Preparation Of Financial Statements: Notes | Accounting for CA Intermediate (Old Scheme) PDF Download

 Page 1


? 
LEARNING OUTCOMES 
71*   
 
 
FINANCIAL STATEMENTS  
OF COMPANIES 
 
 
UNIT 1: PREPARATION OF FINANCIAL 
STATEMENTS 
 
 
 
After studying this unit, you will be able to– 
? Know how to maintain books of account of a company. 
? Learn about statutory books of a company. 
? Prepare and present the financial statements of a company 
as per Schedule III to the Companies Act, 2013  
? Calculate managerial remuneration of managers in a 
company. 
? Appreciate the term divisible profits and dividends. 
 
 
 
CHAPTER 
4 
Page 2


? 
LEARNING OUTCOMES 
71*   
 
 
FINANCIAL STATEMENTS  
OF COMPANIES 
 
 
UNIT 1: PREPARATION OF FINANCIAL 
STATEMENTS 
 
 
 
After studying this unit, you will be able to– 
? Know how to maintain books of account of a company. 
? Learn about statutory books of a company. 
? Prepare and present the financial statements of a company 
as per Schedule III to the Companies Act, 2013  
? Calculate managerial remuneration of managers in a 
company. 
? Appreciate the term divisible profits and dividends. 
 
 
 
CHAPTER 
4 
 
 
4.2 
 
ACCOUNTING 
  
 
 
 1.1 MEANING OF COMPANY 
As per Section 2(20) of the Companies Act, 2013, “Company” means a company 
incorporated under the Companies Act, 2013 or under any previous company law 
(e.g., the Companies Act, 1956). Different types of companies have been defined 
(under various sub-sections of the Companies Act, 2013) as follows: 
2(21) “company limited by guarantee” means a company having the liability of 
its members limited by the memorandum to such amount as the members 
may respectively undertake to contribute to the assets of the company in 
the event of its being wound up;  
2(22)  “Company limited by shares” means a company having the liability of its 
members limited by the memorandum to the amount, if any, unpaid on the 
shares respectively held by them;  
Meaning of 
Company and 
maintenance of 
books of accounts
Preparation of 
financial 
statements
Requisites of 
financial 
statements
Managerial 
remuneration
Divisible profits
Declaration and 
payment of 
dividend
Transfer to 
Reserve
 
Page 3


? 
LEARNING OUTCOMES 
71*   
 
 
FINANCIAL STATEMENTS  
OF COMPANIES 
 
 
UNIT 1: PREPARATION OF FINANCIAL 
STATEMENTS 
 
 
 
After studying this unit, you will be able to– 
? Know how to maintain books of account of a company. 
? Learn about statutory books of a company. 
? Prepare and present the financial statements of a company 
as per Schedule III to the Companies Act, 2013  
? Calculate managerial remuneration of managers in a 
company. 
? Appreciate the term divisible profits and dividends. 
 
 
 
CHAPTER 
4 
 
 
4.2 
 
ACCOUNTING 
  
 
 
 1.1 MEANING OF COMPANY 
As per Section 2(20) of the Companies Act, 2013, “Company” means a company 
incorporated under the Companies Act, 2013 or under any previous company law 
(e.g., the Companies Act, 1956). Different types of companies have been defined 
(under various sub-sections of the Companies Act, 2013) as follows: 
2(21) “company limited by guarantee” means a company having the liability of 
its members limited by the memorandum to such amount as the members 
may respectively undertake to contribute to the assets of the company in 
the event of its being wound up;  
2(22)  “Company limited by shares” means a company having the liability of its 
members limited by the memorandum to the amount, if any, unpaid on the 
shares respectively held by them;  
Meaning of 
Company and 
maintenance of 
books of accounts
Preparation of 
financial 
statements
Requisites of 
financial 
statements
Managerial 
remuneration
Divisible profits
Declaration and 
payment of 
dividend
Transfer to 
Reserve
 
 
 
4.3 
 
FINANCIAL STATEMENTS OF COMPANIES 
 
2(42) “Foreign company” means any company or body corporate incorporated 
outside India which –  
(a) has a place of business in India whether by itself or through an agent 
physically or through electronic mode; and 
(b) conducts any business activity in India in any other manner. 
2(45)  “Government company” means any company in which not less than 51% 
of the paid-up share capital is held by the Central Government, or by any 
State Government or Governments, or partly by the Central Government and 
partly by one or more State Governments, and includes a company which is 
a subsidiary company of such a Government company;  
2(62) “One Person Company” means a company which has only one person as a 
member; 
2(68)  “Private company” means a company having a minimum paid-up share 
capital as may be prescribed, and which by its articles,—  
(i)  restricts the right to transfer its shares;  
(ii)  except in case of One Person Company, limits the number of its 
members to two hundred:  
 Provided that where two or more persons hold one or more shares in 
a company jointly, they should, for the purposes of this sub-clause, be 
treated as a single member:  
Provided further that—  
(A)  persons who are in the employment of the company; and  
(B)  persons who, having been formerly in the employment of the 
company, were members of the company while in that 
employment and have continued to be members after the 
employment ceased, should not be included in the number of 
members; and   
(iii) prohibits any invitation to the public to subscribe for any securities of 
the company;  
2(71) “Public Company” means a company which—  
(a)  is not a private company; 
(b)  has a minimum paid-up share capital as may be prescribed:  
Page 4


? 
LEARNING OUTCOMES 
71*   
 
 
FINANCIAL STATEMENTS  
OF COMPANIES 
 
 
UNIT 1: PREPARATION OF FINANCIAL 
STATEMENTS 
 
 
 
After studying this unit, you will be able to– 
? Know how to maintain books of account of a company. 
? Learn about statutory books of a company. 
? Prepare and present the financial statements of a company 
as per Schedule III to the Companies Act, 2013  
? Calculate managerial remuneration of managers in a 
company. 
? Appreciate the term divisible profits and dividends. 
 
 
 
CHAPTER 
4 
 
 
4.2 
 
ACCOUNTING 
  
 
 
 1.1 MEANING OF COMPANY 
As per Section 2(20) of the Companies Act, 2013, “Company” means a company 
incorporated under the Companies Act, 2013 or under any previous company law 
(e.g., the Companies Act, 1956). Different types of companies have been defined 
(under various sub-sections of the Companies Act, 2013) as follows: 
2(21) “company limited by guarantee” means a company having the liability of 
its members limited by the memorandum to such amount as the members 
may respectively undertake to contribute to the assets of the company in 
the event of its being wound up;  
2(22)  “Company limited by shares” means a company having the liability of its 
members limited by the memorandum to the amount, if any, unpaid on the 
shares respectively held by them;  
Meaning of 
Company and 
maintenance of 
books of accounts
Preparation of 
financial 
statements
Requisites of 
financial 
statements
Managerial 
remuneration
Divisible profits
Declaration and 
payment of 
dividend
Transfer to 
Reserve
 
 
 
4.3 
 
FINANCIAL STATEMENTS OF COMPANIES 
 
2(42) “Foreign company” means any company or body corporate incorporated 
outside India which –  
(a) has a place of business in India whether by itself or through an agent 
physically or through electronic mode; and 
(b) conducts any business activity in India in any other manner. 
2(45)  “Government company” means any company in which not less than 51% 
of the paid-up share capital is held by the Central Government, or by any 
State Government or Governments, or partly by the Central Government and 
partly by one or more State Governments, and includes a company which is 
a subsidiary company of such a Government company;  
2(62) “One Person Company” means a company which has only one person as a 
member; 
2(68)  “Private company” means a company having a minimum paid-up share 
capital as may be prescribed, and which by its articles,—  
(i)  restricts the right to transfer its shares;  
(ii)  except in case of One Person Company, limits the number of its 
members to two hundred:  
 Provided that where two or more persons hold one or more shares in 
a company jointly, they should, for the purposes of this sub-clause, be 
treated as a single member:  
Provided further that—  
(A)  persons who are in the employment of the company; and  
(B)  persons who, having been formerly in the employment of the 
company, were members of the company while in that 
employment and have continued to be members after the 
employment ceased, should not be included in the number of 
members; and   
(iii) prohibits any invitation to the public to subscribe for any securities of 
the company;  
2(71) “Public Company” means a company which—  
(a)  is not a private company; 
(b)  has a minimum paid-up share capital as may be prescribed:  
 
 
4.4 
 
ACCOUNTING 
 Provided that a company which is a subsidiary of a company, not being a 
private company, should be deemed to be public company for the purposes 
of this Act even where such subsidiary company continues to be a private 
company in its articles;  
2(85) “Small company” means a company, other than a public company, -  
(i) paid-up share capital of which does not exceed ` 50 lakhs or such 
higher amount as may be prescribed which should not be more than 
` 5 crores; or 
(ii) turnover of which as per its last profit and loss account does not 
exceed ` 2 crores or such higher amount as may be prescribed which 
should not be more than ` 20 crores: 
 Provided that nothing in this clause should apply to: 
(A) a holding company or a subsidiary company 
(B) a company registered under section 8 
(C) a company or body corporate governed by any special Act 
2(92) “Unlimited company” means a company not having any limit on the liability 
of its members; 
2(46)  “Holding company”, in relation to one or more other companies, means a 
company of which such companies are subsidiary companies; 
2(87) “Subsidiary company”, or “subsidiary”, in relation to any other company 
(that is to say the holding company), means a company in which the holding 
company-  
(i) controls the composition of the Board of Directors; or 
(ii) exercises or controls more than one-half of the total share capital 
either at its own or together with one or more of its subsidiary 
companies: 
 Provided that such class or classes of holding companies as may be 
prescribed should not have layers of subsidiaries beyond such 
numbers as may be prescribed. 
 Explanation – For the purposes of this clause, - 
Page 5


? 
LEARNING OUTCOMES 
71*   
 
 
FINANCIAL STATEMENTS  
OF COMPANIES 
 
 
UNIT 1: PREPARATION OF FINANCIAL 
STATEMENTS 
 
 
 
After studying this unit, you will be able to– 
? Know how to maintain books of account of a company. 
? Learn about statutory books of a company. 
? Prepare and present the financial statements of a company 
as per Schedule III to the Companies Act, 2013  
? Calculate managerial remuneration of managers in a 
company. 
? Appreciate the term divisible profits and dividends. 
 
 
 
CHAPTER 
4 
 
 
4.2 
 
ACCOUNTING 
  
 
 
 1.1 MEANING OF COMPANY 
As per Section 2(20) of the Companies Act, 2013, “Company” means a company 
incorporated under the Companies Act, 2013 or under any previous company law 
(e.g., the Companies Act, 1956). Different types of companies have been defined 
(under various sub-sections of the Companies Act, 2013) as follows: 
2(21) “company limited by guarantee” means a company having the liability of 
its members limited by the memorandum to such amount as the members 
may respectively undertake to contribute to the assets of the company in 
the event of its being wound up;  
2(22)  “Company limited by shares” means a company having the liability of its 
members limited by the memorandum to the amount, if any, unpaid on the 
shares respectively held by them;  
Meaning of 
Company and 
maintenance of 
books of accounts
Preparation of 
financial 
statements
Requisites of 
financial 
statements
Managerial 
remuneration
Divisible profits
Declaration and 
payment of 
dividend
Transfer to 
Reserve
 
 
 
4.3 
 
FINANCIAL STATEMENTS OF COMPANIES 
 
2(42) “Foreign company” means any company or body corporate incorporated 
outside India which –  
(a) has a place of business in India whether by itself or through an agent 
physically or through electronic mode; and 
(b) conducts any business activity in India in any other manner. 
2(45)  “Government company” means any company in which not less than 51% 
of the paid-up share capital is held by the Central Government, or by any 
State Government or Governments, or partly by the Central Government and 
partly by one or more State Governments, and includes a company which is 
a subsidiary company of such a Government company;  
2(62) “One Person Company” means a company which has only one person as a 
member; 
2(68)  “Private company” means a company having a minimum paid-up share 
capital as may be prescribed, and which by its articles,—  
(i)  restricts the right to transfer its shares;  
(ii)  except in case of One Person Company, limits the number of its 
members to two hundred:  
 Provided that where two or more persons hold one or more shares in 
a company jointly, they should, for the purposes of this sub-clause, be 
treated as a single member:  
Provided further that—  
(A)  persons who are in the employment of the company; and  
(B)  persons who, having been formerly in the employment of the 
company, were members of the company while in that 
employment and have continued to be members after the 
employment ceased, should not be included in the number of 
members; and   
(iii) prohibits any invitation to the public to subscribe for any securities of 
the company;  
2(71) “Public Company” means a company which—  
(a)  is not a private company; 
(b)  has a minimum paid-up share capital as may be prescribed:  
 
 
4.4 
 
ACCOUNTING 
 Provided that a company which is a subsidiary of a company, not being a 
private company, should be deemed to be public company for the purposes 
of this Act even where such subsidiary company continues to be a private 
company in its articles;  
2(85) “Small company” means a company, other than a public company, -  
(i) paid-up share capital of which does not exceed ` 50 lakhs or such 
higher amount as may be prescribed which should not be more than 
` 5 crores; or 
(ii) turnover of which as per its last profit and loss account does not 
exceed ` 2 crores or such higher amount as may be prescribed which 
should not be more than ` 20 crores: 
 Provided that nothing in this clause should apply to: 
(A) a holding company or a subsidiary company 
(B) a company registered under section 8 
(C) a company or body corporate governed by any special Act 
2(92) “Unlimited company” means a company not having any limit on the liability 
of its members; 
2(46)  “Holding company”, in relation to one or more other companies, means a 
company of which such companies are subsidiary companies; 
2(87) “Subsidiary company”, or “subsidiary”, in relation to any other company 
(that is to say the holding company), means a company in which the holding 
company-  
(i) controls the composition of the Board of Directors; or 
(ii) exercises or controls more than one-half of the total share capital 
either at its own or together with one or more of its subsidiary 
companies: 
 Provided that such class or classes of holding companies as may be 
prescribed should not have layers of subsidiaries beyond such 
numbers as may be prescribed. 
 Explanation – For the purposes of this clause, - 
 
 
4.5 
 
FINANCIAL STATEMENTS OF COMPANIES 
 
(a) a company should be deemed to be a subsidiary company of the 
holding company even if the control referred to in sub-clause (i) or 
sub-clause (ii) is of another subsidiary company of the holding 
company; 
(b) the composition of a company’s Board of Directors should be deemed 
to be controlled by another company if that other company by exercise 
of some power exercisable by it at its discretion can appoint or remove 
all or a majority of the directors; 
(c) the expression “company” includes any body corporate; 
(d) “layer” in relation to a holding company means its subsidiary or 
subsidiaries; 
 1.2 MAINTENANCE OF BOOKS OF ACCOUNT 
As per Section 128 of the Companies Act, 2013, Every company should prepare and 
keep at its registered office books of account and other relevant books and papers 
and financial statement for every financial year which give a true and fair view of 
the state of the affairs of the company, including that of its branch office or offices, 
if any, and explain the transactions effected both at the registered office and its 
branches and such books should be kept on accrual basis and according to the 
double entry system of accounting: 
Provided further that the company may keep such books of account or other 
relevant papers in electronic mode in such manner as may be prescribed.