Unit 1: Company final accounts
Corporate Accounting and Auditing notes · PTU syllabus (MCOP403-18)
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Unit summary
Company final accounts follow the Companies Act, 2013 and Schedule III. This unit covers the statutory requirements for company accounts, the form and contents of the statement of profit and loss and balance sheet, the meaning of profit for managerial remuneration, and divisible profits.
After this unit you can
- Explain the requirements of the Companies Act, 2013 for financial statements
- Prepare the statement of profit and loss and balance sheet in Schedule III format
- Compute net profit for managerial remuneration under Section 198
- Explain divisible profits and their determination
PTU syllabus topics
- Requirements of the Companies Act 2013
- form and contents of profit and loss account and balance sheet
- meaning of profit and managerial remuneration
- divisible profits
Equity
Share capital, other equity
Non-current liabilities
Long-term borrowings, provisions
Current liabilities
Trade payables, short-term borrowings
Non-current assets
PPE, intangibles, investments
Current assets
Inventories, receivables, cash
Topic 1
Requirements of the Companies Act, 2013
- Books of account (Section 128): kept at the registered office on accrual basis and double-entry system; may be kept in electronic form (with daily back-up on servers in India); preserved for 8 years.
- Financial statements (Section 2(40)): balance sheet, profit and loss account (income and expenditure account), cash flow statement (not mandatory for OPC, small and dormant companies), statement of changes in equity (if applicable), notes — in the format of Schedule III.
- Must give a true and fair view and comply with accounting standards (AS / Ind AS).
- Approved by the board, signed and laid before the AGM; filed with the ROC within 30 days of the AGM (AOC-4); annual return within 60 days (MGT-7).
- Board's report (Section 134): state of affairs, dividend, reserves, directors' responsibility statement, CSR, risk management.
- Consolidated financial statements required for companies with subsidiaries, associates or joint ventures.
Topic 2
Form and contents of the profit and loss account and balance sheet
I Revenue from operations
II Other income
III Total income
IV Expenses
Cost of materials consumed, purchases of stock-in-trade, changes in inventories, employee benefits expense, finance costs, depreciation and amortisation, other expenses
V Profit before exceptional items and tax
Tax expense
Current and deferred tax
Profit for the period
Earnings per share
Equity and liabilities
Shareholders' funds (share capital, reserves and surplus), share application money pending allotment, non-current liabilities (long-term borrowings, deferred tax liabilities, long-term provisions), current liabilities (short-term borrowings, trade payables, other current liabilities, short-term provisions)
Assets
Non-current assets (property, plant and equipment, intangible assets, capital work-in-progress, non-current investments, long-term loans and advances), current assets (current investments, inventories, trade receivables, cash and cash equivalents, short-term loans and advances)
- Notes to accounts give details — share capital (authorised, issued, subscribed, calls-in-arrears), reserves and surplus, long-term borrowings.
- Managerial remuneration (Section 197): total to directors and managers of a public company not to exceed 11% of net profits (computed under Section 198); higher with special resolution.
- Dividend: proposed dividend is disclosed in notes (not provided) until declared at the AGM (AS-4 / Ind AS 10).
Exam tip
Present the vertical balance sheet with Note No. column — examiners award marks for correct headings and sub-headings.
Topic 3
Profit and managerial remuneration
- Section 197: total managerial remuneration of a public company to directors, MD, WTD and manager — 11% of net profits (computed under Section 198); one MD/WTD/manager — 5%; more than one — 10%; non-executive directors — 1% (if there is an MD/WTD) or 3% otherwise. Higher payments need a special resolution; in case of no or inadequate profits, Schedule V limits apply.
- 1Net profit as per P&L
- 2Add back
Managerial remuneration, income tax, provision for tax, excess depreciation, capital losses, losses on sale of investments
- 3Deduct
Depreciation under Section 123 (Schedule II), profits on sale of fixed assets (beyond cost — capital profit), premium on shares, unrealised gains from fair valuation
- 4Net profit for remuneration
Example
Net profit before tax and managerial remuneration ₹2 crore after all adjustments; one MD → maximum ₹10 lakh (5%); total for all directors and managers → ₹22 lakh (11%).
Topic 4
Divisible profits
Divisible profits are profits that can be legally distributed as dividend.
- Section 123: dividend only out of (a) current year's profits after depreciation, (b) accumulated past profits after depreciation (following rules), (c) money provided by government for dividend under guarantee.
Depreciation must be provided
Schedule II rates
Past losses
Set off before dividend from current profit (lower of loss and depreciation not provided)
Capital profits
Distributable only if realised in cash and allowed by articles (court cases: Lubbock v. British Bank)
Revaluation reserves
Not distributable
Unrealised fair value gains
Not distributable
Free reserves
Can be used subject to Declaration and Payment of Dividend Rules
- Legal cases: Verner v. General and Commercial Investment Trust (1894) — fixed capital loss need not be made good before dividend (old law); Indian law now strictly requires depreciation.
Key terms
- Schedule III
- Format of company financial statements
- Managerial remuneration
- Payment to directors and managers limited by Section 197
- Section 198 profit
- Net profit computed for remuneration purposes
- Divisible profit
- Profit legally available for dividend
- Free reserves
- Reserves available for distribution as dividend
Quick revision
- Books under Section 128; financial statements; AOC-4, MGT-7.
- Schedule III vertical formats with notes.
- Remuneration: 11% overall; 5%/10% for executives; 1%/3% non-executives.
- Section 198 adjustments.
- Section 123: dividend from profits after depreciation; capital and revaluation profits restricted.
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.What is Schedule III?
- Q2.What is the overall limit of managerial remuneration?
- Q3.State two items added back while computing profit under Section 198.
- Q4.What are divisible profits?
- Q5.Can revaluation reserve be used for dividend?
- Q6.What are free reserves?
Long-answer questions
- Q1.Explain the provisions of the Companies Act relating to books of account and financial statements.
- Q2.Explain the form and contents of the balance sheet and statement of profit and loss.
- Q3.Explain the computation of net profit for managerial remuneration.
- Q4.Explain the concept of divisible profits and legal rules for dividend.
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