Corporate Accounting कंपनी लेखांकन

Quick summary

Every company must prepare its financial statements – Balance Sheet, Statement of Profit and Loss, Cash Flow Statement, notes and statement of changes in equity – in the form given in Schedule III of the Companies Act, 2013 (Sec 129). This topic explains the vertical formats, the main heads and sub-heads, and how common items and adjustments are shown.

Key points

• Sec 129: financial statements must give a true and fair view, follow notified Accounting Standards (AS or Ind AS) and use the Schedule III form.
• Schedule III has Division I (companies following AS), Division II (Ind AS companies) and Division III (Ind AS NBFCs). B.Com syllabi mostly use Division I.
• The Balance Sheet is in vertical form with two parts: Equity and Liabilities and Assets; previous year figures are given beside the current year.
• Current vs non-current: an item due/realisable within 12 months (or the operating cycle) is current; otherwise non-current.
• Details are given in Notes to Accounts; the face of the statements shows only main heads with a "Note No." column.
• Reserves and surplus include capital reserve, securities premium, general reserve and the surplus (balance) in Statement of Profit and Loss; a debit balance of P&L is shown as a negative figure under this head.
• Proposed dividend is not provided as a liability; it is disclosed in the notes (AS-4 revised).
• Depreciation is charged as per Schedule II (useful-life based).
• Calls in arrears are deducted from called-up capital in the note on share capital.
• Rounding off depends on turnover (e.g. to the nearest hundred, thousand, lakh or crore).

Important terms

• Shareholders' funds (भागधारकांचा निधी) – share capital + reserves and surplus.
• Long-term borrowings – debentures, term loans repayable after 12 months.
• Trade payables – amounts owed to suppliers for goods and services.
• Property, Plant and Equipment (PPE) – tangible fixed assets such as land, buildings and machinery.
• Cash and cash equivalents – cash, bank balances and very short-term deposits.

Formats and formulas

Worked example – Balance Sheet of P Ltd as at 31 March (Division I):

Statement of Profit and Loss (short form):

Finance cost check: 10% × 2,00,000 debentures = ₹20,000.

5 important questions

Q1. What are the main heads of the Balance Sheet under Schedule III?

Equity and Liabilities: shareholders' funds, share application money pending allotment, non-current liabilities, current liabilities. Assets: non-current assets and current assets.

Q2. Where will you show (a) securities premium, (b) debentures due after 3 years, (c) bills payable, (d) goodwill?

(a) Reserves and surplus; (b) long-term borrowings; (c) trade payables under current liabilities; (d) intangible assets under non-current assets.

Q3. Explain the provisions of Sec 129 and Schedule III.

Outline: true and fair view, accounting standards, form in Schedule III, consolidated statements for companies with subsidiaries, penalty for non-compliance, the three divisions, general instructions (current/non-current, notes, rounding, previous year figures).

Q4. Prepare the Balance Sheet from a given trial balance with adjustments.

Steps: classify each ledger balance into heads; adjust depreciation, outstanding and prepaid items, provision for tax, transfer to reserve; prepare the Statement of Profit and Loss first; carry the surplus to reserves and surplus; prepare notes; total both sides (as in the example).

Q5. Explain the treatment of dividend, provision for tax and transfer to reserves in company final accounts.

Proposed dividend – disclosed in notes, not a liability until approved at the AGM. Provision for tax – debited to Statement of P&L, shown under short-term provisions. Transfer to reserves – reduces surplus and increases general reserve inside "Reserves and surplus".

Exam tip

Learn the order of heads by heart and always draw the "Note No." column. Prepare notes for share capital and reserves even if the question does not ask; examiners give marks for them.

Quick summary

Goodwill is the value of a firm's reputation, which helps it earn more profit than a normal firm in the same business. It is an intangible asset. Goodwill has to be valued when a business is sold, at amalgamation, when shares are valued, or when partners change. This topic covers the meaning, factors and the main methods of valuing goodwill.

Key points

• Goodwill (ख्याती) – "the present value of a firm's anticipated excess earnings" (Spicer and Pegler); the benefit and advantage of the good name, reputation and connection of a business (Lord Eldon).
• Factors affecting goodwill: location, quality of products, efficient management, monopoly or patents, long-standing customers, nature of business, risk, trend of profits, capital required.
• Purchased goodwill (paid for when buying a business) is recorded in books; self-generated (inherent) goodwill is not recorded (AS-26 / Ind AS 38).
• Average profit method – goodwill = average maintainable profit × number of years' purchase. Weighted average is used if profits show a trend.
• Super profit method – goodwill = super profit × number of years' purchase.
• Capitalisation method – (a) capitalise average profit and deduct net assets, or (b) capitalise super profit directly.
• Annuity method – goodwill = super profit × present value of annuity of ₹1 for the given years at the normal rate.
• Methods of valuation:
• Future maintainable profit – past average profit adjusted for abnormal items, changes in management salary, expected changes and tax.
• Capital employed = total assets (excluding goodwill and fictitious assets, at revalued figures) − outside liabilities. Average capital employed = opening + closing ÷ 2, or closing − ½ of the year's profit.
• Normal rate of return – rate earned by similar firms in the industry.

Important terms

• Super profit – profit earned above the normal profit.
• Years' purchase – number of years for which super/average profit is expected to continue.
• Normal profit – capital employed × normal rate of return ÷ 100.
• Fictitious assets – debit balances with no real value, e.g. preliminary expenses.

Formats and formulas

• Average profit = total profits of given years ÷ number of years.
• Normal profit = capital employed × normal rate ÷ 100.
• Super profit = average (maintainable) profit − normal profit.
• Goodwill (capitalisation of super profit) = super profit × 100 ÷ normal rate.
• Goodwill (capitalisation of average profit) = (average profit × 100 ÷ normal rate) − capital employed.

Worked problem: Profits of the last 4 years: ₹40,000, ₹50,000, ₹60,000 and ₹70,000. Capital employed ₹4,00,000. Normal rate of return 10%.

Both capitalisation methods give the same answer, which is a good check.

5 important questions

Q1. What is goodwill? Why is it called an intangible asset?

Goodwill is the value of the reputation of a business that enables it to earn more than normal profit. It cannot be seen or touched, but it has value and can be bought or sold, so it is an intangible asset.

Q2. What is super profit?

Super profit is the excess of the average maintainable profit over the normal profit expected on the capital employed. Example: average profit ₹55,000, normal profit ₹40,000 → super profit ₹15,000.

Q3. Explain the factors affecting the value of goodwill.

Outline: nature of business, location, efficiency of management, market situation (monopoly), special advantages (licences, patents, contracts), quality and brand, trend of profits, capital required, risk, customer relations.

Q4. Profits for 3 years are ₹30,000, ₹36,000 and ₹42,000; weights 1, 2, 3. Find goodwill at 2 years' purchase of weighted average profit.

Weighted profit = 30,000 × 1 + 36,000 × 2 + 42,000 × 3 = 30,000 + 72,000 + 1,26,000 = ₹2,28,000. Weighted average = 2,28,000 ÷ 6 = ₹38,000. Goodwill = 38,000 × 2 = ₹76,000.

Q5. Explain the methods of valuation of goodwill with formulas.

Outline the four methods, their formulas, when each is suitable, and a short example; mention adjustments for future maintainable profit and capital employed.

Exam tip

Before calculating, adjust past profits for abnormal gains or losses and show the "future maintainable profit" in a separate working. Most students lose marks by skipping this step.

Quick summary

Shares need to be valued when they are not listed, when shares are gifted or transferred, at amalgamation, for taxation, for loans against shares, or when shares are bought in large blocks. This topic covers the need for valuation, the factors affecting the value of a share, and the three main methods: net assets (intrinsic value) method, yield method and fair value method.

Key points

• Need for valuation: unlisted shares, amalgamation and absorption, conversion of preference into equity shares, gift and wealth/estate purposes, loan against shares, compensation on nationalisation, buy-back, and ESOPs.
• Factors: profits and dividend record, net worth, goodwill, future prospects, market conditions, management, demand and supply of shares, rate of return in the industry.
• Net assets method (intrinsic or break-up value): value of net assets available to equity shareholders ÷ number of equity shares. It is used for winding up, amalgamation and when profits are uncertain.
• Net assets = all assets at market/realisable value (including goodwill, excluding fictitious assets) − outside liabilities − preference share capital (and arrears of preference dividend, if any).
• Yield method (market value method): based on expected return. Value per share = (expected rate of return ÷ normal rate of return) × paid-up value per share.
• Expected rate of return = profit available for equity dividend ÷ paid-up equity capital × 100. Profit available = profit after tax − transfer to reserves − preference dividend.
• Fair value method = (intrinsic value + yield value) ÷ 2. It balances asset backing and earning power.
• If the preference shares are participating, their extra share of profit is deducted before the equity yield.
• Partly paid shares: value of fully paid share minus uncalled amount per share (under net assets, notional calls are added to net assets).

Important terms

• Intrinsic value – value of a share based on the net assets backing it.
• Normal rate of return – return that investors expect from similar companies.
• Earning capacity – ability of a company to earn profit on capital employed.
• Dividend yield – dividend per share ÷ market price × 100.

Formats and formulas

Worked problem: Q Ltd has 50,000 equity shares of ₹10 each fully paid and 2,000, 10% preference shares of ₹100 each. Net assets (after outside liabilities) at fair value = ₹8,00,000. Expected profit after tax = ₹1,00,000, of which ₹5,000 goes to reserves each year. Normal rate of return = 12%.

5 important questions

Q1. What is the intrinsic value of a share?

It is the value of a share found by dividing the net assets available to equity shareholders (assets at fair value less outside liabilities and preference capital) by the number of equity shares.

Q2. Why is the fair value method used?

Because the net assets method looks only at assets and the yield method only at earnings. Fair value takes the average of the two, so it reflects both the asset backing and the earning capacity.

Q3. Explain the circumstances in which valuation of shares becomes necessary.

Outline: unlisted shares, amalgamation/absorption, buy-back, gift and succession, loans, conversion of shares, nationalisation compensation, dissenting shareholders, acquisition of a controlling block.

Q4. Net assets ₹9,00,000; equity: 60,000 shares of ₹10, ₹7.50 paid. Find intrinsic value of a partly paid share.

Notional call = 60,000 × 2.50 = ₹1,50,000. Net assets after notional call = ₹10,50,000. Value of a fully paid share = 10,50,000 ÷ 60,000 = ₹17.50. Value of a partly paid share = 17.50 − 2.50 = ₹15.00.

Q5. Explain the yield method of valuation with an example.

Outline: meaning of yield; steps – find future maintainable profit, deduct tax, reserve and preference dividend; expected rate of return; compare with normal rate; formula; use the table above as an example; merits and limits.

Exam tip

Always write a clear "Net assets available to equity shareholders" working. In yield method, check whether the question wants rate of dividend or rate of earning – they give different answers.

Quick summary

Amalgamation means two or more companies joining together so that their businesses are carried on by one company. It may be done by forming a new company (amalgamation) or by an existing company taking over another (absorption). This topic covers the meaning and types under AS-14, methods of calculating purchase consideration, and the entries in the books of the transferor and transferee companies.

Key points

• Amalgamation (एकत्रीकरण) – AS-14 defines it as an amalgamation under the Companies Act or any other statute applicable to companies. Sec 230–232 of the Companies Act, 2013 deal with mergers; approval of the NCLT is needed (fast-track route under Sec 233 for small companies).
• Absorption – an existing company takes over one or more companies. External reconstruction – a new company is formed to take over an existing company in difficulty.
• Transferor company – the company that is taken over (it goes into liquidation). Transferee company – the company that takes over.
• Two types under AS-14: (1) in the nature of merger – all assets and liabilities taken, at least 90% of equity shareholders of the transferor become shareholders of the transferee, consideration only in equity shares (cash only for fractions), business continued, book values kept; (2) in the nature of purchase – any amalgamation that does not meet all these conditions.
• Methods of accounting: pooling of interests for merger (book values, reserves kept as they are) and purchase method for purchase (assets at fair value, only statutory reserves carried forward, through Amalgamation Adjustment Reserve).
• Purchase consideration – what the transferee pays to the shareholders of the transferor, in shares, debentures or cash. It does not include payment to creditors or debenture holders (who are liabilities taken over).
• Methods of calculating purchase consideration: lump sum, net assets method (agreed value of assets taken − liabilities taken), net payment method (total of shares and cash paid to shareholders), intrinsic value/share exchange method (based on the value of shares of both companies).
• If purchase consideration > net assets → goodwill; if less → capital reserve.
• Ind AS 103 (Business Combinations) applies to Ind AS companies; it uses the acquisition method.

Important terms

• Realisation account – opened in the transferor's books to close assets and liabilities and find profit or loss on realisation.
• Business purchase account – debited in the transferee's books with purchase consideration.
• Statutory reserve – a reserve kept by law for a period (e.g. investment allowance reserve).
• Fair value – the amount for which an asset could be exchanged between willing parties.

Formats and formulas

• Purchase consideration (net assets method) = agreed value of assets taken over − agreed value of liabilities taken over.
• Goodwill = purchase consideration − net assets taken over (if positive).

Worked problem (absorption, purchase method): A Ltd takes over B Ltd. B's assets taken at agreed values: PPE ₹3,40,000; inventory ₹1,00,000; receivables ₹80,000; cash ₹20,000. Liabilities taken: creditors ₹60,000; debentures ₹1,00,000. A Ltd pays 30,000 equity shares of ₹10 each at ₹12 per share and ₹40,000 in cash.

Entries in A Ltd's books:

5 important questions

Q1. Distinguish between amalgamation and absorption.

In amalgamation two or more companies are wound up and a new company is formed to take them over. In absorption an existing company takes over one or more companies and no new company is formed.

Q2. What is purchase consideration?

It is the amount agreed to be paid by the transferee company to the shareholders of the transferor company for taking over its business, in shares, other securities or cash (AS-14).

Q3. State the conditions of amalgamation in the nature of merger as per AS-14.

All assets and liabilities taken over; at least 90% of equity shareholders (by face value) become shareholders of the transferee; consideration paid only in equity shares (cash only for fractional shares); business continued; no adjustment to book values except for uniform accounting policies.

Q4. Explain the methods of calculating purchase consideration.

Outline: lump sum, net assets, net payment, intrinsic value (share exchange ratio) methods; formula and a short example for each; treatment of goodwill and capital reserve.

Q5. Explain the entries in the books of the transferor company.

Outline: transfer assets to Realisation A/c; transfer liabilities to Realisation A/c; purchase consideration due (Transferee Co. Dr, To Realisation); receipt of consideration; realisation expenses; closing Realisation A/c (profit/loss to equity shareholders); close share capital and reserves to Equity Shareholders A/c; distribute shares and cash.

Exam tip

Show the purchase consideration working first in a box; most of the marks for this question are in that working and in the Realisation account.