Unit 2: Final accounts of companies
Corporate Accounting notes · PTU syllabus (BBA 521-18)
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Unit summary
A company's profit is shared among reserves, dividends and other uses under legal rules. This unit covers provisions and reserves, managerial remuneration, appropriation of profits, payment of dividend, transfer to the Investor Education and Protection Fund, and bonus shares.
After this unit you can
- Distinguish provisions from reserves
- Calculate managerial remuneration limits
- Explain appropriation of profits and payment of dividend
- Explain IEPF and the accounting for bonus shares
PTU syllabus topics
- Provisions and reserves
- determination of managerial remuneration
- appropriation out of profits
- payment of dividend
- transfer to the Investor Education and Protection Fund
- bonus shares
- 1Net profit for the year
- 2Transfer to reserves
- 3Preference dividend
- 4Equity dividend
- 5Balance carried forward
Retained earnings
Topic 1
Provisions and reserves
Meaning
Charge against profit for a known liability or loss
Appropriation of profit to strengthen finances
Created
Even if there is a loss
Only from profits
Purpose
Meet a specific known liability
General financial strength or a future need
Example
Provision for doubtful debts, tax
General reserve, capital reserve
Types of reserves: revenue reserves (general reserve, dividend equalisation reserve), capital reserves (profit on re-issue of forfeited shares, pre-incorporation profit), and secret reserves.
Topic 2
Managerial remuneration
Under Section 197 of the Companies Act, 2013, total managerial remuneration of a public company should not exceed 11% of net profit (computed as per Section 198). Limits: one managing or whole-time director or manager — 5%; more than one — 10%; other directors — 1% (if there is an MD/WTD) or 3% (otherwise). Higher payments need shareholders' special resolution.
Topic 3
Appropriation of profits and dividend
- 1Net profit after tax
- 2Transfer to reserves (if decided)
- 3Preference dividend
- 4Equity dividend
- 5Balance carried to the next year
Dividend (Section 123) is paid out of current profits (after depreciation), past profits or government money. Interim dividend is declared by the board during the year; final dividend is declared at the AGM on the board's recommendation. Dividends must be paid within 30 days of declaration; unpaid amounts go to an Unpaid Dividend Account.
Topic 4
IEPF and bonus shares
- Investor Education and Protection Fund (IEPF): amounts in the unpaid dividend account that remain unclaimed for 7 years are transferred to the IEPF; shares on which dividends are unclaimed for 7 consecutive years are also transferred.
- Bonus shares (Section 63): fully paid shares issued free to existing shareholders by capitalising free reserves, securities premium or capital redemption reserve (not revaluation reserve).
Example
Journal: General Reserve A/c Dr; To Bonus to Shareholders A/c. Then Bonus to Shareholders A/c Dr; To Equity Share Capital A/c.
Key terms
- Provision
- A charge against profit for a known liability
- Reserve
- An appropriation of profit
- Managerial remuneration
- Pay to directors and managers
- IEPF
- Fund receiving unclaimed dividends after seven years
- Bonus shares
- Free shares issued by capitalising reserves
Quick revision
- Provision = charge; reserve = appropriation.
- Managerial remuneration ≤ 11% of net profit.
- Dividend paid within 30 days; interim by board, final at AGM.
- Unclaimed 7 years → IEPF.
- Bonus from free reserves, securities premium, CRR.
Important exam questions
Practice questions written to the PTU exam pattern for this unit's syllabus: short answers (Section A style) and long answers (Sections B and C style).
Short-answer questions
- Q1.Differentiate between a provision and a reserve.
- Q2.What is the overall limit of managerial remuneration?
- Q3.Differentiate between interim and final dividend.
- Q4.What is IEPF?
- Q5.From which sources can bonus shares be issued?
Long-answer questions
- Q1.Explain the types of reserves and provisions with examples.
- Q2.Explain the provisions of the Companies Act regarding managerial remuneration and dividends.
- Q3.Explain the issue of bonus shares with journal entries.
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