UNIT II: COMPANY ACCOUNTS

Introduction of the Company

A company incorporated under the Companies Act 1956, is referred as a limited
– Liability Company, because the liability of its members is limited to the
amount that they have agreed to contribute to the company by way of share
capital. In case of a company limited by guarantee, the liability of its members
is limited to the amount specified in the Memorandum of Association.
Meaning and Definition of Company
In common parlance company means as association of persons formed for the
economic gain of its members. A joint stock company is an artificial person,
created by law, with a fixed capital, divisible into transferable shares, with
perpetual succession and common seal. The company has a separate legal entity.
It must be compulsorily registered.
According to Justice Lindely, “A company is an association of many persons
who contribute money or money’s worth to a common stock and employs it for
a common purpose. The common stock so contributed is denoted in money and
is the capital of the company. The persons who contribute it for to whom it
belongs are members”.
Formation of Companies
The promoters of company are required to file the following fundamental
documents with register of the companies for its incorporation.
1. Memorandum of Association: Memorandum means the Memorandum of
Association of a company as originally formed or as altered from time to time in
pursuance of any previous Company Law of this Act. It is the most important
charter of the Company. It contains the following:
● Name
● Domicile
● The objects
● Statement of liability
● Authorized capital & its divisions
 ● Declaration of association
2. Articles of Association: Articles means the Articles of Association of a
company as originally framed or as altered from time to time in pursuance of
any previous Companies law or of this act. It determines the constitution for the
internal management of the company. It defines relationship between the
various members within the company, as well as between the company and its
members.
Characteristics of Company
1. Separate legal existence: A company is a separate legal entity distinct
from its members. It can buy, sell or own assets, borrow money and
employ people; it is liable to pay taxes and it can even be declared
bankrupt.
2. Limited liability of shareholders: Since a company is a separate legal
entity, it is obliged to pay its debts from its assets. The liability of the
members is limited to the amount they have invested in the company.
3. Voluntary association: A company is a voluntary association of persons.
No law can compel persons to form a company.
4. Free transferability of ownership rights: The ownership rights of a
company, called shares, can be freely transferred by one individual to
another.
5. Perpetual existence: A company continues to exist until it is dissolved
by a legal process.
6. Common seal: The actions of a company are authenticated by affixing its
common seal to a document.
7. Profession management: The shareholders of a company elect a board
of directors. The board appoints a chief executive and other individuals to
manage a business.
8. Government regulation: A company is subject to detailed regulation by
the government and regulatory agencies.
Kinds of Companies
1. From the Point of View of its Formation, Companies are of three kinds:
i). Chartered Companies: Those Companies, which are incorporated
under a special charter by the kind of Queen of England. E.g. East India
Company.
ii). Statutory Companies: These companies are formed by a special Act
of Parliament. E.g. Reserve Bank of India, State Bank of India.
iii). Registered Companies: Such companies, which are incorporated
under companies Act 1956, or were registered under any previous
Companies Act.
2. From the Point of View of Public Investment, company may be of two
kinds:
i). Private Company: A private company is one which by its Articles of
Association
a) Restricts the right of the members to transfer shares
b) Limits the number of members to fifty excluding past or present
employees of the company who are the members of the company;
c) Prohibits any invitation to the public to subscribe for its shares or
debenture
Any type of business can set up as a private limited company – for example, a
plumber, hairdresser, photographer, lawyer, dentist, accountant or driving
instructor.
ii). Public Company: Public company means a company, which is not a private
company, which do not contain the requisite restrictions to make it a private
limited company, is called a public company.
3. From the Point of View of Liability, there are three types of companies:
i). Limited Company: In case of such companies the liability of each member
(shareholder) is limited to the extent of a face value of share held by him.
ii). Unlimited Company: They are large partnership registered under the
Companies Act and the members just like a partner have unlimited liability and
both their share contribution and the personal property will be responsible to
pay the liability of the company in the condition of windup.
iii). Guarantee Company: The liability of the members of such companies is
limited to the amount he has undertaken to contribute to the assets of the
company in the event of its windup. Sports clubs, trade associations, are few
examples of guarantee company.
4. Foreign Company: The companies which are incorporated outside India but
which had a place of business in India. These companies are registered in a
country outside India and governed by the law of that country.

Format of Trading and Profit & Loss Account of XYZ Ltd.

for the Year Ending on _______
Dr Cr
Particulars Amt. Particulars Amt.(Cr.)
(Dr.)
To Opening stock XXX By Sales XXX
To Purchases XXX
XXX XXX Less: SR XXX
Less: PR XXX
XXX XXX By Closing Stock XXX
To Wages XXX By Gross Loss (transferred
To Factory expenses XXX to P&L A/c)
To Gross Profit c/d
(transferred to P&L A/c)

XXX XXX
To Gross Loss b/d XXX By Gross Profit b/d XXX
To Indirect Expenses: By Other Incomes:
To Selling expenses: By Interest received XXX
To Advertisement XXX By Discount received XXX
To Traveller’s salaries, XXX By Commission received XXX
expenses & commission By Rent from tenants XXX
To Bad debts XXX By Income from XXX
To Godown rent XXX investments XXX
To Export expenses XXX By Apprenticeship XXX
To Carriage outwards XXX Premium XXX
To Bank charges XXX By Interest on Debentures / XXX
To Agent’s commission XXX bonds XXX
To Upkeep of motor lorries XXX By Income from any other
/ vans source
To Management expenses By Miscellaneous Revenue
(office & admin exps): XXX receipts
To Rent, rates & taxes XXX
To Heating & Lighting XXX By Net Loss transferred
To Office salaries XXX to Capital A/c
To Printing & Stationary XXX
To Postage & Telegrams XXX
To Telephone charges XXX
To Legal expenses XXX
To Audit fees XXX
To Insurance XXX
To General expenses XXX
To Depreciation XXX
To Repairs & Maintenance
To Financial expenses:
To Discount allowed XXX
To Interest on debentures XXX
To Interest on loans XXX
To Extraordinary XXX
expenses: XXX
Loss by fire (not covered
by insurance) XXX
To Net Profit transferred
to Capital A/c
Total XXX Total XXX

Profit and Loss Appropriation Account: it is prepared as a separate account,

or as the extended version of the profit and loss account. It shows how the
profits earned are distributed. Three parts, dividend to the shareholders, transfer
of specific reserves such general reserves, debenture redemption reserve, etc.,
balance profits will be passed on to the balance sheet and added to the capital.

Profit & Loss Appropriation Account

 Amount Amount
(Rs.) (Rs.)
To Interim dividend paid XXX By balance b/d (from XXX
previous year)
To General reserve XXX By Net profit b/d XXX
(transfer)
To Preference Dividend XXX
paid
To Proposed Dividend XXX
To balance c/d (surplus XXX
carried to Balance sheet)
XXX XXX

Balance Sheet of XYZ Ltd. as on ________

Liabilities Amount Assets Amount

(INR) (INR)
Share Capital: Fixed Assets:
Authorised Land & Buildings
Issued Plant & Machinery
Subscribed Furniture & Fittings
Called up Vehicles
Less: Calls in arrears Goodwill
Paid up Capital Patents
Add: Forfeited shares A/c Trade marks
Capital work-in progress
Reserves & Surplus: Investments:
Capital Reserves In government securities
Share premium Shares, debentures, etc.
General Reserve
P & L A/c
Secured Loans: Current Assets, Loans &
Debentures Advances
Loans from banks, Fis A. Current Assets

Bills Receivable
Sundry debtors
Cash in hand
 Cash at bank
Closing stock
Accrued Income
Unsecured Loans B. Loans & Advances
Fixed deposit
Loan from subsidiaries, Prepaid expenses
etc. Advances to subsidiaries
Advance payment of IT
Current Liabilities & Miscellaneous Expenditure:
Provisions: Preliminary expenses
A. Current Liabilities P&L A/c, etc.

Sundry Creditors
Bills Payable
Bank overdraft
Outstanding expenses
Unclaimed dividends
B. Provisions

Provision for taxation

Proposed dividends

Problem 1: RHJ Ltd. was registered with an authorized capital of Rs. 100,000
consisting of 10,000, 8% preference shares of Re. 1 each and 90,000 ordinary
shares of Re. 1 each. All the preference shares have been issued but only 40,000
of the ordinary shares have so far been offered to the public. There are no
arrears on call accounts. The following balances were extracted from the books
on 31.12.2023.

Particulars Debit (Rs.) Credit (Rs.)

Premises at cost 35,000
Machinery (Cost Rs. 35,000) 19,500
Motor Car (at cost – 1.7.2023) 800
Furniture & Fittings at cost 1,200
Purchase and Sales 65,000 110,000
Purchase and Sales returns 240 360
Factory wages 9,205
Office salaries 3,430
Stock on 1st Jan 5,500
Cash in hand 350
Bank balance 14,800
Debtors & Creditors 8,850 6,250
Provision for bad debts 400
 Rates & taxes 3,750
Insurance 480
Factory lighting & heating 920
Office lighting & heating 410
Preference capital 10,000
Ordinary capital 40,000
7% Debentures 5,000
Debenture interest to 30.6.2023 175
Preference dividend for half year 400
5% Interim dividend on ordinary 2,000 40,000
shares
172,010 172,010
Prepare the trading and profit and loss account of the company for the year and
a balance sheet as at 31.12.2023 after making the following adjustments:

a. Stock on 31st December was valued at Rs. 6,200

b. Provide for debenture interest and preference dividend for the second half
of the year.
c. Provision for bad debts to be 4% of the debtor balances.
d. Depreciate machinery by 10% on cost and motor car by 20% p.a.
e. Transfer Rs. 5,000 to General Reserve account.
f. If profits are available, allow a further 10% dividend on ordinary shares
making 15% for the year.

Solution:

Trading & Profit & Loss Account of M/s. RHJ Ltd. for the year ended 31st
March 2023

Particulars Amount Particulars Amount

(Rs.) (Rs.)
To opening stock 5,500 By Sales 110,000
Less: S.R. 240 109,760
To Purchases 65,000 By Closing stock 6,200
Less: P.R. 360 64,640
To Factory wages 9,205
To Factory lighting & 920
heating
To Gross Profit c/d 35,695
115,960 115,960
To Office salaries 3,430 By Gross Profit b/d 35,695
To Rates & Taxes 3,750 By Provision for bad
debts (old) 400
 Less: New provision 354 46
required
To Insurance 480
To Office lighting & 410
heating
To Debenture interest 175
Add: Outstanding 175 350
To Depreciation:
Machinery (35,000 X 3,500
10%)
Motor Car (800 X 20% X 80
6/12)
To Net Profit c/d 23,741
35,741 35,741
To Preference dividend 400 By balance b/d ---
paid
To Preference dividend 400 By Net Profit b/d 23,741
proposed
To Interim dividend paid 2,000
To Proposed dividend 4,000
40,000 X 10%
To General reserve 5,000
To Surplus carried to 11,941
balance sheet
23,741 23,741
Note: Interim dividend Rs. 2,000 and proposed dividend Rs. 4,000 together
amount to 15% on the paidup ordinary capital.

Balance Sheet of M/s. RHJ Ltd. as on 31st March 2023

Particulars Amount Particulars Amount

(Rs.) (Rs.)
Share capital: Fixed Assets:
Authorised capital: Machinery 19,500
10,000 8% Pref. shares Less: Depreciation 3,500 16,000
of Re. 1 each 10,000 Premises 35,000
90,000 ordinary shares Motor car 800
of Re. 1 each 90,000 100,000 Less: Depreciation 80 720
Furniture & Fittings 1,200
Issued and Paid up capital: Investments ---
10,000 8% Pref. shares 10,000
of Re. 1 each
40,000 Ordinary shares 40,000
of Re. 1 each
Reserves & surplus: Current Assets, Loans
General Reserve 5,000 and Advances:
Profit & Loss account 11,941
Secured Loans: A. Current Assets:
7% Debentures 5,000 Cash in hand 350
Debenture interest due 175 Cash at bank 14,800

Unsecured loans --- Debtors 8,850

Less: Prov. for 354 8,496
bad debts
Current Liabilities & Closing stock 6,200
Provisions:
A. Current Liabilities:
Creditors 6,250

B. Proposed dividend: B. Loans & Advances ---

400
On preference shares 4,000 Miscellaneous ---
Proposed dividend on Expenditure
equity shares
82,766 82,766

Problem 2:

From the following ledger balances of Sri Meenakshi Mills Ltd., prepare the
Trading & Profit & Loss account and Balance Sheet as on 31.3.2023.

Rs. Rs.
Share capital 250,000 Wages 70,000
Stock 50,000 Insurance paid upto 6,720
31.12.2023
Sales 425,000 Salaries 18,500
Purchases 300,000 Cash & bank balance 34,700
Rent 6,000 Bills payable 15,700
Furniture 17,100 General expenses 8,950
Profit & loss A/c 6,220 Printing & Stationery 2,400
Advertising 3,800 Office expenses 4,200
Bonus 10,500 Plant & machinery 180,500
Debtors 38,700 Calls in arrears 5,000
Creditors 60,200 Commission received 3,150
Bad debts 3,200
Adjustments:
Expenses payable: Rent Rs. 600, Wages Rs. 5,200, Salaries Rs. 1,200, Closing
stock on 31.3.2023 Rs. 91,500.

Depreciation on Plant & Machinery 15%, Furniture 10%.

Solution:

Trading & Profit & Loss Account of M/s. Meenakshi Mills for the year
ended 31st March 2023

Particulars Amount Particulars Amount (Rs.)

(Rs.)
To opening stock 50,000 By Sales 425,000
To Purchases 300,000 By Closing stock 91,500
To Wages 70,000 75,200
Add: O.S. 5,200
To Gross Profit c/d 91,300
5,16,500 5,16,500
To Rent 6,000 6,600 To Gross Profit c/d 91,300
Add: O.S. 600
To Advertising 3,800 To Commission Recd 3,150
To Bonus 10,500
To Bad debts 3,200
To Insurance 6,720 8,960
Add: O.S. 2,240
(6,720 X 3/9 = 2,240)
To Salaries 18,500 19,700
Add: O.S. 1,200
To General expenses 8,950
To Printing & Stationery 2,400
To Office expenses 4,200
To Depreciation: 28,785 By Net Loss c/d 2,645
P & M @ 15% 27,075
Furniture @ 10% 1,710
97,095 97,095
To Net Loss b/d 2,645 By balance b/d 6,220
To surplus carried to B/S 3,575
6,220 6,220

Balance Sheet of M/s. Meenakshi Mills as on 31st March 2023

Liabilities Amount Assets Amount

(Rs.) (Rs.)
Share Capital: Fixed Assets:
Authorised Capital --- Furniture 17,100
Issued & Subscribed --- Less: Dep 1,710 15,390
Capital Plant & Mach 180,500
Called up Capital 250,000 Less: Dep. 27,075 153,425
Less: Calls in arrears 5,000
Paid up Capital 2,45,000
Reserves & Surplus: 3,575 Investments ---
Profit & Loss A/c
Secured Loans --- Current Assets, Loans
& Advances:
A. Current Assets
Cash & bank bal. 34,700
Closing Stock 91,500
38,700
Debtors

Unsecured Loans --- B. Loans & ---

Advances

Current Liabilities & Miscellaneous ---

Provisions: expenditure
Creditors 60,200
Bills Payable 15,700
Outstanding expenses:
Insurance 2,240
Rent 600
Wages 5,200
Salaries 1,200 9,240
Provisions ---
333,715 333,715

Problem 3:

The following is the trial balance of Sigma Ltd. for the year ending 30 June,
2023.

Debits Rs. Credits Rs.

Land & building 300,000 Creditors 40,000
Plant & machinery 450,000 Bills payable 20,000
Furniture 40,000 General Reserve 200,000
Goodwill 60,000 Profit & loss A/c for 90,000
1.7.2023 (Cr.)
Debtors 60,000 Sales 625,000
 Bills receivable 26,000 Purchase returns 15,000
Investments (5% Govt. sec.) 30,000 Share capital 700,000
Cash in hand 2,000
Cash at bank 55,000
Preliminary expenses 29,000
Purchases 400,000
Sales returns 10,000
Stock (1.7.2023) 85,000
Wages 47,000
Salaries 55,000
Rent, Rates & Taxes 9,000
Carriage inwards 6,500
Legal charges 2,500
Trade expenses 23,000
16,90,000 16,90,000
Additional information:

a. Original cost:
Land & building Rs. 250,000
Plant & Machinery Rs. 600,000
Furniture Rs. 60,000
Additions during the year:
Land & building Rs. 50,000
Plant & Machinery Rs. 20,000

Depreciation is to be charged on plant & machinery & furniture at 10% on

original cost.

b. Of the debtors, Rs. 10,000 is to be considered bad and Rs. 5,000 is

considered doubtful.
c. Stock on 30 June, 2023 Rs. 130,000.
d. Provide for income tax Rs. 35,000.

Prepare profit & loss account and Balance sheet as on 30th June 2023.

Problem 4:

Big Bull Ltd. has a nominal capital of INR 600,000 divided into shares of INR
10 each. The following trial balance is extracted from the books of the company
as on 31.12.2023.
 Debits Rs. Credits Rs.
Calls in arrear 7,500 6% Debentures 300,000
Premises (Rs. 60,000 added 360,000 P&L A/c (1.1.2023) 14,500
on 1.7.2023)
Machinery 300,000 Creditors 50,000
Interim dividend paid 7,500 General Reserve 25,000
Purchases 185,000 Share capital (called 460,000
up)
Preliminary expenses 5,000 Bills payable 38,000
Freight 13,100 Sales 415,000
Director’s fees 5,750 Provision for bad 3,500
debts
Bad debts 2,110
Government securities 60,000
Stock (1.1.2023) 75,000
Furniture 7,200
Sundry debtors 87,000
Goodwill 25,000
Cash 750
Bank 39,900
Wages 84,800
General expenses 16,900
Salaries 14,500
Debenture interest 9,000
13,06,000 13,06,000
Prepare the final accounts of the company for the year ending 31.12.2023 in the
prescribed form after taking into account the following adjustments:

a. Depreciate machinery by 10% and furniture by 5%.

b. Write off half of the preliminary expenses.
c. Wages include Rs. 10,000 paid for the construction of a compound wall
to the premises and no adjustment was made.
d. Provide 5% for bad debts on sundry debtors.
e. Transfer Rs. 10,000 to general reserve.
f. Provide for income tax Rs. 25,000.
g. Stock on 31.12.2023 was Rs. 101,000.

Problem 5:

The following are the balances of JAB Co. Ltd. as on 31.3.2024.

Debits Rs. Credits Rs.

Premises 30,72,000 Share capital 40,00,000
 Plant 33,00,000 12% Debentures 30,00,000
Stock 750,000 P&L A/c 262,500
Debtors 870,000 Bills payable 370,000
Goodwill 250,000 Creditors 400,000
Cash at bank 406,500 Sales 41,50,000
Cash in hand 75,000 General Reserve 250,000
Interim dividend paid 392,500 Bad debts provision 35,000
on 1.4.2023
Purchases 18,50,000
Preliminary expenses 50,000
Wages 979,800
General expenses 68,350
Salaries 202,250
Bad debts 21,100
Debenture interest paid 180,000
124,67,500 124,67,500
Adjustments:

a. Depreciate plant by 15%.

b. Write off Rs. 5,000 from preliminary expenses.
c. Half years debenture interest due.
d. Create 5% provision on debtors for doubtful debts.
e. Provide for income tax at 45%.
f. Stock on 31.3.2024 was Rs. 950,000.
g. Prepare final accounts of the company.