Accountancy 12th Part-2
Accountancy 12th Part-2
Company Accounts
and
Analysis of
Financial Statements
Textbook for Class XII
2020-21
ISBN 978-93-5007-342-1
First Edition
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2020-21
FOREWORD
2020-21
iv
responsible for this book. We wish to thank the Chairperson of the advisory
group in Social Sciences Professor Hari Vasudevan and the Chief Advisor
for this book, Professor R.K. Grover, (Retd.) Director, School of Management
Studies (IGNOU), New Delhi for guiding the work of this committee. Several
teachers contributed to the development of this textbook; we are grateful to
their principals for making this possible. We are indebted to the institutions
and organisations which have generously permitted us to draw upon their
resources, material and personnel. We are especially grateful to the members
of the National Monitoring Committee, appointed by the Department of
Secondary and Higher Education, Ministry of Human Resource Development
under the Chairpersonship of Professor Mrinal Miri and Professor
G.P. Deshpande, for their valuable time and contribution. As an organisation
committed to the systemic reform and continuous improvement in the
quality of its products, NCERT welcomes comments and suggestions which
will enable us to undertake further revision and refinement.
Director
New Delhi National Council of Educational
20 November 2006 Research and Training
2020-21
TEXTBOOK DEVELOPMENT COMMITTEE
MEMBER-COORDINATOR
Shipra Vaidya, Professor, Department of Education in Social Sciences,
NCERT, New Delhi
2020-21
2020-21
ACKNOWLEDGEMENTS
NOTE
The recent accounting practices adopted in the presentation of
corporate financial reporting as per the Companies Act 2013 has
resulted in the updation of this textbook upto August 16, 2019.
NCERT welcomes comments and suggestions which will enable us to
undertake further revision and refinement of this volume.
2020-21
CONTENTS OF
ACCOUNTANCY – NOT-FOR-PROFIT ORGANISATION
2020-21
CONTENTS
FOREWORD iii
Chapter 1 Accounting for Share Capital 1
1.1 Features of a Company 1
1.2 Kinds of Companies 2
1.3 Share Capital of a Company 3
1.4 Nature and Classes of Shares 6
1.5 Issue of Shares 7
1.6 Accounting Treatment 9
1.7 Forfeiture of Shares 35
2020-21
x
2020-21
Accounting for Share Capital 1
2019-20
2 Accountancy : Company Accounts and Analysis of Financial Statements
it has certain special features which distinguish it from the other forms of
organisation. These are as follows:
• Body Corporate: A company is formed according to the provisions of
Law enforced from time to time. Generally, in India, the companies are
formed and registered under Companies Law except in the case of Banking
and Insurance companies for which a separate Law is provided for.
• Separate Legal Entity: A company has a separate legal entity which is
distinct and separate from its members. It can hold and deal with any
type of property. It can enter into contracts and even open a bank account
in its own name.
• Limited Liability: The liability of the members of the company is limited
to the extent of unpaid amount of the shares held by them. In the case of
the companies limited by guarantee, the liability of its members is limited
to the extent of the guarantee given by them in the event of the company
being wound up.
• Perpetual Succession: The company being an artificial person created by
law continues to exist irrespective of the changes in its membership. A
company can be terminated only through law. The death or insanity or
insolvency of any member of the company in no way affects the existence of
the company. Members may come and go but the company continues.
• Common Seal: The company being an artificial person, cannot sign its name
by itself. Therefore, every company is required to have its own seal which
acts as official signatures of the company. Any document which does not
carry the common seal of the company is not binding on the company.
• Transferability of Shares: The shares of a public limited company are
freely transferable. The permission of the company or the consent of any
member of the company is not necessary for the transfer of shares. But
the Articles of the company can prescribe the manner in which the transfer
of shares will be made.
• May Sue or be Sued: A company being a legal person can enter into
contracts and can enforce the contractual rights against others. It can
sue and be sued in its name if there is a breach of contract by the company.
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Accounting for Share Capital 3
his part whatsoever may be the debts of the company. He need not pay a
single paise from his private property. However, if there is any liability
involved, it can be enforced during the existence of the company as well
as during the winding up.
(ii) Companies Limited by Guarantee: In this case, the liability of its members
is limited to the amount they undertake to contribute in the event of the
company being wound up. Thus, the liability of the members will arise
only in the event of its winding up.
(iii) Unlimited Companies: When there is no limit on the liability of its
members, the company is called an unlimited company. When the
company’s property is not sufficient to pay off its debts, the private
property of its members can be used for the purpose. In other words, the
creditors can claim their dues from its members. Such companies are
not found in India even though permitted by the Companies Act.
On the basis of the number of members, companies can be divided into
three categories as follows:
(i) Public Company: A public company means a company which (a) is not a
private company; (b) is a company which is not a subsidiary of a private
company.
(ii) Private Company: A private company is one which by its articles:
(a) Restricts the right to transfer its shares;
(b) A private company must have at least 2 persons, except in case of
one person company;
(c) Limits the number of its members to 200 (excluding its employees);
(iii) One Person Company (OPC): Sec. 2 (62) of the companies Act, 2013,
defines OPC as a “company which has only one person as a member”.
Rule 3 of the Companies (Incorporation) Rules, 2014 provides that:
(a) Only a natural person being an Indian citizen and resident in
India can form one person company,
(b) It cannot carry out non-banking financial investment activities.
(c) Its paid up share capital is not more than Rs. 50 Lakhs
(d) Its average annual turnover of three years does not exceed
Rs. 2 Crores.
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4 Accountancy : Company Accounts and Analysis of Financial Statements
2019-20
Accounting for Share Capital 5
Subscribed Capital
Let us take the following example and show how the share capital will be
shown in the balance sheet. Sunrise Company Ltd., New Delhi, has registered
its capital as Rs. 40,00,000, divided into 4,00,000 shares of Rs. 10 each. The
company offered to the public for subscription of 2,00,000 shares of Rs. 10
each, as Rs. 2 on application, Rs.3 on allotment, Rs.3 on first call and the balance
on final call. The company received applications for 2,50,000 shares. The
company finalised the allotment on 2,00,000 shares and rejected applications
for 50,000 shares. The company did not make the final call. The company received
all the amount except on 2,000 shares where call money has not been received.
The above amounts will be shown in the Notes to Accounts of the balance sheet
of Sunrise Company Ltd. as follows:
Notes to Accounts
Issued Capital
2,00,000 Shares of Rs. 10 each 20,00,000
Subscribed Capital
Subscribed but not fully paid up
2,00,000 Shares of Rs. 10 each, Rs. 8 called up 16,00,000
Less : Calls in Arrears (6,000) 15,94,000
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6 Accountancy : Company Accounts and Analysis of Financial Statements
Shares, refer to the units into which the total share capital of a company is
divided. Thus, a share is a fractional part of the share capital and forms the
basis of ownership interest in a company. The persons who contribute money
through shares are called shareholders.
The amount of authorised capital, together with the number of shares in
which it is divided, is stated in the Memorandum of Association but the classes
of shares in which the company’s capital is to be divided, along with their
respective rights and obligations, are prescribed by the Articles of Association
of the company. As per The Companies Act, a company can issue two types
of shares (1) preference shares, and (2) equity shares (also called ordinary
shares).
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Accounting for Share Capital 7
vary from year to year depending upon the amount of profits available for
distribution. The equity share capital may be (i) with voting rights; or (ii) with
differential rights as to voting, dividend or otherwise in accordance with such
rules and subject to such conditions as may be prescribed.
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8 Accountancy : Company Accounts and Analysis of Financial Statements
Minimum Subscription
The minimum amount that, in the opinion of directors, must be raised to meet the
needs of business operations of the company relating to:
l the price of any property purchased, or to be purchased, which has to be met
wholly or partly out of the proceeds of issue;
l preliminary expenses payable by the company and any commission payable
in connection with the issue of shares;
l the repayment of any money borrowed by the company for the above two
matters;
l working capital; and
l any other expenditure required for the usual conduct of business operations.
It is to be noted that ‘minimum subscription’ of capital cannot be less than 90%
of the issued amount according to SEBI (Disclosure and Investor Protection)
Guidelines, 2000 [6.3.8.1 and 6.3.8.2]. If this condition is not satisfied, the company
shall forthwith refund the entire subscription amount received. If a delay occurs
beyond 8 days from the date of closure of subscription list, the company shall be
liable to pay the amount with interest at the rate of 15% [Section 73(2)].
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Accounting for Share Capital 9
Irrespective of the fact that shares are issued at par or at a premium, the
share capital of a company as stated earlier, may be collected in instalments
payable at different stages.
1.6 Accounting Treatment
On application : The amount of money paid with various instalment represents
the contribution to share capital and should ultimately be credited to share
capital. However, for the sake of convenience, initially individual accounts are
opened for each instalment. All money received along with application is deposited
with a scheduled bank in a separate account opened for the purpose. The journal
entry is as follows:
Bank A/c Dr.
To Share Application A/c
(Amount received on application for — shares @ Rs. ______ per share)
On allotment : When minimum subscription has been received and certain legal
formalities on the allotment of shares have been duly compiled with, the directors
of the company proceed to make the allotment of shares.
The allotment of shares implies a contract between the company and the
applicants who now become the allottees and assume the status of shareholders
or members.
Allotment of Shares
(Implications from accounting point of view)
l It is customary to ask for some amount called “Allotment Money” from the
allottees on the shares allotted to them as soon as the allotment is made.
l With the acceptance to the offer made by the applicants, the amount of
application money received has to be transferred to share capital account as it
has formally become the part of the same.
l The money received on rejected applications should either be fully returned to
the applicant within period prescribed by law/SEBI.
l In case lesser number of shares have to be allotted, than those applied for the
excess application money must be adjusted towards the amount due on allotment
from the allottees.
l The effect of the later two steps is to close the share application account which
is only a temporary account for share capital transactions.
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10 Accountancy : Company Accounts and Analysis of Financial Statements
Sometimes a combined account for share application and share allotment called
‘Share Application and Allotment Account’ is opened in the books of a company.
The combined account is based on the reasoning that allotment without
application is impossible while application without allotment is meaningless.
These two stages of share capital are closely inter-related. When a combined
account is maintained, journal entries are recorded in the following manner:
1. For Receipt of Application and Allotment
Bank A/c Dr.
To Share Application and Allotment A/c
(Money received on applications for shares
@ Rs. _____ per share).
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Accounting for Share Capital 11
On Calls : Calls play a vital role in making shares fully paid-up and for realising
the full amount of shares from the shareholders. In the event of shares not being
fully called up till the completion of allotment, the directors have the authority
to ask for the remaining amount on shares as and when they decide about the
same. It is also possible that the timing of the payment of calls by the shareholders
is determined at the time of share issue itself and given in the prospectus.
Two points are important regarding the calls on shares. First, the amount
on any call should not exceed 25% of the face value of shares. Second, there
must be an interval of at least one month between the making of two calls unless
otherwise provided by the articles of association of the company.
When a call is made and the amount of the same is received, the journal
entries are as given below:
1. For Call Amount Due
Share Call A/c Dr.
To Share Capital A/c
(Call money due on ___Shares @ Rs. ____ per share)
2. For Receipt of Call Amount
Bank A/c Dr.
To Share Call A/c
(Call money received)
The word/words First, Second, or Third must be added between the words
“Share” and ‘Call’ in the Share Call account depending upon the identity of the
call made. For example, in case of first call it will be termed as ‘Share First Call
Account’, in case of second call it will be ‘Share Second Call Account’ and so on.
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12 Accountancy : Company Accounts and Analysis of Financial Statements
Another point to be noted is that the words ‘and Final’ will also be added to the
last call, say, if second call is the last call it will be termed as ‘Second and Final
Call’ and if it is the third call which is the last call, it will be termed as ‘Third and
Final Call’. It is also possible that the whole balance after allotment may be
collected in one call only. In that case the first call itself, shall be termed as the
‘First and Final Call’.
The following points should be kept in mind while issuing the share capital for
public subscription :
1. The application money should be at least 5% of the face value of the share.
2. Calls are to be made as per the provisions of the articles of association.
3. Where there is no articles of association of its own, the following provisions
of Table A will apply:
(a) A period of one month must elapse between two calls;
(b) The amount of call should not exceed 25% of the face value of the share;
(c) A minimum of 14 days’ notice is given to the shareholders to pay the
amount; and
(d) Calls must be made on a uniform basis on all shares within the same
class.
4. The procedure for accounting for the issue of both equity and preference shares
is the same. To differentiate between the two the words ‘Equity’ and ‘Preference’
is prefixed to each and every instalment.
Illustration 1
Mona Earth Mover Limited decided to issue 12,000 shares of Rs.100 each
payable at Rs.30 on application, Rs.40 on allotment, Rs.20 on first call and
balance on second and final call. Applications were received for 13,000 shares.
The directors decided to reject application of 1,000 shares and their application
money being refunded in full. The allotment money was duly received on all the
shares, and all sums due on calls are received except on 100 shares.
Record the transactions in the books of Mona Earth Movers Limited
Solution
Books of Mona Earth Mover Limited
Journal
Date Particulars L.F. Debit Credit
Amount Amount
(Rs.) (Rs.)
Bank A/c Dr. 3,90,000
To Share Application A/c 3,90,000
(Application money on 13,000 shares @ Rs.30
per share received)
Share Application A/c Dr. 3,60,000
To Share Capital A/c 3,60,000
(Application money transferred to share capital)
2019-20
Accounting for Share Capital 13
Illustration 2
Eastern Company Limited issued 40,000 shares of Rs. 10 each to the public for
the subscription out of its share capital, payable as Rs. 4 on application,
Rs. 3 on allotment and the balance on Ist and final call. Applications were received
for 40,000 shares. The company made the allotment to the applicants in full. All
the amounts due on allotment and first and final call were duly received.
Give the journal entries in the books of the company.
2019-20
14 Accountancy : Company Accounts and Analysis of Financial Statements
Solution
Books of Eastern Company Limited
Journal
Date Particulars L.F. Debit Credit
Amount Amount
(Rs.) (Rs.)
Bank A/c Dr. 1,60,000
To Share Application A/c 1,60,000
(Application money on 40,000 shares @
Rs.4 per share received)
Share Application A/c Dr. 1,60,000
To Share Capital A/c 1,60,000
(Application money transferred to share capital)
Share Allotment A/c Dr. 1,20,000
To Share Capital A/c 1,20,000
(Money due on allotment of 40,000 shares @
Rs. 3 per share)
Bank A/c Dr. 1,20,000
To Share allotment A/c 1,20,000
(Money received on 40,000 shares @ Rs. 3 per
share on allotment)
Share First and Final Call A/c Dr. 1,20,000
To Share Capital A/c 1,20,000
(Money due on 40,000 shares @ Rs. 3 per share
on First and final call)
Bank A/c Dr. 1,20,000
To Share First and Final Call A/c 1,20,000
(First and final call money received)
Do it Yourself
On April 01, 2015, a limited company was incorporated with an authorised capital of
Rs. 40,000 divided into shares of Rs. 10 each. It offered to the public for subscription
of 3,000 shares payable as follows:
On Application Rs. 3 per share
On Allotment Rs. 2 per share
On First Call (One month after allotment) Rs. 2.50 per share
On Second and Final Call Rs. 2.50 per share
The shares were fully subscribed for by the public and application money duly
received on April 15, 2015. The directors made the allotment on May 1, 2015.
How will you record the share capital transactions in the books of a company if
the amounts due has been duly received, and the company maintains the combined
account for application and allotment.
2019-20
Accounting for Share Capital 15
Illustration 3
Cronic Limited issued 10,000 equity shares of Rs. 10 each payable at Rs. 2.50
on application, Rs. 3 on allotment, Rs. 2 on first call, and the balance of Rs. 2.50
on second and final call. All the shares were fully subscribed and paid except of
a shareholder having 100 shares who could not pay for second and final call.
Give journal entries to record these transactions.
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16 Accountancy : Company Accounts and Analysis of Financial Statements
Solution:
Books of Cronic Limited
Journal
Date Particulars L.F. Debit Credit
Amount Amount
(Rs.) (Rs.)
Bank A/c Dr. 25,000
To Share Application A/c 25,000
(Money received on applications for
10,000 shares @ Rs. 2.50 per share)
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Accounting for Share Capital 17
The balance in ‘Calls in Advance’ account is shown as a separate item under the
title Equity and Liabilities in the company’s balance sheet under the head ‘current
liabilities’, as sub-head ‘others current liabilities’. It is not added to the amount of
paid-up capital.
As ‘Calls in Advance’ is a liability of the company, it is under obligation, if
provided by the Articles, to pay interest on such amount from the date of its
receipt up to the date when appropriate call is due for payment. A stipulation is
generally made in the Articles regarding the rate at which interest is payable.
However, if Articles are silent on this account, Table F is applicable which provides
for interest on calls in advance at a rate not exceeding 12% per annum.
The accounting treatment of interest on Calls in Advance is as follows:
1. For Payment of Interest
Interest on Calls in Advance A/c Dr.
To Bank A/c
(Interest paid on Calls in Advance)
Or
2.(a) For Interest due
Interest on Calls in Advance A/c Dr.
To Sundry Shareholder’s A/c
(Interest paid on Calls in Advance)
2.(b) For Interest Paid
Sundry Shareholder’s A/c Dr.
To Bank A/c
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18 Accountancy : Company Accounts and Analysis of Financial Statements
Illustration 4
Konica Limited registered with an authorised equity capital of Rs. 2,00,000
divided into 2,000 shares of Rs. 100 each, issued for subscription of 1,000
shares payable at Rs. 25 per share on application, Rs. 30 per share on allotment,
Rs. 20 per share on first call and the balance as and when required.
Application money on 1,000 shares was duly received and allotment was
made to them. The allotment amount was received in full, but when the first call
was made, one shareholder failed to pay the amount on 100 shares held by him
and another shareholder with 50 shares, paid the entire amount on his shares.
The company did not make any other call.
Give the necessary journal entries in the books of the company to record
these share capital transactions.
Solution
Books of Konica Limited
Journal
Date Particulars L.F. Debit Credit
Amount Amount
(Rs.) (Rs.)
Bank A/c Dr. 25,000
To Equity Share Application A/c 25,000
(Money received on application for 1,000
shares @ Rs. 25 per share)
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Accounting for Share Capital 19
In practice the entries for the amount received are recorded in the cash
book and not in the journal (See Illustration 5).
Illustration 5
Unique Pictures Limited was registered with an authorised capital of Rs. 5,00,000
divided into 20,000, 5% preference shares of Rs. 10 each and 30,000 equity
shares of Rs. 10 each. The company issued 10,000 preference and 15,000 equity
shares for public subscription. Calls on shares were made as under
Equity Shares Preference Shares
(Rs.) (Rs.)
Application 2 2
Allotment 3 3
First Call 2.50 2.50
Second and Final Call 2.50 2.50
All these shares were fully subscribed. All the dues were received except the
second and final call on 100 equity shares and on 200 preference shares. Record
these transactions in the journal. You are also required to prepare the cash
book and balance sheet.
Solution
Books of Unique Pictures Limited
Journal
Date Particulars L.F. Debit Credit
Amount Amount
(Rs.) (Rs.)
Equity Share Application A/c Dr. 30,000
5% Preference Share Application A/c Dr. 20,000
To Equity Share Capital A/c 30,000
To 5% Preference Share Capital A/c 20,000
(Transfer of application money)
Equity Share Allotment A/c Dr. 45,000
5% Preference Share Allotment A/c Dr. 30,000
To Equity Share Capital A/c 45,000
To 5% Preference Share Capital A/c 30,000
(Amount due on allotment)
Equity Share First Call A/c Dr. 37,500
5% Preference Share First Call A/c Dr. 25,000
To Equity Share Capital A/c 37,500
To 5% Preference Share Capital A/c 25,000
(First call money due)
Equity Share Second and Final Call A/c Dr. 37,500
5% Preference Share Second and final Call A/cDr. 25,000
To Equity Share Capital A/c 37,500
To 5% Preference Share Capital A/c 25,000
(First call money due)
Call in Arrears A/c Dr. 750
To Equity Share Second and Final Call A/c 250
To 5% Preference Share Final Call A/c 500
(For Calls in Arrears)
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20 Accountancy : Company Accounts and Analysis of Financial Statements
Notes to Accounts
1. Share Capital
Authorised Capital
30,000 Equity Shares of Rs. 10 each 3,00,000
20,000 5% Preference Shares of Rs. 10 each 2,00,000
5,00,000
Issued Capital
15,000 Equity Shares of Rs. 10 each 1,50,000
10,000 5% Preference Shares of Rs. 10 each 1,00,000
2,50,000
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Accounting for Share Capital 21
Subscribed Capital
Illustration 6
Rohit & Company issued 30,000 shares of Rs.10 each payable Rs.3 on
application, Rs.3 on allotment and Rs.2 on first call after two months. All money
due on allotment was received, but when the first call was made a shareholder
having 400 shares did not pay the first call and a shareholder of 300 shares
paid the money for the second and final call of Rs.2 which had not been made as
yet.
Give the necessary journal entries in the books of the company.
Solution:
Books of Rohit & Company
Journal
Date Particulars L.F. Debit Credit
Amount Amount
(Rs.) (Rs.)
Bank A/c Dr. 90,000
To Share Application A/c 90,000
(Application money received on 30,000
shares @ Rs.3 per share)
Share Application A/c Dr. 90,000
To Share Capital A/c 90,000
(Application money transferred to share
capital account)
Share Allotment A/c Dr. 90,000
To Share Capital A/c 90,000
(Allotment money due on 30,000 shares
@ Rs.3 per share)
Bank A/c Dr. 90,000
To Share Allotment A/c 90,000
(Allotment money received)
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22 Accountancy : Company Accounts and Analysis of Financial Statements
Do it Your self
1. A company issued 20,000 equity shares of Rs.10 each payable Rs.3 on
application, Rs.3 on allotment, Rs.2 on first call and Rs.2 on second and the
final call. The allotment money was payable on or before May 01, 2015; first
call money on or before August Ist, 2015; and the second and final call on or
before October Ist, 2015; ‘X’, whom 1,000 shares were allotted, did not pay the
allotment and call money; ‘Y’, an allottee of 600 shares, did not pay the two
calls; and ‘Z’, whom 400 shares were allotted, did not pay the final call. Pass
journal entries and prepare the balance sheet of the company.
2. Alfa Company Ltd. issued 10,000 shares of Rs.10 each for cash payable Rs.3
on application, Rs.2 on allotment and the balance in two equal instalments.
The allotment money was payable on or before March 31, 2015; the first call
money on or before 30 June, 2015; and the final call money on or before
August, 31. 2015. Mr. ‘A’, to whom 600 shares were allotted, paid the entire
remaining face value of shares allotted to him on allotment. Record journal
entries in company’s books and also exhibit the share capital in the balance
sheet on the date.
2019-20
Accounting for Share Capital 23
over subscription within the total frame of application and allotment, i.e. receipt
of application amount, amount due on allotment and its receipt from the
shareholders, and the same has been observed in the pattern of entries.
First Alternative : When the directors decide to fully accept some applications
and totally reject the others, the application money received on rejected
applications is fully refunded. For example, a company invited applications for
20,000 shares and received the applications for 25,000 shares. The directors
rejected the applications for 5,000 shares which are in excess of the required
number and refunded their application money in full. In this case, the journal
entries on application and allotment will be as follows :
The journal entries on application and allotment according to this alternative
are as follows:
1 Bank A/c Dr.
To Share Application A/c
(Money received on application for 25,000
shares @ Rs. _ per share)
2 Share Application A/c Dr.
To Share Capital A/c
To Bank A/c
(Transfer of application for money 20,000 for
shares allotted and money refunded on
applications for 5,000 shares rejected)
3 Share Allotment A/c Dr.
To Share Capital A/c
(Amount due on the allotment of 20,000
shares @ Rs. _ per share)
4 Bank A/c Dr.
To Share Allotment A/c
(Allotment money received)
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24 Accountancy : Company Accounts and Analysis of Financial Statements
Third Alternative : When the application for some shares are rejected outrightly;
and pro-rata allotment is made to the remaining applicants, the money on rejected
applications is refunded and the excess application money received from
applicants to whom pro-rata allotment has been made is adjusted towards the
amount due on the allotment of shares allotted.
For example, a company invited applications for 10,000 shares and received
applications for 15,000 shares. The directors decided to reject the applications
for 2,500 shares outright and to make a pro-rata allotment of 10,000 shares to
the applicants for the remaining 12,500 shares so that four shares are allotted
for every five shares applied. In this case, the money on applications for 2,500
shares rejected would be refunded fully and that on the remaining 2,500 shares
(12,500 shares – 10,000 shares) would be adjusted against the allotment amount
due on 10,000 shares allotted and credited to share allotment account, the
journal entries on application and allotment recorded as follows:
2019-20
Accounting for Share Capital 25
Illustration 7
Janta Papers Limited invited applications for 1,00,000 equity shares of Rs. 25
each payable as under:
On Application Rs. 5.00 per share
On Allotment Rs. 7.50 per share
On First Call Rs. 7.50 per share
(due two months after allotment)
On Second and Final Call Rs. 5.00 per share
(due two months after First Call)
Applications were received for 4,00,000 shares on January 01, 2017 and
allotment was made on February 01, 2017.
Record journal entries in the books of the company to record these share
capital transactions under each of the following circumstances:
1 The directors decide to allot 1,00,000 shares in full to selected applicants
and the applications for the remaining 3,00,000 shares were rejected
outright.
2 The directors decide to make a pro-rata allotment of 25 per cent of the
shares applied for to every applicant; to apply the balance of application
money towards amount due on allotment; and to refund the amount
remaining thereafter.
3 The directors totally reject applications for 2,00,000 shares, accept
full applications for 80,000 shares and make a pro-rata allotment of
the 20,000 shares to remaining applicants and the excess application
money is to be adjusted towards allotment and calls to be made.
2019-20
26 Accountancy : Company Accounts and Analysis of Financial Statements
Solution
Books of Janta Papers Limited
Journal
First Alternative
June 01 Equity Share Second and Final Call A/c Dr. 5,00,000
To Equity Share Capital A/c 5,00,000
(Final Call money due on 1,00,000 shares
@ Rs. 5 per share)
2019-20
Accounting for Share Capital 27
Second Alternative
Note : The entries regarding the two calls would be the same as given in preceding method.
Third Alternative
2019-20
28 Accountancy : Company Accounts and Analysis of Financial Statements
2019-20
Accounting for Share Capital 29
Working Notes:
(Rs.) (Rs.)
Excess Application Money 15,00,000
Less Transfers :
Share Allotment —
20,000 shares @ Rs. 7.50 1,50,000
Share Calls —
20,000 shares @ Rs. 12.50 2,50,000 4,00,0001
Amount to be refunded (including that on 11,00,000
the rejected applications)
2019-20
30 Accountancy : Company Accounts and Analysis of Financial Statements
Illustration 8
Jupiter Company Limited issued 35,000 equity shares of Rs. 10 each at a
premium of Rs.2 payable as follows:
On Application Rs. 3
On Allotment Rs. 5 (including premium)
Balance on First and Final Call
The issue was fully subscribed. All the money was duly received.
Record journal entries in the books of the Company.
2019-20
Accounting for Share Capital 31
Solution:
Books of Jupiter Company Limited
Journal
Date Particulars L.F. Debit Credit
Amount Amount
(Rs.) (Rs.)
Bank A/c Dr. 1,05,000
To Equity Share Application A/c 1,05,000
(Money received on applications for 35,000 shares
@ Rs. 3 per share)
Equity Share Application A/c Dr. 1,05,000
To Equity Share Capital A/c 1,05,000
(Transfer of application money on allotment
to share capital)
Equity Share Allotment A/c Dr. 1,75,000
To Equity Share Capital A/c 1,05,000
To Securities Premium Reserve A/c 70,000
(Amount due on allotment of 35,000 shares @
Rs. 5 per share including premium)
Bank A/c Dr. 1,75,000
To Equity Share Allotment A/c 1,75,000
(Money received including premium )
Equity Share First and Final Call A/c Dr. 1,40,000
To Equity Share Capital A/c 1,40,000
(Amount due on First and Final Call of Rs. 4
per share on 35,000 shares)
Bank A/c Dr. 1,40,000
To Equity Share First and Final Call A/c 1,40,000
(Money received on First and Final Call )
2019-20
32 Accountancy : Company Accounts and Analysis of Financial Statements
(b) When shares issued at premium of 20%, i.e. at Rs. 120 (100 + 20)
Amount Payable
Number of shares to be issued =
Issue Price
Rs. 5,40,000
=
Rs. 120
= 4,500 shares
The journal entries recorded for the shares issued for consideration other
than cash in above situations will be as follows :
2019-20
Accounting for Share Capital 33
Illustration 9
Jindal and Company purchased a machine from High Life Machine Limited for
Rs.3,80,000. As per purchase agreement, Rs. 20,000 were paid in cash and
balance by issue of shares of Rs.100 each. What will be the entries passed if the
shares are issued :
(a) at par
(b) at 20% premium
Solution:
Number of shares will be calculated as follows:
(a) When shares issued at par
Rs. 3,60,000 = 3,600 shares
Rs.100
(b) When shares issued at premium
Rs. 3,60,000 = 3,000 shares
Rs.120
2019-20
34 Accountancy : Company Accounts and Analysis of Financial Statements
2019-20
Accounting for Share Capital 35
Illustration 10
Honda Limited issued 10,000 equity shares of 100 each payable as follows:
Rs. 20 on application, Rs. 30 on allotment, Rs. 20 on first call and Rs. 30 on
second and final calls 10,000 shares were applied for and allotted. All money
due was received with the exception of both calls on 300 shares held by Supriya.
These shares were forfeited. Give necessary journal entries.
2019-20
36 Accountancy : Company Accounts and Analysis of Financial Statements
Solution
Books of Honda Limited
Journal
Date Particulars L.F. Debit Credit
Amount Amount
(Rs.) (Rs.)
Bank A/c Dr. 2,00,000
To Share Application A/c 2,00,000
(Application money on 10,000 shares
@Rs.20 per share received)
Share Application A/c Dr. 2,00,000
To Share Capital A/c 2,00,000
(Application money transferred to
share capital)
Share Allotment A/c Dr. 3,00,000
To Share Capital A/c 3,00,000
(Money due on allotment of 10,000 shares
@Rs. 30 per share)
Bank A/c Dr. 3,00,000
To Share Allotment A/c 3,00,000
(Allotment Money received on 10,000 shares
@ Rs. 30 per share on )
Share First Call A/c Dr. 2,00,000
To Share Capital A/c 2,00,000
(Money due on 10,000 shares
@ Rs. 20 per share on Ist Call)
Bank A/c Dr. 1,94,000
To Share First Call A/c 1,94,000
(First call money received except for 300 shares)
Share Second and Final Call A/c Dr. 3,00,000
To Share Capital A/c 3,00,000
(Money due on 10,000 shares @ Rs. 30 per
share on Second and Final Call)
Bank A/c Dr. 2,91,000
To Share Second and Final Call A/c 2,91,000
(Second and Final Call money received except
for 300 shares)
Share Capital A/c Dr. 30,000
To Share First Call A/c 6,000
To Share Second and Final Call A/c 9,000
To Share Forfeiture A/c 15,000
(300 shares Forfeited)
2019-20
Accounting for Share Capital 37
Illustration 11
Sahil, a share holder, failed to pay the money for second and final call of Rs. 20
on 1,000 shares issued to him at Rs. 120 (face value of Rs. 100 per share). His
shares were forfeited after the second and final call. Give the necessary journal
entry for forefeiture of the shares.
Solution:
Date Particulars L.F. Debit Credit
Amount Amount
(Rs.) (Rs.)
Share Capital A/c Dr. 1,00,000
To Share second and Final Call A/c 20,000
To Share Forfeiture A/c 80,000
(Forfeiture of 1,000 shares for non-payment
of the second and final call)
Illustration 12
Sunena, a shareholder holding 500 shares of Rs. 10 each, did not pay the
allotment money of Rs. 4 per share (including a premium of Rs. 2) and the first
2019-20
38 Accountancy : Company Accounts and Analysis of Financial Statements
and final call of Rs. 3. Her shares were forfeited after the first and final call. Give
journal entry for forefeiture of the shares.
Solution:
Illustration 13
Ashok Limited issued 3,00,000 equity shares of Rs. 10 each at a premium of
Rs. 2 per share, payable as Rs. 3 on application, Rs. 5 on allotment (including
premium) and the balance in two calls of equal amount.
Applications were received for 4,00,000 shares and pro-rata allotment was
made to all the applicants. The excess application money was adjusted towards
allotment. Mukesh who was allotted 800 shares failed to pay both the calls and
his shares were forfeited after the second call. Record necessary journal entries
in the books of Ashok Limited and also show the balance sheet:
Solution:
Books of Ashok Limited
Journal
Date Particulars L.F. Debit Credit
Amount Amount
(Rs.) (Rs.)
Bank A/c Dr. 12,00,000
To Equity Share Application A/c 12,00,000
(Application money received on
4,00,000 shares)
2019-20
Accounting for Share Capital 39
2019-20
40 Accountancy : Company Accounts and Analysis of Financial Statements
Notes to Accounts
1. Share Capital Rs.
Authorised Capital
... Equity shares of Rs. 10 each
Issued Capital
3,00,000 Equity shares of Rs. 10 each 30,00,000
Subscribed Capital
Subscribed and Fully Paid-up
2,99,200 Equity shares of Rs. 10 each 29,92,000
Illustration 14
High Light India Ltd. invited applications for 30,000 Shares of Rs. 100 each at a
premium of Rs. 20 per share payable as follows:
On Application Rs. 40 (including Rs.10 premium)
On Allotment Rs. 30 (including Rs.10 premium)
On First Call Rs. 30
On Second and Final Call Rs. 20
Applications were received for 40,000 shares and pro-rata allotment was
made on the application for 35,000 share. Excess application money was utilised
towards allotment.
Rohan to whom 600 shares were allotted failed to pay the allotment money
and his shares were forfeited immediately after allotment.
Aman who applied for 1,050 shares failed to pay first call and his share were
forfeited immediatelyafter first Call.
Second and final call was made. All the money due on second call have been
received.
Of the shares forfeited, 1,000 share were reissued as fully paid-up for Rs. 80
per share, which included the whole of Aman’s shares.
2019-20
Accounting for Share Capital 41
Record necessary journal entries in the books of High Light India Ltd.
Solution:
2019-20
42 Accountancy : Company Accounts and Analysis of Financial Statements
Working Notes:
(I) Excess amount received on Rohan’s application
Rohan has been alloted = 600 Shares
Rs. 35,000
He must have applied for × 600 700 Shares
Rs. 30,000
Rs.
Amount received from Rohan = 700 × Rs. 40 28,000
Amount Adjusted on Application = 600 × Rs. 40 (24,000)
2019-20
Accounting for Share Capital 43
7,00,000
Amount not received on Rohan’s Share (14,000)
6,86,000
8,55,000
22,000
Profit on 100 shares = × 100 = 3,667
600
Profit in 900 shares = 45,000
48,667
Less: Loss on reissue of 1,000 shares (20,000)
28,667
Do it Yourself
1. A company forfeited 100 equity shares of Rs.10 each issued at a premium of
20% for non-payment of final call of Rs.5 including the premium. Show the
journal entry for forefeiture of shares.
2. A company forfeited 800 equity shares of Rs.10 each issued at a discount of
10% for non-payment of first and final calls of Rs.2 each. Calculate the
amount forfeited by the company and pass the journal entry for forefeiture of
the shares.
2019-20
44 Accountancy : Company Accounts and Analysis of Financial Statements
Illustration 15
X Ltd. issued for public subscription 40,000 equity shares of Rs. 10 each at
premium of Rs. 2 per share payable as under :
On application Rs. 4 per share
On Allotment Rs. 5 per share (including premium)
On Call Rs. 3 per share
Applications were received for 60,000 shares. Allotment was made pro-rata
to the applicants for 48,000 shares, the remaining applications being rejected.
Money overpaid on application was applied towards sums due on allotment.
Shri Chitnis, to whom 1,600 shares were allotted, failed to pay the allotment
money and Shri Jagdale, to whom 2,000 shares were allotted, failed to pay the
call money. These shares were subsequently forfeited.
Record journal entries in the books of the company to record the above
transactions.
Solution:
Books of X Ltd.
Journal
Date Particulars L.F. Debit Credit
Amount Amount
(Rs.) (Rs.)
Bank A/c Dr. 2,40,000
To Equity Share Application A/c 2,40,000
(Money received on applications for 60,000
shares @ Rs. 4 per share)
2019-20
Accounting for Share Capital 45
Working Notes :
I. Amount received on allotment Rs.
(a) Amount due on allotment 2,00,000
40,000 shares × Rs. 5 per share
(b) Amount actually due on allotment 2,00,000
Amount due on allotment
Less Excess Application amount applied for allotment 32,000
2019-20
46 Accountancy : Company Accounts and Analysis of Financial Statements
2019-20
Accounting for Share Capital 47
Illustration 16
The director of Poly Plastic Limited resolved that 200 equity shares of Rs.100
each be forfeited for non-payment of the second and final call of Rs.30 per share.
Out of these, 150 shares were re-issued at Rs.60 per share to Mohit.
Show the necessary journal entries .
Solution:
Books of Poly Plastic Limited
Journal
Date Particulars L.F. Debit Credit
Amount Amount
(Rs.) (Rs.)
Share Capital A/c Dr. 20,000
To Shares Forfeiture A/c 14,000
To Share Second and Final Call A/c 6,000
(200 shares forfeited for non-payment
of final call at Rs.30 per share)
Bank A/c Dr. 9,000
Shares Forfeiture A/c Dr. 6,000
To Share Capital A/c 15,000
(Reissue of 150 shares of Rs.100 each,
issued as fully paid for Rs.60 each)
Shares Forfeiture A/c Dr. 4,500
To Capital Reserve A/c 4,500
(Profit on reissue of 150 forfeited shares
transferred to capital reserve)
Working Notes :
Rs.
Total amount forfeited on 200 shares = 14,000 (200 shares × Rs. 70)
Amount forfeited on 150 shares = 10,500 (150 shares × Rs. 70)
Amount of loss on reissue of 150 shares = 6,000 (150 shares × Rs. 40)
Amount of profit on reissued shares
transferred to capital reserve = 4,500 (Rs. 10,500 – Rs. 6,000)
Amount forfeited on 50 shares = 3,500 (50 shares × Rs. 70)
Balance left in share forfeited account = 3,500 (Rs.14,000 – Rs. 6,000
(equal to amount forfeited on 50 shares) – Rs. 4,500)
2019-20
48 Accountancy : Company Accounts and Analysis of Financial Statements
Illustration 17
On January 1, 2015, the Director of X Ltd. issued for public subscription 50,000
equity shares of Rs. 10 each at Rs. 12 per share payable as to Rs. 5 on application
(including premium), Rs. 4 on allotment and the balance on call on May 01,
2015.
The lists were closed on February 10, 2015 by which date applications for
70,000 shares were received. Of the cash received Rs. 40,000 was returned and
Rs.60,000 was applied to the amount due on allotment, the balance of which
was paid on February 16, 2015.
All the shareholders paid the call due on May 01, 2015 with the exception of
an allottee of 500 shares.
These shares were forfeited on September 29, 2015 and reissued us fully
paid at Rs. 8 per share on November 01, 2015.
The company, as a matter of policy, does not maintain a calls-in-arrears
account.
Give journal entries to record these share capital transactions in the books
of X. Ltd.
Solution:
Book of X. Ltd.
Journal
Date Particulars L.F. Debit Credit
2015 Amount Amount
(Rs.) (Rs.)
Feb.10 Bank A/c Dr. 3,50,000
To Equity Share Application A/c 3,50,000
(Amount received on application for
70,000 shares @ Rs. 5 per share
Including Premium)
Feb.16 Equity Share Application A/c Dr. 2,50,000
To Equity Share Capital A/c 1,50,000
To Securities Premium Reserve A/c 1,00,000
(Transfer of application money on 50,000
shares to share capital and premium
accounts consequent upon allotment)
Feb.16 Equity Share Application A/c Dr. 1,00,000
To Bank A/c 40,000
To Equity Share Allotment A/c 60,000
(Excess application money credited to share
allotment and money refunded on rejected
application)
2019-20
Accounting for Share Capital 49
Illustration 18
O Limited issued a prospectus offering 2,00,000 equity shares of Rs. 10 each, at
a premium of Rs. 2 per share, payable as follows:
On Application Rs. 2.50 per share
On Allotment Rs. 4.50 per share
(including premium)
On First Call (three months from allotment) Rs. 2.50 per share
On Second Call (three months after first call) Rs. 2.50 per share
Subscriptions were received for 3,17,000 shares on April 23, 2017 and the
allotment made on April 30, was as under:
2019-20
50 Accountancy : Company Accounts and Analysis of Financial Statements
Shares Allotted
(i) Allotment in full (two applicants paid in 38,000
full on allotment in respect of 4,000 shares each)
(ii) Allotment of two shares for every 1,60,000
three shares applied for
(iii) Allotment of one share for every 2,000
four shares applied for
Cash amounting to Rs. 77,500 (being application money received with
applications on 31,000 shares upon which no allotments were made) was
returned to applicants on May 6, 2017.
The amounts called from the allottees were received on the due dates with
the exception of the final call on 100 shares. These shares were forfeited on
November 15, 2017 and reissued to Aman on November 16 for payment of
Rs. 9 per share.
Record journal entries other than those relating to cash, in the books of
O Limited, and also show how to transaction would appear in the balance sheet
assuming that the company paid interest due from it on October 31, 2017.
Solution:
Books of O Limited
Journal
Date Particulars L.F. Debit Credit
Amount Amount
(Rs.) (Rs.)
2017 Share Application A/c Dr. 7,92,000
April 30 To Equity Share Capital A/c 5,00,000
To Bank 77,500
To Equity Share Allotment A/c 2,09,000
To Calls in Advance 6,000
(Transfer of Application Money to share
capital after allotment and excess application
money on 86,000 shares due to pro-rata
allotment credited to share allotment and
calls in advance)
April 30 Equity Share Allotment A/c Dr. 9,00,000
To Equity Share Capital A/c 5,00,000
To Securities Premium Reserve A/c 4,00,000
(Allotment amount due on 2,000,000
shares @ Rs. 4.50 per share including premium)
2019-20
Accounting for Share Capital 51
Oct. 31 Equity Share Second and Final Call A/c Dr. 5,00,000
To Equity Share Capital A/c 5,00,000
(Second call money due on 2,00,000 shares
@ Rs. 2.50 per share)
Cash Book
Dr. Cr.
Receipts Amount Payments Amount
(Rs.) (Rs.)
Equity Share Application 7,92,500 Equity Shares Application 77,500
Equity Share Allotment 6,91,000 Balance c/d 24,00,650
Calls in Advance 40,000
Equity Share First Call 4,75,000
Equity Share Second and
Final Call 4,78,750
Equity Share Capital 900
24,78,150 24,78,150
2019-20
52 Accountancy : Company Accounts and Analysis of Financial Statements
Working Notes :
1. Excess Application Money
Categories of No. of Shares No. of Share Ratio of
Allotment Applied Alloted Allotment
i 38,000 38,000 100%
ii 2,40,000 1,60,000 2/3
iii 8,000 2,000 1/4
2,86,000 2,00,000
Therefore, refund of application money = (3,17,000 – 2,86,000) × Rs. 2.50
= Rs. 77,500
Application money received = Rs. 7,15,000
(2,86,000 shares @ Rs. 2.50)
Application money due : = Rs. 5,00,000
(2,00,000 shares @ Rs. 2.50)
Excess application money Rs. 2,15,000
2. Amount of Calls in Advance
As two allotees, each holding 4,000 shares, paid the full amount on allotment, amount
of calls-in-advance is thus :
8,000 shares × (Rs. 2.50 + Rs. 2.50) = Rs. 40,000
2019-20
Accounting for Share Capital 53
(f) The buy-back of the shares should be completed within 12 months from the
date of passing the special resolution.
(g) The company should file a solvency declaration with the Registrar and SEBI
which must be signed by at least two directors of the company.
Illustration 19
Garima Limited issued a prospectus inviting applications for 3,000 shares of
Rs. 100 each at a premium of Rs.20 payable as follows:
On Application Rs.20 per share
On Allotment Rs.50 per share (Including premium)
On First call Rs.20 per share
On Second call Rs.30 per share
Applications were received for 4,000 shares and allotments made on pro-
rata basis to the applicants of 3,600 shares, the remaining applications being
rejected, money received on application was adjusted on account of sums due
on allotment.
Renuka to whom 360 shares were allotted, failed to pay allotment money
and calls money, and her shares were forfeited.
Kanika, the applicant of 200 shares failed to pay the two calls, her shares
were also forfeited. All these shares were sold to Naman as fully paid for Rs.80
per share. Show the journal entries in the books of the company.
Solution:
Books of Garima Limited
Journal
Date Particulars L.F. Debit Credit
Amount Amount
(Rs.) (Rs.)
Bank A/c Dr. 80,000
To Share Application A/c 80,000
(Application money received on 4,000
shares @ Rs. 20 per share)
Share Application A/c Dr. 80,000
To Share Capital A/c 60,000
To Share Allotment A/c 12,000
To Bank A/c 8,000
(Transfer of application money on 3,000 shares
to Share Capital Account, on 600 shares
to Allotment Account, and on of 400
shares refunded)
2019-20
54 Accountancy : Company Accounts and Analysis of Financial Statements
2019-20
Accounting for Share Capital 55
Working Notes :
Amount received on allotment has been calculated as follows:
(Rs.)
Total money due on allotment (including premium) 1,50,000
Less : Application money received on 600 shares adjusted (12,000)
towards allotment money
Net amount due on allotment on 3,000 shares 1,38,000
Less : Allotment money due on 360 shares alloted to
360
Renuka, not received × 1,38,000 (16,560)
3,000
Since the allotment money which includes securities premium of Rs. 20 per share
has not been received on 360 shares held by Renuka (now forfeited) has been
debited to Securities premium account as per rules.
Amount forefeited has been worked out as follows :
3,600
Application money received from Renuka: 360 × = 432 × Rs. 20 =Rs. 8,640
3,000
Application and Allotment money received from Kanika on 200 shares Rs. 10,000
Total amount received on forefeited shares Rs. 18,640
Do it Yourself
Excel Company Limited made an issue of 1,00,000 Equity Shares of Rs.10 each,
payable as follows :
On Application Rs.2.50 per share
On Allotment Rs.2.50 per share
On First and Final Call Rs.5.00 per share
X, the holder of 400 shares did not pay the call money and his shares were forfeited.
200 of the forfeited shares were reissued as fully paid at Rs.8 per share. Draft necessary
journal entries and prepare Share Capital and Share Forfeiture accounts in the
books of the company.
(a) If a Share of Rs. 10 on which Rs. 8 is called-up and Rs. 6 is paid as forfeited.
State with what amount the Share Capital account will be debited.
(b) If a Share of Rs. 10 on which Rs. 6 has been paid is forfeited, at what minimum
price it can be reissued.
(c) Ahluwalia Ltd. issued 1,000 equity shares of Rs. 100 each as fully paid-up in
consideration of the purchase of plant and machinery worth Rs. 1,00,000. What
entry will be recorded in company’s journal.
2019-20
56 Accountancy : Company Accounts and Analysis of Financial Statements
Illustration 20
Sunrise Company Limited offered for public subscription 10,000 shares of Rs.10
each at Rs. 11 per share. Money was payable as follows:
Rs. 3 on application
Rs. 4 on allotment (including premium)
Rs. 4 on first and final call.
Applications were received for 12,000 shares and the directors made pro-
rata allotment.
Mr. Ahmad, an applicant for 120 shares, could not pay the allotment and
call money, and Mr. Basu, a holder of 200 shares, failed to pay the call. All these
shares were forfeited.
Out of the forfeited shares, 150 shares (the whole of Mr. Ahmad’s shares
being included) were issued at Rs. 8 per share. Record journal entries for the
above transactions and prepare the share forfeiture account.
Solution:
Books of Sunrise Company Limited
Journal
Date Particulars L.F. Debit Credit
Amount Amount
(Rs.) (Rs.)
Bank A/c Dr. 36,000
To Share Application A/c 36,000
(Application money received on 12,000 shares
@ Rs. 3 per share)
Share Application A/c Dr. 36,000
To Share Capital A/c 30,000
To Share Allotment A/c 6,000
(Transfer of application money to share capital
account on 10,000 shares and the balance
to allotment account)
Share Allotment A/c Dr. 40,000
To Share Capital A/c 30,000
To Securities Premium Reserve A/c 10,000
(Money due on allotment @ Rs. 4 per share
on 10,000 shares including Rs. 1 on account
of premium)
Bank A/c Dr. 33,660
To Share Allotment A/c 33,660
(Money received on share allotment: See note 1)
2019-20
Accounting for Share Capital 57
Working Notes :
1. Amount received on allotment has been calculated as follows:
(Rs.)
Total money due on 10,000 shares @ Rs. 4 per share 40,000
Less: Application Money Received on 2,000 shares adjusted (6,000)
against allotment money
Net amount due on allotment 34,000
Less: Amount due from an applicant for 120 shares who
was allotted only 100 shares
100
× 34,000 (340)
10,000
2019-20
58 Accountancy : Company Accounts and Analysis of Financial Statements
2. Securities Premium Account has been debited only with Rs. 100 relating to 100
shares allotted Mr. Ahmad’s shares from whom the allotment money (including
premium) has not been received.
3. Shares Forfeiture Account represents the money received on forfeited shares
excluding Securites premium. This has been worked out as follows:
(Rs.)
Mr. Ahmad has paid application money @ Rs. 3 per share on 120 shares 360
Mr. Basu has paid @ Rs. 6 per share on 200 shares 1,200
in (application and allotment money excluding premium)
Total amount received 1,560
(Rs.)
4. Amount received from Mr. Ahmad on 100 shares forfeited 360
which have been reissued
Illustration 21
Devam Limited issued a prospectus inviting application for 30,000 equity shares
of Rs.10 each at a premium of Rs. 4 per share payable as follows:
With Application (including premium Rs.1) Rs. 3
On Allotment (including premium Rs.1) Rs. 4
On First call (including premium Rs.1) Rs. 4
On Second and Final call Balance
Applications were received for 45,000 shares. 20% of the applications
received were rejected and their application money was refunded. Remaining
applicants were allotted shares on pro-rata basis.
Mr. Sudhir, who has applied for 600 shares, failed to pay the allotment money
and his shares were forfeited immediately after that.
Ms. Muskan, to whom 750 shares were allotted failed to pay the first call
and hence her shares were forfeited.
The forfeited shares of Mr. Sudhir were re-issued to Lakshya for Rs. 8 per
share as fully paid up.
Final call was made due on remaining applicants and was received except
on 1,000 shares of Amit. These shares were forfeited.
2019-20
Accounting for Share Capital 59
Of the shares forfeited, 1,500 shares were re-issued to Devika for Rs. 12 per
share as fully paid up, the whole of Lakshya’s share being included. Record
journal entries in the books of the company.
Solution:
Books of Devam Limited
Journal
Date Particulars L.F. Debit Credit
Amount Amount
(Rs.) (Rs.)
Bank A/c Dr. 1,35,000
To Equity Share Application A/c 1,35,000
(Application money received on 45,000 shares)
Equity Share Application A/c Dr. 1,35,000
To Equity Share Capital A/c 60,000
To Securities Premium Reserve 30,000
To Equity Share Allotment A/c 18,000
To Bank A/c 27,000
(Application money on 30,000 shares transferred
to share capital A/c and securities premium reserve
account, on 9,000 shares refunded and the excess
amount adjusted to share allotment account)
Equity Share Allotment A/c Dr. 1,20,000
To Equity Share Capital A/c 90,000
To Securities Premium Reserve 30,000
(Allotment amount due on 30,000 Shares
@ Rs. 4 per share including premium)
Bank A/c Dr. 1,00,300
To Equity Share Allotment A/c 1,00,300
(Allotment amount received after adjusting
excess money received on application except
shares of Sudhir)
Equity Share Capital A/c Dr. 2,500
Securities Premium Reserve A/c Dr. 500
To Equity Share Allotment A/c 1,700
To Share Forfeiture A/c 1,300
(Forfeiture of 500 shares of Sudhir)
Equity Share First Call A/c Dr. 1,18,000
To Equity Share Capital A/c 88,500
To Securities Premium Reserve 29,500
(First Call amount due on 29,500 shares)
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60 Accountancy : Company Accounts and Analysis of Financial Statements
2019-20
Accounting for Share Capital 61
Working Notes:
1. Amount received on allotment (Rs.)
a. Amount due on allotment
30,000 shares × Rs. 4 per share 1,20,000
b. Amount actually due on allotment
Amount due on allotment 1,20,000
Less: Excess Application amount applied for allotment 18,000
Amount actually due. 1,02,000
c. Allotment money due from Sudhir
Shares Applied by Sudhir = 600
2. 1,500 shares have been re-issued including 1,000 shares of Amit and
balance 500 shares of Muskan.
Profit on 1,000 shares of Amit 8,000
2019-20
62 Accountancy : Company Accounts and Analysis of Financial Statements
Summary
2019-20
Accounting for Share Capital 63
2019-20
64 Accountancy : Company Accounts and Analysis of Financial Statements
2019-20
Accounting for Share Capital 65
Numerical Questions
1. Anish Limited issued 30,000 equity shares of Rs.100 each payable at Rs.30
on application, Rs.50 on allotment and Rs.20 on Ist and final call. All money
was duly received.
Record these transactions in the journal of the company.
2. The Adarsh Control Device Ltd. was registered with the authorised capital of
Rs.3,00,000 divided into 30,000 shares of Rs.10 each, which were offered to the
public. Amount payable as Rs.3 per share on application, Rs.4 per share on
allotment and Rs.3 per share on first and final call. These shares were fully
subscribed and all money was dully received. Prepare journal and Cash Book.
3. Software Solution India Ltd. invited applications for 20,000 equity shares of
Rs.100 each, payable Rs.40 on application, Rs.30 on allotment and Rs.30 on
call. The company received applications for 32,000 shares. Application for
2,000 shares were rejected and money returned to applicants. Applications
for 10,000 shares were accepted in full and applicants for 20,000 shares
allotted half of the number of shares applied and excess application money
adjusted into allotment. All money due on allotment and call was received.
Prepare journal and cash book.
4. Rupak Ltd. issued 10,000 shares of Rs.100 each payable Rs.20 per share on
application, Rs.30 per share on allotment and balance in two calls of Rs.25 per
share. The application and allotment money were duly received. On first call,
all members paid their dues except one member holding 200 shares, while
another member holding 500 shares paid for the balance due in full. Final call
was not made.
Give journal entries and prepare cash book.
5. Mohit Glass Ltd. issued 20,000 shares of Rs.100 each at Rs.110 per share,
payable Rs.30 on application, Rs.40 on allotment (including Premium), Rs.20
on first call and Rs.20 on final call. The applications were received for 24,000
shares and allotted 20,000 shares and rejected 4,000 shares and amount
returned thereon. The money was duly received.
Give journal entries.
6. A limited company offered for subscription of 1,00,000 equity shares of Rs.10
each at a premium of Rs.2 per share, 2,00,000 10% Preference shares of Rs.10
each at par.
The amount on share was payable as under :
Equity Shares Preference Shares
On Application Rs.3 per share Rs.3 per share
On Allotment Rs.5 per share Rs.4 per share
(including premium)
On First Call Rs.4 per share Rs.3 per share
All the shares were fully subscribed, called-up and paid.
Record these transactions in the journal and cash book of the company:
2019-20
66 Accountancy : Company Accounts and Analysis of Financial Statements
2019-20
Accounting for Share Capital 67
duly received except Anubha, who holding 200 shares did not pay allotment
and calls money and Kumkum, who holding 100 shares did not pay both the
calls. The directors forfeited the shares of Anubha and Kumkum.
Give journal entries.
12. Kishna Ltd. issued 15,000 shares of Rs.100 each at a premium of Rs.10 per
share, payable as follows:
On application Rs.30
On allotment Rs.50 [including premium]
On first and final call Rs.30
All the shares subscribed and the company received all the money due, with
the exception of the allotment and call money on 150 shares. These shares
were forfeited and reissued to Neha as fully paid share of Rs.12 each.
Give journal entries in the books of the company.
(Answer: Capital Reserve = Rs. 4,500)
13. Arushi Computers Ltd. issued 10,000 equity shares of Rs.100 each at 10%
premium. The net amount payable as follows:
On application Rs.20
On allotment Rs.50 (Rs.40 + premium Rs.10 )
On first call Rs.30
On final call Rs.10
A shareholder holding 200 shares did not pay final call. His shares were
forfeited. Out of these 150 shares were reissued to Ms.Sonia at Rs.75 per share.
Give journal entries in the books of the company.
(Answer: Capital Reserve = Rs.9,750)
14. Raunak Cotton Ltd. issued a prospectus inviting applications for 6,000 equity
shares of Rs.100 each at a premium of Rs.20 per shares, payable as follows:
On application Rs.20
On allotment Rs.50 [including premium]
On first call Rs.30
On final call Rs.20
Applications were received for 10,000 shares and allotment was made pro-rata
to the applicants of 8,000 shares, the remaining applications being refused.
Money received in excess on the application was adjusted toward the amount
due on allotment.
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68 Accountancy : Company Accounts and Analysis of Financial Statements
Rohit, to whom 300 shares were allotted failed to pay allotment and calls money,
his shares were forfeited. Itika, who applied for 600 shares, failed to pay the
two calls and her shares were also forfeited. All these shares were sold to Kartika
as fully paid for Rs.80 per share.
Give journal entries in the books of the company.
(Answer: Capital Reserve = Rs.15,500)
15. Himalaya Company Limited issued for public subscription of 1,20,000 equity
shares of Rs.10 each at a premium of Rs.2 per share payable as under :
With Application Rs. 3 per share
On allotment (including premium) Rs. 5 per share
On First call Rs. 2 per share
On Second and Final call Rs. 2 per share
Applications were received for 1,60,000 shares. Allotment was made on pro-
rata basis. Excess money on application was adjusted against the amount due
on allotment.
Rohan, whom 4,800 shares were allotted, failed to pay for the two calls. These
shares were subsequently forfeited after the second call was made. All the
shares forfeited were reissued to Teena as fully paid at Rs. 7 per share.
Record journal entries and show the transactions relating to share capital in
the company’s balance sheet.
(Answer = Rs. 14,400)
16. Prince Limited issued a prospectus inviting applications for 20,000 equity shares
of Rs.10 each at a premium of Rs.3 per share payable as follows:
With Application Rs.2
On Allotment (including premium) Rs.5
On First Call Rs.3
On Second Call Rs.3
Applications were received for 30,000 shares and allotment was made on pro-
rata basis. Money overpaid on applications was adjusted to the amount due on
allotment.
Mr. Mohit whom 400 shares were allotted, failed to pay the allotment money
and the first call, and his shares were forfeited after the first call. Mr. Joly,
whom 600 shares were allotted, failed to pay for the two calls and hence, his
shares were forfeited.
Of the shares forfeited, 800 shares were reissued to Supriya as fully paid for
Rs.9 per share, the whole of Mr. Mohit’s shares being included.
2019-20
Accounting for Share Capital 69
Record journal entries in the books of the Company and prepare the Balance
Sheet.
(Answer: Capital Reserve = Rs. 2,000)
17. Life Machine Tools Limited issued 50,000 equity shares of Rs.10 each at Rs.12
per share, payable at to Rs.5 on application (including premium), Rs.4 on
allotment and the balance on the first and final call.
Applications for 70,000 shares had been received. Of the cash received,
Rs.40,000 was returned and Rs.60,000 was applied to the amount due on
allotment. All shareholders paid the call due, with the exception of one
shareholder of 500 shares. These shares were forfeited and reissued as fully
paid at Rs.8 per share. Journalise the transactions.
(Answer: Capital Reserve = Rs. 2,500)
18. The Orient Company Limited offered for public subscription 20,000 equity shares
of Rs.10 each at a premium of 10% payable at Rs.2 on application; Rs.4 on
allotment including premium; Rs.3 on First Call and Rs.2 on Second and Final
call. Applications for 26,000 shares were received. Applications for 4,000 shares
were rejected. Pro-rata allotment was made to the remaining applicants. Both
the calls were made and all the money were received except the final call on
500 shares which were forfeited. 300 of the forfeited shares were later reissued
as fully paid at Rs.9 per share. Give journal entries and prepare the balance
sheet.
(Answer: Capital Reserve = Rs. 2,100)
19. Alfa Limited invited applications for 4,00,000 of its equity shares of Rs.10 each
on the following terms :
Payable on application Rs.5 per share
Payable on allotment Rs.3 per share
Payable on first and final call Rs.2 per share
Applications for 5,00,000 shares were received. It was decided :
(a) to refuse allotment to the applicants for 20,000 shares;
(b) to allot in full to applicants for 80,000 shares;
(c) to allot the balance of the available shares’ pro-rata among the other
applicants; and
(d) to utilise excess application money in part as payment of allotment money.
One applicant, whom shares had been allotted on pro-rata basis, did not pay
the amount due on allotment and on the call, and his 400 shares were forfeited.
The shares were reissued @ Rs.9 per share. Show the journal and prepare
Cash book to record the above.
(Answer: Capital Reserve = Rs. 2,100)
2019-20
70 Accountancy : Company Accounts and Analysis of Financial Statements
20. Ashoka Limited Company which had issued equity shares of Rs.20 each at a
premium of Rs. 4 per share, forfeited 1,000 shares for non-payment of final call
of Rs.2 per share. 400 of the forfeited shares were reissued at Rs.14 per share
out of the remaining shares of 200 shares reissued at Rs.20 per share. Give
journal entries for the forfeiture and reissue of shares and show the amount
transferred to capital reserve and the balance in Share Forfeiture Account.
(Answer: Capital Reserve = Rs. 6,800, Balance of Share Forfeiture Account:
Rs. 4800)
21. Amit holds 100 shares of Rs.10 each on which he has paid Re.1 per share as
application money. Bimal holds 200 shares of Rs.10 each on which he has
paid Re.1 and Rs.2 per share as application and allotment money, respectively.
Chetan holds 300 shares of Rs.10 each and has paid Re.1 on application, Rs.2
on allotment and Rs.3 for the first call. They all failed to pay their arrears and
the second call of Rs.2 per share and the directors, therefore, forfeited their
shares. The shares are reissued subsequently for Rs.11 per share as fully
paid. Journalise the transactions.
(Answer: Capital Reserve = Rs. 2,500)
22. Ajanta Company Limited having a nominal capital of Rs.3,00,000, divided into
shares of Rs.10 each offered for public subscription of 20,000 shares payable
at Rs.2 on application; Rs.3 on allotment and the balance in two calls of Rs.2.50
each. Applications were received by the company for 24,000 shares. Applications
for 20,000 shares were accepted in full and the shares allotted. Applications
for the remaining shares were rejected and the application money was refunded.
All moneys due were received with the exception of the final call on 600 shares
which were forfeited after legal formalities were fulfilled. 400 shares of the
forfeited shares were reissued at Rs.9 per share.
Record necessary journal entries and prepare the balance sheet showing the
amount transferred to capital reserve and the balance in share forfeiture
account.
(Answer: Capital Reserve = Rs. 2,600)
23. Journalise the following transactions in the books Bhushan Oil Ltd.:
(a) 200 shares of Rs.100 each issued at a premium of Rs.10 were forfeited
for the non-payment of allotment money of Rs.60 per share. The first
and final call of Rs.20 per share on these shares were not made. The
forfeited shares were reissued at Rs.70 per share as fully paid-up.
(b) 150 shares of Rs.10 each issued at a premium of Rs.4 per share payable
with allotment were forfeited for non-payment of allotment money of
Rs.8 per share including premium. The first and final calls of Rs.4 per
share were not made. The forfeited shares were reissued at Rs.15 per
share fully paid-up.
2019-20
Accounting for Share Capital 71
(c) 400 shares of Rs.50 each issued at par were forfeited for non-payment of
final call of Rs.10 per share. These shares were reissued at Rs.45 per
share fully paid-up.
(Answer: Capital Reserve = (a) NIL (b) Rs. 300 (c) Rs.14,000)
24. Amisha Ltd. invited applications for 40,000 shares of Rs.100 each at a premium
of Rs.20 per share. Amount payable on application Rs.40 ; on allotment Rs.40
(Including premium): on first call Rs.25 and second and final call Rs.15.
Applications were received for 50,000 shares and allotment was made on pro-
rata basis. Excess money on application was adjusted against the sums due
on allotment.
Rohit to whom 600 shares were allotted failed to pay the allotment money and
his shares were forfeited after allotment. Ashmita, who applied for 1,000 shares
failed to pay the two calls and her shares were forfeited after the second call. Of
the shares forfeited, 1,200 shares were sold to Kapil for Rs.85 per share as
fully paid, the whole of Rohit’s shares being included.
Record necessary journal entries.
(Answer: Capital Reserve = Rs. 48,000 Balace of Share Forfeiture A/c Rs.12,000)
2019-20
Issue and Redemption of Debentures 2
LEARNING OBJECTIVES
After studying this chapter
you will be able to :
• state the meaning of
debenture and explain the
A company raises its capital by means of issue of
shares. But the funds raised by the issue of
shares are seldom adequate to meet their long term
difference between financial needs of a company. Hence, most companies
debentures and shares;
• describe various types of turn to raising long-term funds also through
debentures; debentures which are issued either through the route
• record the journal entries
for the issue of debentures of private placement or by offering the same to the
at par, at a discount and public. The finances raised through debentures are
at premium;
• explain the concept of also known as long-term debt. This chapter deals with
debentures issued for the accounting treatment of issue and redemption of
consideration other than
cash and the accounting debentures and other related aspects.
thereof;
• explain the concept of
issue of debentures as a SECTION I
collateral security and the
accounting thereof; 2.1 Meaning of Debentures
• record the journal entries for
issue of debentures with Debenture: The word ‘debenture’ has been derived
various terms of issue,
terms of redemption; from a Latin word ‘debere’ which means to borrow.
• show the items relating to Debenture is a written instrument acknowledging a
issue of debentures in
company’s balance sheet; debt under the common seal of the company. It
• describe the methods of contains a contract for repayment of principal after
writing-off discount/loss
on issue of debentures; a specified period or at intervals or at the option of
• explain the methods the company and for payment of interest at a fixed
of redemption of
debentures and the
rate payable usually either half-yearly or yearly on
accounting thereof; and fixed dates. According to section 2(30) of The
• explain the concept of Companies Act, 2013 ‘Debenture’ includes
sinking fund, its use for
redemption of debentures Debenture Inventory, Bonds and any other
and the accounting securities of a company whether constituting a
thereof.
charge on the assets of the company or not.
2019-20
Issue and Redemption of Debentures 73
2019-20
74 Accountancy : Company Accounts and Analysis of Financial Statements
2019-20
Issue and Redemption of Debentures 75
(b) Zero Coupon Rate Debentures: These debentures do not carry a specific
rate of interest. In order to compensate the investors, such debentures
are issued at substantial discount and the difference between the
nominal value and the issue price is treated as the amount of interest
related to the duration of the debentures.
Types of Debenture/Bond
Secured/ Unsecured/ Redeemable Perpetual/ Convertible Non- Zero Specific Registered Unregistered/
Mortgage Naked debenture Irredeemable debenture convertible coupon rate debenture Bearer
debenture debenture debenture debenture rate/Deep debenture
Discount Rate
Fully Partly
convertible convertible
debenture debenture
2019-20
76 Accountancy : Company Accounts and Analysis of Financial Statements
Illustration 1
ABC Lmited issued Rs 10,000, 12% debentures of Rs 100 each payable Rs 30
on application and remaining amount on allotment. The public applied for 9,000
debentures which were fully allotted, and all the relevant allotment money was
duly received. Give journal entries in the books of ABC Ltd., and exhibit the
relevent information in the balance sheet.
2019-20
Issue and Redemption of Debentures 77
Solution:
Books of ABC Limited
Journal
Date Particulars L.F. Debit Credit
Amount Amount
(Rs) (Rs)
Bank A/c Dr. 2,70,000
To 12% Debenture Application A/c
(Application money on 9,000 debentures received) 2,70,000
ABC Limited
*Balance Sheet as at .................
Particulars Note Amount
No. (Rs)
I. Equity and Liabilities
Non-current liabilities 1 9,00,000
Long-term borrowings
II. Assets
Current assets
Cash and cash equivalents 2 9,00,000
Notes to Accounts
Particulars Amount
(Rs)
1. Long-term borrowings
9,000, 12% Debentures of Rs 100 each 9,00,000
2. Cash and cash equivalents
Cash at bank 9,00,000
2019-20
78 Accountancy : Company Accounts and Analysis of Financial Statements
2019-20
Issue and Redemption of Debentures 79
TV Components Limited
Balance Sheet as at..................
Particulars Note Amount
No. (Rs)
I. Equity and Liabilities
1. Non-current Liabilities
Long-term borrowings 1 10,00,000
II. Assets
1. Non-current assets
Other non-current assets 2 45,000
2. Current assets
a) Cash and cash equivalents 3 9,50,000
b) Other current assets 4 5,000
10,00,000
Notes to Accounts
Particulars Amount
(Rs)
1. Long-term borrowings
10,000, 12% secured debentures of Rs 100 each 10,00,000
2. Other non-current assets
Discount on issue of debentures 45,000
3. Cash and cash equivalents
Cash at bank 9,50,000
4. Other current assets
Discount on issue of debentures
(To be written-off within 12 months of the
balance sheet date or the period of operating cycle) 5,000
Notes:
1 It is presumed that debentures are redeemable after 10 years.
*Relevant data only.
Illustration 3
XYZ Industries Ltd., issued 2,000, 10% debentures of Rs 100 each, at a premium
of Rs 10 per debenture payable as follows:
On application Rs 50
On allotment Rs 60
2019-20
80 Accountancy : Company Accounts and Analysis of Financial Statements
The debentures were fully subscribed and all money was duly received.
Record the journal entries in the books of a company. Show how the amounts
will appear in the balance sheet.
Solution:
Books of XYZ Industries Limited
Journal
Date Particulars L.F. Debit Credit
Amount Amount
(Rs) (Rs)
Bank A/c Dr. 1,00,000
To 10% Debenture Application A/c 1,00,000
(Application money Rs 50 per debentures received)
2019-20
Issue and Redemption of Debentures 81
Notes to Accounts
Particulars Amount
(Rs)
1. Reserve and surplus
Securties Premium Reserve 20,000
2. Long-term borrowings
2,000, 10% debentures of Rs 100 each 2,00,000
3. Cash and cash equivalents
Cash at bank 2,20,000
Illustration 4
A Limited issued 5,000, 10% debentures of Rs 100 each, at a premium of Rs 10
per debenture payable as follows:
On application Rs 25
On allotment Rs 45 (including premium)
On first and final call Rs 40
The debentures were fully subscribed and all money was duly received.
Record the necessary entries in the books of the company. Show how the amounts
will appear in the balance sheet.
Solution:
Books of A Limited
Journal
Date Particulars L.F. Debit Credit
Amount Amount
(Rs) (Rs)
Bank A/c Dr. 1,25,000
To 10% Debenture Application A/c 1,25,000
(Application money on 10% debentures received)
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82 Accountancy : Company Accounts and Analysis of Financial Statements
A Limited
Balance Sheet as at ———
Notes to Accounts
Particulars Amount
(Rs)
1. Reserve and surplus
Securities Premium Reserve 50,000
2. Long-term borrowings
5,000, 10% debentures of Rs 100 each 5,00,000
2019-20
Issue and Redemption of Debentures 83
Illustration 5
X Limited Issued 10,000, 12% debentures of Rs 100 each payable Rs 40 on
application and Rs 60 on allotment. The public applied for 14,000 debentures.
Applications for 9,000 debentures were accepted in full; applications for 2,000
debentures were allotted 1,000 debentures and the remaining applications, were
rejected. All money was duly received. Journalise the transactions.
Solution:
Books of X Limited
Journal
Date Particulars L.F. Debit Credit
Amount Amount
(Rs) (Rs)
Bank A/c Dr. 5,60,000
To 12% Debenture Application A/c 5,60,000
(Receipt of application money on 14,000
debentures)
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84 Accountancy : Company Accounts and Analysis of Financial Statements
Illustration 6
Aashirward Company Limited purchased assets of the book value of Rs 2,00,000
from another company and agreed to make the payment of purchase
consideration by issuing 2,000, 10% debentures of Rs 100 each.
Record the necessary journal entries.
Solution:
Books of Aashirwad Company Limited
Journal
Date Particulars L.F. Debit Credit
Amount Amount
(Rs) (Rs)
Sundry Assets A/c Dr. 2,00,000
To Vendors 2,00,000
(Assets purchased from vendors)
2019-20
Issue and Redemption of Debentures 85
Illustration 7
Rai Company purchased assets of the book value of Rs 2,20,000 from another
company and agreed to make the payment of purchase consideration by issuing
2,000, 10% debentures of Rs 100 each at a premium of 10%.
Record necessary journal entries.
Solution:
Books of Rai Company Limited
Journal
Date Particulars L.F. Debit Credit
Amount Amount
(Rs) (Rs)
Sundry Assets A/c Dr. 2,20,000
To Vendors 2,20,000
(Assets purchased from vendors)
Illustration 8
National Packaging Company purchased assets of the value of Rs 1,90,000 from
another company and agreed to make the payment of purchase consideration by
issuing 2,000, 10% debentures of Rs 100 each at a discount of 5%.
Record necessary journal entries.
Solution:
Books of National Packaging Company
Journal
Date Particulars L.F. Debit Credit
Amount Amount
(Rs) (Rs)
Sundry Assets A/c Dr. 1,90,000
To Vendors 1,90,000
(Assets purchased from vendors)
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86 Accountancy : Company Accounts and Analysis of Financial Statements
Illustration 9
G.S. Rai company purchased assets of the book value of Rs. 99,000 from another
firm. It was agreed that purchase consideration be paid by issuing 11%
debentures of Rs. 100 each. Assume debentures have been issued.
1. At par
2. At discount of 10%, and
3. At a premium of 10%.
Record necessary journal entries.
Solution:
Books of G.S. Rai Company Limited
Journal
Date Particulars L.F. Debit Credit
Amount Amount
(Rs) (Rs)
Sundry Assets A/c Dr. 99,000
To Vendors 99,000
(Assets purchased from vendors)
2019-20
Issue and Redemption of Debentures 87
Illustration 10
Romi Ltd. acquired assets of Rs. 20 lakh and took over creditors of Rs. 2 lakh
from Kapil Enterprises. Romi Ltd., issued 8% debentures of Rs 100 each at par
as purchase consideration. Record necessary journal entries in the books of
Romi Ltd.
Solution:
Books of Romi Ltd.
Journal
Date Particulars L.F. Debit Credit
Amount Amount
(Rs) (Rs)
Sundry Assets A/c Dr. 20,00,000
To Kapil Enterprises 18,00,000
To Sundry Creditors A/c 2,00,000
(Purchase of business from Kapil Enterprises)
In case of the whole business being taken over if the amount of debentures
issued is more than the amount of the net assets taken over, the difference (excess)
will be treated as value of goodwill and the same shall also be debited while
passing the journal entry for the purchase of vender’s business (see Illustration
11). But if it is the other way round, i.e., the value of debentures is less than the
value of the net assets taken over the difference will be credited to capital Reserve
accounts (See Illustration 12).
Illustration 11
Blue Prints Ltd., purchased building worth Rs.1,50,000, machinery worth
Rs.1,40,000 and furniture worth Rs.10,000 from XYZ Co., and took over its
liabilities of Rs. 20,000 for a purchase consideration of Rs. 3,15,000. Blue Prints
Ltd., paid the purchase consideration by issuing 12% debentures of Rs.100
each at a premium of 5%. Record necessary journal entries.
2019-20
88 Accountancy : Company Accounts and Analysis of Financial Statements
Solution:
Books of Blue Prints Limited
Journal
Date Particulars L.F. Debit Credit
Amount Amount
(Rs) (Rs)
Building A/c Dr. 1,50,000
Plant & Machinery A/c Dr. 1,40,000
Furniture A/c Dr. 10,000
Goodwill A/c 1 Dr. 35,000
To Liabilities (Sundry) 20,000
To XYZ Co. 3,15,000
(Purchase of assets and taking over of liabilities
of XYZ Co.)
Note: 1. Since the purchase consideration is more than net assets taken over, the
difference has been debited to goodwill account.
2. No. of debentures issued = Purchase Consideration
Issue Price of a Debenture
= Rs 3,15,000 = 3,000
105
Illustration 12
A Limited took over the assets of Rs. 3,00,000 and liabilities of Rs.10,000 from
B & Co. Ltd., for an agreed purchase consideration of Rs. 2,70,000 to be satisfied
by issue of 15% debentures of Rs. 100 at 20% premium. Show the journal
entries in the journal of A Limited.
Solution:
Books of A Limited
Journal
Date Particulars L.F. Debit Credit
Amount Amount
(Rs) (Rs)
Sundry Assets A/c Dr. 3,00,000
To Sundry Liabilities A/c 10,000
To B & Co. Ltd. 2,70,000
To Capital Reserve 20,000
(Purchased assets and took over liabilities from B Ltd.)
2019-20
Issue and Redemption of Debentures 89
Do it Yourself
1. Amrit Company Limited purchased assets of the value of Rs. 2,20,000 from
another company and agreed to make the payment of purchase consideration
by issuing 2,000, 10% debentures of Rs.100 each at a premium of 10%. Record
necessary journal entries.
2. A company purchased assets of the value of Rs.1,90,000 from another company
and agreed to make the payment of purchase consideration by issuing 2,000,
10% debentures of Rs. 100 each at a discount of 5%. Record necessary journal
entries.
3. Rose Bond Limited purchased a business for Rs. 22,00,000. Purchase Price was
paid by 6% debentures. Debentures of Rs. 20,00,000 were issued at a premium
of 10% for the purpose. Record necessary journal entries.
4. Nikhil and Ashwin Limited bought business of Agarwal Limited consisting sundry
assts of Rs. 3,60,000, sundry creditors Rs.1,00,000 for a consideration of
Rs. 3,07,200. It issued 14% debentures of Rs. 100 each fully paid at a discount
of 4% in satisfaction of purchase consideration. Record necessary journal entries.
Illustration 13
Suvidha Ltd. purchased machinery worth Rs.1,98,000 from Suppliers Ltd. The
payment was made by issue of 12% debentures of Rs.100 each.
Pass the necessary journal entries for the purchase of machinery and issue
of debentures when:
(i) Debentures are issued at par;
(ii) Debentures are issued at 10% discount; and
(iii) Debentures are issued at 10% premium
Solution:
Books of Suvidha Ltd.
Journal
Date Particulars L.F. Debit Credit
Amount Amount
(Rs) (Rs)
Machinery A/c Dr. 1,98,000
To Suppliers Ltd. 1,98,000
(Machinery purchased)
2019-20
90 Accountancy : Company Accounts and Analysis of Financial Statements
Workings:
(a)
(Rs)
Face value of debenture 100
Less: Discount 10% 10
Value at which debenture issued 90
Rs. 1,98,000
Number of debentures issued in case of 10% discount =
90
= 2,200 debenture
(b)
(Rs)
Face value of debenture 100
Add: Premium 10% 10
Value at which debenture issued 110
Rs.1,98,000
Number of debentures issued in case of 10% premium =
110
= 1,800 Debentures
2019-20
Issue and Redemption of Debentures 91
insist on additional assets as collateral security so that the amount of loan can
be realised in full with the help of collateral security in case the amount from the
sale of principal security falls short of the loan money. In such situation, the
company may issue its own debentures to the lenders in addition to some other
assets already pledged. Such an issue of debentures is known as ‘Debentures
issued as Collateral Security’.
If the company fails to repay the loan along with interest, the lender is free to
receive his money from the sale of primary security and if the realisable value of
the primary security falls short to cover the entire amount, the lender has the
right to invoke the benefit of collateral security whereby debentures may either
be presented for redemption or sold in the open market.
Debentures issued as collateral security can be dealt within two ways in the
books of the company:
First Method
No entry is made in the books of accounts since no liability is created by such
issue. However, on the liability side of the balance sheet, below the item of loan,
a note to the effect that it has been secured by issue of debentures as a collateral
security is appended. For example, X Company has issued 9%, 10,000
debentures of Rs.100 each for a loan of Rs.10, 00,000 taken from a bank. This
fact may be shown in the balance sheet as under:
X Company
Balance Sheet as at __________
Particulars Note Amount
No. (Rs)
I. Equity and Liabilities
1. Non-current Liabilities
Long-term borrowings 1 10,00,000
Notes to Accounts
Particulars Amount
(Rs)
1. Long-term borrowings
Bank Loan
(Secured by issue of 10,000, 10% debentures 10,00,000
of Rs. 10 each as Collatoral Security)
Second Method
The issue of debentures as a collateral security may be recorded by means of
journal entry as follows:
2019-20
92 Accountancy : Company Accounts and Analysis of Financial Statements
Journal Entries
i. Issue of 10,000, 9% debentures of Rs. 100 each as collateral security
for bank loan of Rs. 10,00,000.
Debenture Suspense A/c Dr. 10,00,000
To 9% Debentures A/c 10,00,000
Notes to Accounts
Particulars Amount
(Rs) (Rs)
1. Long term borrowings 10,00,000
Bank loan
10,000, 9% debentures of
Rs 100 each 10,00,000
Less: Debenture suspense 10,00,000
10,00,000
Illustration 14
A company took a loan of Rs. 10,00,000 from Punjab National Bank and issued
10% debentures of Rs. 12,00,000 of Rs. 100 each as a collateral security. Explain
how you will deal with the issue of debentures in the books of the company.
2019-20
Issue and Redemption of Debentures 93
Solution:
First Method:
Balance Sheet (Extract)
Particulars Note Amount
No. (Rs)
I. Equity and Liabilities
1. Non-current Liabilities
Long-term borrowings 1 10,00,000
Notes to Accounts
Particulars Amount
(Rs)
1. Long-term borrowings
Bank loan 10,00,000
(Secured by issue of 12,000,
10% debentures of Rs. 100 each
as Collatoral Security
Second Method:
Journal Entries
Date Particulars L.F. Debit Credit
Amount Amount
(Rs) (Rs)
Debenture Suspense A/c Dr. 12,00,000
To 10% Debentures A/c 12,00,000
(12,000 debenture of Rs. 100 each issued as
collateral security to P.N.Bank)
Notes to Accounts
Particulars Amount
(Rs) (Rs)
1. Long-term borrowings
Secured Loan from 10,00,000
PNB
12,000, 10% debentures of 12,00,000
Rs. 100 each
Less: Debenture
Suspense 12,00,000
10,00,000
2019-20
94 Accountancy : Company Accounts and Analysis of Financial Statements
Do it Yourself
2019-20
Issue and Redemption of Debentures 95
2019-20
96 Accountancy : Company Accounts and Analysis of Financial Statements
Illustration 15
Give Journal entries for the following:
1. Issue of Rs 1,00,000, 9% debentures of Rs 100 each at par and
redeemable at par.
2019-20
Issue and Redemption of Debentures 97
Solution:
Journal
Date Particulars L.F. Debit Credit
Amount Amount
(Rs) (Rs)
1 Bank A/c Dr. 1,00,000
To 9% Debenture Application & Allotment A/c 1,00,000
(Debentures Application money received)
Debenture Application & Allotment A/c Dr. 1,00,000
To 9% Debentures A/c 1,00,000
(Application money transferred to
Debentures Account)
2019-20
98 Accountancy : Company Accounts and Analysis of Financial Statements
Illustration 16
You are required to pass the journal entries relating to the issue of the debentures
in the books of X Ltd., and show how they would appear in its balance sheet
under the following cases:
(a) 120, 8% debentures of Rs 1,000 each are issued at 5% discount and
repayable at par.
(b) 150, 7% debentures of Rs 1,000 each are issued at 5% discount and
repayable at premium of 10%.
2019-20
Issue and Redemption of Debentures 99
Books of X Ltd.
Balance Sheet as at_____________
Particulars Note Amount
No. (Rs)
I. Equity and Liabilities
1. Non-current Liabilities
Long-term borrowings 1 1,20,000
1,20,000
II. Assets
1. Non-current assets
Other non-current assets 2 4,800
2. Current assets
Cash and cash equivalents 3 1,14,000
Other current assets 4 1,200
1,20,000
Notes to Accounts
Particulars Amount
(Rs)
1. Long-term borrowings
120, 8% debentures of Rs 1,000 each 1,20,000
2. Other non-current assets
Discount on issue of debentures 4,800
3. Cash and cash equivalents
Cash at bank 1,14,000
4. Other current assets
Discount on issue of debentures 1,200
2019-20
100 Accountancy : Company Accounts and Analysis of Financial Statements
Books of X Ltd.
(b) Journal
Date Particulars L.F. Debit Credit
Amount Amount
(Rs) (Rs)
Bank A/c Dr. 1,42,500
To Debenture Application and Allotment A/c
(Debenture application money received) 1,42,500
Debenture Application and Allotment A/c Dr. 1,42,500
Loss on Issue of Debentures A/c Dr. 22,500
To 8% Debentures A/c 1,50,000
To Premium on Redemption of Debenture A/c 15,000
(Debentures application money transferred to
Debentures A/c)
Books of X Ltd.
Balance Sheet as at_________________
Particulars Note Amount
No. (Rs)
I. Equity and Liabilities
1. Non-current Liabilities
a) Long-term borrowings 1 1,50,000
b) Other long-term liabilities 2 15,000
1,65,000
II. Assets
1. Non-current assets
Other non-current assets 3 18,000
2. Current assets
a) Cash and cash equivalents 4 1,42,500
b) Other current assets 5 4,500
1,65,000
Notes to Accounts
Particulars Amount
(Rs)
1. Long-term borrowings
150, 7% debentures of Rs 1,000 each 1,50,000
2. Other long-term liabilities
Premium on redemption of debentures 15,000
3. Other non-current assets
Loss on issue of debentures 18,000
4. Cash and cash equivalents
Cash at bank 1,42,500
5. Other current assets
Loss on issue of debentures 4,500
2019-20
Issue and Redemption of Debentures 101
Books of X Ltd.
(c) Journal
Date Particulars L.F. Debit Credit
Amount Amount
(Rs) (Rs)
Bank A/c Dr. 84,000
To Debenture Application and Allotment A/c 84,000
(Debenture application money received)
Debenture Application and Allotment A/c Dr. 84,000
To 9% Debentures A/c 80,000
To Securities Premium Reserve A/c 4,000
(Debentures application money transferred to
Debentures A/c and securities premium reserve A/c)
X Ltd.
Balance Sheet as at ..............
Particulars Note Amount
No. (Rs)
I. Equity and Liabilities
1. Shareholder’s funds
Reserves and surplus 1 4,000
2. Non-current Liabilities
Long-term borrowings 2 80,000
84,000
II. Assets
1. Current assets
Cash and cash equivalents 3 84,000
84,000
Notes to Accounts
Particulars Amount
(Rs)
1. Reserves and surplus
Securities premium reserve 4,000
2. Long-term borrowings
80, 9% debentures of Rs 1,000 each 80,000
Books of X Ltd.
(d) Journal
Date Particulars L.F. Debit Credit
Amount Amount
(Rs) (Rs)
Debenture Suspense A/c Dr. 40,000
To 8% Debentures A/c 40,000
(Issue of 400, 8% debentures of Rs 100 each as
collateral security against a loan of Rs 40,000)
2019-20
102 Accountancy : Company Accounts and Analysis of Financial Statements
X Ltd.
Balance Sheet as at _____________ (Extract)
Particulars Note Amount
No. (Rs)
I. Equity and Liabilities
1. Long-term borrowings 1 40,000
Notes to Accounts
Particulars Amount Amount
(Rs) (Rs)
1. Long-term borrowings
Bank loan 40,000
400, 8% debentures of Rs 100 each 40,000
Less: Debentures suspense 40,000 -
40,000
Do it Yourself
1. Nena Limited issued 50,000, 10% debentures of Rs 100 each on the basis of
the following conditions:
a. Debentures issued at par and redeemable at par.
b. Debentures issued at discount @ 5% and redeemable at par.
c. Debentures issued at premium @ 10% and redeemable at par.
d. Debentures issued at par and redeemable at premium @ 10%.
e. Debentures issued at discount of 5% and redeemable at a premium of
10%.
f. Debentures issued at premium of 6% and redeemable at a premium of
4%.
Record necessary journal entries in the above mentioned cases at the time of
issue and redemption of debentures.
2. Record necessary journal entries in each of the following cases:
a. 27,000, 7% debentures of Rs 100 each issued at par, redeemable at
par.
b. 25,000, 7% debentures of Rs 100 each issued at par redeemable at 4%
premium.
c. 20,000, 7% debentures of Rs 100 each issued at 5% discount and
redeemable at par.
d. 30,000, 7% debentures of Rs 100 each issued at 5% discount and
redeemable at 2½ % premium.
e. 35,000, 7% debentures of Rs 100 each issued at 4% premium and
redeemable at premium of 5%.
2019-20
Issue and Redemption of Debentures 103
The following journal entries are recorded in the books of a company in connection
with the interest on debentures:
1. When interest is due
Debenture Interest A/c Dr.
To Income Tax payable A/c
To Debentureholders A/c
(Amount of interest due on debenture and tax deducted at source )
2. For payment of interest to debentureholders
Debentureholders A/c Dr.
To Bank A/c
(Amount of interest paid to debentureholders)
3. On transfer debenture Interest Account to statement of Profit and Loss
Statement of Profit and Loss Dr.
To Debenture Interest A/c
(Debenture interest transferred to profit and loss A/c)
4. On payment of tax deducted at source to the Government
Income Tax Payable A/c Dr.
To Bank A/c
(Payment of tax deducted at source on interest on debentures)
Illustration 17
A Ltd., issued 2,000, 10% debentures of Rs 100 each on April 01, 2016 at a
discount of 10% redeemable at a premium of 10%.
Give journal entries relating to the issue of debentures and debenture interest
for the period ending March 31, 2017 assuming that interest was paid half
yearly on September 30 and March 31 and tax deducted at source is 10%.
2019-20
104 Accountancy : Company Accounts and Analysis of Financial Statements
Solution:
Book of A Ltd.
Journal
Date Particulars L.F. Debit Credit
Amount Amount
(Rs) (Rs)
2016 Bank A/c Dr. 1,80,000
Apr. 01 To 10% Debenture Application & 1,80,000
Allotment A/c
(Application money received on 2,000,
10% debentures)
Apr. 01 10% Debentures Application &
Allotment A/c Dr. 1,80,000
Loss on Issue of Debenture A/c Dr. 40,000
To 10% Debentures A/c 2,00,000
To Premium on Redemption of 20,000
Debentures A/c
(Allotment of debentures at a discount of 10%
and redeemable at a premium of 10%)
Sept.30 Debenture Interest A/c Dr. 10,000
To Debentureholders A/c 9,000
To Income Tax Payable A/c 1,000
(Interest due for 6 months and tax
deducted at source)
Income Tax payable A/c Dr. 1,000
Bank A/c 1000
(Tax deducted at source paid to the government)
2017 Debentureholders A/c Dr. 9,000
Sept. To Bank A/c 9,000
(Payment of interest)
March 31 Debenture interest A/c Dr. 10,000
To Debentureholders A/c 9,000
To Income Tax Payable A/c 1,000
(Interest due for 6 months and tax
deducted at source)
March 31 Debenturesholders A/c Dr. 9,000
To Bank A/c 9,000
(Payment of interest)
March 31 Income Tax Payable A/c Dr. 1,000
To Bank A/c 1,000
(Paid tax deducted at source to the government)
March 31 Statement of Profit and Loss Dr. 20,000
To Debenture Interest A/c 20,000
(Debenture interest transferred to profit
and loss account)
2019-20
Issue and Redemption of Debentures 105
Do it Yourself
1. Diwakar enterprises Ltd. Issued 10,00,000, 6% debentures on April 1, 2016.
Interest is paid on September 30, 2016 and March 31, 2017.
Record necessary journal entries assuming that income tax is deducted @10%
of the amount of interest.
2. Laser India Ltd. Issued 7,00,000, 8% debentures of Rs 100 each at par. Interest
is to be paid on these debentures half-yearly on September 30 and March 31,
every year. Record necessary journal entries asuming that income tax is deducted
@ 10% of the amount of interest.
2019-20
106 Accountancy : Company Accounts and Analysis of Financial Statements
Do it Yourself
1. X Ltd. issued 2,000, 10% debentures of Rs 100 each at a discount of 8% on
April, 2014 which are redeemable at par by annual drawings in 4 years
commencing from March 31, 2015 as per the following redemption plan:
Ist Draw 10%, 2nd Draw 20%, 3rd Draw 30%, and 4th Draw 40%. Calculate
the amount of discount to be written-off each year assuming that X Ltd.,
follows calendar year as its accounting year.
2019-20
Issue and Redemption of Debentures 107
Illustration 18
A Ltd. Company has issued Rs 1,00,000, 9% debentures at a discount of 6%.
These debentures are to be redeemed equally, spread over 5 annual instalments.
Show Discount on issue of debentures account for five years
Solution:
Books of A Ltd.
Discount on Issue of Debentures Account
Dr. Cr.
Date Particulars Amount Date Particulars Amount
(Rs) (Rs)
Ist Debenture 6,000 Ist Statement of Profit & Loss 2,000
year year Balance c/d 4,000
6,000 6,000
IInd Balance b/d 4,000 IInd Statement of Profit & Loss 1,600
year year Balance c/d 2,400
4,000 4,000
IIIrd Balance b/d 2,400 IIIrd Statement of Profit & Loss 1,200
year year Balance c/d 1,200
2,400 2,400
IVth Balance b/d 1,200 IVth Statement of Profit & Loss 800
year year Balance c/d 400
1,200 1,200
Vth Balance b/d 400 Vth Statement of Profit & Loss 400
year year
400 400
Workings Notes:
6
Total discount on the issue of debentures = 1, 00, 000 × = Rs 6, 000
100
2019-20
108 Accountancy : Company Accounts and Analysis of Financial Statements
5
_______
1 1,00,000 5 × 6,000 = 2,000
15
4
_______
2 80,000 4 × 6,000 = 1,600
15
3
_______
3 60,000 3 × 6,000 = 1,200
15
2
_______
4 40,000 2 × 6,000 = 800
15
1
_______
5 20,000 1 × 6,000 = 400
15
15
State whether the following statements are True (T) or False (F):
1. Debenture is a part of owned capital.
2. The payment of interest on debentures is a charge on the profits of the
company.
3. The debentures cannot be issued at a discount of more than 10% of the face
value.
4. Redeemable debentures are those debentures, which are payable on the expiry
of the specific period.
5. Perpetual debentures are also known as irredeemable debentures.
6. Debentures cannot be converted into shares.
7. Debentures cannot be issued at a premium.
8. A collateral security is a subsidiary security.
9. Debentures cannot be issued at a premium and redeemable at par.
10. Loss on issue of debentures account is a revenue loss.
11. Premium on redemption of debentures account is shown under the ‘Securities
Premium’ in the balance sheet.
2019-20
Issue and Redemption of Debentures 109
SECTION II
Payment in lump sum : The company redeems the debentures by paying the
amount in lump sum to the debentureholders at the maturity thereof as per
terms of issue.
Payment in instalments : Under this method, normally redemption of debentures
is made in instalments on the specified date during the tenure of the debentures.
The total amount of debenture liability is divided by the number of years. It is to
note that the actual debentures redeemable are identified by means of drawing
the requisite number of lots out of the debentures outstanding for payment.
Purchase in open market: When a company purchases its own debentures for
the purposes of cancellation, such an act of purchasing and cancelling the
debentures constitutes redemption of debentures by purchase in the open
market.
Conversion into shares or new debentures : A company can redeem its
debentures by converting them into shares or new class of debentures. If
debentureholders find that the offer is beneficial to them, they can exercise their
right of converting their debentures into shares or new class of debentures. These
new shares or debentures can be issued at par, at a discount or at a premium.
It should be noted that only the actual proceeds of debentures are to be taken
into account for ascertaining the number of shares to be issued in lieu of the
2019-20
110 Accountancy : Company Accounts and Analysis of Financial Statements
When the company pays the whole amount in lump sum, the following journal
entries are recorded in the books of the company:
1. If debentures are to be redeemed at par
(a) Debentures A/c Dr.
To Debentureholders
(b) Debentureholders Dr.
To Bank A/c
2. If debentures are to be redeemed at premium
(a) Debentures A/c Dr.
Premium on Redemption of Debentures A/c Dr.
To Debentureholders
(b) Debentureholders Dr.
To Bank A/c
2019-20
Issue and Redemption of Debentures 111
Illustration 19
Solution:
Journal
Date Particulars L.F. Debit Credit
Amount Amount
(Rs) (Rs)
1. 9% Debentures A/c Dr. 5,00,000
To Debentureholders A/c 5,00,000
(Amount due on redemption debentures)
2019-20
112 Accountancy : Company Accounts and Analysis of Financial Statements
As per the provisions of the Companies Act, 2013, the company must set
aside a portion of profits every year and transfer it to Debenture Redemption
Reserve for redemption of debentures until the debentures are redeemed. The
journal entry recorded for the purpose is as follows :
(a) Where a company has issued debentures, it shall create a Debenture
Redemption Reserve for the redemption of such debentures, to which
adequate amount shall be credited, from out of its profit every year
until such debentures are redeemed.
(b) The amount credited to the Debenture Redemption Reserve shall not
be utilised by the company except for the purpose of redemption of
debentures.
According to Rule 18(7) of COMPANIES (SHARE CAPITAL AND
DEBENTURES) RULES, 2014, the company shall create a Debenture Redemption
Reserve for the purpose of redemption of debentures, in accordance with the
conditions given below:
(a) The Debenture Redemption Reserve shall be create out of the profits of
the company available for payment of dividend;
(b) The company shall create Debenture Redemption Reserve (DRR) in
accordance with following conditions:
i. No DRR is required for debentures issued by All India Financial
Institutions (AIFIs) regulated by Reserve Bank of India and
Banking Companies for both public as well as privately placed
debentures.
ii. For NBFCs registered with the RBI and for Housing Finance
Companies registered with the National Housing Bank, DRR will
be 25% of the value of outstanding debentures issued through
2019-20
Issue and Redemption of Debentures 113
2019-20
114 Accountancy : Company Accounts and Analysis of Financial Statements
Solution:
2019-20
Issue and Redemption of Debentures 115
When, as per terms of the issue, the debentures are to be redeemed in instalments
beginning from a particular year, the actual debentures to be redeemed are
selected usually by draw of lots, and the redemption to be made either out of
profits or out of capital. The entries will be:
Illustration 21
ABC Ltd. issued 3,000, 14% Debentures of Rs 100 each at a discount of 5% on
April 1, 2012. Interest on these debentures is payable annually on March 31
each year. The debentures are redeemable at par in three equal instalments at
the end of the third, fourth and fifth year. Prepare 14% Debentures Account,
Discount on Issue of Debentures Account and Debenture Interest Account in
the books of the company.
Solution:
14% Debentures Account
Dr. Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
(Rs) (Rs)
2013 2012
Mar.31 Balance c/d 3,00,000 Apr.01 Debenture 2,85,000
Application
Discount 15,000
on Issue of
Debentures
3,00,000 3,00,000
2019-20
116 Accountancy : Company Accounts and Analysis of Financial Statements
2014 2013
Mar.31 Balance c/d 3,00,000 Apr.01 Balance b/d 3,00,000
3,00,000 3,00,000
2015 2014
Mar.31 Bank A/c 1,00,000 Apr.01 Balance b/d 3,00,000
Mar.31 Balance c/d 2,00,000
3,00,000 3,00,000
2016 2015
Mar.31 Bank A/c 1,00,000 Apr.01 Balance b/d 2,00,000
Mar.31 Balance c/d 1,00,000
2,00,000 2,00,000
2017 2016
Mar.31 Balance c/d 1,00,000 Apr.01 Balance b/d 1,00,000
1,00,000 1,00,000
2019-20
Issue and Redemption of Debentures 117
Working Notes:
1. Debenture interest is calculated @ 14% on the amount of debentures outstanding
in the beginning of each year. The amount of debentures outstanding on April 1,
each year is:
Debenture Outstanding
Rs
April 2012 3,00,000
April 2013 3,00,000
April 2014 3,00,000
April 2015 2,00,000
April 2016 1,00,000
2. Discount on Issue of Debentures is written-off in the ratio of the amount of
debentures outstanding in the beginning of each year. The ratio is 3:3:3:2:1. So
amount of discount to be written-off will be
Year Amount
Rs Rs
3
2012 Rs 15,000 × 3,750
12
3
2013 Rs 15,000 × 3,750
12
3
2014 Rs 15,000 × 3,750
12
2
2015 Rs 15,000 × 2,500
12
1
2016 Rs 15,000 × 1,250
12
2019-20
118 Accountancy : Company Accounts and Analysis of Financial Statements
In case, the debentures are purchased from the market at a price which is above
the nominal value of debenture, the excess will be debited to loss on redemption
of debentures. The journal entry in that case will be
1. Debentures A/c Dr.
Loss on Redemption of Debentures A/c Dr.
To Bank A/c
2. Statement of profit and loss Dr.
To Loss on Redemption of Debentures A/c
Illustration 22
X Ltd. purchased its own debentures of Rs 100 each of the face value of Rs
20,000 from the open market for cancellation at Rs 92. Record necessary journal
entries.
Solution:
Books of X Limited
Journal
Date Particulars L.F. Debit Credit
Amount Amount
(Rs) (Rs)
Debentures A/c Dr. 20,000
To Bank A/c 18,400
To Profit on Redemption of Debentures A/c 1,600
(Own debentures purchased at Rs 92
from the market)
2019-20
Issue and Redemption of Debentures 119
Illustration 23
X Ltd. decided to redeem 250, 12% debentures of Rs 100 each amounting to
Rs 25,000. For this purpose, the company purchased debentures amounting
to Rs 20000 in the open market at Rs 98.50 each. Expenses of Rs 100 was
incurred on it. The balance of debentures amounting to Rs 5,000 were reedemed
by draw of lots. Journalise.
Solution:
Books of X Ltd.
Journal
Date Particulars L.F. Debit Credit
Amount Amount
(Rs) (Rs)
Balance in Statement of profit and loss A/c Dr. 6,250
To Debenture Redemption Reserve A/c 6,250
(Transfer of profits to Debenture Reserve A/c
2019-20
120 Accountancy : Company Accounts and Analysis of Financial Statements
Illustration 24
On April 01, 2013, a company made an issue of 1,000, 6% debentures of
Rs 1,000 each at Rs 960 per debenture. The terms of issue provided for the
redemption of 200 debentures every year starting from 31 March 2015 either by
purchase or by draw of lot at par at the company’s option. Rs 10,000 was written-
off as the debenture discount account in years ending on March 31, 2014–15. On
31.03.2015, the company purchased for cancellation debentures of the face
value of Rs 80,000 at Rs 950 per debenture and of the face value of Rs 1,20,000
at Rs 900 per debenture.
Journalise the above transaction and show the profit on redemption would
be treated.
Solution:
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Issue and Redemption of Debentures 121
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122 Accountancy : Company Accounts and Analysis of Financial Statements
Illustration 25
Arjun Plastics Limited redeemed 1,000, 15% debentures of Rs 100 each by
converting them into equity shares of Rs 10 each at a premium of Rs 2.50 per
share. The company also redeemed 500 debentures by utilising Rs 50,000 out
of profit. Give the necessary journal entries.
Solution:
Books of Arjun Plastic Limted
Journal
Date Particulars L.F. Debit Credit
Amount Amount
(Rs) (Rs)
Statement of Profit and Loss Dr. 50,000
To Debenture Redemption Reserve A/c 50,000
(Transfer of profit to Debenture Redemption
Reserve)
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Issue and Redemption of Debentures 123
Illustration 26
On April 01, 2013, a company made an issue of 10,000, 9% Debentures of
Rs 100 each at Rs. 92 per debenture. The terms of issue provided for the redemption
of 2,000 debentures every year starting from the March 31, 2016 either by conversion
in to equity shares of Rs 20 each or by draw of lot at per at the company’s option.
On March 31, 2016, company redemption, 2,000, 9% debentures by converting
them into Equity shares of Rs 20 each. Give the necessary Journal entries.
Books of a Company
Journal
Date Particulars L.F. Debit Credit
Amount Amount
(Rs) (Rs)
2016 9% Debentures A/c Dr. 2,00,000
Mar. 31 To Debentureholders A/c 1,84,000
To Statement of Profit & Loss 9,600
To Discount on Issue of Debentures A/c 8,400
(Amount due to debentureholders on redemption
by conversion)
Working Notes :-
i. Total Discount on the issue of 10,000 Debentures = 10,00,000 × 8
100
= Rs 80,000
Amount of Discount to be written off is determined as follows :
Year Amount (Rs) Ratio Amount (Rs)
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124 Accountancy : Company Accounts and Analysis of Financial Statements
ii.
Up to March 31, 2016 discount on issue of debentures written off is
Rs 48,000 out of total amount of Rs. 80,000.
So, on 2,000 debentures, now converted into shares amount of discount
48000
on issue of debentures written off is = (2,00,000 × 8 ) × = Rs. 9,600
10 0 80000
Remaining amount of discount amounting to Rs. 6,400 (Rs. 16,000 – Rs.
9,600) is not written off till March 31, 2016.
Illustration 27
The balance sheet of XYZ Ltd., disclosed the following information as on March
31, 2015.
Rs
15% debentures 15,00,000
Debenture Redemption Fund 11,63,600
Debenture Redemption Fund Investment 11,63,600
(10% Govt. Securities)
The contribution to Debenture Redemption Fund was Rs 1,30,800 p.a. for
the year 2015–16 and 2016–17. Debentures are due for payment on December
31, 2017. Prepare the above accounts in the books of company assuming that
securities were realised on March 31, 2017 for a sum of Rs 13,52,000 and
interest on securities on March 31, was immediately invested.
Solution:
Debentures Account
Dr. Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
(Rs) (Rs)
2016 2015
Mar.31 Balance c/d 15,00,000 Apr.01 Balance b/d 15,00,000
15,00,000 15,00,000
2017 2016
Mar.31 Bank 15,00,000 Apr.01 Balance b/d 15,00,000
15,00,000 15,00,000
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Issue and Redemption of Debentures 125
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126 Accountancy : Company Accounts and Analysis of Financial Statements
Illustration 28
LCM Ltd. purchased for cancellation its own 10,00,000, 9% Debentures of Rs
500 each at Rs 480 each. Record necessary journal entries.
Solution:
Books of LCM Ltd.
Journal
Date Particulars L.F. Debit Credit
Amount Amount
(Rs) (Rs)
Own Debentures A/c Dr. 48,00,00,000
To Bank A/c 48,00,00,000
(Purchased its own debentures @ Rs 480 each)
Illustration 29
The following balances appeared in the books of Madhu Ltd. as on April 01,
2016:
(Rs)
12% Debentures 1,50,000
Debenture Redemption Fund 1,25,000
Debenture Redemption Fund Investments 1,25,000
The Debenture Redemption Fund Investments were represented by Rs
1,30,000, 9% Govt. Securities.
The annual instalment added to the fund was Rs 20,600. On March 31
2017, the bank balance before the receipt of interest on investments was Rs
40,000. On the date, all the investments were sold at 84% and the debentures
were duly redeemed.
Prepare Debentures Account, Debenture Redemption Fund Account,
Debenture Redemption Fund Investment Account and Bank Account for
2016–2017. The company closes its books on March 31, every year.
2019-20
Issue and Redemption of Debentures 127
Solution:
Books of Madhu Ltd.
Debenture Redemption Fund Account
Dr. Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
(Rs) (Rs)
2017 2016 Balance b/d 1,25,000
Mar.31 Debenture April 1 Interest on
Redemption 2017 Debenture
Fund Investment Mar.31 Redemption Fund
(Loss on Sale) Investment 11,700
Mar.31 General Reserve 15,800 (9% on Rs 1,30,000)
(Transfer) 1,41,500 Mar.31 Statement of
profit and loss 20,600
1,57,300 1,57,300
Bank Account
Dr. Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
(Rs) (Rs)
2017 2017
Mar.31 Balance b/d 40,000 Mar.31 Debenture 1,50,000
Interest on D.R.F 11,700 Mar.31 Balance c/d 10,900
Investment
Mar.31 Debenture 1,09,200
Redemption
Fund Investment
(Sales Proceeds)
1,60,900 1,60,900
2019-20
128 Accountancy : Company Accounts and Analysis of Financial Statements
Working Notes :
1. Interest on Debenture Redemption Fund Investments of 1,30,000 at 9% will be
Rs 11,700.
2. Investments realised at 84%. Hence, the investments of Rs 1,30,000 will realise
Rs 1,09,200.
Select the correct answer for the following multiple choice questions:
1. Debentures which are transferable by mere delivery are:
(a) Registered debentures, (b) First debentures,
(c) Bearer debentures.
2. The following journal entry appears in the books of X Co. Ltd.
Bank a/c Dr. 4,75,000
Loss on issue of debenture a/c Dr. 75,000
To 12% Debentures a/c 5,00,000
To Premium on Redemption of Debenture A/c 50,000
Debentures have been issued at a discount of:
(a) 15%, (b) 5%, (c) 10%.
3. X Co. Ltd. purchased assets worth Rs 28,80,000. It issued debentures of Rs
100 each at a discount of 4 per cent in full satisfaction of the purchase
consideration. The number of debentures issued to vendor is:
(a) 30,000, (b) 28,800, (c) 32,000.
4. Convertible debentures cannot be issued at a discount if:
(a) They are to be immediately converted,
(b) They are not to be immediately converted,
(c) None of the above.
5. Discount on issue of debentures is shown under the following head in the
Balance Sheet:
(a) Statement of profit and loss,
(b) Other non-Corrent Assets,
(c) Debentures account.
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Issue and Redemption of Debentures 129
6. When debentures are issued at par and are redeemable at a premium, the
loss on such an issues debited to :
(a) Statement of profit and loss,
(b) Debentures applications and allotment account,
(c) Loss on issue of debentures account.
7. Excess value of net assets over purchase consideration at the time of purchase
of business is credited to :
(a) General reserve,
(b) Capital reserve,
(c) Vendors’ account.
8. When all the debentures are redeemed, balance in the debentures redemption
fund account is transferred to :
(a) Capital reserve,
(b) General reserve,
(c) Statement of profits and loss.
9. The nominal and book values of debenture redemption fund investments
account are respectively Rs 1,00,000 and Rs 96,000. The company sold
investments of nominal value of Rs 30,000 at a price which was just sufficient
to redeem debentures of Rs 30,000 at 10% premium, the profit on sale of
investment is :
(a) Rs 4,200, (b) Rs 3,000, (c) Rs Nil.
10. Own debentures are those debentures of the company which:
(a) The company allots to its own promoters,
(b) The company allots to its Director,
(c) The company purchases from the market and keeps them as investments.
11. Profit on cancellation of own debentures is transferred to :
(a) Statement of profit and loss,
(b) Debenture redemption reserve,
(c) Capital reserve.
12. When debentures are redeemed out of profits, an equal amount is transferred
to :
(a) General reserve,
(b) Debenture redemption reserve,
(c) Capital reserve.
13. Profit on sale of debenture redemption fund investments in the first instance
is credited to :
(a) Debenture redemption fund account,
(b) Statement of profit and loss,
(c) General reserve account.
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130 Accountancy : Company Accounts and Analysis of Financial Statements
14. The balance of sinking fund investment account after the realisation of
investments is transferred to:
(a) Statement of Profit and Loss,
(b) Debentures account,
(c) Sinking fund account.
15. When debentures are issued at a discount and are redeemable at a premium,
which of the following accounts is debited at the time of issue:
(a) Debentures account,
(b) Premium on redemption of debentures account,
(c) Loss on issue of debentures account.
Do it Yourself
1. G. Ltd., has Rs 800 lakh, 10% debentures of Rs 100 each due for redemption
on March 31, 2017. Assume that Debenture Redemption Reserve has a
balance of Rs 3,40,00,00,000 on that date. Record necessary entries at the
time of redemption of debentures.
2. R. Ltd., issued 88,00,000, 8% debenture of Rs 50 each at a premium of 5 %
on July 1, 2014 redeemable at par by conversion of debentures into shares of
Rs 20 each at a premium of Rs 2 per share on June 30, 2017. Record necessary
entries for redemption of debentures.
3. C. Ltd. has outstanding 11,00,000, 10% debentures of Rs 200 each, on April
1, 2017. The Board of Directors have decided to purchase 20% of own
debentures for cancellation at Rs 200 each. Record necessary entries for the
same.
4. Record necessary journal entries in the books of the Company in each of the following
cases for redemption of 1,000, 12% Debentures of Rs 10 each issued at par:
(a) Debentures redeemed at par by conversion into 12% Preference Shares
of Rs 100 each,
2019-20
Issue and Redemption of Debentures 131
Bank Account
Dr. Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
(Rs) (Rs)
2016 2017
Apr.1 Balance b/d 3,00,000 Mar.31 12% Debentures 4,00,000
balance Balance c/d 2,28,000
includes Rs 40,000,
interest @ 10% on
Rs 4,00,000 )
Mar.31 12% Debentures 3,28,000
Sinking Fund
Investment
6,28,000 6,28,000
Illustration 30
The following balances stood as on 31 March, 2017 in the books of a Company:
12% Debentures Rs 10,00,000
Debenture Redemption Fund Rs 10,00,360
Debenture Redemption Fund Investments represented by:
Rs 4,00,000 9% Loan Rs 3,80,000
Rs 7,00,000 8% Govt. Paper Rs 6,20,360
On the above date, the investments were sold as follows: 9% loan at par, and
8% Govt. Paper at 90% of nominal value. The Debentures were also redeemed
accordingly. Show the necessary ledger accounts.
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132 Accountancy : Company Accounts and Analysis of Financial Statements
Solution:
12% Debentures Account
Dr. Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
(Rs) (Rs)
2017 Bank 10,00,000 2017 Balance b/d 10,00,000
March 31 10,00,000 March 31 10,00,000
2019-20
Issue and Redemption of Debentures 133
Bank Account
Dr. Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
(Rs) (Rs)
2017 To Debenture 2017 By 12% Debentures 10,00,000
March 31 Redemption Fund March 31
Investment: By Balance c/d 30,000
9% Loan 4,00,000
8% Govt. Paper 6,30,000
10,30,000 10,30,000
Note: The Bank Balance has not been given in the question.
Do it Yourself
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134 Accountancy : Company Accounts and Analysis of Financial Statements
Summary
2019-20
Issue and Redemption of Debentures 135
Numerical Questions
1. G. Ltd. issued 75,00,000, 6% debentures of Rs 50 each at par payable Rs 15 on
application and Rs 35 on allotment, redeemable at par after 7 years from the date
of issue of debentures. Record necessary entries in the books of Company.
2. Y. Ltd. issued 2,000, 6% debentures of Rs 100 each payable as follows: Rs 25 on
application; Rs 50 on allotment and Rs 25 on first and final call.
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136 Accountancy : Company Accounts and Analysis of Financial Statements
What Journal entries will be made in the following three cases, if debentures are
issued: (a) at par; (b) at discount; (c) at premium of 10%? It was agreed that any
fraction of debentures be paid in cash.
(Note: Goodwill Rs 30,000)
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Issue and Redemption of Debentures 137
Calculate the amount of discount to be written-off each year. Give journal entries
also.
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138 Accountancy : Company Accounts and Analysis of Financial Statements
17. A company issued 10% debentures of the face value of Rs.1,20,000 at a discount
of 6% on April 01, 2011. The debentures are payable by annual drawings of Rs
40,000 commencing from the end of third year.
How will you deal with discount on debentures?
Show the discount on debentures account in the company ledger for the period of
duration of debentures. Assume accounts are closed on March 31 every year.
18. B. Ltd. issued debentures at 94% for Rs 4,00,000 on April 01, 2011 repayable by
five equal drawings of Rs 80,000 each. The company prepares its final accounts on
March 31 every year.
Indicate the amount of discount to be written-off every accounting year assuming
that the company decides to write-off the debentures discount during the life of
debentures. (Amount to be written-off: 2012 Rs 8,000; 2013 Rs 6,400; 2014
Rs 4,800; 2015 Rs 2,000; 2016 Rs 1,600).
19. B. Ltd. issued 1,000, 12% debentures of Rs 100 each on April 01, 2014 at a discount
of 5% redeemable at a premium of 10%.
Give journal entries relating to the issue of debentures and debentures interest
for the period ending March 31, 2015 assuming that interest is paid half-yearly on
September 30 and March 31 and tax deducted at source is 10%.
20. What journal entries will be made in the following cases when company redeems
debentures at the expiry of period by serving the notice: (a) when debentures were
issued at par with a condition to redeem them at premium; (b) when debentures
were issued at premium with a condition to redeem at par; and (c) when debentures
were issued at discount with a condition to redeem them at premium?
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Financial Statements of a Company 3
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140 Accountancy : Company Accounts and Analysis of Financial Statements
2019-20
Financial Statements of a Company 141
amount paid for them. While, preparing statement of profit and loss
the revenue is included in the sales of the year in which the sale was
undertaken even though the sale price may be received over a number
of years. The assumption is known as realisation postulate.
4. Personal Judgements: Under more than one circumstance, facts and
figures presented through financial statements are based on personal
opinion, estimates and judgements. The depreciation is provided taking
into consideration the useful economic life of fixed assets. Provisions
for doubtful debts are made on estimates and personal judgements.
In valuing inventory, cost or market value, whichever is less is being
followed. While deciding either cost of inventory or market value of
inventory, many personal judgements are to be made based on certain
considerations. Personal opinion, judgements and estimates are made
while preparing the financial statements to avoid any possibility of
over statement of assets and liabilities, income and expenditure,
keeping in mind the convention of conservatism.
Thus, financial statements are the summarised reports of recorded facts and
are prepared the following accounting concepts, conventions and requirements
of Law.
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142 Accountancy : Company Accounts and Analysis of Financial Statements
2019-20
Financial Statements of a Company 143
2019-20
144 Accountancy : Company Accounts and Analysis of Financial Statements
Box 1
Rounding-off Rule for figures in the Presentation of Financial Statements
Rounding off of figures to be reported in the financial statements is based on the size of
turnover:
1. Turnover < Rs.100 crore: Nearest hundreds, thousands, lakhs or millions or
decimal thereof;
2. Turnover > Rs.100 crore: Nearest lakhs or millions or decimal thereof;
Shareholders Fund
The shareholders’ funds are sub-classified on the face of the balance sheet.
a) Share Capital
b) Reserves and Surplus
c) Money received against Share Warrants
2019-20
Financial Statements of a Company 145
Share Capital
Disclosures relating to share capital are to be given in notes to accounts. The
following additions/modifications are significant:
a) For each class of shares, recognition of the number of shares outstanding
at the beginning and at the end of the reporting period is required.
b) The rights, preferences and restrictions attached to each class of shares
including restrictions on the distribution of dividends and repayment of
capital.
c) In order to bring clarity regarding the identity of ultimate owners of the
company:
i) Disclosure of shares in respect of each class in the company held
by its holding company or its ultimate holding company including
shares held by subsidiaries or associates of holding company or
the ultimate holding company in aggregate.
ii) Disclosure of shares in the company held by each shareholder
holding more than 5% shares specifying the number of shares held.
iii) Disclosure of the following for the period of 5 years immediately
preceding the date of the balance sheet:
Aggregate number and class of shares allotted as fully paid up
pursuant to contracts without payment being received in cash.
Aggregate number and class of shares allotted as fully paid up
by way of bonus shares.
Aggregate number and class of shares bought back.
This may be noted that the information of shareholders funds are presented
on the face of financial statements limited only to broad and significant items. Details
are given in Notes to Accounts.
d) For each class of share capital:
i) The number and amount of share authorised.
ii) The number of shares issued, subscibed, fully paid and subscribed
but not fully paid.
iii) Par value per share.
iv) Reconciliation of the number of shares outstanding at the beginning
and end of the accounting period.
v) Rights, preferences and restrictions attaching each class of shares
including restrictions on the distribution of dividends and
repayment of capital.
vi) Aggregate number of shares with respect to each class in the
company held by its holding company, its ultimate holding
company including shares held by or by subsidiaries or associates
of the holding company or the ultimate holding company.
2019-20
146 Accountancy : Company Accounts and Analysis of Financial Statements
2019-20
Financial Statements of a Company 147
Notes to Accounts
Particulars Amount Amount
(Rs.) (Rs.)
1. Share capital
Authorised share capital
50,000 equity shares of Rs. 100 each 50,00,000
Issued capital
40,000 equity shares of Rs. 100 each 40,00,000
Subscirbed and fully paid up capital
35,500 equity shares of Rs. 100 each
fully paid 35,50,000
Subscirbed but not fully paid-up capital
300 equity shares of Rs. 100 each fully
called up 30,000
Less: Calls-in-arrears (300×20) (6,000)
24,000
Add: Share forfeiture A/c (200 shares × Rs. 80) 16,000 40,000
35,90,000
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148 Accountancy : Company Accounts and Analysis of Financial Statements
criteria for defining current assets and liabilities has been clearly spelled out
with non-current assets and liabilities being the residual items.
Current/Non-current distinction
An item is classified as current:
if it is involved in entity’s operating cycle or,
is expected to be realised/settled within twelve months or,
if it is held primarily for trading or,
is cash and cash equivalent or,
if entity does not have on unconditional rights to defer settlement of
liability for atleast 12 months after the reporting period,
Other assets and liabilities are non-current.
Illustration 2
Show the following items in the balance sheet of Amba Ltd. as on March 31,
2017: Rs.
8% Debentures 10,00,000
Equity share capital 50,00,000
Securities premium 20,000
Preliminary expenses 40,000
Statement of Profit & Loss (cr.) 1,50,000
Discount on issue of 8% debentures 40,000
(Amount to be written in next 4 years approx.)
Loose tools 20,000
Bank balance 60,000
Cash in hand 38,000
Solution:
Books of Amba Ltd.
*Balance Sheet as at March 31, 2017
Particulars Note Amount
No. (Rs.)
I. Equity and Liabilities
1. Shareholders’ Funds
a) Share capital 50,00,000
b) Reserve and surplus 1 1,30,000
2. Non-current Liabilities
a) Long-term borrowings 2 10,00,000
II. Assets
1. Non-current assets
a) Other non-current assets 3 30,000
2. Current assets
a) Inventories 4 20,000
b) Cash and cash equivalents 5 98,000
c) Other current assets 6 10,000
* Relevant items only
2019-20
Financial Statements of a Company 149
Notes to Accounts
Particulars Amount Amount
(Rs.) (Rs.)
1. Reserve and surplus
Securities premium 20,000
Less: Preliminary expenses (40,000)
(20,000)
Statement of profit and loss 1,50,000 1,30,000
2. Long-term borrowings
8% debentures 10,00,000
3. Other non-current assets
Discount on issue of 8% debentures 30,000
(¾of Rs. 40,000)
4. Inventory
Loose tools 20,000
5. Cash and cash equivalents
Bank balance 60,000
Cash in hand 38,000 98,000
6. Other current assets
Discount on issue of 8% debentures 10,000
(¼of Rs. 40,000)
Important points:
Preliminary expenses are to be written-off completely in the year in which
such expenses are incurred. They should be written-off first from
securities premium and the balance if any, from statement of profit &
loss.
Borrowing costs such as discount on issue of debentures could be written-
off over loan period.
Share application money pending allotment
Share application money not exceeding the issued capital and to the extent
non-refundable shall be classified as non-current. It will be shown on this face
of balance sheet as share application money pending allotment.
Borrowings
Total borrowings are categorised into long-term borrowings, short-term
borrowings and current maturities to long-term debt.
(i) Loans which are repayable in more than twelve months/operating cycle
are classified as long-term borrowings on the face of balance sheet.
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150 Accountancy : Company Accounts and Analysis of Financial Statements
(ii) Loans repayable on demand or whose original tenure is not more than
twelve months/operating cycle are classified as short-term borrowings
on the face of balance sheet.
(iii) Current maturities to long-term loan include amount repayable within
twelve months/operating cycle under other current liabilities with Note
to Account.
Deferred tax assets/liabilities are always non-current. This is in accordance
to IAS-I.
Trade payables
Sundry creditors have been replaced with the term Trade payables and are
classified as current and non-current. Trade payables to be settled beyond 12
months from the date of balance sheet or beyond the operating cycle are classified
under “other long-term liabilities” with Note to Account. For example, purchase
of goods and services in normal course of business. The balance of trade payables
are classified as current liabilities on the face of balance sheet.
Provisions
The amount of provision settled within 12 months from balance sheet date or
within operating cycle period from date of its recognition is classified as short
term provisions and shown under current liabilities on the face of balance sheet.
Others are depicted as long-term provisions under non-current liabilities on the
face of balance sheet.
Fixed assets
There is no change in the treatment of fixed assets. Both tangible and intangible
assets are non-current. This may also be noted if the useful life of the asset is
less than 12 months, it will still fall under non-current.
Investments
Investments are also classified into current and non-current categories.
Investments expected to realise within twelve months are considered as current
investments under current assets. Others are classified as non-current
investments under non-current assets. Both are however shown on the face of
the balance sheet.
Inventories
All inventories are always treated as current.
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Financial Statements of a Company 151
Trade receivables
Trade receivables realised beyond twelve months from reporting date/operating
cycle starting from the date of their recognition are classified as “Other non-
current assets” under the head non-current assets with Note to Accounts. For
example, sale of goods or services rendered in normal course of business. Others
are classified as current assets and shown on the face of the balance sheet.
Cash and cash equivalent
It is always current however, amounts which qualify as cash and cash equivalents
as per IAS-3 is shown here. The supremacy is accorded to AS over Schedule III,
cash and cash equivalents are to the disclosed in accordance to IAS-3.
Illustration 3
Show the following items in the balance sheet of Sunfill Ltd. as at March 31,
2017:
Solution:
Books of Sunfill Ltd.
Balance Sheet as at March 31, 2017
Notes to Accounts
Particulars Amount
(Rs.)
1. Reserve and surplus
General Reserve (1 April, 2016) 5,00,000
Less: Statement of profit and loss (3,00,000)
(Dr. balance)
2,00,000
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152 Accountancy : Company Accounts and Analysis of Financial Statements
Illustration 4
Show the following items in the balance sheet of Avalon Ltd., as at March 31,
2017:
Rs. in
Lakh
General Reserve (since 31 March 2016) 5
Statement of Profit & Loss (Debit Balance) for 2016–17 (8)
Solution:
Books of Avalon Ltd.
Balance Sheet as at March 31, 2017
Notes to Accounts
Particulars Amount
(Rs.)
1. Reserve and Surplus
i) General reserve (1 April, 2012) 5,00,000
ii) Less: Statement of profit and loss (8,00,000)
(debit balance) (3,00,000)
Illustration 5
Arushi Ltd. issued 5,000, 10% debentures of Rs. 100 each at par but redeemable
at a premium of 5% after 5 years. Give journal entries and also prepare the
balance sheet of the company.
Solution:
Books of Arushi Ltd.
Journal
Date Particulars L.F. Debit Credit
(Rs.) (Rs.)
Bank A/c Dr. 5,00,000
To 10% Debenture Application 5,00,000
and Allotment A/c
(Being application money received)
10% Debenture Application Dr. 5,00,000
and Allotment A/c
Loss on Issue of Debentures A/c Dr. 25,000
To 10% Debentures A/c
To Premium on Redemption of 5,00,000
Debentures A/c 25,000
(Being debentures issued at par but
redeemable at premium)
2019-20
Financial Statements of a Company 153
Arushi Ltd.
Balance Sheet as at ............
Particulars Note Amount
No. (Rs.)
I. Equity and Liabilities
1. Non-current Liabilities
a) Long-term borrowing 1 5,00,000
b) Other long-term liabilities 2 25,000
Total 5,25,000
II. Assets
1. Non-current assets
a) Other non-current assets 3 20,000
2. Current Assets
a) Cash and cash equivalents 4 5,00,000
b) Other current assets 5 5,000
Total 5,25,000
Notes to Accounts
Particulars Amount
(Rs.)
1. Long-term borrowings
5,000, 10% debentures of Rs. 100 each 5,00,000
2. Other long term liabilities
Premium on redemption of debentures A/c 25,000
3. Other non-current assets
Loss on issue of debentures 20,000
(4/5th of Rs. 25,000)
4. Cash and cash equivalents
Cash at bank 5,00,000
5. Other current assets
Loss on issue of debentures 5,000
(1/5th of Rs. 25,000, i.e., amount to
be written-off in next 12 months)
Do it yourself
Classify the following items in the balance sheet of a company under Major
heads and Sub-heads
S. No. Items Major Head Sub-head (if any)
1. Goodwill
2. Forfeited shares
3. Acceptances
4. Preliminary expenses
5. Capital reserve
6. Loans from banks
7. Investment in shares and
debentures
8. Interest accrued and due on
debentures
2019-20
154 Accountancy : Company Accounts and Analysis of Financial Statements
2019-20
Financial Statements of a Company 155
Illustration 6
From the given particulars of Shine and Bright Co. Ltd., as at March 31, 2017,
prepare balance sheet in accordance to the Schedule III:
Solution:
Book of Shine and Bright Ltd.
Balance Sheet as at March 31, 2017
Particulars Note Figure as Figure as
No. at the end at the end
of current of previous
reporting reporting
period period
I. Equity and Liabilities
1. Non-current Liabilities
a) Long-term borrowings 1 2,00,000
2. Current liabilities
a) Short-term provisions 2 16,000
II. Assets
1. Non-current assets
a) Fixed assets
Tangible assets 3 4,75,000
Intangible assets 4 30,000
2. Other non-current assets* 5 2,60,000
Current assets
a) Inventories 6 1,52,000
b) Trade receivables 7 12,000
c) Cash and cash equivalents 1,35,000
2019-20
156 Accountancy : Company Accounts and Analysis of Financial Statements
Notes to Accounts
Particulars Amount
(Rs.)
1. Long-term borrowings:
10% debentures 2,00,000
2. Short-term provisions:
Provision for taxation 16,000
3. Fixed assets:
(i) Tangible assets
Motor vehicles 4,75,000
(ii) Intangible assets
Goodwill 30,000
4. Other non-current assets
Preliminary expenses 2,40,000
Discount on issue of debentures 20,000 2,60,000
5. Inventories
Stock in trade 1,40,000
Loose tools 12,000 1,52,000
6. Trade receivables
Bills receivables 12,000
7. Cash & cash equivalents
Cash at bank 1,35,000
* It has been assumed that discount on issue of debentures is not written-off in the next
12 months of the reporting period.
2019-20
Financial Statements of a Company 157
2019-20
158 Accountancy : Company Accounts and Analysis of Financial Statements
3. Expense
Expenses incurred to earn the income shown under various heads as discussed below:
Illustration 8
From the following particulars, prepare Statement of profit and loss for the year
ending March 2017:
2019-20
Financial Statements of a Company 159
Additional information
(i) Equity dividend @ 10% declared on paid up capital.
(ii) Dividend on the preference share capital paid in full.
(iii) Rs. 2,00,000 transferred to general reserve.
Solution
Statement of Profit and Loss
for the year ending 31st March, 2017
Particulars Note Amount
No. (Rs.)
I. Income
Revenue from operations (Sales) 10,00,000
Total 10,00,000
II. Expenses
Cost of materials consumed (Adjusted purchase) 4,00,000
Employees benefit expenses 1 2,00,000
Finance cost 10,000
Depreciation and amortisation 16,000
Total 6,26,000
Profit before tax (I-II) 3,74,000
Notes to Accounts
Particulars Amount Amount
Rs. Rs.
Employee Benefit Expenses
(i) Wages 1,20,000
(ii) Salary 80,000 2,00,000
2019-20
160 Accountancy : Company Accounts and Analysis of Financial Statements
2. Basis for fiscal policies: The fiscal policies, particularly taxation policies
of the government, are related with the financial performance of
corporate undertakings. The financial statements provide basic input
for industrial, taxation and other economic policies of the government.
3. Basis for granting of credit: Corporate undertakings have to borrow
funds from banks and other financial institutions for different purposes.
Credit granting institutions take decisions based on the financial
performance of the undertakings. Thus, financial statements form the
basis for granting of credit.
4. Basis for prospective investors: The investors include both short-term
and long-term investors. Their prime considerations in their investment
decisions are security and liquidity of their investment with reasonable
profitability. Financial statements help the investors to assess long-
term and short-term solvency as well as the profitability of the concern.
5. Guide to the value of the investment already made: Shareholders of
companies are interested in knowing the status, safety and return on
their investment. They may also need information to take decision
about continuation or discontinuation of their investment in the
business. Financial statements provide information to the shareholders
in taking such important decisions.
6. Aids trade associations in helping their members: Trade associations
may analyse the financial statements for the purpose of providing
service and protection to their members. They may develop standard
ratios and design uniform system of accounts.
7. Helps stock exchanges: Financial statements help the stock exchanges
to understand the extent of transparency in reporting on financial
performance and enables them to call for required information to protect
the interest of investors. The financial statements enable the Stock
brokers to judge the financial position of different concerns and take
decisions about the prices to be quoted.
2019-20
Financial Statements of a Company 161
Summary
Financial Statements: Financial statements are the end products of accounting
process, which reveal the financial results of a specified period and financial position
as on a particular date. Financial Statements are prepared and published by
corporate undertakings for the benefit of various stakeholders. These statements
include Statement of profit and loss and balance sheet. The basic objective of
these statements is to provide information required for decision-making by the
management as well as other outsiders who are interested in the affairs of the
undertaking.
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162 Accountancy : Company Accounts and Analysis of Financial Statements
Balance Sheet: The balance sheet shows all the assets owned by the concern, all
the obligations or liabilities payable to outsiders or creditors and claims of the
owners on a particular date. It is one of the important statements depicting the
financial position or status or strength of an undertaking.
Statement of Profit and Loss: The Statement of profit and loss is prepared for a
specific period to determine the operational results of an undertaking. It is a
statement of revenue earned and the expenses incurred for earning the revenue.
It is a performance report showing the changes in income, expenses, profits and
losses as a result of business operations during the year between two balance
sheet dates.
Significance of Financial Statements: The users of financial statements include
Shareholders, Investors, Creditors, Lenders, Customers, Management, Government,
etc. Financial statements help all the users in their decision-making process. They
provide data about general purpose needs of these members.
Limitations of Financial Statements: Financial statements are not free from limitations.
They provide only aggregate information to satisfy the general purpose needs of
the users. They are technical statements understood by only persons having some
accounting knowledge. They reflect historical information but not current situation,
which is essential in any decision making. In addition, one can get idea about the
organisation’s performance in terms of quantitative changes but not in qualitative
terms like labour relations, quality of work, employees satisfaction, etc. The financial
statements are neither complete nor accurate as the flow of income and expenses
are segregated using best judgement apart from accepted concepts. Hence, these
statements need proper analysis before their use in decision-making.
2019-20
Financial Statements of a Company 163
5. How will you disclose the following items in the Balance Sheet of a company;
(i) Loose tools
(ii) Uncalled liability on partly paid-up shares
(iii) Debentures redemption reserve
(iv) Mastheads and publishing titles
(v) 10% debentures
(vi) Proposed dividend
(vii) Share forfeited account
(viii) Capital redemtion reserve
(ix) Mining rights
(x) Work-in-progress
Numerical Questions
1. Show the following items in the balance sheet as per the provisions of the
companies Act, 2013 in Schedule III:
Particulars Rs. Particulars Rs.
Preliminary Expenses 2,40,000 Goodwill 30,000
Discount on issue of shares 20,000 Loose tools 12,000
10% Debentures 2,00,000 Motor Vehicles 4,75,000
Stock in trade 1,40,000 Provision for tax 16,000
Cash at bank 1,35,000
Bills receivable 1,20,000
2019-20
164 Accountancy : Company Accounts and Analysis of Financial Statements
2019-20
Financial Statements of a Company 165
Show the above items in the balance sheet of the company as at March 31,
2017.
7. Prepare a balance sheet of Black Swan Ltd., as at March 31, 2017 from the
following information:
Rs.
General Reserve : 3,000
10% Debentures : 3,000
Balance in Statement of : 1,200
Profit and Loss
Depreciation on fixed assets : 700
Gross Block : 9,000
Current Liabilities : 2,500
Preliminary Expenses : 300
6% Preference Share Capital : 5,000
Cash & Cash Equivalents : 6,100
2019-20
Analysis of Financial Statements 4
2019-20
Analysis of Financial Statements 167
2019-20
168 Accountancy : Company Accounts and Analysis of Financial Statements
their overall responsibility to see that the resources of the firm are used
most efficiently and that the firm’s financial condition is sound. Financial
analysis helps the management in measuring the success of the
company’s operations, appraising the individual’s performance and
evaluating the system of internal control.
(c) Trade payables: Trade payables, through an analysis of financial
statements, appraises not only the ability of the company to meet its
short-term obligations, but also judges the probability of its continued
ability to meet all its financial obligations in future. Trade payables are
particularly interested in the firm’s ability to meet their claims over a
very short period of time. Their analysis will, therefore, evaluate the firm’s
liquidity position.
(d) Lenders: Suppliers of long-term debt are concerned with the firm’s long-
term solvency and survival. They analyse the firm’s profitability over a
period of time, its ability to generate cash, to be able to pay interest and
repay the principal and the relationship between various sources of funds
(capital structure relationships). Long-term lenders analyse the historical
financial statements to assess its future solvency and profitability.
(e) Investors: Investors, who have invested their money in the firm’s shares,
are interested about the firm’s earnings. As such, they concentrate on
the analysis of the firm’s present and future profitability. They are also
interested in the firm’s capital structure to ascertain its influences on
firm’s earning and risk. They also evaluate the efficiency of the
management and determine whether a change is needed or not. However,
in some large companies, the shareholders’ interest is limited to decide
whether to buy, sell or hold the shares.
(f) Labour unions: Labour unions analyse the financial statements to assess
whether it can presently afford a wage increase and whether it can absorb
a wage increase through increased productivity or by raising the prices.
(g) Others: The economists, researchers, etc., analyse the financial statements
to study the present business and economic conditions. The government
agencies need it for price regulations, taxation and other similar purposes.
2019-20
Analysis of Financial Statements 169
2019-20
170 Accountancy : Company Accounts and Analysis of Financial Statements
2019-20
Analysis of Financial Statements 171
Exhibit. 4.1
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172 Accountancy : Company Accounts and Analysis of Financial Statements
Illustration 1
Convert the following statement of profit and loss into the comparative statement
of profit and loss of BCR Co. Ltd.:
Particulars Note 2015-16 2016-17
No. Rs. Rs.
(i) Revenue from operations 60,00,000 75,00,000
(ii) Other incomes 1,50,000 1,20,000
(iii) Expenses 44,00,000 50,60,000
(iv) Income tax 35% 40%
Solution:
Comparative statement of profit and loss for the year ended March 31, 2016
and 2017:
Particulars 2015-16 2016-17 Absolute Percentage
Increase (+) or Increase (+)
Decrease (–) or Decrease (–)
Rs . R s. R s. %
I. Revenue from operations 60,00,000 75,00,000 15,00,000 25.00
II. Add: Other incomes 1,50,000 1,20,000 (30,000) (20.00)
III. Total Revenue I+II 61,50,000 76,20,000 14,70,000 23.90
IV. Less: Expenses 44,00,000 50,60,000 6,60,000 15.00
Profit before tax 17,50,000 25,60,000 8,10,000 46.29
V. Less: Tax 6,12,500 10,24,000 4,11,500 67.18
Profit after tax 11,37,500 15,36,000 3,98,500 35.03
Illustration 2
From the following statement of profit and loss of Madhu Co. Ltd., prepare
comparative statement of profit and loss for the year ended March 31, 2016 and
2017:
Particulars Note 2015-16 2016-17
No. Rs. Rs.
2019-20
Analysis of Financial Statements 173
Solution:
Comparative statement of profit and loss of Madhu Co. Limited
for the year ended March 31, 2016 and 2017:
Do it yourself
From the following particulars, prepare comparative statement of profit and loss of Narang
Colours Ltd. for the year ended March 31, 2016 and 2017:
Particulars Note 2016-17 2015-16
No.
1. Revenue from operations 40,00,000 35,00,000
2. Other income 50,000 50,000
3. Cost of material consumed 15,00,000 18,00,000
4. Changes in inventories of finished goods 10,000 (15,000)
5. Employee benefit expenses 2,40,000 2,40,000
6. Depreciation and amortisation 25,000 22,500
7. Other expenses 2,66,000 3,02,000
8. Profit 20,09,000 14.27,300
Notes to Accounts
Particulars 2016-17 2015-16
1. Other expenses
i) Power and fuel 36,000 40,000
ii) Carriage outwards 7,500 9,500
iii) License fees 2,500 2,500
iv) Selling and distribution 1,70,000 1,90,000
v) Provision of tax 50,000 60,000
2,66,000 3,02,000
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174 Accountancy : Company Accounts and Analysis of Financial Statements
Illustration 3
The following are the Balance Sheets of J. Ltd. as at March 31, 2016 and 2017.
Prepare a Comparative balance sheet.
Particulars Note March 31, March 31,
No. 2017 2016
(Rs.) (Rs.)
I. Equity and Liabilities
1. Shareholders’ Funds
a) Share capital 20,00,000 15,00,000
b) Reserve and surplus 3,00,000 4,00,000
2. Non-current Liabilities
Long-term borrowings 9,00,000 6,00,000
3. Current liabilities
Trade payables 3,00,000 2,00,000
Total 35,00,000 27,00,000
II. Assets
1. Non-current assets
a) Fixed assets
- Tangible assets 20,00,000 15,00,000
- Intangible assets 9,00,000 6,00,000
2. Current assets
- Inventories 3,00,000 4,00,000
- Cash and cash equivalents 3,00,000 2,00,000
Solution:
Comparative Balance Sheet of J. Limited
as at March 31, 2016 and March 2017:
(Rs. in Lakhs)
Particulars March 31, March 31, Absolute Percentage
2016 2017 Change Change
I. Equity and Liabilities
1. Shareholders’ Funds
a) Share capital 15 20 05 33.33
b) Reserve and surplus 04 03 (01) (25)
2. Non-current Liabilities
a) Long-term borrowings 06 09 03 50
3. Current liabilities
a) Trade payables 02 03 01 50
Total 27 35 08 29.63
2019-20
Analysis of Financial Statements 175
II. Assets
1. Non-current assets
a) Fixed assets
- Tangible assets 15 20 05 33.33
- Intangible assets 06 09 03 50
b) Current assets
- Inventories 04 03 (01) (25)
- Cash and cash equivalents 02 03 01 50
Total 27 35 08 29.63
Illustration 4
From the following Balance Sheets of Amrit Limited as at March 31, 2016 and
2017, prepare a comparative balance sheet:
Particulars Note March 31, March 31,
No. 2017 2016
(Rs.) (Rs.)
I. Equity and Liabilities
1. Shareholders’ Funds
a) Share capital 20,00,000 15,00,000
b) Reserve and surplus 13,00,000 14,00,000
2. Non-current Liabilities
Long-term borrowings 19,00,000 16,00,000
3. Current liabilities
Trade payables 3,00,000 2,00,000
Total 55,00,000 47,00,000
II. Assets
1. Non-current assets
a) Fixed assets
- Tangible assets 20,00,000 15,00,000
- Intangible assets 19,00,000 16,00,000
2. Current assets
- Inventories 13,00,000 14,00,000
- Cash and Cash Equivalents 3,00,000 2,00,000
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176 Accountancy : Company Accounts and Analysis of Financial Statements
Solution:
Comparative Balance Sheet of Amrit Limited
as at March 31, 2016 and March 31, 2017
(Rs. in Lakhs)
Particulars March 31, March 31, Absolute Percentage
2016 2017 Increase (+) or Increase (+)
Decrease (–) or Decrease (–)
Rs. Rs. Rs. %
I. Equity and Liabilities
1) Shareholders’ funds
a) Share capital 15 20 5 33.33
b) Reserves and surplus 14 13 (1) (7.14)
2) Non-current liabilities
Long-term borrowings 16 19 3 18.75
3) Current liabilities
Trade payables 2 3 1 50
Total 47 55 8 17.02
II. Assets
1) Non-current assets
Fixed assets
a) Tangible assets 15 20 5 33.33
b) Intangible assets 16 19 3 18.75
2) Current assets
a) Inventories 14 13 (1) (7.14)
b) Cash and Cash Equivalents 2 3 1 50
Total 47 55 8 17.02
Do it yourself
From the Balance Sheets for the year ended March 31, 2016 and 2017, prepare the
comparative Balance Sheet of Omega Chemicals Ltd.:
Rs. in Lakhs
Particulars Note 2017 2016
No. (Rs.) (Rs.)
I. Equity and Liabilities
1) Shareholders’ Fund
a) Share capital 5 10
b) Reserve and surplus 3 2
2) Non-current liabilities
Long-term borrowings 5 8
3) Current liabilities
Trade Payable 2 4
Total 15 24
2019-20
Analysis of Financial Statements 177
II. Assets
1) Non-current assets
a) Fixed assets
- Tangible assets 14 8
- Intangible assets 3 2
2) Current assets
a) Inventories 5 4
b) Cash and cash equivalents 2 1
Total 24 15
Exhibit 4.2
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178 Accountancy : Company Accounts and Analysis of Financial Statements
Illustration 5
From the following information, prepare a Common size Income Statement for
the year ended March 31, 2016 and March 31, 2017:
Solution:
Common Size Income Statement
for the year ended March 31, 2016 and March 31, 2017
Particulars Absolute Amounts Percentage of Net Sales
2015-16 2016-17 2015-16 2016-17
Rs. Rs. (%) (%)
Net Sales 25,00,000 18,00,000 100 100
(Less) Cost of goods 12,00,000 10,00,000 48 55.56
Sold*
Gross Profit 13,00,000 8,00,000 52 44.44
(Less) Operating 1,20,000 80,000 4.80 4.44
Expenses**
Operating Income 11,80,000 7,20,000 47.20 40
(Less) Non-Operating 15,000 12,000 0.60 0.67
expenses
Profit 11,65,000 7,08,000 46.60 39.33
Illustration 6
From the following information, prepare Common size statement of profit and
loss for the year ended March 31, 2016 and March 31, 2017:
Particulars 2015-16 2016-17
Rs. Rs.
Revenue from operations 25,00,000 20,00,000
Other income 3,25,000 2,50,000
2019-20
Analysis of Financial Statements 179
Solution:
Common size statement of Profit and Loss
for the year ended March 31, 2016 and March 31, 2017:
Particulars Absolute Amounts Percentage of Net
Revenue from operations
2015-16 2016-17 2015-16 2016-17
Rs. Rs. (%) (%)
Revenue from Operations 25,00,000 20,00,000 100 100
(Add) Other income 3,25,000 2,50,000 13 12.5
Total revenue 28,25,000 22,50,000 113 112.5
(Less) expenses:
a) Employee benefit 8,25,000 4,50,000 33 22.5
expenses
b) Other expenses 2,00,000 1,00,000 8 5
Profit before tax 18,00,000 17,00,000 72 85
(Less) taxes 5,40,000 3,40,000 21.6 17
Profit after tax 12,60,000 13,60,000 50.4 68
Illustration 7
Prepare common size Balance Sheet of XRI Ltd. from the following information:
Particulars Note No. March 31, March 31,
2016 2017
I. Equity and Liabilities
1. Shareholders’ Fund
a) Share capital 15,00,000 12,00,000
b) Reserves and surplus 5,00,000 5,00,000
2. Non-current liabilities
Long-term borrowings 6,00,000 5,00,000
3. Current liabilities
Trade Payable 15,50,000 10,50,000
Total 41,50,000 32,50,000
II. Assets
1. Non-current assets
a) Fixed assets
- Tangible asset
Plant & machinery 14,00,000 8,00,000
- Intangible assets
Goodwill 16,00,000 12,00,000
b) Non-current investments 10,00,000 10,00,000
2. Current assets
Inventories 1,50,000 2,50,000
Total 41,50,000 32,50,000
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180 Accountancy : Company Accounts and Analysis of Financial Statements
Solution:
Common size Balace Sheet
as at March 31, 2016 and March 31, 2017:
Do it yourself
Prepare common size balance sheet of Raj Co. Ltd. as at March 31, 2016 and
March 31, 2017 from the given information:
2019-20
Analysis of Financial Statements 181
II. Assets
1. Non-current assets
a) Fixed assets
- Tangible assets 20,00,000 15,00,000
- Intangible assets 9,00,000 6,00,000
b) Current assets
- Inventories 3,00,000 4,00,000
- Cash and cash equivalents 3,00,000 2,00,000
Total 35,00,000 27,00,000
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182 Accountancy : Company Accounts and Analysis of Financial Statements
2019-20
Analysis of Financial Statements 183
Summary
Comparative Statement
Comparative statement shows changes in all items of financial statements in
absolute and percentage terms over a period of time for a firm or between two
firms.
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184 Accountancy : Company Accounts and Analysis of Financial Statements
Numerical Questions
1. Following are the balance sheets of Alpha Ltd., as at March 31, 2016
and 2017:
Particulars March 31, March 31,
2016 2017
Rs. Rs.
I. Equity and Liabilities
Equity share capital 2,00,000 4,00,000
Reserves and surplus 1,00,000 1,50,000
Long-term borrowings 2,00,000 3,00,000
Short-term borrowings 50,000 70,000
Trade payables 30,000 60,000
Short-term provisions 20,000 10,000
Other current liabilities 20,000 30,000
Total 6,20,000 10,20,000
II. Assets
Fixed assets 2,00,000 5,00,000
Non-current investments 1,00,000 1,25,000
Current investments 60,000 80,000
2019-20
Analysis of Financial Statements 185
2. Following are the balance sheets of Beta Ltd. at March 31, 2016 and
2017:
Particulars March 31, March 31,
2017 2016
(Rs.) (Rs.)
I. Equity and Liabilities
Equity share capital 4,00,000 3,00,000
Reserves and surplus 1,50,000 1,00,000
Loan from IDBI 3,00,000 1,00,000
Short-term borrowings 70,000 50,000
Trade payables 60,000 30,000
Short-term provisions 10,000 20,000
Other current liabilities 1,10,000 1,00,000
Total 11,00,000 7,00,000
II. Assets
Fixed assets 4,00,000 2,20,000
Non-current investments 2,25,000 1,00,000
Current investments 80,000 60,000
Stock 1,05,000 90,000
Trade receivables 90,000 60,000
Short-term loans and advances 1,00,000 85,000
Cash and cash equivalents 1,00,000 85,000
Total 11,00,000 7,00,000
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186 Accountancy : Company Accounts and Analysis of Financial Statements
2019-20
Analysis of Financial Statements 187
5. Prepare a Common size statement of profit and loss of Shefali Ltd. with
the help of following information:
Particulars 2015-16 2016-17
(Rs.) (Rs.)
Revenue from operations 6,00,000 8,00,00
Indirect expense 25% of gross profit 25% of gross profit
Cost of revenue from operations 4,28,000 7,28,000
Other incomes 10,000 12,000
Income tax 30% 30%
6. Prepare a Common Size balance sheet from the following balance sheet
of Aditya Ltd., and Anjali Ltd.:
Particulars Aditya Ltd. Anjali Ltd.
Rs. Rs.
I. Equity and Liabilities
a) Equity share capital 6,00,000 8,00,000
b) Reserves and surplus 3,00,000 2,50,000
c) Current liabilities 1,00,000 1,50,000
Total 10,00,000 12,00,000
II. Assets
a) Fixed assets 4,00,000 7,00,000
b) Current assets 6,00,000 5,00,000
Total 1,00,0000 12,00,000
2019-20
Accounting Ratios 5
2019-20
Accounting Ratios 189
2019-20
190 Accountancy : Company Accounts and Analysis of Financial Statements
bright spots of the business. The knowledge of problem areas help management
take care of them in future. The knowledge of areas which are working better
helps you improve the situation further. It must be emphasised that ratios are
means to an end rather than the end in themselves. Their role is essentially
indicative and that of a whistle blower. There are many advantages derived from
ratio analysis. These are summarised as follows:
1. Helps to understand efficacy of decisions: The ratio analysis helps
you to understand whether the business firm has taken the right kind
of operating, investing and financing decisions. It indicates how far
they have helped in improving the performance.
2. Simplify complex figures and establish relationships: Ratios help in
simplifying the complex accounting figures and bring out their
relationships. They help summarise the financial information effectively
and assess the managerial efficiency, firm’s credit worthiness, earning
capacity, etc.
3. Helpful in comparative analysis: The ratios are not be calculated for
one year only. When many year figures are kept side by side, they help
a great deal in exploring the trends visible in the business. The
knowledge of trend helps in making projections about the business
which is a very useful feature.
4. Identification of problem areas: Ratios help business in identifying
the problem areas as well as the bright areas of the business. Problem
areas would need more attention and bright areas will need polishing
to have still better results.
5. Enables SWOT analysis: Ratios help a great deal in explaining the
changes occurring in the business. The information of change helps
the management a great deal in understanding the current threats
and opportunities and allows business to do its own SWOT (Strength-
Weakness-Opportunity-Threat) analysis.
6. Various comparisons: Ratios help comparisons with certain bench
marks to assess as to whether firm’s performance is better or otherwise.
For this purpose, the profitability, liquidity, solvency, etc., of a business,
may be compared: (i) over a number of accounting periods with itself
(Intra-firm Comparison/Time Series Analysis), (ii) with other business
enterprises (Inter-firm Comparison/Cross-sectional Analysis) and
(iii) with standards set for that firm/industry (comparison with standard
(or industry expectations).
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Accounting Ratios 191
ratio analysis. Thus, the limitations of financial statements also form the
limitations of the ratio analysis. Hence, to interpret the ratios, the user should
be aware of the rules followed in the preparation of financial statements and
also their nature and limitations. The limitations of ratio analysis which arise
primarily from the nature of financial statements are as under:
1. Limitations of Accounting Data: Accounting data give an unwarranted
impression of precision and finality. In fact, accounting data “reflect a
combination of recorded facts, accounting conventions and personal
judgements which affect them materially. For example, profit of the
business is not a precise and final figure. It is merely an opinion of the
accountant based on application of accounting policies. The soundness
of the judgement necessarily depends on the competence and integrity
of those who make them and on their adherence to Generally Accepted
Accounting Principles and Conventions”. Thus, the financial statements
may not reveal the true state of affairs of the enterprises and so the
ratios will also not give the true picture.
2. Ignores Price-level Changes: The financial accounting is based on
stable money measurement principle. It implicitly assumes that price
level changes are either non-existent or minimal. But the truth is
otherwise. We are normally living in inflationary economies where the
power of money declines constantly. A change in the price-level makes
analysis of financial statement of different accounting years meaningless
because accounting records ignore changes in value of money.
3. Ignore Qualitative or Non-monetary Aspects: Accounting provides
information about quantitative (or monetary) aspects of business.
Hence, the ratios also reflect only the monetary aspects, ignoring
completely the non-monetary (qualitative) factors.
4. Variations in Accounting Practices: There are differing accounting
policies for valuation of inventory, calculation of depreciation, treatment
of intangibles Assets definition of certain financial variables etc.,
available for various aspects of business transactions. These variations
leave a big question mark on the cross-sectional analysis. As there are
variations in accounting practices followed by different business
enterprises, a valid comparison of their financial statements is not
possible.
5. Forecasting: Forecasting of future trends based only on historical
analysis is not feasible. Proper forecasting requires consideration of
non-financial factors as well.
Now let us talk about the limitations of the ratios. The various limitations are:
1. Means and not the End: Ratios are means to an end rather than the
end by itself.
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192 Accountancy : Company Accounts and Analysis of Financial Statements
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Accounting Ratios 193
2. Balance Sheet Ratios: In case both variables are from the balance
sheet, it is classified as balance sheet ratios. For example, ratio of
current assets to current liabilities known as current ratio. It is
calculated using both figures from balance sheet.
3. Composite Ratios: If a ratio is computed with one variable from the
statement of profit and loss and another variable from the balance
sheet, it is called composite ratio. For example, ratio of credit revenue
from operations to trade receivables (known as trade receivables
turnover ratio) is calculated using one figure from the statement of
profit and loss (credit revenue from operations) and another figure
(trade receivables) from the balance sheet.
Although accounting ratios are calculated by taking data from financial
statements but classification of ratios on the basis of financial statements is
rarely used in practice. It must be recalled that basic purpose of accounting is
to throw light on the financial performance (profitability) and financial position
(its capacity to raise money and invest them wisely) as well as changes occurring
in financial position (possible explanation of changes in the activity level). As
such, the alternative classification (functional classification) based on the purpose
for which a ratio is computed, is the most commonly used classification which is
as follows:
1. Liquidity Ratios: To meet its commitments, business needs liquid
funds. The ability of the business to pay the amount due to
stakeholders as and when it is due is known as liquidity, and the
ratios calculated to measure it are known as ‘Liquidity Ratios’. These
are essentially short-term in nature.
2. Solvency Ratios: Solvency of business is determined by its ability to
meet its contractual obligations towards stakeholders, particularly
towards external stakeholders, and the ratios calculated to measure
solvency position are known as ‘Solvency Ratios’. These are essentially
long-term in nature.
3. Activity (or Tu rnover) Ratios: This refers to the ratios that are
calculated for measuring the efficiency of operations of business based
on effective utilisation of resources. Hence, these are also known as
‘Efficiency Ratios’.
4. Profitability Ratios: It refers to the analysis of profits in relation to
revenue from operations or funds (or assets) employed in the business
and the ratios calculated to meet this objective are known as ‘Profitability
Ratios’.
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194 Accountancy : Company Accounts and Analysis of Financial Statements
Current Assets
Current Ratio = Current Assets : Current Liabilities or
Current Liabilities
Current assets include current investments, inventories, trade receivables
(debtors and bills receivables), cash and cash equivalents, short-term loans and
advances and other current assets such as prepaid expenses, advance tax and
accrued income, etc.
Current liabilities include short-term borrowings, trade payables (creditors
and bills payables), other current liabilities and short-term provisions.
Illustration 1
Calulate Current Ratio from the following information:
Particulars Rs.
Inventories 50,000
Trade receivables 50,000
Advance tax 4,000
Cash and cash equivalents 30,000
Trade payables 1,00,000
Short-term borrowings (bank overdraft) 4,000
Solution:
Current Assets
Current Ratio =
Current Liabilities
Current Assets = Inventories + Trade receivables + Advance tax +
Cash and cash equivalents
= Rs. 50,000 + Rs. 50,000 + Rs. 4,000 + Rs. 30,000
= Rs. 1,34,000
Current Liabilities = Trade payables + Short-term borrowings
= Rs. 1,00,000 + Rs. 4,000
= Rs. 1,04,000
Rs.1,34,000
Current Ratio = = 1.29 :1
Rs.1,04,000
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Accounting Ratios 195
Illustration 2
Calculate quick ratio from the information given in illustration 1.
Solution:
Quick Assets
Quick Ratio =
Current Liabilities
Quick Assets = Current assets – (Inventories + Advance tax)
= Rs. 1,34,000 – (Rs. 50,000 + Rs. 4,000)
= Rs. 80,000
Current Liabilities = Rs. 1,04,000
Rs. 80,000
Quick Ratio = = 0.77 :1
Rs. 1,04,000
Significance: The ratio provides a measure of the capacity of the business to
meet its short-term obligations without any flaw. Normally, it is advocated to be
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196 Accountancy : Company Accounts and Analysis of Financial Statements
safe to have a ratio of 1:1 as unnecessarily low ratio will be very risky and a high
ratio suggests unnecessarily deployment of resources in otherwise less profitable
short-term investments.
Illustration 3
Calculate ‘Liquidity Ratio’ from the following information:
Current liabilities = Rs. 50,000
Current assets = Rs. 80,000
Inventories = Rs. 20,000
Advance tax = Rs. 5,000
Prepaid expenses = Rs. 5,000
Solution
Liquid Assets
Liquidity Ratio =
Current Liabilities
Liquidity Assets = Current assets – (Inventories + Prepaid expenses +
Advance tax)
= Rs. 80,000 – (Rs. 20,000 + Rs. 5,000 + Rs. 5,000)
= Rs. 50,000
Rs. 50,000
Liquidity Ratio = = 1 :1
Rs. 50,000
Illustration 4
X Ltd., has a current ratio of 3.5:1 and quick ratio of 2:1. If excess of current
assets over quick assets represented by inventories is Rs. 24,000, calculate
current assets and current liabilities.
Solution:
Current Ratio = 3.5:1
Quick Ratio = 2:1
Let Current liabilities = x
Current assets = 3.5x
and Quick assets = 2x
Inventories = Current assets – Quick assets
24,000 = 3.5x – 2x
24,000 = 1.5x
x = Rs.16,000
Current Liabilities = Rs.16,000
Current Assets = 3.5x = 3.5 × Rs. 16,000 = Rs. 56,000.
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Accounting Ratios 197
Verification :
Current Ratio = Current assets : Current liabilities
= Rs. 56,000 : Rs. 16,000
= 3.5 : 1
Quick Ratio = Quick assets : Current liabilities
= Rs. 32,000 : Rs. 16,000
= 2:1
Illustration 5
Calculate the current ratio from the following information:
Total assets = Rs. 3,00,000
Non-current liabilities = Rs. 80,000
Shareholders’ Funds = Rs. 2,00,000
Non-Current Assets:
Fixed assets = Rs. 1,60,000
Non-current Investments = Rs. 1,00,000
Solution:
Total assets = Non-current assets + Current assets
Rs. 3,00,000 = Rs. 2,60,000 + Current assets
Current assets = Rs. 3,00,000 – Rs. 2,60,000 = Rs. 40,000
Total assets = Equity and Liabilities
= Shareholders’ Funds + Non-current liabilities +
Current liabilities
Rs. 3,00,000 = Rs. 2,00,000 + Rs. 80,000 + Current Liabilities
Current liabilities = Rs. 3,00,000 – Rs. 2,80,000
= Rs. 20,000
Current Assets
Current Ratio =
Current Liabilities
Rs. 40,000
= = 2 :1
Rs. 20,000
Do it Yourself
1. Current liabilities of a company are Rs. 5,60,000, current ratio is 2.5:1 and
quick ratio is 2:1. Find the value of the Inventories.
2. Current ratio = 4.5:1, quick ratio = 3:1.Inventory is Rs. 36,000. Calculate the
current assets and current liabilities.
3. Current assets of a company are Rs. 5,00,000. Current ratio is 2.5:1 and
Liquid ratio is 1:1. Calculate the value of current liabilities, liquid assets
and inventories.
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198 Accountancy : Company Accounts and Analysis of Financial Statements
Illustration 6
The current ratio is 2 : 1. State giving reasons which of the following transactions
would improve, reduce and not change the current ratio:
(a) Payment of current liability;
(b) Purchased goods on credit;
(c) Sale of a Computer (Book value: Rs. 4,000) for Rs. 3,000 only;
(d) Sale of merchandise (goods) costing Rs. 10,000 for Rs. 11,000;
(e) Payment of dividend.
Solution:
The given current ratio is 2 : 1. Let us assume that current assets are Rs. 50,000
and current liabilities are Rs. 25,000; Thus, the current ratio is 2 : 1. Now we
will analyse the effect of given transactions on current ratio.
(a) Assume that Rs. 10,000 of creditors is paid by cheque. This will reduce
the current assets to Rs. 40,000 and current liabilities to Rs. 15,000.
The new ratio will be 2.67 : 1 (Rs. 40,000/Rs.15,000). Hence, it has
improved.
(b) Assume that goods of Rs. 10,000 are purchased on credit. This will
increase the current assets to Rs. 60,000 and current liabilities to
Rs. 35,000. The new ratio will be 1.7:1 (Rs. 60,000/Rs. 35,000). Hence,
it has reduced.
(c) Due to sale of a computer (a fixed asset) the current assets will
increase to Rs. 53,000 without any change in the current liabilities.
The new ratio will be 2.12 : 1 (Rs. 53,000/Rs. 25,000). Hence, it has
improved.
(d) This transaction will decrease the inventories by Rs. 10,000 and
increase the cash by Rs. 11,000 thereby increasing the current
assets by Rs. 1,000 without any change in the current liabilities.
The new ratio will be 2.04 : 1 (Rs. 51,000/Rs. 25,000). Hence, it has
improved.
(e) Assume that `5,000 is given by way of dividend. It will reduce the
current assets to `45,000 and short-term provisions (current liabilities)
by `5,000. The new ratio will be 2:25:1 (`45,000/`20,000). Hence, it
has improved.
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Accounting Ratios 199
repayment of principal amount at the end of the loan period. Solvency ratios
are calculated to determine the ability of the business to service its debt in
the long run. The following ratios are normally computed for evaluating
solvency of the business.
1. Debt-Equity Ratio;
2. Debt to Capital Employed Ratio;
3. Proprietary Ratio;
4. Total Assets to Debt Ratio;
5. Interest Coverage Ratio.
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200 Accountancy : Company Accounts and Analysis of Financial Statements
Illustration 7
From the following balance sheet of ABC Co. Ltd. as on March 31, 2015. Calculate
debt equity ratio:
ABC Co. Ltd.
Balance Sheet as at 31 March, 2017
Particulars Note Amount
No. (Rs.)
I. Equity and Liabilities
1. Shareholders’ funds
a) Share capital 12,00,000
b) Reserves and surplus 2,00,000
c) Money received against share warrants 1,00,000
2. Non-current Liabilities
a) Long-term borrowings 4,00,000
b) Other long-term liabilities 40,000
c) Long-term provisions 60,000
3. Current Liabilities
a) Short-term borrowings 2,00,000
b) Trade payables 1,00,000
c) Other current liabilities 50,000
d) Short-term provisions 1,50,000
25,00,000
II. Assets
1. Non-Current Assets
a) Fixed assets 15,00,000
b) Non-current investments 2,00,000
c) Long-term loans and advances 1,00,000
2. Current Assets
a) Current investments 1,50,000
b) Inventories 1,50,000
c) Trade receivables 1,00,000
d) Cash and cash equivalents 2,50,000
e) Short-term loans and advances 50,000
25,00,000
Solution:
Debts
Debt-Equity Ratio =
Equity
Debt = Long-term borrowings + Other long-term liabilities +
Long-term provisions
= Rs. 4,00,000 + Rs. 40,000 + Rs. 60,000
= Rs. 5,00,000
Equity = Share capital + Reserves and surplus + Money received
against share warrants
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Accounting Ratios 201
50, 0000
Debt Equity Ratio = = 0.33 : 1
1,50, 0000
Illustration 8
From the following balance sheet of a company, calculate Debt-Equity Ratio:
Balance Sheet
Particulars Note Rs.
No.
I. Equity and Liabilities
1. Shareholders’ funds
a) Share capital 10,00,000
b) Reserves and surplus 1 1,00,000
2. Non-Current Liabilities
Long-term borrowings 1,50,000
3. Current Liabilities 1,50,000
14,00,000
II. Assets
1. Non-Current Assets
a) Fixed assets
- Tangible assets 2 11,00,000
2. Current Assets
a) Inventories 1,00,000
b) Trade receivables 90,000
c) Cash and cash equivalents 1,10,000
14,00,000
Notes to Accounts
Rs.
1. Share Capital
Equity Share Capital 8,00,000
Preference Share Capital 2,00,000
10,00,000
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202 Accountancy : Company Accounts and Analysis of Financial Statements
Fixed Assets
Rs.
2. Tangible Assets:
Plant and Machinery 5,00,000
Land and Building 4,00,000
Motor Car 1,50,000
Furniture 50,000
11,00,000
Solution:
1, 50, 000
Debt Equity Ratio = = 0.136 : 1
11, 00, 000
5.7.2 Debt to Capital Employed Ratio
The Debt to capital employed ratio refers to the ratio of long-term debt to the
total of external and internal funds (capital employed or net assets). It is computed
as follows:
Debt to Capital Employed Ratio = Long-term Debt/Capital Employed (or Net Assets)
Capital employed is equal to the long-term debt + shareholders’ funds.
Alternatively, it may be taken as net assets which are equal to the total assets –
current liabilities taking the data of Illustration 7, capital employed shall work
out to Rs. 5,00,000 + Rs. 15,00,000 = Rs. 20,00,000. Similarly, Net Assets as
Rs. 25,00,000 – Rs. 5,00,000 = Rs. 20,00,000 and the Debt to capital employed
ratio as Rs. 5,00,000/Rs. 20,00,000 = 0.25:1.
Significance: Like debt-equity ratio, it shows proportion of long-term debts in
capital employed. Low ratio provides security to lenders and high ratio helps
management in trading on equity. In the above case, the debt to Capital Employed
ratio is less than half which indicates reasonable funding by debt and adequate
security of debt.
It may be noted that Debt to Capital Employed Ratio can also be computed
in relation to total assets. In that case, it usually refers to the ratio of total debts
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Accounting Ratios 203
Total Debts
Debt to Capital Employed Ratio =
Total Assets
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204 Accountancy : Company Accounts and Analysis of Financial Statements
Illustration 9
From the following information, calculate Debt Equity Ratio, Total Assets to
Debt Ratio, Proprietory Ratio, and Debt to Capital Employed Ratio:
Solution:
Debts
i) Debt-Equity Ratio =
Equity
Debt = Long-term borrowings = Rs. 1,50,000
Equity = Share capital + Reserves and surplus
= Rs. 4,00,000 + Rs. 1,00,000 = Rs. 5,00,000
Rs. 1,50,000
Debt-Equity Ratio = = 0.3 : 1
Rs. 5, 00, 000
Total assets
ii) Total Assets to Debt Ratio =
Long-term debts
Total Assets = Fixed assets + Non-current investments + Current assets
= Rs. 4,00,000 + Rs. 1,00,000 + Rs. 2,00,000 = Rs. 7,00,000
Long-term Debt = Rs. 1,50,000
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Shareholders’ Funds
iii) Proprietary Ratio = or
Total Assets
Long-term
Long - term debts
debts
iv) Debt to Capital Employed Ratio =
Capital Employed
Capital Employed = Shareholders’ Funds + Long-term borrowings
= Rs. 5,00,000 + Rs. 1,50,000
= Rs. 6,50,000
Long-term
Long - termdebts
debts
Debt to Capital Employed Ratio=
Capital Employed
Illustration 10
The debt equity ratio of X Ltd. is 0.5 : 1. Which of the following would increase/
decrease or not change the debt equity ratio?
(i) Further issue of equity shares
(ii) Cash received from debtors
(iii) Sale of goods on cash basis
(iv) Redemption of debentures
(v) Purchase of goods on credit.
Solution:
The change in the ratio depends upon the original ratio. Let us assume that
external funds are Rs. 5,00,000 and internal funds are Rs. 10,00,000.
Now we will analyse the effect of given transactions on debt equity ratio.
(i) Assume that Rs. 1,00,000 worth of equity shares are issued. This will
increase the internal funds to Rs. 11,00,000. The new ratio will be
0.45 : 1 (5,00,000/11,00,000). Thus, it is clear that further issue of
equity shares decreases the debt-equity ratio.
(ii) Cash received from debtors will leave the internal and external funds
unchanged as this will only affect the composition of current assets.
Hence, the debt-equity ratio will remain unchanged.
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206 Accountancy : Company Accounts and Analysis of Financial Statements
(iii) This will also leave the ratio unchanged as sale of goods on cash basis
neither affect Debt nor equity.
(iv) Assume that Rs. 1,00,000 debentures are redeemed. This will decrease
the long-term debt to Rs. 4,00,000. The new ratio will be 0.4 : 1
(4,00,000/10,00,000). Redemption of debentures will decrease the
debit-equity ratio.
(v) This will also leave the ratio unchanged as purchase of goods on credit
neither affect Debt nor equity.
Illustration 11
From the following details, calculate interest coverage ratio:
Net Profit after tax Rs. 60,000; 15% Long-term debt 10,00,000; and Tax rate
40%.
Solution:
Net Profit after Tax =Rs. 60,000
Tax Rate =40%
Net Profit before tax =Net profit after tax × 100/(100 – Tax rate)
=Rs. 60,000 × 100/(100 – 40)
=Rs. 1,00,000
Interest on Long-term Debt =15% of Rs. 10,00,000 = Rs. 1,50,000
Net profit before interest and tax =Net profit before tax + Interest
=Rs. 1,00,000 + Rs. 1,50,000 = Rs. 2,50,000
Interest Coverage Ratio =Net Profit before Interest and
Tax/Interest on long-term debt
= Rs. 2,50,000/Rs. 1,50,000
= 1.67 times.
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Accounting Ratios 207
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208 Accountancy : Company Accounts and Analysis of Financial Statements
Illustration 12
From the following information, calculate inventory turnover ratio :
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Accounting Ratios 209
Rs.
Inventory in the beginning = 18,000
Inventory at the end = 22,000
Net purchases = 46,000
Wages = 14,000
Revenue from operations = 80,000
Carriage inwards = 4,000
Solution:
Illustration 13
From the following information, calculate inventory turnover ratio:
Rs.
Revenue from operations = 4,00,000
Average Inventory = 55,000
Gross Profit Ratio = 10%
Solution:
Revenue from operations = Rs. 4,00,000
Gross Profit = 10% of Rs. 4,00,000 = Rs. 40,000
Cost of Revenue from operations = Revenue from operations – Gross Profit
= Rs. 4,00,000 – Rs. 40,000 = Rs. 3,60,000
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210 Accountancy : Company Accounts and Analysis of Financial Statements
Illustration 14
A trader carries an average inventory of Rs. 40,000. His inventory turnover ratio
is 8 times. If he sells goods at a profit of 20% on Revenue from operations, find
out the gross profit.
Solution:
100
Revenue from operations = Cost of Revenue from operations ×
80
100
= Rs. 3,20,000 × = Rs. 4,00,000
80
Gross Profit = Revenue from operations – Cost of Revenue from operations
= Rs. 4,00,000 – Rs. 3,20,000 = Rs. 80,000
Do it Yourself
1. Calculate the amount of gross profit:
Average inventory = Rs. 80,000
Inventory turnover ratio = 6 times
Selling price = 25% above cost
2. Calculate Inventory Turnover Ratio:
Annual Revenue from operations = Rs. 2,00,000
Gross Profit = 20% on cost of Revenue from
operations
Inventory in the beginning = Rs. 38,500
Inventory at the end = Rs. 41,500
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Accounting Ratios 211
It needs to be noted that debtors should be taken before making any provision
for doubtful debts.
Significance: The liquidity position of the firm depends upon the speed with
which trade receivables are realised. This ratio indicates the number of times
the receivables are turned over and converted into cash in an accounting period.
Higher turnover means speedy collection from trade receivable. This ratio also
helps in working out the average collection period. The ratio is calculated by
dividing the days or months in a year by trade receivables turnover ratio.
Illustration 15
Calculate the Trade receivables turnover ratio from the following information:
Rs.
Total Revenue from operations 4,00,000
Cash Revenue from operations 20% of Total Revenue from operations
Trade receivables as at 1.4.2016 40,000
Trade receivables as at 31.3.2017 1,20,000
Solution:
20
= Rs. 4,00,000 × = Rs. 80,000
100
Credit Revenue from operations = Rs. 4,00,000 – Rs. 80,000 = Rs. 3,20,000
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212 Accountancy : Company Accounts and Analysis of Financial Statements
Trade Receivables
Average Trade Receivables =
2
Rs. 3, 20,000
Trade Receivables Turnover Ratio = = 4 times.
Rs. 80,000
Significance : It reveals average payment period. Lower ratio means credit allowed
by the supplier is for a long period or it may reflect delayed payment to suppliers
which is not a very good policy as it may affect the reputation of the business.
The average period of payment can be worked out by days/months in a year by
the Trade Payable Turnover Ratio.
Illustration 16
Calculate the Trade payables turnover ratio from the following figures:
Rs.
Credit purchases during 2016-17 = 12,00,000
Creditors on 1.4.2016 = 3,00,000
Bills Payables on 1.4.2016 = 1,00,000
Creditors on 31.3.2017 = 1,30,000
Bills Payables on 31.3.2017 = 70,000
Solution:
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Accounting Ratios 213
Rs. 3, 00, 000 + Rs. 1, 00, 000 + Rs. 1, 30, 000 + Rs. 70, 000
=
2
= Rs. 3,00,000
Given :
(Rs.)
Revenue from Operations 8,75,000
Creditors 90,000
Bills receivable 48,000
Bills payable 52,000
Purchases 4,20,000
Trade debtors 59,000
Solution:
= 8.18 times
* This figure has not been divided by 2, in order to calculate average Trade Receivables as
the figures of debtors and bills receivables in the beginning of the year are not available.
So when only year-end figures are available use the same as it is.
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214 Accountancy : Company Accounts and Analysis of Financial Statements
365
(ii) Average Collection Period =
Trade Receivables Turnover Ratio
365
=
8.18
= 45 days
Purchases *
(iii) Trade Payable Turnover Ratio =
Average Trade Payables
Purchases
= Creditors + Bills payable
4,20,000
=
90,000 + 52,000
4,20,000
= 1,42,000
= 2.96 times
365
(iv) Average Payment Period =
Trade Payables Turnover Ratio
365
=
2.96
= 123 days
*Since no information regarding credit purchase is given, hence it will be related as net
purchases.
5.8.4 Net Assets or Capital Employed Turnover Ratio
It reflects relationship between revenue from operations and net assets (capital
employed) in the business. Higher turnover means better activity and profitability.
It is calculated as follows :
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Accounting Ratios 215
Significance : High turnover of capital employed, working capital and fixed assets
is a good sign and implies efficient utilisation of resources. Utilisation of capital
employed or, for that matter, any of its components is revealed by the turnover
ratios. Higher turnover reflects efficient utilisation resulting in higher liquidity
and profitability in the business.
Illustration 18
From the following information, calculate (i) Net assets turnover, (ii) Fixed assets
turnover, and (iii) Working capital turnover ratios :
Amount Amount
(Rs.) (Rs.)
Revenue from operations for the year 2016-17 were Rs. 30,00,000
Solution:
Revenue from Operations = Rs. 30,00,000
Capital Employed = Share Capital + Reserves and
Surplus + Long-term Debts
(or Net Assets)
= (Rs.4,00,000 + Rs.6,00,000)
+ (Rs.1,00,000 + Rs.3,00,000)
+ (Rs.2,00,000 + Rs.2,00,000)
= Rs. 18,00,000
Fixed Assets = Rs.8,00,000 + Rs.5,00,000 + Rs.2,00,000
+ Rs.1,00,000 = Rs. 16,00,000
Working Capital = Current Assets – Current Liabilities
= Rs.4,00,000 – Rs.2,00,000 = Rs. 2,00,000
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216 Accountancy : Company Accounts and Analysis of Financial Statements
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Accounting Ratios 217
Illustration 19
Following information is available for the year 2016-17, calculate gross profit
ratio:
Rs.
Revenue from Operations: Cash 25,000
: Credit 75,000
Purchases : Cash 15,000
: Credit 60,000
Carriage Inwards 2,000
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218 Accountancy : Company Accounts and Analysis of Financial Statements
Salaries 25,000
Decrease in Inventory 10,000
Return Outwards 2,000
Wages 5,000
Solution:
Revenue from Operations = Cash Revenue from Operations + Credit Revenue from
Opration
= Rs.25,000 + Rs.75,000 = Rs. 1,00,000
Net Purchases = Cash Purchases + Credit Purchases – Return Outwards
= Rs.15,000 + Rs.60,000 – Rs.2,000 = Rs. 73,000
Cost of Revenue from = Purchases + (Opening Inventory – Closing Inventory) +
operations Direct Expenses
= Purchases + Decrease in inventory + Direct Expenses
= Rs.73,000 + Rs.10,000 + (Rs.2,000 + Rs.5,000)
= Rs.90,000
Gross Profit = Revenue from Operations – Cost of Revenue from
Operation
= Rs.1,00,000 – Rs.90,000
= Rs. 10,000
Gross Profit Ratio = Gross Profit/Net Revenue from Operations ×100
= Rs.10,000/Rs.1,00,000 × 100
= 10%.
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Illustration 20
Given the following information:
Rs.
Revenue from Operations 3,40,000
Cost of Revenue from Operations 1,20,000
Selling expenses 80,000
Administrative Expenses 40,000
Solution:
Gross Profit = Revenue from Operations – Cost of Revenue from
Operations
= Rs. 3,40,000 – Rs. 1,20,000
= Rs. 2,20,000
Gross Profit
Gross Profit Ratio = × 100
Revenue from operation
Rs. 2,20,000
= × 100
Rs. 3,40,000
= 64.71%
Operating Cost = Cost of Revenue from Operations + Selling Expenses
+ Administrative Expenses
= Rs. 1,20,000 + 80,000 + 40,000
= Rs. 2,40,000
Operating Cost
Operating Ratio = × 100
Net Revenue from Operations
Rs. 2,40,000
= × 100
Rs. 3,40,000
= 70.59%
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220 Accountancy : Company Accounts and Analysis of Financial Statements
Illustration 21
Gross profit ratio of a company was 25%. Its credit revenue from operations was
Rs. 20,00,000 and its cash revenue from operations was 10% of the total revenue
from operations. If the indirect expenses of the company were Rs. 50,000,
calculate its net profit ratio.
Solution:
Cash Revenue from Operations = Rs.20,00,000 × 10/90
= Rs.2,22,222
Hence, total Revenue from Operations are = Rs.22,22,222
Gross profit = 0.25 × 22,22,222 = Rs. 5,55,555
Net profit = Rs.5,55,555 – 50,000
= Rs.5,05,555
Net profit ratio = Net profit/Revenue from Operations
× 100
= Rs.5,05,555/Rs.22,22,222 × 100
= 22.75%.
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Accounting Ratios 221
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222 Accountancy : Company Accounts and Analysis of Financial Statements
Illustration 22
From the following details, calculate Return on Investment:
Share Capital : Equity (Rs.10) Rs. 4,00,000 Current Liabilities Rs. 1,00,000
12% Preference Rs. 1,00,000 Fixed Assets Rs. 9,50,000
General Reserve Rs. 1,84,000 Current Assets Rs. 2,34,000
10% Debentures Rs. 4,00,000
Also calculate Return on Shareholders’ Funds, EPS, Book value per share
and P/E ratio if the market price of the share is Rs. 34 and the net profit after tax
was Rs. 1,50,000, and the tax had amounted to Rs. 50,000.
Solution:
Profit before interest and tax = Rs. 1,50,000 + Debenture interest + Tax
= Rs. 1,50,000 + Rs. 40,000 + Rs. 50,000
= Rs.2,40,000
Capital Employed = Equity Share Capital + Preference Share
Capital + Reserves + Debentures
= Rs. 4,00,000 + Rs. 1,00,000 + Rs. 1,84,000
+ Rs. 4,00,000 = Rs. 10,84,000
Return on Investment = Profit before Interest and Tax/
Capital Employed × 100
= Rs. 2,40,000/Rs. 10,84,000 × 100
= 22.14%
Shareholders’ Fund = Equity Share Capital + Preference Share Capital
+ General Reserve
= Rs. 4,00,000 + Rs. 1,00,000 + Rs. 1,84,000
= Rs. 6,84,000
Return on Shareholders’ Funds = Profit after tax/shareholders’ Funds × 100
= Rs. 1,50,000/Rs. 6,84,000 × 100
= 21.93%
EPS = Profit available for Equity Shareholders/
Number of Equity Shares
= Rs. 1,38,000/ 40,000 = Rs. 3.45
Preference Share Dividend = Rate of Dividend × Prefence Share Capital
= 12% of Rs. 1,00,000
= Rs. 12,000
Profit available to equity = Profit after Tax – Preference dividend on
Shareholders preference shares
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Accounting Ratios 223
It may be noted that various ratios are related with each other. Sometimes,
the combined information regarding two or more ratios is given and missing
figures may need to be calculated. In such a situation, the formula of the ratio
will help in working out the missing figures (See Illsuatration 23 and 24).
Illustration 23
Calculate current assets of a company from the following information:
Inventory turnover ratio = 4 times
Inventory at the end is Rs. 20,000 more than the inventory in the beginning.
Revenue from Operations Rs. 3,00,000 and gross profit ratio is 20% of revenue from
operations.
Current liabilities = Rs. 40,000
Quick ratio = 0.75 : 1
Solution:
Cost of Revenue from Operations = Revenue from Operations – Gross Profit
= Rs. 3,00,000 – (Rs. 3,00,000 × 20%)
= Rs. 3,00,000 – Rs. 60,000
= Rs. 2,40,000
Inventory Turnover Ratio = Cost of Revenue from Operations/ Average Inventory
Average Inventory = Cost of Revenue from Operations/4
= Rs. 2,40,000/4 = Rs. 60,000
Average Inventory = (Opening inventory + Closing inventory)/2
Rs. 60,000 = Opening inventory + (Opening inventory
+Rs.20,000)/2
Rs. 60,000 = Opening inventory + Rs. 10,000
Opening Inventory = Rs. 50,000
Closing Inventory = Rs. 70,000
Liquid Ratio = Liquid assets/current liabilities
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224 Accountancy : Company Accounts and Analysis of Financial Statements
Illustration 24
The current ratio is 2.5 : 1. Current assets are Rs. 50,000 and current liabilities
are Rs. 20,000. How much must be the decline in the current assets to bring the
ratio to 2 : 1
Solution:
Current liabilities = Rs. 20,000
For a ratio of 2 : 1, the current assets must be 2 × 20,000 = Rs. 40,000
Present level of current assets = Rs. 50,000
Necessary decline = Rs. 50,000 – Rs. 40,000
= Rs. 10,000
Illustration 25
Following information is given by a company from its books of accounts as on
March 31, 2017:
Particulars Rs.
Inventory 1,00,000
Total Current Assets 1,60,000
Shareholders’ funds 4,00,000
13% Debentures 3,00,000
Current liabilities 1,00,000
Net Profit Before Tax 3,51,000
Cost of revenue from operations 5,00,000
Calculate:
i) Current Ratio
ii) Liquid Ratio
iii) Debt Equity Ratio
iv) Interest Coverage Ratio
v) Inventory Turnover Ratio
Solution:
Current Assets
i) Current Ratio =
Current Liabilities
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Accounting Ratios 225
Liquid Assets
Liquid Ratio =
Current Liabilities
Long-term Debts
iii) Debt-Equity Ratio =
Shareholders’ Funds
Rs. 5, 00,000
= = 5 times
Rs. 1, 00, 000
Note: In absence of information regarding ‘Inventory in the beginning’ and ‘Inventory
at the end’, the ‘Inventory’ is treated as Average Inventory.
Illustration 26
From the following information calculate (i) Earning per share (ii) Book value
per share (iii) Dividend payout ratio (iv) Price earning ratio
Particulars Rs.
70,000 equity shares of Rs 10 each 7,00,000
Net Profit after tax but before dividend 1,75,000
Market price of a share 13
Dividend declared @ 15%
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226 Accountancy : Company Accounts and Analysis of Financial Statements
Solution:
Rs. 8, 75,000
= = Rs. 12.50
Rs. 70, 000
1.50
= = 0.6
2.50
13
= = 5.20
2.50
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Accounting Ratios 227
Summary
Ratio Analysis: An important tool of financial statement analysis is ratio
analysis. Accounting ratios represent relationship between two accounting
numbers.
Objective of Ratio Analysis: The objective of ratio analysis is to provide a
deeper analysis of the profitability, liquidity, solvency and activity levels in
the business. It is also to identify the problem areas as well as the strong
areas of the business.
Advantages of Ratio Analysis: Ratio analysis offers many advantages
including enabling financial statement analysis, helping understand efficacy
of decisions, simplifying complex figures and establish relationships, being
helpful in comparative analysis, identification of problem areas, enables
SWOT analysis, and allows various comparisons.
Limitations of Ratio Analysis: There are many limitations of ratio analysis.
Few are based because of the basic limitations of the accounting data on
which it is based. In the first set are included factors like Historical Analysis,
Ignores Price-level Changes, Ignore Qualitative or Non-monetary Aspects,
Limitations of Accounting Data, Variations in Accounting Practices, and
Forecasting. In the second set are included factor like means and not the
end, lack of ability to resolve problems, lack of standardised definitions,
lack of universally accepted standard levels, and ratios based on unrelated
figures.
Types of Ratios: There are many types of ratios, viz., liquidity, solvency,
activity and profitability ratios. The liquidity ratios include current ratio
and acid test ratio. Solvency ratios are calculated to determine the ability
of the business to service its debt in the long run instead of in the short
run. They include debt equity ratio, total assets to debt ratio, proprietary
ratio and interest coverage ratio. The turnover ratios basically exhibit the
activity levels characterised by the capacity of the business to make more
sales or turnover and include Inventory Tur nover, Trade Receivables
Turnover, Trade Payables Turnover, Working Capital Turnover, Fixed Assets
Turnover and Current assets Turnover. Profitability ratios are calculated
to analyse the earning capacity of the business which is the outcome of
utilisation of resources employed in the business. The ratios include Gross
Profit ratio, Operating ratio, Net Profit Ratio, Return on investment (Capital
employed), Earnings per Share, Book Value per Share, Dividend per Share
and Price/Earning ratio.
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228 Accountancy : Company Accounts and Analysis of Financial Statements
Numerical Questions
1. Following is the Balance Sheet of Raj Oil Mills Limited as at March 31, 2017.
Calculate current ratio.
Particulars Rs.
I. Equity and Liabilities:
1. Shareholders’ funds
a) Share capital 7,90,000
b) Reserves and surplus 35,000
2. Current Liabilities
Trade Payables 72,000
Total 8,97,000
II. Assets
1. Non-current Assets
Fixed assets
– Tangible assets 7,53,000
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Accounting Ratios 229
2. Current Assets
a) Inventories 55,800
b) Trade Receivables 28,800
c) Cash and cash equivalents 59,400
Total 8,97,000
2. Following is the Balance Sheet of Title Machine Ltd. as at March 31, 2017.
Particulars Amount
(Rs.)
I. Equity and Liabilities
1. Shareholders’ funds
a) Share capital 24,00,000
b) Reserves and surplus 6,00,000
2. Non-current liabilities
Long-term borrowings 9,00,000
3. Current liabilities
a) Short-term borrowings 6,00,000
b) Trade payables 23,40,000
c) Short-term provisions 60,000
Total 69,00,000
II. Assets
1. Non-current assets
Fixed assets
- Tangible assets 45,00,000
2. Current Assets
a) Inventories 12,00,000
b) Trade receivables 9,00,000
c) Cash and cash equivalents 2,28,000
d) Short-term loans and advances 72,000
Total 69,00,000
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230 Accountancy : Company Accounts and Analysis of Financial Statements
6. Handa Ltd. has inventory of Rs. 20,000. Total liquid assets are Rs. 1,00,000
and quick ratio is 2 : 1. Calculate current ratio.
(Ans: Current Ratio 2.4 : 1)
7. Calculate debt-equity ratio from the following information:
Total Assets Rs. 15,00,000
Current Liabilities Rs. 6,00,000
Total Debts Rs. 12,00,000
(Ans: Debt-Equity Ratio 2 : 1.)
8. Calculate Current Ratio if:
Inventory is Rs. 6,00,000; Liquid Assets Rs. 24,00,000; Quick Ratio 2 : 1.
(Ans: Current Ratio 2.5 : 1)
9. Compute Inventory Turnover Ratio from the following information:
Net Revenue from Operations Rs. 2,00,000
Gross Profit Rs. 50,000
Inventory at the end Rs. 60,000
Excess of inventory at the end over
inventory in the beginning Rs. 20,000
(Ans: Inventory Turnover Ratio 3 times)
10. Calculate following ratios from the following information:
(i) Current ratio (ii) Liquid ratio (iii) Operating Ratio (iv) Gross profit ratio
Current Assets Rs. 35,000
Current Liabilities Rs. 17,500
Inventory Rs. 15,000
Operating Expenses Rs. 20,000
Revenue from Operations Rs. 60,000
Cost of Revenue from operation Rs. 30,000
(Ans: Current Ratio 2 : 1; Liquid Ratio 1.14 : 1; Operating Ratio 83.3%; Gross
Profit Ratio 50%)
11. From the following information calculate:
(i) Gross Profit Ratio (ii) Inventory Turnover Ratio (iii) Current Ratio (iv) Liquid
Ratio (v) Net Profit Ratio (vi) Working Capital Ratio:
Revenue from Operations Rs. 25,20,000
Net Profit Rs. 3,60,000
Cost of Revenue from Operations Rs. 19,20,000
Long-term Debts Rs. 9,00,000
Trade Payables Rs. 2,00,000
Average Inventory Rs. 8,00,000
Current Assets Rs. 7,60,000
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Accounting Ratios 231
(Ans: Gross Profit Ratio 40%; Working Capital Ratio 8.33 times; Debt–Equity
Ratio 0.4 : 1; Proprietary Ratio 0.51 : 1)
13. Calculate Inventory Turnover Ratio if:
Inventory in the beginning is Rs. 76,250, Inventory at the end is 98,500, Gross
Revenue from Operations is Rs. 5,20,000, Sales Return is Rs. 20,000, Purchases
is Rs. 3,22,250.
(Ans: Inventory Turnover Ratio 3.43 times)
14. Calculate Inventory Turnover Ratio from the data given below:
Inventory in the beginning of the year Rs. 10,000
Inventory at the end of the year Rs. 5,000
Carriage Rs. 2,500
Revenue from Operations Rs. 50,000
Purchases Rs. 25,000
(Ans: Inventory Turnover Ratio 4.33 times)
15. A trading firm’s average inventory is Rs. 20,000 (cost). If the inventory turnover
ratio is 8 times and the firm sells goods at a profit of 20% on sales, ascertain
the profit of the firm.
(Ans: Profit Rs. 40,000)
16. You are able to collect the following information about a company for two years:
2015-16 2016-17
Trade receivables on Apr. 01 Rs. 4,00,000 Rs. 5,00,000
Trade receivables on Mar. 31 Rs. 5,60,000
Stock in trade on Mar. 31 Rs. 6,00,000 Rs. 9,00,000
Revenue from operations Rs. 3,00,000 Rs. 24,00,000
(at gross profit of 25%)
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232 Accountancy : Company Accounts and Analysis of Financial Statements
(Ans: Debt-Equity Ratio 0.63 : 1; Working Capital Turnover Ratio 1.39 times; Trade
Receivables Turnover Ratio 2 times)
18. From the following information, calculate the following ratios:
i) Liquid Ratio
ii) Inventory turnover ratio
iii) Return on investment
Rs.
Inventory in the beginning 50,000
Inventory at the end 60,000
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Accounting Ratios 233
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234 Accountancy : Company Accounts and Analysis of Financial Statements
22. From the following information calculate Gross Profit Ratio, Inventory Turnover
Ratio and Trade Receivable Turnover Ratio.
Revenue from Operations Rs. 3,00,000
Cost of Revenue from Operations Rs. 2,40,000
Inventory at the end Rs. 62,000
Gross Profit Rs. 60,000
Inventory in the beginning Rs. 58,000
Trade Receivables Rs. 32,000
(Ans: Gross Profit Ratio 20%; Inventory Turnover Ratio 4 times; Trade
Receivables Turnover Ratio 9.4 times)
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Cash Flow Statement 6
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236 Accountancy : Company Accounts and Analysis of Financial Statements
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Cash Flow Statement 237
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238 Accountancy : Company Accounts and Analysis of Financial Statements
2019-20
Cash Flow Statement 239
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240 Accountancy : Company Accounts and Analysis of Financial Statements
Payment of taxes
Sale of property, plant,
equipment, long-term
investments Investing Purchase of property,
Activities plant, equipment and
Receipt from Interest non-current investments
and dividends
Financing
Proceeds from Issuance of Activities Redemption of debentures
Debts/Bonds and payment of the
long-term debts
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Cash Flow Statement 241
Non-cash Transactions
As per AS-3, investing and financing transactions that do not require the use of
cash or cash equivalents should be excluded from a cash flow statement.
Examples of such transactions are – acquisition of machinery by issue of equity
shares or redemption of debentures by issue of equity shares. Such transactions
should be disclosed elsewhere in the financial statements in a way that provide
all the relevant information about these investing and financing activities. Hence,
assets acquired by issue of shares are not disclosed in cash flow statement due
to non-cash nature of the transaction.
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242 Accountancy : Company Accounts and Analysis of Financial Statements
With these three classifications, Cash Flow Statement is shown in Exhibit 6.2.
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Cash Flow Statement 243
As per AS-3, an enterprise should report cash flows from operating activities
either by using :
l Direct method whereby major classes of gross cash receipts and gross
cash payments are disclosed;
or
l Indirect method whereby net profit or loss is duly adjusted for the effects
of (1) transactions of a non-cash nature, (2) any deferrals or accruals of
past/future operating cash receipts, and (3) items of income or expenses
associated with investing or financing cash flows. It is important to
mention here that under indirect method, the starting point is net profit/
loss before taxation and extra ordinary items as per Statement of Profit
and Loss of the enterprise. Then this amount is for non-cash items,
etc., adjusted for ascertaining cash flows from operating activities.
Accordingly, cash flow from operating activities can be determined using
either the Direct method or the Indirect method. These methods are discussed
in detail as follows.
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244 Accountancy : Company Accounts and Analysis of Financial Statements
Illustration 1
From the following information, calculate cash flow from operating activities
using direct method.
Statement of Profit and Loss
for the year ended on March 31, 2017
Particulars Note Figures for Current
reporting period
i) Revenue from operations 2,20,000
ii) Other Income
iii)Total revenue (i+ii) 2,20,000
iv) Expenses
Cost of materials consumed 1,20,000
Employees benefits expenses 30,000
Depreciation 20,000
Other expenses
Insurance Premium 8,000
Total expenses 1,78,000
v) Profit before tax (iii-iv) 42,000
Less Income tax (10,000)
vi) Profit after tax 32,000
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Cash Flow Statement 245
Additional information:
Particulars April 01, 2016 March 31, 2017
Rs Rs
Trade receivables 33,000 36,000
Trade payables 17,000 15,000
Inventory 22,000 27,000
Outstanding employees benefits 2,000 3,000
expenses
Prepaid insurance 5,000 5,500
Income tax outstanding 3,000 2,000
Solution:
Cash Flows from Operating Activities
Particulars (Rs)
Cash receipts from customers 2,17,000
Cash Paid to suppliers (1,27,000)
Cash Paid to employees (29,000)
Cash Paid for Insurance premium (8,500)
Cash generated from operations 52,500
Income Tax paid (11,000)
Net Cash Inflow from Operations 41,500
Working Notes:
1. Cash Receipts from Customers is calculated as under :
Cash Receipts from Customers = Revenue from Operations + Trade Receivables
in the beginning – Trade Receivables in the end
= Rs 2,20,000 + Rs 33,000 – Rs 36,000
= Rs 2,17,000
2. Purchases = Cost of Revenue from Operations – Opening
Inventory + Closing Inventory
= Rs 1,20,000 – Rs 22,000 + Rs 27,000
= Rs 1,25,000
3. Cash payment to suppliers = Purchases + Trade Payables in the beginning – Trade
Payables in the end
= Rs 1,25,000 + Rs 17,000 – Rs 15,000
= Rs 1,27,000
4. Cash Expenses = Expenses on Accrual basis – Prepaid Expenses
in the beginning and Outstanding Expenses in the end + Prepaid Expenses in the
end and Outstanding Expenses in the beginning
5. Cash Paid to Employees = Rs 30,000 + Rs 2,000 – Rs 3,000
= Rs 29,000
6. Cash Paid for Insurance Premium = Rs 8,000 – Rs 5,000 + Rs 5,500
= Rs 8,500
7. Income Tax Paid = Rs 10,000+Rs 3,000 – Rs 2,000
= Rs 11,000
8. It is important to note here that there are no extraordinary items.
2019-20
246 Accountancy : Company Accounts and Analysis of Financial Statements
The above Statement of Profit and Loss shows the amount of net profit of Rs
30,000. This has to be adjusted for arriving cash flows from operating activities.
Let us take various items one by one.
1. Depreciation is a non-cash item and hence, Rs 5,000 charged as
depreciation does not result in any cash flow. Therefore, this amount
must be added back to the net profit.
2. Finance costs of Rs 5,000 is a cash outflow on account of financing
activity. Therefore, this amount must also be added back to net profit
while calculating cash flows from operating activities. This amount of
finance cost will be shown as an outflow under the head of financing
activities.
3. Other income includes profit on sale of land: It is cash inflow from
investing activity. Hence, this amount must be deducted from the
amount of net profit while calculating cash flows from operating
activities.
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Cash Flow Statement 247
The above example gives you an idea as to how various adjustments are
made in the amount of net profit/loss. Other important adjustments relate to
changes in working capital which are necessary (i.e., items of current assets and
current liabilities) to convert net profit/loss which is based on accrual basis into
cash flows from operating activities. Therefore, the increase in current assets
and decrease in current liabilities are deducted from the operating profit, and
the decrease in current assets and increase in current liabilities are added to the
operating profit so as to arrive at the exact amount of net cash flow from operating
activities.
As per AS-3, under indirect method, net cash flow from operating activities is
determined by adjusting net profit or loss for the effect of :
l Non-cash items such as depreciation, goodwill written-off, provisions,
deferred taxes, etc., which are to be added back.
l All other items for which the cash effects are investing or financing cash
flows. The treatment of such items depends upon their nature. All investing
and financing incomes are to be deducted from the amount of net profits
while all such expenses are to be added back. For example, finance cost
which is a financing cash outflow is to be added back while other income
such as interest received which is investing cash inflow is to be deducted
from the amount of net profit.
l Changes in current assets and liabilities during the period. Increase in
current assets and decrease in current liabilities are to be deducted while
increase in current liabilities and decrease in current assets are to be
added up.
Exhibit 6.4 shows the proforma of calculating cash flows from operating
activities as per indirect method.
The direct method provides information which is useful in estimating future
cash flows. But such information is not available under the indirect method.
However, in practice, indirect method is mostly used by the companies for arriving
at the net cash flow from operating activities.
Cash Flows from Operating Activities
(Indirect Method)
Net Profit/Loss before Tax and Extraordinary Items
+ Deductions already made in Statement of Profit and Loss on account of xxx
Non-cash items such as Depreciation, Goodwill to be Written-off.
+ Deductions already made in Statement of Profit and Loss on Account of xxx
Non-operating items such as Interest.
– Additions (incomes) made in Statement of Profit and Loss on xxx
Account of Non-operating items such as Dividend received, xxx
Profit on sale of Fixed Assets.
Operating Profit before Working Capital changes
+ Increase in Current liabilities xxx
+ Decrease in Current assets xxx
– Increase in Current assets xxx
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248 Accountancy : Company Accounts and Analysis of Financial Statements
As stated earlier, while working out the cash flow from operating activities,
the starting point is the ‘Net profit before tax and extraordinary items’ and not
the ‘Net profit as per Statement of Profit and Loss’. Income tax paid is deducted
as the last item to arrive at the net cash flow from operating activities.
Illustration 2
Using the data given in Illustration 1, calculate cash flows from operating activities
using indirect method.
Solution:
Cash Flows from Operating Activities
Particulars (Rs)
(Net Profit before Taxation and Extraordinary Items (Note 1) 42,000
Adjustments for–
+ Depreciation 20,000
= Operating Profit before working capital changes 62,000
– Increase in Trade Receivables (3,000)
– Increase in Inventories (5,000)
– Increase in Prepaid Insurance (500)
– Decrease in Trade Payables (2,000)
+ Increase in Outstanding Employees Benefits Expenses +1,000
= Cash generated from Operations 52,500
– Income tax paid (11,000)
= Net cash from Operating Activities 41,500
You will notice that the amount of cash flows from operating activities are the same whether
we use direct method or indirect method for its calculation.
Working Notes :
The net profit before taxation and extraordinary items has been worked out as under:
Net Profit = Rs 32,000
+ Income Tax = Rs 10,000
= Net Profit before Tax and Extraordinary Items = Rs 42,000
2019-20
Cash Flow Statement 249
Illustration 3
Calculate cash flows from operating activities from the following information.
Statement of Profit and Loss for the year ended March 31, 2017
Particulars Note Amount
No. Rs
i) Revenue from Operations 50,000
ii) Other Income 1 5,000
iii) Total Revenue (i+ii) 55,000
iv) Expenses
Cost of Materials Consumed 15,000
Employees Benefits Expenses 10,000
Depreciation and Amortisation 2 7,000
Expenses
Other Expenses 3 21,000
53,000
v) Profit before Tax (iii-iv) 2,000
Working Notes:
1. Other Income = Profit on Sale of Machinery (Rs 2,000 ) +
Income Tax Refund (Rs 3,000)
= Rs 5,000
2. Depreciation and Amortisation = Depreciation (Rs 5,000) + Goodwill
Expenses Amortised (Rs 2,000)
= Rs 7,000
3. Other Expenses = Rent (Rs 10,000) + Loss on Sale of
Equipment (Rs 3,000) + Provision for
Taxation (Rs 8,000)
= Rs 21,000
Additional Information:
April 01, 2016 March 31, 2017
Rs Rs
Provision for Taxation 10,000 13,000
Rent Payable 2,000 2,500
Trade Payables 21,000 25,000
Trade Receivables 15,000 21,000
Inventories 25,000 22,000
Solution:
Cash Flows from Operating Activities
Particulars (Rs)
Net profit before taxation, and extraordinary items 7,000
Adjustments for:
+ Depreciation 5,000
+ Loss on sale of equipment 3,000
+ Goodwill amortised 2,000
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250 Accountancy : Company Accounts and Analysis of Financial Statements
Working Notes:
1. Net profit before taxation & extraordinary item = Rs 2,000 + Rs 8,000 – Rs 3,000
= Rs 7,000
2. Income tax paid during the year has been ascertained by preparing provision for
taxation account as follows:
Provision for taxation Account
Dr. Cr.
Particulars J.F. Amount Particulars J.F. Amount
(Rs) (Rs)
Cash 5,000 Balance b/d 10,000
(Income tax paid during Profit and Loss 8,000
the year :Balancing
Figure)
Balance c/d 13,000
18,000 18,000
Illustration 4
Charles Ltd., made a profit of Rs 1,00,000 after charging depreciation of Rs
20,000 on assets and a transfer to general reserve of Rs 30,000. The goodwill
amortised was Rs 7,000 and gain on sale of machinery was Rs 3,000. Other
information available to you ( changes in the value of current assets and current
liabilities) are trade receivables showed an increase of Rs 3,000; trade payables
an increase of Rs 6,000; prepaid expenses an increase of Rs 200; and outstanding
expenses a decrease of Rs 2,000. Ascertain cash flow from operating activities.
2019-20
Cash Flow Statement 251
Solution:
Cash Flows from Operating Activities
Particulars (Rs)
Net Profit before Taxation 1,30,000
Adjustment for Non-cash and Non-operating Items :
+ Depreciation 20,000
+ Goodwill amortised 7,000
– Gain on sale of machinery (3,000)
Operating profit before working capital 1,54,000
Adjustment for working capital charges :
– Increase in Trade receivables (3,000)
+ Increase in Trade payables 6,000
– Increase in Prepaid expenses (200)
– Decrease in Outstanding expenses (2,000)
= Net Cash from Operating Activities 1,54,800
Working Notes :
Calculation of Net Profit before Taxation and Extraordinary items:
(1) Net Profit = Rs 1,00,000
+ Transfer to General reserve = Rs 30,000
= Rs 1,30,000
Do it Yourself
Statement of Profit and Loss
for the year ending 31 March, 2017
Particulars Note Figures in
Rs
i) Revenue from Operations 1 40,00,000
ii) Other Income 2 21,00,000
iii) Total Revenues (i+ii) 61,00,000
iv) Expenses
Cost of Materials Consumed 3 20,00,000
Changes in inventories of finished 4 1,00,000
goods
Depreciation and Amortisation 5 3,80,000
expenses
Other expenses 6 20,40,000
Total expenses 45,20,000
v) Profit before Tax (iii-iv) 15,80,000
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252 Accountancy : Company Accounts and Analysis of Financial Statements
Working Notes:
Rs
1. Cash revenue from operations 8,00,000
Credit revenue from operations 34,00,000
Less: Returns (2,00,000)
Net Revenue from Operations 40,00,000
Additional Information:
(Rs) (Rs)
Trade Receivables 20,00,000 40,00,000
Trade Payables 20,00,000 10,00,000
Other Expenses payable (administrative) 10,000 20,000
Prepaid Administrative Expenses 20,000 10,000
Outstanding Trading Expenses 20,000 40,000
Advance Trading Expenses 40,000 20,000
Provision for Taxation 10,00,000 12,00,000
Ascertain Cash from Operations. Show your workings clearly.
2019-20
–
Depreciation 1,40,000
Loss on Sale of Machinery 30,000
Profit on Sale of Investment 20,000
Dividend Received on Investments 6,000
Decrease in Current Assets 10,000
(other than cash and cash equivalents)
Increase in Current Liabilities 1,51,000
Increase in Current Assets other than Cash and Cash Equivalents 6,00,000
Decrease in Current Liabilities 64,000
Income Tax Paid 1,18,000
Refund of Income Tax Received 3,000
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254 Accountancy : Company Accounts and Analysis of Financial Statements
Sometimes, neither the amount of net profit is specified nor the Statement of
profit and loss is given. In such a situation, the amount of net profit can be
worked out by comparing the balances of Statement of Profit and Loss given in
the comparative balance sheets for two years. The difference is treated as the net
profit for the year; and, then, by adjusting it with the amount of provision for tax
made during the year (as worked out by comparing the provision for tax balances
of two years given in balance sheets), the amount of ‘Net Profit before tax’ can be
ascertained (see Illustration 7 and 8).
Illustration 5
Welprint Ltd. has given you the following information:
(Rs)
Machinery as on April 01, 2016 50,000
Machinery as on March 31, 2017 60,000
Accumulated Depreciation on April 01, 2016 25,000
Accumulated Depreciation on March 31, 2017 15,000
During the year, a Machine costing Rs 25,000 with Accumulated Depreciation of
Rs 15,000 was sold for Rs 13,000.
Calculate cash flow from Investing Activities on the basis of the above
information.
Solution:
Cash Flows from Investing Activities (Rs)
Sale of Machinery 13,000
Purchase of Machinery (35,000)
Net cash used in Investing Activities (22,000)
2019-20
Cash Flow Statement 255
Working Notes:
Machinery Account
Dr. Cr.
Particulars J.F. Amount Particulars J.F. Amount
(Rs) (Rs)
Balance b/d 50,000 Cash (proceeds
Statement of Profit and Loss from sale of machine) 13,000
(profit on sale of machine) 3,000 Accumulated
Cash (balancing figure:new Depreciation 15,000
machinery purchased) 35,000 Balance c/d 60,000
88,000 88,000
Illustration 6
From the following information, calculate cash flows from financing activities:
April 1, March 31,
2016 2017
(Rs) (Rs)
Long-term Loans 2,00,000 2,50,000
During the year, the company repaid a loan of Rs 1,00,000.
Solution:
Cash flows from Financing Activities
Proceeds from long-term borrowings 1,50,000
Repayment of long-term borrowings (1,00,000)
Net cash inflow from Financing Activities 50,000
Working Notes:
Long-term Loan Account
Dr. Cr.
Particulars J.F. Amount Particulars J.F. Amount
(Rs) (Rs)
Cash (loan repaid) 1,00,000 Balance b/d 2,00,000
Balance c/d 2,50,000 Cash (new loan raised) 1,50,000
3,50,000 3,50,000
2019-20
256 Accountancy : Company Accounts and Analysis of Financial Statements
Do it Yourself
1. From the following particulars, calculate cash flows from investing activities:
Purchased Sold
(Rs) (Rs)
Plant 4,40,000 50,000
Investments 1,80,000 1,00,000
Goodwill 2,00,000
Patents 1,00,000
Interest received on debentures held as investment Rs 60,000
Dividend received on shares held as investment Rs 10,000
A plot of land had been purchased for investment purposes and was let out for
commercial use and rent received Rs 30,000.
2. From the following Information, calculate cash flows from investing and
financing activities:
Particulars 2016 2017
2019-20
Cash Flow Statement 257
activities are worked out by an indirect method and shown as such in the cash
flow statement, the statement itself is termed as ‘Indirect method cash flow
statement’. Thus, the Cash flow statements prepared in Illustrations 7, 8 and 9
fall under this category as the cash flows from operating activities have been
worked out by indirect method. Similarly, if the cash flows from operating
activities are worked by direct method while preparing the cash flow statement,
it will be termed as ‘direct method Cash Flow Statement’. Illustration 10 shows
both types of Cash Flow Statement. However, unless it is specified clearly as to
which method is to be used, the cash flow statement may preferably be prepared
by an indirect method as is done by most companies in practice.
Illustration 7
From the following information, prepare Cash Flow Statement for Pioneer Ltd.
Balance Sheet of Pioneer Ltd., as on March 31, 2017
Particulars Note 31st March 31st March
No. 2017 (Rs) 2016 (Rs)
I. Equity and Liabilities
1. Shareholders’ Funds
a) Share capital 1 7,00,000 5,00,000
b) Reserve and surplus 2 3,50,000 2,00,000
2. Non-current Liabilities
Long-term borrowings: Bank Loan 50,000 1,00,000
3. Current Liabilities
a) Trade payables 45,000 50,000
b) Other current liabilities: outstanding rent 7,000 5,000
c) Short-term provisions 3 1,20,000 80,000
Total 12,72,000 9,35,000
II. Assets
1. Non-current assets
a) Fixed assets
(i) Tangible assets 4 5,00,000 5,00,000
(ii) Intangible assets 5 95,000 1,00,000
b) Non-current investments 1,00,000 -
2. Current assets
a) Inventories 1,30,000 50,000
b) Trade receivables 1,20,000 80,000
c) Cash and cash equivalents 6 3,27,000 2,05,000
Total 12,72,000 9,35,000
Notes to Accounts:
Particulars 31st March 31st March
2017 (Rs) 2016 (Rs)
1. Equity Share Capital 7,00,000 5,00,000
2. Reserve and Surplus
Surplus: i.e., Balance in Statement of
Profit and Loss 3,50,000 2,00,000
2019-20
258 Accountancy : Company Accounts and Analysis of Financial Statements
3. Short-term Provision:
Proposed Dividend 70,000 50,000
Provision for Taxation 50,000 30,000
1,20,000 80,000
4. Fixed Assets
– Tangible assets
– Equipments 2,30,000 2,00,000
– Furniture 2,70,000 3,00,000
5,00,000 5,00,000
5. Intangible Assets
Patents 95,000 1,00,000
6. Cash and cash equivalents
i) Cash 27,000 5,000
ii) Bank balance 3,00,000 2,00,000
3,27,000 2,05,000
2019-20
Cash Flow Statement 259
Working Notes:
(1)
Equipment Account
Dr. Cr.
Particulars J.F. Amount Particulars J.F. Amount
(Rs) (Rs)
Balance b/d 2,00,000 Depreciation 15,000
Cash 80,000 (balancing figure)
Bank 30,000
Statement of Profit & Loss 5,000
(Loss on sale)
Balance c/d 2,30,000
2,80,000 2,80,000
(2) Patents of Rs 5,000 (i.e., Rs 1,00,000 – Rs 95,000) were written-off during the year,
and depreciation on furniture Rs 30,000. (Rs 3,00,000 – Rs 2,70,000)
(3) It is assumed that dividend of Rs 50,000 and tax of Rs 30,000 provided in 2015-
2016 has been paid during the year 2016-17. Hence, proposed dividend and provision
for tax during the year amounts to Rs 70,000 and Rs 50,000 respectively.
(Rs)
(4) Profit and Loss at the end 3,50,000
(–) Profit and Loss in the beginning 2,00,000
2019-20
260 Accountancy : Company Accounts and Analysis of Financial Statements
Illustration 8
From the following Balance Sheets of Xerox Ltd., prepare cash flow statement.
Particulars Note 31st March 31st March
No. 2017 (Rs) 2016 (Rs)
I. Equity and Liabilities
1. Shareholders’ Funds
a) Share capital 15,00,000 10,00,000
b) Reserve and surplus (Balance in 7,50,000 6,00,000
Statement of Profit and Loss)
2. Non-current Liabilities
Long-term borrowings 1 1,00,000 2,00,000
3. Current Liabilities
a) Trade payables 1,00,000 1,10,000
b) Short-term provisions 95,000 80,000
(Provision for taxation)
Total 25,45,000 19,90,000
II. Assets
1. Non-current assets
a) Fixed assets
(i) Tangible assets 2 10,10,000 12,00,000
(ii) Intangible assets (Goodwill) 1,80,000 2,00,000
b) Non-current investment 6,00,000 -
2. Current assets
a) Inventories 1,80,000 1,00,000
b) Trade Receivables 2,00,000 1,50,000
c) Cash and cash equivalents 3 3,75,000 3,40,000
Total 25,45,000 19,90,000
Notes to Accounts:
Particulars 31st March 31st March
2017 (Rs) 2016 (Rs)
1. Long-term borrowings:
i) Debentures 2,00,000
ii) Bank loan 1,00,000
1,00,000 2,00,000
2. Tangible Assets
i) Land and building 6,50,000 8,00,000
ii) Plant and machinery 3,60,000 4,00,000
10,10,000 12,00,000
3. Cash and cash equivalents
i) Cash in hand 70,000 50,000
ii) Bank balance 3,05,000 2,90,000
3,75,000 3,40,000
Additional information:
1. Dividend proposed and paid during the year Rs 1,50,000.
2. Income tax paid during the year includes Rs 15,000 on account of dividend tax.
3. Land and building book value Rs 1,50,000 was sold at a profit of 10%.
4. The rate of depreciation on plant and machinery is 10%.
2019-20
Cash Flow Statement 261
Solution:
Cash Flow Statement
Particulars (Rs)
I. Cash flows from Operating Activities
Net Profit before Taxation and Extraordinary Items 3,95,000
Adjustment for –
+ Depreciation 40,000
+ Goodwill written-off 20,000
– Profit on Sale of Land (15,000)
= Operating Profit before working capital changes 4,40,000
– Decrease in Trade Payables (10,000)
– Increase in Trade Receivables (50,000)
– Increase in Inventories (80,000)
= Cash generated from Operations 3,00,000
– Income Tax Paid (1) (65,000)
A. Cash Inflows from Operations 2,35,000
II. Cash flows from Investing Activities
Proceeds from Sale of Land and Building 1,65,000
Purchase of Investment (6,00,000)
2019-20
262 Accountancy : Company Accounts and Analysis of Financial Statements
Debenture Account
Dr. Cr.
Particulars J.F. Amount Particulars J.F. Amount
(Rs) (Rs)
Cash (Redemption) 20,000 Balance b/d 20,000
20,000 20,000
Bank Account
Dr. Cr.
Particulars J.F. Amount Particulars J.F. Amount
(Rs) (Rs)
Balance c/d 1,00,000 Cash 1,00,000
1,00,000 1,00,000
2019-20
Cash Flow Statement 263
1,50,000 1,50,000
Illustration 9
From the following information of Oswal Mills Ltd., prepare cash flow statement:
Balance Sheet of Oswal Mills
as on 31st March, 2016 and 2017
(Rupees in Lakhs)
Particulars Note 31st March 31st March
No. 2017 (Rs) 2016 (Rs)
I. Equity and Liabilities
1. Shareholders’ Funds
a) Share capital 1 1,300 1,400
b) Reserve and surplus (Surplus) 4,700 4,000
2. Current Liabilities
a) Short-term borrowings 200 600
b) Trade payables 500 400
Total 6,700 6,400
II. Assets
1. Non-current assets
a) Fixed assets 2 2,400 2.400
b) Non-current investments 300 200
2. Current assets
a) Inventories 1,200 1,300
b) Trade receivables 800 900
c) Cash and cash equivalents 1,200 800
d) Short-term loans and advances 800 800
Total 6,700 6,400
2019-20
264 Accountancy : Company Accounts and Analysis of Financial Statements
Additional information:
1. No dividend paid by the company during the current financial year.
2. Out of fixed assets, land worth Rs 1,000 Lakhs having no accumulated depreciation
was sold at no profit or no loss.
Solution:
Cash Flow Statement
(Rupees in Lakhs)
Particulars Rs
Cash Flows from Operating Activities
Net Profit before Tax and Extraordinary Items (1) 2,800
Adjustment for Non-cash and Non-operating Items
+ Interest paid 200
+ Depreciation 200
2019-20
Cash Flow Statement 265
Working Notes:
(Rs in Lakhs)
(1) Net Profit before Tax and Extraordinary Items = Rs 700 + Rs 1,100 + Rs 1,000
= Rs 2,800
2019-20
266 Accountancy : Company Accounts and Analysis of Financial Statements
Illustration 10
From the following information of Banjara Ltd., prepare a cash flow statement:
(Rupees in Lakhs)
Particulars Note 31st March 31st March
No. 2017 (Rs) 2016 (Rs)
I. Equity and Liabilities
1. Shareholders’ Funds
a) Share capital 1,500 1,250
b) Reserve and surplus (surplus) 3,410 1,380
2. Non-current Liabilities
Long-term borrowings 1,110 1,040
(Long-term loan)
3. Current Liabilities
a) Trade payables 150 1,890
b) Other current liabilities 1 630 1,100
Total 6,800 6,660
II. Assets
1. Non-current assets
a) Fixed assets 2 730 850
b) Non-current investments 2,500 2,500
2. Current assets
a) Current investments (Marketable) 670 135
b) Inventories 900 1,950
c) Trade Receivables 1,700 1,200
d) Cash and cash equivalents 200 25
e) Other current assets 100
(Interest receivables)
Total 6,800 6,660
Notes to Accounts:
Particulars 31st March 31st March
2017 (Rs) 2016 (Rs)
1. Other Current Liabilities
i) Interest payable 230 100
ii) Income tax payable 400 1,000
630 1,100
2019-20
Cash Flow Statement 267
2. Fixed Assets:
Tangible 2,180 1,910
Less: Accumlated depreciation (1,450) (1,060)
730 850
Notes to Accounts:
Particulars Rs
1. Other Income during the year 2016-17
i) Interest Income 300
ii) Dividend Income 200
iii) Insurance Proceeds from earthquake disaster Settlement 140
640
Additional Information:
(Rs ’000)
(i) An amount of Rs 250 was raised from the issue of share capital and a
further Rs 250 was raised from long-term borrowings.
(ii) Interest expense was Rs 400 of which Rs 170 was paid during the period.
Rs 100 relating to interest expense of the prior period was also paid during
the period.
(iii) Dividends paid were Rs 1,200.
(iv) Tax deducted at source on dividends received (included in the tax expense
of Rs 300 for the year) amounted to Rs 40.
2019-20
268 Accountancy : Company Accounts and Analysis of Financial Statements
(v) During the period, the enterprise acquired Fixed Assets for Rs 350. The
payment was made in cash.
(vi) Plant with original cost of Rs 80 and accumulated depreciation of Rs 60
was sold for Rs 20.
(vii) Trade Receivables and Trade Payables include amounts relating to credit
sales and credit purchases only.
2019-20
Cash Flow Statement 269
2019-20
270 Accountancy : Company Accounts and Analysis of Financial Statements
Working Notes:
(1) Cash and Cash Equivalents
Cash and Cash Equivalents consist of cash in hand and balances with banks, and
investments in money-market instruments. Cash and Cash Equivalents included in the
Cash Flow Statement comprise of the following balance sheet amounts.
(Rs ‘000)
2017 2016
(Rs) (Rs)
Cash in Hand and balances with Bank 200 25
Short-term Investments 670 135
Cash and Cash Equivalents 870 160
(2) Cash Receipts from Customers
Sales 30,650
Add: Trade Receivables at the beginning of the year 1,200
31,850
Less : Trade Receivables at the end of the year (1,700)
30,150
(3) Cash paid to Suppliers and Employees
Cost of Revenue from operations 26,000
Administrative and Selling Expenses 910
26,910
Add: Trade Payables at the beginning of the year 1,890
Inventories at the end of the year 900 2,790
29,700
Less : Trade Payables at the end of the year 150
Inventories at the beginning of the year 1,950 (2,100)
27,600
1,300
Less : Income tax payable at the end of the year (400)
900
2019-20
Cash Flow Statement 271
1,290
Less : Long-term Borrowings at the end of the year (1,110)
180
500
Less: Interest Payable at the end of the year (230)
270
Summary
Cash Flow Statement: The Cash Flow Statement helps in ascertaining the liquidity
of an enterprise. Cash Flow Statement is to be prepared and reported by Indian
companies according to AS-3 issued by The Institute of Chartered Accountants of
India. The cash flows are categorised into flows from operating, investing and
financing activities. This statement helps the users to ascertain the amount and
certainty of cash flows to be generated by company.
2019-20
272 Accountancy : Company Accounts and Analysis of Financial Statements
Numerical Questions
1. Anand Ltd., arrived at a net income of Rs 5,00,000 for the year ended
March 31, 2017. Depreciation for the year was Rs 2,00,000. There was a
profit of Rs 50,000 on assets sold which was transferred to Statement of
Profit and Loss account. Trade Receivables increased during the year Rs
40,000 and Trade Payables also increased by Rs 60,000. Compute the
cash flow from operating activities by the indirect approach.
[Ans.: Rs 6,70,000]
2019-20
Cash Flow Statement 273
2. From the information given below you are required to calculate the cash
paid for the inventory:
Particulars (Rs)
Inventory in the beginning 40,000
Credit Purchases 1,60,000
Inventory in the end 38,000
Trade payables in the beginning 14,000
Trade payables in the end 14,500
[Ans.: Rs 1,59,500]
3. For each of the following transactions, calculate the resulting cash flow
and state the nature of cash flow, viz., operating, investing and financing.
(a) Acquired machinery for Rs 2,50,000 paying 20% by cheque and
executing a bond for the balance payable.
(b) Paid Rs 2,50,000 to acquire shares in Informa Tech. and received a
dividend of Rs 50,000 after acquisition.
(c) Sold machinery of original cost Rs 2,00,000 with an accumulated
depreciation of Rs 1,60,000 for Rs 60,000.
[Ans.: (a) Rs (50,000) investing activity (outflow); (b) Rs (2,00,000) investing
activity (outflow); (c) Rs 60,000 investing activity (inflow).
4. The following is the Profit and Loss Account of Yamuna Limited:
Additional information:
(i) Trade receivables decrease by Rs 30,000 during the year.
(ii) Prepaid expenses increase by Rs 5,000 during the year.
(iii) Trade payables increase by Rs 15,000 during the year.
(iv) Outstanding expenses payable increased by Rs 3,000 during the year.
(v) Other expenses included depreciation of Rs 25,000.
2019-20
274 Accountancy : Company Accounts and Analysis of Financial Statements
Compute net cash from operations for the year ended March 31, 2017 by the
indirect method.
[Ans.: Cash from operations Rs 2,18,000].
5. Compute cash from operations from the following figures:
(i) Profit for the year 2016-17 is a sum of Rs 10,000 after providing for
depreciation of Rs 2,000.
(ii) The current assets and current liabilities of the business for the year
ended March 31, 2016 and 2015 are as follows:
Particulars March March
31, 2016 31, 2017
(Rs) (Rs)
Trade Receivables 14,000 15,000
Provision for Doubtful Debts 1,000 1,200
Trade Payables 13,000 15,000
Inventories 5,000 8,000
Other Current Assets 10,000 12,000
Expenses payable 1,000 1,500
Prepaid Expenses 2,000 1,000
Accrued Income 3,000 4,000
Income received in advance 2,000 1,000
[Ans.: Cash from operations: Rs 7,700].
6. From the following particulars of Bharat Gas Limited, calculate Cash
Flows from Investing Activities. Also show the workings clearly preparing
the ledger accounts:
Balance Sheet of Bharat Gas Ltd., as on 31 March, 2016 and 31 March 2017
Notes to accounts:
Figures of Figures of
current year previous year
1. Tangible Assets
Machinery 12,40,000 10,20,000
2. Intangible Assets
Goodwill 3,00,000 1,00,000
Patents 1,60,000 2,80,000
4,60,000 3,80,000
2019-20
Cash Flow Statement 275
3. Non-current Investments
10% long term investments 1,60,000 60,000
Investment in land 1,00,000 1,00,000
Shares of Amartex Ltd. 1,00,000 1,00,000
3,60,000 2,60,000
Additional Information:
(a) Patents were written-off to the extent of Rs 40,000 and some Patents
were sold at a profit of Rs 20,000.
(b) A Machine costing Rs 1,40,000 (Depreciation provided thereon
Rs 60,000) was sold for Rs 50,000. Depreciation charged during the year
was Rs 1,40,000.
(c) On March 31, 2016, 10% Investments were purchased for Rs 1,80,000
and some Investments were sold at a profit of Rs 20,000. Interest on
Investment was received on March 31, 2017.
(d) Amartax Ltd., paid Dividend @ 10% on its shares.
(e) A plot of Land had been purchased for investment purposes and let out
for commercial use and rent received Rs 30,000.
[Ans.: Rs 5,24,000].
7. From the following Balance Sheet of Mohan Ltd., prepare cash flow
Statement:
Balance Sheet of Mohan Ltd.,
as at 31st March 2016 and 31st March 2017
2. Non-current liabilities
a) Long-term borrowings 1 80,000 1,00,000
3. Current liabilities
Trade payables 1,20,000 1,40,000
Short-term provisions 2 70,000 60,000
Total 7,70,000 6,60,000
II) Assets
1. Non-current assets
Fixed assets 3 5,00,000 3,20,000
2. Current assets
a) Inventories 1,50,000 1,30,000
b) Trade receivables 4 90,000 1,20,000
c) Cash and cash equivalents 5 30,000 90,000
Total 7,70,000 6,60,000
2019-20
276 Accountancy : Company Accounts and Analysis of Financial Statements
Notes to accounts:
2017 2016
1. Long-term borrowings
Bank Loan 80,000 1,00,000
2. Short-term provision
Proposed dividend 70,000 60,000
3. Fixed assets 6,00,000 4,00,000
Less: Accumulated Depreciation 1,00,000 80,000
(Net) Fixed Assets 5,00,000 3,20,000
4. Trade receivables
Debtors 60,000 1,00,000
Bills receivables 30,000 20,000
90,000 1,20,000
5. Cash and cash equivalents
Bank 30,000 90,000
Additional Information:
Machine Costing Rs 80,000 on which accumulated depreciation was Rs,
50,000 was sold for Rs 20,000.
Rs
[Ans.: Cash flow from Operating Activities 1,80,000
Cash flow from Investing Activities (2,60,000)
Cash flow from Financing Activities 20,000.
8. From the following Balance Sheets of Tiger Super Steel Ltd., prepare Cash
Flow Statement:
2019-20
Cash Flow Statement 277
Notes to accounts:
2017 2016
1. Share Capital
Equity share capital 1,20,000 80,000
10% Preference share capital 20,000 40,000
1,40,000 1,20,000
2. Reserves and surplus
General reserve 12,000 8,000
Balance in statement of 10,800 7,200
profit and loss
22,800 15,200
3. Trade payables
Bills payable 21,200 14,000
4. Other current liabilities
Outstanding expenses 2,400 3,200
5. Short-term provisions
Provision for taxation 12,800 11,200
Proposed dividend 15,600 11,200
28,400 22,400
6. Tangible assets
Land and building 20,000 40,000
Plant 76,400 36,000
96,400 76,000
Additional Information:
Depreciation Charge on Land & Building Rs 20,000, and Plant Rs 10,000
during the year.
[Ans.: Cash flow from Operating Activities Rs 56,000
Cash flow from Investing Activities Rs (60,400)
Cash flow from Financing Activities Rs 8,800].
9. From the following information, prepare cash flow statement:
2019-20
–
II. Assets
1. Non-current assets
Fixed assets
i) Tangible 7,00,000 5,00,000
ii) Intangible–Goodwill 1,70,000 2,50,000
2. Current assets
a) Inventories 6,00,000 5,00,000
b) Trade Receivables 6,00,000 4,00,000
c) Cash and cash equivalents 4,00,000 3,00,000
Total 24,70,000 19,50,000
Additional Information:
Depreciation Charge on Plant amount to Rs 80,000.
Rs
[Ans.: Cash inflow from Operating Activities 4,28,000
Cash inflow from Investing Activities (2,80,000)
Cash inflow from Financing Activities (48,000).
10. From the following Balance Sheet of Yogeta Ltd., prepare cash flow
statement:
Particulars Note 31st March 31st March
No. 2017 (Rs) 2016 (Rs)
I. Equity and Liabilities
1. Shareholders’ Funds
a) Share capital 1 4,00,000 2,00,000
b) Reserve and surplus (Surplus) 2,00,000 1,00,000
2. Non-current Liabilities
Long-term borrowings 2 1,50,000 2,20,000
3. Current Liabilities
a) Short-term borrowings 1,00,000
(Bank overdraft)
b) Trade payables 70,000 50,000
c) Short-term provision 50,000 30,000
(Provision for taxation)
Total 9,70,000 6,00,000
II. Assets
1. Non-current assets
Fixed assets
Tangible 7,00,000 4,00,000
2. Current assets
a) Inventories 1,70,000 1,00,000
b) Trade Receivables 1,00,000 50,000
c) Cash and cash equivalents 50,000
Total 9,70,000 6,00,000
2019-20
Cash Flow Statement 279
Notes to Accounts:
Particulars 31st March 31st March
2017 (Rs) 2016 (Rs)
1. Share capital
a) Equity share capital 3,00,000 2,00,000
b) Preference share capital 1,00,000
4,00,000 2,00,000
2. Long-term borrowings
Long-term loan 2,00,000
Loan from Rahul 1,50,000 20,000
1,50,000 2,20,000
Additional Information:
Net Profit for the year after charging Rs 50,000 as Depreciation was Rs
1,50,000. Dividend paid on Share was Rs 50,000, Tax Provision created
during the year amounted to Rs 60,000.
Rs
[Ans.: Cash from Operating Activities 1,20,000
Cash from Investing Activities (3,50,000)
Cash from Financing Activities 80,000
11. Following is the Financial Statement of Garima Ltd., prepare cash flow
statement.
Particulars Note 31st March 31st March
No. 2017 (Rs) 2016 (Rs)
I. Equity and Liabilities
1. Shareholders’ Funds
a) Share capital 1 4,40,000 2,80,000
b) Reserve and surplus (Surplus) 2 40,000 28,000
2. Current Liabilities
a) Trade payables 1,56,000 56,000
b) Short-term provisions 12,000 4,000
(Provision for taxation)
Total 6,48,000 3,68,000
II. Assets
1. Non-current assets
Fixed assets
Tangible 3,64,000 2,00,000
2. Current assets
a) Inventories 1,60,000 60,000
b) Trade receivables 80,000 20,000
c) Cash and cash equivalents 28,000 80,000
d) Other current assets 16,000 8,000
Total 6,48,000 3.68,000
2019-20
280 Accountancy : Company Accounts and Analysis of Financial Statements
Notes to Accounts:
Particulars 31st March 31st March
2017 (Rs) 2016 (Rs)
1. Share capital
a) Equity share capital 3,00,000 2,00,000
b) Preference share capital 1,40,000 80,000
4,40,000 2,80,000
2. Reserve and surplus
Surplus in statement of profit and loss 28,000
at the beginning of the year
Add: Profit of the year 16,000
Less: Dividend 4,000
Additional Information:
1. Interest paid on Debenture Rs 600
2. Dividend paid during the year Rs 4,000
3. Depreciation charged during the year Rs 32,000
Rs
[Ans.: Cash flow from Operating Activities (11,400)
Cash flow from Investing Activities (1,96,000)
Cash flow from Financing Activities 1,55,400.
12. From the following Balance Sheet of Computer India Ltd., prepare cash
flow statement.
(Rs in ‘000)
Particulars Note 31st March 31st March
No. 2017 (Rs) 2016 (Rs)
I. Equity and Liabilities
1. Shareholders’ Funds
a) Share capital 50,000 40,000
b) Reserve and surplus–Surplus 1 3,700 3,000
2. Non-Current Liabilities
10% Debentures 6,500 6,000
3. Current liabilities
a) Short-term borrowings 2 6,800 12,500
b) Trade payables 11,000 12,000
c) Short-term provisions 3 10,000 8,000
Total 88,000 81,500
II. Assets
1. Non-current assets
a) Fixed assets 4 25,000 30,000
2. Current assets
a) Inventories 35,000 30,000
b) Trade receivables 24,000 20,000
c) Cash and cash equivalents–cash 3,500 1,200
d) Other current assets–prepaid exp. 500 300
Total 88,000 81,500
2019-20
–
Notes to Accounts:
Particulars 31st March 31st March
2017 (Rs) 2016 (Rs)
1. Reserve and surplus
i) Balance in statement of profit and loss 1,200 1,000
ii) General reserve 2,500 2,000
3,700 3,000
2. Short-term borrowings
Bank overdraft 6,800 12,500
3. Short-term provisions
i) Provision for taxation 4,200 3,000
ii) Proposed dividend 5,800 5,000
10,000 8,000
4. Fixed Assets:
Fixed Assets 40,000 41,000
Less Accumulated Depreciation (15,000) (11,000)
25,000 30,000
Additional Information:
Interest paid on Debenture Rs 600
Project Work
1. Read and analyse the cash flow statements as given in the Annual Report
of any three listed companies and ascertain:
(i) which method (direct or indirect) is used for the purpose of calculating
cash flows from operating activities;
(ii) the treatment of special items such as dividend tax, profit/loss on sale of
fixed assets, depreciation extraordinary items, etc.
(iii) Whether all companies follow the same proforma of cash flow statement
or different ones.
(iv) As to whether you think that companies properly highlight cash flow
statement in their Annual Reports.
2. “Why companies must necessarily prepare and present a statement of cash
flows”. Discuss it in the classroom. Comment.
3. You analyse the cash flow statement for the past 3 years for a company
chosen by you and find out-
(i) Whether the net increase in cash and cash equivalents over the years
is noticed.
(ii) If net cash flow from operating activities have been negative throughout,
what may be the possible reasons for the situation. What would be the
possible reasons for your perception about the functioning of the company?
2019-20
282 Accountancy : Company Accounts and Analysis of Financial Statements
Answer : a) Operating activities - 3, 6, 7, 10, 13, 15, 19, 20, 23, 24, 27;
b) Investing activities - 1, 5, 8, 11, 12, 16, 17, 21, 22
c) Financing activities - 2, 4, 9, 14, 18, 25, 26, 28, 29;
d) Cash equivalents - 30, 31, 32, 33.
2019-20