CSEET · Fundamentals of Accounting

Introduction to Company Accounts: formula sheet

Full chapter guide

Key formulas

True and fair view rule: Financial statements = true and fair view + accounting standards + Schedule III form; This is the core of section 129(1). Remember the three parts. Insurance, banking and electricity companies follow forms set by their own Acts.
Laying before AGM: Board lays financial statements for the financial year at every AGM; Section 129(2). The duty is on the Board of Directors.
Consolidated statement: Company with one or more subsidiaries = own statements + consolidated financial statement; Section 129(3). A separate statement of salient features of the subsidiaries is also attached.
Accounting standards: Central Government prescribes standards recommended by ICAI (section 133); The Central Government does this after consulting the National Financial Reporting Authority.
Deviation disclosure: Deviation from a standard: disclose deviation + reasons + financial effect; Section 129(5). The effect is disclosed if there is any.
Penalty for contravention: Imprisonment up to 1 year, or fine ₹50,000 to ₹5,00,000, or both; Section 129(7). It falls on the managing director, the whole-time director in charge of finance, the CFO or any person charged by the Board. If none of them is there, all directors are liable.
Order of share capital: Authorised ≥ Issued ≥ Subscribed ≥ Called-up ≥ Paid-up; Each stage is a part of the one before it. Use it to check your answer.
Unissued capital: Unissued capital = Authorised capital − Issued capital; This is the part the company has not yet offered.
Uncalled capital: Uncalled capital = Subscribed capital − Called-up capital; Money the company has not yet asked shareholders to pay.
Calls in arrear: Calls in arrear = Called-up capital − Paid-up capital; Called but not yet received. Paid-up = Called-up − Calls in arrear.
Equity share capital: Equity share capital = All share capital that is not preference share capital (Section 43); It is defined by exclusion.
Preference share capital: Preferential right to (a) dividend at a fixed amount or rate and (b) repayment of capital on winding up (Section 43); Both rights are part of the definition.
Redemption of preference shares: No irredeemable preference shares; redeemable within 20 years if articles authorise (Section 55); Infrastructure projects may exceed 20 years, subject to prescribed conditions.
Voting of preference holders: Vote only on resolutions affecting their rights, winding up, or repayment or reduction of capital (Section 47(2)); They vote on all resolutions if the dividend is unpaid for two years or more.
Application money received: Dr Bank A/c; Cr Share Application A/c (application money × number of shares applied for); Record on the number of shares applied for, not the number allotted.
Transfer on allotment: Dr Share Application A/c; Cr Share Capital A/c (application money × shares allotted); Any excess application money is refunded or adjusted towards allotment.
Allotment due: Dr Share Allotment A/c; Cr Share Capital A/c (face value part) and Cr Securities Premium A/c (premium); Premium is usually called with allotment unless the question says otherwise.
Call due: Dr Share Call A/c; Cr Share Capital A/c; Receive the call with Dr Bank A/c; Cr Share Call A/c.
Issue price: Issue price = Face value + Premium; Premium is the amount above face value. It is never credited to Share Capital.
Section 53 rule: Shares issued at a discount are void; Exception: conversion of debt for creditors under an RBI-guided statutory resolution plan or debt restructuring scheme.
Forfeiture entry: Share Capital A/c Dr (called-up amount) ; To Calls in Arrear A/c (unpaid calls) ; To Share Forfeiture A/c (amount paid, excluding premium received); If premium was not received, also debit Securities Premium A/c with the unpaid premium and reduce the credit to Calls in Arrear accordingly.
Amount credited to Share Forfeiture: Share Forfeiture = Share capital paid up on the forfeited shares; Premium already received is never part of this amount. It stays in Securities Premium.
Re-issue entry: Bank A/c Dr (cash received) ; Share Forfeiture A/c Dr (discount) ; To Share Capital A/c (face value, or paid-up value); Credit Share Capital with the amount treated as paid up. If re-issued at a premium, credit Securities Premium for the excess.
Maximum discount on re-issue: Discount per share ≤ Amount forfeited per share; Discount above this is not allowed. It keeps the company from refunding more than it retained.
Capital reserve on re-issue: Capital Reserve = Forfeited amount on shares re-issued − Discount allowed on re-issue; If only some shares are re-issued, use forfeited amount × (shares re-issued ÷ shares forfeited) for the first term.
Pro rata allotment: Shares allotted to an applicant = Shares applied × (Shares allotted ÷ Shares applied by all in that category); Excess application money on rejected shares is adjusted against allotment due, or refunded.
Amount received on issue: Cash received = Number of debentures × Issue price per debenture; Issue price is below face value for a discount and above it for a premium.
Discount or premium on issue: Discount (or Premium) = Face value − Issue price (or Issue price − Face value); Discount is debited to 'Discount on Issue of Debentures'. Premium is credited to 'Securities Premium'.
Premium payable on redemption: Premium on redemption = Face value × Premium % payable; Debit 'Premium on Redemption of Debentures' and credit Debenture holders along with the face value.
Debenture interest: Interest = Face value × Rate % × Period ÷ 12 months; Interest is always on face value, not on issue price.
Entry on issue (at par): Bank A/c Dr → Debenture Application and Allotment A/c; then Debenture Application and Allotment A/c Dr → Debentures A/c; With discount, also debit Discount on Issue. With premium, also credit Securities Premium.
Entry on redemption: Debentures A/c Dr + Premium on Redemption A/c Dr → Debenture holders A/c; then Debenture holders A/c Dr → Bank A/c; Two steps: first the amount becomes due, then it is paid.
Debenture Redemption Reserve: Surplus (Profit and Loss) A/c Dr → Debenture Redemption Reserve A/c; Amount as given in the question. It may be used only to redeem debentures (Section 71(4)).
Balance Sheet equality: Total Equity and Liabilities = Total Assets; Both totals must match. If they do not, an item is misclassified or missing.
Shareholders' funds: Shareholders' funds = Share capital + Reserves and surplus + Money received against share warrants; Securities premium, general reserve and the surplus (balance in the Statement of Profit and Loss) go under Reserves and surplus.
Total revenue: Total revenue = Revenue from operations + Other income; Interest and dividend received are usually Other income for a non-finance company.
Profit before tax: Profit before tax = Total revenue − Total expenses; Total expenses include cost of materials consumed, purchases of stock-in-trade, changes in inventories, employee benefit expense, finance costs, depreciation and amortisation, and other expenses.
Profit after tax: Profit for the period = Profit before tax − Tax expense; Tax expense has current tax and deferred tax. Exceptional items, if any, are shown before arriving at profit before tax.
Current / non-current test: Due or realisable within 12 months (or operating cycle) = current; otherwise non-current; Apply this to both assets and liabilities.

Quick revision

A company is a separate legal person with perpetual succession; shareholders own it, directors run it.
Authorised capital ≥ issued capital ≥ subscribed capital; paid-up capital = called-up capital − calls in arrears.
Under section 55 of the Companies Act, 2013, a company limited by shares cannot issue irredeemable preference shares.
Preference shares must be redeemed within twenty years of issue, except certain infrastructure projects.
Preference shares can be redeemed only if fully paid, out of divisible profits or a fresh issue of shares.
When redeeming out of profits, transfer the nominal amount of shares redeemed to the Capital Redemption Reserve.
Under section 52, premium on shares goes to the securities premium account, which is not a free profit.
Securities premium can be used for bonus shares, preliminary expenses, issue expenses, premium on redemption and buy-back.
Under section 53, shares issued at a discount are void, with a limited exception for creditors under a debt restructuring.
Bonus shares can be issued out of free reserves, securities premium or capital redemption reserve, but not out of revaluation reserve.
Bonus shares cannot be issued in lieu of dividend (section 63), and partly paid shares must first be made fully paid.
Under section 62, further shares are first offered to existing equity holders, with a notice period of at least fifteen days unless a lesser period is prescribed, and not more than thirty days.

Common mistakes

Saying company accounts have no fixed format, like a partnership. Fix: Remember that a company follows Schedule III (unless its own Act gives a form). A partnership follows only its deed.
Writing that shareholders own the company's assets. Fix: The company is a separate legal entity and owns the assets. Shareholders own shares.
Treating issued capital as the same as authorised capital. Fix: Remember authorised is the ceiling. Issued is only what has been offered. The difference is unissued capital.
Writing paid-up capital equal to called-up capital when calls are unpaid. Fix: Always compute Paid-up = Called-up − Calls in arrear.
Crediting the premium to Share Capital. Fix: Credit only the face value part to Share Capital. Credit the extra to Securities Premium.
Recording application money on shares allotted instead of shares applied for. Fix: Bank receipt on application is for all shares applied for. Adjust the excess at allotment.
Debiting Share Capital with the amount paid instead of the called-up amount. Fix: Always debit Share Capital with the full amount called on the forfeited shares, then credit Calls in Arrear for the unpaid part.
Crediting Share Forfeiture with the premium that was already received. Fix: Subtract the premium received. Premium stays in Securities Premium, and only paid-up capital goes to Share Forfeiture.
Crediting Debentures with the issue price instead of face value. Fix: Debentures are always credited at face value. The gap goes to Discount on Issue (debit) or Securities Premium (credit).
Treating premium on issue as profit and crediting the Profit and Loss Account. Fix: Credit Securities Premium. Under Section 52, it can be used only for the purposes listed there, such as writing off the discount on issue of debentures or the premium payable on redemption of debentures.

Exam tips

Learn the three-part rule of section 129(1) word for word in your own phrasing. It is the most useful legal point in this topic.
In a 'distinguish' answer, write both sides for every point. One-sided points lose marks.
Link every feature to its accounting effect. A bare list of features earns less than features with reasons.
Mention section 129(3) consolidation only with the words 'where a company has subsidiaries'.
Keep the answer in short points. Neat points are easier for the examiner to mark.
Numerical questions usually give shares and face value. Convert to rupees first and show each stage on its own line.
Learn the exact order of the five stages. A one-line definition of each earns easy marks in short-answer questions.
For the equity versus preference question, write at least four points in a two-column style list: dividend, repayment, voting, redemption.