7 Final Accounts of Companies

FINAL ACCOUNTS OF COMPANIES
MANAGERIAL REMUNERATION
Section 197 of Companies Act, 2013 : The total remuneration payable by a Public company to director,
manager and managing director in any financial year should not exceed 11% of net profit of that
company for financial year computed in a manner laid down in Section 198.
Percentage of remuneration allowed

WTD → Whole time director MD → Managing director PTD → Part time director
WTD/MD/Manager
Only 1 >1
Maximum → 5% 10% (for all directors)
PTD
Depends on
WTD/MD WTD/MD
√ ×
Maximum → 1% 3%
Expenses Incomes
Allowed Disallowed Allowed Disallowed
Forward approach Backward approach

Gross Profit Net Profit
+ Allowed incomes - Disallowed incomes
- Allowed expenses + Disallowed expenses
= Net Profit for managerial remuneration = Net Profit for managerial remuneration
COMPUTATION OF NET PROFIT

• All Normal business expenses like salaries, rent etc.
• Interest on debt or any loan
• Actual repairs (Revenue nature)
Allowed • Depreciation as specified u/s 123 of Companies Act, 2013/Sch II
expenses • Bonus as per payment of Bonus Act
• Compensation for breach of contract/Workment Compensation – Legal
• Loss on sale of fixed asset
• Charitable donations
• Directors fees
Copyright of these notes is with CA. Nitin Goel (IQ Education Worldwide). Contact: 9915005021, 9988451199
• Provisions like
• Provision for tax
• Provision for doubtful debt
• Transfer to Reserve
Disallowed • Proposed/Declared dividend
expenses • Preliminary expenses written off
• Expenditure on scientific research
• Commission /salary to manager /director
• Workmen compensation – Illegal/voluntary
• Capital expenditure
• Subsidy received from government (bounties)
Allowed
• Profit on sale of fixed assets (Revenue nature only)
Incomes
• Interest on investment
• Transfer fees
Disallowed • Premium on issue of share/debentures
Incomes • Profit on sale of forfeited shares
• Profit on sale of fixed asset (Capital nature)
Question
Following is the profit and loss account of Azad Ltd. for the year ended 31st March, 2020:
Rs.
To Office & administrative exp. 3,10,000 By Balance b/d 3,43,200
To Selling & distribution expenses 1,92,000 By Gross profit b/d 24,15,000
To Directors’ fees 39,500 By Subsidies 1,39,300
To Managerial remuneration 1,70,000 By Interest on investment 9,500
To Interest on debentures 18,500 By Transfer fees 1,000
To Compensation for breach of 27,000 By Profit on sale of machinery 25,000
contract (W.D.V. Rs.30,000)
To Donation to charitable trust 15,000
To Depreciation on fixed assets 3,12,000
To Preliminary Expenses 30,000
To Investment revaluation reserve 12,500
To Provision for taxation 7,10,000
To General reserve 2,50,000
To Balance c/d 8,46,500
29,33,000 29,33,000
Additional information:
a) Original cost of the machinery sold was Rs. 40,000.
b) Depreciation on fixed assets as per Schedule II of the Companies Act, 2013 was Rs. 3,42,000.
You are required to calculate managerial remuneration in the following situations:

a) when there is only whole–time director;
b) when there are two whole–time directors; and
c) when there are two whole–time directors, a managing director and a part–time director.
Solution
Calculation of Net Profit u/s 198 of the Companies Act, 2013
Particulars Amount
Net Profit as per P&L A/c 8,46,500
Less: Balance b/d (3,43,200)
Less: Capital Profit on sale of machinery (15,000)
(30,000+25,000-40,000)
Add: Managerial remuneration 1,70,000
Add: Depreciation on fixed assets 3,12,000
Less: Depreciation on fixed assets as per Companies Act (3,42,000)
Add: Preliminary Expenses 30,000
Add: Investment revaluation reserve 12,500
Add: Provision for taxation 7,10,000
Add: General reserve 2,50,000
16,30,800
Managerial remuneration:
a) 1 whole–time director = 16,30,800 * 5% = 81,540
b) 2 whole–time directors = 16,30,800 * 10% = 1,63,080
c) 2 whole–time directors, 1 managing director & 1 part–time director =16,30,800 * 11% = 1,79,388
Remuneration in Case of Nil /Inadequate Profits
Where the effective capital of company is Maximum Yearly remuneration
Negative or less than Rs. 5 crore 60 lacs
Rs. 5 crores & above but less than Rs. 100 crores 84 lacs
Rs. 100 crores & above but less than Rs. 250 crores 120 lacs
Rs. 250 crores & above 120 lacs + 0.01% of effective capital in excess of
250 crores
Provided that above limits can be increased if resolution passed by shareholders is special resolution. Also
clarified that for a period < 1 year limits shall be pro rated
Question
The following extract of Balance Sheet of Star Ltd. was obtained:
Balance Sheet (Extract) as on 31st March, 2020
Laibilities Rs.
Authorised capital:
60,000, 14% preference shares of Rs. 100 60,00,000
6,00,000 Equity shares of Rs. 100 each 6,00,00,000
6,60,00,000
Issued and subscribed capital:
45,000, 14% preference shares of Rs. 100 each fully paid 45,00,000
3,60,000 Equity shares of Rs. 100 each, Rs. 80 paid-up 2,88,00,000
Share Suspense Account 60,00,000
Reserves and surplus
Capital reserves (Rs. 4,50,000 is revaluation reserve) 5,85,000
Securities premium 1,50,000
Secured loans:
15% Debentures 1,95,00,000
Unsecured loans:
Public deposits 11,10,000
Cash credit loan from SBI(short term) 3,95,000
Current Liabilities:
Trade Payables 10,35,000
Assets
Investment in shares, debentures, etc. 2,25,00,000
Profit and Loss account (Dr. Balance) 45,75,000
Share suspense account represents application money received on shares, the allotment of which is not
yet made. You are required to compute effective capital as per the provisions of Schedule V. Would your
answer differ if Star Ltd. is an investment company?
Solution
Computation of effective capital:
Where Star Ltd. is a non- Where Star Ltd is an
investment company investment company
Paid-up share capital
45,000, 14% Preference shares 45,00,000 45,00,000
3,60,000 Equity shares 2,88,00,000 2,88,00,000
Capital reserves 1,35,000 1,35,000
Securities premium 1,50,000 1,50,000
15% Debentures 1,95,00,000 1,95,00,000
Public Deposits 11,10,000 11,10,000
Profit and Loss account (Dr. balance) (45,75,000) (45,75,000)
Investments (2,25,00,000) -
Effective capital 2,71,20,000 4,96,20,000
SCHEDULE III TO THE COMPANIES ACT 2013
PART I – BALANCE SHEET
Name of the Company…………………….
Balance Sheet as at ………………………
Figures as at the Figures as at the
Note
PARTICULARS end of current end of previous
No.
Reporting period reporting period
A. EQUITY AND LIABILITIES
1. Shareholder's funds
a Share capital
b Reserves and surplus
c Money received against share warrants
2. Share application money pending allotment
3. Non-Current Liabilities
a Long-term borrowings
b Deferred tax liabilities (Net)
c Other long term liabilities
d Long-term provisions
4. Current Liabilities
a Short-term borrowings
b Trade payables
c Other current liabilities
d Short-term provisions
TOTAL
B. ASSETS
1. Non-Current Assets
a Property,Plant & Equipment
i. Tangible assets
ii. Intangible assets
iii. Capital work-in-Progress
iv. Intangible assets under development
b Non-current investments
c Deferred tax assets (net)
d Long-term loans and advances
e Other non-current assets
2. Current Assets
a Current investments
b Inventories
c Trade receivables
d Cash and cash equivalents
e Short-term loans and advances
f Other current assets
TOTAL
OPERATING CYCLE:
It is the time between the acquisition of assets for processing and their realization in cash or cash
equivalents. Where the normal operating cycle cannot be identified, it is assumed to have a duration of
12 months.
CONTINGENT LIABILITIES and COMMITMENTS (to the extent not provided for)
a. Claims against the company not acknowledged as debt
b. Guarantees
c. Arrears of fixed cumulative dividends on preference shares
d. Estimated amount of contracts remaining to be executed on capital account and not provided for
e. Uncalled liability on shares and other investments partly paid
f. Bills discounted not yet matured
g. Other money for which the company is contingently liable & other commitments.
PART II – STATEMENT OF PROFIT AND LOSS

Name of the Company…………………….
Profit and loss statement for the year ended ………………………
Figures as at the Figures as at the
Note
PARTICULARS end of current end of previous
No.
Reporting period reporting period
I. Revenue from operations
II. Other income
III. Total Revenue (I + II)
IV. Expenses:
Cost of materials consumed
Purchases of Stock-in-Trade
Changes in inventories of finished goods, work-in-
progress and Stock-in-Trade
Employee benefits expense
Finance costs
Depreciation and amortization expense
Other expenses
Total Expenses
V. Profit before exceptional and extraordinary
items and tax (III-IV)
VI. Exceptional items
VII. Profit before extraordinary items and tax (V - VI)
VIII. Extraordinary Items
IX. Profit before tax (VII- VIII)
X Tax expense:
(1) Current tax
(2) Deferred tax
XI. Profit (Loss) for the period from continuing
operations (VII-VIII)
XII. Profit/(loss) from discontinuing operations
XIII. Tax expense of discontinuing operations
XIV. Profit/(loss) from Discontinuing operations (after
tax) (XII-XIII)
XV Profit (Loss) for the period (XI + XIV)
XVI. Earnings per equity share:
(1) Basic
(2) Diluted
Note: Any item of income or expenditure which exceeds 1% of the revenue from operations or Rs.
1,00,000 whichever is higher to be separately disclosed.
Question
On 31st March, 2020, X Ltd. provides the following ledger balances after preparing its Profit & Loss
Account for the year ended 31st March, 2020.
Particulars Debit Credit
Equity Share Capital, fully paid shares of Rs. 50 each 80,00,000
Calls in arrear 15,000
Land 25,00,000
Buildings 30,00,000
Plant & Machinery 24,00,000
Furniture & Fixture 13,00,000
Securities Premium 15,00,000
General Reserve 9,41,000
Profit & Loss Account 5,80,000
Loan from Public Finance Corporation 26,30,000
(Secured by hypothecation of Land)
Other Long Term Loans 22,50,000
Short Term Borrowings 4,60,000
Inventories: Finished goods 45,00,000
Raw materials 13,00,000
Trade Receivables 17,50,000
Advances: Short Term 3,75,000
Trade Payables 8,13,000
Provision for Taxation 3,80,000
Unpaid Dividend 70,000
Cash in Hand 70,000
Balances with Banks 4,14,000
1,76,24,000 1,76,24,000
The following additional information was also provided in respect of the above balances:
(1) 50,000 fully paid equity shares were allotted as consideration for land.
(2) The cost of assets were:
Building Rs. 32,00,000
Plant and Machinery Rs. 30,00,000
Furniture and Fixture Rs. 16,50,000
(3) Trade Receivables for Rs. 4,86,000 due for more than 6 months.
(4) Balances with banks include Rs. 56,000, the Naya bank, which is not a scheduled bank.
(5) Loan from Public Finance Corporation repayable after 3 years.
(6) The balance of Rs. 26,30,000 in the loan account with Public Finance Corporation is inclusive of Rs.
1,34,000 for interest accrued but not due.
(7) Other long term loans (unsecured) includes:
Loan taken from Nixes Bank Rs. 13,80,000 (Amount repayable within one year Rs. 4,80,000)
Loan taken from Directors Rs. 8,50,000
(8) Bills Receivable for Rs. 1,60,000 maturing on 15th June, 2020 has been discounted.
(9) Short term borrowings includes:
Loan from Naya bank Rs. 1,16,000 (Secured)
Loan from directors Rs. 48,000
(10) Transfer of Rs. 35,000 to general reserve has been proposed by the Board of directors out of the
profits for the year.
(11) Inventory of finished goods includes loose tools costing Rs. 5 lakhs (which do not meet definition of
property, plant & equipment as per AS-10)
You are required to prepare the Balance Sheet of the Company as on March 31st 2020 as required under
Part - I of Schedule III of the Companies Act, 2013. You are not required to give previous year figures.
Solution
X Ltd.
Balance Sheet as on 31st March, 2020
Particulars Notes Rs.
Equity and Liabilities
(1) Shareholders’ funds
a) Share capital 1 79,85,000
b) Reserves and Surplus 2 30,21,000
(2) Non-current liabilities
a) Long-term borrowings 3 42,66,000
(3) Current liabilities
a) Trade Payables 8,13,000
b) Other current liabilities 4 6,84,000
c) Short-term provisions 5 3,80,000
d) Short-term borrowings 6 4,60,000
Total 1,76,09,000
Assets
(1) Non Current assets
a) Property,Plant & Equipment
(i) Tangible assets 7 92,00,000
(2) Current assets
a) Inventories 8 58,00,000
b) Trade receivables 9 17,50,000
c) Cash and cash equivalents 10 4,84,000
d) Short-term loans and advances 3,75,000
Total 1,76,09,000
Notes to accounts
Particulars Rs.
1. Share Capital
Equity share capital
Issued & subscribed & called up
1,60,000 Equity Shares of Rs.50 each
(of the above 50,000 shares have been issued for 80,00,000
consideration other than cash)
Less: Calls in arrears (15,000) 79,85,000
Total 79,85,000
2. Reserves and Surplus
General Reserve 9,41,000
Add: Current year transfer 35,000 9,76,000
Profit & Loss balance
Profit for the year 5,80,000
Less: Appropriations:
Transfer to General reserve (35,000) 5,45,000
Securities Premium 15,00,000
Total 30,21,000
3. Long-term borrowings
Secured: Term Loan
Loan from Public Finance Corporation [repayable after 3 24,96,000
years (26,30,000 - 1,34,000 for interest accrued but not due)]
(Secured by hypothecation of plant and machinery
Unsecured Loan
Bank Loan (Nixes Bank) (13,80,000-4,80,000) 9,00,000
Loan from Directors 8,50,000
Others 20,000 17,70,000
Total 42,66,000
4. Other current liabilities
Interest accrued but not due on borrowings 1,34,000
Unpaid dividend 70,000
Loan from Nixes bank repayable within one year 4,80,000 6,84,000
5. Short-term provisions
Provision for taxation 3,80,000
6. Short-term borrowings
Loan from Naya bank (Secured) 1,16,000
Loan from Directors 48,000
Others 2,96,000 4,60,000
7. Tangible Assets
Land 25,00,000
Building 32,00,000
Less: Depreciation (2,00,000) 30,00,000
Plant & Machinery 30,00,000
Furniture & Fittings 16,50,000
Total 92,00,000
8. Inventories
Raw Materials 13,00,000
Finished Goods 40,00,000
Loose tools 5,00,000
Total 58,00,000
9. Trade receivables
Outstanding for a period exceeding six months 4,86,000
Other Amounts 12,64,000
Total 17,50,000
10. Cash and cash equivalents
Cash at bank
With Scheduled Banks 3,58,000
With others 56,000 4,14,000
Cash in hand 70,000
Total 4,84,000
Contingent Liabilities and Commitments (to the extent not provided for)
Contingent Liabilities: Bills discounted but not matured 1,60,000

7 Final Accounts of Companies

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FINAL ACCOUNTS OF COMPANIES

Percentage of remuneration allowed

Maximum → 5% 10% (for all directors)

Allowed Disallowed Allowed Disallowed

Forward approach Backward approach

COMPUTATION OF NET PROFIT

You are required to calculate managerial remuneration in the following situations:

PART II – STATEMENT OF PROFIT AND LOSS

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