Corporate Accounting

CORPORATE ACCOUNTING
CORE COURSE
BCom
(2011 Admission)
III SEMESTER
UNIVERSITY OF CALICUT
SCHOOL OF DISTANCE EDUCATION
Calicut University P.O. Malappuram, Kerala, India 673 635
329
School of Distance Education
UNIVERSITY OF CALICUT
SCHOOL OF DISTANCE EDUCATION
Study Material
CORPORATE ACCOUNTING
BCom
III SEMESTER
Core Course
Prepared by : Sri. T.H. JAHFARALI
Assistant Professor
P.G. Department of Commerce
Govt. College Malappuram
Scrutinized by : Dr. K. Venugopalan

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

©
Reserved
CORPORATE ACCOUNTING 2
CONTENTS PAGE
Module 1 5
Module 2 38
Module 3 57
Module 4 82
Module 5 112
Module 1
ACCOUNTING FOR SHARE CAPITAL
A company is an association of persons who contribute money or money’s worth to a

common stock and uses it for a common purpose. In the words of Justice James, “a company is
an association of persons united for a common object”. Sec 3(1) (i) of the Companies Act 1956
defines a company as “company formed and registered under this Act or an existing company”.
Characteristics of Company
1. It is a voluntary association of persons
2. It has a separate legal entity
3. It has a common seal
4. It has a perpetual succession.
Kinds of Companies
I. On the basis of formation
1. Chartered companies – Those companies which are incorporated under a special
charter by the king or sovereign such as East India Company.
2. Statutory companies – These companies are formed by the special Act of legislature
or parliament like RBI.
3. Registered companies – Such companies are incorporated under the Companies Act
1956 or were registered under any previous Companies Act.
On the basis of liability
1. Limited companies‐ In these companies, the liability of each member is limited to
the extent of face value of shares held by him.
2. Guarantee companies – The liability of member of such companies are limited to the
amount he has undertaken to contribute to the assets of the company in the event of its
winding up.
3. Unlimited Companies – In these companies, the liability of the members is unlimited
and members are personally liable to the creditors of the company fop making up the
deficiency. Such companies are rare these days.
On the basis of public investment
1. Private Companies – These are companies by its Articles, (i) limits the number of
members to 50,(ii)prohibits the invitation to the public to subscribe their shares or
debentures and
(iii) restricts the transferability of their shares.
2. Public companies – These are companies other than private companies.
SHARE CAPITAL
Total capital of the company is divided into units of small denominations; each one is
called a share. According to Sec 2(46) of the Companies Act 1956, share has been defined as
a share in the share capital of the company; and includes stock except where a distinction
between stock and share is expressed or implied.
Classes of Shares
A. Preference Shares
Shares which enjoy the preferential rights as to dividend and repayment of capital
in the event of winding up of the company over the equity shares are called preference
shares. The holder of preference shares will get a fixed rate o dividend.
Types of preference shares
1. Cumulative preference shares – In case of these shares, the arrears of dividend are
carried forward and paid out of the profits of the subsequent years.
2. Non‐cumulative preference shares – If dividend not to accumulate and not to carried
forward to next year, these are called non‐cumulative preference shares.
3. Participating preference shares – In addition to a fixed dividend, balance of profit (after
meeting equity dividend) shared by some preference shareholders. Such shares are
participating preference shares.
4. Non‐participating preference shares – These shares get only a fixed rate of dividend.
These do not get share in the surplus profit.
5. Redeemable preference shares – If preference shares are returned after a specified
period to shareholders, these preference shares e shares are called redeemable
preference shares.
6. Convertible preference shares – These shares are given the right of conversion into
equity shares within a specified period or at a specified date according to the terms of
issue.
B. Equity Shares
Equity shares are those which are not preference shares. Equity shares do not
carry any preferential gain in respect of dividend or repayment of capital. So these are
known as ordinary shares. There will be no fixed rate of dividend to be paid to the equity
shareholders and this rate may vary from year to year. In winding up, the equity capital
is repaid last. However, equity shareholder gets full voting power.
Types of share capital

1. Authorized (Registered or Nominal) Capital – It is the maximum amount of capital which
the company is authorized to raise by way of public subscription.
2. Issued Capital – The part of authorized capital which is offered top the public for
subscription is called issued capital.
3. Subscribed Capital – That part of the issued capital for which applications are received
from the public is called subscribed capital.
4. Called‐up Capital – That part of subscribed capital which has been called‐up or
demanded by the company is called called‐up capital.
5. Paid‐up Capital – The part of called‐up capital which is offered and actually paid by the
members is known as paid‐up capital. Any unpaid amount of balance on the called‐up
capital is known as unpaid capital or calls in arrears.
6. Reserve Capital – It is that portion of the uncalled capital which is called‐up only at the
event of company’s winding up.
Difference between equity shares and preference shares
Equity shares Preference shares

1 It is an ownership security 1. It is a hybrid security
2 Dividend rate is not fixed 2. Dividend rate is fixed
3 Capital is repaid only in 3. Capital is repaid after a
winding up stipulated period
4 These shares have voting rights 4 These shares generally do not
5 Face value is lower have voting rights
5 Face value is higher
Issue of Share Capital
The shares can be issued either at par, premium or at discount. Shares are said to be
issued at par when a shareholder is required to pay the face value of the shares to the
company. Shares are said to be issued at premium when a shareholder is required to pay more
than the face value to the company. Shares are said to be issued at discount when the
shareholder is required to pay less amount than the face value to the company. For example, a
company issues the shares having the face value of Rs.10 at Rs.10; it is the issue at par. If it is
issued at Rs. 12, the issue is at premium. If it is issued at Rs.8, the issue is at discount.
The issue price of the shares can be received in one instalment or it can be received in
different instalments. If the issue is in different instalments, it may be paid on application,
allotment and on one or more calls. The amount on application is called application money, the
amount dues on allotment is called allotment money and the rest amount is called call money.
As per SEBI guidelines the application money on issue must not be less than 25% of issue price
(as per Cos Act, it is 5%).
Allotment of shares
Allotment of shares means the acceptance of offer of the applicant for the purchase of
shares. Directors have the discretionary power to reject or accept the applications. But the
public company cannot allot its shares unless the minimum subscription has been subscribed
by the public and the amount of application has been received. After the allotment of shares to
the applicants who will become the shareholders of the company.
Journal Entries for Share Issue

1. On receipt of application money:
Bank A/c Dr
To Share Application A/c
2. On acceptance of application:
Share application A/c Dr
To Share Capital A/c
3. On allotment money due:
Share allotment A/c Dr
To Share capital A/c
4. On receipt of allotment money:

Bank A/c Dr
To Share allotment A/c
5. On making first call due:
Share first call A/c Dr
6. On receipt of first call money:
Bank A/c Dr
To Share first call A/c
(Note: similar entries may be passed for second call, third call, if any.)
Illustration 1
Bharat Trading Co. Ltd.with a registered capital of Rs.100000 issued 5000 equity shares of
Rs.10 each, payable Rs.2 on application, Rs.2 on allotment, Rs.3 on first call and Rs.3 on final
call. Pass journal entries assuming the shares issued were fully subscribed and the money has
been received.
Solution:
Journal
Bank A/c Dr 10000

To Share Application A/c 10000
(Application money received)
Share application A/c Dr 10000
To Share Capital A/c 10000
(Transfer of application money to share capital)
Share allotment A/c Dr 10000
To Share capital A/c 10000
(Allotment money due)
Bank A/c Dr 10000
To Share allotment A/c 10000
(Allotment money received)
Share first call A/c Dr 15000
(First call money due)
Bank A/c Dr 15000
To Share first call A/c 15000
(First call money received)
Share final call A/c Dr 15000
(Final call money due)
Bank A/c Dr 15000
To Share final call A/c 15000
(Final call money received)
Issue of shares at premium

Shares are said to be issued at premium when a shareholder is required to pay more
than the face value to the company. The excess amount received over the face value is called
share premium. It is a capital receipt. The share premium shall be transferred to “Securities
Premium A/c”. It should be shown on the liability side of balance sheet under the head
“Reserves and Surplus”.
Journal entries:
(a) If premium is received with application money:
(i) Bank A/c Dr
To Share application A/c
(ii) Share application A/c Dr (with total)
To Share capital A/c (application money)
To Securities premium A/c (premium)
(b) If premium is received with allotment money:
(i) Share allotment A/c Dr (total)
To Share capital A/c (allotment money due)
To Securities premium A/c (premium)
(ii) Bank A/c A/c

To Share allotment A/c
Issue of shares at discount
Shares are said to be issued at discount when the shareholder is required to pay
less amount than the face value to the company. Discount on issue of shares is a capital
loss and it should be debited to a separate account called “Discount on issue of shares
A/c”. It is shown on the assets side of balance sheet under “Miscellaneous Expenditure”.
The rate of discount should not exceed 10% of nominal value of shares. Generally the
discount on issue is recorded at the time of allotment. It is also noted that a newly
registered company cannot issue shares at discount. The journal entry is
Share allotment A/c Dr (allotment money due)

Discount on issue of shares A/c Dr (discount)
To Share capital A/c (Total)
Illustration 2
A Ltd. Issued 5000 shares of Rs.10 each at a premium of Rs.5 per share. The amount
was payable as Rs.3 on application, Rs.7 on allotment (incl. Premium) and the balance
on first and final call. All shares were subscribed and money duly received. Show the
journal entries.
Solution:
Bank A/c Dr 15000
To Securities premium A/c 10000
(Allotment money due with 25000
premium)
Bank A/c Dr
(Allotment money received) 35000
Share first and final call A/c Dr
(First and final call money due) 25000
Bank A/c Dr
To Share first and final call A/c 25000
(First and final call money received) 25000
Illustration 3
Balu Ltd. Issued 20000 shares of Rs.10 each at a discount of 10% payable as Rs.2 on
application, Rs.3 on allotment and Rs.4 on first and final call. 20000 applications were
received and all were accepted. Pass journal entries.
Solution:
Bank A/c Dr 40000
Discount on issue of shares A/c
Dr 20000
(Allotment money due at 10% discount)
Bank A/c Dr 60000
Share first and final call A/c Dr 80000
(First and final call money due)
Bank A/c Dr
To Share first and final call A/c 80000
(First and final call money received)
80000
When both Preference and Equity Shares are issued

When a company issues both preference and equity shares the journal entries are
written separately for each type of share capital.
Under subscription of shares
Sometimes the applications for shares received will be less than the number of shares
issued. This is called under subscription. In such a case, the allotment will be equal to the
number of shares subscribed and not to the shares issued.
Over subscription of shares
Sometimes the applications for shares received will be more than the number of shares
issued. This is called over subscription. When there is over subscription, it is not possible to
issue shares to all applicants. In such a situation company shall reject some applications
altogether, allot in full on some applications and make a pro‐rata allotment on some
applications. Pro‐rata allotment means that allotment on every application is made in the ratio
which the number of shares allotted bears to number of shares applied. In case of applications
fully rejected will be returned to the applicants. In pro‐rata allotment the excess application
will be adjusted either on allotment and or on calls. Any surplus left even after the adjustment
will be refunded to the applicants. Journal entries are
1. When application money is

returned: Share application A/c Dr
To Bank A/c
2. When excess application is adjusted towards allotment or
call: Share application A/c Dr (total)
To share allotment A/c (amount adjusted towards
allotment) To Call (if any) (amount adjusted towards call)
Illustration 4
Sun Ltd.makes an issue of 100000 equity shares of Rs.10 each payable Rs.3 on application, Rs.5
on allotment and Rs.2 on first and final call. Applications were received for 250000 shares. The
company returned the applications on 24000 shares and excess application money from
remaining applicants was carried forward in part satisfaction on amount due on allotment on
the shares allotted to them. The balance of allotment was received. The company did not make
the first and final call. Journalize the transactions.
Solution:
Bank A/c Dr 750000
(Application money received for
250000 shares) 372000
Share application A/c Dr
300000
To Bank A/c 72000
(Transfer of application money to share
capital and 24000 applicants rejected and
refunded)
(Allotment money due )
Share application A/c 378000
Dr
Bank A/c Dr 122000
(Excess application money adjusted
and balance received in cash)
Calls in Arrears and Calls in Advance
Sometimes shareholders may fail to pay the allotment money and or call money. Such
dues are called calls in arrears. It is shown in the balance sheet as a deduction from the called‐
up capital. Directors are authorized to charge interest on calls in arrears at a rate as per
Articles. In its absence, the interest does not exceed 5% pa. When a shareholder pays more
money than called up, the excess money is called calls in advance. The company must pay
interest on calls in advance at a rate prescribed by Articles. In its absence, the company is liable
to pay interest @6% pa. But the shareholder is not entitled to any dividend on calls in advance.
Forfeiture of shares
The cancellation of shares due to non‐payment of allotment money or call money within
a specified period is called forfeiture of shares. It is the compulsory termination of membership
of the defaulting shareholders. He also losses whatever amount he has paid to the company so
far. A company can forfeit the shares only if it is authorized by its Articles. The forfeiting is done
only after giving 14 days notice to the defaulting shareholders. The balance of forfeited shares
A/c should be shown by way of an addition to called up capital on the liability side of balance
sheet till the shares are reissued.
Journal entries
1. Forfeiture of shares which were issued at par:
Share Capital A/c Dr (amount called up)
To share allotment A/c (allotment unpaid)
To share call A/c (call unpaid)
To forfeited shares A/c (total amount paid)
2. Forfeiture of shares which were issued at premium:
(a) When allotment money(incl. premium) and call money not paid

Security premium A/c Dr (premium unpaid)
(b) When call money not paid
3. Forfeiture of shares which were issued at discount:
To discount on issue of shares A/c (amount of discount)
Illustration 5
Kerala Ltd issued 5000 shares of Rs.10 each at par payable as Rs.3 on application, Rs.2 on
allotment, Rs.3 on first call and Rs.2 on final call. Mr. Ali was allotted 50 shares and who failed
to pay allotment money and first call. Give journal entries if those shares were forfeited.
Solution:
Share Capital A/c Dr (50x8) 400
To share allotment A/c 100
(50x2) 150
To first call A/c 150
(50x3)
To forfeited shares A/c
(50x3)
(forfeiture of 50 shares due to non‐payment of
allotment and first call)
Illustration 6
Malabar Ltd issued 5000 shares of Rs.10 each at a premium of Rs.2 payable as Rs.3 on
application, Rs.4 on allotment (incl. premium), Rs.3 on first call and Rs.2 on final call. Mr. Ajay
was allotted 50 shares and who failed to pay allotment money and first call. Give journal
entries if those shares were forfeited.
Solution:
Share Capital A/c Dr (50x8) 400
Security premium A/c 100
(50x2) 200
To share allotment A/c 150
(50x4)
150
To first call A/c
(50x3)
(50x3)
(forfeiture of 50 shares due to non‐payment

of allotment and first call)
Illustration 7
Jay Ltd issued 5000 shares of Rs.10 each at a discount of 10% payable as Rs.3 on application,
Re.1 on allotment, Rs.3 on first call and Rs.2 on final call. Mr. Raju was allotted 50 shares and
who failed to pay first call and final call. Give journal entries if those shares were forfeited.
Solution:
Share Capital A/c Dr 500
(50x10) 150
To first call A/c 100
(50x3) 200
To final call A/c 50
(50x2)
(50x4)
To discount on issue of shares A/c
(50x1)
(forfeiture of 50 shares due to non‐payment
of first and final call)
Reissue of forfeited shares

Forfeited shares may be reissued by the company either at pr, premium or
discount. But the discount on reissue should not exceed the amount forfeited.
Journal entries
1. On reissue at par (issued at par or premium):
Bank A/c Dr (amount received on
reissue) To share capital A/c (amount paid up)
2. On reissue of at a discount (issued at par or premium):
Bank A/c Dr (amount received on reissue)
Forfeited shares A/c Dr (amount of discount on
reissue)
To share capital A/c (amount paid up)
3. On reissue at a premium (issued at par or premium):
reissue) To share capital A/c (amount paid up)
To security premium A/c (premium on reissue)
4. On reissue at a discount (issued at a discount):
reissue) Discount on issue of shares A/c Dr (amount of original
discount)
Forfeited shares A/c Dr (excess of discount on reissue over original
issue) To share capital A/c (amount paid up)
If all forfeited shares have been reissued, the credit balance in forfeited shares
A/c (capital profit) shall be transferred to capital Reserve A/c by passing the following
entry Forfeited shares A/c Dr
To capital reserve A/c
If all forfeited shares are not reissued, only the profit on shares which are issued
is transferred to Capital reserve A/c.
Illustration 8
The directors of A Ltd resolved that 2000 equity shares of Rs.10 each, Rs.7.50 paid, be
forfeited for non‐payment of final call of Rs.2.50. 1800 of the above shares were reissued for
Rs.6 per share. Show the journal entries.
Solution:
Share capital A/c Dr 20000
(2000x10) 5000
To final call 15000
A/c (2000x2.50)
To Forfeited shares
A/c (2000x7.50) 10800
(2000 shares forfeited due to nonpayment of 7200
final call) 18000
Bank A/c Dr (1800x6)
Forfeited shares A/c Dr (1800x4) 6300
(1800x10)
(1800 of forfeited shares reissued @ Rs.6)
Forfeited shares A/c Dr
To Capital Reserve A/c(1800x7.5)‐ )‐
(1800x4)
(surplus received on forfeiture & reissue
transferred)
Illustration 9
Arjun Ltd invited applications for 10000 shares of Rs.100 each at a premium of 5% payable as
Rs.25 on application, Rs.45 on allotment (incl. premium) and Rs.35 on first and final call. The
applications received for 9000 shares and all of these shares were accepted. All money dues
were received except the call on 100 shares which were forfeited. Of these 50 shares were
reissued @ Rs.90 as fully paid. Pass journal entries.
Solution:
Bank A/c Dr 225000

To Security premium A/c 45000
(Allotment money due)
Bank A/c Dr 405000
Share final call A/c Dr 315000
(Final call money due)
Bank A/c Dr 311500
To Share final call A/c 311500
Share capital A/c 10000
Dr 3500
To share final call A/c 6500
To Forfeited shares A/c
(100 shares forfeited) 4500
Bank A/c 500
Dr 5000
Forfeited shares
A/c Dr 2750
To share capital A/c 2750
(50 shares reissued @ Rs.90)
Forfeited shares A/c
Dr
To Capital reserve A/c(65x50)‐(500)
(Balance of forfeited shares A/c transferred)
Surrender of shares
Sometimes a shareholder is not able to pay further calls and returns his shares to the
company for cancellation. Such voluntary return of shares to the company by the shareholder
himself is called surrender of shares. The accounting treatment of surrender of shares is the
same as that of forfeiture of shares.
REDEMPTION OF PREFERENCE SHARES

When the preference shares are issued it is to be paid back by the company to such
shareholders after the expiry of a stipulated period whether the company is to be wound up or
not.
As per Sec 80 of the Companies Act, a company limited by shares can redeem the
preference shares, subject to the following conditions
1. The shares to be redeemed must be fully paid up.

2. Such shares can be redeemed either out of profit or out of the proceeds of fresh issue of
shares. But these cannot be redeemed out of fresh issue of debentures or out of sale
proceeds of any property of the company.
3. Premium payable on redemption must be provided out of profits of company or out of
company’s security premium account.
4. When shares are redeemed out of profit, a sum equal to the nominal amount of shares so
redeemed must be transferred out of profit to a reserve account namely Capital
Redemption Reserve A/c.
5. The Capital Redemption reserve A/c can be utilized only for the issue of fully paid up
bonus shares.
The preference shares can be redeemed either at par or at premium (but not at discount).
Premium on redemption is provided out of existing security premium account or security
premium on fresh issue. If they are not sufficient, the redemption premium should be
provided out of P&L A/c or General Reserve.
Methods of Redemption
There are three methods for redemption of preference shares. They are:
(a) Redemption out of fresh issue of shares
(b) Redemption out of profits
(c) Redemption partly out of fresh issue and partly out of profit
Accounting Procedure for Redemption
1. Ensure that the redeemable preference shares are fully paid. If they are partly paid,
the following entries are passed to make them fully paid.
(a) Preference Share Final Call A/c Dr
To Preference Share Capital A/c
(b) Bank A/c Dr
To Preference Share Final Call A/c
2. Entry for total amount due to preference shareholders
Preference Shares Capital A/c Dr (face
value)
Premium on Redemption A/c Dr (premium on redemption)
To Preference Shareholders A/c (total amount payable
on redemption)
3. Entry for issue of equity shares either with or without premium
Bank A/c Dr (amount received)
Discount on issue of shares A/c Dr (if shares issued at
discount) To Equity share capital A/c (face value of shares
issued) To Security Premium A/c (if shares issued at
premium)
4. Entry for providing premium on redemption
Security premium A/c or P& L A/c or General Reserve A/c
Dr To Premium on Redemption A/c
5. Entry for appropriation from divisible profits to meet deficiency of amount

on redemption
(or if redemption is out of profit)
P & L A/c or General Reserve A/c Dr
To Capital Redemption Reserve A/c
6. Entry for payment to preference shares
Preference Shareholders A/c Dr
To Bank A/c
Illustration 10
Sun Ltd had 8000, 8% redeemable preference shares of Rs.25 each, Rs.20 called up. The
company decided to redeem the preference shares at 5% premium by the issue of sufficient
number of equity shares of Rs.10 each fully paid up at a premium of 10%. Pass journal entries
relating to redemption.
Solution:
Nominal value of shares to be redeemed 200000
Premium on redemption 10000
Total amount required for redemption 210000
No. of shares to be issued (except premium) 200000 = 20000
10
Preference share final call A/c Dr 40000
To 8% preference share capital A/c 40000
(pref share final call due)
Bank A/c Dr 40000
To preference share final call A/c 40000
(final call money received)
Bank A/c Dr 220000
To equity share capital A/c 200000
To security premium A/c 20000
(issue of 20000 equity shares of Rs.10 each at
10% premium)
Security premium A/c Dr 10000
To premium on redemption A/c 10000
(provided premium on redemption at 5% out of
security premium A/c )
8% preference share capital A/c Dr 200000
Premium on redemption A/c Dr 10000
To preference shareholders A/c 210000
(amount due to preference shareholders)
Preference shareholders A/c 210000
Dr 210000
To Bank A/c
(payment to preference shareholders)
Illustration 11
: The following are taken from the balance sheet of Raja Ltd as on 31 December 2011.
10000 equity shares of Rs.10 each Rs.100000
10000, 8% preference shares of Rs.10 each
Rs.100000 Capital reserve Rs.50000
General reserve Rs.30000
P & L A/c Rs.85000
The company redeems the preference shares on 1 January 2012. Give journal entries.
Solution:
General reserve A/c 30000
Dr 70000
P & L A/c 100000
Dr
To capital redemption reserve A/c
(transfer of an amount equal to nominal 100000
value of shares redeemed to CRR A/c) 100000
8% preference share capital A/c
Dr 100000
To preference shareholders A/c 100000
Preference shareholders A/c
Dr
To Bank A/c
Illustration 12
: A company has 10000, 11% redeemable preference shares of Rs.100 each fully paid. The
company redeems the shares at par. For the purpose it issued 50000 equity shares of Rs.10
each and balance is made available from the accumulated profit (P & L A/c). The issue was
fully subscribed. Give journal entries.
Solution:
Bank A/c Dr 500000
To equity share capital A/c 500000
(fresh issue of 50000 shares at Rs.10)
P&L A/c 500000
Dr 500000
To capital redemption reserve A/c
(amount transferred to CRR)
11% Preference share capital A/c 1000000
Dr 1000000
To preference shareholders A/c
Preference shareholders A/c 1000000

Dr 1000000
To Bank A/c
Use of equation for determining the face value of shares to be issued
An equation can be applied when the given amount of premium in security premium A/c
in the balance sheet plus amount of premium to be obtained from fresh issue of shares is not
sufficient to pay premium on redemption of preference shares. It is due to security premium
A/c given in balance sheet cannot be used for redeeming the face value of shares.
(a) When fresh issue is to be made at a premium:
[Redeemable preference share capital + premium on redemption] = [{Balance in
security premium A/c in B/S} + {Revenue profit available for redemption} + {N} + {N x
% rate of premium on fresh issue}]
(b) When fresh issue of shares is to be made at a discount:
[Redeemable preference share capital + premium on redemption] = [{Balance in
security premium A/c in B/S} + {Revenue profit available for redemption} + {N} ‐ {N x %
rate of discount on fresh issue}]
Note: N=Nominal value of fresh issue of shares to be made for redemption
Illustration 13
Determine the amount of fresh issue of shares from the following information relating to A
Ltd. Redeemable preference shares Rs.200000, premium on redemption 10%, divisible profits
available Rs.60000, balance in general reserve Rs.40000 and security premium A/c Rs.15000. if
fresh issue is made (i) at a premium of 5% and (ii) at a discount of 10%.
Solution
(i) if fresh issue is made at a premium of 5%:
[Redeemable preference share capital + premium on redemption] = [{Balance in security
premium A/c in B/S} + {Revenue profit available for redemption} + {N} + {N x % rate of
premium on fresh issue}]
[200000 + 20000] = [15000+ 60000+ 40000+N +
0.05N] 1.05N = 220000‐115000
N = 105000 = Rs. 100000
1.05
(ii) If fresh issue is made at a discount of 10%:
[Redeemable preference share capital + premium on redemption] = [{Balance in security
premium A/c in B/S} + {Revenue profit available for redemption} + {N} ‐ {N x % rate of discount
on fresh issue}]
[200000 + 20000] = [15000+ 60000+ 40000+N ‐
0.1N] 0.9N = 220000‐115000
N = 105000 = Rs. 116667
0.9
BUY BACK OF SHARES

Buy back is a method of cancellation of share capital. It simply means buying of own
shares. It leads to reduction in the share capital of a company.
Objectives of buy back
1. To return surplus cash to investors
2. To improve the financial health
3. To increase the EPS
4. To increase the market price of the share
Advantages of buy back
1. It helps to return the surplus cash to investors
2. It helps to increase the EPS
3. It increases promoter’s holding in the company
4. It helps to restructure the capital base of the company
Disadvantages of buy back
1. It implies under valuation of company’s stock
2. It may be used as a tool of insider trading
3. It may be used for manipulating the prices of shares.
Methods of buy back
As per SEBI guidelines, there are two methods of buy back of shares. They are:
1. Buy back through tender offer – Under this, a company can buy back its shares from
its existing shareholders on a proportionate basis.
2. Buy back from the open market – A company can also buy back its shares from the
open market either through stock exchanges or book building process.
DEBENTURES
The term ‘debenture’ has been derived from the Latin word ‘debere’, which means ‘to
borrow’. Debenture is an instrument in writing given by a company acknowledging debt
received from the public.
The Companies Act defines debenture as “debenture includes debenture stock, bonds
or any other securities of a company, whether constituting a charge on the assets of the
company or not”.
Features of Debenture
1. It is an instrument of debt issued by company under its seal.
2. It carries fixed rate of interest.
3. Debenture is a part of borrowed capital.
4. It is repaid after a long period.
5. It is generally secured.
Difference between shares and debentures
Share Debenture
1. The person holding share is 1. The person having debenture
called shareholder is called debenture holder
2. It is part of owned capital 2. It is a part of borrowed capital
3. Dividend is paid on shares 3. Interest is paid on debenture
4. Rate of dividend varies year to year 4. Rate of interest is fixed
5. Shareholder has voting right 5. Debenture holder doesn’t
have voting right
6. It can’t be converted into debenture 6. It can be converted into share
Classification of debentures
1. Secured or Mortgage debentures – These debentures are secured either on a

particular asset or on the assets of the company in general.
2. Unsecured or Naked debentures – These debentures do not create any charge on
the assets of the company.
3. Registered debentures – These debentures arte payable to the persons recorded in
the register of debenture holders of the company and these are transferable only
with the knowledge of the company.
4. Bearer debentures – In these debentures company maintains no register of
debenture holders and these are transferable by mere delivery.
5. Redeemable debentures – These debentures are repayable after a fixed period either
in lump sum or in instalments.
6. Perpetual or Irredeemable debentures – These debentures are not repayable during
the life time of the company.
7. Convertible debentures – These debentures can be converted into the shares within
or after a Specified period, at the option of the holder.
8. Non‐Convertible debentures – These debentures can’t be converted into shares.
Issue of Debentures
Issue of debentures can be studied in the following two points of view
1. From consideration point of view
a. For consideration in cash: Debentures can be issued either at par, at premium or
at discount. The entry will be
Bank A/c Dr
Discount on issue of debentures A/c Dr (if issue at
discount) To Debentures A/c
To Security premium A/c (if issue at premium)
b. For consideration other than cash: The entries are
i. For purchase of assets
Sundry Assets A/c Dr
To Vendor A/c
ii. For issuing debentures for payment of purchase
consideration Vendor A/c Dr
To Debentures A/c
c. As collateral security: When debentures are issued as subsidiary or secondary
security in addition to the principal security against a loan or bank over draft such
an issue of debentures is called issue of debentures as collateral security.
2. From price point of view
From this point of view debentures can be issued either at par, at premium or at
discount.
a. When debentures are issued at par
Bank A/c Dr (with face value)
To debentures A/c
b. When debentures are issued at discount
Bank A/c Dr (net amount received)
To Discount on issue of Debentures A/c (amount of
discount) To Debentures A/c (with face value)
c. When debentures are issued at premium
Bank A/c Dr (total amount)
To Debentures A/c (with face value)
To Security premium A/c (amount of premium)
Illustration 14
: X Ltd issued 1000, 9% debentures of Rs.100 each. Write journal entries when they are issued
(a) at par, (b) at 20% premium and (c) at 10% discount.
Solution:
(a) Bank A/c 100000
Dr 100000
To 9% debentures A/c
(issue of 1000, 9% debentures at Rs.100)
Bank A/c Dr 120000
(b) To 9% debentures A/c 100000
(issue of 1000, 9% debentures at Rs.100 at
20% premium)
(c)
Bank A/c Dr 90000
Discount on issue of debentures A/c Dr 10000
To 9% debentures A/c 100000
(issue of 1000, 9% debentures at Rs.100 at
10% discount)
Illustration 15
A company issued 10000 debentures of R.100 each for subscription. Debenture moneys are
payable as Rs.30 on application, Rs.40 on allotment, Rs.20 on first call and Rs.10 on second call.
A person who9 holds 200 debentures fails to pay the amount due at the time of allotment. He
however pays this amount with the first call money. Another person, who is holding 400
debentures, has paid all the calls in advance at the time of allotment. Give journal entries in
the books of company.
Solution:
Bank A/c Dr 300000
To Debenture Application A/c 300000
Debenture application A/c Dr 300000
To Debentures A/c 300000
(Transfer of application money to debentures
A/c) 400000
Debenture allotment A/c Dr 400000
To Debentures A/c
(Allotment money due) 404000
Bank A/c Dr 392000
To Debenture allotment A/c 12000
To Debentures calls in
advance
(Allotment money on 9800 debentures and call 200000
on 400 debentures as advance received)
Debenture first call A/c 200000
Dr
(First call money due) 8000
Debentures calls in advance A/c
Dr 200000
To Debentures first call A/c 8000
(transfer of calls in advance to first call A/c) 192000
Bank A/c Dr
To Debenture allotment A/c
To Debenture first call A/c 100000
(First call money received along with allotment 100000
due on 200 debentures)
Debenture final call A/c Dr
(Final call money due) 4000
Bank A/c Dr 100000
Debentures calls in advance A/c
Dr
To Share final call A/c
3. From condition of redemption point of view

There are six cases on the basis of terms of issue and conditions of redemption of
debentures. They are as follows:
a. Issued at par and redeemable at par.
b. Issued at premium and redeemable at par.
c. Issued at discount and redeemable at par.
d. Issued at par and redeemable at premium.
e. Issued at discount and redeemable at premium.
f. Issued at premium and redeemable at premium.
A. When issued at par and redeemable at par.
Bank A/c Dr
To Debentures A/c
B. When issued at premium and redeemable at par.
Bank A/c Dr (face value+
premium) To Debentures A/c (face value)
To security premium A/c (premium)
C. When issued at discount and redeemable at par.
Discount on issue of debentures A/c Dr (discount)
To Debentures A/c (face
value)
D. When issued at par and redeemable at premium.
Loss on issue of debentures A/c Dr (premium on
redemption) To debentures A/c (face value)
To premium on redemption A/c (premium on redemption)
E. When issued at discount and redeemable at premium.
Loss on issue of debentures A/c Dr (issue discount+
redemption premium)
To debentures A/c (face value)
To premium on redemption A/c (redemption premium)
F. When issued at premium and redeemable at premium.
Loss on issue of debentures A/c Dr (redemption
premium) To debentures A/c (face value)
To security premium A/c (issue premium)
To premium on redemption A/c (redemption premium)
Illustration 16
Journalize the following transactions at the time of issue of debenture of Rs.100.
a. A debenture issued at Rs.95, repayable at Rs.100.
b. A debenture issued at Rs.95, repayable at Rs.105.
c. A debenture issued at Rs.100, repayable at Rs.105.
d. A debenture issued at Rs.105, repayable at Rs.100.
e. A debenture issued at Rs.102, repayable at Rs.105.
Solution:
a. Bank A/c Dr 95
Discount on issue of debentures A/c Dr 5
(issue of debenture at Rs.95, repayable
at
Rs.100)
b. Bank A/c Dr 95
Loss on issue of debentures A/c Dr 10
To debentures A/c 100
(issue of debenture at Rs.95, repayable
c. at
Rs.105) 100
Bank A/c Dr 5
Loss on issue of debentures A/c Dr
To debentures A/c 100
d. To premium on redemption A/c 5
(issue of debenture at Rs.100,
repayable
atRs.105)
e. Bank A/c Dr 105
(issue of debenture at Rs.105,
repayable atRs.100)
Bank A/c Dr 102
Loss on issue of debentures A/c Dr 3
To debentures A/c
(issue of debenture at Rs.102, 3
repayable atRs.105)
Discount or Loss on issue of debentures

Discount or loss on issue of debentures and premium on redemption are capital losses. They
are shown in the balance sheet under the head “Miscellaneous Expenditure”. Being the losses,
they are to be written off against capital reserve or security premium A/c. In its absence it is
written off to P& L A/c during the life of debentures. The entry is
Capital reserve/ Security premium A/c/ P & L A/c Dr
To Discount / Loss on issue of debentures A/c.
REDEMPTION OF DEBENTURES
Redemption of debentures refers to the discharge of liability on account of debentures. It
simply means repayment of debentures. As per Companies Act, the debentures should be
redeemed in accordance with the terms and conditions of issue.
The following entries are passed for redemption of debentures.

a. When debentures are redeemed at par
i. Debentures A/c Dr
To debenture holders A/c
ii. Debenture holders A/c Dr
To Bank A/c
b. When debentures are redeemed at premium
i. Debentures A/c Dr
Premium on redemption A/c Dr
To debenture holders A/c
ii. Security premium/ General reserve/P&L A/c Dr
To Premium on redemption A/c
iii. Debenture holders A/c Dr
To Bank A/c
Sources of redemption of debentures
Debentures can be deemed out of the following sources
1. Redemption out of fresh issue.
A company may issue new shares or debentures or both for redeeming the
existing debentures.
Illustration 17
Moon Ltd 10%, 5000 debentures of Rs.100 each, redeemable at 5% premium. The company
issued 40000 equity shares of Rs.10 each at 10% premium and 1000, 9% debentures of Rs.100
each at par for the purpose of redemption. Pass journal entries.
Solution
10% Debentures A/c Dr 500000
Premium on redemption A/c Dr 25000
To Debenture holders A/c 525000
(10% debentures due for redemption)
Bank A/c Dr 440000
To Equity share capital A/c 400000
(issue of 40000 equity shares at 10% premium
for redemption)
Bank A/c Dr 100000
To 9% Debentures A/c 100000
(issue of 1000 debentures of Rs.100 each)
Security premium A/c Dr
To Premium on redemption A/c 25000
(provision for redemption premium) 25000
Debenture holders A/c Dr
To Bank A/c 525000
(payment to debenture holders) 525000
2. Redemption out of Capital

If debentures are redeemed out of capital, no amount of divisible profit is kept aside for
Redeeming debentures. Redemption out of Capital reduces the liquid resources available
to the company. As per the guidelines issued by SEBI, a company has to create Debenture
Redemption Reserve (DRR) equivalent to 50% o the amount of debenture issue before
redemption of debentures commences. But the creation of DRR is not required in the
following cases
a. Debentures with maturity of 18 months or less
b. Fully convertible debentures.
3. Redemption out of profit
When sufficient profits are transferred from P & L Appropriation A/c to the Debenture
Redemption Reserve A/c at the time of redemption of debentures, such redemption is
said to be out of profits. It reduces the profits available for dividend. The following entry
is passed for transfer of profit
P & L Appropriation A/c Dr
To Debenture Redemption Reserve A/c
As per guidelines of SEBI, creation of DRR (50% of amount of debentures issued)
is compulsory for debentures with maturity period of more than 18 months. On the
completion of redemption of all debentures, the DRR A/c is close by transferring it to
general reserve. The entry is as follows
Debenture Redemption Reserve A/c Dr
To General Reserve A/c
Illustration 18
Abin Ltd issued 12000 debentures of Rs.100 each on 1 October 2010 in the terms of redemption
that 1/3 of debentures are redeemable every six months. Journalize the transaction.
Solution:
2010 Bank A/c Dr 1200000

Oct 1 To 8% Debentures A/c 1200000
(issue of 12000, 8% debentures)
2011 P & L Appropriation A/c Dr 400000
Mar To Debenture Redemption Reserve A/c 400000
31 (Transfer of amount for debenture
redemption)
8% Debentures A/c Dr
To Debenture holders A/c
(amount due to debenture holders) 400000
Debenture holders A/c Dr 400000
To Bank A/c
2011 To Debenture holders A/c
Sep (amount due to debenture holders) 400000
30 Debenture holders A/c Dr 400000

To Bank A/c
P & L Appropriation A/c Dr 400000
To Debenture Redemption Reserve
2012 A/c
Mar (Transfer of amount for debenture 800000
31 redemption) 800000
(amount due to debenture holders) 400000
Debenture holders A/c Dr 400000
To Bank A/c
Debenture Redemption Reserve A/c Dr 400000
(transfer of DRR to GR after redemption) 1200000
1200000
Note: Amount equal to the value of debentures redeemed is transferred from P&L Appropriation A/c to DRR A/c.
4. Redemption by Sinking Fund
Under this method of redemption, every year a part of the profit (fixed amount) is set aside
and sinking fund (Debenture Redemption Fund) is created. Sinking fund I invested in
outside securities. The interest received o such investments along with the amount set
aside from profit will again be invested as usual. It continues till the date of redemption of
debenture. The investment will be sold and the cash thus realized will b used to repay the
debentures. Under this method, sinking fund A/c (Debenture Redemption Fund A/c) and
sinking fund investment A/c (Debenture Redemption Fund Investment A/c) will be opened.
After the redemption, balance of sinking fund A/c is transferred to general reserve. The
following entries are required under this method.
At the end of first year:
i. For the amount set aside every year
To Sinking Fund A/c
ii. For investment of sinking fund
Sinking Fund Investment A/c Dr
To Bank A/c
At the end of second and subsequent years:

i. For interest received on investment
Bank A/c Dr
To Interest on Sinking Fund Investment A/c
ii. For transferring interest to sinking fund
Interest on Sinking Fund Investment A/c Dr
To Sinking Fund A/c
iii. For annual amount set aside

To Sinking Fund A/c
iv. For investment of annual installment and
interest Sinking Fund Investment A/c Dr
To Bank A/c
At the end of last year:
All the entries except entry (iv) in second and subsequent year should be passed.
i. For amount realized on sale of investment
Bank A/c Dr
To Sinking Fund Investment A/c
ii. For profit on sale of investment
To Sinking Fund A/c
(Note: if loss the above entry is reversed)
iii. For amount due to debenture holders
Debentures A/c Dr
Premium on redemption A/c Dr (if redemption at premium)
iv. For amount paid to debenture holders
To Bank A/c
v. For transfer of balance in sinking fund A/c
Sinking Fund A/c Dr
Illustration 19
On 1 January 2007, Balu Ltd issued 1000, 6% debentures of Rs.100 each repayable at the
end of 4 year at a premium of 10%. It is decided to create a sinking fund for the purpose; the
investment is expected to yield 5% net. Sinking fund table shows that Re.0.232012 invested
annually amounts to Re.1 at 5% in 4 years. Investments were made in multiples of 100 only. On
31 December 2010, the balance at the bank was Rs.40000 and the investment realized
Rs.82000. the debentures were paid off. Give journal entries and show ledger accounts except
for debenture interest.
Solution:
Amounts annually set aside = (100000+10% premium)x 0.232012 = Rs.25521
2007 Bank A/c Dr 100000
Jan 1 Loss on issue of debentures A/c Dr 10000
To premium on redemption of 10000
debentures A/c
(issue of 1000, 6% debentures of Rs.100 each
redeemable at 10% premium)
Dec P & L Appropriation A/c Dr 25521
31 To Sinking Fund A/c 25521
(Transfer of profit to sinking fund)

25500
25500
2008 To Bank A/c 1275
Dec (investment made to nearest multiple of 100) 1275
31 Bank A/c Dr
To Interest on Sinking Fund Investment 1275
A/c (interest received @ 5% on investment) 1275
To Sinking Fund A/c 25521
(transfer of interest to sinking fund) 25521
(Transfer of profit to sinking fund) 26800
To Bank A/c 2615
(investment with interest 25521+1275) 2615
Bank A/c Dr
2009 To Interest on Sinking Fund Investment
Dec A/c 2615
31 (interest received @ 5% on investment) 2615
(transfer of interest to sinking fund) 25521
To Bank A/c 4020
(investment with interest 25521+2615) 4020
Bank A/c Dr
To Interest on Sinking Fund Investment 4020
A/c (interest received @ 5% on investment) 4020
2010 Interest on Sinking Fund Investment A/c Dr
Dec To Sinking Fund A/c 25521
31 (transfer of interest to sinking fund) 25521
To Sinking Fund A/c
Bank A/c Dr 82000
To Sinking Fund Investment A/c
(sale of investment) 1600
Sinking Fund Investment A/c Dr 1600

To Sinking Fund A/c
(transfer of profit on sale of investment) 100000
Premium on redemption of debentures A/c 110000
Dr 110000
To Debenture holders A/c 110000
(amount due to debenture holders)
To Bank A/c 10000
(amount paid to debenture holders) 10000
Sinking Fund A/c Dr
To loss on issue of debentures A/c 101594
(redemption provided out of sinking fund) 101594
Sinking Fund A/c Dr
(transfer of balance in sinking fund A/c to GR)
6% Debentures A/c
2007 2007
Dec 31 Jan 1
2008 To Balance 100000 2008 By Bank 100000
Dec 31 c/d To 100000 Jan 1 By Balance b/d 100000
2009 2009
Dec 31
Balance c/d
100000 Jan 1 100000
2010 2010 By Balance
Dec 31 To Balance c/d 100000 Jan 1 b/d By 100000
To Debenture holders Balance b/d
A/c
Premium on Redemption of debentures A/c

2007 2007 By loss on issue
Dec 31 Jan 1
2008 To Balance 10000 2008 of debentures 10000
Dec 31 c/d To 10000 Jan 1 A/c By Balance 10000
2009 2009
Dec 31
Balance c/d b/d
2010 10000 Jan 1 10000
2010
Dec 31 To Balance c/d 10000 Jan 1 By Balance 10000
To Debenture holders b/d By
A/c Balance b/d
Debenture holders A/c

2010 2010 By 6% Debentures
Dec To Bank A/c 110000 Dec 31 A/c 100000
31 By premium on
redemption of 10000
110000 debentures A/c 110000
Sinking Fund A/c

2007 To Balance c/d 25521 2007 By P&L Appn A/c 25521
Dec Jan 1 By Balance b/d 25521
31 By interest on S.F.I 1275
To Balance c/d 52317 By P&L Appn A/c 25521
52317 52317
2008 52317
2008 By Balance b/d
Dec 80453 2615
Jan 1
31 To Balance c/d By interest on S.F.I 25521
Dec 31 By P&L Appn A/c
80453 80453
2009
80453
To loss on issue of 10000 Jan 1 By Balance b/d 4020
2009 debentures By interest on S.F.I 25521
Dec 31 To general reserve 101594 Dec 31 By P&L Appn A/c 1600
(balance transferred) 111594 By S.F.I(profit on 111594
sale)
Sinking Fund Investment A/c

2007
Dec 31 To Bank 25500 2007
Dec 31 By Balance 25500
2008 To Balance 25500
Jan 1 2008
Dec 31 b/d To Bank 26800 Dec 31 c/d By 52300
52300 52300
52300 Balance c/d
2009
Jan 1 To Balance 28100 2009 80400
Dec 31 b/d To Bank Dec 31
80400 80400
2010 80400
Jan 1 To Balance b/d By Balance c/d
Dec 31
To Sinking Fund A/c 1600 2010 82000
Dec 31
(profit) 82000 82000
By Bank
Bank A/c
2010 2010 By Debenture
Dec 31 Dec 31
To Balance b/d 40000 holders A/c 110000
To S.F.I A/c 82000 By Balance b/d 12000
122000 122000
5. Redemption by Insurance Policy

This is an alternative to sinking fund method. Under this method, an insurance policy is
purchased by paying annual premium. Such policy will mature on the date of redemption.
This method provides funds for redemption and covers the risk involved in the
transactions. Under this method the following entries are passed.
During all the years till the policy maturity:

i. For amount of premium paid at the beginning of the
year Debenture Redemption Policy A/c Dr
To Bank A/c
ii. For setting aside the profit at the end of the year
To Debenture Redemption Fund A/c
During the last year in addition to the above two entries
i. For realizing the insurance policy
Bank A/c Dr
To Debenture Redemption Policy A/c
ii. For the transfer of profit on realization
Debenture Redemption Policy A/c Dr
To Debenture Redemption Fund A/c
(Note: if loss the entry is reversed)
iii. For amount due to debenture holders
Debentures A/c Dr
Premium on redemption A/c Dr (if redemption at premium)
iv. For amount paid to debenture holders
To Bank A/c
v. For transfer of balance in Debenture Redemption Fund
A/c Debenture Redemption Fund A/c Dr
Illustration 20
Athul Ltd issued 1000, 6% debentures of Rs.100 each at par redeemable after 5 years at
premium of 10%. An insurance policy was taken at the time of issue of debentures on 1 April
2006 for the amount in order to provide for the necessary funds required for the redemption.
The annual premium paid at the beginning of every year Rs.18280. show the accounts for
redemption.
Solution:
6% Debentures A/c
2007 2006
Mar 31 To Balance c/d 100000 Apr 1 By Bank (first year) 100000
2011 2010
Mar 31 To Debenture holders A/c 100000 Apr 1 By Balance b/d 100000
Premium on redemption of debentures A/c

2007 2006 By loss on issue of
Mar 31 To Balance c/d 10000 Apr 1 debentures A/c 10000
2011 2010
Mar 31 To Debenture holders A/c 10000 By Balance b/d 10000
Apr 1
Debenture Redemption Fund A/c

2007
Mar 31
To Balance c/d 18280 2007 By P&L Appn A/c 18280
Mar 31
Apr 1 By Balance b/d 18280
2008
Mar 31
To Balance c/d 36560 2008
Mar 31
By P&L Appn A/c 18280
36560 36560
2008 36560
Apr 1 By Balance b/d
18280
2009
To Balance c/d 2009 By P&L Appn A/c
Mar 31 54840 Mar 31
54840 54840
2009
By Balance b/d 54840
Apr 1
2010 73120 2010 By P&L Appn A/c 18280
Dec 31 To Balance c/d Mar 31
73120 73120
2010
2011 Apr 1
By Balance b/d 73120
Mar 31 To loss on issue of By P&L Appn A/c 18280
debentures A/c 10000 2011 By Debenture
To General Reserve 100000 Mar 31 Redemption Policy 18600
(profit on realization – B.F)
110000 110000
Debenture Redemption Policy A/c (Investment)

2006
Apr 1
To Bank 18280 2007 By Balance c/d 18280
Mar 31
2007 To Balance b/d 18280
Apr 1
To Bank 18280 2008
Mar 31
By Balance c/d 36560
36560 36560
2008 To Balance b/d
Apr 1 36560 2009
To Bank By Balance c/d
18280 Mar 31 54840
54840 2010 54840
2009
Apr 1 To Balance b/d 54840 Mar 31 By Balance c/d
To Bank 18280 73120
2010 73120 73120
Apr 1 73120 2011 110000
To Balance b/d Mar 31
By Bank
2011 To Bank 18280 (realization of policy)
Mar 31 To Deb. Red. Fund (profit‐B.F) 18600
110000 110000
Debenture holders A/c
2011 By 6% Debentures
2011 To Bank A/c 110000 Mar 31 A/c 100000
Mar 31
By premium on
redemption of 10000
debentures A/c
110000 110000
6. Redemption by Conversion
Sometimes the debenture holders of a company are given the option to convert their
debentures into the shares or new debentures within a stipulated period. The new shares or
debentures can be issued either at par or at premium or at discount. The following entry will
be made for the purpose.
Old Debentures A/c Dr
Discount on issue of shares/debentures A/c Dr (if issue at discount)
To New Share Capital/ Debenture A/c
To Premium on issue of shares/ debentures A/c (if issue at premium)
Illustration 22
On 1 April 2009, Fast Ltd issued 800, 12% debentures of Rs.1000 each at Rs.950 each.
Debenture holders had an option to convert their holdings into 6% preference shares of Rs.100
each at a premium of Rs.25 per share. On 31 March 2010, one year’s interest had accrued on
these debentures which were not paid. A holder of 50 debentures notified his intention to
convert his holding into 13% preference shares. Journalize the transactions and prepare the
Balance sheet as on 31 March 2010.
Solution:
2009 Bank A/c Dr 760000

Apr 1 Discount on issue of debentures A/c Dr 40000
(issue of 800, 12% debentures of Rs.1000 each
2010 at Rs.950)
Mar Interest on debentures A/c Dr 96000
B31 To sundry debenture holders 96000
A/c (interest due on debentures)
B
alanc To 13% Preference Share Capital A/c 40000
e To security premium A/c 10000
Sheet
as on (conversion of 50 debentures to
31 400,13% preference shares of Rs.100
Marc each at a
h
2011 premium of Rs. 25 )
Sundry debenture holders A/c Dr 6000
To Bank A/c 6000
(interest on 50,12% debentures paid on
conversion)
P&L A/c Dr 96000
To interest on debentures A/c 96000
(interest on debentures transferred to
P&L A/c)
Liabilities Rs. Assets Rs.
Share capital: Bank (760000‐6000) 754000
400 13% Discount on issue of 40000
preference shares 40000 debentures 96000

of Rs.100 each P & L A/c
750 12% Debentures 750000
of 90000
Rs.1000 each 10000
Sundry debenture 890000 890000
holders
Security premium
Own Debentures
The directors can purchase debentures whenever they find the market price favorable to the
company. Such purchased debentures can be either cancelled by the company or may be
kept as an investment called own debentures and may be utilized for reissue when needed
afterwards.
Purchase of own debentures are to be treated in account in the same way as an ordinary
investment. The entry will be:
Own Debentures A/c Dr (with purchase
price) To Bank A/c
The own debentures A/c will appear on the assets side of B/S (under “investments”) until it is
cancelled or reissued
As and when the company wants to cancel investment in own debentures the following
entry will be passed
Debentures A/c Dr (with face
value) Loss on redemption of debentures A/c Dr
(for loss)
To own debentures A/c (with purchase
price) To Profit on redemption of debentures A/c (for profit)
For transfer of profit on redemption:
Profit on redemption of debentures A/c
Dr To Capital Reserve
Illustration 23
: A company purchased Rs.30000, 6% Debentures of Rs.100 each at Rs.95 each for investment.
After six months the debentures were cancelled. Show journal entries.
Solution:
Own Debentures A/c Dr 28500
To Bank A/c 28500
(300 own debentures purchased
for investment at Rs.95)
To own debentures A/c 28500
To Profit on redemption of 1500
debentures A/c
(cancellation of debentures held as
investment)
Profit on redemption of debentures A/c Dr 1500
To Capital Reserve
( transfer of profit on redemption to C.R) 1500
Module 2
FINAL ACCOUNTS OF COMPANIES
It is not obligatory to sole proprietors and partnership firms to prepare the final accounts
as per the statute. But, according to Section 210 of Indian Companies Act 1956 it is a statutory
obligation to a joint stock company to prepare its final accounts. The final accounts of a
company consist of (a) Balance Sheet and (b) Profit and Loss Account.
Balance Sheet
The Balance sheet of companies must be prepared according to the prescribed form
given in Part I of Schedule VI of the Companies Act. As per the Companies Act, the Balance sheet
of companies can be prepared in two forms – (i) Horizontal Form and (ii) Vertical Form.
Horizontal Form
SCHEDULE VI, PART I
FORM OF BALANCE
SHEET HORIZONTAL
FORM
Balance Sheet of..................(here enter the name of the company)
As on..........................(here enter the date at which the balance sheet is made out)
Figures Figures Figures Figures
for the for the for the for the
previous Liabilities current previous Assets current
year year year (5) year
Rs. Rs. Rs. Rs.
(1) (2) (3) (4) (6)
Share Capital: Fixed Assets:
Authorized… Shares of Distinguishing as far as
Rs…. Each possible between
Issued: (distinguishing expenditure upon:
between the various (a) Goodwill
classes of capital and (b) Land
stating the particulars (c) Buildings
specified below, in (d) Leaseholds
respect of each class) (e) Railway sidings
…… Shares of Rs… (f) Plant and
each. machinery
Subscribed: (g) Furniture
(distinguishing between and fittings
the various classes of (h) Development
capital and stating the of property
particulars specified (i) Patents,
below, in respect of trademarks and
each class)…… Shares of designs
Rs… each.. Rs… called (j) Live stock, and
up. (k) Vehicles, etc.
(of the above (Under each head

the
shares….shares are original cost and the

allotted as fully paid up additions thereto and
pursuant to a contract deductions there from
without payment being during the year, and the
received in cash) total depreciations
(of the above written off or provided
shares….shares are up to the end of the year
allotted as fully paid up is to be stated.
by way of bonus Depreciation written off
shares) (Specify the or provided shall be
source from which allotted under the
bonus shares are different asset heads
issued, e.g. and deducted in arriving
capitalization of profits t the value of fixed
or reserves or from assts. In every case
Shares premium where the original cost
Account. cannot be ascertained,
Less: Calls unpaid: without unreasonable
(i) by directors expense or delay, the
(ii) By others. valuation shown by the
Add : Forfeited shares: books is to be given. For
(amount originally the purpose of this
paid up) paragraph, stock
(any capital profit on valuation shall be the
issue of forfeited net amount at which an
shares should be asset stood in the
transferred to capital company’s books at the
reserve) Notes: commencement of this
1. Terms of Act after deduction of
redemption or the amounts previously
conversion (if provided or written off
any)) redeemable for depreciation or
preference capital diminution in values,
is to be stated and where any such
together with asset is sold, the
earliest date of amount of sale
redemption or proceeds shall be
conversion. shown as deduction
2. Particulars of any Where sum have been
option on written off on a
unissued share reduction of capita; or a
capital are to be revaluation of assets,
specified. every balance
3. [particulars to the sheet,(after the first

different classes of
preference shares balance sheet)

are to be given subsequent to the
These particulars are to reduction or revaluation
be given along with shall show the reduced
Share capital. figures with the date of
In the case of the reduction in the
subsidiary companies, places of the original
the number of share cost.
held by the holding Each balance sheet for
company as well as by the first five years
the ultimate holding subsequent to the date
company and its of reduction shall sow
subsidiaries shall be also the mount of the
separately stated in reduction made.
respect of Subscribed Similarly, where sums
share capital. The have been added by
auditor is not required writing up the assets,
to certify the every balance sheet
correctness subsequent to such
shareholdings as writing up shall show the
certified by the increased figures with
management) the date of increase in
Reserves and Surplus: the place of the original
1. Capital Reserves cost. Each balance sheet
2. Capital redemption for the first five years
Reserve subsequent to the date
3. Securities Premium of writing up shall also
Account (showing show the amount of
details of its increase made)
utilization in the Investments:
manner provided Showing nature of
in Section 78 in investments and mode
the year of of valuation, for
utilization). example, cost or market
4. Other reserves value, and distinguishing
specifying the between:
nature of each 1. Investments in
Reserve and the Government
amount in or trust
respect thereof. securities
Less: Debit balance in 2. Investments
Profit and Loss account in shares,
(if any). debentures or
(The debit balance in bonds.

the Profit and loss
Account shall be (Showing separately

shown as a deduction shares fully paid up and
from the uncommitted partly paid up and also
reserves, if any). distinguishing different
5. Surplus, i.e., classes of shares and
balance in Profit showing also in similar
and Loss Account details of investments in
after providing for shares, debentures or
proposed bonds of subsidiary
allocations companies).
namely; dividend, 3. Immovable
bonus or reserves. properties
6. Proposed additions 4. Investments in
to reserves. the capital of
7. Sinking funds. partnership firm.
(Additions and 5. Balance of
deductions since last unutilized money
balance sheet to be raised by issues.
shown under each of (Aggregate amount of
the specified heads. company’s quoted
The word “fund” in investments and also the
relation to any market value thereof
“Reserve” should be shall be shown).
used only where such (Aggregate amount of
reserve is specifically company’s unquoted
represented by investments shall also be
earmarked shown).
investments). Current Assets, Loans
Secured Loans: and Advances:
1. Debentures (A) Current Assets
2. Loans and 1. Interest accrued
advances on investments
from banks 2. Stores and
3. Loans and spare parts
advances 3. Loose tools
from 4. Stock in trade
subsidiaries 5. Work‐in‐progress.
4. Other loans [In respect of (2) and
and advances (4), mode of valuation
(Loans from directors of stock shall be stated
and/or manager should and the amount in
be shown separately). respect of raw materials
Interest accrued and shall also
due on Secured loans be stated separately

should be included
under the appropriate where practicable. Mode

sub‐heads under the of valuation of work‐in‐
head “Secured Loans” progress shall be stated].
The nature of security 6. Sundry debtors
to be specified in each (a) Debts outstanding
case. for a period
Where loans have been exceeding six
guaranteed by months
managers and/or by (b) Other debts
directors a mention Less:
thereof shall also be Provision
made and also the (the amounts to be
aggregate amount of shown under sundry
such loans under each debtors shall include the
head. amounts due in respect
In case of debentures, of goods sold or services
terms of redemption or rendered or in respect of
conversion (if any) are other contractual
to be stated together obligations but shall not
with earliest date of include the amounts
redemption or which are in the nature
conversion. of loans or advances)
Unsecured Loans: In regard to sundry
1. Fixed deposits debtors particulars to be
2. Loans and given separately of :
advances (a) Debts considered
from good and in
subsidiaries respect of which
3. Short term the company is
loans and fully secured
advances: (b) Debts considered
(a) From banks good for which the
(b) From others. company holds no
(loans from directors security other than
and/or manager the debtor’s
should be shown personal security
separately. and
). Interest accrued and (c) Debts
due on Unsecured loans considered
should be included doubtful or bad.
under the appropriate Debts due by directors
sub‐heads under the or other officers of the
head “Unsecured company or any of
Loans” them either severally or

Where loans have been jointly with any other
guaranteed by person or
debts due by firms or
managers and/or by private companies

directors a mention respectively in which any
thereof shall also be director is a partner or a
made together with the director or a member to
aggregate amount of be separately stated.
such loans under such Debts due from other
head. This does not companies under the
apply to fixed deposits) same management
Current Liabilities and within the meaning of
Provisions: sub‐section (IB) of
A. Current Liabilities Section 370 to be
1. Acceptances disclosed with the
2. Sundry creditors names of the
(i) Total companies.
outstanding The maximum amount
dues of due by directors or other
small scale officers of the company
industrial at any time during the
undertakings year to be shown by way
(ii) Total outstanding of a note.
dues of creditors The provision to be
other than small shown under this head
scale industrial should not exceed the
undertakings amount of debt stated
3. Subsidiary to be considered
companies doubtful or bad and any
4. Advance surplus of such
payments and provision, if already
unexpired created should be
discounts for the shown at every closing
portion for which under “Reserves and
value has still to Surplus”(in liabilities
be given, i.e., in side)under a separate
the case of the sub head ”Reserve for
following Doubtful or Bad Debts ”.
companies: 7A. Cash balance on
News paper, Fire hand.
insurance, Theatres, 7B. Bank balance:
Clubs, Banking, Steam (a) With
ship companies etc. scheduled
5. Unclaimed banks
dividends. (b) With
6. Other liabilities(if others (in regard
any)
7. Interest accrued to bank

balances particulars to
but not due on be given separately of:

loans. (a)The balance lying
B. Provisions with scheduled
8. Provision banks on
for taxation current
9. Proposed accounts, call
dividends accounts and
10. For contingencies deposit
11. For provident accounts
fund scheme (b) The names of the
12. For insurance, bankers other than
pension and scheduled banks
similar staff and the balances
benefit schemes lying with each such
13. Other provisions. banker banks on
A foot note to the current accounts,
balance sheet any be call accounts and
added to show deposit accounts
separately: and the maximum
1. Claim against amount outstanding
the company at any time during
not the year with each
acknowledged such banker and
as debts (c) The nature of
2. Uncalled liability interest, if any, of any
on shares partly director or his
paid. relative in each of the
3. Arrears of bankers(other than
fixed scheduled banks
cumulative referred to in (b)
dividends. above )
(the period for which (B) Loans and
the dividends are in Advances:
arrears or if there is 8.(a) advances and
more than one class of loans to subsidiaries
shares, the dividends (b) Advances and
on each such class that loans to partnership
are in arrears shall be firm in which the
sated. The amount company or any of its
shall be stated before subsidiaries is a
deduction of income partner.
tax, except that in the 9. Bills of exchange
case of tax‐free 10. Advances
dividends the amount recoverable in

shall be shown free of cash
income tax and the fact or ion kind or for
that it is shown shall be value to be received,

stated) e.g., Rates, taxes,
4. Estimated amount insurance etc.
of contracts 11. Balances with
remaining to be customs, port trust
executed on capital etc.(where payable
account and not on demand)
provide for. [The instructions
5. Other moneys for regarding sundry
which the company debtors apply to
is contingently “loans and
liable. advances” also. The
The amount of any amounts due from
guarantees given by other companies
the company on behalf under the same
of directors or other management within
officers of the the meaning of sub
company shall be section (IB)of
stated and where e section 370 should
practicable, the also be given with
general nature and the names of
amount of each such companies; the
contingent liability, if maximum amount
material, shall also be due from everyone
specified) those at any time
during the year
must b shown]
Miscellaneous
Expenditure
(To the extent not
written off or adjusted).
1. Preliminary
expenses
2. Expenses including
commission or
brokerage or
underwriting or
subscription of
shares or
debentures.
3. Discount allowed
on the issue of
shares or
debentures
4. Interest paid out of
capital during
construction
(also stating the
rate of interest).
5. Development
expenditure
not adjusted.
6. Other
sums(specifying
nature)
Profit and Loss Account
(Show here the debit
balance of profit and
loss account carried
forward after deduction
of the uncommitted
reserves, if any).
Vertical Form
Vertical form of balance sheet inserts as Part B of Part I of Schedule VI to the Companies
Act, 1956 by GSR No. 220(E) dated 12‐3‐1979 is as follows:
VERTICAL FORM
Name of the Company……………..
Balance Sheet at………………………
Schedule Figures at Figures at the
No. the end end of
of current previous
financial year financial year
1 2 3 4
I. Sources of Funds
(1) Shareholders’ funds:
(a) Capital
(b) Reserves and Surplus
(2) Loans funds:
(a) Secured loans
(b) Unsecured loans
Total
II. Application of Funds
(1) Fixed assets:
(a) Gross block
(b) Less: depreciation
(c) Net block
(d) Capital work‐in‐progress
(2) Investments
(3) Current assets, loans
and advances
(a) Inventories
(b) Sundry debtors

(c) Cash and bank balances
(d) Other current assets
(e) Loans and
advances Less:
Current liabilities & Provisions
(a) Current liabilities
(b) Provisions
Net Current
Assets
(4) (a) Miscellaneous expenditure to
the extent not written off or
adjusted
(b)Profit and Loss Account
Total
In Companies Act, there is no specified format for preparation of Profit and Loss Account
of companies. It is not required to split the Profit and Loss Account into three sections (Trading
Account, Profit and Loss Account and Profit and Loss Appropriation Account). Only the Profit
and Loss Account is prepared which cover items appearing in Trading Account and Profit and
Loss Appropriation Account. But it is desirable to split the Profit and Loss Account into three
sections so that Gross profit, Net profit and Surplus carried to balance sheet may be ascertain\
ed. Under this Trading and Profit and Loss Account items are called as items ‘above the line’ and
the Profit and Loss Appropriation Account items are called as items ‘below the line’. The section
of Profit and Loss Appropriation Account is prepared in the following manner.
To Transfer to Reserves By Last Year’s Balance b/d
To Income tax for By Net Profit for the year b/d
previous year not By Amount withdrawn from
provided for General Reserve or any Other
To Interim dividend Reserves
To Proposed dividend By Provision such as income
To Corporate tax provision no longer
Dividend
Tax required
To Surplus (Bal. Fig)
carried to Balance Sheet
Thus the account showing the disposal of divisible profits is called Profit and Loss
Appropriation Account. The credit balance of Profit and Loss Appropriation Account is shown on
the liability side of the Balance sheet under the head ‘Reserves and Surplus’. Debit balance is
shown on the assets side of the balance sheet under the head ‘Miscellaneous expenditure’.
Illustration1
For the year ended 31st December 2011, the profit of Sunder Ltd. before charging depreciation
on fixed assets and managerial commission amounted to Rs.300000. De3preciatio for the year
charged Rs.60000 and a commission of 10% of profit(before charging such commission) was
payable to the manager.
The paid up capital of the company consisted Rs.1000000 divided into 5000, 6%
preference shares of Rs.100 each and 50000 equity shares of Rs.10 each. Interim dividend at
Re.0.5 per share was paid during the year. There was a credit balance of Rs. 35000 in the Profit
and Loss Account brought from the previous year. Te following proposals was passed:
a. To pay the year’s dividend on the preference shares
b. To pay a final dividend on equity shares at Re.0.50 per share top make a total dividend
of Re. 1 per share for that year.
c. To provide for taxation @50% on the net profit
d. To transfer Rs.25000 to General Reserve.
e. To carry forward the balance.
Show the Profit and Loss Appropriation Account.
Solution:
Net profit before charging depreciation and managerial commission 300000
Less Depreciation 60000
240000
Less Managerial commission (10%) 24000
216000
Less Provision for taxation (50%) 108000
108000
Profit and Loss Appropriation Account
To Transfer to General By Last Year’s Balance b/d 35000
Reserves 25000 By Net Profit for the year b/d 108000
To Interim dividend paid
on equity shares 25000
(50000x.50)
To Preference dividend 30000
(500000x6%)
To final dividend paid on 25000
equity shares (50000x.50)
To Surplus (Bal. Fig) 38000
carried to Balance Sheet 143000 143000
Difference between Reserves and Provisions

Reserves Provisions
1. It is an appropriation of profit. 1. It is a charge against profit.
Hence it is debited to Profit and Hence it is debited to Profit
Loss Appropriation Account and Loss Account
2. It needs not be created when
profits are inadequate. 2. It must be made irrespective
3. It is shown on the liability side of whether profit or loss.
of balance sheet under the 3. It is usually shown by way of
head ‘Reserves and Surplus’. deduction from the amount of
4. It can be utilized for distribution the item for which it is
of dividend. created.
4. It cannot be utilized for
distribution of
dividend.
Provision for taxation
Income tax is payable in the assessment year on the income earned during the previous
year. A company will estimate the tax payable for the current accounting period and on this
basis it will make provision for taxation. Provision for taxation is debited to Profit and loss
Account and it will appear on the liability side of balance sheet under the head ‘Provisions’.
When assessment completed, the provision for tax will be adjusted. If the assessed tax is more
than the provision made in the previous year, the excess has to be shown on the debit side of
Profit and Loss Appropriation Account. If the assessed tax is less than the opening provision,
such excess provision should be credited to the Profit and Loss Appropriation Account.
Dividend
The divisible profit (profit available to shareholders) of a company is distributed among
the shareholders of the company on the basis of number of shares held. This is called dividend.
The Board of Directors recommends the amount of dividend and the shareholders in their
annual general meeting declare the dividend recommended by the Board of Directors. Dividend
is usually paid on paid up capital.
Proposed dividend
It is the dividend recommended by Board of Directors after the close of the books of
account. When it I approver by the shareholders in the annual general meeting, it becomes final
dividend.
Interim dividend
Interim dividend refers to the dividend paid by the company before the preparation of
final accounts. It is declared between two annual general meetings.
Final dividend
It is the dividend which is proposed and declared at the end of the accounting year after
the close of the books of account.
Unclaimed dividend
It refers to the dividend not yet claimed by the shareholders within 30 days of
declaration of dividend. It is shown as a current liability in the balance sheet.
Corporate Dividend Tax (CDT)
The companies distributing dividend are required to pay tax on such dividends. It is
called Corporate Dividend Tax (CDT). CDT is payable on any amount declared, distributed or
paid by a company as dividend. At present, the rate of CDT is 16.995 %( 17%). Corporate
Dividend Tax is shown on the debit side of Profit and Loss Appropriation Account and on the
liability side of Balance sheet under the head ‘Current liabilities and Provisions’ (Provisions).
Transfer to Reserves
Generally, Board of Directors has the discretionary power regarding the transfer of profit
to the reserve. However, as per Section 205(2A) of the Act, it is compulsory for a company to
transfer certain minimum amount to the reserve at a rate not exceeding 10%. Amount of
transfer to reserve depends on the rate at which dividend is to be declared as follows:
i. If the dividend proposed exceeds 10% but not exceed 12.5% of the paid up capital, the
amount to be transferred to the reserve shall not be less than 2.5% of the current
profits.
ii. If the dividend proposed exceeds 12.5% but not exceed 15% of the paid up capital,
the amount to be transferred to the reserve shall not be less than 5% of the current
profits.
iii. If the dividend proposed exceeds 15% but not exceed 20% of the paid up capital, the
amount to be transferred to the reserve shall not be less than 7.5% of the current
profits.
iv. If the dividend proposed exceeds 20% of the paid up capital, the amount to be
transferred to the reserve shall not be less than 10% of the current profits.
Illustration 2
The following is the trial balance of the Good Hope Ltd. as on 31st December 2011.
Debtors and Creditors 250000 200000
Purchases and Sales 647000 983500
Returns 4700 3500
Fixed Assets at cost 1597900
Promotion expenses 13520
Share capital (Rs.100 per share) 1250000
Sinking fund 250000
Reserve fund 47600
Bad debt Reserve 10000
Cash 17750
Manufacturing expenses 21000
Wages 75000
Unclaimed dividends 1700
Interest on investments 11400
Depreciation 70000
Administrative expenses 34680
4% Debentures 300000
Interest on debentures 6000
Sales expenses 8000
Bad debts 3400
Depreciation fund 202400
Bill s payable 9300
Profit and Loss Account 10600
Investments 350000
Sundry expenses 1050
st
Stock on 1 January 2011 130000
Goodwill at cost 50000
3280000 3280000
Adjustments:
a. Closing stock amounted to Rs.137000
b. Maintain the reserve for debtors @ 5%
c. Write off preliminary expenses.
d. Add Rs.10000 to sinking fund
e. Provide for debenture interest.
Solution:
Good Hope Ltd.

For the year ended 31st December 2011
To Opening stock 130000 By Sales 983500
To Purchases 647000 less: Returns 4700 978800
Less: Returns 3500 643500 By Closing stock 137000
To Manufacturing expenses 21000
To Wages 75000
To Gross Profit c/d 246300
To Preliminary expenses 1115800 By Gross profit b/d 1115800
To Depreciation By Interest on investment
To Administrative expense 13520 246300
Interest on debentures6000 70000 11400
Add: Outstanding 6000 34680
To Sales expense 12000
To Bad debt 3400
Add: New provision 12500 8000
15900
Less: Old Provision 10000
To Sundry expenses
To Net profit c/d 5900
1050
112550
To Transfer to sinking fund 257700
To Surplus carried to B/S 257700
10000 By Last year balance b/d 10600
113150 By Profit for the year 112550
123150
123150
Good Hope Ltd.
Balance Sheet
As on 31st December 2011
Share Capital Fixed Assets
12500 shares of Rs.100 each 1250000 Fixed assets 1597900
Reserves & Surplus Goodwill 50000
Sinking fund 250000 Investments 350000
Add: Additions 10000 260000 Current Assets
Reserve fund 47600 Sundry Debtors 250000
Depreciation fund 202400 Less: Provision 12500 237500
P & L A/c 113150 Cash 17750
Secured Loan Closing stock 137000
4% Debentures 300000 Miscellaneous Expenditure Nil
Unsecured loan Nil
Current liabilities &
Provisions Sundry 200000
creditors Unclaimed 1700
dividend 9300
Bills Payable 6000
Debenture interest outstanding 2390150 2390150
Illustration 3
Following is the trial balance of Standard Ltd as on 31st March 2011:

Stock on 31st March 2010 75000
Sales 350000
Purchases 245000
Wages 50000
Discount 5000
Furniture and fittings 17000
Salaries 7500
Rent 4950
Profit and loss appropriation Account on 31st March 2010 15030
Dividend paid 9000
Share capital 100000
Debtors and creditors 37500 17500
Plant and machinery 29000
Cash and bank 16200
Reserve 15500
Patent and trade mark 4830
503030 503030
Prepare Profit and loss account for the year ended 31stMarch 2011 and balance sheet
as on that date after taking into consideration the following adjustments:
a. Stock on 31st March 2011 was valued at Rs.82000
b. Depreciation on fixed assets @ 10%
c. Make a provision for income tax @ 50%
d. Provide corporate dividend tax @ 10%.
Solution:
Standard Ltd
For the year ended 31st March 2011
To Opening stock 75000 By Sales 350000
To Purchases 245000 By Closing stock 82000
To Wages 50000
To Gross profit c/d 62000
432000 432000
7500
To Salaries 4950 By Gross profit b/d 62000
To Rent 7050 By Discount 5000
To Sundry expenses
To Depreciation on
plant and machinery 2900
patents and trademark 483
furniture and fittings 1700
To provision for Income tax 21209
To Net Profit c/d 21208
67000 67000
15030
To Dividend paid 9000 By Balance b/d 21208
To Corporate dividend tax 900 By Net Profit for current year
(10% of dividend 9000)
To Balance c/d (Surplus 26338
carried to Balance sheet)
36238 36238
Balance Sheet of standard Ltd

As on 31st March 2011

Share Capital 100000 Fixed assets:
Reserves & Surplus: Plant and machinery29000
Reserve 15500 Less Depreciation 2900 26100
Profit and loss Account 26338 Furniture and fittngs17000
Current liabilities and Less Depreciation 1700 15300
provisions: Patents and trademark4830
Creditors 17500 Less Depreciation 483 4347
Provision for taxation 21209 Current assets:
Corporate dividend tax 900 Stock 82000
Debtors 37500
Cash at bank 16200
181447 181447
Illustration 4
Prepare the final accounts of Janaki Ltd.for the year ended 31st March 2011 and the Balance
sheet as on that date. The balances in the books after closing the trading account are given
below:
Equity share capital (Authorized and subscribed in

shares of Rs.100 each) 400000
8% Preference Share Capital (Authorized and a.
subscribed in shares of Rs.100 each) 200000 b.
c.
Plant at cost 300000
d.
Land and building at cost 500000
e.
Depreciation up to 31st March 2010:
f.
On plant 100000 g.
On land and building 150000 h.
Dividend equalization reserve 10000 i.
Investment in shares 200000 j.
Stock 70000 k.
Cash at bank 60000 l.
Debtors 50000 m.
Profit and loss Account on 1st April 2010 25000 n.
Creditors o.
30000
Income tax deducted at source on dividend p.
2200
q.
Establishment expenses 15000 r.
Rents and taxes 6000 s.
Audit fee (including Rs.1000 paid for other services) 2500 t.
Managing Director’s minimum remuneration 12000 u.
Director’s fees 2000 v.
Sundry expenses 6000 w.
Dividend (Gross) 10000 x.
Miscellaneous receipts 2300 y.
Trading Account Balance 304400 z.
Income tax for previous year not provided for 6000 aa.
bb.
1231700 1231700
cc.
1. Depreciation is to be charged on the written down value of plant @10% and land and
building @ 5%.
2. The directors propose to recommend a dividend of 15% on equity shares.
3. Provision for taxation is to be made @ 55%.
4. The managing director is entitled to 5% of the net profits subject to a minimum of
Rs.12000 per annum.
5. A sum of Rs. 15000 is to be transferred to Dividend equalization reserve.
6. Provide corporate dividend tax @ 10%.
Solution:
Janaki Ltd
For the year ended 31st March 2011
To Establishment expenses 15000 By Gross profit b/d 304400
To Rent and taxes 6000 By Dividend 10000
To auditors Fee: By Miscellaneous receipts 2300
Audit fee 1500
Other services 1000 2500
To Director’s fees 2000
To Sundry expenses 6000
To Depreciation:
Plant (200000x10%) 20000
Land & building
(350000x5%) 17500
To MD’s remuneration @ 5% 12385
To Provision for
taxation 129423
(235315x55%) 105892
To Net Profit c/d 316700 316700
To Proposed dividend: 16000 By Balance b/d 25000

8% on preference By Net Profit b/d 105892
share capital
15% on equity 60000
share capital
To Corporate Dividend Tax 7600
(10% on proposed dividend)
To transfer to dividend 15000
Equalization Reserve
To income tax for previous 6000
year not provided for 26292
To surplus carried to B/S
130892 130892
Balance Sheet of Janaki Ltd

As on 31st March 2011
Share Capital Fixed assets:
Authorized, Subscribed and Land & Building 500000
Paid up Capital: Less: Depreciation 167500 332500
4000 Equity shares of Plant 300000
Rs.100 each fully paid up. 400000 Less Depreciation 120000 180000
2000 Preference shares of Investments in shares 200000
Rs.100 each fully paid up 200000 Current assets, Loans and
Reserves & Surplus: Advances:

Dividend Equalization A. Current assets
Reserve (01.04.10) 10000 Stock 70000
Provided for year 15000
25000 Debtors 50000
Profit and loss Account
Current liabilities and 26292 Cash at 60000
provisions: bank
A. Current Liabilities: B. Loans and Advances:
Creditors Income tax deducted at 2200
MD’s remuneration 30000 source
payable(12385‐12000)
385
B. Provisions:
129423
Proposed Dividend
76000
Corporate dividend
7600
tax 894700 894700
Exercise:
1. Amulya Ltd. was registered with an authorized capital of Rs.3000000 in equity shares of
RS.10 each. Following is the list of balances taken from its books on 31st March 2011:
Purchases 925000 General expenses 84175
st
Wages 424325 Stock on 1 April 2010 375000
Manufacturing expenses 65575 Goodwill 100000
Salaries 70000 Cash in hand 28750
Bad debts 10550 Cash at bank 199500
Directors’ fee 31125 Subscribed and fully paid
Debenture interest paid 45000 capital 2000000
Preliminary expenses 25000 Profit and loss account (cr.) 72500
Calls in arrears 37500 6% debentures 1500000
Plant and machinery 1500000 Sundry creditors 290000
Premises 1650000 Bills payable 167500
Interim dividend paid 187500 Sales 2075000
Furniture and fixtures 35000 General reserve 125000
Sundry debtors 436000
Prepare Profit and Loss Account for the year ended 31st March 2011 and the Balance sheet
as on that date after making the following adjustments:
a. Depreciate plant and machinery by 10%.
b. Provide half year’s interest on debentures.
c. Write off Rs.2500 from preliminary expenses.
d. Make the provision for bad and doubtful debts Rs. 4250 on sundry debtors.
e. Stock on 31st March 2011 was Rs.455000.
f. Ignore Corporate Dividend Tax.
Ans: (Gross profit Rs.740100, Net profit Rs.297500, Surplus carried to balance sheet Rs. 182500
and Balance sheet total Rs.4272500).
Module 3
AMALGAMATION OF COMPANIES
There are many forms of business combinations to obtain the economies of large scale
production or to avoid the cut throat competition. They are amalgamation, absorption, external
reconstruction etc.
The term amalgamation is used when two or more existing companies go into liquidation
and a new company is formed to take over the business of liquidated companies. The term
absorption is used when an existing company takes over the business of one or more existing
companies which go into liquidation. In external reconstruction, one existing company goes into
liquidation and a new company is formed to take over the former company.
Definitions as per Accounting Standard 14 (AS‐14)

a. Amalgamation – means an amalgamation pursuant to the provisions of the Companies
Act 1956 or any other statute which may be applicable to companies.
b. Transferor Company – means the company which is amalgamated into another company.
c. Transferee Company – means the company to which a 6ransferor company
is amalgamated.
d. Reserve – means the portion of earnings, receipts or other surpluses of an enterprise
(whether capital or revenue) appropriated by the management for a general or a
specific purpose other than provision for depreciation or diminution in the value of
assets or for a known liability.
Types of Amalgamation
As per AS‐14 there are two types of amalgamation (1) Amalgamation in the nature of
merger and (2) Amalgamation in the nature of purchase.
Amalgamation in the nature of Merger (Pooling Interest Method)

An amalgamation should be considered to be an amalgamation in the nature of merge
when all the following conditions are satisfied:
i. All the assets and liabilities of the Transferor Company or companies before amalgamation
should become the assets and liabilities of the transferee company.
ii. Shareholders holding not less than 90% of the face value of the equity shares of the transferor
company (excluding the proportion held by the transferee company) should become the
shareholders of the transferee company.
iii. The consideration payable to the above mentioned shareholders should be discharged by the
transferee company by the issue of the equity shares and cash can be payable in respect of
fractional shares.
iv. The business of the Transferor Company/ companies is intended to be carried on by the
transferee company.
v. No adjustment is intended to be made to the book values of the assets and liabilities of the
Transferor Company/ companies when they are incorporated in the financial statements of
the transferee company except to ensure uniformity of accounting policies.
Amalgamation in the nature of purchase

An amalgamation should be considered to be an amalgamation in the nature of purchase,
when any one or more of the conditions specified for amalgamation in the nature of merger is
not satisfied.
Difference between Amalgamation in the nature of merger and Amalgamation in the nature of
purchase
Merger Purchase
1. There is a genuine mpooli9ng of 1. One company acquires another. As a
assets and liabilities of the consequencx3, the shareholders of
transferor companies as well as the the transferor company normally do
share holders’ interest. As such the not continue to have a proportionate
shareholders of all the transferor share in the equity management of
companies conti9nue to have the transferee company.
substantial or proportionate share
in the equity or management of
Transferee Company. 2. Assets, liabilities and reserves of the
2. Assets, liabilities and reserves of transferor company are recorded by
the transferor company are the transferee company either at
recorded by the transferee book value or at values revised on
company at their book values. the basis of their fair values.
3. The balance of P&L A/c of the
3. The balance of P&L A/c of the transferor company is not included
transferor company aggregated in the books of the transferee
with the balance of the P&L A/c of company.
the transferee company.
4. All reserves whether capital or 4. Only statutory reserves of
revenue 0of Transferor Company Transferor Company are taken in
are merged into the reserves of the books of Transferee Company
Transferee Company. in order to preserve their identity.
5. It is always intended to continue 5. It may not be intended to continue
the business of transferor the business of Transferor Company.
company. 6. All the assets of Transferor
6. All the assets of Transferor Company may or may not become
Company become the assets of the the assets of the transferee
transferee company. company.
7. Purchase consideration is usually 7. Purchase consideration is
valued at the par value of the usually valued at the market
shares issued. price of the shares issued.
Purchase Consideration
Purchase consideration is the amount which is paid by the transferee company for the
purchase the business of Transferor Company. As per AS‐14, consideration for amalgamation
means the aggregate of shares and other securities issued and the payment made in the form
of
cash or other assets by the transferee company to the shareholders of the transferor company.
Purchase consideration does not include any payment to outsiders including debenture
holders. The purchase consideration may be calculated in the following ways:
1. Lump Sum Method: When the transferee company agrees to pay a fixed sum to
the transferor company, it is called lump sum payment of purchase consideration.
For example, X Ltd purchases the business of Y Ltd for a consideration of
1000000.
2. Net Worth (Net Assets) Method: Under this method, the net worth of the assets taken
over by the transferee company is taken as purchase consideration. Here, Purchase
consideration = Assets taken over at agreed values – Liabilities taken over at agreed
values. The following points are noted while calculating purchase consideration under
his method:
a. Cash balance is usually included in assets. But if it is not taken over, it will not
be included.
b. Fictitious assets should never be added.
c. Accumulated profits and reserves should not be considered.
d. The term ‘liabilities’ include all liabilities to third parties. But ‘trade liabilities’
include only trade creditors and bills payable.
e. The term ‘business’ will always means both the assets and liabilities.
Illustration 1
The following is the Balance Sheet of Amrita Ltd
Share capital 60000 Goodwill 28000
Debentures 10000 Land & building 16000
Sundry creditors 6000 Plant & Machinery 28000
General reserve 4000 Stock 16000
Profit & Loss A/c 20000 Debtors 8000
Cash 2000
Preliminary expenses 2000
100000 100000
Bangalore Ltd takes over the business of Amrita Ltd. the value agreed for various assets
are: Goodwill Rs.22000, Land & Building Rs.25000, Plant and Machinery Rs.24000, Stock
Rs.13000 and Debtors Rs.8000. Bangalore Ltd does not take over cash but agrees to assume the
liability of sundry creditors at Rs.5000. Calculate the purchase consideration.
Solution:
Calculation of purchase consideration
Value of assets taken over:
Goodwill 22000
Land & Building 25000
Plant and Machinery 24000
Stock 13000
Debtors 8000
92000
Less: Liabilities taken over:
Sundry creditors 5000

Debentures 10000 15000
Purchase consideration 77000
3. Net Payment method: Under this method, purchase consideration is the aggregate of all
payments in the form of cash, shares, securities etc. to the shareholders of the
transferor company by the transferee company. The following points are considered
while calculating purchase consideration under this method:
a. The assets and liabilities taken over by the transferee company are not considered.
b. Purchase consideration includes the payments to shareholders only.
c. Any payments made by the transferee company to some other party on behalf of
the transferor company are to be ignored.
Illustration 2
The balance sheet of Jay Ltd as on 31 March 2011isas follows:
Share capital 200000 Goodwill 40000
General reserve 35000 Land & building 90000
Profit & Loss A/c 20000 Plant & Machinery 75000
Debentures 50000 Stock 52000
Sundry creditors 25000 Debtors 58000
Cash 15000
330000 330000
Jay Ltd decides to amalgamate into a new company New Ltd which will take over the
assets and liabilities of Jay Ltd in the term that holders of each share of Rs.10 in the company
would receive one share of Rs.10 each, Rs.5 paid up and Rs.4 in cash. The liquidation expense of
Rs.5000 is met by New Ltd. calculate purchase consideration.
Solution:
Holder of each share of Rs.10 each will get one share of Rs. 10 each Rs.5 paid up =
100000 Holder of each equity share will get Rs.4in cash (2000x4) = 80000
Purchase consideration = 180000
(Note: Liquidation expense is not included in purchase consideration)
4. Share exchange or Intrinsic value Method: Under this method purchase consideration is
calculated on the basis of intrinsic value of shares. The intrinsic value of a share is
calculated by dividing g the net assets available le for equity shareholders by the number of
equity shares. This value determines the ratio of exchange of the shares between the
transferee and transferor companies.
Steps in accounting procedure of amalgamation, absorption and external reconstruction
a. Calculation of purchase consideration.
b. Ascertainment of discharge of purchase consideration.
c. Closing the books of transferor companies.
d. Passing opening entries in the books of purchasing or transferee company.
Accounting entries in the books of transferor company

1. For transferring assets to Realization A/c:
Realization A/c Dr
To Assets A/c (individually at book value)
(Note :( a). Fictitious assets should not be transferred to Realization A/c (b). If cash in hand and
bank are not taken over by transferee company should not be transferred to Realization A/c.
But it can be taken as opening balance of cash or bank A/c and (c). Other assets, even if they
are not taken over, should be transferred to Realization A/c)
2. For transferring liabilities(outside liabilities only) to Realization A/c:
Liabilities A/c Dr (individually at book
value)
To Realization A/c
(Note :( a). If any liability is not taken over by transferee company should not be transferred to
Realization A/c, (b). Items in the nature of provisions are to be transferred to Realization A/c and
(c). Any fund which denotes both liability and reserve, the portion of liability should be
transferred to Realization A/c).
3. For purchase consideration due from transferee
company: Transferee Company A/c Dr
To Realization A/c
4. On receiving or discharging purchase consideration:
Equity shares in Transferee company A/c Dr
Preference shares in Transferee company A/c Dr
Debentures in Transferee company A/c Dr
Cash/ Bank A/c Dr
To Transferee company A/c
5. For sale of assets not taken over by transferee company:
Cash/ Bank A/c Dr (Sale proceeds)
To Realization A/c
6. For discharging liabilities not taken over by transferee
company: Liability A/c Dr
Realization A/c Dr (if excess amount
paid) To Cash/ Bank A/c
To Realization A/c (If less payment is made)
7. For liquidation (realization) expenses:
a. If liquidation expenses are met by transferor company.
Realization A/c Dr
To Cash/ Bank A/c
b. If liquidation expenses are met by transferee
company. No entry is required.
8. For closing preference share capital:
Preference share capital A/c Dr
Realization A/c Dr (if excess amount
paid) To Preference shareholders A/c
To Realization A/c (if less amount paid)
9. For paying off Preference shareholders:

Preference shareholders A/c Dr
To Preference shares in Transferee company
A/c To Cash/ Bank A/c (if any)
To Debentures A/c (if any)
10. For transferring equity share capital, reserves etc.
Equity share capital A/c Dr
General reserve A/c Dr
P&L A/c Dr
Dividend equalization reserve A/c Dr
Security premium A/c Dr
To equity shareholders A/c
11. For transferring fictitious assets:
Equity shareholders A/c Dr
To P&L A/c
To preliminary expenses
To Discount/ expense on issue of shares/ debentures
12. For closing Realization A/c:
a. For loss on realization (if debit > credit).
To Realization A/c
b. For profit on realization (if credit > debit).
Realization A/c Dr
To Equity shareholders A/c
13. For payment to equity shareholders:
To Equity shares in Transferee company
A/c To Cash/ Bank A/c (if any)
After payment to equity shareholders, all accounts in the book of transferor company
will be closed.
Accounting entries in the books of transferee
company (Amalgamation in the nature of purchase)
1. For purchase consideration due and assets and liabilities taken over:
Assets A/c Dr (At revised, otherwise at book value)
Goodwill A/c Dr (if credit > debit)
To Liabilities A/c (At revised, otherwise at book value)
To Liquidator of transferor company (purchase
consideration) To Capital reserve (if debit > credit)
2. For payment of purchase consideration:
Liquidator of transferor company A/c Dr
To Debenture A/c
To Bank A/c
(Note: if shares are issued at premium, security premium A/c is credited with
premium. If shares are issued at discount, discount on issue of shares A/c is debited
with discount).
3. For payment of liquidation expenses by transferee
company: Goodwill/ Capital reserve/ P&L A/c Dr
To Cash/ Bank A/c
4. For payment of formation expenses:
Preliminary expenses A/c Dr
To Cash/ Bank A/c
5. If there are both Goodwill and Capital reserve A/c, Goodwill may be set off against
Capital reserve:
Capital Reserve A/c Dr
To Goodwill A/c
6. If any liability (including debenture) is discharged by transferee
company: Liability A/c Dr (Amount payable)
To Share capital/ Debenture/ Bank A/c
7. To record Statutory Reserves of transferor company:
Amalgamation Adjustment A/c Dr
To Statutory Reserve A/c
(Note: Amalgamation adjustment A/c is shown on the assets side of the
company’s Balance Sheet under the head “Miscellaneous Expenditure”).
Illustration 3
X Ltd acquired the business of Y Ltd on 31 March 2011 for a purchase consideration of
Rs. 55000 to be paid by fully paid equity shares of Rs.10 each. The balance sheets of
both the companies on the date of acquisition were as follows:
X Ltd Y Ltd X Ltd Y Ltd

Equity shares of Rs.10 Land & Building 21500 13500
each 55000 32500 Plant & Machinery 40000 25000
10 % Preference shares ……….. 6000 Furniture 7500 5000
of Rs.10 each Investment 12500 8000
General Reserve 17000 11000 Inventories 25000 22500
Development ……….. 4000 Sundry Debtors 8500 5000
Allowance Reserve Cash & Bank 3000 1500
P&L A/c 7000 5000 Advance Tax 3500 3000
Work men
Compensation Fund 3000 1500
10% Debentures 20000 10000
Fixed 7500 5000
Deposit(unsecured) 5000 5500
Sundry creditors 3000 ……..
Bills Payable 4000 3000
Provision for tax 121500 83500 121500 83500
Debenture holders of Y Ltd will be issued equity shares in X Ltd. Journalize the
transactions in the books of X Ltd sand the Balance sheet after amalgamation assuming
that the amalgamation is in the nature of purchase. Also give journal entries in the books
of the transferor company to close the books.
Solution:
In the books of Y Ltd (Transferor
company) Closing entries
Realization A/c Dr 83500
To Land & Building A/c 13500
To Plant & Machinery 25000
A/c To Furniture A/c 5000
To Investment A/c 8000
To Inventories A/c 22500
To Sundry Debtors A/c 5000
To Cash & Bank A/c 1500
To Advance Tax A/c 3000
(transfer of various assets to Realization A/c)
Fixed Deposit A/c Dr 5000
Sundry creditors A/c Dr 5500
Provision for tax A/c Dr 3000
To Realization A/c 23500
(transfer of various liabilities to Realization A/c)
X Ltd A/c Dr
To Realization A/c 55000
(purchase consideration due from X Ltd) 55000
Equity Shares in X Ltd A/c Dr
To X Ltd A/c 55000
(purchase consideration received) 55000
10% Preference share capital A/c Dr 6000
To Preference shareholders A/c 6000
(amount payable to Preference shareholders
Preference shareholders A/c Dr 6000
To Equity Shares in X Ltd A/c 6000
(distribution of equity shares received from X
Ltd) 32500
Equity share capital A/c Dr 11000
4000
General reserve A/c Dr
5000
Development Allowance reserve A/c
1500
Dr P&L A/c Dr
Workmen compensation Fund A/c Dr 54000
To equity shareholders A/c
5000
(transfer of equity shareholders funds)
Equity shareholders A/c Dr 5000

To Realization A/c
(transfer of loss on realization) 49000
To Equity shares in X Ltd A/c
(distribution of equity shares received from
X Ltd)
Realization A/c
To Land & Building A/c 13500 By 10% Debentures A/c 10000
To Plant & Machinery A/c 25000 By Fixed Deposit A/c 5000
To Furniture A/c 5000 By Sundry creditors A/c 5500
To Investment A/c 8000 By Provision for tax A/c 3000
To Inventories A/c 22500 By X Ltd (PC)A/c 55000
To Sundry Debtors A/c 5000 By Equity shareholders A/c 5000
To Cash & Bank A/c 1500 (realization loss)‐Bal. figure
To Advance Tax A/c 3000
83500 83500
X Ltd A/c
To Realisation A/c 55000 By Equity shares in X Ltd. A/c 55000
55000 55000
Preference shareholders A/c
To Equity shares in X Ltd A/c 6000 By 10%Preference share capital 6000
6000 A/c 6000
Equity shareholders A/c

To Realisation A/c (loss) 5000 By Equity share capital A/c 32500
To Equity shares in X Ltd. A/c 49000 By General reserve A/c 11000
By Development Allowance 4000
reserve
By P&L A/c 5000
By Workmen compensation Fund 1500
A/c
54000 54000
Opening Entries in the books of X Ltd (Transferee Company)
Land & Building A/c Dr 13500
Plant & Machinery A/c Dr 25000
Furniture A/c Dr 5000
Investment A/c Dr 8000
Inventories A/c Dr 22500
Sundry Debtors A/c Dr 5000
Cash & Bank A/c Dr 1500
Advance Tax A/c Dr 3000
To 10% Debentures 10000

A/c To Fixed Deposit 5000
A/c To Sundry 5500
creditors A/c To 3000
Provision for tax A/c 55000
To Liquidators of Y Ltd A/c 5000
To Capital Reserve (Bal. figure)
(purchase consideration due and assets
and liabilities taken over)
Liquidators of Y Ltd A/c Dr
To Equity Share capital A/c 55000
(payment of purchase consideration in equity 55000
shares)
(discharge of debentures by issuing equity 10000
shares)
To Development Allowance reserve 5500
A/c To Workmen compensation Fund 4000
A/c 1500
(statutory reserves incorporated)
Balance Sheet of X Ltd as on 1 April 2011 (after amalgamation)
12000 equity shares of Land & Building 35000
Rs.10 Each 120000 Plant & Machinery 65000
Reserves & Surplus Furniture 12500
Capital Reserve 5000 Investments 20500
General Reserve 17000 Current Assets
Development Allowance Inventories 47500
reserve 4000 Sundry Debtors 13500
Workmen compensation Cash & Bank 4500
Fund 4500 Advance Tax 6500
P & L A/c 7000 Miscellaneous Expenditure
Secured Loan Amalgamation Adjustment A/c 5500
10% Debentures 20000
Unsecured loan
12500
Fixed Deposit
Current liabilities &
Provisions
10500
Sundry creditors
3000
Bills Payable 7000
Provision for tax 210500 210500
Accounting entries in the books of transferee

company (Amalgamation in the nature of merger)
1. For purchase consideration due and assets and liabilities taken over:
Assets A/c Dr (Individually at book
value) To Liabilities A/c (Individually at book value)
To Reserves of Transferor Company A/c
To P & L A/c
To Liquidator of transferor company A/c (purchase
consideration) (Note: The difference between debit and credit is adjusted in the
reserves of Transferee Company)
2. For payment of purchase consideration:
Liquidator of transferor company A/c Dr
To Debenture A/c
To Bank A/c
(Note: if shares are issued at premium, security premium A/c is credited with
premium. If shares are issued at discount, discount on issue of shares A/c is debited
with discount).
3. Payment of liquidation expense by transferee
company: General Reserve/ P & L A/c Dr
To Cash/ Bank A/c
4. For the payment of formation expenses:
Preliminary expenses A/c Dr
To Cash/ Bank A/c
Illustration 4
The following is the summarized Balance sheet of Moon Ltd as on 31 March 2012.
Rs.10 Each 400000 Plant & Machinery 100000
Capital Reserve A/c 180000 Investments ‐‐‐‐‐‐‐
P & L A/c 60000 Current Assets
Secured Loan Stock 40000
10% Debentures 200000 Sundry Debtors 60000
Current liabilities & Bank 300000
Provisions Cash 80000
860000 860000
On 1 April 2012 Sun Ltd took over the business of Moon Ltd as per the following terms:
a. Debentures are to be discharged at a premium of 5% in Sun Ltd.
b. Creditors are to be paid off by Sun Ltd.
c. Sun Ltd will issue 5 equity shares of Rs.10 each at a market value of Rs.11 for
every 4 equity shares of Moon Ltd.
d. Cost of liquidation Rs.10000 is to be paid by Sun Ltd.
Close the books of Moon Ltd and pass opening entries in the books of Sun Ltd assuming that the
amalgamation s in the nature f merger.
Solution:
Purchase consideration (in Equity shares) = 40000x5/4x11 =
Rs.550000 In the books of Moon Ltd.
Realisation A/c
To Land & Building A/c 200000 By 10% Debentures A/c 200000
To Plant & Machinery A/c 100000 By Sundry creditors A/c 20000
To Furniture A/c 80000 By Sun Ltd (PC) 550000
To Stock A/c 40000 By Equity shareholders A/c 90000
To Sundry Debtors A/c 60000 (realisation loss)‐Bal. figure
To Bank A/c 300000
To Cash A/c 80000
860000 860000
Sun Ltd A/c
To Realisation A/c 550000 By Equity shares in Sun Ltd. 550000
550000 550000
Equity Shares in Sun Ltd A/c
To Sun Ltd A/c 550000 By Equity shareholders A/c 550000
550000 550000
Equity shareholders A/c

To Realisation A/c (loss) 90000 By Equity share capital A/c 400000
To Equity shares in Sun Ltd. 550000 By Capital Reserve A/c 180000
By P&L A/c 60000
640000 640000
Entries In the books of Sun Ltd
Furniture A/c Dr 80000
Stock A/c Dr 40000
Bank A/c Dr 300000
Cash A/c Dr 80000
To Sundry creditors A/c 20000
To Capital Reserve A/c (Bal. Fig) 30000
To P & L A/c 60000
To Liquidators of Moon Ltd A/c 550000
and
liabilities taken over)
Liquidators of Moon Ltd A/c Dr 550000

To Security Premium A/c 50000
(payment of purchase consideration in
50000 equity shares of Rs.10 at Rs.11)
Premium on Redemption of Debentures A/c Dr 10000
To Bank A/c 210000
(discharge of debentures at 5% premium)
Capital Reserve A/c Dr 10000
To Premium on Redemption of
Debentures A/c 10000
(Premium on Redemption of Debentures
adjusted )
Capital Reserve A/c Dr 10000
To Bank A/c 10000
(liquidation expenses paid)
Working Note: Calculation of Reserve:
Purchase consideration 550000
Less: Share capital of Moon Ltd 400000
Difference to be adjusted 150000
Capital Reserve in Moon Ltd 180000
Less: Difference adjusted 150000
Balance of Capital Reserve 30000
Illustration 5
A Ltd acquired the business of B Ltd on 31 March 2012 for a purchase consideration of
Rs.2,50,00,000 to be paid by fully paid equity shares of Rs.10 each. The balance sheets
of two companies on the date of acquisition were as follows:
A Ltd B Ltd A Ltd B Ltd

Equity shares of Land & Building 12000000 8000000
Rs.10 each fully Plant & Machinery 20000000 18000000
paid 25000000 15000000 Furniture 1000000 2000000
General Reserve 12000000 1800000 Stock 5500000 4000000
Development Sundry Debtors 4500000 4000000
Rebate Reserve 1000000 3700000 Bank 2000000 1700000
P&L A/c 1000000 5300000
Workmen
Compensation
Fund 1500000 2400000
Current Liabilities 4500000 9500000
45000000 37700000 45000000 37700000
Pass the necessary journal entries in the books of A Ltd when amalgamation is in
the nature of (i) merger and (ii) purchase.
Also prepare the Balance sheet of A Ltd after amalgamation assuming that Development
Rebate Reserve and Workmen Compensation Fund of B Ltd are required to be continued
in the books of A Ltd.
Solution:
(i) When amalgamation is in the nature of merger:
Entries in the books of A Ltd.
2012 Land & Building A/c Dr 8000000
Mar Plant & Machinery A/c Dr 18000000
31 Furniture A/c Dr 2000000
Stock A/c Dr 4000000
Bank A/c Dr 1700000
General Reserve A/c (Bal. Fig) Dr 2900000
To Development Rebate Reserve A/c 3700000
To Workmen Compensation Fund 2400000
A/c To Current liabilities A/c 9500000
To Liquidators of B Ltd A/c 25000000
Liquidators of B Ltd A/c Dr 25000000
(payment of purchase consideration in equity
shares)
Balance Sheet of A Ltd as on 1 April 2012 (after amalgamation)

Rs.10 Each, fully paid up 50000000 Plant & Machinery 38000000
General Reserve 9100000 Current Assets
Development Rebate 4700000 Stock 9500000
Reserve 3900000 Sundry Debtors 8500000
Workmen Compensation Bank 3700000
Fund 1000000
P & L A/c 14000000
Current liabilities 82700000 82700000
(ii) When amalgamation is in the nature of purchase:
Entries in the books of A Ltd.
2012 Land & Building A/c Dr 8000000
Mar Plant & Machinery A/c Dr 18000000
31 Furniture A/c Dr 2000000
Stock A/c Dr 4000000

Bank A/c Dr 1700000
To Current liabilities A/c 9500000
To Liquidators of B Ltd A/c 25000000
To Capital Reserve A/c (Bal. Fig)
3200000
(purchase consideration due and assets and
liabilities taken over)
Liquidators of B Ltd A/c Dr
25000000
To Equity Share capital A/c
25000000
(payment of purchase consideration in equity
shares)
To Development Rebate Reserve 6100000
A/c To Workmen compensation 3700000
Fund A/c 2400000
(statutory reserves incorporated)
Balance Sheet of A Ltd as on 1 April 2012 (after amalgamation)
Rs.10Each, fully paid up 50000000 Plant & Machinery 38000000
Capital Reserve 3200000 Current Assets
General Reserve 12000000 Stock 9500000
Development Rebate 4700000 Sundry Debtors 8500000
Reserve Bank 3700000
Workmen Compensation Miscellaneous Expenditure
Fund 3900000 Amalgamation Adjustment A/c 6100000
P & L A/c 1000000
Current liabilities 14000000
88800000 88800000
Illustration 6
A Ltd agrees to sell their undertaking to B Ltd on the following terms. B Ltd will pay them
Rs.600000 in cash and allot them two fully paid share of Rs.6 each (market value Rs. 7.50 per
share) in exchange of every three shares in their own company. The Balance sheet of A Ltd on
the date of amalgamation stood as follows:
Rs.6 Each, fully paid up 720000 Plant & Machinery 218700
Reserves & Surplus Current Assets
General Reserve 360000 Stock 273450
P & L A/c 34168 Sundry Debtors 229500
Creditors 132500 Bank 74280
Cash 738
1246668 1246668
A ltd will pay their liquidation expenses themselves which amounted to Rs.9000. close
the books of A Ltd and give opening entries in the books of B Ltd assuming that the
amalgamation is in the nature of purchase.
Solution:
In cash 600000
In equity shares (120000x2/3x7.50) 600000
Purchase Consideration 1200000
Closing entries in the books of A Ltd
Realisation A/c Dr 1246668
To Land & Building A/c 450000
To Plant & Machinery 218700
A/c To Stock A/c 273450
To Sundry Debtors A/c 229500
To Bank A/c 74280
To Cash A/c 738
(transfer of various assets to Realisation A/c)
Sundry creditors A/c Dr 132500
To Realisation A/c 132500
(transfer of sundry creditors to Realisation A/c)
B Ltd A/c Dr 1200000
To Realisation A/c 1200000
(purchase consideration due from B Ltd)
Cash A/c Dr 600000
Equity Shares in B Ltd A/c Dr 600000
To B Ltd A/c 1200000
(purchase consideration received)
Equity share capital A/c Dr 720000
General reserve A/c Dr 360000
P&L A/c Dr 34168
To equity shareholders A/c 1114168
(transfer of equity shareholders funds)
To Cash A/c 9000
(liquidation expenses paid)
To Equity shareholders A/c 76832
(transfer of profit on realisation)
To Equity shares in B Ltd A/c 600000
To Cash A/c 591000
(distribution of equity shares and cash
received)
Opening entries in the books of B Ltd

Stock A/c Dr 273450
Bank A/c Dr 74280
Cash A/c Dr 738
Goodwill A/c (Bal. Fig) Dr 85832
To Sundry Creditors A/c 132500
To Liquidators of A Ltd A/c 1200000
Liquidators of A Ltd A/c Dr 1200000
To Cash A/c 600000
(payment of purchase consideration)
ACCOUNTING FOR INTERNAL RECONSTRUCTION
There are two types or reconstruction, namely external reconstruction and internal
reconstruction. In external reconstruction, a new company is formed to take over the assets and
liabilities of an existing company which goes into liquidation. But in internal reconstruction,
there will be neither liquidation of an existing company nor formation of a new company.
Internal reconstruction means an internal rearrangement that gives a new look to the capital
structure, adjusts the rights of shareholders, debenture holders and creditors along with some
adjustments in the values of assets and writing off fictitious assets. Internal reconstruction may
be done due to the accumulate losses, shortage of working capital, overvaluation of assets etc.
Difference between Internal reconstruction and External reconstruction
Internal reconstruction External reconstruction

1. The company does not loss 1. The company losses its identity
its identity 2. The newly formed company takes
2. The overvalued assets are over the assets and liabilities of
revalued at their net worth and the liquidated company at agreed
the losses written off. values.
3. No new company is formed nor is 3. A new company is formed in
any existing company liquidated. place of the old company.
It is the internal matter of a single
company. 4. These parties will have to
4. Debenture holds, creditors and bank be settled.
overdraft may continue.
Forms or Methods of Internal reconstruction

1. Alteration of share capital.
2. Reduction of share capital.
3. Variation of shareholders’ rights.
4. Scheme of compromise.
Alteration of Share Capital
According to Sec. 94 of the Companies Act, a limited company can, if authorized by
its articles of association, alter the capital clause of its memorandum of association in any
of the following ways.
a. By increasing its share capital by issue of new shares.
b. By consolidating existing shares of smaller amounts into shares of larger amo9unts.
c. By subdividing the existing share into shares of smaller amounts.
d. By converting fully paid shares into stock 0or stock into fully paid shares.
Accounting entries for alteration of capital
a. For increasing its share capital
i. Bank A/c Dr
To Share Application & Allotment A/c
ii. Share Application & Allotment A/c Dr
b. For consolidation of shares:
Share Capital (old) A/c Dr
To Share Capital (New) A/c
c. For subdivision of shares:

d. For conversion of shares into stock:
Share Capital A/c Dr
To Stock A/c
e. For conversion of stock into shares:
Stock A/c Dr
Illustration 7
A Ltd having a share capital of Rs.500000 divided into 5000 shares of Rs.100 each, resolves to
subdivide the shares into 50000 shares of Rs.10 each. Pass the journal entry.
Solution
Share Capital (Rs.100) A/c Dr 500000
To Share Capital (Rs.10) A/c 500000
Illustration 8
X Ltd resolves to convert its 50000 equity shares of Rs.10 each fully paid into Rs.500000 worth
of equity stock. Journalize the transaction.
Solution:
Equity Share Capital A/c Dr 500000
To Equity Stock A/c 500000
Illustration 9
B Ltd having an equity share capital of Rs.100000 divided into 10000 shares of Rs.10 each
resolves to consolidate the shares into 1000 shares of Rs.100 each. Pass the journal entry.
Solution:
Equity Share Capital (Rs.10) A/c Dr 100000
To Equity Share Capital (Rs.100) A/c 100000
Reduction of Share Capital

Reduction of capital is unlawful except when sanctioned by the court because
conservation of capital is one of the main principles the Company Act. In order to reduce the
share capital, the company must be authorized by its articles of association, a special resolution
must be passed at general meeting, and confirmation of court etc. is required. A company can
reduce its share capital by any of the following ways:
a. By reducing the liability of the shareholders for uncalled capital.
b. By paying off the surplus capital.
c. By reducing paid up capital which is not represented by available assets.
Accounting entries for reduction of share capital

a. For reducing the liability in respect of uncalled capital:
b. For paying off surplus capital:
i. Share Capital A/c Dr
To Shareholders A/c
ii. Shareholders A/c Dr
To Bank A/c
c. For reducing or cancelling paid up capital which is not represented by available assets:
i. For reducing paid up capital by changing its face
value: Share Capital (old) A/c Dr
To Capital Reduction A/c
ii. For reducing paid up capital without changing its face value:
Share Capital A/c Dr (amount of reduced
capital) To Capital Reduction A/c
Capital Reduction Account

Capital Reduction Account is a new account opened for transferring that part of capital
which is lost or not represented by the assets. It is a temporary account opened for carrying out
internal reconstruction. This account will be closed as soon as the scheme is carried out. The
balance in Capital Reduction A/c can be used to write off fictitious assets, past losses and excess
value of assets. The entry is as follows:
Capital Reduction A/c Dr
To P&L A/c (Debit balance)
To Goodwill A/c
To Preliminary Expenses A/c
To discount on issue of shares/ debentures
A/c To Patents/ Trademarks A/c
To Plant & Machinery A/c
To other Assets A/c
To Capital Reserve A/c (Bal. Fig)
Illustration 10
The following is the balance sheet of Brahma Ltd as on 31 March 2011.
Liabilities Amount Assets Amount
5000 Equity shares of Rs.100 Plant & Machinery 173000
each fully paid 500000 Patents 850000
7500 10% Preference shares Stock in trade 55000
of Rs.100 each fully paid 750000 Sundry debtors 77000
Sundry creditors 50000 Profit & Loss A/c 145000
1300000 1300000
The company suffered losses and the following scheme was adopted:
i. Equity shares are to be reduced to an equal number of shares of Rs.25 each.
ii. The preference shares to be reduced to an equal number of shares of Rs.50 each.
iii. The amount available to be used to write off Rs.39240 of plant and machinery
and Rs.15000 of stock in trade.
iv. Made a provision of Rs.15300 for doubtful debt.
v. The balance being used to write off patents.
Journalise the transactions and prepare the balance sheet after reconstruction.
Solution:
Journal
2011 Equity Share Capital (Rs.100) A/c Dr 500000
Mar To Equity Share Capital (Rs.25) A/c 125000
31 To Capital Reduction A/c 375000
(reduction of equity share capital to
Rs.25
each )
10% Preference Share Capital (Rs.100) A/c 750000
Dr To Preference Share Capital (Rs.50) 375000
A/c To Capital Reduction A/c 375000
(reduction of preference share capital to
Rs.50)
Capital Reduction A/c Dr 750000

To P&L A/c 145000
To Plant & Machinery A/c 39240
To Stock in trade A/c 15000
To Provision for doubtful debts A/c 15300
To Patents (Bal. Fig) 535460
(utilization of capital reduction A/c)
Balance Sheet as on 1 April 2011 (after reconstruction)
5000 Equity shares of Plant & Machinery(173000‐ 133760
Rs.25each fully paid 125000 39240) 314540
7500 10% Preference shares Patents (850000‐535460) 40000
of Rs.50 each fully paid 375000 Stock in trade (55000‐15000) 61700
Sundry creditors 50000 Sundry debtors (77000‐15300)
550000 550000
Illustration 5
The following is the balance sheet of Jay Ram Ltd as on 31 March 2011
10000 Equity shares of Rs.10 Goodwill 25000
each fully paid 100000 Other Fixed assets 104000
1000 7% Preference shares of Current assets 95000
Rs.100 each fully paid 100000 Profit and loss A/c 26000
250000 250000
It was decided that equity shares of Rs.10 each be reduced to shares of Rs.7 each and 7%
preference shares of Rs.100 each be reduced to 8% preference shares of Rs.75 each. The
number of shares in each case is to remain the same. It was decided that the amount so
available be used for writing of the debit balance in P&L A/c, goodwill A/c and with the balance
for writing down the fixed assts. Journalise the transactions and prepare the balance sheet after
reconstruction.
Solution:
Journal
(reduction of equity share capital to
Rs.7
each )
100000
7% Preference Share Capital (Rs.100) A/c Dr 75000

To 8%Preference Share 25000
Capital(Rs.75)A/c To Capital Reduction
A/c
(reduction of preference share capital to
Rs.75)
Capital Reduction A/c Dr 55000

To P&L A/c 26000
To Goodwill A/c 25000
To Fixed assets 4000
A/c
(utilization of capital reduction A/c)
10000 Equity shares of Fixed assets (104000‐4000) 100000
Rs.7each fully paid 70000 Current assets 95000
1000 8% Preference shares of
Rs.75 each fully paid 75000
195000 195000
Variation of Shareholders’ rights

Under this, the shareholders rights are altered by changing the rate of dividend or
changing the classes of shares. For example, it can be done by changing the cumulative
preference shares to non‐cumulative preference shares or from 10% preference shares into 7%
preference shares etc.
Scheme of compromise or arrangement

Here a compromise or arrangement is made with creditors or debenture holders while
settling their liabilities. This scheme involves the following:
a. For sacrifice by debenture holders:
Debentures A/c Dr (with amount sacrificed)
b. For exchange of debentures for new debentures or
shares: Debentures A/c (old)
Dr
To Debentures/ Share Capital A/c (New)
c. For sacrifice by creditors:
Creditors A/c Dr (with amount sacrificed)
d. For agreement to receive shares or debentures in settlement of claims of
creditors: Creditors A/c Dr
To Share Capital/ debentures A/c
Miscellaneous journals
a. For appreciation of fixed assets:
Fixed assets A/c Dr (with amount of appreciation)
b. For expense incurred on reconstruction:

To Bank A/c
Illustration 6
: The balance sheet of Gloomy Ltd as on 31 March 2011 was as follows:
4000 Equity shares of Rs.100 Goodwill 15000
each fully paid 400000 Freehold premises 200000
2000 5% Preference shares of Plant & Machinery 300000
Rs.100 each fully paid 200000 Stock in trade 50000
6% Debentures 100000 Sundry debtors 40000
Bank overdraft 35000 Cash in hand 5000
Sundry creditors 100000 Profit & Loss A/c 225000
835000 835000
The company has got the following scheme of capital reduction approved by the court.
a. Preference shares to be reduced to Rs.60 per share fully paid up and equity shares to
Rs.40 per share fully paid up.
b. The debenture holders to take over stock in trade and book debts in full satisfaction of
the amount due to them.
c. The value of freehold premises to be increased by 10%.
d. The value of plant and machinery to be depreciated by 33 1/3 %.
e. The goodwill account to be eliminated.
f. Expenses of reconstruction amounted to Rs.4000.
Journalize the transactions and prepare the balance sheet after reconstruction.
Solution:
Journal
(reduction of equity share capital to Rs.40
each )
5% Preference Share Capital (Rs.100) A/c Dr 200000
To 5%Preference Share 120000
Capital(Rs.60)A/c 80000
(reduction of preference share capital
to Rs.60)
To Stock in trade A/c
To Sundry debtors A/c 100000
To Capital Reduction A/c (Bal. Fig) 50000
(stock and debtors taken over by 40000
debenture 10000
holders)
Freehold premises A/c Dr
(Freehold premises appreciated by

10%)
20000 20000
To P&L A/c
To Goodwill A/c 15000
To Plant and machinery A/c 350000 225000
To Bank A/c (expenses) 100000
To Capital Reserve A/c 4000
(utilization of capital reduction A/c) 6000
4000 Equity shares of Freehold
Rs.40each fully paid 160000 premises(200000+20000) 220000
2000 5% Preference shares of Plant & Machinery(300000‐ 200000
Rs.60 each fully paid 120000 100000)
Capital Reserve 6000 Cash in hand(5000‐4000) 1000
Bank overdraft 35000
421000 421000
Surrender of shares
Under reconstruction, the shareholders may be required to surrender a part of their
share holdings. Such surrendered shares may be reissued to other parties (creditors, debenture
holders etc.) in whole or in part satisfaction of their claims. The entries required are as follows:
i. On surrender of shares:
Share capital A/c Dr
To Surrendered shares A/c
ii. On reissue of surrendered shares:
Surrendered shares A/c Dr
iii. On cancellation of unissued surrendered shares:
Surrendered shares A/c Dr
Illustration 7
A company has equity share capital of Rs.1000000 consisting 10000 shares of RS.100 each. It is
resolved
a. To subdivide the shares into shares of Rs.10 each

b. To ask their shareholders to surrender 50% of their shares
c. To issue 60% of the surrendered shares to 15% debenture holders of Rs.400000 in
full settlement of their claims
d. To cancel the unissued surrendered shares.
Give entries in the books of the company.
Solution:
Journal
Equity Share Capital (Rs.100) A/c Dr 1000000
To Equity Share Capital (Rs.10) A/c 1000000
(subdivision of equity shares into Rs.10 each )
Equity Share capital A/c Dr 500000
To Surrendered shares A/c 500000
(50% of shares surrendered)
Surrendered shares A/c Dr 300000
To Capital Reduction A/c 400000
(issue of 60% surrendered shares to
debenture holders in full settlement of their
claims)
Surrendered Shares A/c Dr 200000
To Capital Reduction A/c 200000
(cancellation of unissued surrendered
shares)
Module 4
FINAL ACCOUNTS OF BANKING COMPANIES
In India, banking companies are governed by the Banking Regulation Act 1949. Section 5
of the Act defines banking as “the accepting, for the purpose of lending or investment, of
deposits of money from the public repayable on demand or otherwise and withdrawable by
cheque, draft, and order or otherwise“.
Business of banking companies
In addition to the business of banking, a banking company may engage in any one or
more of the following business:
i. The borrowing, raising, or taking up of money
ii. The lending or advancing of money either upon or without security
iii. The drawing, making, accepting, discounting, buying, selling, collecting and dealing in
b bills of exchange, hundies, promissory notes, coupons, drafts, bills of lading,
railway receipts, warrants, debentures, certificates, scrips and other instruments,
and securities whether transferable or negotiable or not.
iv. The granting and issuing of letter of credit, travelers cheques and circular notes
v. On receiving of all kinds of bonds, scrips or valuables on deposit or for safe custody
or otherwise.
vi. The buying, selling and dealing in bullion
vii. The collecting and transmitting of money and securities
viii. Contracting for public and private loans and negotiating and issuing the same
ix. Carrying on and transacting every kind of guarantees and indemnity business
x. Undertaking and executing trusts, etc…
Important provisions of the Banking Regulation Act 1949
1. Statutory Reserve
As per Section 17, banking companies incorporated in India hall transfer every year at
least 25% of its profit before any dividend is declared to a Statutory reserve (Reserve fund) until
the amount of the reserve together with the security premium Account is equal to the paid up
capital.
2. Cash Reserve Ratio (CRR)
Banks are required to maintain with the Reserve Bank of India a cash reserve of at least
3% of the total of its demand and time liabilities in India.
3. Statutory Liquidity Ratio (SLR)
Banks are also required to maintain atleas6t 25% of the demand and time liabilities in
the form of liquid assets like cash, gold or unencumbered. SLR may vary in a range of 25% to
40%.
4. Non – Banking Assets
These are the assets which are not used in the ordinary course of business of banking,
but they are such immovable and movable properties which come under the possession o t he
banking company for recovering the amount due from customers.
5. Minimum Capital and Reserves
In case of a banking company incorporated in India, the sum of its paid up capital and
reserves shall not be less than the amount mentioned below:
a. If it has places of business in more than one state Rs.500000, and if any such place
of business is situated in Mumbai or Kolkata or in both, Rs.1000000.
b. If it has all its places of business in one state, none of which is Mumbai or
Kolkata,Rs.100000 in respect of its principal place of business plus Rs.10000 for each
additional place of business in the same district plus Rs.25000 for each place of
business elsewhere in the state(the maximum amount required being Rs.500000).
Accounting System
The accounting system of a banking company is different from that of a trading
or manufacturing company. The main features of a bank’s accounting system are as
follows:
1. Entries in the personal ledgers are made directly from the vouchers
2. From such entries in the personal ledgers each day summary sheets in total are
prepared which are posted to the control accounts in the general ledger.
3. The general ledger’s trial balance is extracted and agreed every day.
4. All entries in the personal ledgers and summary sheets are checked by persons other
than those who have recorded entries. It helps in detection of mistakes.
5. A trial balance of detailed personal ledgers is prepared periodically and gets agreed
with the general ledger control accounts.
6. Two vouchers are prepared for every transaction not involving cash.
Books maintained by banks
1. Receiving Cashier’s Counter Cash Book.
2. Paying Cashier’s Counter Cash Book.
3. Current Accounts Ledger.
4. Saving Bank Accounts Ledger.
5. Fixed Deposit Accounts Ledger.
6. Investment ledger.
7. Bills Discounted and Purchased Ledger.
8. Loan Ledger.
9. Cash Credit Ledger.
10. Customers’ Acceptances, endorsements and Guarantee Ledger.
11. Recurring Deposits Accounts Ledger, etc.
The Slip System

This is not a system of book keeping, but a method of rapidly posting entries to books
kept on double entry system. In this system, posting is made from slips prepared inside the
organization itself or from slips filled in by its customers. In a banking company, the main
slips are pay‐in‐slips, withdrawal slips and cheques and all these slips are filled in by clients
of the bank.
Advantages of Slip system

1. It makes accounts reliable.
2. Slips are the basis of auditing.
3. The bank saves a lot of clerical labour as most of the slips are filled in by its customers.
4. There is no need for keeping subsidiary books.
Disadvantages of Slip system

1. Slips may be lost, destroyed or misappropriated as these are loose.
2. In the absence of subsidiary books, books cannot be verified.
3. It is very difficult and expensive to keep date wise record of a large number of slips.
4. Customers feel difficulty on account of slip system.
Final Accounts of Banks

As per Section 29, a banking comp[any incorporated in India, is required to prepare, at
the end of each accounting year, a Balance sheet and profit and Loss Account as on the last
working day of the year.

A banking company is required to prepare its Profit and Loss Account according to Form
B in the Third Schedule to the Banking Regulation Act, 1949. Form B is given as follows:
Form B
Form of Profit & Loss Account for the year ended 31st March
(000s omitted)
Schedule Year ended Year ended
No 31.3..(Current 31.3.(Previous
Year ) Year)
I. Income
Interest earned 13
Other income 14
Total
II. Expenditure
Interest expended 15
Operating expenses 16
Provisions and contingencies
Total
III. Profit/ Loss
Net profit / loss for the year(I‐II)
Profit/loss brought forward
Total
IV. Appropriations
Transfer to statutory reserves
Transfer to other reserves
Transfer to government/
proposed
Dividend
Balance carried over to Balance
sheet
Total
SCHEDULE 13 – INTEREST EARNED (000s omitted)

Year ended Year ended
31.3..(Current 31.3.(Previous
Year ) Year)
I. Interest/ discount on advances/bills
II. Income on investments
III. Interest on balances with Reserve Bank
of India and other inter‐bank funds
IV. Others
Total
SCHEDULE 14 – OTHER INCOME (000s
omitted)
Year ) Year)
I. Commission, exchange and brokerage
II. Profit on sale of investments
Less: Loss on sale of
investments
III. Profit on revaluation of investments
Less: Loss on revaluation of
investments
IV. Profit on sale of land, buildings and
other assets
Less: Loss on sale of land, buildings
and other
Assets
V. Profit on exchange transactions
Less: Loss on exchange
transactions
VI. Income earned by way of dividends etc.
from subsidiaries/ companies
and/or joint ventures abroad/in
India
VII. Miscellaneous income
Total
Note: Under items II to V loss figures may be shown in brackets
SCHEDULE 15 – INTEREST EXPENDED (000s omitted)
Year ) Year)
I. Interest on deposits
II. Interest on Reserve Bank of India/
inter‐ bank borrowings
III. Others
Total
SCHEDULE 16– OPERATING EXPENSES

(000s omitted)

Year ) Year)
I. Payments to and provisions for employees
II. Rent, taxes and lighting
III. Printing and stationary
IV. Advertisement and publicity
V. Depreciation on bank’s property
VI. Directors’ fees, allowances and expenses
VII. Auditor’s fees, allowances and
expenses (including branch
auditors)
VIII. Law charges
IX. Postages, telegrams, telephones, etc
X. Repairs and maintenance
XI. Insurance
XII. Other expenditure
Total
Illustration 1
Following figures have been obtained from the books of Rai Bank Ltd for the year ending 31 st
March 2011(figures in ‘000):
Issued and subscribed capital Rs.1000, Interest and discount earned Rs.3800, Commission and
exchange earned Rs.195, Interest paid Rs.2000, Salaries and wages Rs.210, Directors fees Rs.35,
Rent and taxes Rs.70, Postage and telegrams Rs.61, Profit on sale of investments Rs.240, Loss
on sale of investments Rs.38, Rent received Rs. 62, Depreciation Rs.31, Stationary Rs.60 and
Auditors fees Rs.8.
Additional information:
a. The profit and loss account had a balance of Rs.10,00,000 on 1st April 2010.
b. An advance of Rs.12,00,000 has become doubtful and it is expected that only 50% of
the amount due can be recovered from the security.
c. The provision of tax is made at 50%.
d. A dividend of 10% is proposed.
Prepare Profit and Loss Account of Rai Bank Ltd for the year ending 31st March 2011.
Solution:
Rai Bank Ltd

Profit and Loss
Account
For the year ending 31st March 2011 (000s omitted)
No 31.3.2011 31.3.2010
I. Income
Interest earned 13 3800
Other income 14 459
Total 4259
II. Expenditure
Interest expended
Operating expenses 15 2000
Provisions and contingencies 16 475
Total 1192
III. Profit/ Loss 3667
Net profit / loss for the year(I‐II)
Profit/loss brought forward 592
Total 1000
IV. Appropriations 1592
Transfer to
statutory
reserves (592x25%)
Transfer to other reserves 148
Proposed Dividend ‐‐‐‐‐
Balance carried over to Balance sheet 100
Total 1344
1592
31.3.2011 31.3.2010
I. Interest/ discount on advances/bills 3800
Total 3800
SCHEDULE 14 – OTHER INCOME (000s omitted)
31.3.2011 31.3.2010
I. Commission, exchange and brokerage 195
II. Profit on sale of investments 240
Less: Loss on sale of investments (38)
III. Miscellaneous income (Rent received)
62
Total
459

31.3.2011 31.3.2010
I. Interest on deposits 2000
Total 2000
SCHEDULE 16– OPERATING EXPENSES (000s omitted)

31.3.2011 31.3.2010
I. Payments to and provisions for employees 210
II. Rent, taxes and lighting 70
III. Printing and stationary 60
IV. Depreciation on bank’s property 31
V. Directors’ fees, allowances and expenses 35
VI. Auditor’s fees, allowances and expenses
(including branch auditors) 8
VII. Postages, telegrams, telephones, etc 61
Total 475
Illustration 2
From the following information, prepare the Profit and loss Account of the National Bank for the
year ended 31st March 2011(figures in ‘000):
Interest on loans Rs.518, Interest on cash credits Rs.446, Discount on bills discounted
(net) Rs.390, Interest on Overdrafts Rs.108, Interest on Savings bank Account Rs.220, Interest on
fixed deposits Rs.554, Commission, exchange and brokerage Rs.16.40, Rent, taxes and lighting
Rs.36, Auditors fees Rs.2.40, Postage, telegrams and telephones Rs.2.80, Sundry charges Rs.2,
Directors fees Rs.6, Printing and stationery Rs.0.40, Law charges Rs.1.40, payment to employees
Rs.108, Locker rent Rs.0.70, Transfer fees Rs.1.40, Depreciation on bank’s property Rs.10 and
Advertisement an publicity Rs.1.40.
Additional information: Rebate on bills discounted Rs.98000 and provide for bad
debts Rs.58000.
Solution:
National Bank Ltd
Profit and Loss
Account
For the year ending 31st March 2011 (000s omitted)
No 31.3.2011 31.3.2010
I. Income
Interest earned 13 1364.00
Other income 14 18.50
Total 1382.50
II. Expenditure
Interest expended 15 774.00
Operating expenses 16 170.40
Provisions and contingencies 58.00
Total 1002.40
III. Profit/ Loss
Net profit / loss for the year(I‐II) 380.10
Profit/loss brought forward ‐‐‐‐‐‐‐‐
Total 380.10
IV. Appropriations
Transfer to statutory 95.03
reserves (380.10x25%) ‐‐‐‐‐
Transfer to government/ ‐‐‐‐‐
proposed 285.07
Dividend 380.10
sheet
Total

31.3.2011 31.3.2010
I. Interest/ discount on
advances/bills(518+446+390+108‐98) 1364.00
II. Income on investments ‐‐‐‐
III. Interest on balances with Reserve Bank of ‐‐‐‐‐
India and other inter‐bank funds
IV. Others ‐‐‐‐‐
Total 1364.00

31.3.2011 31.3.2010
I. Commission, exchange and brokerage 16.40
II. Lockers Rent 0.70
III. Transfer fees 1.40
Total 18.50

31.3.2011 31.3.2010
I. Interest on deposits(220+554) 774.00
Total 774.00

31.3.2011 31.3.2010
I. Payments to and provisions for employees 108.00
II. Rent, taxes and lighting 36.00
III. Printing and stationary 0.40
IV. Advertisement and publicity 1.40
V. Depreciation on bank’s property 10.00
VI. Directors’ fees, allowances and expenses 6.00
VII. Auditor’s fees, allowances and 2.40
expenses (including branch
auditors) 1.40
VIII. Law charges 2.80
IX. Postages, telegrams, telephones, etc 2.00
X. Other expenditure 170.40
Total
Balance Sheet
The balance sheet of a banking company is prepared according to Form A in Third Schedule
which is as follows:
BALANCE SHEET OF …… (Here enter name of the banking company)
as on 31st March (Year) (000s omitted)
Schedule As on As on
No 31.3..(Current 31.3.(Previous
Year ) Year)
Capital & Liabilities
Capital 1
Reserves & Surplus 2
Deposits 3
Borrowings 4
Other Liabilities and Provisions 5
Total
Assets
Cash and balances with RBI 6
Balances with banks & money at call and
short notice 7
Investments 8
Advances 9
Fixed Assets 10
Other Assets 11
Total
Contingent liabilities 12
Bills for collection
SCHEDULE 1 – CAPITAL
As on As on
Year ) Year)
I. For Nationalized Banks
Capital (Fully owned by Central
Government Total
II. For Banks Incorporated Outside India

Capital
(The amount brought in by banks by way of

start‐up capital as prescribed by RBI should
be shown under this head)
Amount of deposit kept with the RBI under

section 1(2) of Banking Regulations Act,
1949
Total
For other Banks
Authorised capital
……. Shares of Rs….. each
Issued capital
……. Shares of Rs….. each
Subscribed capital
……. Shares of Rs…..
each Called up capital
……. Shares of Rs…..
each Less: Calls unpaid
Add: Forfeited shares
SCHEDULE 2 – RESERVES & SURPLUS

As on 31.3.. As on 31.3.
(Current Year ) (Previous Year)
I. Statutory Reserves
Opening Balance
Additions during the
year
Deductions during the year
II. Capital Reserves
Opening
Balance
Additions during the year
III. Securities Premium
Opening Balance
Additions during the
year
IV. Revenue & Other
Reserves Opening
Balance Additions during
the year
V. Balance in Profit and Loss Account
Total (I+II+III+IV+V)
SCHEDULE 3 – DEPOSITS
As on 31.3.. As on 31.3.
(Current (Previous
Year ) Year)
A.
I. Demand Deposits
(i) From Banks
(ii) From Others
II. Saving Bank Deposits
III. Term Deposits
(i) From Banks
(ii) From Others
Total
(I+II+III)
B.
(i) Deposits of branches in India
(ii) Deposits of branches outside India
Total
SCHEDULE 4 – BORROWINGS
As on 31.3.. As on 31.3.
(Current (Previous
Year ) Year)
I. Borrowings in India
(i) Reserve Bank of India
(ii) Other banks
(iii) Other institutions and agencies
II. Borrowings outside India
Total
Secured borrowings included in I & II above – Rs.
SCHEDULE 5 – OTHER LIABILITIES AND PROVISIONS
As on 31.3.. As on 31.3.
(Current (Previous
Year ) Year)
I. Bills payable
II. Inter‐office adjustments (net)
III. Interest accrued
IV. Others (including provisions)
Total
SCHEDULE 6 – CASH AND BALANCES WITH RESERVE BANK OF INDIA
As on As on
Year ) Year)
I. Cash in hand
(including foreign currency notes)
II. Balances with Reserve Bank of India
(i) In current accounts
(ii) In other deposit accounts
Total (I
&II)
SCHEDULE 7 – BALANCES WITH BANKS & MONEY AT CALL & SHORT NOTICE
As on 31.3.. As on 31.3.
(Current (Previous
Year ) Year)
I. In India
(i) Balances with banks
(a) In current accounts
(b) In other deposit accounts
(ii) Money at call and short notice
(a) With banks

(b) With other
institutions Total
II. Outside India

(i) In current accounts
(iii) Money at call and short
notice Grand Total (I+II)
SCHEDULE 8 – INVESTMENTS
As on As on
Year ) Year)
I. Investments in India in
(i) Government securities
(ii) Other approved securities
(iii) Shares
(iv) Debentures and bonds
(v) Subsidiaries and/or joint ventures
(vi) Others (to be specified)
Total
II. Investments outside India in

(i) Government securities
(including local
authorities)
(ii) Subsidiaries and/or joint
ventures abroad
(iii) Other investments (to be specified)
Total
Grand Total (I+II)

SCHEDULE 9 – ADVANCES
As on As on
Year ) Year)
A.
(i) Bills purchased and discounted
(ii) cash credits, overdrafts and loans repayable
on demand
(iii) Term loans

Total
B.
(i) secured by tangible assets
(ii)covered by bank/Government guarantees
(iii) unsecured
Total
C.
I. Advances in India
(i) priority sectors
(ii) public sector
(iii) banks
(iv) others
Total
II. Advances outside India
(i) Due from banks
(ii) Due from others
(a) Bills purchased and discounted
(b) Syndicated loans
(c) Others
Total
Grand Total (CI+CII)
SCHEDULE 10 – FIXED ASSETS

As on 31.3.. As on 31.3.
(Current (Previous
Year ) Year)
I. Premises
At cost on 31st March of the preceding
year
Depreciation to date
II. Other fixed Assets (including furniture
and fixtures)
At cost on 31st March of the preceding
year
Depreciation to date
Total
SCHEDULE 11 – OTHER ASSETS

As on 31.3.. As on 31.3.
(Current Year ) (Previous Year)
I. Inter‐office adjustments (net)

II. Interest accrued
III. Tax p[aid in advance/ tax deducted at source
IV. Stationery and stamps
V. Non‐banking assets acquired in
satisfaction of claims
VI. Others
Total
SCHEDULE 12 – CONTINGENT LIABILITIES
As on As on
Year ) Year)
I. Claims against the bank not acknowledged
as debts
II. Liability for partly paid investments
III. Liability on account of outstanding
forward exchange contracts
IV. Guarantees given on behalf of constituents
(i) In India
(ii) Outside India
V. Acceptances, endorsements and
other obligations
VI. Other items for which the bank
is contingently liable
Total
Explanation of some items relating to Balance Sheet
1. Money at call and short notice: It represents temporary loans to bill brokers, stock
brokers and other banks. If the loan is given for one day, it is called “money at call” and if
the loan cannot be called back on demand and will require at least a notice of three days
for calling back, it is called “money at short notice”.
2. Advances: Advances include Bills discounted and purchased, loans, cash credit and
overdraft.
3. Inter ‐ office adjustments: Every head office will have a number of transactions with its
branches. The head office makes necessary adjustments in its books on the receipt of
information from the branches. On the date of balance sheet some transaction may
remain unadjusted in the books of the head office. Such entries are recorded in the
balance sheet under the sub‐heading ‘Branch Adjustments’ and may appear on the
assets side under the heading ‘Other Assets’ if it has a debit balance and on t e liabilities
side under the heading ‘Other Liabilities’ if it has a credit balance.
4. Bills for Collection: When the bank receives bills receivables from its customers for
collection, it keeps them till maturity. On the date of maturity when bills are collected,
customers account is credited with the amount collected. If some bills remain
outstanding, such bills are treated by the banks as outstanding bills for collection. It is
shown as ‘Contingent Liability (Schedule 12)’.
5. Acceptance, endorsement and other obligation: This represents bank’s liability on
account of bills endorsed or accepted on behalf of its customers. For greater security,
the drawer of bill wants acceptance of the drawee’s bank. The bank incurs a liability by
accepting bills on behalf of customers. On the maturity of bill, the bank pays and collects
the amount from its customers. At the end of the accounting period, if tee is any
outstanding bills it is shown on the ‘Contingent Liability (Schedule 12)’.
Illustration 3
From the following particulars, prepare the final accounts of Jaya Bank Ltd for the year ended 31 st
March 2011.
Share capital 500000
Reserve Fund 1000000
Fixed deposit 2000000
Savings bank deposit 3000000
Current accounts 7000000
Borrowed from the bank 200000
Investments 3000000
Premises 1200000
Cash in hand 60000
Cash at bank 2800000
Money at call and short notice 300000
Interest accrued and paid 200000
Salaries 80000
Rent 30000
Profit and Loss Account (01.04.2010) 160000
Interest earned 450000
Bills discounted 500000
Bills payable 800000
Loans, advances, overdraft and credits 7000000
Unclaimed dividends 30000
` ‐‐‐‐‐‐‐‐‐‐‐‐ ‐‐‐‐‐‐‐‐‐‐‐‐‐‐
15170000 15170000
‐‐‐‐‐‐‐‐‐‐‐‐‐‐ ‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐
The bank had the bills for Rs.1400000 as collection for its constituents and also
acceptance and endorsements for them amounting to Rs.400000.
Solution:
Profit and Loss Account of Jaya Bank

Ltd.
For the year ended 31st March 2011 (000s omitted)
No 31.3.2011 31.3.2010
I. Income
Other income 14
Total 450
II. Expenditure
Interest expended 15 200
Provisions and contingencies ‐‐‐‐‐
Total 310
III. Profit/ Loss
Net profit / loss for the year(I‐II) 140
Total 300
IV. Appropriations
Transfer to statutory reserves 35
(140x25%)
Transfer to government/
proposed 265
Dividend 300
Balance carried over to Balance sheet
Total
31.3.2011 31.3.2010
450
Total
31.3.2011 31.3.2010
I. Commission, exchange and brokerage
investments
‐‐‐‐‐‐‐‐‐‐‐
Total

31.3.2011 31.3.2010
Total 200

31.3.2011 31.3.2010
I. Payments to and provisions for employees 80
II. Rent, taxes and lighting 30
Total 110
Balance Sheet of Jaya Bank Ltd as on 31st March 2011 (000s omitted)
No 31.3.2011 31.3.2010
Capital 1 500
Reserves & Surplus 2 1300
Deposits 3 12000
Borrowings 4 200
Other Liabilities and Provisions 5 860
Total 14860
Assets
Cash and balances with RBI 6
Balances with banks & money at call and 60
short notice 7
Investments 8 3100
Advances 9 3000
Fixed Assets 10 7500
Other Assets 11 1200
Total ‐‐‐‐‐‐
Contingent liabilities 12 14860
Bills for collection 400
1400
SCHEDULE 1 ‐ CAPITAL
As on As on
31.3.2011 31.3.2010
Authorised capital: Shares of Rs.10 each
Issued capital: Shares of Rs.10 each
Subscribed capital: Shares of Rs.10 each
Called up capital: Shares of Rs.10each
Rs.5 500
each
fully paid
500
Less: Calls unpaid
Total
As on As on
31.3.2011 31.3.2010
Opening Balance 1000
Additions during the year 35 1035
IV. Revenue & Other Reserves
265
V. Balance in Profit and Loss Account
1300
As on 31.3.2011 As on 31.3.2010
A.
I. Demand Deposits 7000
II. Saving Bank Deposits 3000
III. Term Deposits 2000
Total 12000
(I+II+III)
B.
(ii) Deposits of branches outside India
12000
Total

As on As on
31.3.2011 31.3.2010
Reserve Bank of India
Other banks 200
Other institutions and agencies
II. Borrowings outside India
200
Total
As on As on
31.3.2011 31.3.2010
I. Bills payable 800
II. Inter‐office adjustments (net)
III. Interest accrued
IV. Others (including provisions)30+30 60
Total 860

As on As on
31.3.2011 31.3.2010
I. Cash in hand
(including foreign currency notes) 60
(iii) In current accounts
(iv) In other deposit accounts
60
Total (I
&II)
As on As on
31.3.2011 31.3.2010
I. In India
Balances with banks 2800
Money at call and short notice 300
3100
Total
II. Outside India ‐‐‐‐‐‐‐

Grand Total (I+II) 3100

As on As on 31.3.2010
31.3.2011
I. Investments in India 3000
II. Investments outside India
Total
3000
As on As on
31.3.2011 31.3.2010
A.
(i) Bills purchased and discounted 500
on demand 7000
(iii) Term loans
7500
Total

As on As on
31.3.2011 31.3.2010
I. Premises
At cost on 31st March of the preceding 1200
year
and fixtures)
year
Total
As on As on
31.3.2011 31.3.2010
III.Tax p[aid in advance/ tax deducted at source
VI. Others
‐‐‐‐‐‐‐‐‐
Total


As on As on
31.3.2011 31.3.2010
I. Claims against the bank not acknowledged
as debts
II. Liability for partly paid investments
III. Liability on account of outstanding
forward exchange contracts
IV. Guarantees given on behalf of constituents
(iii) In India
(iv) Outside India
V. Acceptances, endorsements and 400
other obligations
VI. Other items for which the bank
is contingently liable 400
Total
Non‐Performing Assets (NPA)

Bank advances can be classified as Performing Assets and Non‐Performing Assets (NPA).
An asset becomes NPA when it ceases to generate income for the bank. NPA means a credit
facility in respect of which interest and/or principal repayment installments is in arrears for
more than 90 days. Interest income from NPA is considered as income as and when it is
received rather than on accrual basis.
Asset Classification
Bank’s loans and advances are to be classified into two broad categories‐ Standard
assets and Non‐Performing Assets. NPAs are subdivided into three‐ Substandard, Doubtful and
Loss Assets. These may be explained as follows:
1. Standard Assets – Standard assets are those which do not carry more than the normal
credit risk attached to the business. These are assets which are not NPAs.
2. Sub‐standard Assets – These have been classified as NPA for a period not exceeding 12
months.
3. Doubtful Assets ‐ Doubtful Assets are those which have remained NPA for a period
exceeding 12 months.
4. Loss Assets – Loss assets are those assets in which loss has been identified by the bank,
auditors or RBI but the amount has not been written off wholly or partly. These assets
are irrecoverable.
Rebate on bills discounted or unexpired discounts
The whole amount of discount on bills discounted may no t be related to that accounting
year. A part of it may be related to next accounting period. This is so because at the close of the
accounting year, some of the bills discounted may not have matured. In short rebate on bills
discounted means the unearned amount or discount received for those bills which mature after
the date of closing the final accounts. It is also called unexpired discount or discount received in
advance. It is carried forward to next year by passing the following entry:

Interest and discount A/c Dr

To Rebate on bills discounted.
If rebate on bills discounted is given in trial balance, it should e taken to Balance sheet
under “Other Liabilities and Provisions”. If it is given under adjustments, it should be deducted
from “Interest and Discount” in Profit and loss Account and should be taken to Balance sheet
under “Other Liabilities and Provisions”.
At the commencement of next accounting year it is transferred to Interest and
Discount Account by reversing the above entry.
Illustration 4
In respect 0f the following transactions of Best Bank Ltd pass necessary journal entries as well
as their treatment in the P&L A/c and Balance Sheet for the year ended 31st March 2011.
The following bills are discounted at 5%.

Discounted on Amount Rs. Terms (months)
23.12.2011 50000 3
19.09.2011 100000 4
20.10.2011 400000 3
30.11.2011 30000 5
Solution:
Calculation of Rebate on bills discounted
Due date No. of days Amount Rs. Rate of Unexpired Discount
after 31.12.11 discount
%
26.03.2011 85 50000 5 50000x5/100x85/365= 582
22.01.2011 22 100000 5 100000x5/100x22/365= 301
23.01.2011 23 400000 5 400000x5/100x23/365= 1260
03.05.2011 123 30000 5 30000x5/100x123/365= 506
2649
Rebate on bills discounted = 2649
Journal entry:
Interest and discount A/c Dr 2649
To Rebate on bills discounted. 2649
Rebate on bills discounted Rs.2649 will be deducted from “Interest and Discount” in P&L
A/c. it will also appear on the liability side of Balance sheet under the heading “Other liabilities
and provisions”.
Illustration 5
The following are the ledger balances of the National Bank Ltd. Prepare P&L A/c and Balance
Sheet as on 31st March 2011 as per the requirements of The Banking Regulation Act.

Share capital (20000 shares of Rs.100 each) 2000000

Reserve Fund investments 1000000
General expenses 182000
Current accounts 20244000
Interest paid 161000
Savings bank account 2920000
Fixed deposits 4000000
st
Profit and loss Account(on 31 March 2010) 230000
Discount received 180000
Rebate on bills discounted 64000
Commission, exchange and brokerage 44000
Cash 227000
Interest received 532000
Cash with RBI 2012000
Owing by foreign correspondents 200000
Short loans 6482000
Loans and advance to customers 15585000
Investments 9883000
Bills discounted 6228000
Premises 2218000
Adjustments:
1. Provision for bad and doubtful debts required Rs.129000
2. The bank had bills for collection for its constituents Rs.500000and
acceptances, endorsements and guarantees Rs.1600000.
3. The P&L A/c balance is the balance left on that account after the payment of
interim dividend amounting to Rs.200000.
Solution:
Profit and Loss Account of National Bank
Ltd.
For the year ended 31st March 2011 (000s omitted)
No 31.3.2011 31.3.2010
I. Income
Other income 14 44
Total 756
II. Expenditure
Interest expended 15 161
Provisions and contingencies 129
Total 472

III. Profit/ Loss

Net profit / loss for the year(I‐II) 284
Total 714
IV. Appropriations
Transfer to statutory 71
reserves
(284x25%)
Transfer to other 200
reserves Interim Dividend 443
paid 714
sheet
Total
31.3.2011 31.3.2010
Total 712
31.3.2011 31.3.2010
I. Commission, exchange and brokerage 44
investments
44
Total
31.3.2011 31.3.2010
Total 161
31.3.2011 31.3.2010
I. Payments to and provisions for employees
II. General expenses 182
Total 182
st
Balance Sheet of National Bank Ltd as on 31 March 2011 (000s omitted)

No 31.3.2011 31.3.2010


Capital 1 2000
Reserves & Surplus 2 1514
Deposits 3 27164
Borrowings 4 6482
Other Liabilities and Provisions 5 193
Total 37353
Assets
Cash and balances with RBI 6 2239
Balances with banks & money at call and
short notice 7 200
Investments 8 10883
Advances 9 21813
Fixed Assets 10 2218
Other Assets 11 ‐‐‐‐‐‐
Total 37353
Contingent liabilities 12 1600
Bills for collection 500
SCHEDULE 1 ‐ CAPITAL
As on As on
31.3.2011 31.3.2010
Authorised capital: 20000 Shares of
Rs.100 each
Issued capital: 20000 Shares of Rs.100
each Subscribed capital: 20000 Shares of
Rs.100 2000
each
Called up capital: 20000 Shares of
2000
Rs.100 each
Rs.100 each fully paid
Less: Calls unpaid
Total
As on 31.3.2011 As on
31.3.2010
Opening Balance 1000
Additions during the year 71 1071
IV. Revenue & Other Reserves

V. Balance in Profit and Loss Account 443

1514
As on 31.3.2011 As on 31.3.2010
A.
I. Demand Deposits 20244
II. Saving Bank Deposits 2920
III. Term Deposits 4000
Total 27164
(I+II+III)
B.
(ii) Deposits of branches outside
27164
India Total
As on 31.3.2011 As on
31.3.2010
Reserve Bank of India
Other banks 6482
Other institutions and agencies
III. Borrowings outside India
6482
Total
As on As on
31.3.2011 31.3.2010
I. Others (including provisions)
Rebate on bills discounted 64
Provisions 129 193
Total 193


As on As on 31.3.2010
31.3.2011
I. Cash in hand
(including foreign currency notes) 227
(i) In current accounts 2012
Total (I &II) 2239
As on As on
31.3.2011 31.3.2010
I. In India
Balances with banks
Money at call and short notice
Total
200
II. Outside India
200
Grand Total (I+II)
As on As on 31.3.2010
31.3.2011
I. Investments in India
Investments 9883
Reserve Fund Investment 1000 10883
Total
10883
As on As on
31.3.2011 31.3.2010
A.
(i) Bills purchased and discounted 6228
on demand 15585
(iii) Term loans
21813
Total


As on As on 31.3.2010
31.3.2011
I. Premises
year
and fixtures)
year
Total

As on As on
31.3.2011 31.3.2010
III. Tax p[aid in advance/ tax deducted at source
VI. Others
‐‐‐‐‐‐‐‐‐
Total

As on As on
31.3.2011 31.3.2010
Acceptances, endorsements and other 1600
obligations
1600
Total

Module 5
FINAL ACCOUNTS OF INSURANCE COMPANIES
Insurance is a contract whereby one party agrees for a consideration called premium to
indemnify the other against a possible loss or to pay a stated sum of money on the happening of
a particular event. This agreement or contract when put in writing is known as policy. The
person whose risk is covered is called insured or assured and the company or corporation which
insures is known as insurer, assurer or underwriter. The consideration in return for which the
insurer agrees to make good the loss is known as premium.
Types of Insurance
From accounting point of view, the insurance may be divided into two as follows:
1. Life Insurance
A life insurance contract is a long term contract in which the assured must pay the
premium at stated intervals and the insurer guarantee to pay a certain sum of money to the
assured on the happening of the event which is certain (either death or expiry of the fixed
period). Section 2 of Indian Insurance Act 1938 defines life insurance as “life insurance business
is the business of effecting contracts upon human life”.
2. General Insurance
All insurance other than life insurance is general insurance. Under this type of insurance,
the insurer undertakes to indemnify the loss suffered by the insured on happening of a certain
event in consideration for a fixed premium. Usually all these are short term agreements for a
year. Fire insurance, marine insurance, accident insurance, burglary insurance, third party
insurance etc. are the examples for general insurance.
FINANCIAL STATEMENTS OF INSURANCE COMPANIES

Insurance Regulatory and Development Authority (IRDA) has issued the
regulations regarding the preparation of financial statements.
Final Accounts of Life Insurance Companies

The final accounts of a life insurance company consist of (a) Revenue Account, (b) P&L
A/c and (c) Balance Sheet.
Revenue Account (Form A‐RA)

Revenue Account is prepared as per the provisions of IRDA regulations 2002 and
complies with the requirements of Schedule A as follows:
FORM A – RA
Name of the insurer
Registration No. and Date of Registration with the IRDA
Revenue Account for the year ended 31st March, 20….

Policyholders’ Account (Technical Account)

No Particulars Sched Current Previous

. ule Year Year
(Rs.’000) (Rs.’000)
Premiums earned – net
(a) Premium 1
(b) Reinsurance ceded
(c) Reinsurance accepted
Income from investments
(a) Interest, dividends & rent – Gross
(b) Profit on sale/redemption of investments
(c) (Loss on sale/redemption of investments)
(d) Transfer/ Gain on revaluation/change
in fair value*
Other income (to be specified)
Total (A)
Commission 2
Operating Expenses related to insurance
business Provision for doubtful debts 3
Bad debts written off
Provision for tax
Provisions (other than taxation)
(a) For diminution in the value of
investments (net)
(b) Others (to be
specified) Total (B)
Benefits Paid (Net) 4
Interim Bonuses paid
Change in valuation of liability in respect of
life policies
(a) Gross**
(b) Amount ceded in Reinsurance
(c) Amount accepted in
Reinsurance Total (C)
Surplus (Deficit) (D)=(A)‐(B)‐(C)
Appropriations
Transfer to Shareholders’ Account
Transfer to Other Reserves (to be specified)
Balance being Funds for Future
Appropriations Total (D)
Notes:
*Represents the deemed realized gain as per norms specified by the Authority.
**Represents Mathematical Reserves after allocation of bonus
The total surplus shall be disclosed separately with the following details:

(a) Interim bonuses paid

(b) Allocation of bonus to policyholders
(c) Surplus shown in the Revenue Account
(d) Total Surplus: [(a)+(b)+(c)]
Profit And Loss Account (Form A‐PL)
The P&L A/c is prepared to calculate the overall profit of the life insurance business. The
incomes or expenses that are not related to any particular fund are recorded in the P&L A/c.
FORM A ‐ PL
Name of the insurer
Profit and Loss Account for the year ended 31st March, 20….
Shareholders’ Account (Non‐technical Account)
No. Particulars Schedule Current Previous
Year Year
(Rs.’000) (Rs.’000)
Amounts transferred from/to the
Policyholders Account (Technical Account )
(b) Profit on sale/redemption of investments
(c) (Loss on sale/redemption of
investments) Other income (to be specified)
Total (A)
Expenses other than those directly related to
the insurance business
Bad debts written off
Provision for tax
investments (net)
(b) Provision for doubtful debts
(c) Others (to be
Profit (Loss) before tax
Appropriations
(a) Balance at the beginning of the year
(b) Interim dividends paid during the year
(c) Proposed final dividend
(d) Dividend Distribution Tax
(e) Transfer to Reserves/other accounts (to
be specified)
Profit carried....................to the Balance Sheet

Notes to Form A‐RA and A‐PL:

(a) Premium income received from business concluded in and outside India shall be
separately disclosed.
(b) Reinsurance premiums whether on business ceded or accepted are to be brought into
account gross (i.e., before deducting commissions) under the head reinsurance
premiums
(c) Claims incurred shall comprise claims paid, specific claims settlement costs
wherever applicable and change in the outstanding provisions for claims at the
year‐end.
(d) Items of expenses and income in excess of one percent of the total premiums (less
reinsurance) or Rs.500000 whichever is higher, shall be shown as a separate line
item.
(e) Fees and expenses connected with claims shall be included in claims.
(f) Under the sub‐head “Others” shall be included items like foreign exchange gains or
losses and other items.
(g) Interest, dividends and rentals receivable in connection with an investment should
be stated at gross amount, the amount of income tax deducted at source being
included under “advance taxes paid and taxes deducted at source”.
(h) Income from rent shall include only the realized rent. It shall not include any notional rent.
Balance Sheet (Form A‐BS)
Balance Sheet of Life Insurance Company is prepared in vertical format. The form of
Balance Sheet is as follows:
FORM A ‐ BS
Name of the insurer
Balance Sheet as at 31st March, 20….
No. Particulars Sched Current Previous
ule Year Year
(Rs.’000) (Rs.’000)
Sources of Funds
Shareholders’ Funds:
Share Capital 5
Reserves and Surplus 6
Credit/[Debit] Fair Value Change Account
Sub‐Total
Borrowings 7
Policyholders’ Funds:
Policy Liabilities
Insurance Reserves
Provision for Linked Liabilities
Sub‐Total

Funds for Future Appropriations

Total

Application of Funds
Investments
Shareholders’ 8
Policyholders’ 8A
Assets held to Cover Linked Liabilities 8B
Loans 9
Fixed Assets 10
Current Assets
Cash and Bank Balances 11
Advances and Other Assets 12
Sub‐Total (A)
Current Liabilities 13
Provisions 14
Sub‐Total (B)
Net Current Assets (C)=(A)‐(B)
Miscellaneous Expenditure (to the extent not 15
written off or adjusted)
Debit Balance in Profit and Loss Account
(Shareholders’ Account)
Total
CONTINGENT LIABILITIES
No Particulars Current Previous
. Year Year
(Rs.’000) (Rs.’000)
1. Partly paid‐up investments
2. Claims, other than against policies, not acknowledged as
debts by the company
3. Underwriting commitments outstanding (in respect of
shares and securities)
4.
Guarantees given by or on behalf of the company
5.
Statutory demands/liabilities in dispute, not provided
6.
for Reinsurance obligations to the extent not provided
for in
7. accounts
Others (to be specified)
Total

SCHEDULES FORMING PART OF FINANCIAL

STATEMENTS SCHEDULE 1 ‐ PREMIUM
. Year Year
(Rs.’000) (Rs.’000)
1. First Year Premiums
2. Renewal Premiums
Single Premiums
3. Total Premium
SCHEDULE 2 – COMMISSION EXPENSES
Particulars Current Previous
Year Year
(Rs.’000) (Rs.’000)
Commission paid
Direct ‐ First Year Premiums
Renewal Premiums
Single Premiums
Add: Commission on Re‐insurance
Accepted Less: Commission on Re‐
insurance Ceded
Net Commission
Note: The profit/commission, if any, are to be combined with the Re‐insurance accepted or Re‐
insurance ceded figures.
SCHEDULE 3 – OPERATING EXPENSES RELATED TO INSURANCE BUSINESS
. Year Year
(Rs.’000) (Rs.’000)
1. Employees’ remuneration & welfare benefits
2. Travel, conveyance and vehicle running
3. expenses Training expenses
4. Rents, rates & taxes
5. Repairs
6. Printing & stationery
7. Communication expenses
8. Legal & Professional charges
9. Medical fees
10. Auditors’ fees, expenses etc
(a) As auditor
(b) As adviser or in any other capacity, in respect of:
(i) Taxation matters
(ii) Insurance matters
(iii) Management services; and
(c) In any other capacity
Advertisement and publicity
11. Interest and bank charges
12. Others(to be specified)
13.
Depreciation
14.
Total
Note: Items of expenses and income in excess of one percent of the total premiums (less
reinsurance) or Rs.500000 whichever is higher, shall be shown as a separate line item.
SCHEDULE 4 – BENEFITS PAID [NET]
. Year Year
(Rs.’000) (Rs.’000)
1. Insurance Claims:
(a) Claims by Death
(b) Claims by Maturity
(c) Annuities/Pension payment
(d) Other benefits,
2. specify. (Amount ceded in
reinsurance):
(a) Claims by Death
3. (d) Other benefits,
specify. Amount accepted in
reinsurance:
(a) Claims by Death
(d) Other benefits, specify.
Total
Notes: (a) claims include specific claims settlement costs, wherever applicable.
(b)Legal and other fees and expenses shall also form part of the claims cost, wherever
applicable.
SCHEDULE 5 – SHARE CAPITAL
. Year Year
(Rs.’000) (Rs.’000)
1. Authorised capital
Equity shares of Rs…..each
2. Issued Capital
3. Subscribed Capital


4.
Called‐up Capital
Less: Calls unpaid
Add: Shares forfeited (Amount originally paid
up) Less: Par value of equity shares bought back
Less: Preliminary Expenses
Expenses including commission or brokerage
on underwriting or subscription of shares
Total

Notes:
(a) Particulars of the different classes of capital should be separately stated.
(b) The amount capitalized on account of issue of bonus shares should be disclosed.
(c) In case any part of the capital is held by a holding company, the same should be
SCHEDULE 5A – PATTERN OF SHAREHOLDING
[As certified by the Management]
Current Year Previous Year
Shareholders No. of % of No. of % of
Shares Holding Shares Holding
Promoters
*Indian
*Foreign
Others
Total
SCHEDULE 6 – RESERVES AND SURPLUS
. Year Year
(Rs.’000) (Rs.’000)
1. Capital Reserve
2. Capital Redemption
3. Reserve Share Premium
4. Revaluation Reserve
5. General Reserves
Less: Debit balance in P&L A/c, if any
Less: Amount utilized for buy back.
6. Catastrophe Reserve
7. Other Reserves (to be specified)
8. Balance of Profit in P&L A/c
Total
Note: Additions to and deductions from the reserves shall be disclosed under each of the specified
heads.
. Year Year
(Rs.’000) (Rs.’000)
1. Debentures/Bonds
2. Banks
3. Financial Institutions
4. Others (to be specified)
Total

SCHEDULE 8 – INVESTMENTS‐SHAREHOLDERS

. Year Year
(Rs.’000) (Rs.’000)
Long –term Investments
1. Government securities and Government Guaranteed Bonds
including treasury bills
2. Other approved securities
3. Other investments
(a) Shares
(aa) Equity
(bb) Preference
(b) Mutual Funds
(c) Derivative Instruments
(d) Debentures/Bonds
(e) Other securities (to be specified)
(f) Subsidiaries
Investment Properties – Real Estate
4. Investments in Infrastructure and Social sector
5. Other than Approved Investments
Short –term Investments
(a) Shares
(aa) Equity
(bb) Preference
(b) Mutual Funds
(f) Subsidiaries
Investment Properties – Real Estate
5 Other than Approved Investments
Total

SCHEDULE 8 A– INVESTMENTS‐POLICYHOLDERS
. Year Year
(Rs.’000) (Rs.’000)
2.
Other approved securities
3.
(a) Shares
(aa) Equity
(bb) Preference
(b) Mutual Funds
(f) Subsidiaries
4. (g) Investment Properties – Real Estate
Investments in Infrastructure and Social sector
5.
Other than Approved Investments
1. Short –term Investments
Government securities and Government Guaranteed Bonds
2. including treasury bills
(a) Shares
(aa) Equity
(bb) Preference
(b) Mutual Funds
(f) Subsidiaries
4. (g) Investment Properties – Real Estate
5 Investments in Infrastructure and Social sector
Other than Approved Investments
Total

SCHEDULE 8 B– ASSETS HELD TO COVER LINKED LIABILITIES

. Year Year
(Rs.’000) (Rs.’000)

3. (a) Shares
(aa) Equity
(bb) Preference
(b) Mutual Funds
(f) Subsidiaries
(g) Investment Properties – Real Estate
5. Other than Approved Investments

3. (a) Shares
(aa) Equity
(bb) Preference
(b) Mutual Funds
(f) Subsidiaries
5 Other than Approved Investments
Total

SCHEDULE 9– LOANS
. Year Year
(Rs.’000) (Rs.’000)
1. Security‐wise Classification
Secured
(a) On mortgage of
property (aa) In India
(bb) Outside India
(b) On Shares, Bonds, Govt. Securities, etc.
(c) Loans against policies
(d) Others (to be
specified) Unsecured
Total
2. Borrower‐wise Classification
(a) Central and State Governments
(b) Banks and Financial Institutions
(c) Subsidiaries
(d) Companies
(e) Loans against policies
(e) Others (to be specified)
Total
3. Performance‐wise Classification
(a) Loans classified as
standard (aa) In India
(bb) Outside India
(b) Non‐standard loans less
provisions (aa) In India
(bb) Outside India
Total
4. Maturity‐wise Classification
(a) Short Term
(b) Long Term
Total

SCHEDULE 10– FIXED ASSETS

Particulars Cost/Gross Block Depreciation Net Block
Deductions
Adjustmen
Up to Last
As at year
Additions
On Sales/
Opening
Previous
To Date
For the
Closing
Year
Year
Year
end
Goodwill
Intangibles (specify)
Land‐Freehold
Leasehold Property
Buildings
Furniture &
Fittings
Information
Technology
Equipment
Vehicles
Office Equipment
Others (Specify nature)
Total
Work in progress
Grand Total
Previous Year
SCHEDULE 11– CASH AND BANK BALANCES
No. Particulars Current Previous
Year Year
(Rs.’000) (Rs.’000)
1. Cash (including cheques, drafts and stamps)
2. Bank Balances
(a) Deposit Accounts
(aa) Short‐term (due within 12 months of the date
of Balance Sheet)
(bb) Others
(b) Current Accounts
(c) Others (to be specified)
3. Money at call and short notice

(a) With banks

4. (b) With other
institutions Others (to be
specified)
Total
Balances with non‐scheduled banks in 2 and 3 above
Cash and Bank Balances
1. In India
2. Outside India
Total

SCHEDULE 12– ADVANCES AND OTHER ASSETS

. Year Year
(Rs.’000) (Rs.’000)
Advances
1. Reserve deposits with ceding
2. companies Application money for
3. investments Prepayments
4. Advances to Directors/Officers
5. Advance tax paid and taxes deducted at source
(Net provision for taxation)
Total (A)
Other Assets
1. Income accrued on investments
2. Outstanding Premiums
3. Agents’ balances
4. Foreign Agencies Balances
5. Due from other entities carrying on insurance
business (including reinsurers)
6. Due from subsidiaries/holding company
7. Deposit with Reserve Bank of India [Pursuant to section 7 of
Insurance Act, 1938]
8.
Total (B)
Total (A+B)
SCHEDULE 13– CURRENT LIABILITIES
. Year Year
(Rs.’000) (Rs.’000)
2. Balances due to other insurance companies
3. Deposits held on re‐insurance ceded
4. Premiums received in advance
5. Unallocated premium
6. Sundry creditors
7. Due to subsidiaries/holding company
8. Claims outstanding
9. Annuities due
10. Due to Officers/Directors
Total

SCHEDULE 14– PROVISIONS

. Year Year
(Rs.’000) (Rs.’000)
1. For taxation (less payments and taxes deducted at source)
2. For proposed dividends
3. For dividend distribution tax
Total
SCHEDULE 15– MISCELLANEOUS EXPENDITURE
(To the extent not written off or adjusted)
. Year Year
(Rs.’000) (Rs.’000)
1. Discount allowed on issue of shares/debentures
Total
Explanation of some items in final accounts
1. Claims – Claim is the amount payable by the insurance company. In life insurance
business, claims may arise due to two reasons i.e., by death or maturity.
2. Annuity – It is an annual payment which a life insurance company guarantees to pay for
lump sum money received in the beginning.
3. Surrender value – If an insured is unable to pay the further premium, he can get his
policy paid from the company. It is the present cash value of the policy which a holder
gets from the company on surrendering all the rights of the policy.
4. Bonus in reduction of premium – instead of paying bonus in cash, the insurance
company may deduct the bonus from the premium due from the insured. This is known
as bonus in reduction of policy.
5. Consideration for annuities granted ‐ Any lump sum payment received by the insurance
company in lieu of granting annuity is called consideration for annuity granted.
6. Re‐insurance – When a company accepts a business of more value and in order to
reduce the risk, may pass on some business to the other company, it is called
reinsurance.
7. Commission on Reinsurance Accepted or Ceded – The Company which passes some
business to the other company gets some commission which is known as commission on
reinsurance business ceded. Commission paid on reinsurance business accepted is
known as Commission on Reinsurance Accepted.
Illustration 1
From the following information prepare Revenue Account of Safe Insurance Co. Ltd. as on 31 st
March 2011 (figures in 000s):
Claims by death Rs. 152280, Claims by maturity Rs.60220, Premiums Rs.1411380, Transfer fees
Rs.258, Consideration for annuities granted Rs.164254, annuities paid Rs. 106922, Bonus in
cash Rs.4832, Expenses of Management Rs.63840, Commission Rs.19148, Interest and dividend
Rs.195680, Income tax Rs.11420, Surrenders Rs.26280, Bonus in reduction of premium Rs.
1960, Dividends to shareholders Rs.11000 and Life Assurance Fund Rs. 3042000.
Solution:
FORM A – RA
Name of the insurer: Safe Insurance Co. Ltd.
Registration No. and Date of Registration with the
IRDA
Revenue Account for the year ended 31st March, 2011
. ule Year Year
(Rs.’000) (Rs.’000)
(a) Premium 1 1411380
(b) Reinsurance ceded (‐)
(c) Reinsurance accepted (+)
(b) Profit on sale/redemption of investments 195680
(c) (Loss on sale/redemption of investments)
(d) Transfer/ Gain on revaluation/change
in fair value
Other income (to be specified):
Consideration for annuities granted
Transfer fee
Total (A) 164254
Commission 258
Operating Expenses related to insurance 1771572
business Provision for doubtful debts 2 19148
Bad debts written off 3 63840
Provision for tax
investments (net)
(b) Others (to be
specified): Income tax
Total (B)
Benefits Paid (Net) 11420
Interim Bonuses paid 94408
Change in valuation of liability in respect of 4 363494
life policies
Total (C)
Surplus (Deficit) (D)=(A)‐(B)‐(C)
Appropriations 363494
Transfer to Other Reserves (to be specified) 1313670
Balance being Funds for Future
Appropriations
Total (D)
1313670
1313670

SCHEDULE 1 ‐ PREMIUM
. Year Year
(Rs.’000) (Rs.’000)
1. First Year Premiums 1411380
2. Renewal Premiums
3. Single Premiums
Total Premium 1411380
SCHEDULE 2 – COMMISSION EXPENSES

Year Year
(Rs.’000) (Rs.’000)
Commission paid 19148
Direct ‐ First Year Premiums
Renewal Premiums
Single Premiums
insurance Ceded 19148
Net Commission
. Year Year
(Rs.’000) (Rs.’000)
2. Travel, conveyance and vehicle running
3. expenses Training expenses
5. Repairs
9. Medical fees
11. Advertisement and publicity
12.
Interest and bank charges
13.
Others(to be specified):
63840
Expenses of management
14.
Depreciation 63840
Total

SCHEDULE 4 – BENEFITS PAID [NET]

. Year Year
(Rs.’000) (Rs.’000)
1. Insurance Claims:
(a) Claims by Death 152280
(b) Claims by Maturity 60220
(c) Annuities/Pension payment 106922
(d) Other
benefits: 26280
Surrenders 4832
Bonus in cash 1960
Bonus in reduction of premium 11000
Dividend to shareholders 363494
Total
Illustration 2
From the following trial balance of Guarantee Life Insurance co. Ltd prepare Revenue Account and
Balance Sheet as at 31st March 2011(figures in 000s).
Claims paid and outstanding 115200
Surrenders 3300
Reversionary bonus paid and 12300
outstanding Establishment charges
23500
Commission to agents
Medical fees 48500
Directors and auditors fees 10100
Stationery and printing 24000
Postage and telegram 4800
Office rent 1050
Bank charges and commission 800
Investments
950
Loans and policies
Outstanding interest 4047400
Outstanding premiums 174700
Cash at bank 69800
Fine and fees received 23200
Interest and dividend 29600
received 300
Premiums received and 225300
outstanding Premiums received in
330800
advance Claims admitted but not
paid Claims intimated but not 9000
admitted Sundry creditors 210000
Life fund in the beginning of the year 20000
18000
3780000

4593400 4593400

Solution:
FORM A – RA
Name of the insurer: Guarantee Life Insurance Co.
Ltd. Registration No. and Date of Registration with the
IRDA
. ule Year Year
(Rs.’000) (Rs.’000)
(a) Premium 1 330800
(a) Interest, dividends & rent – Gross 225300
Other income (to be specified):
Fines and fees 300
Total (A) 556400
Commission 2 48500
Operating Expenses related to insurance 3 69400
business Others (to be specified):
Total (B) 117900
Benefits Paid (Net) 4 130800
Total (C) 130800
Surplus (Deficit) (D)=(A)‐(B)‐(C) 307700
FORM A ‐ BS
Name of the insurer: Guarantee Life Insurance Co.
Ltd. Registration No. and Date of Registration with the
IRDA
Balance Sheet as at 31st March, 2011
. ule Year Year
(Rs.’000) (Rs.’000)
Sources of Funds
Share Capital 5 ‐‐‐‐‐‐‐‐‐‐
Reserves and Surplus 6 4087700
Sub‐Total 4087700

Borrowings 7 ‐‐‐‐‐‐‐‐‐
Policyholders’ Funds:
Credit/[Debit] Fair Value Change
Account Policy Liabilities
Insurance Reserves
Provision for Linked Liabilities

Sub‐Total ‐‐‐‐‐‐‐‐‐‐
Funds for Future Appropriations ‐‐‐‐‐‐‐‐‐‐
Total 4087700
Investments 8 4047400
Loans 9 174700
Fixed Assets 10 ‐‐‐‐‐‐‐‐‐
4222100
Current Assets
29600
93000
Sub‐Total (A)
122600
257000
Provisions 14
‐‐‐‐‐‐‐‐‐
Sub‐Total (B)
Net Current Assets (C)=(A)‐(B) 257000
Miscellaneous Expenditure (to the extent not ‐134400
written off or adjusted) 15 ‐‐‐‐‐‐‐‐‐‐
Total
4087700
Schedules forming part of A‐RA

Particulars Amount Amount
Schedule 1 – Premium earned – net
Premium received and outstanding 330800
Schedule 2 – Commission
Commission paid to agents 48500
Schedule 3 –operating expenses related to insurance
business
Establishment charges 23500
Medical fees 10100
Stationery and printing 4800
Directors and auditors fees 24000
Postage and telegram 1050
Office rent 4200
Sundry expenses 800
Bank charges and commission 950 69400
Schedule 4 – Benefits paid (Net)
Claims paid and outstanding 115200
Surrenders 3300
Reversionary bonus paid 12300 130800

Schedules forming part of A‐BS

Schedule 5 – Share Capital Nil
Schedule 6 – Reserves and Surplus
Life Fund at the beginning 3780000
Add: Surplus 307700 4087700
Schedule 7 – Borrowings Nil
Schedule 8 – Investments 4047400

Schedule 9 – Loans 174700
Schedule 10 – Fixed Assets Nil
Schedule 11 – Cash and Bank Balances 29600
Schedule 12– Advances and Other Assets
Outstanding Interest 69800
Outstanding Premium 23200 93000
Schedule 13 – Current Liabilities

18000
Sundry Creditors
Premiums received in advance 9000
Claims admitted but not paid 210000
Claims intimated but not admitted 20000 257000
Schedule 14 – Provisions Nil

Schedule 15 – Miscellaneous Expenditure Nil
Determination of profit in life insurance business

A life insurance company earns profit when the life insurance fund exceeds its net
liability. The net liability is the excess of present value of future claims of current policies over
the present value of premiums to be received in future in respect of current policies. Net
liability is to be compared with life assurance fund on a particular date in order to calculate the
surplus or deficiency. Usually this comparison is made by preparing a statement called
Valuation Balance Sheet. Its format is as follows:
Net Liability ***** Life Fund *****
Surplus (Bal. Fig) ***** Deficit (Bal. Fig) *****
***** *****
As per Section 28 of the Life Insurance Corporation Act 1956, 95%of the surplus must be
distributed to policyholders in the form of bonus in respect of with profit policies. The balance
5% may be utilized for such purpose as determined by the central government. Bonus payable
to policyholders is calculated as follows:

Surplus as per Valuation Balance Sheet ****

Less: Actuarial expenses ****
Dividends payable to shareholders **** ****
****
Add: Interim bonus paid ****
Net Surplus ****
95% of net profit is payable as bonus to policyholders. While paying the above bonus,
interim bonus paid already has to be deducted.
Illustration 3
A life insurance company gets its valuation made once in every two years. Its life assurance
fund on 31st December 2011 was Rs.5555000 before providing for 55000 being the
shareholders’ dividend for 2011. Its actuarial valuation on 31st December 2011 disclosed a net
liability of Rs.3500000. an interim bonus of Rs.100000 was paid to policyholders during the
previous two years. Show Valuation Balance Sheet, Net Profit for the period and Distribution of
surplus.
Solution:
Valuation Balance Sheet as on 31st December 2011
Net Liability 3500000 Life Fund 5555000
Surplus (Bal. Fig) 2055000
5555000 5555000
Calculation of Net profit:
Surplus as per Valuation Balance Sheet 2055000
Less: Dividends payable to shareholders 55000
2000000
Add: Interim bonus paid 100000
Net Surplus 2100000

Distribution of surplus
Bonus to policyholders (2100000x95%) 1995000
Less: interim bonus already paid 100000
Balance due to policyholders 1895000
Final Accounts of General Insurance Companies

The final accounts of a general insurance company consist of (a) Revenue Account, (b)
P&L A/c and (c) Balance Sheet.
Revenue Account (Form B‐RA)

General insurance company may be doing more than one business like fire, marine,
accidental etc. For each type of business a separate Revenue Account is to be prepared in the
prescribed form B‐RA. The form of Revenue Account is given below:

FORM B – RA
Name of the insurer
Revenue Account for the year ended 31st March, 20….

. ule Year Year
(Rs.’000) (Rs.’000)
1. Premiums Earned (Net) 1
3. Change in Provisions for unexpired risk
4. Interest, Dividend & Rent ‐ Gross
Total (A)
1. Claims Incurred 2
2. Commission 3
3. Operating Expenses related to insurance business 4
Total (B)
Operating Profit/ (Loss) from Fire/ Marine/
Miscellaneous business (C)=(A‐B)
Appropriations
Transfer to Catastrophe Reserve
Total (C)
Profit And Loss Account (Form B‐PL)

The P&L A/c is prepared to calculate the overall profit of the general insurance business.
Operating profits (or losses) of fire, marine and miscellaneous insurance are taken in the P&L
A/c. income from investments, profit or loss on sale of investments, bad debts, provision for
doubtful debts etc. are taken in the P&L A/c.
FORM B ‐ PL
Name of the insurer
Profit and Loss Account for the year ended 31st March, 20….
. ule Year Year
(Rs.’000) (Rs.’000)
1. Operating Profit/ (Loss)
(a) Fire Insurance

(b) Marine Insurance

(c) Miscellaneous Insurance
2. Income from investments
(d) Interest, dividends & rent – Gross
(e) Profit on sale/redemption of investments
Less: Loss on sale of investments
3. Other income (to be specified)
Total (A)
4. Provisions (other than taxation)
(a) For diminution in the value of investments
(net)
(b) For Doubtful Debts
5. (c) Others (to be specified)
Other Expenses
(a) Expenses other than those directly related
to the insurance business
(b) Bad debts written off
Total (B)
Profit before tax
Profit after tax
Appropriations
(f) Interim dividends paid during the year
(g) Proposed final dividend
(h) Dividend Distribution Tax
(i) Transfer to Reserves or other accounts (to
be specified)
Balance of Profit/Loss brought forward fro last

year
Balance carried forward to the Balance Sheet
Balance Sheet (Form B‐BS)
Balance Sheet of Life Insurance Company is prepared in vertical format. The form of
Balance Sheet is as follows:
FORM B ‐ BS
Name of the insurer

Balance Sheet as at 31st March, 20….

. ule Year Year
(Rs.’000) (Rs.’000)
Sources of Funds
Share Capital 5
Reserves and Surplus 6
Fair Value Change Account
Borrowings
Total 7
Investments 8
Loans 9
Fixed Assets 10
Current Assets
Sub‐Total (A)
Provisions 14
Sub‐Total (B)
Net Current Assets (C)=(A)‐(B)
Total
CONTINGENT LIABILITIES
. Year Year
(Rs.’000) (Rs.’000)
1. Partly paid‐up investments
2. Claims, other than against policies, not acknowledged as
debts by the company
3. Underwriting commitments outstanding (in respect of
shares and securities)
4. Guarantees given by or on behalf of the company
5. Statutory demands/liabilities in dispute, not provided for
6. Reinsurance obligations to the extent not provided for in
accounts
Total

SCHEDULES FORMING PART OF FINANCIAL

STATEMENTS SCHEDULE 1 – PREMIUM EARNED [NET]
. Year Year
(Rs.’000) (Rs.’000)
Premium for direct business written
Add: Premium on reinsurance
accepted Less: premium on
reinsurance ceded Net Premium
Total Premium Earned (Net)
Note: Reinsurance premiums whether on business cede or accepted are to be bought into
account, before deducting commission under the head of reinsurance premiums.
SCHEDULE 2 – CLAIMS INCURRED [NET]
Year Year
(Rs.’000) (Rs.’000)
Claims paid
Direct
Add: Reinsurance accepted
Less: Reinsurance ceded
Net Claims paid
Add: Claims outstanding at the end of the year
Less: Claims outstanding at the
beginning Total Claims Incurred
SCHEDULE 3 – COMMISSION
Year Year
(Rs.’000) (Rs.’000)
Commission paid
Direct
insurance Ceded
Net Commission
Note: The profit/commission, if any, are to be combined with the Re‐insurance accepted or Re‐
insurance ceded figures.
. Year Year
(Rs.’000) (Rs.’000)
2. Managerial remuneration
3. Travel, conveyance and vehicle running expenses
5. Repairs
9. Medical fees
(a) As auditor
(b) As adviser or in any other capacity, in respect of:
(j) Taxation matters
(ii) Insurance matters
(iii) Management services; and
(c) In any other capacity
11. Advertisement and publicity
12. Interest & bank charges
13. Others(to be specified)
14. Depreciation
Total
Note: Items of expenses and income in excess of one percent of the total premiums (less
reinsurance) or Rs.500000 whichever is higher, shall be shown as a separate line item.
SCHEDULE 5 – SHARE CAPITAL
. Year Year
(Rs.’000) (Rs.’000)
1. Authorised capital
2. Issued Capital
3. Subscribed Capital
4. Called‐up Capital
Less: Calls unpaid
Add: Equity Shares forfeited (Amount originally paid
up) Less: Par value of equity shares bought back
Less: Preliminary Expenses
Expenses including commission or brokerage
on underwriting or subscription of shares
Total
Notes:
(a) Particulars of the different classes of capital should be separately stated.
(b) The amount capitalized on account of issue of bonus shares should be disclosed.
(c) In case any part of the capital is held by a holding company, the same should be

SCHEDULE 5A – PATTERN OF SHAREHOLDING

[As certified by the Management]
Current Year Previous Year
Shareholders No. of % of No. of % of
Shares Holding Shares Holding
Promoters
*Indian
*Foreign
Others
Total
SCHEDULE 6 – RESERVES AND SURPLUS
. Year Year
(Rs.’000) (Rs.’000)
1. Capital Reserve
2. Capital Redemption Reserve
3. Securities Premium
4. General Reserves
Less: Debit balance in P&L A/c, if any
Less: Amount utilized for buy back.
5. Catastrophe Reserve
6. Other Reserves (to be specified)
7. Balance of Profit in P&L A/c
Total
Note: Additions to and deductions from the reserves shall be disclosed under each of the specified
heads.
. Year Year
(Rs.’000) (Rs.’000)
1. Debentures/Bonds
2. Banks
3. Financial Institutions
Total
. Year Year
(Rs.’000) (Rs.’000)
1. Government securities and Government Guaranteed
Bonds including treasury bills

(a) Shares
(aa) Equity
(bb) Preference
(b) Mutual Funds
(f) Subsidiaries
4. Investments in Infrastructure and Social
5. sector Other than Approved Investments
1. Government securities and Government Guaranteed
Bonds including treasury bills
(a) Shares
(aa) Equity
(bb) Preference
(b) Mutual Funds
(f) Subsidiaries
4. Investments in Infrastructure and Social
5 sector Other than Approved Investments
Total
SCHEDULE 9– LOANS
. Year Year
(Rs.’000) (Rs.’000)
1. Security‐wise Classification
Secured
(a) On mortgage of
property (aa) In India
(bb) Outside India
(b) On Shares, Bonds, Govt. Securities, etc.
(c) Others (to be
specified) Unsecured
Total
2. Borrower‐wise Classification

(a)Central and State Governments

(b)Banks and Financial Institutions
(c)Subsidiaries
(d)Industrial Undertakings
(e)Others (to be specified)
Total
3. Performance‐wise Classification
(a) Loans classified as
standard (aa) In India
(bb) Outside India
(b) Non‐performing loans less
provisions (aa) In India
(bb) Outside India
Total
4. Maturity‐wise Classification
(a) Short Term
(b) Long Term
Total
SCHEDULE 10– FIXED ASSETS
Particulars Cost/Gross Block Depreciation Net Block
For the Year
Adjustments
Deductions
Up to Last
As at year
Additions
On Sales/
Previous
Opening
To Date
Closing
Year
Year
end
Goodwill
Intangibles (specify)
Land‐Freehold
Leasehold Property
Buildings
Furniture & Fittings
Information
Technology
Equipment
Vehicles
Office Equipment
Others (Specify nature)
Total
Work in progress
Grand Total
Previous Year

SCHEDULE 11– CASH AND BANK BALANCES

. Year Year
(Rs.’000) (Rs.’000)
1. Cash (including cheques, drafts and stamps)
2. Bank Balances
(a) Deposit Accounts
(aa) Short‐term (due within 12
months) (bb) Others
(b) Current Accounts
3. Money at call and short notice
(a) With banks
(b) With other
4. institutions Others (to be
specified)
Total
Balances with non‐scheduled banks in 2 and 3 above
SCHEDULE 12– ADVANCES AND OTHER ASSETS
. Year Year
(Rs.’000) (Rs.’000)
Advances
1. Reserve deposits with ceding
2. companies Application money for
3. investments Prepayments
4. Advances to Directors/Officers
5. Advance tax paid and taxes deducted at source
(Net provision for taxation)
Total (A)
Other Assets
1. Income accrued on investments
2. Outstanding Premiums
4. Foreign Agencies Balances
5. Due from other entities carrying on insurance
business (including reinsurers)
6. Due from subsidiaries/holding company
7.
Deposit with Reserve Bank of India [Pursuant to section 7 of
Insurance Act, 1938]
8.
Total (B)
Total (A+B)
SCHEDULE 13– CURRENT LIABILITIES

. Year Year
(Rs.’000) (Rs.’000)
2. Balances due to other insurance companies
3. Deposits held on re‐insurance ceded
4. Premiums received in advance
5. Unallocated premium
6. Sundry creditors
7. Due to subsidiaries/holding company
8. Claims outstanding
9. Due to Officers/Directors
Total
SCHEDULE 14– PROVISIONS
. Year Year
(Rs.’000) (Rs.’000)
1. Reserve for Unexpired Risk
2. For taxation (less payments and taxes deducted at source)
3. For proposed dividends
4. For dividend distribution tax
Total
SCHEDULE 15– MISCELLANEOUS EXPENDITURE
(To the extent not written off or adjusted)
. Year Year
(Rs.’000) (Rs.’000)
1. Discount allowed on issue of shares/debentures
Total
Reserve for Unexpired Risk
The reserve maintained to meet any possible liability in respect of those policies which
are not expired at the end of an accounting year is called reserve for unexpired risk. Opening
balance for reserve for unexpired risk is added to the premium and closing balance of reserve
for unexpired risk is deducted from the premium. The net premium should be shown in revenue
account. The closing balance of reserve for unexpired risk should be shown in the balance sheet
under the head ‘provisions’. At present reserve for unexpired risk will be created as follows:
a. 50% of net premium for fire insurance, marine cargo business and
miscellaneous insurances.
b. 100% of net premium for marine hull business.
In addition to the above reserve, a company can maintain more reserves. Then it is
called Additional Reserve.

Illustration 4
From the following figures taken from the books of Asia Insurance Co. Ltd doing the fire insurance
business, prepare the final accounts for the year 2010‐2011.
Fire fund on 1st April 2010 930000
General Reserve 450000
Investments 3600000
Premium 2701533
Claims paid 602815
Share capital – Equity shares @ Rs.100 each 900000
Additional Reserve on 1st April 2010 330000
75000
Profit and loss Account (credit)
112525
Reinsurance premium
21119
Claims recovered from reinsurers
48016
Commission on reinsurance ceded 250000
Advance income tax 20000
agents’ balance (Debit) 299777
Commission on direct business 60038
Commission on reinsurance accepted 22300
Outstanding premium 60000
st
Claims intimated but not paid on 1 April 2010 431947
Expenses of management 36000
Audit fees (General) 5804
Rate and tax (General) 67500
Rent (General) 153000
22500
182462
Sundry creditors
Cash in hand and bank balances
The following further information may also be noted:

1. Expenses of management include survey fees and legal expenses of Rs.36000and
Rs.20000 relating to claims
2. Claims intimated but not paid on 31st March 2011 Rs.104000
3. Income tax to be provided @55%
4. Proposed dividend 8%
5. Transfer to general reserve Rs.200000
6. Reserve for unexpired risk to be kept @ 40% of net premium.
Solution:
FORM B – RA
Name of the insurer: Asia Insurance Co. Ltd
IRDA

. ule Year Year
1. Premiums Earned (Net) 1 2483405
Total (A) 2483405
1. Claims Incurred 2 681696
2. Commission 3 311799
3. Operating Expenses related to insurance business 4 375947
Total (B) 1369422
Operating Profit/ (Loss) from Fire business 1113963
(C)=(A‐B)
Appropriations
Total (C) 1113963
FORM B ‐ PL
Profit and Loss Account for the year ended 31st March, 2011
. ule Year Year
(a) Fire Insurance 1113963
(b) Marine Insurance
2.
153000
(b) Profit on sale/redemption of
investments Less: Loss on sale of
3. investments 1266963

Total (A)
 For diminution in the value
of investments (net)
 For Doubtful Debts
 Others (to be specified)
5. Other Expenses
(a) Expenses other than those
directly related to the insurance
business
Rent 67500
Rates and taxes 5804 109304
audit fees 36000 109304
Total (B) 1157659
Profit before tax 636712
Provision for taxation(‐) 520947
Profit after tax
Appropriations
(a) Interim dividends paid during
the year
(b) Proposed final 72000
dividend (900000x8%)
(c) Dividend Distribution Tax
(d) Transfer to Reserves or 200000
other accounts (to be
specified) general reserve 272000
248947
Balance of Profit/Loss brought forward from 75000
last year
Balance carried forward to the Balance Sheet 323947
FORM B ‐ BS
. ule Year Year
Sources of Funds
Share Capital 5 900000
Reserves and Surplus 6 973947
Borrowings 7

Total 1873947
Investments 8 3600000
Loans 9
Fixed Assets 10
3600000
Current Assets
Cash and Bank Balances 11 182462
Advances and Other Assets 12 292300
Sub‐Total (A) 474762
Provisions 14 2074315
Sub‐Total (B) 2200815
Net Current Assets (C)=(A)‐(B) ‐1726053
Total 1873947
Schedules forming part of B‐RA
Premium 2701533
less: Reinsurance 112525
Net premium 2589008
Adjustment for changes for reserve for unexpired risk
Add: Opening balance of reserve(930000+330000) 1260000
3849008
less: closing balance of reserve:
2589008x40% = 1035603
Additional opening = 330000 1365603 2483405
Schedule 2 – Claims incurred

Claims paid 602815
Add: Survey fees 36000
Legal expenses 20000
658815
less: Claims recovered from reinsurance 21119
Net claims paid 637696
Add: outstanding at the end 104000
741696
less: outstanding at the beginning 60000 681696

Commission paid 299777
Add: Reinsurance commission accepted 60038
359815
Less: Reinsurance commission ceded 48016 311799
Schedule 4‐ operating expenses related to insurance business

Expenses of Management 431947
less: survey fees and legal expenses(36000+20000) 56000 375947
Schedules forming part of B‐BS

Schedule 5 – Share Capital 900000
Schedule 6 – Reserves and Surplus
General Reserve 450000
Add: Additional 200000
650000
Balance in P&L A/c 323947 973947

Schedule 9 – Loans Nil
Schedule 10 – Fixed Assets Nil
Schedule 11 – Cash and Bank Balances 182462
Agents’ balances 20000
outstanding premium 22300 292300

Sundry Creditors 22500
Claims intimated but not paid 104000 126500
Schedule 14 – Provisions
Reserve for unexpired risk(closing) 1365603
Provision for tax 636712
Proposed dividend 72000 2074315
Schedule 15 – Miscellaneous Expenditure Nil

Illustration 5: From the following trial balance of Zenith Insurance Company Ltd prepare
Revenue Account for Fire and Marine business and Profit and Loss Account for the year ended
31st March 2011 and a Balance Sheet on that date:
Investments 406980
Freehold premises 306142
Leasehold premises 12604
Agents balances 46212
Advance income tax on interest and 4513
dividend Claims paid and outstanding:
Fire 102412
Marine 261512
Expenses of management:
Fire 96512
Marine 142218
Commission:
Fire 34921
Marine 62857
919
Interest accrued
14761
Office furniture
90212
Preliminary expenses
101738
Cash and bank balance
400000
Share capital (4000 shares @ Rs. 100
each) Claims admitted but not paid: 4620
Fire 9808
Marine 44962
Creditors
Due to reinsurers: 2471
Fire 4143
Marine 19512
Interest and 807
dividend Other
incomes Premium 356418
received: 859960
Fire 1702701 1702701
Marine
Provision for unexpired risk is to be made at 50% of the premium received for fire
business and 100% of the premium received for marine business.
Solution:
FORM B – RA
Name of the insurer: Zenith Insurance Co. Ltd
IRDA


No Particulars Sched Fire Marine
. ule
1. Premiums Earned (Net) 1 178209 ‐‐‐‐‐‐‐‐‐‐‐
Total (A) 178209 ‐‐‐‐‐‐‐‐‐‐‐‐
1. Claims 2 102412 261512
2. Incurred 3 34921 62857
3. Commission 4 96512 142218
4. Operating Expenses related to insurance
business Others (to be specified) 233845 466587
Total (B) ‐55636 ‐466587
Operating Profit/ (Loss) from Fire
business (C)=(A‐B)
Appropriations
Transfer to Other Reserves (to be
specified) Total (C) ‐55636 ‐466587
FORM B ‐ PL
IRDA
Profit and Loss Account for the year ended 31st March, 2011
No Particulars Sche Current Previous
. dule Year Year
(a) Fire Insurance ‐55636
(b) Marine Insurance ‐466587
2. Income from investments
(a) Interest, dividends & rent – Gross 19512
(b) Profit on sale/redemption of
investments Less: Loss on sale of
3. investments 807
Total (A) ‐501904


(a) For diminution in the value
of investments (net)
(b) For Doubtful Debts
5. Other Expenses
(a) Expenses other than those
directly related to the insurance
business
(c) Others (to be
‐‐‐‐‐‐‐‐‐‐
Balance carried forward to the Balance Sheet (A)‐(B) ‐501904
FORM B ‐ BS
IRDA
N Particulars Sched Current Previous
o. ule Year Year
Sources of Funds
Share Capital 5 309788
Reserves and Surplus 6 ‐‐‐‐‐‐‐‐‐‐
Borrowings 7 ‐‐‐‐‐‐‐‐‐‐‐
Total 309788
Investments
Loans 8 406980
Fixed Assets 9 ‐‐‐‐‐‐‐‐‐‐
Current Assets 10 333777
Advances and Other Assets
Sub‐Total (A) 11 101738
Provisions Sub‐
171300
Total (B) 13
66004
Net Current Assets (C)=(A)‐(B) 14
1038169
Miscellaneous Expenditure (to the extent
not written off or adjusted) 1104173
Debit Balance in Profit and Loss Account ‐932873
15
Total
501904
309788
Schedules forming part of B‐RA

Particulars Fire Marine
Premium (Net) 356418 859960
less: closing balance of reserve:
50% of fire and 100% of marine 178209 859960
178209 ‐‐‐‐‐‐‐‐‐‐‐‐
Schedule 2 – Claims incurred
Claims paid 102412 261512
Commission paid 34921 62857
Schedule 4‐ operating expenses related to insurance
business 96512 142218
Expenses of Management
Schedules forming part of B‐BS
Schedule 5 – Share Capital
Paid up shares 400000
less: Preliminary expenses 90212 309788
Schedule 6 – Reserves and Surplus Nil
Schedule 9 – Loans
Nil
Schedule 10 – Fixed Assets
306412
Freehold premises
12604
Leasehold premises
14761 333777
Office furniture
Schedule 11 – Cash and Bank Balances
101738
Cash in hand and Bank balances
Agents’ balances 46212
69562
Accrued interest 919

Sundry Creditors 44962
Claims admitted but not paid(4620+9808) 14428
Due to reinsurers 6614 66004
Schedule 14 – Provisions
Reserve for unexpired risk(closing)
Fire 178209 1038169
Marine 859960 Nil
Schedule 15 – Miscellaneous Expenditure

Exercises:
1. Following were the balance extracted from the trial balance of the Southern Life Insurance
Co. Ltd. at 31st March 2011:
Rs. 000s Rs. 000s
Balance of account at the Claims admitted but not
beginning of the year 2000000 paid 6000
Govt. Securities 1000000 Surrenders 20000
Profit on realization of Single premiums 80000
assets 2000 Consideration for annuities
Investment fluctuation granted 50000
account 10000 Interest, dividends and rent
Claims under policies by received 70000
death 60000 Depreciation on furniture 3000
Claims under policies by Administrative expenses 36000
maturity 100000 Salaries 3000
Loans on mortgages 560000 Auditor’s fees 1500
Loans on policies 300000 Director’s fees 300
Freehold property and 103000 Legal expenses 1000
furniture 3600 Advertising 1400
Sundry creditors 2000 Printing, stationery and
Outstanding premiums 24000 others 10800
Commission paid 24000 Cash at bank 168400
Interest accrued not due 3000 Provision for depreciation 3000
Premium (other than
single) 200000
Prepare a Revenue Account and Balance sheet.
Ans: (Profit: Rs.141000 and Balance sheet Total: Rs.2151000)
2. From the following balances of Mysore General Insurance Co. Ltd. as on 31st March 2011,
prepare Revenue Accounts, Profit & Loss Account and Balance sheet.
Claims paid less Building (cost Rs.125000) 87000
reinsurance: Office equipment (cost
Fire 80000 Rs.48000) 30000
Marine 62000 Cash in hand 56000
General reserve 118000 Cash at bank 104000
Commission paid: Premium less reinsurance:
Fire 48000 Fire 210000
Marine 39000 Marine 163000
Share capital (20000 shares Tax deducted at source 9000
of Rs.100 each) 200000 Furniture (cost Rs. 18000) 12000
Expenses of management Premium due:
Fire 53000 Fire 28000
st
Reserve for unexpired risk Claims outstanding on 1

(1st April 2010): April 2010:

Fire 204000 Fire 14000
Investments at cost 2515000 Due from other insurers 27000
Depreciation 21000 Director’s fees 4000
Additional reserves (1st Commission on reinsurance
April 2010): ceded:
Fire 132000 Fire 23000
Interest accrued 25000 Dividends (Credit) 20000
Contingency reserve 39000 Interest on investments 100000
Investment reserve 47000 43000
Due to other insurers
Following further information is also given:
(a) Claims outstanding on 31st March 2011 are: Fire Rs.17000, Marine Rs.6000
(b) Market value of investments is Rs.2401000.
(c) Increase additional reserve by 10% of net premium for the year for fire.
(d) Maintain reserves for unexpired risks at 50% of premium for the year in case of
fire insurance and 100% of premium for the year in case of marine insurance.
Ans: (Fire profit: Rs.127000, Marine loss: Rs.16000, Balance carried to Balance sheet:
Rs.139000 and Balance sheet total: Rs.2410000).
………………..

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

Scrutinized by : Dr. K. Venugopalan

Layout: Computer Section, SDE

A company is an association of persons who contribute money or money’s worth to a

between stock and share is expressed or implied.

Types of preference shares

Types of share capital

event of company’s winding up.

Difference between equity shares and preference shares

Equity shares Preference shares

Journal Entries for Share Issue

4. On receipt of allotment money:

Bank A/c Dr 10000

Issue of shares at premium

(ii) Bank A/c A/c

Share allotment A/c Dr (allotment money due)

When both Preference and Equity Shares are issued

1. When application money is

Share Capital A/c Dr (amount called up)

(forfeiture of 50 shares due to non‐payment

Reissue of forfeited shares

issue) To share capital A/c (amount paid up)

Share allotment A/c Dr 405000

REDEMPTION OF PREFERENCE SHARES

1. The shares to be redeemed must be fully paid up.

Dr To Premium on Redemption A/c

5. Entry for appropriation from divisible profits to meet deficiency of amount

Preference shareholders A/c 1000000

BUY BACK OF SHARES

Difference between shares and debentures

1. Secured or Mortgage debentures – These debentures are secured either on a

3. From condition of redemption point of view

e. A debenture issued at Rs.102, repayable at Rs.105.

Discount or Loss on issue of debentures

The following entries are passed for redemption of debentures.

2. Redemption out of Capital

2010 Bank A/c Dr 1200000

30 Debenture holders A/c Dr 400000

At the end of second and subsequent years:

iii. For annual amount set aside

P & L Appropriation A/c Dr

(Transfer of profit to sinking fund)

Sinking Fund Investment A/c Dr 1600

Premium on Redemption of debentures A/c

Debenture holders A/c

110000 debentures A/c 110000

Sinking Fund A/c

Sinking Fund Investment A/c

5. Redemption by Insurance Policy

During all the years till the policy maturity:

Premium on redemption of debentures A/c

Debenture Redemption Fund A/c

Debenture Redemption Policy A/c (Investment)

2009 Bank A/c Dr 760000

preference shares 40000 debentures 96000

(of the above (Under each head

shares….shares are original cost and the

3. [particulars to the sheet,(after the first

preference shares balance sheet)