepurposeoflendingorinvestment,ofdepositsof
moneyfromthepublicrepayableondemandorotherwiseandwithdrawablebycheque,draft,
andorderorotherwise.
Businessofbankingcompanies
Inadditiontothebusinessofbanking,abankingcompanymayengageinanyoneormore
ofthefollowingbusiness:
i. Theborrowing,raising,ortakingupofmoney
ii. Thelendingoradvancingofmoneyeitheruponorwithoutsecurity
iii. Thedrawing,making,accepting,discounting,buying,selling,collectinganddealinginb
billsofexchange,hundies,promissorynotes,coupons,drafts,billsoflading,railway
receipts,warrants,debentures,certificates,scripsandotherinstruments,and
securitieswhethertransferableornegotiableornot.
iv. Thegrantingandissuingofletterofcredit,travelerschequesandcircularnotes
v. Onreceivingofallkindsofbonds,scripsorvaluablesondepositorforsafecustodyor
otherwise.
vi. Thebuying,sellinganddealinginbullion
vii. Thecollectingandtransmittingofmoneyandsecurities
viii. Contractingforpublicandprivateloansandnegotiatingandissuingthesame
ix. Carryingonandtransactingeverykindofguaranteesandindemnitybusiness
x. Undertakingandexecutingtrusts,etc
ImportantprovisionsoftheBankingRegulationAct1949
1. StatutoryReserve
AsperSection17,bankingcompaniesincorporatedinIndiahalltransfereveryyearatleast
25%ofitsprofitbeforeanydividendisdeclaredtoaStatutoryreserve(Reservefund)untilthe
amountofthereservetogetherwiththesecuritypremiumAccountisequaltothepaidupcapital.
2. CashReserveRatio(CRR)
BanksarerequiredtomaintainwiththeReserveBankofIndiaacashreserveofatleast3%
ofthetotalofitsdemandandtimeliabilitiesinIndia.
3. StatutoryLiquidityRatio(SLR)
Banksarealsorequiredtomaintainatleas6t25%ofthedemandandtimeliabilitiesinthe
formofliquidassetslikecash,goldorunencumbered.SLRmayvaryinarangeof25%to40%.
4. NonBankingAssets
Thesearetheassetswhicharenotusedintheordinarycourseofbusinessofbanking,but
theyaresuchimmovableandmovablepropertieswhichcomeunderthepossessionothe
bankingcompanyforrecoveringtheamountduefromcustomers.
5. MinimumCapitalandReserves
IncaseofabankingcompanyincorporatedinIndia,thesumofitspaidupcapitaland
reservesshallnotbelessthantheamountmentionedbelow:
a. IfithasplacesofbusinessinmorethanonestateRs.500000,andifanysuchplaceof
businessissituatedinMumbaiorKolkataorinboth,Rs.1000000.
b. If it has all its places of business in one state, none of which is Mumbai or
Kolkata,Rs.100000 in respect of its principal place of business plus Rs.10000 for each
additional place of business in the same district plus Rs.25000 for each place of
businesselsewhereinthestate(themaximumamountrequiredbeingRs.500000).
AccountingSystem
Theaccountingsystemofabankingcompanyisdifferentfromthatofatradingor
manufacturingcompany.Themainfeaturesofabanksaccountingsystemareasfollows:
1. Entriesinthepersonalledgersaremadedirectlyfromthevouchers
2. Fromsuchentriesinthepersonalledgerseachdaysummarysheetsintotalareprepared
whicharepostedtothecontrolaccountsinthegeneralledger.
3. Thegeneralledgerstrialbalanceisextractedandagreedeveryday.
4. Allentriesinthepersonalledgersandsummarysheetsarecheckedbypersonsotherthan
thosewhohaverecordedentries.Ithelpsindetectionofmistakes.
5. Atrialbalanceofdetailedpersonalledgersispreparedperiodicallyandgetsagreedwith
thegeneralledgercontrolaccounts.
6. Twovouchersarepreparedforeverytransactionnotinvolvingcash.

Booksmaintainedbybanks
1. ReceivingCashiersCounterCashBook.
2. PayingCashiersCounterCashBook.
3. CurrentAccountsLedger.
4. SavingBankAccountsLedger.
5. FixedDepositAccountsLedger.
6. Investmentledger.
7. BillsDiscountedandPurchasedLedger.
8. LoanLedger.
9. CashCreditLedger.
10. CustomersAcceptances,endorsementsandGuaranteeLedger.
11. RecurringDepositsAccountsLedger,etc.

TheSlipSystem
Thisisnotasystemofbookkeeping,butamethodofrapidlypostingentriestobookskept
on double entry system. In this system, posting is made from slips prepared inside the
organizationitselforfromslipsfilledinbyitscustomers.Inabankingcompany,themainslips
arepayinslips,withdrawalslipsandchequesandalltheseslipsarefilledinbyclientsofthe
bank.

AdvantagesofSlipsystem
1. Itmakesaccountsreliable.
2. Slipsarethebasisofauditing.
3. Thebanksavesalotofclericallabourasmostoftheslipsarefilledinbyitscustomers.
4. Thereisnoneedforkeepingsubsidiarybooks.

DisadvantagesofSlipsystem
1. Slipsmaybelost,destroyedormisappropriatedastheseareloose.
2. Intheabsenceofsubsidiarybooks,bookscannotbeverified.
3. Itisverydifficultandexpensivetokeepdatewiserecordofalargenumberofslips.
4. Customersfeeldifficultyonaccountofslipsystem.

FinalAccountsofBanks
AsperSection29,abankingcomp[anyincorporatedinIndia,isrequiredtoprepare,atthe
end of each accounting year, a Balance sheet and profit and Loss Account as on the last
workingdayoftheyear.

AbankingcompanyisrequiredtoprepareitsProfitandLossAccountaccordingtoFormB
intheThirdScheduletotheBankingRegulationAct,1949.FormBisgivenasfollows:

FormB
FormofProfit&LossAccountfortheyearended31stMarch
(000somitted)
Schedule Yearended Yearended
No 31.3..(Current 31.3.(Previous
Year) Year)
I. Income
Interestearned 13
Otherincome 14
Total
II. Expenditure
Interestexpended 15
Operatingexpenses 16
Provisionsandcontingencies

Total

III. Profit/Loss
Netprofit/lossfortheyear(III)
Profit/lossbroughtforward

Total
IV. Appropriations
Transfertostatutoryreserves
Transfertootherreserves
Transfertogovernment/
proposed
Dividend
BalancecarriedovertoBalance
sheet
Total
SCHEDULE13INTERESTEARNED(000somitted)
Yearended Yearended
31.3..(Current 31.3.(Previous
Year) Year)
I. Interest/discountonadvances/bills
II. Incomeoninvestments
III. InterestonbalanceswithReserveBankof
Indiaandotherinterbankfunds
IV. Others
Total
SCHEDULE14OTHERINCOME (000s
omitted)
Yearended Yearended
Year) Year)
I. Commission,exchangeandbrokerage
II. Profitonsaleofinvestments
Less:Lossonsaleofinvestments
III. Profitonrevaluationofinvestments
Less:Lossonrevaluationofinvestments
IV. Profitonsaleofland,buildingsandother
assets
Less:Lossonsaleofland,buildingsand
other

Assets
V. Profitonexchangetransactions
Less:Lossonexchangetransactions
VI. Incomeearnedbywayofdividendsetc.
fromsubsidiaries/companiesand/or
jointventuresabroad/inIndia
VII. Miscellaneousincome
Total
Note:UnderitemsIItoVlossfiguresmaybeshowninbrackets
SCHEDULE15INTERESTEXPENDED(000somitted)
Yearended Yearended
Year) Year)
I. Interestondeposits
II. InterestonReserveBankofIndia/inter
bankborrowings
III. Others
Total
SCHEDULE16OPERATINGEXPENSES
(000somitted)

Yearended Yearended
Year) Year)
I. Paymentstoandprovisionsforemployees
II. Rent,taxesandlighting
III. Printingandstationary
IV. Advertisementandpublicity
V. Depreciationonbanksproperty
VI. Directorsfees,allowancesandexpenses
VII. Auditorsfees,allowancesandexpenses
(includingbranchauditors)
VIII. Lawcharges
IX. Postages,telegrams,telephones,etc
X. Repairsandmaintenance
XI. Insurance
XII. Otherexpenditure
Total

Illustration1
FollowingfigureshavebeenobtainedfromthebooksofRaiBankLtdfortheyearending31st
March2011(figuresin000):
IssuedandsubscribedcapitalRs.1000,InterestanddiscountearnedRs.3800,Commissionand
exchangeearnedRs.195,InterestpaidRs.2000,SalariesandwagesRs.210,DirectorsfeesRs.35,
RentandtaxesRs.70,PostageandtelegramsRs.61,ProfitonsaleofinvestmentsRs.240,Losson
saleofinvestmentsRs.38,RentreceivedRs.62,DepreciationRs.31,StationaryRs.60andAuditors
feesRs.8.
Additionalinformation:
a. TheprofitandlossaccounthadabalanceofRs.10,00,000on1stApril2010.
b. AnadvanceofRs.12,00,000hasbecomedoubtfulanditisexpectedthatonly50%ofthe
amountduecanberecoveredfromthesecurity.
c. Theprovisionoftaxismadeat50%.
d. Adividendof10%isproposed.
PrepareProfitandLossAccountofRaiBankLtdfortheyearending31stMarch2011.
Solution:
RaiBankLtd
Fortheyearending31stMarch2011 (000somitted)
No 31.3.2011 31.3.2010
I. Income
Interestearned 13 3800
Otherincome 14 459
Total
4259
II. Expenditure
Interestexpended
Operatingexpenses 15 2000
Provisionsandcontingencies 16 475
Total 1192
III. Profit/Loss 3667
Netprofit/lossfortheyear(III)
592
Total
IV. Appropriations 1000
Transfertostatutory 1592
reserves(592x25%)
ProposedDividend 148
BalancecarriedovertoBalancesheet
Total 100
1344
1592
Yearended Yearended
31.3.2011 31.3.2010
I. Interest/discountonadvances/bills 3800
Total 3800
SCHEDULE14OTHERINCOME(000somitted)
Yearended Yearended
31.3.2011 31.3.2010
I. Commission,exchangeandbrokerage 195
II. Profitonsaleofinvestments 240
Less:Lossonsaleofinvestments (38)
III. Miscellaneousincome(Rentreceived)
62
Total
459
Yearended Yearended
31.3.2011 31.3.2010
I. Interestondeposits 2000
Total 2000
SCHEDULE16OPERATINGEXPENSES(000somitted)
Yearended Yearended
31.3.2011 31.3.2010
I. Paymentstoandprovisionsforemployees 210
II. Rent,taxesandlighting 70
III. Printingandstationary 60
IV. Depreciationonbanksproperty 31
V. Directorsfees,allowancesandexpenses 35
VI. Auditorsfees,allowancesandexpenses
(includingbranchauditors) 8
VII. Postages,telegrams,telephones,etc 61
Total
475
Illustration2
Fromthefollowinginformation,preparetheProfitandlossAccountoftheNationalBankforthe
yearended31stMarch2011(figuresin000):
InterestonloansRs.518,InterestoncashcreditsRs.446,Discountonbillsdiscounted(net)
Rs.390,InterestonOverdraftsRs.108,InterestonSavingsbankAccountRs.220,Interestonfixed
deposits Rs.554, Commission, exchange and brokerage Rs.16.40, Rent, taxes and lighting Rs.36,
AuditorsfeesRs.2.40,Postage,telegramsandtelephonesRs.2.80,SundrychargesRs.2,Directors
fees Rs.6, Printing and stationery Rs.0.40, Law charges Rs.1.40, payment to employees Rs.108,
Locker rent Rs.0.70, Transfer fees Rs.1.40, Depreciation on banks property Rs.10 and
AdvertisementanpublicityRs.1.40.
Additionalinformation:RebateonbillsdiscountedRs.98000andprovideforbaddebts
Rs.58000.
Solution:
NationalBankLtd
Fortheyearending31stMarch2011 (000somitted)
No 31.3.2011 31.3.2010
I. Income
Interestearned 13 1364.00
Otherincome 14 18.50
Total 1382.50
II. Expenditure
Interestexpended 15 774.00
Operatingexpenses 16 170.40
Provisionsandcontingencies 58.00
Total 1002.40
III. Profit/Loss
Netprofit/lossfortheyear(III) 380.10
Total 380.10
IV. Appropriations
Transfertostatutory 95.03
reserves(380.10x25%)
proposed 285.07
Dividend 380.10
BalancecarriedovertoBalance
sheet
Total

Yearended Yearended
31.3.2011 31.3.2010
I. Interest/discounton
advances/bills(518+446+390+10898) 1364.00
II. Incomeoninvestments
III. InterestonbalanceswithReserveBankof
Indiaandotherinterbankfunds
IV. Others

Total 1364.00
SCHEDULE14OTHERINCOME (000somitted)
Yearended Yearended
31.3.2011 31.3.2010
I. Commission,exchangeandbrokerage 16.40
II. LockersRent 0.70
III. Transferfees 1.40
Total 18.50
Yearended Yearended
31.3.2011 31.3.2010
I. Interestondeposits(220+554) 774.00
Total 774.00
Yearended Yearended
31.3.2011 31.3.2010
I. Paymentstoandprovisionsforemployees 108.00
II. Rent,taxesandlighting 36.00
III. Printingandstationary 0.40
IV. Advertisementandpublicity 1.40
V. Depreciationonbanksproperty 10.00
VI. Directorsfees,allowancesandexpenses 6.00
VII. Auditorsfees,allowancesandexpenses 2.40
(includingbranchauditors)
VIII. Lawcharges 1.40
IX. Postages,telegrams,telephones,etc 2.80
X. Otherexpenditure 2.00
Total 170.40
BalanceSheet
ThebalancesheetofabankingcompanyispreparedaccordingtoFormAinThirdSchedule
whichisasfollows:
BALANCESHEETOF(Hereenternameofthebankingcompany)
ason31stMarch(Year)(000somitted)
Schedule Ason Ason
No 31.3..(Current 31.3.(Previous
Year) Year)
Capital&Liabilities
Capital 1
Reserves&Surplus 2
Deposits 3
Borrowings 4
OtherLiabilitiesandProvisions 5
Total

Assets
CashandbalanceswithRBI 6
Balanceswithbanks&moneyatcalland
shortnotice 7
Investments 8
Advances 9
FixedAssets 10
OtherAssets 11
Total
Contingentliabilities 12
Billsforcollection
SCHEDULE1CAPITAL

Ason Ason
Year) Year)
I. ForNationalizedBanks
Capital(FullyownedbyCentralGovernment

Total

II. ForBanksIncorporatedOutsideIndia
Capital

(Theamountbroughtinbybanksbywayof
startupcapitalasprescribedbyRBIshouldbe
shownunderthishead)

AmountofdepositkeptwiththeRBIunder
section1(2)ofBankingRegulationsAct,1949

Total
ForotherBanks

Authorisedcapital
.SharesofRs..each
Issuedcapital
.SharesofRs..each

Subscribedcapital
.SharesofRs..each
Calledupcapital
.SharesofRs..each
Less:Callsunpaid
Add:Forfeitedshares

SCHEDULE2RESERVES&SURPLUS
Ason Ason
Year) Year)
I. StatutoryReserves
OpeningBalance
Additionsduringtheyear
Deductionsduringtheyear
II. CapitalReserves
OpeningBalance

III. SecuritiesPremium
OpeningBalance
IV. Revenue&OtherReserves
OpeningBalance
V. BalanceinProfitandLossAccount
Total(I+II+III+IV+V)
SCHEDULE3DEPOSITS
Ason Ason
Year) Year)
A.
I. DemandDeposits
(i) FromBanks
(ii) FromOthers
II. SavingBankDeposits
III. TermDeposits
(i) FromBanks
(ii) FromOthers
Total
(I+II+III)
B.
(i)DepositsofbranchesinIndia
(ii)DepositsofbranchesoutsideIndia

Total

SCHEDULE4BORROWINGS
Ason Ason
Year) Year)
I. BorrowingsinIndia
(i) ReserveBankofIndia
(ii) Otherbanks
(iii) Otherinstitutionsandagencies
II. BorrowingsoutsideIndia
Total
SecuredborrowingsincludedinI&IIaboveRs.
SCHEDULE5OTHERLIABILITIESANDPROVISIONS
Ason Ason
Year) Year)
I. Billspayable
II. Interofficeadjustments(net)
III. Interestaccrued
IV. Others(includingprovisions)
Total
SCHEDULE6CASHANDBALANCESWITHRESERVEBANKOFINDIA
Ason Ason
Year) Year)
I. Cashinhand
(includingforeigncurrencynotes)
II. BalanceswithReserveBankofIndia
(i) Incurrentaccounts
(ii) Inotherdepositaccounts

Total(I
&II)
SCHEDULE7BALANCESWITHBANKS&MONEYATCALL&SHORTNOTICE
Ason Ason
Year) Year)
I. InIndia
(i) Balanceswithbanks
(a) Incurrentaccounts
(b) Inotherdepositaccounts
(ii) Moneyatcallandshortnotice
(a) Withbanks
(b) Withotherinstitutions
Total

II. OutsideIndia
(i) Incurrentaccounts

(iii) Moneyatcallandshortnotice
GrandTotal(I+II)

SCHEDULE8INVESTMENTS
Ason Ason
Year) Year)
I. InvestmentsinIndiain
(i) Governmentsecurities
(ii) Otherapprovedsecurities
(iii) Shares
(iv) Debenturesandbonds
(v) Subsidiariesand/orjointventures
(vi) Others(tobespecified)

Total

II. InvestmentsoutsideIndiain
(i) Governmentsecurities
(includinglocalauthorities)
(ii) Subsidiariesand/orjointventures
abroad

(iii) Otherinvestments(tobespecified)
Total

GrandTotal(I+II)

SCHEDULE9ADVANCES
Ason Ason
Year) Year)
A.
(i)Billspurchasedanddiscounted
(ii)cashcredits,overdraftsandloansrepayableon
demand

(iii)Termloans
Total
B.
(i)securedbytangibleassets
(ii)coveredbybank/Governmentguarantees
(iii)unsecured
Total
C.
I.AdvancesinIndia
(i)prioritysectors
(ii)publicsector
(iii)banks
(iv)others
Total
II.AdvancesoutsideIndia
(i) Duefrombanks
(ii) Duefromothers
(a) Billspurchasedanddiscounted
(b) Syndicatedloans
(c) Others
Total
GrandTotal(CI+CII)

SCHEDULE10FIXEDASSETS
Ason Ason
Year) Year)
I. Premises
Atcoston31stMarchofthepreceding
year
Depreciationtodate
II. OtherfixedAssets(includingfurnitureand

fixtures)
Atcoston31stMarchofthepreceding
year
Depreciationtodate

Total

SCHEDULE11OTHERASSETS
Ason Ason
Year) Year)
I. Interofficeadjustments(net)
II. Interestaccrued
III. Taxp[aidinadvance/taxdeductedatsource
IV. Stationeryandstamps
V. Nonbankingassetsacquiredinsatisfaction
ofclaims
VI. Others

Total
SCHEDULE12CONTINGENTLIABILITIES
Ason Ason
Year) Year)
I. Claimsagainstthebanknotacknowledgedas
debts
II. Liabilityforpartlypaidinvestments
III. Liabilityonaccountofoutstandingforward
exchangecontracts
IV. Guaranteesgivenonbehalfofconstituents
(i) InIndia

(ii) OutsideIndia
V. Acceptances,endorsementsandother
obligations
VI. Otheritemsforwhichthebankis
contingentlyliable
Total
ExplanationofsomeitemsrelatingtoBalanceSheet
1. Moneyatcallandshortnotice:Itrepresentstemporaryloanstobillbrokers,stockbrokers
andotherbanks.Iftheloanisgivenforoneday,itiscalledmoneyatcallandiftheloan
cannotbecalledbackondemandandwillrequireatleastanoticeofthreedaysforcalling
back,itiscalledmoneyatshortnotice.
2. Advances: Advances include Bills discounted and purchased, loans, cash credit and
overdraft.
3. Inter office adjustments: Every head office will have a number of transactions with its
branches. The head office makes necessary adjustments in its books on the receipt of
information from the branches. On the date of balance sheet some transaction may
remain unadjusted in the books of the head office. Such entries are recorded in the
balancesheetunderthesubheadingBranchAdjustmentsandmayappearontheassets
side under the heading Other Assets if it has a debit balance and on t e liabilities side
undertheheadingOtherLiabilitiesifithasacreditbalance.
4. Bills for Collection: When the bank receives bills receivables from its customers for
collection, it keeps them till maturity. On the date of maturity when bills are collected,
customersaccountiscreditedwiththeamountcollected.Ifsomebillsremainoutstanding,
such bills are treated by the banks as outstanding bills for collection. It is shown as
ContingentLiability(Schedule12).
5. Acceptance,endorsementandotherobligation:Thisrepresentsbanksliabilityonaccount
ofbillsendorsedoracceptedonbehalfofitscustomers.Forgreatersecurity,thedrawerof
billwantsacceptanceofthedraweesbank.Thebankincursaliabilitybyacceptingbillson
behalfofcustomers.Onthematurityofbill,thebankpaysandcollectstheamountfrom
itscustomers.Attheendoftheaccountingperiod,ifteeisanyoutstandingbillsitisshown
ontheContingentLiability(Schedule12).
Illustration3
Fromthefollowingparticulars,preparethefinalaccountsofJayaBankLtdfortheyearended31st
March2011.
Sharecapital 500000
ReserveFund 1000000
Fixeddeposit 2000000
Savingsbankdeposit 3000000
Currentaccounts 7000000
Borrowedfromthebank 200000
Investments 3000000
Premises 1200000
Cashinhand 60000
Cashatbank 2800000
Moneyatcallandshortnotice 300000
Interestaccruedandpaid 200000
Salaries 80000
Rent 30000
ProfitandLossAccount(01.04.2010) 160000
Interestearned 450000
Billsdiscounted 500000
Billspayable 800000
Loans,advances,overdraftandcredits 7000000
Unclaimeddividends 30000
`
15170000 15170000

ThebankhadthebillsforRs.1400000ascollectionforitsconstituentsandalsoacceptance
andendorsementsforthemamountingtoRs.400000.
Solution:
ProfitandLossAccountofJayaBankLtd.
(000somitted)
No 31.3.2011 31.3.2010
I. Income
Otherincome 14
Total 450
II. Expenditure
Interestexpended 15 200
Provisionsandcontingencies
Total 310
III. Profit/Loss
Netprofit/lossfortheyear(III) 140
Profit/lossbroughtforward 160
Total 300
IV. Appropriations
Transfertostatutoryreserves 35
(140x25%)
proposed 265
Dividend 300
BalancecarriedovertoBalancesheet
Total
Yearended Yearended
31.3.2011 31.3.2010

450
Total
Yearended Yearended
31.3.2011 31.3.2010
I. Commission,exchangeandbrokerage

Total
Yearended Yearended
31.3.2011 31.3.2010
Total 200
Yearended Yearended
31.3.2011 31.3.2010
I. Paymentstoandprovisionsforemployees 80
II. Rent,taxesandlighting 30
Total 110

BalanceSheetofJayaBankLtdason31stMarch2011(000somitted)
Schedule Ason Ason
No 31.3.2011 31.3.2010
Capital&Liabilities
Capital 1 500
Reserves&Surplus 2 1300
Deposits 3 12000
Borrowings 4 200
OtherLiabilitiesandProvisions 5 860
Total 14860

Assets
CashandbalanceswithRBI 6
60
shortnotice 7
3100
Investments 8
3000
Advances 9
7500
FixedAssets 10
1200
OtherAssets 11

Total
Contingentliabilities 12 14860
Billsforcollection 400
1400

SCHEDULE1CAPITAL
Ason Ason
31.3.2011 31.3.2010
Authorisedcapital:SharesofRs.10each
Issuedcapital:SharesofRs.10each
Subscribedcapital:SharesofRs.10each
Calledupcapital:SharesofRs.10eachRs.5
each 500
fullypaid

Less:Callsunpaid
500
Add:Forfeitedshares
Total
Ason Ason
31.3.2011 31.3.2010
OpeningBalance1000
Additionsduringtheyear35 1035
II. CapitalReserves
265
V. BalanceinProfitandLossAccount
1300
SCHEDULE3DEPOSITS
Ason31.3.2011 Ason31.3.2010
A.
I. DemandDeposits 7000
II. SavingBankDeposits 3000
III. TermDeposits 2000
Total 12000
(I+II+III)
B.
Total 12000

SCHEDULE4BORROWINGS
Ason Ason
31.3.2011 31.3.2010
ReserveBankofIndia
Otherbanks 200
Otherinstitutionsandagencies
II. BorrowingsoutsideIndia
200
Total
Ason Ason
31.3.2011 31.3.2010
I. Billspayable 800
II. Interofficeadjustments(net)
III. Interestaccrued
IV. Others(includingprovisions)30+30 60
Total 860
Ason Ason
31.3.2011 31.3.2010
I. Cashinhand
(includingforeigncurrencynotes) 60
(iii) Incurrentaccounts
(iv) Inotherdepositaccounts
60
Total(I
&II)
Ason Ason
31.3.2011 31.3.2010
I. InIndia
Balanceswithbanks 2800
Moneyatcallandshortnotice 300
3100
Total

II. OutsideIndia
GrandTotal(I+II) 3100
Ason Ason31.3.2010
31.3.2011
I. InvestmentsinIndia 3000
II. InvestmentsoutsideIndia

Total
3000

SCHEDULE9ADVANCES
Ason Ason
31.3.2011 31.3.2010
A.
(i)Billspurchasedanddiscounted 500
demand 7000
(iii)Termloans
7500
Total

Ason Ason
31.3.2011 31.3.2010
I. Premises
Atcoston31stMarchofthepreceding 1200
year
fixtures)
year
Total
Ason Ason
31.3.2011 31.3.2010
II. Interestaccrued
III.Taxp[aidinadvance/taxdeductedatsource
ofclaims
VI. Others

Total

Ason Ason
31.3.2011 31.3.2010
I. Claimsagainstthebanknotacknowledgedas
debts
II. Liabilityforpartlypaidinvestments
III. Liabilityonaccountofoutstandingforward
exchangecontracts
IV. Guaranteesgivenonbehalfofconstituents
(iii) InIndia
(iv) OutsideIndia
V. Acceptances,endorsementsandother 400
obligations
VI. Otheritemsforwhichthebankis
contingentlyliable 400
Total
NonPerformingAssets(NPA)
Bank advances can be classified as Performing Assets and NonPerforming Assets (NPA).
An asset becomes NPA when it ceases to generate income for the bank. NPA means a credit
facilityinrespectofwhichinterestand/orprincipalrepaymentinstallmentsisinarrearsformore
than90days.InterestincomefromNPAisconsideredasincomeasandwhenitisreceivedrather
thanonaccrualbasis.
AssetClassification
BanksloansandadvancesaretobeclassifiedintotwobroadcategoriesStandardassets
and NonPerforming Assets. NPAs are subdivided into three Substandard, Doubtful and Loss
Assets.Thesemaybeexplainedasfollows:
1. Standard Assets Standard assets are those which do not carry more than the normal
creditriskattachedtothebusiness.TheseareassetswhicharenotNPAs.
2. Substandard Assets These have been classified as NPA for a period not exceeding 12
months.
3. Doubtful Assets Doubtful Assets are those which have remained NPA for a period
exceeding12months.
4. Loss Assets Loss assets are thoseassets in which loss has been identified by the bank,
auditorsorRBIbuttheamounthasnotbeenwrittenoffwhollyorpartly.Theseassetsare
irrecoverable.
Rebateonbillsdiscountedorunexpireddiscounts
Thewholeamountofdiscountonbillsdiscountedmaynotberelatedtothataccounting
year.Apartofitmayberelatedtonextaccountingperiod.Thisissobecauseatthecloseofthe
accounting year, some of the bills discounted may not have matured. In short rebate on bills
discountedmeanstheunearnedamountordiscountreceivedforthosebillswhichmatureafter
thedateofclosingthefinalaccounts.Itisalsocalledunexpireddiscountordiscountreceivedin
advance.Itiscarriedforwardtonextyearbypassingthefollowingentry:
InterestanddiscountA/c Dr
ToRebateonbillsdiscounted.
If rebate on bills discounted is given in trial balance, it should e taken to Balance sheet
under Other Liabilities and Provisions. If it is given under adjustments, it should be deducted
from Interest and Discount in Profit and loss Account and should be taken to Balance sheet
underOtherLiabilitiesandProvisions.
AtthecommencementofnextaccountingyearitistransferredtoInterestandDiscount
Accountbyreversingtheaboveentry.
Illustration4
Inrespect0fthefollowingtransactionsofBestBankLtdpassnecessaryjournalentriesaswellas
theirtreatmentintheP&LA/candBalanceSheetfortheyearended31stMarch2011.

Thefollowingbillsarediscountedat5%.
Discountedon AmountRs. Terms(months)
23.12.2011 50000 3
19.09.2011 100000 4
20.10.2011 400000 3
30.11.2011 30000 5
Solution:
CalculationofRebateonbillsdiscounted
Duedate No.ofdays AmountRs. Rateof UnexpiredDiscount
after31.12.11 discount
%
26.03.2011 85 50000 5 50000x5/100x85/365=582
22.01.2011 22 100000 5 100000x5/100x22/365=301
23.01.2011 23 400000 5 400000x5/100x23/365=1260
03.05.2011 123 30000 5 30000x5/100x123/365=506
2649
Rebateonbillsdiscounted=2649
Journalentry:
InterestanddiscountA/c Dr 2649
ToRebateonbillsdiscounted. 2649
RebateonbillsdiscountedRs.2649willbedeductedfromInterestandDiscountinP&L
A/c.itwillalsoappearontheliabilitysideofBalancesheetundertheheadingOtherliabilities
andprovisions.
Illustration5
ThefollowingaretheledgerbalancesoftheNationalBankLtd.PrepareP&LA/candBalance
Sheetason31stMarch2011aspertherequirementsofTheBankingRegulationAct.
Sharecapital(20000sharesofRs.100each) 2000000
ReserveFundinvestments 1000000
Generalexpenses 182000
Currentaccounts 20244000
Interestpaid 161000
Savingsbankaccount 2920000
Fixeddeposits 4000000
st
ProfitandlossAccount(on31 March2010) 230000
Discountreceived 180000
Rebateonbillsdiscounted 64000
Commission,exchangeandbrokerage 44000
Cash 227000
Interestreceived 532000
CashwithRBI 2012000
Owingbyforeigncorrespondents 200000
Shortloans 6482000
Loansandadvancetocustomers 15585000
Investments 9883000
Billsdiscounted 6228000
Premises 2218000
Adjustments:
1. ProvisionforbadanddoubtfuldebtsrequiredRs.129000
2. ThebankhadbillsforcollectionforitsconstituentsRs.500000andacceptances,
endorsementsandguaranteesRs.1600000.
3. TheP&LA/cbalanceisthebalanceleftonthataccountafterthepaymentofinterim
dividendamountingtoRs.200000.
Solution:
ProfitandLossAccountofNationalBankLtd.
(000somitted)
No 31.3.2011 31.3.2010
I. Income
Otherincome 14 44
Total 756
II. Expenditure
Interestexpended 15 161
Provisionsandcontingencies 129
Total 472
III. Profit/Loss
Netprofit/lossfortheyear(III) 284
Profit/lossbroughtforward 430
Total 714
IV. Appropriations
Transfertostatutoryreserves 71
(284x25%)
InterimDividendpaid 200
BalancecarriedovertoBalance 443
sheet 714
Total
Yearended Yearended
31.3.2011 31.3.2010

Total 712
Yearended Yearended
31.3.2011 31.3.2010
I. Commission,exchangeandbrokerage 44

Total 44
Yearended Yearended
31.3.2011 31.3.2010
Total 161
Yearended Yearended
31.3.2011 31.3.2010
I. Paymentstoandprovisionsforemployees
II. Generalexpenses 182
Total 182
BalanceSheetofNationalBankLtdason31stMarch2011(000somitted)
Schedule Ason Ason
No 31.3.2011 31.3.2010
Capital&Liabilities
Capital 1 2000
Reserves&Surplus 2 1514
Deposits 3 27164
Borrowings 4 6482
OtherLiabilitiesandProvisions 5 193
Total 37353

Assets
CashandbalanceswithRBI 6 2239
shortnotice 7 200
Investments 8 10883
Advances 9 21813
FixedAssets 10 2218
OtherAssets 11
Total 37353
Contingentliabilities 12 1600
Billsforcollection 500

SCHEDULE1CAPITAL
Ason Ason
31.3.2011 31.3.2010
Authorisedcapital:20000SharesofRs.100
each
Issuedcapital:20000SharesofRs.100each
Subscribedcapital:20000SharesofRs.100
each 2000
Calledupcapital:20000SharesofRs.100

each
2000
Rs.100eachfullypaid
Less:Callsunpaid
Add:Forfeitedshares
Total
Ason31.3.2011 Ason
31.3.2010
OpeningBalance1000
Additionsduringtheyear71 1071
II. CapitalReserves
V. BalanceinProfitandLossAccount 443
1514
SCHEDULE3DEPOSITS
Ason31.3.2011 Ason31.3.2010
A.
I. DemandDeposits 20244
II. SavingBankDeposits 2920
III. TermDeposits 4000
Total 27164
(I+II+III)
B.
27164
Total
SCHEDULE4BORROWINGS
Ason31.3.2011 Ason
31.3.2010
ReserveBankofIndia
Otherbanks 6482
Otherinstitutionsandagencies
III. BorrowingsoutsideIndia
6482

Total
Ason Ason
31.3.2011 31.3.2010
I. Others(includingprovisions)
Rebateonbillsdiscounted64
Provisions129 193

Total 193
Ason Ason31.3.2010
31.3.2011
I. Cashinhand
(includingforeigncurrencynotes) 227
(i) Incurrentaccounts 2012
Total(I&II) 2239
Ason Ason
31.3.2011 31.3.2010
I. InIndia
Balanceswithbanks
Moneyatcallandshortnotice

Total

200
II. OutsideIndia
200
GrandTotal(I+II)
Ason Ason31.3.2010
31.3.2011
I. InvestmentsinIndia
Investments9883
ReserveFundInvestment1000 10883
Total
10883

SCHEDULE9ADVANCES
Ason Ason
31.3.2011 31.3.2010
A.
(i)Billspurchasedanddiscounted 6228
demand 15585
(iii)Termloans
21813
Total

Ason Ason31.3.2010
31.3.2011
I. Premises
year
fixtures)
year
Total

Ason Ason
31.3.2011 31.3.2010
II. Interestaccrued
III. Taxp[aidinadvance/taxdeductedatsource
ofclaims
VI. Others

Total

Ason Ason
31.3.2011 31.3.2010
Acceptances,endorsementsandother 1600
obligations
1600
Total
Module5
FINALACCOUNTSOFINSURANCECOMPANIES
Insurance is a contract whereby one party agrees for a consideration called premium to
indemnifytheotheragainstapossiblelossortopayastatedsumofmoneyonthehappeningofa
particularevent.Thisagreementorcontractwhenputinwritingisknownaspolicy.Theperson
whoseriskiscoverediscalledinsuredorassuredandthecompanyorcorporationwhichinsures
is known as insurer, assurer or underwriter. The consideration in return for which the insurer
agreestomakegoodthelossisknownaspremium.
TypesofInsurance
Fromaccountingpointofview,theinsurancemaybedividedintotwoasfollows:
1. LifeInsurance
A life insurance contract is a long term contract in which the assured must pay the
premium at stated intervals and the insurer guarantee to pay a certain sum of money to the
assuredonthehappeningoftheeventwhichiscertain(eitherdeathorexpiryofthefixedperiod).
Section 2 of Indian Insurance Act 1938 defines life insurance as life insurance business is the
businessofeffectingcontractsuponhumanlife.
2. GeneralInsurance
Allinsuranceotherthanlifeinsuranceisgeneralinsurance.Underthistypeofinsurance,
the insurer undertakes to indemnify the loss suffered by the insured on happening of a certain
eventinconsiderationforafixedpremium.Usuallyalltheseareshorttermagreementsforayear.
Fire insurance, marine insurance, accident insurance, burglary insurance, third party insurance
etc.aretheexamplesforgeneralinsurance.
FINANCIALSTATEMENTSOFINSURANCECOMPANIES
InsuranceRegulatoryandDevelopmentAuthority(IRDA)hasissuedtheregulations
regardingthepreparationoffinancialstatements.
FinalAccountsofLifeInsuranceCompanies
Thefinalaccountsofalifeinsurancecompanyconsistof(a)RevenueAccount,(b)P&LA/c
and(c)BalanceSheet.
RevenueAccount(FormARA)
RevenueAccountispreparedaspertheprovisionsofIRDAregulations2002andcomplies
withtherequirementsofScheduleAasfollows:
FORMARA
Nameoftheinsurer
RegistrationNo.andDateofRegistrationwiththeIRDA
RevenueAccountfortheyearended31stMarch,20.
PolicyholdersAccount(TechnicalAccount)
No Particulars Sched Current Previous

. ule Year Year
(Rs.000) (Rs.000)
Premiumsearnednet
(a) Premium 1
(b) Reinsuranceceded
(c) Reinsuranceaccepted
Incomefrominvestments
(a) Interest,dividends&rentGross
(b) Profitonsale/redemptionofinvestments
(c) (Lossonsale/redemptionofinvestments)
(d) Transfer/Gainonrevaluation/changein
fairvalue*
Otherincome(tobespecified)
Total(A)
Commission 2
OperatingExpensesrelatedtoinsurancebusiness
Provisionfordoubtfuldebts 3
Baddebtswrittenoff
Provisionfortax
Provisions(otherthantaxation)
(a) Fordiminutioninthevalueofinvestments
(net)
(b) Others(tobespecified)
Total(B)
BenefitsPaid(Net) 4
InterimBonusespaid
Changeinvaluationofliabilityinrespectoflife
policies
(a) Gross**
(b) AmountcededinReinsurance
(c) AmountacceptedinReinsurance
Total(C)
Surplus(Deficit)(D)=(A)(B)(C)
Appropriations
TransfertoShareholdersAccount
TransfertoOtherReserves(tobespecified)
BalancebeingFundsforFutureAppropriations
Total(D)
Notes:
*RepresentsthedeemedrealizedgainaspernormsspecifiedbytheAuthority.
**RepresentsMathematicalReservesafterallocationofbonus
Thetotalsurplusshallbedisclosedseparatelywiththefollowingdetails:
(a) Interimbonusespaid
(b) Allocationofbonustopolicyholders
(c) SurplusshownintheRevenueAccount
(d) TotalSurplus:[(a)+(b)+(c)]
ProfitAndLossAccount(FormAPL)
TheP&LA/cispreparedtocalculatetheoverallprofitofthelifeinsurancebusiness.The
incomesorexpensesthatarenotrelatedtoanyparticularfundarerecordedintheP&LA/c.

FORMAPL
Nameoftheinsurer
ProfitandLossAccountfortheyearended31stMarch,20.
ShareholdersAccount(NontechnicalAccount)
No. Particulars Schedule Current Previous
Year Year
(Rs.000) (Rs.000)
Amountstransferredfrom/tothePolicyholders
Account(TechnicalAccount)
Total(A)
Expensesotherthanthosedirectlyrelatedtothe
insurancebusiness
Baddebtswrittenoff
Provisionfortax
(net)
(b) Provisionfordoubtfuldebts
(c) Others(tobespecified)
Total(B)
Profit(Loss)beforetax
Appropriations
(a) Balanceatthebeginningoftheyear
(b) Interimdividendspaidduringtheyear
(c) Proposedfinaldividend
(d) DividendDistributionTax
(e) TransfertoReserves/otheraccounts(tobe
specified)
Profitcarried.totheBalanceSheet
NotestoFormARAandAPL:
(a) PremiumincomereceivedfrombusinessconcludedinandoutsideIndiashallbeseparately
disclosed.
(b) Reinsurancepremiumswhetheronbusinesscededoracceptedaretobebroughtinto
accountgross(i.e.,beforedeductingcommissions)undertheheadreinsurancepremiums
(c) Claimsincurredshallcompriseclaimspaid,specificclaimssettlementcostswherever
applicableandchangeintheoutstandingprovisionsforclaimsattheyearend.
(d) Itemsofexpensesandincomeinexcessofonepercentofthetotalpremiums(less
reinsurance)orRs.500000whicheverishigher,shallbeshownasaseparatelineitem.
(e) Feesandexpensesconnectedwithclaimsshallbeincludedinclaims.
(f) UnderthesubheadOthersshallbeincludeditemslikeforeignexchangegainsorlosses
andotheritems.
(g) Interest,dividendsandrentalsreceivableinconnectionwithaninvestmentshouldbe
statedatgrossamount,theamountofincometaxdeductedatsourcebeingincluded
underadvancetaxespaidandtaxesdeductedatsource.
(h) Incomefromrentshallincludeonlytherealizedrent.Itshallnotincludeanynotionalrent.
BalanceSheet(FormABS)
BalanceSheetofLifeInsuranceCompanyispreparedinverticalformat.Theformof
BalanceSheetisasfollows:

FORMABS
Nameoftheinsurer
BalanceSheetasat31stMarch,20.
No. Particulars Sched Current Previous
ule Year Year
(Rs.000) (Rs.000)
SourcesofFunds
ShareholdersFunds:
ShareCapital 5
ReservesandSurplus 6
Credit/[Debit]FairValueChangeAccount
SubTotal
Borrowings 7
PolicyholdersFunds:
PolicyLiabilities
InsuranceReserves
ProvisionforLinkedLiabilities
SubTotal
FundsforFutureAppropriations
Total

ApplicationofFunds
Investments
Shareholders 8
Policyholders 8A
AssetsheldtoCoverLinkedLiabilities 8B
Loans 9
FixedAssets 10
CurrentAssets
11
CashandBankBalances
12
AdvancesandOtherAssets

SubTotal(A) 13
CurrentLiabilities 14
Provisions
SubTotal(B)
NetCurrentAssets(C)=(A)(B) 15
MiscellaneousExpenditure(totheextentnot
writtenofforadjusted)
DebitBalanceinProfitandLossAccount
(ShareholdersAccount)
Total

CONTINGENTLIABILITIES
No Particulars Current Previous
. Year Year
(Rs.000) (Rs.000)
1. Partlypaidupinvestments
2. Claims,otherthanagainstpolicies,notacknowledgedas
debtsbythecompany
3. Underwritingcommitmentsoutstanding(inrespectof
sharesandsecurities)
4. Guaranteesgivenbyoronbehalfofthecompany
5.
Statutorydemands/liabilitiesindispute,notprovidedfor
6.
Reinsuranceobligationstotheextentnotprovidedforin
7. accounts
Others(tobespecified)
Total

SCHEDULESFORMINGPARTOFFINANCIALSTATEMENTS
SCHEDULE1PREMIUM
. Year Year
(Rs.000) (Rs.000)
1. FirstYearPremiums
2. RenewalPremiums
SinglePremiums
3. TotalPremium
SCHEDULE2COMMISSIONEXPENSES
Particulars Current Previous
Year Year
(Rs.000) (Rs.000)
Commissionpaid
DirectFirstYearPremiums
RenewalPremiums
SinglePremiums
Add:CommissiononReinsuranceAccepted
Less:CommissiononReinsuranceCeded
NetCommission
Note:Theprofit/commission,ifany,aretobecombinedwiththeReinsuranceacceptedorRe
insurancecededfigures.
SCHEDULE3OPERATINGEXPENSESRELATEDTOINSURANCEBUSINESS
. Year Year
(Rs.000) (Rs.000)
1. Employeesremuneration&welfarebenefits
2. Travel,conveyanceandvehiclerunningexpenses
3. Trainingexpenses
4. Rents,rates&taxes
5. Repairs
6. Printing&stationery
7. Communicationexpenses
8. Legal&Professionalcharges
9. Medicalfees
10. Auditorsfees,expensesetc
(a) Asauditor
(b) Asadviserorinanyothercapacity,inrespectof:
(i) Taxationmatters
(ii)Insurancematters
(iii)Managementservices;and
(c) Inanyothercapacity
Advertisementandpublicity
11. Interestandbankcharges
12. Others(tobespecified)
13. Depreciation
14. Total
Note:Itemsofexpensesandincomeinexcessofonepercentofthetotalpremiums(less
SCHEDULE4BENEFITSPAID[NET]
. Year Year
(Rs.000) (Rs.000)
1. InsuranceClaims:
(a) ClaimsbyDeath
(b) ClaimsbyMaturity
(c) Annuities/Pensionpayment
(d) Otherbenefits,specify.
2. (Amountcededinreinsurance):
(a) ClaimsbyDeath
3. Amountacceptedinreinsurance:
(a) ClaimsbyDeath
Total
Notes:(a)claimsincludespecificclaimssettlementcosts,whereverapplicable.
(b)Legalandotherfeesandexpensesshallalsoformpartoftheclaimscost,wherever
applicable.
SCHEDULE5SHARECAPITAL
. Year Year
(Rs.000) (Rs.000)
1. Authorisedcapital
EquitysharesofRs..each
2. IssuedCapital
3. SubscribedCapital
4. CalledupCapital
Less:Callsunpaid
Add:Sharesforfeited(Amountoriginallypaidup)
Less:Parvalueofequitysharesboughtback
Less:PreliminaryExpenses
Expensesincludingcommissionorbrokerageon
underwritingorsubscriptionofshares
Total
Notes:
(a) Particularsofthedifferentclassesofcapitalshouldbeseparatelystated.
(b) Theamountcapitalizedonaccountofissueofbonussharesshouldbedisclosed.
(c) Incaseanypartofthecapitalisheldbyaholdingcompany,thesameshouldbeseparately
disclosed.
SCHEDULE5APATTERNOFSHAREHOLDING
[AscertifiedbytheManagement]
CurrentYear PreviousYear
Shareholders No.of %of No.of %of
Shares Holding Shares Holding
Promoters
*Indian
*Foreign
Others
Total
SCHEDULE6RESERVESANDSURPLUS
. Year Year
(Rs.000) (Rs.000)
CapitalReserve
1.
CapitalRedemptionReserve
2.
SharePremium
3.
RevaluationReserve
4.
GeneralReserves
5.
Less:DebitbalanceinP&LA/c,ifany
Less:Amountutilizedforbuyback.
CatastropheReserve
6.
OtherReserves(tobespecified)
7.
BalanceofProfitinP&LA/c
8.
Total
Note:Additionstoanddeductionsfromthereservesshallbedisclosedundereachofthespecified
heads.
SCHEDULE7BORROWINGS
. Year Year
(Rs.000) (Rs.000)
1. Debentures/Bonds
2. Banks
3. FinancialInstitutions
Total

SCHEDULE8INVESTMENTSSHAREHOLDERS

. Year Year
(Rs.000) (Rs.000)
LongtermInvestments
1. GovernmentsecuritiesandGovernmentGuaranteedBonds
includingtreasurybills
2. Otherapprovedsecurities
3. Otherinvestments
(a) Shares
(aa)Equity
(bb)Preference
(b) MutualFunds
(c) DerivativeInstruments
(d) Debentures/Bonds
(e) Othersecurities(tobespecified)
(f) Subsidiaries
InvestmentPropertiesRealEstate
4. InvestmentsinInfrastructureandSocialsector
5. OtherthanApprovedInvestments
ShorttermInvestments
3. Otherinvestments
(a) Shares
(aa)Equity
(bb)Preference
(b) MutualFunds
(f) Subsidiaries
InvestmentPropertiesRealEstate
5 OtherthanApprovedInvestments

Total

SCHEDULE8AINVESTMENTSPOLICYHOLDERS
. Year Year
(Rs.000) (Rs.000)
LongtermInvestments
3.
(a) Shares
(aa)Equity
(bb)Preference
(b) MutualFunds
(f) Subsidiaries
4. (g) InvestmentPropertiesRealEstate
InvestmentsinInfrastructureandSocialsector
5.
OtherthanApprovedInvestments
1. ShorttermInvestments
GovernmentsecuritiesandGovernmentGuaranteedBonds
2. includingtreasurybills
(a) Shares
(aa)Equity
(bb)Preference
(b) MutualFunds
(f) Subsidiaries
4. (g) InvestmentPropertiesRealEstate
5 InvestmentsinInfrastructureandSocialsector
OtherthanApprovedInvestments

Total

SCHEDULE8BASSETSHELDTOCOVERLINKEDLIABILITIES
. Year Year
(Rs.000) (Rs.000)

LongtermInvestments
3. (a) Shares
(aa)Equity
(bb)Preference
(b) MutualFunds
(f) Subsidiaries
(g) InvestmentPropertiesRealEstate

3. (a) Shares
(aa)Equity
(bb)Preference
(b) MutualFunds
(f) Subsidiaries
Total


SCHEDULE9LOANS
. Year Year
(Rs.000) (Rs.000)
1. SecuritywiseClassification
Secured
(a) Onmortgageofproperty
(aa)InIndia
(bb)OutsideIndia
(b) OnShares,Bonds,Govt.Securities,etc.
(c) Loansagainstpolicies
(d) Others(tobespecified)
Unsecured
Total
2. BorrowerwiseClassification
(a) CentralandStateGovernments
(b) BanksandFinancialInstitutions
(c) Subsidiaries
(d) Companies
(e) Loansagainstpolicies
(e) Others(tobespecified)
Total
3. PerformancewiseClassification
(a) Loansclassifiedasstandard
(aa)InIndia
(bb)OutsideIndia
(b) Nonstandardloanslessprovisions
(aa)InIndia
(bb)OutsideIndia
Total
4. MaturitywiseClassification
(a) ShortTerm
(b) LongTerm
Total

Particulars Cost/GrossBlock Depreciation NetBlock
Deductions

Adjustmen
UptoLast
Asatyear
Additions
OnSales/
Previous
Opening
ToDate
Closing
Forthe
Year
Year
Year
end
Goodwill
Intangibles(specify)
LandFreehold
LeaseholdProperty
Buildings
Furniture&Fittings
Information
Technology
Equipment
Vehicles
OfficeEquipment
Others(Specifynature)
Total
Workinprogress
GrandTotal
PreviousYear
SCHEDULE11CASHANDBANKBALANCES
No. Particulars Current Previous
Year Year
(Rs.000) (Rs.000)
1. Cash(includingcheques,draftsandstamps)
2. BankBalances
(a) DepositAccounts
(aa)Shortterm(duewithin12monthsofthedateof
BalanceSheet)
(bb)Others
(b) CurrentAccounts
3. Moneyatcallandshortnotice
(a) Withbanks
Total
Balanceswithnonscheduledbanksin2and3above
CashandBankBalances
1. InIndia
2. OutsideIndia
Total
SCHEDULE12ADVANCESANDOTHERASSETS
. Year Year
(Rs.000) (Rs.000)
Advances
1. Reservedepositswithcedingcompanies
2. Applicationmoneyforinvestments
3. Prepayments
4. AdvancestoDirectors/Officers
5. Advancetaxpaidandtaxesdeductedatsource(Net
provisionfortaxation)
Total(A)
OtherAssets
1. Incomeaccruedoninvestments
2. OutstandingPremiums
3. Agentsbalances
4. ForeignAgenciesBalances
5. Duefromotherentitiescarryingoninsurancebusiness
(includingreinsurers)
6. Duefromsubsidiaries/holdingcompany
7. DepositwithReserveBankofIndia[Pursuanttosection7of
InsuranceAct,1938]
Total(B)
Total(A+B)
SCHEDULE13CURRENTLIABILITIES
. Year Year
(Rs.000) (Rs.000)
1. Agentsbalances
2. Balancesduetootherinsurancecompanies
3. Depositsheldonreinsuranceceded
4. Premiumsreceivedinadvance
5. Unallocatedpremium
6. Sundrycreditors
7. Duetosubsidiaries/holdingcompany
8. Claimsoutstanding
9. Annuitiesdue
10. DuetoOfficers/Directors
Total

SCHEDULE14PROVISIONS
. Year Year
(Rs.000) (Rs.000)
1. Fortaxation(lesspaymentsandtaxesdeductedatsource)
2. Forproposeddividends
3. Fordividenddistributiontax
Total
SCHEDULE15MISCELLANEOUSEXPENDITURE
(Totheextentnotwrittenofforadjusted)
. Year Year
(Rs.000) (Rs.000)
1. Discountallowedonissueofshares/debentures
Total
Explanationofsomeitemsinfinalaccounts
1. ClaimsClaimistheamountpayablebytheinsurancecompany.Inlifeinsurancebusiness,
claimsmayariseduetotworeasonsi.e.,bydeathormaturity.
2. Annuity Itis anannualpaymentwhichalifeinsurancecompany guaranteestopayfor
lumpsummoneyreceivedinthebeginning.
3. SurrendervalueIfaninsuredisunabletopaythefurtherpremium,hecangethispolicy
paidfromthecompany.Itisthepresentcashvalueofthepolicywhichaholdergetsfrom
thecompanyonsurrenderingalltherightsofthepolicy.
4. Bonusinreductionofpremiuminsteadofpayingbonusincash,theinsurancecompany
maydeductthebonusfromthepremiumduefromtheinsured.Thisisknownasbonusin
reductionofpolicy.
5. Consideration for annuities granted Any lump sum payment received by the insurance
companyinlieuofgrantingannuityiscalledconsiderationforannuitygranted.
6. ReinsuranceWhenacompanyacceptsabusinessofmorevalueandinordertoreduce
therisk,maypassonsomebusinesstotheothercompany,itiscalledreinsurance.
7. Commission on Reinsurance Accepted or Ceded The Company which passes some
businesstotheothercompanygetssomecommissionwhichisknownascommissionon
reinsurancebusinessceded.Commissionpaidonreinsurancebusinessacceptedisknown
asCommissiononReinsuranceAccepted.
Illustration1
FromthefollowinginformationprepareRevenueAccountofSafeInsuranceCo.Ltd.ason31st
March2011(figuresin000s):
ClaimsbydeathRs.152280,ClaimsbymaturityRs.60220,PremiumsRs.1411380,Transferfees
Rs.258,ConsiderationforannuitiesgrantedRs.164254,annuitiespaidRs.106922,Bonusincash
Rs.4832,ExpensesofManagementRs.63840,CommissionRs.19148,Interestanddividend
Rs.195680,IncometaxRs.11420,SurrendersRs.26280,BonusinreductionofpremiumRs.1960,
DividendstoshareholdersRs.11000andLifeAssuranceFundRs.3042000.
Solution:
FORMARA
Nameoftheinsurer:SafeInsuranceCo.Ltd.
RevenueAccountfortheyearended31stMarch,2011
. ule Year Year
(Rs.000) (Rs.000)
Premiumsearnednet
(a) Premium 1 1411380
(b) Reinsuranceceded()
(c) Reinsuranceaccepted(+)

(b) Profitonsale/redemptionofinvestments 195680
(d) Transfer/Gainonrevaluation/changein
fairvalue
Otherincome(tobespecified):
Considerationforannuitiesgranted
Transferfee
Total(A) 164254
Commission 258
OperatingExpensesrelatedtoinsurancebusiness 1771572
Provisionfordoubtfuldebts 2 19148
Baddebtswrittenoff 3 63840
Provisionfortax
(net)
(b) Others(tobespecified):
Incometax

Total(B)

BenefitsPaid(Net)
11420
InterimBonusespaid
94408
Changeinvaluationofliabilityinrespectoflife
4 363494
policies
Total(C)
Surplus(Deficit)(D)=(A)(B)(C)
Appropriations
TransfertoShareholdersAccount 363494
TransfertoOtherReserves(tobespecified) 1313670
BalancebeingFundsforFutureAppropriations
Total(D)

1313670
1313670
SCHEDULE1PREMIUM
. Year Year
(Rs.000) (Rs.000)
1. FirstYearPremiums 1411380
2. RenewalPremiums
3. SinglePremiums
TotalPremium 1411380
SCHEDULE2COMMISSIONEXPENSES
Year Year
(Rs.000) (Rs.000)
Commissionpaid 19148
DirectFirstYearPremiums
RenewalPremiums
SinglePremiums
NetCommission 19148
. Year Year
(Rs.000) (Rs.000)
3. Trainingexpenses
5. Repairs
6. Printing&stationery
7. Communicationexpenses
8. Legal&Professionalcharges
9. Medicalfees
10. Auditorsfees,expensesetc
11. Advertisementandpublicity
12. Interestandbankcharges
13. Others(tobespecified):
Expensesofmanagement 63840
14. Depreciation
Total 63840

SCHEDULE4BENEFITSPAID[NET]
. Year Year
(Rs.000) (Rs.000)
1. InsuranceClaims:
(a) ClaimsbyDeath 152280
(b) ClaimsbyMaturity 60220
(c) Annuities/Pensionpayment 106922
(d) Otherbenefits:
Surrenders 26280
Bonusincash 4832
Bonusinreductionofpremium 1960
Dividendtoshareholders 11000
Total
363494
Illustration2
FromthefollowingtrialbalanceofGuaranteeLifeInsuranceco.LtdprepareRevenueAccountand
BalanceSheetasat31stMarch2011(figuresin000s).
Claimspaidandoutstanding 115200
Surrenders 3300
Reversionarybonuspaidandoutstanding 12300
Establishmentcharges 23500
Commissiontoagents
Medicalfees 48500
Directorsandauditorsfees 10100
Stationeryandprinting 24000
Postageandtelegram 4800
Officerent 1050
Sundryexpenses 4200
Bankchargesandcommission 800
Investments
950
Loansandpolicies
Outstandinginterest 4047400
Outstandingpremiums 174700
Cashatbank 69800
Fineandfeesreceived 23200
Interestanddividendreceived 29600
Premiumsreceivedandoutstanding 300
Premiumsreceivedinadvance 225300
Claimsadmittedbutnotpaid
330800
Claimsintimatedbutnotadmitted
Lifefundinthebeginningoftheyear 210000
20000
18000
3780000
4593400 4593400
Solution:
FORMARA
Nameoftheinsurer:GuaranteeLifeInsuranceCo.Ltd.
. ule Year Year
(Rs.000) (Rs.000)
Premiumsearnednet
(a) Premium 1 330800
(a) Interest,dividends&rentGross 225300
Otherincome(tobespecified):
Finesandfees 300
Total(A) 556400
Commission 2 48500
OperatingExpensesrelatedtoinsurancebusiness 3 69400
Others(tobespecified):
Total(B) 117900
BenefitsPaid(Net) 4 130800
Total(C)
130800
Surplus(Deficit)(D)=(A)(B)(C) 307700
FORMABS
Nameoftheinsurer:GuaranteeLifeInsuranceCo.Ltd.
BalanceSheetasat31stMarch,2011
. ule Year Year
(Rs.000) (Rs.000)
SourcesofFunds
ShareholdersFunds:
ShareCapital 5
ReservesandSurplus 6 4087700
SubTotal 4087700
Borrowings 7
PolicyholdersFunds:
PolicyLiabilities
InsuranceReserves
ProvisionforLinkedLiabilities
SubTotal
FundsforFutureAppropriations
Total 4087700

ApplicationofFunds
Investments 8 4047400
Loans 9 174700
FixedAssets 10

4222100
CurrentAssets

CashandBankBalances 11
29600
AdvancesandOtherAssets 12
93000
SubTotal(A)
122600
Provisions 14 257000
SubTotal(B)
MiscellaneousExpenditure(totheextentnot 134400
writtenofforadjusted) 15
Total
4087700

SchedulesformingpartofARA
Particulars Amount Amount
Schedule1Premiumearnednet
Premiumreceivedandoutstanding 330800
Schedule2Commission
Commissionpaidtoagents 48500
Schedule3operatingexpensesrelatedtoinsurancebusiness
Establishmentcharges 23500
Medicalfees 10100
Stationeryandprinting 4800
Directorsandauditorsfees 24000
Postageandtelegram 1050
Officerent 4200
Sundryexpenses 800
Bankchargesandcommission 950 69400
Schedule4Benefitspaid(Net)
Claimspaidandoutstanding 115200
Surrenders 3300
Reversionarybonuspaid 12300 130800

SchedulesformingpartofABS
Schedule5ShareCapital Nil
Schedule6ReservesandSurplus
LifeFundatthebeginning 3780000
Add:Surplus 307700 4087700
Schedule7Borrowings Nil

Schedule8Investments 4047400
Schedule9Loans 174700
Schedule10FixedAssets Nil
Schedule11CashandBankBalances 29600
Schedule12AdvancesandOtherAssets
OutstandingInterest 69800
OutstandingPremium 23200 93000

Schedule13CurrentLiabilities
18000
SundryCreditors
9000
Premiumsreceivedinadvance
210000
Claimsadmittedbutnotpaid
20000
Claimsintimatedbutnotadmitted 257000

Schedule14Provisions Nil
Schedule15MiscellaneousExpenditure Nil
Determinationofprofitinlifeinsurancebusiness
Alifeinsurancecompanyearnsprofitwhenthelifeinsurancefundexceedsitsnetliability.
Thenetliabilityistheexcessofpresentvalueoffutureclaimsofcurrentpoliciesoverthepresent
valueofpremiumstobereceivedinfutureinrespectofcurrentpolicies.Netliabilityistobe
comparedwithlifeassurancefundonaparticulardateinordertocalculatethesurplusor
deficiency.UsuallythiscomparisonismadebypreparingastatementcalledValuationBalance
Sheet.Itsformatisasfollows:
NetLiability ***** LifeFund *****
Surplus(Bal.Fig) ***** Deficit(Bal.Fig) *****
***** *****
AsperSection28oftheLifeInsuranceCorporationAct1956,95%ofthesurplusmustbe
distributedtopolicyholdersintheformofbonusinrespectofwithprofitpolicies.Thebalance5%
maybeutilizedforsuchpurposeasdeterminedbythecentralgovernment.Bonuspayableto
policyholdersiscalculatedasfollows:
SurplusasperValuationBalanceSheet ****
Less:Actuarialexpenses ****
Dividendspayabletoshareholders ********
****
Add:Interimbonuspaid ****
NetSurplus ****
95%ofnetprofitispayableasbonustopolicyholders.Whilepayingtheabovebonus,
interimbonuspaidalreadyhastobededucted.
Illustration3
Alifeinsurancecompanygetsitsvaluationmadeonceineverytwoyears.Itslifeassurancefund
on31stDecember2011wasRs.5555000beforeprovidingfor55000beingtheshareholders
dividendfor2011.Itsactuarialvaluationon31stDecember2011disclosedanetliabilityof
Rs.3500000.aninterimbonusofRs.100000waspaidtopolicyholdersduringtheprevioustwo
years.ShowValuationBalanceSheet,NetProfitfortheperiodandDistributionofsurplus.
Solution:
ValuationBalanceSheetason31stDecember2011
NetLiability 3500000 LifeFund 5555000
Surplus(Bal.Fig) 2055000
5555000 5555000
CalculationofNetprofit:
SurplusasperValuationBalanceSheet 2055000
Less:Dividendspayabletoshareholders 55000
2000000
Add:Interimbonuspaid 100000

NetSurplus 2100000
Distributionofsurplus
Bonustopolicyholders(2100000x95%) 1995000
Less:interimbonusalreadypaid 100000
Balanceduetopolicyholders 1895000
FinalAccountsofGeneralInsuranceCompanies
Thefinalaccountsofageneralinsurancecompanyconsistof(a)RevenueAccount,(b)P&L
A/cand(c)BalanceSheet.
RevenueAccount(FormBRA)
Generalinsurancecompanymaybedoingmorethanonebusinesslikefire,marine,
accidentaletc.ForeachtypeofbusinessaseparateRevenueAccountistobepreparedinthe
prescribedformBRA.TheformofRevenueAccountisgivenbelow:

FORMBRA
Nameoftheinsurer
RevenueAccountfortheyearended31stMarch,20.
. ule Year Year
(Rs.000) (Rs.000)
1. PremiumsEarned(Net) 1
3. ChangeinProvisionsforunexpiredrisk
4. Interest,Dividend&RentGross
Total(A)
1. ClaimsIncurred 2
2. Commission 3
3. OperatingExpensesrelatedtoinsurancebusiness 4
Total(B)
OperatingProfit/(Loss)fromFire/Marine/
Miscellaneousbusiness(C)=(AB)

Appropriations
TransfertoCatastropheReserve
Total(C)
ProfitAndLossAccount(FormBPL)
TheP&LA/cispreparedtocalculatetheoverallprofitofthegeneralinsurancebusiness.
Operatingprofits(orlosses)offire,marineandmiscellaneousinsurancearetakenintheP&LA/c.
incomefrominvestments,profitorlossonsaleofinvestments,baddebts,provisionfordoubtful
debtsetc.aretakenintheP&LA/c.
FORMBPL
Nameoftheinsurer
ProfitandLossAccountfortheyearended31stMarch,20.
. ule Year Year
(Rs.000) (Rs.000)
1. OperatingProfit/(Loss)
(a) FireInsurance
(b) MarineInsurance
(c) MiscellaneousInsurance
2. Incomefrominvestments
(d) Interest,dividends&rentGross
(e) Profitonsale/redemptionofinvestments
3. Otherincome(tobespecified)
Total(A)
4. Provisions(otherthantaxation)
(net)
(b) ForDoubtfulDebts
5. (c) Others(tobespecified)
OtherExpenses
(a) Expensesotherthanthosedirectlyrelated
totheinsurancebusiness
(b) Baddebtswrittenoff

Total(B)
Profitbeforetax
Profitaftertax

Appropriations
(f) Interimdividendspaidduringtheyear
(g) Proposedfinaldividend
(h) DividendDistributionTax
(i) TransfertoReservesorotheraccounts(to
bespecified)

BalanceofProfit/Lossbroughtforwardfrolast
year
BalancecarriedforwardtotheBalanceSheet
BalanceSheet(FormBBS)
BalanceSheetofLifeInsuranceCompanyispreparedinverticalformat.Theformof
BalanceSheetisasfollows:

FORMBBS
Nameoftheinsurer
BalanceSheetasat31stMarch,20.
. ule Year Year
(Rs.000) (Rs.000)
SourcesofFunds
ShareholdersFunds:
ShareCapital 5
FairValueChangeAccount
Borrowings
Total 7

ApplicationofFunds
Investments 8
Loans 9
FixedAssets 10
CurrentAssets
AdvancesandOtherAssets 12
SubTotal(A)
Provisions 14
SubTotal(B)
NetCurrentAssets(C)=(A)(B)
Total
CONTINGENTLIABILITIES
. Year Year
(Rs.000) (Rs.000)
1. Partlypaidupinvestments
2. Claims,otherthanagainstpolicies,notacknowledgedas
debtsbythecompany
3. Underwritingcommitmentsoutstanding(inrespectof
sharesandsecurities)
4. Guaranteesgivenbyoronbehalfofthecompany
5. Statutorydemands/liabilitiesindispute,notprovidedfor
6. Reinsuranceobligationstotheextentnotprovidedforin
accounts
Total
SCHEDULESFORMINGPARTOFFINANCIALSTATEMENTS
SCHEDULE1PREMIUMEARNED[NET]
. Year Year
(Rs.000) (Rs.000)
Premiumfordirectbusinesswritten
Add:Premiumonreinsuranceaccepted
Less:premiumonreinsuranceceded
NetPremium
TotalPremiumEarned(Net)
Note:Reinsurancepremiumswhetheronbusinesscedeoracceptedaretobeboughtinto
account,beforedeductingcommissionundertheheadofreinsurancepremiums.
SCHEDULE2CLAIMSINCURRED[NET]
Year Year
(Rs.000) (Rs.000)
Claimspaid
Direct
Add:Reinsuranceaccepted
Less:Reinsuranceceded
NetClaimspaid
Add:Claimsoutstandingattheendoftheyear
Less:Claimsoutstandingatthebeginning
TotalClaimsIncurred
SCHEDULE3COMMISSION
Year Year
(Rs.000) (Rs.000)
Commissionpaid
Direct
NetCommission
Note:Theprofit/commission,ifany,aretobecombinedwiththeReinsuranceacceptedorRe
insurancecededfigures.
. Year Year
(Rs.000) (Rs.000)
2. Managerialremuneration
5.Repairs
6.Printing&stationery
7.Communicationexpenses
8.Legal&Professionalcharges
9.Medicalfees
Auditorsfees,expensesetc
10.
(a) Asauditor
(b) Asadviserorinanyothercapacity,inrespectof:
(j) Taxationmatters
(ii)Insurancematters
(iii)Managementservices;and
(c) Inanyothercapacity
11.
Advertisementandpublicity
12.
Interest&bankcharges
13.
14.
Depreciation
Total
Note:Itemsofexpensesandincomeinexcessofonepercentofthetotalpremiums(less
SCHEDULE5SHARECAPITAL
. Year Year
(Rs.000) (Rs.000)
1. Authorisedcapital
2. IssuedCapital
3. SubscribedCapital
4. CalledupCapital
Less:Callsunpaid
Add:EquitySharesforfeited(Amountoriginallypaidup)
Less:Parvalueofequitysharesboughtback
Less:PreliminaryExpenses
Expensesincludingcommissionorbrokerageon
underwritingorsubscriptionofshares
Total
Notes:
(a) Particularsofthedifferentclassesofcapitalshouldbeseparatelystated.
(b) Theamountcapitalizedonaccountofissueofbonussharesshouldbedisclosed.
(c) Incaseanypartofthecapitalisheldbyaholdingcompany,thesameshouldbeseparately
disclosed.
SCHEDULE5APATTERNOFSHAREHOLDING
[AscertifiedbytheManagement]
CurrentYear PreviousYear
Shareholders No.of %of No.of %of
Shares Holding Shares Holding
Promoters
*Indian
*Foreign
Others
Total
SCHEDULE6RESERVESANDSURPLUS
. Year Year
(Rs.000) (Rs.000)
1. CapitalReserve
2. CapitalRedemptionReserve
3. SecuritiesPremium
4. GeneralReserves
Less:DebitbalanceinP&LA/c,ifany
Less:Amountutilizedforbuyback.
5. CatastropheReserve
6. OtherReserves(tobespecified)
7. BalanceofProfitinP&LA/c
Total
Note:Additionstoanddeductionsfromthereservesshallbedisclosedundereachofthespecified
heads.
SCHEDULE7BORROWINGS
. Year Year
(Rs.000) (Rs.000)
1. Debentures/Bonds
2. Banks
3. FinancialInstitutions
Total
. Year Year
(Rs.000) (Rs.000)
LongtermInvestments
3. Otherinvestments
(a) Shares
(aa)Equity
(bb)Preference
(b) MutualFunds
(f) Subsidiaries
3. Otherinvestments
(a) Shares
(aa)Equity
(bb)Preference
(b) MutualFunds
(f) Subsidiaries
Total
SCHEDULE9LOANS
. Year Year
(Rs.000) (Rs.000)
1. SecuritywiseClassification
Secured
(a) Onmortgageofproperty
(aa)InIndia
(bb)OutsideIndia
(b) OnShares,Bonds,Govt.Securities,etc.
Unsecured
Total
2. BorrowerwiseClassification
(a) CentralandStateGovernments
(b) BanksandFinancialInstitutions
(c) Subsidiaries
(d) IndustrialUndertakings
(e) Others(tobespecified)
Total
3. PerformancewiseClassification
(a) Loansclassifiedasstandard
(aa)InIndia
(bb)OutsideIndia
(b) Nonperformingloanslessprovisions
(aa)InIndia
(bb)OutsideIndia
Total
4. MaturitywiseClassification
(a) ShortTerm
(b) LongTerm
Total
Particulars Cost/GrossBlock Depreciation NetBlock

Adjustments
FortheYear
Deductions
UptoLast
Asatyear
Additions
OnSales/
Previous
Opening
ToDate
Closing
Year
Year
end
Goodwill
Intangibles(specify)
LandFreehold
LeaseholdProperty
Buildings
Furniture&Fittings
Information
Technology
Equipment
Vehicles
OfficeEquipment
Others(Specifynature)
Total
Workinprogress
GrandTotal
PreviousYear

SCHEDULE11CASHANDBANKBALANCES
. Year Year
(Rs.000) (Rs.000)
1. Cash(includingcheques,draftsandstamps)
2. BankBalances
(a) DepositAccounts
(aa)Shortterm(duewithin12months)
(bb)Others
(b) CurrentAccounts
3. Moneyatcallandshortnotice
(a) Withbanks
Total
Balanceswithnonscheduledbanksin2and3above
SCHEDULE12ADVANCESANDOTHERASSETS
. Year Year
(Rs.000) (Rs.000)
Advances
1. Reservedepositswithcedingcompanies
2. Applicationmoneyforinvestments
3. Prepayments
4. AdvancestoDirectors/Officers
5. Advancetaxpaidandtaxesdeductedatsource(Net
provisionfortaxation)
Total(A)
OtherAssets
1. Incomeaccruedoninvestments
2. OutstandingPremiums
3. Agentsbalances
4. ForeignAgenciesBalances
5. Duefromotherentitiescarryingoninsurancebusiness
(includingreinsurers)
6. Duefromsubsidiaries/holdingcompany
7. DepositwithReserveBankofIndia[Pursuanttosection7of
InsuranceAct,1938]
Total(B)
Total(A+B)
SCHEDULE13CURRENTLIABILITIES
. Year Year
(Rs.000) (Rs.000)
1. Agentsbalances
2. Balancesduetootherinsurancecompanies
3. Depositsheldonreinsuranceceded
4. Premiumsreceivedinadvance
5. Unallocatedpremium
6. Sundrycreditors
7. Duetosubsidiaries/holdingcompany
8. Claimsoutstanding
9. DuetoOfficers/Directors
Total
SCHEDULE14PROVISIONS
. Year Year
(Rs.000) (Rs.000)
1. ReserveforUnexpiredRisk
2. Fortaxation(lesspaymentsandtaxesdeductedatsource)
3. Forproposeddividends
4. Fordividenddistributiontax
Total
SCHEDULE15MISCELLANEOUSEXPENDITURE
(Totheextentnotwrittenofforadjusted)
. Year Year
(Rs.000) (Rs.000)
1. Discountallowedonissueofshares/debentures
Total
ReserveforUnexpiredRisk
Thereservemaintainedtomeetanypossibleliabilityinrespectofthosepolicieswhichare
notexpiredattheendofanaccountingyeariscalledreserveforunexpiredrisk.Openingbalance
for reserve for unexpired risk is added to the premium and closing balance of reserve for
unexpired risk is deducted from the premium. The net premium should be shown in revenue
account.Theclosingbalanceofreserveforunexpiredriskshouldbeshowninthebalancesheet
undertheheadprovisions.Atpresentreserveforunexpiredriskwillbecreatedasfollows:
a. 50%ofnetpremiumforfireinsurance,marinecargobusinessandmiscellaneous
insurances.
b. 100%ofnetpremiumformarinehullbusiness.
Inadditiontotheabovereserve,acompanycanmaintainmorereserves.Thenitiscalled
AdditionalReserve.
Illustration4
FromthefollowingfigurestakenfromthebooksofAsiaInsuranceCo.Ltddoingthefireinsurance
business,preparethefinalaccountsfortheyear20102011.
Firefundon1stApril2010 930000
GeneralReserve 450000
Investments 3600000
Premium 2701533
Claimspaid 602815
[email protected] 900000
AdditionalReserveon1stApril2010 330000
75000
ProfitandlossAccount(credit)
112525
Reinsurancepremium
21119
Claimsrecoveredfromreinsurers 48016
Commissiononreinsuranceceded 250000
Advanceincometax 20000
agentsbalance(Debit) 299777
Commissionondirectbusiness 60038
Commissiononreinsuranceaccepted 22300
Outstandingpremium 60000
st
Claimsintimatedbutnotpaidon1 April2010 431947
Expensesofmanagement 36000
Auditfees(General) 5804
Rateandtax(General) 67500
Rent(General) 153000
22500
182462
Sundrycreditors
Cashinhandandbankbalances

Thefollowingfurtherinformationmayalsobenoted:
1. ExpensesofmanagementincludesurveyfeesandlegalexpensesofRs.36000andRs.20000
relatingtoclaims
2. Claimsintimatedbutnotpaidon31stMarch2011Rs.104000
3. Incometaxtobeprovided@55%
4. Proposeddividend8%
5. TransfertogeneralreserveRs.200000
6. Reserveforunexpiredrisktobekept@40%ofnetpremium.
Solution:
FORMBRA
Nameoftheinsurer:AsiaInsuranceCo.Ltd
. ule Year Year
1. PremiumsEarned(Net) 1 2483405
Total(A) 2483405
1. ClaimsIncurred 2 681696
2. Commission 3 311799
3. OperatingExpensesrelatedtoinsurancebusiness 4 375947
Total(B) 1369422
OperatingProfit/(Loss)fromFirebusiness 1113963
(C)=(AB)

Appropriations
Total(C) 1113963
FORMBPL
ProfitandLossAccountfortheyearended31stMarch,2011
. ule Year Year
(a) FireInsurance 1113963
(b) MarineInsurance

2.
153000


3. 1266963
Total(A)
Fordiminutioninthevalueof
investments(net)
ForDoubtfulDebts
5. OtherExpenses
(a) Expensesotherthanthosedirectly
relatedtotheinsurancebusiness
Rent67500
Ratesandtaxes5804
auditfees36000 109304
Total(B) 109304
Profitbeforetax 1157659
Provisionfortaxation() 636712
Profitaftertax 520947
Appropriations
(a) Interimdividendspaidduringthe
year
(b) Proposedfinaldividend
(900000x8%) 72000
(c) DividendDistributionTax
(d) TransfertoReservesorother
accounts(tobespecified) 200000
generalreserve
272000
BalanceofProfit/Lossbroughtforwardfromlast 248947
year 75000
BalancecarriedforwardtotheBalanceSheet
323947
FORMBBS
. ule Year Year
SourcesofFunds
ShareholdersFunds:
ShareCapital 5 900000
ReservesandSurplus 6 973947
Borrowings 7
Total 1873947

ApplicationofFunds
Investments 8 3600000
Loans 9
FixedAssets 10
3600000
CurrentAssets
CashandBankBalances 11 182462
AdvancesandOtherAssets 12 292300
SubTotal(A) 474762
Provisions 14 2074315
SubTotal(B) 2200815
Total 1873947
SchedulesformingpartofBRA
Premium 2701533
less:Reinsurance 112525
Netpremium 2589008
Adjustmentforchangesforreserveforunexpiredrisk
Add:Openingbalanceofreserve(930000+330000) 1260000
3849008
less:closingbalanceofreserve:
2589008x40%=1035603
Additionalopening=330000 1365603 2483405

Schedule2Claimsincurred
Claimspaid 602815
Add:Surveyfees 36000
Legalexpenses 20000
658815
less:Claimsrecoveredfromreinsurance 21119
Netclaimspaid 637696
Add:outstandingattheend 104000
741696
less:outstandingatthebeginning 60000 681696

Schedule3Commission
Commissionpaid 299777
Add:Reinsurancecommissionaccepted 60038
359815
Less:Reinsurancecommissionceded 48016 311799

ExpensesofManagement 431947
less:surveyfeesandlegalexpenses(36000+20000) 56000 375947

SchedulesformingpartofBBS
Schedule5ShareCapital 900000
Schedule6ReservesandSurplus
GeneralReserve 450000
Add:Additional 200000
650000
BalanceinP&LA/c 323947 973947

Schedule9Loans Nil
Schedule11CashandBankBalances 182462
Agentsbalances 20000
outstandingpremium 22300 292300

SundryCreditors 22500
Claimsintimatedbutnotpaid 104000 126500

Schedule14Provisions
Reserveforunexpiredrisk(closing) 1365603
Provisionfortax 636712
Proposeddividend 72000 2074315

Schedule15MiscellaneousExpenditure Nil
Illustration5:FromthefollowingtrialbalanceofZenithInsuranceCompanyLtdprepareRevenue
AccountforFireandMarinebusinessandProfitandLossAccountfortheyearended31stMarch
2011andaBalanceSheetonthatdate:
Investments 406980
Freeholdpremises 306142
Leaseholdpremises 12604
Sundrydebtors 17918
Advanceincometaxoninterestanddividend 4513
Claimspaidandoutstanding:
Fire 102412
Marine 261512
Expensesofmanagement:
Fire 96512
Marine 142218
Commission:
Fire 34921
Marine 62857
Interestaccrued 919
Officefurniture 14761
Preliminaryexpenses 90212
Cashandbankbalance 101738
Sharecapital([email protected]) 400000
Claimsadmittedbutnotpaid:
Fire 4620
Marine 9808
Creditors 44962
Duetoreinsurers:
Fire 2471
Marine 4143
Interestanddividend 19512
Otherincomes 807
Premiumreceived:
Fire 356418
Marine 859960
1702701 1702701
Provisionforunexpiredriskistobemadeat50%ofthepremiumreceivedforfirebusiness
and100%ofthepremiumreceivedformarinebusiness.
Solution:
FORMBRA
Nameoftheinsurer:ZenithInsuranceCo.Ltd
No Particulars Sched Fire Marine
. ule
1. PremiumsEarned(Net) 1 178209
Total(A) 178209
1. ClaimsIncurred 2 102412 261512
2. Commission 3 34921 62857
3. OperatingExpensesrelatedtoinsurancebusiness 4 96512 142218
Total(B) 233845 466587
OperatingProfit/(Loss)fromFirebusiness 55636 466587
(C)=(AB)

Appropriations
Total(C) 55636 466587
FORMBPL
ProfitandLossAccountfortheyearended31stMarch,2011
No Particulars Sche Current Previous
. dule Year Year
(a) FireInsurance 55636
(b) MarineInsurance 466587
2. Incomefrominvestments
(a) Interest,dividends&rentGross 19512
3. Otherincome(tobespecified) 807
Total(A)
501904
(a) Fordiminutioninthevalueof
investments(net)
(b) ForDoubtfulDebts
5. OtherExpenses
(a) Expensesotherthanthosedirectly
relatedtotheinsurancebusiness
Total(B)

BalancecarriedforwardtotheBalanceSheet(A)(B)
501904

FORMBBS
N Particulars Sched Current Previous
o. ule Year Year
SourcesofFunds
ShareholdersFunds:
ShareCapital 5 309788
Borrowings 7
Total 309788
ApplicationofFunds
Investments
Loans 8 406980
FixedAssets 9
CurrentAssets 10 333777
AdvancesandOtherAssets
SubTotal(A) 11 101738
Provisions
SubTotal(B) 171300
13
14

writtenofforadjusted) 1104173
DebitBalanceinProfitandLossAccount 932873
15
Total
501904
309788
SchedulesformingpartofBRA
Particulars Fire Marine
Premium(Net) 356418 859960
less:closingbalanceofreserve:
50%offireand100%ofmarine 178209 859960
178209
Schedule2Claimsincurred
Claimspaid 102412 261512
Schedule3Commission
Commissionpaid 34921 62857
ExpensesofManagement 96512 142218
SchedulesformingpartofBBS
Schedule5ShareCapital
Paidupshares 400000
less:Preliminaryexpenses 90212 309788
Schedule6ReservesandSurplus Nil

Schedule9Loans
Freeholdpremises 306412
Leaseholdpremises 12604
Officefurniture 14761 333777
Schedule11CashandBankBalances
CashinhandandBankbalances 101738

Sundrydebtors 17918
Accruedinterest 69562
919


SundryCreditors
44962
Claimsadmittedbutnotpaid(4620+9808)
14428
Duetoreinsurers
6614 66004

Schedule14Provisions

Reserveforunexpiredrisk(closing)

Fire
178209 1038169
Marine
859960 Nil

Schedule15MiscellaneousExpenditure
Exercises:
1. FollowingwerethebalanceextractedfromthetrialbalanceoftheSouthernLifeInsurance
Co.Ltd.at31stMarch2011:
Rs.000s Rs.000s
Balanceofaccountatthe Claimsadmittedbutnot
beginningoftheyear 2000000 paid 6000
Govt.Securities 1000000 Surrenders 20000
Profitonrealizationof Singlepremiums 80000
assets 2000 Considerationforannuities
Investmentfluctuation granted 50000
account 10000 Interest,dividendsandrent
Claimsunderpoliciesby received 70000
death 60000 Depreciationonfurniture 3000
Claimsunderpoliciesby Administrativeexpenses 36000
maturity 100000 Salaries 3000
Loansonmortgages 560000 Auditorsfees 1500
Loansonpolicies 300000 Directorsfees 300
Freeholdpropertyand 103000 Legalexpenses 1000
furniture 3600 Advertising 1400
Sundrycreditors 2000 Printing,stationeryand
Outstandingpremiums 24000 others 10800
Commissionpaid 24000 Cashatbank 168400
Interestaccruednotdue 3000 Provisionfordepreciation 3000
Premium(otherthan
single) 200000
PrepareaRevenueAccountandBalancesheet.
Ans:(Profit:Rs.141000andBalancesheetTotal:Rs.2151000)
2. FromthefollowingbalancesofMysoreGeneralInsuranceCo.Ltd.ason31stMarch2011,
prepareRevenueAccounts,Profit&LossAccountandBalancesheet.
Claimspaidless Building(costRs.125000) 87000
reinsurance: Officeequipment(cost
Fire 80000 Rs.48000) 30000
Marine 62000 Cashinhand 56000
Generalreserve 118000 Cashatbank 104000
Commissionpaid: Premiumlessreinsurance:
Fire 48000 Fire 210000
Marine 39000 Marine 163000
Sharecapital(20000shares Taxdeductedatsource 9000
ofRs.100each) 200000 Furniture(costRs.18000) 12000
Expensesofmanagement Premiumdue:
Fire 53000 Fire 28000
st
Reserveforunexpiredrisk Claimsoutstandingon1
(1stApril2010): April2010:
Fire 204000 Fire 14000
Investmentsatcost 2515000 Duefromotherinsurers 27000
Depreciation 21000 Directorsfees 4000
st
Additionalreserves(1 Commissiononreinsurance
April2010): ceded:
Fire 132000 Fire 23000
Interestaccrued 25000 Dividends(Credit) 20000
Contingencyreserve 39000 Interestoninvestments 100000
Investmentreserve 47000 Duetootherinsurers 43000
Followingfurtherinformationisalsogiven:
(a) Claimsoutstandingon31stMarch2011are:FireRs.17000,MarineRs.6000
(b) MarketvalueofinvestmentsisRs.2401000.
(c) Increaseadditionalreserveby10%ofnetpremiumfortheyearforfire.
(d) Maintainreservesforunexpiredrisksat50%ofpremiumfortheyearincaseoffire
insuranceand100%ofpremiumfortheyearincaseofmarineinsurance.
Ans:(Fireprofit:Rs.127000,Marineloss:Rs.16000,BalancecarriedtoBalancesheet:Rs.139000
andBalancesheettotal:Rs.2410000).
..

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CORPORATE ACCOUNTING

Calicut University P.O. Malappuram, Kerala, India 673 635

Scrutinized by : Dr. K. Venugopalan

2009 BankA/c Dr 760000

preferenceshares 40000 debentures 96000

Incometax ispayable intheassessmentyear ontheincomeearnedduringtheprevious

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No Particulars Sched Current Previous

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