Slm-Iii Sem - Corpo Accounting

CORPORATE ACCOUNTING.
B COM
(2019 Admission)
III SEMESTER
CORE COURSE (BCM3 B04)
UNIVERSITY OF CALICUT
School of Distance Education
Calicut University P.O. Malappuram, Kerala,
India 673 635
19606
UNIVERSITY OF CALICUT
SCHOOL OF DISTANCE EDUCATION
Study Material
III SEMESTER
B Com
Core Course (BCM3 B04)
CORPORATE ACCOUNTING
Prepared by:
Mr. Rajan P,
Assistant Professor of Commerce (on Contract),
School of Distance Education,
University of Calicut.
Scrutinized by:
Mr. Muhammed Faisal.T,
Assistant Professor of Commerce,
EMEA College of Arts & Science,
Kondotty.
Corporate Accounting 2
INDEX
Page
MODULE CONTENTS
Number
a.) Redemption of
Debentures
b.) Redemption of
MODULE 1 Preference Shares 05-123
c. Bonus Shares
d. Buy back of shares
e) Right Issue
MODULE 2 Banking Companies 124-221
Accounts of Life
MODULE 3 222-277
Insurance
Consolidated Financial
MODULE 4 278-296
Statements (Ind AS 110)
Important Disclosure
MODULE 5 based accounting 297-304
standards
MODULE 1
REDEMPTION OF DEBENTURES
A company raises its capital by means of issue of
shares. But the funds raised by the issue of shares are
seldom adequate to meet their long term financial needs
of a company. Hence, most companies turn to raising
long-term funds also through debentures which are
issued either through the route of private placement or
by offering the same to the public. The finances raised
through debentures are also known as long-term debt.
This chapter deals with the accounting treatment of issue
and redemption of debentures and other related aspects
Redemption of Debentures
Redemption of debentures refers to extinguishing
or discharging the liability on account of debentures in
accordance with the terms of issue. In other words
redemption of debentures means repayment of the
amount of debentures by the company.
Treatment of Discount or loss on issue of debentures
Writing-off Discount/Loss on Issue of
Debentures The discount/loss on issue of debentures is
a capital loss or a fictitious asset and, therefore, must be
written-off during the life time of debentures. The
amount of discount/loss on issue of debentures should
normally not be written-off in the year of issue itself
since the benefit of the debentures would accrue to the

company till their redemption. The discount/loss on it is,
therefore, treated as capital loss. The discount may be
charged to Securities Premium A/c or may be written-
off over 3 to 5 years through statement of profit and loss
as per guidelines issued by ICAI. Section 78 of the
Companies Act, 1956 also permits the utilization of
‘Securities Premium Account’ and other capital profits
for writing-off the discount/loss on issue of debentures.
In case, however, there are no capital profits or if the
capital profits are not adequate, the amount of such
discount/ loss can be written-off against the revenue
profits every year by passing the following journal entry.
Statement of Profit and Loss Dr.
To Discount/Loss on Issue of Debentures A/c
(Discount/loss on issue of debentures written-off)
Illustration 1
A Ltd. Company has issued ` 1,00,000, 9%
debentures at a discount of 6%. These debentures are to
be redeemed equally, spread over 5 annual installments.
Show Discount on issue of debentures account for five
years.
Solution:
Books of A Ltd. Discount on Issue of Debentures
Account
Date Particul Amount Date Particulars Amount
ars ` `
Ist Debenture 6,000 Ist Statement of 2,000
year year Profit & Loss 4,000
Balance c/d
6,000 6,000
4,000 1,600
2,400
IInd Balance IInd
4,000 4,000
year b/d year Statement of
2,400 Profit & Loss 1,200
Balance c/d 1,200
2,400 2,400
IIIrd IIIrd
year year
Balance Statement of
b/d 1,200 800
Profit & Loss
Balance c/d 400
1,200 1,200
IVth 400 IVth 400

year year
400 400
Balance Statement of
b/d Profit & Loss
Vth Vth Balance c/d
year year
Statement of
Profit & Loss
Balance
b/d
Workings Notes:
Total discount on the issue of debentures = 100000 x
= 6000
Amount of discount to be written-off is determined as
follows:
Year Amount (Rs.) Ratio Amount (Rs)

1 1,00,000 5 5/15 6,000 =
2,000
2 80,000 4 4/15 6,000 =

1,600
3/15 6,000 =
3 60,000 3 1,200
4 40,000 2 2/15 6,000 =

800
5 20,000 1 1/15 6,000 =
400
15
Disclosure of discount or loss on issue of debentures

in balance sheet
The discount or loss on issue of debentures is shown
under ‘assets’ under the heading “other current /non
current assets’ as amortised expenses till it is written off.
The amount which is to be written off in next 12 months
should be recorded as unamortized expenses under the
heading “ other Current Assets”. The balancesheet amount
which is to be written off after that period should be shown
as un amortised expenses under the heading “ other non

current assets “ in the balancesheet.
Sources of redemption of debentures
1. Out of fresh issue of shares/debentures
2. By utilization of a part of capital
3. By utilization of profits (accumulated profit)
4. By conversion into shares or debentures
5. Out of proceeds from sales of fixed assets
6. By purchase of own debentures
Methods of redeeming debentures
1. Redemption by lump-sum payment
2. Redemption by annual installment payment
3. Redemption by sinking fund method
4. Redemption by insurance policy method
5. Redemption by purchase of own debentures in
open market
6. Redemption by conversion into new shares or
debentures
Redemption of debenture by lump-sum method
Under this method the entire amount of
debentures is redeemed at the end of the specified period
(expiry) as per the terms of the issue. In other words, the

amount of debentures is paid in one lump-sum to the
debenture holders according to the conditions of the
issue at the end of the life of the debentures.
Redemption out of capital
When debentures are redeemed out of current assets or
sources of the company, it is known as redemption out
of capital. In this method, the debenture redemption
reserve Account (DRR) is not created. In short, when
profits are not used in the redemption of debentures,
then it is said to be redemption out of capital.
Journal entries for redemption of debentures out of
capital
a. When debentures are redeemed at par
Debenture a/c Dr
Debenture holders account
(Amount due to debenture holders)
Debenture holders a/c Dr
Bank
(Payment to debenture holders)
b. When debenture are redeemed at premium
Debenture a/c Dr
Premium on redemption a/c Dr

Debenture holders a/c
(Amount due to debenture holders)
Securities premium reserve/general
reserve /p/l a/c Dr
Premium on redemption a/c
(Premium on redemption provided out of
securities premium reserve or general reserve or p/l a/c)
Bank
(Payment due to debenture holders)
c. When debentures are redeemed at discount (a
rare possibility)
Debenture A/c Dr.
Capital reserve a/c
(Amount due to debenture holders on redemption after
deducting the discount)
Bank a/c
(Payment due to debenture holders)
Redemption of Debentures of out of profit/surplus

When sufficient profits are transferred from Statement
of Profit and Loss to the Debenture Redemption Reserve
Account at the time of redemption of debentures, such
redemption is said to be out of profits. This is called
redemption out of profit because it reduces the amount
of profit available for dividend. The amount thus saved
because of non-payment of dividends is utilized for the
redemption of debentures. This method does not affect
working capital of the company.
As per Section 71(4) of the Companies Act 2013, the
new provisions regarding redemption of debentures out
of profits are:-
1. The company shall create Debenture Redemption
Reserve equivalent to at least 25% of the face value of
debentures before the debenture redemption
commences.
2. The above Debenture Redemption Reserve shall
be created out of the profits available for payment of
dividend by the company. Thus, the dividend gets
reduced because profits are utilised in redemption of
debentures.
3. Every company required to create Debenture
Redemption Reserve shall on or before the 30th day of
April in each year, investor deposit a sum which shall
not be less than 15 per cent of the amount of its

debentures maturing during the year ending on the 31st
March of the next year, in any one or more of the
following methods:
a. in deposits with any scheduled bank, free from
any charge or lien;
b. in unencumbered securities of the Central
Government or of any State Government
c. in unencumbered securities mentioned in sub-
clauses (a) to (d) and (e) of Section 20 of the Indian
Trusts Act, 1882;
d. in unencumbered bonds issued by any other
company which is notified under sub- clause (f) of
Section 20 of the Indian Trusts Act, 1882,
e. the amount invested or deposited as above shall
not be used for any purpose other than for redemption of
debentures maturing during the year referred above :
Provided that the amount remaining invested or
deposited shall not at any time fall below 15 per cent of
the amount of the debentures maturing during the year
ending on the 31st March of that year;
4. In case of partly convertible debentures,
Debenture Redemption Reserve shall be created in
respect of non-convertible portion of debenture issue.
5. The amount credited to the Debenture

Redemption Reserve shall not be utilised by the
company for any purpose other than redemption of
debentures,
Accounting Treatment
The following journal entries are passed in case of
redemption of debentures
1. For investing the amount so appropriated in the
debenture redemption investment (ie, at least 15% of the
amount of debentures to be redeemed by 31st March of
the next year)
Debenture redemption investment A/c Dr.
To Bank A/c
(Amount Invested In Debenture Redemption Investment
A/C As Statutorily Required)
2. For receiving interest on debenture redemption
investment account
Bank A/c Dr.
To Interest on Debenture Redemption
Investment A/c
(Received interest on debenture redemption
investment)
3. For realising the amount invested in debenture

redemption investment Alc
Bank A/C Dr.
To Debenture Redemption Investment A/C
To Debenture Redemption Reserve A/c
(Amount realised on sale of investment and the
profit (if there is profit) transferred to DRR
Account)
4. For creation of Debenture Redemption Reserve
(DRR)
Statement of Profit and Loss (Surplus) Dr.
To Debenture Redemption Reserve A/C
(Amount transferred to DRR Account)
5. For making payment to the debenture holders
Entries have already been given After redemption of all
debentures the balance of DRR A/c should be
transferred to General Reserve Account. The entry is
Debenture Redemption Reserve A/C Dr
To General Reserve A/c
(Balance of DRR A/c transferred to General Reserve
A/c)
Redemption of debentures by annual drawings or

installments
When redemption of debentures is made by annual
installments (drawings) then it is called as redemption
of debentures by annual installments (drawings). This
method is also called “lottery method” of redeeming
debentures. There are two methods of redemption of
debentures by annual installments. They are:-
1. Redemption of Debentures out of Capital:
When the debentures are redeemed out of current
sources of the company, it is known as redemption of
debentures out of capital. It adversely affects the
working capital of the company. Important Note:
According to the Companies (shares Capital and
Debentures) Rules, 2014, it is compulsory to transfer an
amount equal to at least 25% of the total amount of
redeemable debentures to Debenture Redemption
Reserve Account before starting the redemption of
debentures. Thus, redemption of debentures, fully out of
capital, is not possible now.
2. Redemption of Debentures out of Profits:
When the amount payable is charged out of surplus from
profit and loss statement before the redemption of
debentures, then it is called redemption of debentures
out of profits. Important Note: If it is not specified
whether debentures are redeemed out of capital or out of
profits, then it should always be supposed to be out of

profits.
Illustration 2
A ltd, issued 4000, 11% debentures of Rs. 100 each on
April 1, 2016 at a discount of 5% redeemable at
premium of 10% in equal annual drawings in 4 years out
of capital.
Give journal entries both at the time of issue and
redemption of debentures. (ignore the treatment of los
on issue of debenture sand interest)
1/4/16 Bank a/c Dr 380000
Loss on issue of debentures a/c 60000
11% debentures a/c 400000
Premium on redemption of 40000
debentures a/c
(Issue of debentures at 5%
discount and redeemable at
premium of 10%)
Debenture redemption 15000
investment a/c Dr
Bank A/c 15000
(investment made in
government securities equal to
15% the face of value of

debentures to be redeemed)
30/4/16 Statement of profit and loss 100000

(surplus)
Debenture redemption
reserve a/c 100000
(creation of DRR @ 25% of

face value of debentures)
31/3/17 11%Debentures A/C Dr 100000
Premium on Redemption of 10000
Debentures A/C Dr.
To Debenture 110000
holders A/C
(Amount due on redemption of
1/4th debentures)
Debenture holders' A/C 110000
Dr.
To Bank A/C 110000
(Redemption of debentures)
11% Debentures A/C Dr. 110000
Debentures A/C Dr.
31/3/18 To Debenture 110000

holders A/c
1/4" debentures)
Debenture holders A/c Dr. 110000
To Bank A/C 110000
Debentures A/c Dr.
31/3/19 To Debenture holders 110000
A/C
1/4th debentures)
Debenture holders A/c Dr. 110000
110000
To Bank A/c
Bank A/C Dr. 15000
To Debentures Redemption
Investment A/c
15000
31/3/20
(Debenture redemption
investment encashed)

Debentures A/C Dr.
To Debenture 110000
holders' A/c
1/4th debentures)
Debenture holders A/C 110000
Dr.
To Bank A/C 110000
Debenture Redemption 100000
Reserve A/c
To General Reserve 100000
A/C
(DRR A/c closed by
transferring it to General
Reserve)
Redemption by Sinking Fund
Debentures may be redeemed by creating a sinking fund.
Under this method of redemption, every year a part of
the profit (fixed instalment) is set aside and sinking fund
is created. The sinking fund (also called debenture
redemption fund) is invested in outside securities (like

shares, debentures, bonds of other companies or
corporations). The interest received on such investments
along with annual amount set aside from profit will
again be invested as usual. This process continues till the
date of redemption of debentures. The investment will
be sold and the cash thus received will be used to repay
the debentures. The working capital of the company will
not be affected as the cash is separately made available
for redemption. Under this method of redemption
sinking fund account, and sinking fund investment
account will be opened. After the debentures have been
redeemed, the balance of sinking fund account is
transferred to general reserve.
Merits of Sinking Fund Method
The chief merits of sinking fund method are:
1. As the funds required for redemption
accumulates outside the business, liquid cash is
available at the time of redemption. Hence debentures
can be repaid without disturbing the financial position
of the company
2. in the interim period, the security may be pledged
or sold out to get liquid cash in case of any emergency
Demerits of Sinking Fund Method
The demerits of the method are:
1. There may be losses in realising the investments

2. The rate of returns on investments may be less
than the earning rate of the business.
3. As a part of the profit is set aside for creating a
sinking fund, shareholders get a comparatively low rate
of dividend during the currency of debentures.
Insurance policy method
This is an alternative to sinking fund method. Under the
sinking fund method, annual contribution is invested in
outside securities. Under the insurance policy method,
an insurance policy is purchased by paying annual
premium. Such policy will mature on the date when the
debentures become redeemable. The total premium paid
will amount to less than the policy amount, but the
policy amount will be equal to the amount required for
redemption. Thus the difference between the policy
amount and premium paid will be interest on premiums.
Redemption by Purchase of Own Debentures from
the Open Market
A company can buy its own debentures if it is authorised
by its Articles. When a company purchases own
debentures it will constitute redemption of debentures.
This is because the old debentures are withdrawn or
taken back from the debenture holders by paying them
either at par or at premium. The purchase of debentures
may be paid from sinking fund or out of profit or out of

capital. This method is used in the following
circumstances:
(a) When the rate of interest on debentures is higher than
the market interest rate.
(b) When the market price of debentures falls below the
face value or redemption price.
(c) When sufficient amount is available in surplus fund.
Advantages
Redemption by purchase of debentures has the
following advantages:
1. The company gets profit because the purchase is
made when the market price of debentures is the lowest.
2. It reduces the burden of loan.
3. It reduces the interest burden.
4. It avoids the payment of premium on redemption
Purposes of Purchase of Own Debentures
The debentures may be purchased either for (a)
Immediate cancellation, or for (b) Investment.
Purchase of Own Debentures for Immediate

Cancellation
A company may purchase its debentures for the purpose
of immediate cancellation. This results in reduction of
debenture liability to the extent of par value of
debentures cancelled. When the debentures are
cancelled immediately, generally there may be profit to
the company. This is because the debentures are
purchased from the open market at lower price than the
face value of the debentures. Besides, if debentures are
redeemable at premium, the company need not pay this
redemption premium. This is a gain to the company.
Both gains should be transferred to profit on purchase of
debenture a/c. no interest is required to be paid on the
debentures purchased and cancelled after the date of
cancellation.
Accounting treatment
1. When debentures (redeemable at par) are
purchased at par or at nominal value
Debenture a/c Dr.
To Bank A/c
2. When debentures (redeemable at premium ) are
purchased at par or nominal value
Debenture A/c Dr.
Premium on redemption of Debentures A/c Dr.

To Bank
To Profit on redemption on debentures
Profit on redemption or purchase of debentures is a
capital profit. Hence, it should be transferred to capital
reserve. The entry is:
Profit on Redemption of Debentures A/c Dr
To Capital Reserve
Note: when there is sinking fund, the profit on
redemption of debentures a/c should be credited to
sinking fund a/c (and not to capital reserve a/c)
purchased at a discount (ie at less than nominal value)
a. Debenture a/c Dr
To bank a/c
To profit on purchase /redemption alc
b. Profit on purchase/redemption a/c Dr
To capital reserve
4. When debentures (redeemable at premium) are
purchased at less than nominal value on the due date of
interest
a. Debentures a/c
To bank
To profit on redemption or purchase of
debentures a/c
b. Profit on redemption (or purchase ) of debentures a/c
To capital reserve
purchased at more than nominal (ie, at premium ) on the
due date of interest.
a. Debenture a/c Dr
Loss on redemption/ purchase of debentures a/c
Dr
To bank
6. When debentures (redeemable at premium) are
purchased at more than nominal value ie, at premium on
the due date of interest.
Expenses on purchase of Debentures
If any expense is incurred on purchase of debentures,
then it will be added with cost of purchase. The same
amount is deducted from ‘profit on redemption’
Purchase of debentures for investment (own

debentures)
A company may purchase its own debentures for
investment (not for immediate cancellation). The
debentures so purchased are kept alive (debenture
liability remains the same) and are treated as
investments. In the future they may be cancelled or
reissued. After cancellation, the debentures stand
redeemed. This means that the debenture liability is
reduced. Debentures when purchased for investment are
popularly called own debentures.
Debenture interest will continue to be payable on
those which are held by outsiders ie, debenture holders.
But interest on debentures will be simultaneously
income also.
a. On purchase of own debentures
Own debentures a/c Dr
To bank a/c
b. On cancellation of own debentures
Debentures a/c Dr
To own debentures
To profit on redemption of debentures
c. On transfer of profit on redemption

Profit on redemption of debentures a/c Dr
To capital reserve
d. On reissue of own debentures
Bank a/c Dr
Loss on reissue of debentures a/c Dr.
To own debentures a/c
To profit on reissue of debentures
Interest on Own Debentures
If own debentures are not cancelled immediately after
the purchase of debentures, interest becomes due on
such debentures also. The company will pay interest
only to outsiders (debenture holders). The interest on
own debentures will be retained by the company and this
will be credited to Interest on Own Debentures Account
(income).
The required journal entry is:
Interest on Debentures A/c Dr. (Total
interest)
To Bank A/c(Payable to outsiders)
To Interest on Own Debentures (Due to
the company)
When there is no Sinking Fund, the total interest on
debentures (expense) is debited to Profit or Loss and the
"Interest on Own Debentures" (income) is credited to

Statement of Statement of Profit or Loss. The net debit
represents the interest payable to outsiders. However,
when there is sinking fund, the "Interest on Own
Debentures" is credited to Sinking Fund A/c instead of
Statement of Profit or Loss.
Ex-Interest and Cum-Interest Quotations
Generally interest on debentures is paid on fixed dates,
i.e., half yearly or yearly. However, the company can
buy its own debentures from the open market at any time
during the year. If a company purchases its own
debentures on the date of payment of interest, there will
be no problem with regard to interest. This is because
the interest accrued upto the date of purchase fie, on the
date of payment of interest) will be payable to debenture
holder. If the debentures are purchased before the due
date of the interest payment, then the problem arises as
to whether the price paid includes interest for the expired
period or not. Sometimes, the price paid for debentures
includes the interest for the expired period. Sometimes,
the price paid does not include the interest for the
expired period. Expired period means the period from
the date of previous payment of Interest upto the date of
purchase. The interest portion included
in the purchase price constitutes revenue and the balance
is capital (actual cost of debentures). The price paid for
the debentures depends on the type of quotation. There

are two types of quotations - cum-interest quotation and
ex-interest quotation.
Cum-interest Quotation
If the purchase price includes interest for the period from
previous date of interest to the date of purchase, it is
called cum interest price ('Cum' is a Latin word which
means 'with i.e., cumulative or inclusive of interest). It
means the price paid by the company for the
debentures includes the interest for the expired period
also.
Journal Entries
At the time of recording the purchase of own debentures,
only the price paid towards the cost of debentures must
be debited to the own debentures account. The interest
must be debited to interest account.
(a) When the debentures are purchased for immediate
cancellation:
Debentures A/C Dr. (Nominal value of
debentures)
Interest on debentures a/c Dr
To bank
To profit on redemption of debentures (profit on
redemption)
(b) When the debentures are purchased for holding as

investment:
Own Debentures A/C Dr. (Cost of debentures)
Interest on Debentures A/C Dr. (Interest for the
expired period)
To Bank A/C (Amount paid)
In this case, Own Debentures A/c should be debited with
cost of debentures (and not nominal value of
debentures).
Cost of Own Debentures = Price paid - Interest for the
expired period.
Note: When own debentures are purchased as
investment, there will be no profit or loss on redemption
of debentures. Profit or loss on redemption will arise at
the time of cancellation of debentures.
(c) When own debentures purchased for investment are
cancelled in future
Debentures A/C Dr (Nominal value)
To Own Debentures A/c (Cost, i.e., price paid
minus interest)
To Profit on Redemption of Debentures
(Balance)
Ex-interest Quotation
If the purchase price excludes the interest for the expired
period, it is called Ex-interest price ('Ex' is also a Latin
word which means 'without', i.e., exclusive of interest).
This means that the purchase price of debentures does
not include the interest for the expired period. This
further means that the purchaser (company) has to pay,
in addition, the interest for the expired period. Thus,
Cost of Own Debentures = Price paid
Journal Entries
a. When debentures are purchased for immediate
cancellation
Debentures A/C Dr. (Nominal value of debentures)
Interest on Debentures A/c Dr. (Interest for the expired
period)
To Bank A/C (Total amount paid, i.e.,cost of
debentures + interest)
To Profit on Redemption of Debentures (Balancing
figure)
b. When debentures are purchased as investment
Own Debentures A/C Dr.
(Cost of debentures, i.e., Price paid)
Interest on Debentures A/C Dr. (Interest for the
expired period)
To bank (total)
c. When own debentures purchased for investment

are cancelled in future
Debenture a/c Dr (nominal value)
To own debenture (price paid)
To profit on redemption of debentures (balance)
Illustration
A ltd purchases its own 12% debentures of Rs. 30000 at
Rs. 98 on 01/04/2020. Interest is payable on 30th june
and 31st December every year. Give entries n the books
of A ltd. If the quotation is (i) cum-interest, and (ii) ex-
interest. The company closes its books on 31st
December.
Solution
(i) Cum-interest
Own debentures A/c Dr 28500
Interest on debentures A/c Dr 900
To bank A/c (300x98) 29400
(purchase of own debentures at
Rs. 98 cum interest)
Ex-interest
(ii)
Own debentures A/c
Interest on Debentures
To bank A/c
(29400+900)
Working note
1. Cum-interest
Total Price paid 300*98 = 29400.
Less: interest on 30000 *12/100 x12/100 = 900
--------
Cost 28500
2. Ex-interest price paid for debentures
300*98 = 29400
Add: int. for 3 months from 1.1.20 to
31.3.20 (30000*12/100*3/12) = 900
-------
Total price 30300
Redemption by Conversion
This is another method of redeeming debentures.
Redemption by conversion means redeeming the
debentures by converting them into new debentures
and/or shares within a stipulated period at the option of
the debenture holders. Under this method, a company
gives
an option to debenture holders at the time of issue of
debentures that after a certain period they can convert
their debentures into shares or new debentures. The
redemption by conversion of debentures can be made
either at par or at premium but not at discount. However,

the new debentures may be issued either at par, or at
premium or at discount. New shares can be issued at par
or at premium, but not at discount.
Advantages of redemption by conversion
A. Advantages to company
a) Any financial source is not needed for
redemption.
b) It has no adverse effect on working capital of
the company.
c) Creation of debenture redemption reserve is
not required by the company.
d) Investment is not needed for redemption.
B. Advantages to debenture holders
a) The debenture holders can participate in
profits and management of the company
b) The conversion depends upon the will of
debenture holders, not forcibly.
c) Debenture holders accept this type of
redemption in hope of higher
interest/dividend
A. At the time of conversion, the following journal
entries are to be passed.
1. Debenture a/c Dr
To Debenture holders
(transfer of debenture to debenture holders)
2. Debenture A/c Dr
To new debentures A/c/ Share capital
(Issue of new debenture or share at par)
B. When debentures are redeemed at premium at
maturity and new shares/debentures are issued at par.
1. Debenture A/c Dr
Premium on redemption of debenture A/c Dr.
To debenture holders A/c
(Amount due to debenture holders and premium due)
2. Debenture A/c Dr.
To new debenture a/c / share capital a/c
(Issue of new debentures or shares at par)
C. When debenture are redeemed (by conversion) at
par at maturity and new shares /debentures are issued at
premium.
1. Debentures a/c Dr
To debenture holders a/c
(Amount due to debenture holders on
redemption)
2. Debenture holders a/c Dr
To Equity share capital / new debenture a/’c
To securities premium reserve a/c
(Issue of new debentures or shares at premium)
D. When debenture are redeemed (by conversion) at
premium at maturity and new shares/ debentures are
issued at premium.\
1. Debentures a/c Dr
Premium on redemption of debentures a/c
redemption)
2. Debenture holders a/c
To Equity share capital/ new debenture a/c
To securities premium reserve a/c
(Issue of new debentures or shares at premium)
E. When debentures are redeemed (by conversion)

at par on maturity and new debentures are issued at
discount.
1. Debenture a/c Dr.
redemption)
2. Debenture holders A/c Dr.
Discount on issue of debenture A/c Dr
To new debenture a/c
(Issue of new debenture at discount)
F. When debentures originally issued at discount
are redeemed by conversion:
Debentures may by redeemed either before maturity or
maturity
a. Conversion before maturity
When debentures originally issued at discount are
converted before maturity, the number of shares or
debentures to be issued are calculated on the basis of net
proceeds.
Journal entries
1. For amount due to debenture holders
Debenture a/c Dr.

To discount on issue of debentures a/c
To statement of profit and loss
To Debenture holders a/c
2. For issue of shares or debentures at par
To Equity share capital/preference share
capital/debentures
3. For issue of shares or debentures at premium
To equity/ preference/ debenture a/c
To securities premium reserve a/c.
b. Conversion of debenture on maturity
If debentures issued at discount are converted into
shares or debentures on maturity, then it is converted on
the basis of the face value or nominal value and not at
its net proceeds. In such cases, the provisions of the
companies Act are not violated because the discount on
issue of debentures has already been written.
REDEMPTION OF PREFERENCE SHARES

Introduction
A company limited by shares may (if so
authorised by its Articles) issue preference shares which
are liable to be redeemed within a period not exceeding
20 years from the date of their issue.
Redeemable preference shares are those shares
which are repayable after a fixed period or earlier at the
discretion of the company. Section 55(i) of the
Companies Act, 2013 prohibits the issue of any
preference share that is irredeemable.
Redemption of Preference Shares
Redemption means repayment of capital. Thus,
redemption of preference share means repayment of
preference share capital to the preference shareholders.
Condition of Redemption of Preference Shares
(Provisions of the Companies Act – Sec. 55)
According to Section 55 of the Companies Act,
2013, a company limited by shares, If authorized by its
Articles, can redeem the preference shares, subject to the
following conditions:
a) The shares to be redeemed must be fully paid up.
b) The shares should redeemed either out of profits
of the company available for distribution as
dividend or out of the proceeds of fresh issue of

shares made for the purpose of redemption.
c) Any premium payable on redemption must be
provided out of the profits of the company or out
of the company’s security premium account
(from fresh issue r existing balance). Generally,
it is provided out of security premium, if there is
existing security premium or premium on fresh
issue.
d) Where any such shares are redeemed out of
profits available for dividend, an amount equal to
the nominal value of shares to be redeemed must
be transferred out of the divisible profits to
Capital Redemption Reserve Account
e) The capital redemption reserve account can be
utilised only for the issue of fully paid up bonus
shares. This means that partly paid up shares
cannot be made fully paid up out of Capital
Redemption Reserve A/c.
Methods of Redemption
There are three methods of redemption of preference
shares. They are:
(a) Redemption out of fresh issue of shares.
(b) Redemption out of Profits.
(c) Redemption partly out of fresh issue and partly

out of profit.
Redemption out of fresh issue of shares
Under this method the company redeems the
preference shares out of the proceeds of fresh issue of
shares made for the purpose. In other words, a company
issues new shares (equity or preference) and the
proceeds from such issue are used for redemption of
preference shares. The company may issue fresh shares
either at par or at premium.
Accounting Procedure
For solving problems, the following procedure is to be
followed:
1. First see whether the redeemable preference
shares are fully paid up or partly paid up.
If they are partly paid up, pass the following journal
entries to make them fully paid.
(a) Preference Share Final Call A/c Dr
To Preference Share Capital A/c
(b) Bank A/c Dr.
To Preference Share Final Call A/c
2. Make journal entry for fresh issue of shares
when company issues new shares:
(a) At Par
Bank A/c Dr.
To Share Capital A/c
(b) At Premium
Bank A/c Dr.
To Security Premium A/c
(c) At Discount
Bank A/c Dr.
Discount on Issue of Share A/c Dr.
3. Write journal entry for redemption of
preference shares
(a) When Redemption is at Par
Redeemable Preference Share Capital A/c Dr.
To Preference Shareholders A/c
(For transferring the capital to preference shareholders)
Preference Shareholders A/c Dr
To Bank A/c
(For paying the amount due to preference
shareholders)
(b) When Redemption is at Premium

Security Premium A/c / Profit and Loss A/c Dr.
To Premium on Redemption of Preference
Shares A/c
(For providing premium on redemption out of security
premium or profit and loss)
Redeemable Preference Share Capital
A/c Dr.
Premium on Redemption of Preference Share
A/c Dr.
(For transferring the capital and premium to
preference shareholders)
Preference Shareholders A/c Dr.
To Bank A/c
(For paying the amount due to preference shareholders)
Note: If the preference shares are redeemed at a
premium, such premium on redemption is provided out
of Security Premium Account(existing or fresh issue) or
Profit and Loss or General Reserve.
Illustration 1 (Fresh Issue of Shares at Par and

Redemption, at Par)
A Ltd had 10,000, 8% redeemable preference shares of
Rs. 100 each, fully paid up. The company decided to
redeem these preference shares at par by issue of
sufficient number of equity shares of Rs.10 each fully
paid at par. Write journal entries in the books of the
company.
Solution
Face value of share to be redeemed (10,000 x 100) =
10,00,000
Proceeds per new share = Rs. 10
No. of shares to be issued = 10,00,000 = 1,00,000 shares
10
Illustration (Fresh Issue of Shares at Premium and
Redemption at Par)
B Ltd had 3,000, 9% preference shares of ` 200 each
fully paid up. The company decided to redeem these
preference shares at par, by issue of sufficient number
of ordinary shares of `. 25 each at a premium of ` 2 per
share as fully paid. Write journal entries in the books of
the company.
Solution
Value of shares to be redeemed (3,000 x 200) = 6,00,000
Proceeds per new share = Rs. 25

No.of shares to be issued = 6,00,000 = 24,000 shares
25
Illustration (Fresh Issue of Shares at Discount and
Redemption at Par)
C Ltd had 9000,8% Redeemable Preference Shares of
`20 each, fully paid up. The company decided to redeem
these shares by issue of sufficient No. of equity shares
of `.10 each fully paid at 10% discount. Pass necessary
journal entries in company’s book.
Solution
Value of shares to be redeemed (9,000 x 20) = Rs.
1,80,000
When shares are issued at discount, the proceeds must
be sufficient to cover the face value of preference shares
to be redeemed, i.e., `1,80,000.
Proceeds per new share = 10 -10% = Rs. 9
No.of Shares = Rs.1,80,000 = 20,000 shares
9
or
1,80,000 x 100 = 2,00,000 = 20,000 shares
9 90 10
Illustration (Issue of Fresh Equity Shares)

Ahuja Company Ltd. had 5,000, 8% Redeemable
Preference Shares of Rs. 100 each, fully paid up. The
company decided to redeem these preference shares at
par by the issue of sufficient number of equity shares of
₹10 each fully paid up at par. You are required to pass
necessary Journal Entries including cash transactions in
the books of the company.
Solution
Journal Entries in the books of Ahuja Company
Ltd.
Date Particu Dr. (`) Cr. (`)
lars
Bank A/c Dr. 5,00,000
To Equity Share Capital 5,00,000
A/c
(Being the issue of 50,000
Equity Shares of 10
each at par for the purpose
of redemption of
preference shares)
8% Redeemable Dr. 5,00,000
Preference Share
5,00,000
Capital A/c To
Preference
Shareholders A/c
(Being the amount payable Dr. 5,00,000
on redemption of
preference shares 5,00,000
transferred to Preference
Shareholders Account)
Preference Shareholders
A/c
To Bank A/c
(Being the amount paid on
redemption of preference
shares)
Illustration 5 (Issue of Fresh Equity Shares)

A Ltd. had 10,000, 10% Redeemable Preference Shares
of Rs. 100 each, fully paid up. The company decided to
redeem these preference shares at par, by issue of
sufficient number of equity shares of Rs. 10 each at a
premium of Rs. 2 per share as fully paid up. You are
required to pass necessary Journal Entries including
cash transactions in the books of the company.
Solution
Journal Entries in the books of
A Ltd.
DateParticulars Dr. (`) Cr. (`)
Bank A/c Dr 12,00,000
To Equity .
Share Capital A/c 10,00,000
To Securities 2,00,000
Premium A/c
(Being the issue of
1,00,000 Equity Shares
of 10 each ata
premium of ₹2 per
share)
10% Redeemable Dr 10,00,000
Preference Share .
Capital A/c 10,00,000
To Preference
Shareholders A/c
(Being the amount
payable on redemption of
preference shares
transferred to Preference
Shareholders
Preference Shareholders Dr 10,00,000

A/c .
To Bank A/c 10,00,000
(Being the amount paid
on redemption
Note: Amount required for redemption is `10,00,000.
Therefore, face value of equity shares to be issued for
this purpose must be equal to `10,00,000. Premium
received on new issue cannot be used to finance the
redemption.
Illustration (Issue of Fresh Equity Shares)
S India Ltd. had 9,000 10% redeemable Preference
Shares of `10 each, fully paid up. The company decided
to redeem these preference shares at par by the issue of
sufficient number of equity shares of `9 each fully paid
up.
You are required to pass necessary Journal Entries
including cash transactions in the books of the company.
Solution
In the books of S India Limited Journal
Date Particulars Dr. (`) Cr. (`)

Bank A/c Dr. 90,000
To Equity Share Capital 90,000
A/c
Equity Shares of 9 each at
par)
10% Redeemable Preference Dr. 90,000
Shares Capital A/c
To Preference
90,000
Shareholders A/c
(Being the amount payable on
sharestransferred to Preference
Shareholders A/c)
To Bank A/c 90,000
(Being the amount paid on 90,000
shares)
Redemption out of Profits
Redeemable preference shares can be redeemed
out of the divisible profits. Divisible profits for
dividend. The examples of divisible or undistributed

profits include general reserve, reserve fund, dividend
equalisation reserve, investment fluctuation reserve,
insurance fund, workmen's compensation fund,
workmen's accident fund, debenture redemption
reserve, reserve for contingencies, any other revenue
reserve, profit and loss account balance etc.
In the case of shares so redeemed should be transferred
from divisible profits to Capital Redemption Reserve
Account.
Reasons for Creating CRR
CRR is created for the following reasons:
1) Capital maintenance: The important purpose of
creating CRR is to maintain the capital intact. By
creating CRR, it is possible to protect capital structure
and components of capital as it is. If much variation is
taking place in components and volume of capital,
business activities would be reduced. This causes
dissatisfaction among shareholders.
2) Safeguard of creditors: The other reason for
creating CRR is to protect the interest of creditors. If
CRR is not created, the directors may distribute the
entire amount of profits by way of dividend. This will
adversely affect the interest of creditors.
Note: For calculating CRR, the premium on redemption

and security premium are totally ignored.
Accounting Treatment
The following journal entries are required to be passed
1. When Shares are Redeemed at Par
(a) On transfer to Capital Redemption Reserve
A/c
Profit and Loss A/c / General Reserve A/c Dr.
To Capital Redemption Reserve A/c
(b) On the redemption of shares
Preference Share Capital A/c Dr.
(c) On Payment to Preference Shareholders
To Bank A/c
Note: First see whether the preference shares are
fully paid up or partly paid up. If the shares are partly
paid up they must be made fully paid up. The journal
entries have already been given.
2. When Shares are Redeemed at Premium

(a) Same entry as under 1 (a) above for transfer to
Capital Redemption Reserve A/c from divisible profits.
(b) On providing Premium Payable on
Redemption
Security Premium A/c / Profit & Loss A/c / Capital
Reserve A/c Dr.
To Premium on Redemption A/c
(c) On making money due to preference
shareholders
Preference Share Capital A/c Dr.
Premium on Redemption A/c Dr.
(d) On payment to Shareholders
Same entry as under 1(c) above
Illustration (Redemption out of Profits)
The Balance Sheet of Y Ltd. as on 31st March, 2018 is
as follows:
Particulars
EQUITY AND LIABILITIES
1. Shareholders’ funds
a) Share capital 2,90,000
b) Reserves and Surplus 48,000
2. Current liabilities
Trade Payables 56,500
Total 3,94,500
ASSETS
1. Fixed Assets
Tangible asset 3,45,000
Non-current investments 18,500
2. Current Assets
Cash and cash equivalents
31,000
(bank)
Total 3,94,500
The share capital of the company consists of `50 each
equity shares of `2,25,000 and 100 each Preference
shares of `65,000(issued on 1.4.2016). Reserves and
Surplus comprises Profit and Loss Account only. In
order to facilitate the redemption of preference shares at

a premium of 10%, the Company decided:
(a) to sell all the investments for `15,000.
(b) to finance part of redemption from company
funds, subject to, leaving a bank balance of
`12,000.
(c) to issue minimum equity share of `50 each at a
premium of `10 per share to raise the balance of
funds required.
You are required to pass: The necessary Journal Entries
to record the above transactions and prepare the balance
sheet as on completion of the above transactions.
Solution
Journal
Bank A/c Dr.37,500
To Share Application 37,500
A/c
(For application money
received on 625 shares @ ` 60
per share)
Share Application A/c Dr.37,500
To Equity Share Capital 31,250

A/c
6,250
To Securities Premium A/c
(For disposition of application
money received)
Preference Share Capital A/c Dr. 65,000
Premium on Redemption of Dr. 6,500
Preference Shares A/c 71,500
To Preference
Shareholders A/c
(For amount payable on
shares)
Profit and Loss A/c Dr. 6,500
To Premium on 6,500
Redemption of Preference
Shares A/c
(For writing off premium on
redemption out of profits)
Bank A/c Dr.15,000
Profit and Loss A/c (loss on Dr. 3,500
sale) A/c
18,500
To Investment A/c
(For sale of investments at a

loss of `3,500)
Profit and Loss A/c Dr.33,750
To Capital Redemption 33,750
Reserve A/c
(For transfer to CRR out of
divisible profits an amount
equivalent to excess of
nominal value of preference
shares over proceeds (face
value of equity shares) i.e., `
65,000 -`31,250)
Preference Shareholders A/c Dr.71,500
To Bank A/c 71,500
(For payment of preference
shareholders)
Balance Sheet (after redemption)
Date Particulars Notes ( )
No.
1. Shareholders’ funds
a) Share capital 1 2,56,250
b) Reserves and Surplus 2 44,250
2. Current liabilities
Trade Payables 56,500
Total 3,57,000
ASSETS
1. Fixed Assets
Tangible asset 3,45,000
Current Assets
2. Cash and cash equivalents
(bank)
3 12,000
Total
3,57,000
Notes to accounts
1. Share Capital
Equity share capital (2,25,000 + 2,56,250
31,250)
2. Reserves and Surplus
Capital Redemption Reserve 33,750
Profit and Loss Account (48,000 – 4,250
6,500 – 3,500 – 33,750)
Security Premium 6,250
44,250
3. Cash and cash equivalents
Balances with banks (31,000 + 37,500 12,000
+15,000 – 71,500)
Working Note:
Calculation of Number of Shares: `
Amount payable on redemption 71,500
Less: Sale price of investment (15,000)
56,500
Less: Available bank balance(31,000-12,000) (19,000)
Funds from fresh issue 37,500
No. of shares = 37,500/60=625 shares
Illustration 8 (Capitalisation of Undistributed
Profits)
The following are the extracts from the Balance Sheet of
ABC Ltd. as on 31st December, 2018.
Share capital: 40,000 Equity shares of `10 each fully
paid – `4,00,000; 1,000 10% Redeemable preference
shares of `100 each fully paid – `1,00,000.
Reserve & Surplus: Capital reserve – `50,000; Securities
premium – `50,000; General reserve –`75,000; Profit
and Loss Account – 35,000
On 1st January 2019, the Board of Directors decided to

redeem the preference shares at par by utilisation of
reserve.You are required to pass necessary Journal
Entries including cash transactions in the books of the
company.
Solution
Journal Entries in the books of ABC Limited
Date Particul Dr. ( ) Cr. ( )
ars
2019 10% Redeemable
Jan1 Preference Share Dr. 1,00,000
Capital A/c To
Preference 1,00,000
Shareholders A/c
(Being the amount payable
on redemption transferred
to Preference Shareholders
Account)
Preference Shareholders Dr. 1,00,000
A/c To Bank A/c 1,00,000
shares)
General Reserve A/c Dr. 75,000

Profit & Loss A/c Dr. 25,000
To Capital Redemption 1,00,000
Reserve A/c
(Being the amount
transferred to Capital
Redemption Reserve
Account as per the
requirement of the Act)
Note: Securities premium and capital reserve cannot be
utilised for transfer to Capital Redemption Reserve.
Illustration (Capitalisation of Undistributed
Profits)
B Limited had 3,000, 12% Redeemable Preference
Shares of `100 each, fully paid up. The company had to
redeem these shares at a premium of 10%. It was
decided by the company to issue the following:
i) 25,000 Equity Shares of `10 each at par,
ii) 1,000 14% Debentures of `100 each.
The issue was fully subscribed and all amounts were
received in full .The payment was duly made. The
company had sufficient profits. Show Journal Entries in
Solution
Journal Entries in the books of B Limited
Date Particul Dr. (`) Cr. (`)
ars
Bank A/c Dr 2,50,000
To Equity Share .
Capital A/c 2,50,000
equity shares of ` 10 each
at par)
Bank A/c Dr 1,00,000
To 14% Debenture A/c .
(Being the issue of 1,000 1,00,000
Debentures of `100 each)
12% Redeemable Dr 3,00,000
Preference Share Capital .
A/c
Premium on Redemption of Dr. 30,000
Preference Shares A/c
To Preference
3,30,000
Shareholders A/c
(Being the amount payable
on redemption transferred
to Preference Shareholders
Account)
Preference Shareholders A/c Dr. 3,30,000

To Bank A/c 3,30,000
shares)
Profit & Loss A/c Dr. 30,000
To Premium on 30,000
Redemption of
(Being the adjustment of
premium on redemption
against Profits & Loss
Account)
Profit & Loss Dr. 50,000
To Capital Redemption 50,000
Reserve A/c
(Being the amount
transferred to Capital
Redemption Reserve
Account as per the
requirement of the Act)
Working Note:
Amount to be transferred to Capital Redemption
Reserve Account
Face value of shares to be redeemed `3,00,000
Less: Proceeds from new issue (2,50,000)
Total Balance 50,000
ˑRedemption of Partly Paid up Shares
If the preference shares are partly paid, they will have to
be made fully paid before redemption. The journal
entries have already been given. In case there are two
categories of redeemable preference shares (one fully
paid \and another partly paid) and there is no instruction
regarding redemption, only fully /paid preference shares
maybe redeemed. Sometimes there are calls in arrears in
case of redeemable preference shares. In. such a case, it
is necessary to follow the instructions given in the
question. If nothing is mentioned in the question, there
are two options. They are:
(a) Preference shares having calls in arrears should
not be redeemed,
(b) It is presumed that calls in arrears are collected
and all the preference shares are redeemed.
Illustration10 (Partly Paid up Shares)

The Balance Sheet of ABC Ltd. as at 31st December,
2018 inter alia includes the following:
`50,000, 8% Preference Shares of `100 each, 35,00,000
`70 paid up
1,00,000 Equity Shares of 100 each fully 1,00,00,000
paid up
Securities Premium 5,00,000
Capital Redemption Reserve 20,00,000
General Reserve 50,00,000
Under the terms of their issue, the preference shares are
redeemable on 31st March, 2019 at 5% premium. In
order to finance the redemption, the company makes a
rights issue of 50,000 equity shares of `100 each at `110
per share, `20 being payable on application, `35
(including premium) on allotment and the balance on 1st
January, 2020. The issue was fully subscribed and
allotment made on 1st March, 2019. The money due on
allotment were received by 31st March, 2019. The
preference shares were redeemed after fulfilling the
necessary conditions of Section 55 of the Companies
Act, 2013.
You are asked to pass the necessary Journal Entries and
show the relevant extracts from the balance sheet as on
31st March, 2019 with the corresponding figures as on

31st December, 2018.
Solution
Journal Entries in the books of ABC Ltd.
8% Preference Share Dr. 15,00,000
Final Call A/c
15,00,000
To 8% Preference
Share Capital A/c
(For final call made on
preference shares @ `30
each to make them fully
paid up)
Bank A/c Dr. 15,00,000
To 8% Preference 15,00,000
Share Final Call A/c
(For receipt of final call
money on preference
shares)
Bank A/c Dr. 10,00,000
To Equity Share 10,00,000
Application A/c
(For receipt of
application money on
50,000 equity shares @
` 20 per share)
Equity Share Dr. 10,00,000
Application A/c
10,00,000
To Equity Share
Capital A/c
(For capitalisation of
application money
received)
Equity Share Allotment Dr. 17,50,000
A/c
12,50,000
To Equity Share
5,00,000
Capital A/c
To Securities
Premium A/c
(For allotment money
due on 50,000 equity
shares @ ` 35 pershare
including a premium of
` 10 per share)
Bank A/c Dr. 17,50,000
To Equity Share 17,50,000
Allotment A/c
(For receipt of allotment
money on equity shares)
8% Preference Share Dr. 50,00,000
Capital A/c
Dr. 2,50,000
Premium on
52,50,000
Redemption of
To Preference
Shareholders A/c
(For amount payable to
preference shareholders
on redemption at 5%
premium)
General Reserve A/c Dr. 2,50,000
To Premium on 2,50,000
Redemption A/c
(For writing off
premium on redemption
of preference shares)
To Capital 27,50,000
Redemption Reserve
A/c
(For transfer of CRR the
amount not covered by
the proceeds offresh
issue of equity shares Dr.
i.e., `50,00,000 -
`10,00,000 - `12,50,000)
52,50,000
Preference
Shareholders A/c
To 52,50,000
Bank A/c
(For amount paid to
preference shareholders)
Balance Sheet (extracts)
Particulars Notes As at As at
No. 31.3.2019 31.12.2018
(`) (`)
EQUITY AND
LIABILITIES
1.Shareholders’ funds
a) Share capital 1 1,22,50,000 1,35,00,000
b) Reserves and 2 77,50,000 75,00,000
Surplus
Notes to accounts
Particulars As at As at
31.3.2019 31.12.2018
1.Share Capital
Issued, Subscribed and
Paid up:
1,00,000 Equity shares of 1,00,00,000 1,00,00,000
100 each fully paid up
50,000 Equity shares of 22,50,000 -
100 each 45 paid up
50,000, 8% Preference 35,00,000
shares of 100 each,
70 called up
1,22,50,000 1,35,00,000
2.Reserves and Surplus
Capital Redemption 47,50,000 20,00,000
Reserve
Securities Premium 10,00,000 5,00,000
(5,00,000 + 5,00,000)
General Reserve 20,00,000 50,00,000
77,50,000 75,00,000
Note: Amount received (excluding premium) on fresh

issue of shares till the date of redemption should be
considered for calculation of proceeds of fresh issue of
shares. Thus, proceeds of fresh issue of shares are
`22,50,000 (`10,00,000 application money plus
`12,50,000 received on allotment towards share capital).
BONUS SHARES
A bonus share is a free share issued without any
consideration to an existing shareholder in the ratio of
number of shares held by that shareholder.
Issue of Bonus share —
a) Decreases the Reserve & Surplus;
b) Increases the issued capital but does not
bring any change in cash flow and net worth.
Way to capitalize profits or reserves:
(a) By paying up amounts unpaid on existing
partly paid shares so as to make them fully
paid up shares, or
(b) By issuing fully paid bonus shares to the
existing members.
Circumstances issuing bonus shares
1. When the company wishes to capitalize its huge
undistributed profits or reserve built
2. When the company has not sufficient cash reserves,

it issues bonus shares without adversely affecting its
working capital.
3. When value of fixed assets of a company exceeds
its capital, the difference is capitalized by issuing
bonus shares.
4. The company may capitalize its reserve or profits
by issuing bonus shares with a view to avoid
problems such as demand by the workers for higher
wages etc.
5. When market value of shares far exceeds the paid
up value of the shares, the company may issue bonus
shares.
Sources for fully paid-up bonus shares [Sec 63]
As per Sec 63(1), a company may issue fully paid-up
bonus shares to its members out of-
• Its Free Reserves
• Its Securities Premium Account; or
• Its Capital Redemption Reserve Account
Restrictions
No issue of bonus shares shall be made by
capitalizing reserves created by the Revaluation of
Assets i.e. Revaluation Reserves.
Meaning of Free Reserves: As per Sec 2(43) of the
Companies Act, 2013, “Free Reserves” mean such

reserves which, as per the latest audited balance sheet
of a company, are available for distribution as
dividend.
Exclusions from Free Reserves:
1) Any amount representing unrealized gains,
notional gains or revaluation of assets, where
shown as a reserve or otherwise, or
2) Any change in carrying amount of an asset or
of a liability recognized in equity, including
surplus in Profit and Loss Account on
measurement of the Asset or the Liability at
Fair Value.
Conditions for issue of fully paid-up bonus shares
[SEC 63(2)]
a) A company can issue bonus shares if its Articles
expressly authorize to do so.
b) A resolution is required to be passed by the
Board of Directors recommending its decision
to issue bonus shares.
c) A resolution is required to be passed by the
members in the general meeting to approve the
Board’s resolution recommending the issue of
bonus shares.
Members’ resolution —
 Must have an intention to capitalize the profits
or reserves, and
 Must mention the amount of profits or
reserves to be capitalized.
d) The company has not defaulted in payment of
interest or principal in respect of fixed deposits or debt
securities issued by it.
 The Company has not defaulted in respect of
payment of statutory dues of the employees such
as contribution to provident fund, gratuity and
bonus.
 The partly-paid shares, if any, outstanding on the
date of allotment are made fully paid-up.
 A Company must comply with Prescribed
Conditions.
The bonus shares shall not be issued in lieu of dividend.
SEBI guidelines on issue of bonus issues:
A listed company proposing to issue bonus shares
shall comply with the following requirements:
1. The articles of association of the company must
contain a provision for capitalization of
reserves, etc; If there is no such provision in the
articles the company must pass a resolution at
its general meeting making provision in the

articles of association for capitalization;
2. The company has not defaulted in payment of
interest or principal in respect of fixed deposits
and interest on existing debentures or principal
on redemption;
3. The company has not defaulted in payment of
statutory dues of the employees such as
contribution to provident fund, gratuity etc.
4. The partly-paid shares, if any, outstanding on
the date of allotment are required to be made
fully paid-up.
5. No company shall, pending conversion of
FCDs/PCDs, issue any by way of bonus unless
similar benefit is extended to the holders of such
FCDs/though reservation of shares in proportion
to such convertible part of FCDs or PCDs.
6. The declaration of bonus issue, in lieu of
dividend, shall not be made.
7. A company which announces its bonus issue after
the approval of the Board of directors must
implement the proposal within a period of 15
days from the date of such approval (if
Shareholders’ approval is not required) or 2
months (if Shareholders’ approval is required).
8. Once the decision to make a bonus issue is

announced, the same cannot be withdrawn.
Advantages of Issuing Bonus Shares:
A. From the company’s view point:
(a) By issuing bonus shares shareholders are to be
satisfied when the company cannot pay dividend in cash
due to shortage of liquid funds, i.e., profit can be
distributed without distributing the liquid resources, viz.,
cash.
(b) By issuing bonus shares shareholders are to be
satisfied particularly when the company does not prefer
to pay dividend in cash for the purpose of either its
extension or its working capital or any other specific
purposes.
(c) Sometimes a company is bound to reduce its reserve
for the interest of its own. It may so happen that the
amount of earning profit exceeds the amount of total paid
up capital of the company which, in other words,
encourages the competitors and creates unhealthy
relationship between workers and the company.
B. From the shareholder’s view point:
(a) Shareholders need not pay tax on the bonus shares but
they are to pay them on the dividend so received in cash.
(b) Shareholders, if they so desire, can convert the shares

into cash by disposing of the same at a higher price.
(c) If partly paid shares are converted into fully paid by
issuing bonus, the shareholders need not pay a further
sum for the purpose. On the other hand, their shares
become fully paid up.
Disadvantages of issuing Bonus Shares:
(a) If the rate of dividend fluctuates, i.e., cannot be
maintained, the market value of shares may go down.
(b) If the rate of profit is not increased, the rate of
dividend may be decreased.
(c) It encourages speculation which is not desirable.
Accounting Entries:
The various accounting entries relating to bonus issue
are given below:
Particulars L.F. Dr. Cr.
1. On giving Bonus by converting
partly paid shares into fully paid
shares
Dr.
Capital Reserve A/c (realized in
cash only) General reserve A/c Dr.
Profit & Loss A/c Dr.
To Bonus to
Shareholders A/c
2. On making the final call due

Share Final Call A/c Dr.
3. On adjustment of final call
Bonus to Shareholder A/c Dr.
To Share Final Call A/c
On issue of fully paid Bonus Shares
On Declaration of such bonus
Capital Redemption Reserve A/c Dr
Securities Premium A/c Dr
Capital Reserve A/c (realized in
cash only) Dr
General Reserve A/c Dr
Profit andLoss A/c Dr
To Bonus to Shareholders A/c
2. On issue of fully paid Bonus
Shares
Bonus to Shareholders A/c Dr
Illustration
Following items appear in the Trial Balance of M Ltd.
as at 31st March, 2015:
Particulars Amount
60,000 Equity Shares of ` 10 each 6,00,000
Plant Revaluation Reserve 15,000
Securities Premium Account 52,500
Profit & Loss Account 75,000
Capital Reserve (including Rs. 37,500 1,12,500
being Profit on Sale of Machinery)
The company decided to issue bonus shares to its share
holders at the rate of one share for every four shares
held.
Required: Pass the necessary journal entries. It is
desired that there should be minimum reduction in free
reserves. Solution:Journal
Date Particulars LF Dr Cr
1 Capital Reserve A/c Dr. 37500
2 Capital Redemption Reserve 45000
A/c Dr.
Securities Premium A/c Dr. 52500 150000
General Reserve A/c Dr. 15000
To Bonus to Shareholders A/c
(Being the bonus declared by
issuing 1 bonus share for
every 4 shares held as per
general body’s resolution
dated...)
Bonus to Shareholders A/c 150000
Dr. 150000
To Equity Share Capital
A/c
shares of ` 10 each by way
of bonus)
Notes:
(a) Plant Revaluation Reserve cannot be utilized to
issue bonus shares.
(b) Capital Reserve realized in cash can be utilized
for bonus issue.
Illustration
Following is the extract of the Balance Sheet of YY Ltd. as at
31st March, 2015:
Authorized Capital
15,000 12% Preference shares of Rs. 10 each 1,50,000
1,50,000 Equity shares of Rs. 10 each 15,00,000
16,50,000
Issued and Subscribed Capital:
12,000 12% Preference Shares of Rs. 10 each fully 1,20,000
paid
1,35,000 Equity shares of Rs. 10 each, Rs. 8 paid 10,80,000
up
Reserves and Surplus:
Capital Reserve 1,12,500
Securities Premium 37,500
Profit and Loss Account 2,70,000
Secured Loans:
12% Partly Convertible Debentures @ Rs. 100 7,50,000

each
On 1st April, 2015 the Company has made final call @ 2 each
on 1,35,000 equity shares. The call money was received by 20th
April, 2015. Thereafter the company decided to capitalise its
reserves by way of bonus at the rate of one share for every four
shares held. Securities premium of Rs. 37,500 includes a
premium of Rs. 7,500 for shares issued to vendors pursuant to
a scheme of amalgamation. Capital reserves include ` 60,0000,
being profit on sales of plant and machinery 20% of 12%
Debentures are convertible into equity shares of `10 each fully
paid on 1st June 2015.
Required: Show necessary entries in the books of the company
and prepare the extract of the Balance Sheet immediately after
bonus issue but before conversion of debentures. Are the
convertible debenture holders entitled to bonus shares?
Solution:
Journal of Y Y Ltd.
Date Particulars LF. Dr. Cr.
April 1Equity Share Final Call A/c Dr. 2,70,000
To Equity Share Capital 2,70,000
A/c
(Being the Final call of `. 2 per
share on 1,35,000 equity shares

due as per Board’s Resolution
dated...)
April Bank A/c Dr. 2,70,000
20 To Equity Share Final Call 2,70,000
A/c
(Being the Final Call money on
1,35,000 equity shares received)
A/c Dr. 60,000
Capital Reserve A/c [Realized 30,000
in cash] Dr.
1,80,000
Securities Premium A/c
[37,500 – 7,500] Dr. 37,500
Profit and Loss A/c Dr.

To Bonus to
Shareholders A/c
(Being the Bonus issue @ one
share for every four shares held
by utilising various reserves as
per Board’s Resolution dated...)
April Bonus to Shareholders A/c Dr. 3,37,500

20 To Equity Share Capital A/c 3,37,500
(Being the Capitalisation of
profits to issue 33,750 equity
shares of Rs. 10 each, fully paid.)
An Extract of BALANCE SHEET as at 30th April, 2015
(after bonus issue)
Particulars Note `
No.
(1) Shareholders’ Funds
(a) Share Capital 1 18,07,500
(b) Reserves and Surplus 2 2,92,500
(2) Non-Current Liabilities
(a) Long-term borrowings 3
7,50,000
Total 28,50,000
Notes to Accounts:
Particulars `
1. Share Capital
Authorised Share Capital
1,87,500 Equity Shares of `. 10 each 18,07,500
15,000,12% Preference Shares of `. 10 each 1,50,000
19,57,500
Issued, Subscribed and fully paid Share Capital
1,68,750 Equity Shares of `. 10 each, fully paid 16,87,500
(Out of above, 33,750 equity shares @ `. 10
each were issued by way of bonus)
12,000 12% Preference Shares of `. 10 each 1,20,000
Total 18,07,500
2. Reserves and Surplus
Capital Reserves [1,12,500 - 60,000] 52,500
Securities Premium Reserves [37,500 - 30,000] 7,500
Surplus (Profit & Loss Account) [2,70,000 – 2,32,500
37,500]
Total 2,92,500
3. Long-term borrowings Secured
Secured 12% Convertible Debentures @ `100

each 7,50,000
(Out of above 1,50,000 Debentures @ `. 100
each to be converted into 15,000 Equity Shares
@ Rs. 10 each 1st July,2015
Total 7,50,000
Working Notes:
1. Capital Reserve realized in cash can be utilized for
issue of fully paid bonus shares.
2. As per SEBI guidelines, securities premium collected in
cash can only be utilized for bonus issue.
3. As per pare (ii) of SEBI guidelines, no-company can
issue bonus shares to its shareholders without extending
similar benefit to convertible debentures holders. Pending
such conversion, necessary number of shares should be
earmarked for convertible debentures holders. Therefore,
convertible debenture holders are also entitled to the bonus
shares in the same ratio as the equity shareholders.
4. It is assumed that the company will pass necessary
resolution at its general body meeting for increasing the
authorized capital by Rs. 2,50,000.
Issue of Bonus Shares to equity shareholders 2,25000

[22,500 × 10]
Issue of Bonus Shares to be issued to Debenture 25,000
holders after conversion
[(20% of 5,00,000)/10]× 1/4 ×10 2,50,000
Illustration
The following is the balance sheet of reliance company ltd
as on 31.12.2018
Liabilities: (Rs.)
Issued and paid up capital:
225000 equity shares of `10 each fully 22,50,000
called up
Less: Calls in arrear 50,000
(25000 shares of Rs. 2 each)
100000 equity shares of èach, `4 paid up 4,00,000
P/L A/c 12,50,000

Dividend Equalization Reserve 1,00,000
Development Rebate reserve 2,50,000
Capital reserve 1,50,000

Securities premium 2,50,000
Capital redemption reserve 4,00,000
Current liability 10,00,000
Total 6,15,0000
Assets: (Rs)
Non current assets
Fixed assets 30,00,000
Current assets 10,00,000

Cash at bank 21,50,000
61,50,000
The board of directors of the company took the following
decisions.
a. To forfeit the shares on which final call of `. 2 each is
due.
b. To issue fully paid bonus shares @ 1 fully paid up
share for every 2 fully paid shares held.
c. To pay bonus to the partly paid shares at an

equivalent rate as in (b)above without collecting any
amount from the related shareholders.
d. to reissue the forfeited shares @ `. 12 each fully fed up.
e. To pay dividend equivalent to 10% on share capital
including bonus shares.
f. To issue right shares in the ratio of 1 fully paid up
share for every four existing fully paid up shares held after
bonus issue at Rs. 15 per share.
g. To use minimum balance of profit and loss account.
Note:
1. All Capital Reserve are realized in cash.
2. One fifth of the development rebate reserve is free.
Pass necessary journal entries in the books of the company
including cash transaction after the above decisions are
implemented.
Solution:
Date Particulars
Equity Share Capital A/c Dr 2,50,000
To calls in arrear 50,000
To share forfeiture 2,00,000
Capital redemption reserve Dr. 4,00,000

Securities premium Dr. 2,50,000
Capital reserve Dr. 1,50,000
Development rebate reserve Dr. 50,000
General reserve Dr. 1,50,000
To bonus to 10,00,000
shareholders
Bonus to shareholders Dr. 10,00,000
To equity share capital 10,00,000
Equity share call Dr. 2,00,000
Equity share call Dr 2,00,000

To equity share capital . 2,00,000
Dividend equalization reserve Dr. 1,00,000
Profit and loss Dr. 1,00,000
To bonus to shareholders 2,00,000
Bonus to shareholders Dr 2,00,000
To equity share 2,00,000
call
Bank (12 × 25000) Dr 3,00,000
To securities premium 50,000
Share forfeiture Dr 2,00,000
To capital reserve 2,00,000
Profit and loss Dr 3,85,000
To equity dividend . 3,85,000
Equity dividend Dr 3,85,000
To bank . 3,85,000
Bank Dr 12,18,750
To equity share . 8,12,500
capital 4,06,250
To securities premium
Illustration
MG Limited was registered on 1st January 2017 with an
authorised capital of `3,00,000 divided into 30000 equity
shares of `10 each. During the next 12 months to 31st
November 2017 following events occurred which related to
the share capital of the company.
On 1st January 2017 the company offered for subscription of
10,000 equity shares at a price of rupees 19 each, to be paid
as follows:
At the date of issue including premium `10
On allotment `4
On first and final call `5
On 30th June 2017 the company made right issue on 1 for 2
basis at ``22.50 per share, payable in full on 10th July 2017.
Only 80% of the issue was subscribed for by the shareholders
with a payment being made on the due date. On 30th
November 2017 Company decided to make a bonus issue of
shares at par by utilising the entire balance of securities
premium account.
Prepare the equity share capital account and the securities
premium account of the company for the year ended 31st

December 2017. A share holder who had subscribed initially
for 140 shares had subsequently taken up 80% of the right
issue and then received the bonus shares to which he was
entitled.
Calculate the ultimate number of shares owned by him and the
total price paid by him for those shares.
Solution:
Equity Share Capital Account
Particulars Amount Particulars Amount
(`) (`)
By, Share Application 10,000
A/c
By, Share Allotment A/c 40,000
By, Share First and 50,000
Final Call A/c
By, Bank (right 40,000
issue)A/c
To, Balance c/d 2,80,000 By, Bonus to 1,40,000
Shareholders A/
2,80,000 2,80,000
Securities Premium Account

Particulars Amount Particulars Amount
(`) (`)
To Bonus to 1,40,000 By, Share 90,000
Shareholders Application
By, Bank 50,000
1,40,000 1,40,000
Working notes:
 Securities premium per share on original issue =
`(19-10) = 9. Securities premium per share on right
issue = ` (22.50 -10) = `12.50.
 Number of right shares issued = 80% (1/2×10000) =
4000 shares.
 Total securities premium available
=(10000×9)+(4000×12.50) = ` (90,000+50,000) =
`1,40,000.
 So number of bonus share to be issued at par =
`1,40,000 / `10 = 14000, i.e , rate of bonus issue is
14000 : 14000 = 1:1, i.e. , 1 bonus share issued for
every share held after right issue.
 Number of right shares purchased by the shareholder
= 80% x (1/2 × 140) = 56 shares. So number of
bonus shares to be received by him @ 1:1 =
(140+56)= 196 shares.

 It is remembered that no amount is payable by the
shareholders against bonus issue of shares.
 Calculation of ultimate number of equity shares
owned by :
Particulars No of Amount
Shares
Main issue of shares in jan 2017:
a. As application money 140x10 140 1,400
b. As allotment money 140x4 560
c. As first and final money 140x 700
5
2,660
For right issue @1:2 (80% of 140 56 1,260
shares x1/2 x 22.50)
For bonus issue of shares @ 1:1 196 nil
for total 196 shares held
392 3,920
BUY BACK OF SHARES
Buy back is the reverse of issue of shares. Buy back
simply means buying of own shares. It is a process of capital
restructuring. It allows a company to buy back its own shares,

which were issued by its earlier
Objectives/Advantages of Buy-back of shares:
1. To increase the promoters holding as the shares which are
bought are cancelled.
2. To increase EPS, if there is no dilution in companies
earnings as the buy-back reduces the outstanding number of
shares.
3. To support the share price when the share price, in the
opinion of the management is less than its fair value.
4. To pay surplus cash to the shareholders when the company
does not need it for the business. For e.g. TCS, Infosys, Wipro,
HCL and Tech Mahindra are regularly conducting such
programmes since 2014 as part of their capital allocation
policies.
5. To reward shareholders by Buy-back of shares at much
higher price than ruling market price.
6. It safeguard against a hostile takeover by increasing
promoters holding.
Restrictions on Purchase by Company or giving of Loans
by it for Purchase of its Shares [Section 67]
1. No company limited by shares or by guarantee and
having a share capital shall have power to buy its own
shares unless the consequent reduction of share capital

is effected under the provisions of this Act.
2. No public company shall give, whether directly or
indirectly and whether by means of a loan, guarantee,
the provision of security or otherwise, any financial
assistance for the purpose of, or in connection with, a
purchase or subscription made or to be made, by any
person of or for any shares in the company or in its
holding company.
3. Nothing in sub-section (2) shall apply to—
a. the lending of money by a banking company in the
ordinary course of its business;
b. the provision by a company of money in
accordance with any scheme approved by company
through special resolution and in accordance with
such requirements as may be prescribed, for the
purchase of, or subscription for, fully paid-up
shares in the company or its holding company, if
the purchase of, or the subscription for, the shares
held by trustees for the benefit of the employees or
such shares held by the employee of the company;
c. the giving of loans by a company to persons in the
employment of the company other than its directors
or key managerial personnel, for an amount not
exceeding their salary or wages for a period of six
months with a view to enabling them to purchase or

subscribe for fully paid- up shares in the company
or its holding company to be held by them by way
of beneficial ownership.
Provided that disclosures in respect of voting rights not
exercised directly by the employees in respect of shares to
which the scheme relates shall be made in the Board’s report
in such manner as may be prescribed.
4. Nothing in this section shall affect the right of a company
to redeem any preference shares issued by it under this Act or
under any previous company law.
5. If a company contravenes the provisions of this section, it
shall be punishable with fine which shall not be less than one
lakh rupees but which may extend to twenty-five lakh rupees
and every officer of the company who is in default shall be
punishable with imprisonment for a term which may extend
to three years and with fine which shall not be less than one
lakh rupees but which may extend to twenty-five lakh rupees.
Power of Company to Purchase its Own Securities
[Section 68]
1. Notwithstanding anything contained in this Act, but subject
to the provisions of sub-section (2), a company may purchase
its own shares or other specified securities hereinafter referred
to as buy- back) out of—

 its free reserves;

 the securities premium account; or
 the proceeds of the issue of any shares or other
specified securities:
Provided that no buy-back of any kind of shares or other
specified securities shall be made out of the proceeds of an
earlier issue of the same kind of shares or same kind of other
specified securities.
2. No company shall purchase its own shares or other
specified securities under sub-section (1), unless—
 the buy-back is authorised by its articles;
 a special resolution has been passed at a general
meeting of the company authorising the buy-back.
Provided that nothing contained in this clause shall apply to a
case where—
o the buy-back is, ten per cent. or less of the total
paid-up equity capital and free reserves of the
company; and
o such buy-back has been authorised by the Board
by means of a resolution passed at its meeting;
 the buy-back is twenty-five per cent. or less of the
aggregate of paid-up capital and free reserves of the
company:

Provided that in respect of the buy-back of equity shares

in any financial year, the reference to twenty-five per cent. in
this clause shall be construed with respect to its total paid-up
equity capital in that financial year;
 the ratio of the aggregate of secured and unsecured
debts owed by the company after buy-back is not more
than twice the paid-up capital and its free reserves:
Provided that the Central Government may, by order,
notify a higher ratio of the debt to capital and free reserves for
a class or classes of companies;
 all the shares or other specified securities for buy-back
are fully paid-up;
 the buy-back of the shares or other specified securities
listed on any recognized stock exchange is in
accordance with the regulations made by the Securities
and Exchange Board in this behalf; and
 the buy-back in respect of shares or other specified
securities other than those specified in clause (f) is in
accordance with such rules as may be prescribed.
Provided that no offer of buy-back under this sub-section
shall be made within a period of one year reckoned from the
date of the closure of the preceding offer of buy-back, if any.

3. The notice of the meeting at which the special resolution is

proposed to be passed under clause (b) of sub-section (2) shall
be accompanied by an explanatory statement stating—
 a full and complete disclosure of all material facts;
 the necessity for the buy-back;
 the class of shares or securities intended to be
purchased under the buy-back;
 the amount to be invested under the buy-back; and
 the time-limit for completion of buy-back.
4. Every buy-back shall be completed within a period of one
year from the date of passing of the special resolution, or as
the case may be, the resolution passed by the Board under
clause (b) of sub-section (2).
5. The buy-back under sub-section (1) may be—
 from the existing shareholders or security holders on a
proportionate basis;
 from the open market;
 by purchasing the securities issued to employees of the
company pursuant to a scheme of stock option or sweat
equity.
6. Where a company proposes to buy-back its own shares or
other specified securities under this section in pursuance of a
special resolution under clause (b) of sub-section (2) or a

resolution under item (ii ) of the proviso thereto, it shall,

before making such buy-back, file with the Registrar and the
Securities and Exchange Board, a declaration of solvency
signed by at least two directors of the company, one of whom
shall be the managing director, if any, in such form as may be
prescribed and verified by an affidavit to the effect that the
Board of Directors of the company has made a full inquiry
into the affairs of the company as a result of which they have
formed an opinion that it is capable of meeting its liabilities
and will not be rendered insolvent within a period of one year
from the date of declaration adopted by the Board.
Provided that no declaration of solvency shall be filed
with the Securities and Exchange Board by a company whose
shares are not listed on any recognised stock exchange.
7. Where a company buys back its own shares or other
specified securities, it shall extinguish and physically destroy
the shares or securities so bought back within seven days of
the last date of completion of buy-back.
8. Where a company completes a buy-back of its shares or
other specified securities under this section, it shall not make
a further issue of the same kind of shares or other securities
including allotment of new shares under clause (a) of sub-
section (1) of section 62 or other specified securities within a
period of six months except by way of a bonus issue or in the
discharge of subsisting obligations such as conversion of

warrants, stock option schemes, sweat equity or conversion of

preference shares or debentures into equity shares.
9. Where a company buys back its shares or other specified
securities under this section, it shall maintain a register of the
shares or securities so bought, the consideration paid for the
shares or securities bought back, the date of cancellation of
shares or securities, the date of extinguishing and physically
destroying the shares or securities and such other particulars
as may be prescribed.
10. A company shall, after the completion of the buy-back
under this section, file with the Registrar and the Securities
and Exchange Board a return containing such particulars
relating to the buy- back within thirty days of such
completion, as may be prescribed.
Provided that no return shall be filed with the Securities
and Exchange Board by a company whose shares are not listed
on any recognised stock exchange.
11. If a company makes any default in complying with the
provisions of this section or any regulation made by the
Securities and Exchange Board, for the purposes of clause (f)
of sub-section (2), the company shall be punishable with fine
which shall not be less than one lakh rupees but which may
extend to three lakh rupees and every officer of the company
who is in default shall be punishable with imprisonment for a
term which may extend to three years or with fine which shall

not be less than one lakh rupees but which may extend to three
lakh rupees, or with both.
Disclosure Requirements relating to Buy-Back of Shares or
Other Securities in Explanatory Statement to be Annexed to
the Notice of the General Meeting
The explanatory statement to be annexed to the notice of the
general meeting pursuant to section 102 in relation to buy-
back of shares or other securities by the private companies and
unlisted public companies shall contain the following
disclosures, namely:-
 the date of the board meeting at which the proposal for
buy-back was approved by the board of directors of the
company;
 the objective of the buy-back;
 the class of shares or other securities intended to be
purchased under the buy-back;
 the number of securities that the company proposes to
buy-back;
 the method to be adopted for the buy-back;
 the price at which the buy-back of shares or other
securities shall be made;
 the basis of arriving at the buy-back price;

 the maximum amount to be paid for the buy-back and

the sources of funds from which the buy-back would
be financed;
 the time-limit for the completion of buy-back;
 (j)
o the aggregate shareholding of the promoters and
of the directors of the promoter, where the
promoter is a company and of the directors and
key managerial personnel as on the date of the
notice convening the general meeting;
o the aggregate number of equity shares
purchased or sold by persons mentioned in sub-
clause (i) during a period of twelve months
preceding the date of the board meeting at
which the buy-back was approved and from that
date till the date of notice convening the general
meeting;
o the maximum and minimum price at which
purchases and sales referred to in sub-clause (ii)
were made along with the relevant date;
 (k) if the persons mentioned in sub-clause (i) of clause
(j) intend to tender their shares for buy- back –
o the quantum of shares proposed to be tendered;

o the details of their transactions and their

holdings for the last twelve months prior to the
date of the board meeting at which the buy-back
was approved including information of number
of shares acquired, the price and the date of
acquisition;
 a confirmation that there are no defaults subsisting in
repayment of deposits, interest payment thereon,
redemption of debentures or payment of interest thereon
or redemption of preference shares or payment of dividend
due to any shareholder, or repayment of any term loans or
interest payable thereon to any financial institution or
banking company;
 a confirmation that the Board of directors have made a full
enquiry into the affairs and prospects of the company and
that they have formed the opinion-
 that immediately following the date on which the
general meeting is convened there shall be no grounds
on which the company could be found unable to pay its
debts;
 as regards its prospects for the year immediately
following that date, that, having regard to their
intentions with respect to the management of the
company’s business during that year and to the amount
and character of the financial resources which will in

their view be available to the company during that year,

the company shall be able to meet its liabilities as and
when they fall due and shall not be rendered insolvent
within a period of one year from that date; and
 The directors have taken into account the
liabilities(including prospective and contingent
liabilities), as if the company were being wound up
under the provisions of the Companies Act, 2013.
 A report addressed to the Board of directors by the
company’s auditors stating that-
o they have inquired into the company’s state of
affairs;
o the amount of the permissible capital payment for
the securities in question is in their view properly
determined;
o that the audited accounts on the basis of which
calculation with reference to buy back is done is
not more than six months old from the date of
offer document; and
o the Board of directors have formed the opinion as
specified in clause (m) on reasonable grounds and
that the company, having regard to its state of
affairs, shall not be rendered insolvent within a
period of one year from that date.

Prohibition for Buy-Back in Certain Circumstances

[Section 70]
1. No company shall directly or indirectly purchase its own
shares or other specified securities –
 Through any subsidiary company including its own
subsidiary companies;
 Through any investment company or group of
investment companies; or
 If a default, is made by the company, in the repayment
of deposits accepted either before or after the
commencement of this Act, interest payment thereon,
redemption of debentures or preference shares or
payment of dividend to any shareholder, or repayment
of any term loan or interest payable thereon to any
financial institution or banking company.
Provided that the buy-back is not prohibited, if the default
is remedied and a period of three years has lapsed after such
default ceased to subsist.
2. No company shall, directly or indirectly, purchase its own
shares or other specified securities in case such company
has not complied with the provisions of sections 92, 123,
127 and section 129.

SEBI Guidelines:
The Securities and Exchange Board of India, has issued the
following guidelines with regard to buy- back of shares or
other specified securities by companies, having been
empowered to do so by the Companies (Amendment) Act,
1999. These guidelines came into effect from 14-11-1998.
Modes of Buy-Back:
Buy-back is permissible:
 from the existing security holders on a proportionate
basis through the tender offer; or
 from the open market through
 Book-building process,
 ii. stock exchange;
 from odd lots, that is to say, where the lot of securities
of a public company whose shares are listed on a
recognized stock exchange is smaller than such
marketable lot as may be specified by the stock
exchange: or
 by purchasing the securities issued to employees of the
company pursuant to a scheme of stock option or sweat
equity.
Where a company proposes to buy-back its own shares. It
shall after passing the special resolution or resolution of its

Board of Directors make a public announcement in at least

one English National Daily one Hindi National Daily and
Regional Language Daily with wide circulation at the place
where the registered office of the company is located.
The public announcement shall specify a date which shall be
the ‘specified date’ for the purposes of determining the names
of the shareholders to whom the letter of offer shall be sent.
The specified date cannot be earlier than 30 days and not later
than 42 days from the date of such public announcement. The
letter of offer shall be despatched not earlier than 21 days from
the submission of its draft with SEBI through the merchant
banker. The date of opening of the offer shall not be earlier
than 7 days or later than 30 days after the specified date.
Companies buying back through the tender offer have to open
an escrow account.
A company cannot buy-back its shares from any person:
 through negotiated deals whether on or off the stock
exchange; or
 through spot transactions; or
 through any private arrangements.
Price at which shares shall be bought back has to be
determined by shareholders through a special resolution. A
copy of their resolution has to be filed with the SEBI as well
as the stock exchanges where the shares of the company are

listed, within 7 days from the date of passing the resolution.

Companies buying back through stock exchanges should
disclose purchases daily. Buy-back offer shall remain open for
not less than 15 days and not more than 30 days. The
verification of shares bought back has to be completed within
15 days of the closure of the offer and payments made within
7 days. The onus of complying with the SEBI guidelines is on
the merchant banker who has to file a ‘due diligence
certificate’ with the SEBI.
Escrow Account
Regulation 10(1) of the Securities and Exchange Board of
India provides that a company shall, as and by way of security
for performance of its obligations on or before the opening of
the offer of re- purchase, deposit in an escrow account such
sum as is specified in 10(2), that is:
 If the consideration payable does not exceed ` 100
crores, 25% of the consideration;
 If the consideration payable exceeds ` 100 crores, 25%
up to ` 100 crores, and 10% thereafter.
Escrow account means an account in which money is held
until a specified duty is performed, i.e., till the consideration
for buy-back of shares is paid to the shareholders. This
account consists of cash deposited with a scheduled
commercial bank, or bank guarantee in favour of the merchant

banker, or deposit of acceptable securities with appropriate

margin, with the merchant banker, or combination of these.
Advantages of buy-back
Buy-back have the following advantages:
 A company with capital, which cannot be profitably
employed, may get rid of it by resorting to buy-back,
and re-structure its capital.
 Free reserves which are utilized for buy-back instead
of dividend enhance the value of the company’s shares
and improve earnings per share.
 Surplus cash may be utilized by the company for buy-
back and avoid the payment of dividend tax.
 Buy-back may be used as a weapon to frustrate any
hostile take-over of the company by undesirable
persons.
Accounting for buy-back
Buy-back of shares is just the opposite of issue of shares. Just
as shares may be issued at par, at a premium, even buy-back
may be at par, at a premium or at a discount. The basis of
accounting for buy-back is Section 68 of the Amended
Companies Act. This Section not only permits a company to
buy-back or redeem its equity shares, but also specifies the
sources from out of which re-purchase is to be effected.

According to this Section, a company may buy-back its

shares or other specified securities from out of
1. Its free reserves, or
2. The securities premium account, or
3. The proceeds of any shares or other specified
securities like employees’ stock option.
However, no buy-back of shares shall be made out of the
proceeds of an earlier issue of the same kind of shares. This
Section also lays down that all the shares or other specified
securities for buy-back are fully paid up.
As per to Section 69, when a company purchases its own
shares out of free reserves. Then a sum equal to the nominal
value of the shares so purchased shall be transferred to the
capital redemption reserve account and details of such transfer
should be disclosed in the balance sheet.
Determination of quantum for buy-back. Sec. 68 of
Company Act, 2013
The maximum number of shares to be bought back is
determined as the least number of shares arrived by
performing the following tests :
 Share outstanding test
 Resource test
 Debt-Equity Ratio test.

Share Outstanding test:

 Ascertain the number of shares
 25% of the number of shares is eligible for buy back
with the approval of shareholders.
Resource test :
 Ascertain shareholders fund (Capital + Free Reserves)
 (b) No. of shares held for buyback =
Free Reserve includes Securities Premium, General Reserve,

Revenue Reserves, Profit & Loss A/c (Cr. Balance)
excludes Revaluation Reserve, any other specific reserves.
Accounting — Buy-back of Shares
1. Shares held for buy-back
Equity Share Capital A/c Dr.
Premium on Buyback A/c Dr.
To Equity Shareholders A/c
or Shares bought back A/c
2. Adjustment of premium on buyback
Securities Premium A/c Dr.
General Reserve A/c Dr.
To Premium on Buyback A/c

3. Transferring reserves to the extent of capital redeemed

Reserves A/c Dr.
Profit Loss A/c Dr.
To Capital Redemption Reserve
4. On buy-back of shares
Equity Shareholders A/c Dr.
or Shares bought back A/c Dr.
To Bank A/c
Illustration (Buy-back at par)
X Co. Ltd. buys back its own 2,00,000 equity shares of ` 10
each at par. The company has sufficient profits otherwise
available for dividend besides general reserve. No fresh issue
of shares is made for this purpose. The shares are fully paid
up.
Journalise the transactions.

Solution:
In the Books of X Co. Ltd.
Journal Entries
Date Particulars Debit Credit
Equity share capital a/c Dr 2000000
To Bank 2000000
(Buying back 200000 equity
shares of `. 10 each at par)
General reserve A/c Dr 2000000
Capital redemption 2000000
reserve a/c
(transfer of nominal value of
shares bought back)
Illustration
(Where shares are partly paid up)
The BCG Co. Ltd. resolved by a special resolution to buy-
back 2,00,000 of its equity shares of the face value of`10
each on which ` 8 has been paid up. The general reserve
balance of the company stood at `50,00,000 and no fresh
issue of shares was made. Journalize the transactions.

Solution:
In the Books of BCG Co. Ltd.
Journal Entries
DateParticulars Debit (`) Credit (`)

Equity Share Final Call A/c Dr. 4,00,000
To Equity Share Capital A/c 4,00,000
(Final call of `2 per share due on
2,00,000 equity shares as per
Board resolution)
Bank A/c Dr. 4,00,000
To Equity Share Final Call A/c 4,00,000
(Final call money on 2,00,000
shares received)
Equity Share Capital A/c Dr. 20,00,000
To Equity Shareholders A/c 20,00,000
(Amount due to equity
shareholders transferred to their
account for Buy Back )
Equity Shareholders A/c Dr.
To Bank A/c 20,00,000

(Payment to shareholders towards 20,00,000

buy-back)
General Reserve A/c Dr.
To Capital Redemption Reserve 20,00,000
A/c 20,00,000
(Transfer of nominal value of
shares Bought-back.)
Illustration
(Where shares are bought-back at a premium)
The share capital of Beta Co. Ltd consists of 1,00,000 equity
shares of ` 10 each, and 25,000 preference shares of `100
each, fully called up. Its securities premium account shows a
balance of `40,000 and general reserve of
` 7,00,000. The company decides to buy-back 20,000 equity
shares of ` 12 each. Pass the necessary journal entries.
In the Books of Beta Co. Ltd.
Journal Entries
Equity Share Capital A/c Securities 200000
Premium A/c
To Equity Shareholders A/c 40000 240000

(Amount due to equity shareholders

for buying-back of 20,000 equity
shares)
Equity Shareholders A/c 240000
To Bank A/c 240000
(Payment to shareholders on
account of buy-back)
General Reserve A/c 200000
To Capital Redemption Reserve 200000
A/c
(Transfer of nominal amount of
equity shares Bought back.)
Illustration
(Fresh issue of shares for purposes of buy-back).
Alpha Co. Ltd. has a paid up equity share capital of
``20,00,000 in 2,00,000 shares of `10 each. It resolved to buy-
back 50,000 equity shares at `15 per share. For this purpose.
it issued 20,000 12% preference shares of `10 each, at par,
payable along with application. The company has to its credit
`2,50,000 in securities premium account and ` 10,00,000 in
the general reserve account. The company utilized the general
reserve. Pass the necessary journal entries.


Bank A/c Dr. 2,00,000
ToPreference Share 2,00,000
Application A/c
(Application money on 20,000
preference shares at ` 10 each)
2,00,000
Preference Share Application
A/c Dr. 2,00,000
To Preference Share
Capital A/c
(Transfer of application money
to preference share capital
5,00,000
account on shares being
allotted) 2,50,000
Equity Share Capital A/c 7,50,000
Securities Premium A/c

To Equity Shareholders
A/c
(Amount due to equity 7,50,000
shareholders consequent upon
7,50,000
buy-back of 50,000 Shares at
`15)

Equity Shareholders A/c

To Bank A/c 3,00,000
(Payment to equity 3,00,000
shareholders for amount due to
them)
General Reserve A/c
ToCapital Redemption
Reserve A/c
(Transfer of the nominal value
of shares bought Back out of
profit)

MODULE 2
ACCOUNTS OF BANKING COMPANIES
A bank is a commercial institution, licensed to accept
deposits and acts as a safe custodian of the spendable funds of
its customers. Banks are concerned mainly with the functions
of banking, i.e., receiving, collecting, transferring, buying,
lending, investing, dealing, exchanging and servicing (safe
deposit, custodianship, agency, trusteeship) money and claims
to money both domestically and internationally. The principal
activities of a bank are operating current accounts, receiving
deposits, taking in and paying out notes and coins, and making
loans.
Banking activities undertaken by banks include personal
banking (non-business customers), commercial Banking
(small and medium-sized business customers) and corporate
banking (large international and multinational corporations).
Sources of income
The principal sources from which a bank derives its income
are:
1. interest on loans and overdrafts
2. discount on bills discounted
3. dividend and interest on its own investments
4. profit on overseas exchange transactions

5. commission on transfer of funds, issue of bank drafts and

charges for various services rendered.
Revenue expenses
1. interest on deposits
2. general expenses of management
3. maintenance of premises and equipment
4. taxation
According to Charles J. Woelfel:
A complete banking service would comprehend a variety of
functions, including any of the following:
1. Receive demand deposits and pay customers’ cheques
drawn against them, and operate Automated Teller
Machines (ATM);
2. Receive time and savings deposits, issue negotiable
orders of withdrawal, and pay interest thereon, as well as
provide Automatic Transfer Service (ATS) for funds from
serving accounts to cover cheques;
3. Discount notes, acceptances and bills of exchange;
4. Supply credit to business firms with or without security,
issue letters of credit and accept bills drawn thereunder;
5. Transfer money at home and abroad;
6. Make collections and facilitate exchanges;

7. Issue drafts, cashier’s cheques, money orders, and certify

cheques;
8. Furnish safe deposit vault service;
9. Provide custodianship for securities and other valuables;
10. Provide personal loans, credit and services to individuals,
and lend or discount customer instalment receivables of
vendors;
11. Act in a fiduciary capacity for individuals, as well as
establish common trust funds;
12. Provide corporate trust services (stock transfer agent,
registrar, paying agent, escrow agent, and indenture trustee);
13. Act as factors and engage in equipment leasing;
14. Deal in Government securities and underwrite general
obligations of state and municipal securities;
15. Invest in government and other debt securities;
16. Act as fiscal agent or depository for the Central
Government, states and subdivisions of states;
17. Provide miscellaneous services such as place orders in
securities for customers; act as insurance agent of incidental
to banking transactions; serve as finder to bring buyers and
sellers together; act as travel agent and issue letters of credit
and traveler’s cheques; provide club accounts and other
special purpose accounts; act as agent for accepting service of

legal process of incidental normal banking or fiduciary

transactions of the bank; act as pay role issuer; establish
charitable foundations, invest in small business investment
corporations and bank service corporations; deal in foreign
exchange; buy and sell gold bullion under license from the
Treasury Department, and foreign coin; provide domestic and
international correspondent banking services, etc.
In India, banking activities are governed by The Banking
Regulation Act, 1949. As per the provisional Section 5(b) of
the said Act, “banking” means the accepting, for the purpose
of lending or investment, of deposits of money from the
public, repayable on demand or other-wise, and withdraw able
by cheque, drafts, order or otherwise.
Section 5(c) defines “Banking Companies” as any company
which transacts the business of banking in India. However,
any company which is engaged in the manufacture of goods or
carries on any trade and which accept deposits of money from
the public merely for the purpose of financing its business as
such manufacturer or trader shall not be deemed to transact
the business of banking within the meaning of this clause.
Business of Banking Companies
As per the provision of Section 6 of the Banking Regulation
Act, 1949, a banking company may engage in any one or more
of the following forms of business, in addition to the business
of banking. These are:

1. The borrowing, raising, or taking up of money; the lending

or advancing of money either upon or without security; the
drawing, making, accepting, discounting, buying, selling,
collecting and dealing in bills of exchange, hundis,
promissory notes, coupons, drafts, bills of lading, railway
receipts, warrants, debentures, certificates, scrips and other
instruments, and securities whether transferable or
negotiable or not; the granting and issuing of letters of credit,
traveler’s cheques and circular notes; the buying, selling and
dealing in bullion and specie; the buying and selling of
foreign exchange including foreign bank notes: the
acquiring, holding, issuing on commission, underwriting and
dealing in stock, funds, shares, debentures, debenture stock,
bonds, obligations, securities and investments of all kinds;
the purchasing and selling of bonds, scrips or other forms of
securities on behalf of constituents or others, the negotiating
of loans and advances; the receiving of all kinds of bonds,
scrips or valuables on deposit or for safe custody or
otherwise, the providing of safe deposit vaults; the collecting
and transmitting of money and securities;
2. Acting as agents for any Government or local authority
or any other person or persons; the carrying on of agency
business of any description, including the clearing and
forwarding of goods, giving of receipts and discharges, and
otherwise acting as an attorney on behalf of customers; but
excluding the business of a managing agent or secretary and

treasurer of a company;
3. Contracting for public and private loans and
negotiating and issuing the same;
4. The effecting, insuring, guaranteeing, underwriting,
participating in managing and carrying out of any issue, public
or private, of State, municipal or other loans or of shares,
stock, debentures, or debenture stock of any company,
corporation or association, and the lending of money for the
purpose of any such issue;
5. Carrying on and transacting every kind of guarantee
and indemnity business;
6. Managing, selling and realizing any property which
may come into the possession of the company in satisfaction
or part satisfaction of any of its claims;
7. Acquiring and holding and generally dealing with any
property or any right, title or interest in any such property
which may form the security or part of the security for any
loans or advances or which may be connected with any such
security;
8. Undertaking and executing trusts;
Undertaking the administration of estates as executor, trustee
or otherwise;
a. Establishing and supporting or aiding in the
establishment and support of associations, institutions, funds,

trusts and conveniences calculated to benefit employees or ex-

employees of the company or the dependants or connections
of such persons; granting pensions and allowances and
making payments towards insurance; subscribing to or
guaranteeing money for charitable or benevolent objects or for
any exhibition or for any public, general or useful object;
b. The acquisition, construction, maintenance and
alteration of any building or works necessary or convenient
for the purposes of the company;
c. Selling, improving, managing, developing,
exchanging, leasing, mortgaging, disposing of or turning into
account, or otherwise dealing with all or any part of the
property and rights of the company;
d. Acquiring and undertaking the whole or any part of the
business of any person or company, when such business is of
a nature enumerated or described in this sub-section;
e. Doing all such other things as are incidental or
conducive to the promotion
Restriction on Business of Banking Company
Section 8 of the Banking Regulation Act, 1949, imposes
certain restrictions on the business of a banking company.
These are as follows:
a. No banking company shall directly or indirectly deal in the
buying, selling or bartering of goods, except in connection

with the realisation of security given to or held by it;

b. No banking company can engage in any trade, or buy, sell
or barter goods for others otherwise than in connection with
bills of exchange received for collection or negotiation or with
such of its business or is referred to in clause (i) of sub-section
(1) of section 6.
Some Important Provisions of the Banking Regulation Act,
1949 Time limit for disposal of non- banking Assets (Section
– 9)Non- banking assets must be disposed off within 7 years
from the date of acquisition or period extended by RBI.
Minimum paid up capital and reserve [Section 11]
Minimum
Aggregate value of
Banking Company paid up capital
and reserve
1. In case of banking company
Incorporated outside India:
(a) Having a place (s) of `20 lacs
business in the city of
Mumbai or Kolkata or both
(b) Not having a place (s) of `15 lacs
business in the city of
Mumbai or Kolkata
or both

2. In case of a banking company

incorporated in India: `10 lacs
(a) Having place of business in
more than one state including
place(s) business in the city `1 lac + `10,000 for
of Mumbai or Kolkata or each of other
both places of business
in the district in
(b) Having all its places of which it has its
business in one state and principal place of
none of which is in the city business + `25,000
of Mumbai or Kolkata. for each place of
business elsewhere
in the state subject
of maximum of ``5
lacs
Restriction as to payment of dividend [Sections 15 (1)
and (2)]
Before paying any dividend, a banking company has to write off
completely all its capitalised expenses including preliminary
expenses, organisation expenses, share-selling commission,
brokerage, and amounts of losses incurred by tangible assets.
However, a banking company may pay dividend on its shares
without writing off:
1. the depreciation in the value of its investment in approved

securities in any case where such depreciation has not

actually been capitalised or accounted for as a loss;
2. the depreciation in the value of its investment in shares,
debentures or bonds (other than approved securities) in any
case where adequate provision for such depreciation has been
made to the satisfaction of the auditor of the banking company;
3. the bad debts in any case where adequate provision for
such debts had been made to the satisfaction of the auditor of
the banking company.
Minimum transfer of profits to reserve fund [Section 17]
Every banking company incorporated in India is required to
transfer at least 25% of its profit to the reserve fund. The profit
of the year as per the profit and loss account prepared u/s 29
is to be taken as base for the purpose of such transfer and
transfer to reserve fund should be made before declaration of
any dividend. If any banking company makes any
appropriation from the reserve fund or securities premium
account, it has to report to the Reserve Bank of India the
reasons for such appropriation within 21 days.
Cash Reserve (Section 18)
Every banking company, not being a scheduled bank, has to
maintain a cash reserve (CRR) of at least a percentage of the
total of its demand and time liabilities in India, as on last
Friday of the second preceding fortnight, as specified by R. B.

I. time to time. Cash reserve can be maintained with itself or

by way of a balance in the Current account with the reserve
bank or by way of net balance in current accounts or in one or
more of the aforesaid ways.
Restrictions on Loans and Advances (Section 20)
No banking company shall
a. grant any loans or advances on the security of its own
shares, or
b. enter into any commitment for granting any loan or advance
to or on behalf of
 Any of its directors,
 Any firm, in which any of its directors is interested as
partner, manager, employee or guarantor, Or
 Any company (not being a subsidiary of the banking
company or a company registered under Section 25 of the
Companies Act, 1956 or a Government Company) of
which any of the directors of the banking company is a
director, manager, employee or guarantor or in which he
holds substantial interest, or
 Any individual, in respect of whom any of its
directors is a partner or guarantor.
Now-a-days, the daily transactions of bank numerous. All
these transactions are to be recorded immediately to reflect

the exact position of each customer’s account. Therefore, a

bank has to adopt specialised system of book-keeping,
which will ensure immediate entry of numerous transactions
and keep an internal check on the books of account. To
achieve these objectives, banks generally maintain a large
number of subsidiary and memorandum books in addition to
Principal Books of Account. These are as below
Liquidity norms (Section 24)
Every banking company has to maintain in cash, gold or
unencumbered approved securities, an amount at %
prescribed (by RBI) of its demand and time liabilities in India.
However, this percentage is changed by the Reserve Bank of
India from time to time considering the general economic
conditions. This is in addition to the average daily balance
which a scheduled bank is required to maintain under Section
42 of the Reserve Bank of India Act, and in case of other
banking companies, the cash reserve required to be
maintained under Section 18 of the Banking Regulation Act.
Unclaimed deposits
Every banking company is required to submit a return in the
prescribed form and manner to the Reserve Bank of India at
the end of each calendar year of all accounts in India which
could not be operated for 10 years. This report is to be
submitted within 30 days after the close of each calendar year.
In case of fixed deposit, such 10 years are to be reckoned from

the date of expiry of the fixed period.

Bank’s Book-Keeping System
Entering transactions in the ledger directly from vouchers
Under bank’s Bookkeeping system, every transaction
particularly concerning the customers is entered in the
personal ledger directly from vouchers as soon as it takes
place.
The objective of the system is
(a) to keep up-to-date detailed ledgers,
(b) to balance the trial balance every day, to keep
all control accounts in agreement with the
detailed ledgers.
Main Characteristics of a Bank’s Book-Keeping System

The main characteristics of a bank’s system of book-keeping are
as follows:

Voucher Posting Entries in the personal ledger are made

directly from vouchers instead of
being posted from the books of prime
entry.
Voucher The vouchers entered into different
Summary personal ledgers each day are
Sheets summarised on summary sheets, totals
of which are posted to the control
accounts in the general ledger.
Daily Trial The general ledger trial balance is
Balance extracted and agreed every day.
Continuous All entries in the detailed personal
Checks ledgers and summary sheets are
checked by persons other than those
who have made the entries. A
considerable force of such check is
employed, with the general result that
most clerical mistakes are detected
before another day begins.
Control A trial balance of the detailed personal
Accounts ledgers is prepared periodically,
usually every two weeks, agreed with
general ledger control accounts.
Double Two vouchers are prepared for every

Voucher transaction not involving cash-one

System debit voucher and another credit
voucher.
Book of Accounts
1. General Ledger The General Ledger contains:
(a) Control Accounts of all personal
ledgers.
(b) Profit and Loss Account.
(c) Assets’ Accounts.
(d) Contra Accounts.
Usefulness It facilitates the
preparation of Balance Sheet.
2. Profit and Loss The Profit and Loss Ledger contains:
Ledger (a) Detailed Accounts of Revenue
items.
(b) Detailed Accounts of Expense
items.
Usefulness It facilitates the
preparation of Profit and Loss
Account.

Principal Books of Accounts Subsidiary

Books
1. (a) Current Accounts Ledger.
Personal (b) Saving Bank Accounts Ledgers.
Ledgers
(c) Fixed Deposit (often further classified by
length of period of deposit) Ledgers.
(d) Loan Ledger.
(e) Overdraft Ledger.
(f) Cash Credit Ledger.
(g) Customers’ Acceptances, Endorsements
and Guarantee Ledgers.
2. Bill (a) Inward Bills for Collection.
Registers (b) Outward Bills for Collection.
(c) Bills Discounted and Purchased Register.
Subsidiary Registers
1. Demand Drafts, Telegraphic Transfers and Mail
Transfers issued on Branches and Agencies.
2. Demand Drafts, Telegraphic Transfers and Mail
Transfers received from Branches and Agencies.
3. Letters of Credit.
4. Letters of Guarantee

Memoranda Books
1. Departmental Maintain a record of all the transfer
Journals entries originated by each department
2. Cash (a) Receiving Cashiers’ Cash Book
Department’s (pay-in-slips are vouchers).
(b) Paying Cashiers’ Cash Book
(Bearer Cheques/drafts etc. are
vouchers).
(c) Main Cash Book (by person other
than cashier).
(d) Cash Balance Book.
3. Clearing (a) Outward Clearing (for cheques
Department’s received from customers):
 Clearing Cheques Received
Book.
 Bank wise List of above Cheques
(one copy of which is sent to the
clearing house together with
cheques).
(b) Inward Clearing (for cheques
issued by customers received
from other Banks).

4. Loans and (i) Registers for shares and other

Overdraft securities held on behalf of
Departments’ each customer.
(ii) Summary Books of
Securities giving details of
Government securities,
shares of individual
companies etc.
(iii) Godown registers maintained by
the godown-keeper of the bank.
(iv) Price register giving the
wholesale price of the
commodities pledged with the
bank.
(v) Overdraft Sanction register.
(vi) Drawing Power book.
(vii) Delivery Order books.
(viii) Storage books.
5. Deposits (a) Account Opening and Closing
Department registers.
(b) For Fixed Deposits, Rate
register giving analysis of
deposits according to rates.

(c) Due Date Diary.

(d) Specimen signature book.
6. (a) Salary and allied registers,

Establishment such as attendance register,
department leave register, overtime
register, etc.
(b) Register of fixed assets, e.g.
furniture’s and fixtures, motor
cars, vehicles, etc.
(c) Stationery registers.
(d) Old records register.
7. General (a) Signature book of bank’s officers.
(b) Private Telegraphic Code and
Cyphers.
Statistical Books
 To record Average Balance in Loan and
Advances etc.
 To record Deposits received and amount paid
out each month in the various departments.
 Number of Cheques paid.
 Number of Cheques, Drafts, Bills etc. collected.

THE THIRD SCHEDULE

Form ‘A’
FORM OF BALANCE SHEET
Balance Sheet of …..
Balance Sheet as on 31st March……..
Schedule
As on 31.3.
As on 31.3.
(Current
(Previous
Year)
No.
Year)
Capital and
Liabilities 1
Capital 2
Reserves & Surplus 3
Deposits 4
Borrowings 5
Other Liabilities and
Provisions
Total
6
Assets
7
Cash and balances
with RBI

Balances with banks 8

and money at call 9
and short
10
notice
Investments
Advances
11
Fixed Assets
12
Other Assets
Total
Contingent liabilities
Bills for collection
Form ‘B’
FROM OF PROFIT & LOSS ACCOUNT FOR
THE YEAR ENDED 31ST MARCH
Schedule
(Current
(Previou
s Year)
ended
ended
Year)
Year
Year
31.3
31.3
No.
I. Income Interest 13
earned 14
Other Income
Total

II. Expenditure
Interest Expended
Operating Expenses 15
Provision and 16
contingencies
Total
III. Profit /Loss
Net Profit/(Loss) (–) for
the year Profit/(Loss) (–
) brought forward
Total
Transfer to
statutory reserve
Transfer to other
reserve Proposed
Dividend Balance
carried forward to
Balance sheet
Total
Note:
1. The total income includes income of foreign
branches at `------------

2. The total expenditure includes expenditure of foreign

branches at `………..
3. Surplus / Deficit of foreign branches `
SCHEDULES
Details of all schedules are in below:
A. Capital and Liabilities
1. Capital
2. Reserve and Surplus: It includes

Statutory Reserve, Capital Reserve,
Security Premium, Revenue and other
Reserve and Profit and Loss Account
balance.
3. Deposits:
It includes Demand Deposits, Savings
Bank Deposits and Term Deposits.
4. Borrowings: (i) It includes Borrowings from
Reserve Bank of India, other banks, others institutions and
agencies. (ii) Borrowing outside India.
4. Other Liabilities and Provisions: It includes Bills
payable, inter-office adjustments (net), interest accrued,
others (including provisions) provision for bad debts,
provision for taxation.
B. Assets

1. Cash and Balances with Reserve Bank of

India: Cash in hand (including foreign
currency notes); and balances with Reserve
Bank of India are shown under this item.
2. Balances with Banks and Money at
Call and Short Notice: In India Balances with banks;
money at call and short notice are shown under this
item.
Outside India — Current Account other Deposit
Accounts, Money at call and short notice.
3. Investments: Investment in Government securities,
other approved securities, shares, debentures and
bonds, subsidiaries and /or joint ventures, others, gold
etc., are shown under this item.
4. Advances: Bills purchased and discounted,
cash credit, overdrafts and loans payable on
demand; and term loans etc. are shown under
this item.
Fixed Assets: Premises, other fixed assets (including
1. furniture and fixtures) are shown under this item.
2. Other Assets: Inter-office adjustments, interest
accrued, tax paid in advance, stationery and
stamps, non- banking assets acquired in
satisfaction of claims are shown under this item.

3. Contingent Liabilities: It is shown by way

of a footnote. It represents liabilities not
provided in the Balance Sheet.
Profit and Loss Account
Profit and Loss Account of a banking
company is also prepared in vertical form.
‘Form B’ of the Third Schedule of the
Banking Regulation Act, 1949 is to be used for
preparing Profit and Loss Account. It is
divided into four sections:
I. Income;
II. Expenditure;
III. Profit/Loss; and
IV. Appropriations.
I. Income:
The schedules of Income are:
a. Interest Earned. It includes interest/discount on
advances/bills, income on investments, interest on
balances with RBI etc. It should be noted that
according to the new form, bad debts and provision
for bad debts, other provisions are not to be deducted
from the interest earned. For greater transparency in
accounts, these items are shown as separate items in

the Profit and Loss Account.

b. Other income. It includes commission, exchange
and brokerage, profit on sale of investments, profit on
revaluation of investments, profit on sale of land,
building and other assets, profit on exchange
transaction, and income earned by way of dividends
from subsidiaries, etc.
II. Expenditure
a. Interest expended. Interest paid on deposits, interest
on RBI borrowings; interest on inter- bank borrowings,
etc., are shown under this item.
b. Operating expenses. Salaries and wages of staff;
rent, rates and taxes; printing and stationery;
advertisement; depreciation on banks’ properties;
director’s fees; auditor’s fees; law charges; postage;
repairs; insurance; etc., are shown under this item.
c. Third item of this section is provisions and
contingencies. Provision for bad debts, provision for
taxation and other provisions are shown under this item.
III. Profit/Loss
In this section, profit/loss for the current year (difference
between income and expenditure explained above) and
brought forward profit/loss are shown.

IV Appropriations
In this section, amount transferred to statutory
reserve as per Section 17; amount transferred to other
reserve; proposed dividend, etc., are shown. The
balance is transferred to the Balance Sheet.
FORMS OF SCHEDULE 1-CAPITAL
As on As on
31.3. 31.3.
Particulars
(Current (Previous
Year) Year)
I. For Nationalised
Banks
Capital (Fully owned by
Central Government)
II. For Banks
Incorporated Outside
India
Capital
(i) (The amount
brought in by banks by
way of start-up capital as
prescribed by RBI should
be shown under this
head)

(ii) Amount of deposit

kept with the RBI under
Section 11(2) of Banking
Regulation Act, 1949
Total
III. For Other Banks
Authorised Capital
........... shares of`
...................................... e
ach Issued Capital
........... shares of ``
..................................... e
ach Subscribed Capital
.......... shares of ``
..................................... e
ach Called-up Capital
........... shares of each
Less: Calls unpaid
Add: Forfeited
shares

SCHEDULE 2 - RESERVES AND SURPLUS
Particulars As on 31.3. As on 31.3.

(Current (Previous
Year) Year)
I. S
tatutory Reserves
Opening Balance
Additions during the year
Deductions during the year
II. C
apital Reserves
1. Opening Balance
2. Additions during the
year
3. Deductions during
the year
III. S
ecurities Premium
Opening Balance
Deductions during the year
IV. Revenue and other
Reserves

Opening Balance
Additions during the
year Deductions during
the year
V. Balance in Profit
and Loss Account
Total (I + II + III +
IV + V)`
Particulars As on As on
31.3. 31.3.
(Current (Previous
Year) Year)
I. Statutory Reserves
Opening Balance
Deductions during the
year
II. Capital Reserves
1. Opening Balance
2. Additions during the
year

3. Deductions during the

year
III. Securities Premium
Opening Balance
year
IV. Revenue and other
Reserves
Opening Balance
year
V. Balance in Profit and
Loss Account
Total (I + II + III + IV +
V)`

SCHEDULE 3 - DEPOSITS
As on As on
Particula 31.3. 31.3.
rs (Curren (Previ
t Year) ous
Year)
A. I. Demand Deposits
(i) From banks
(ii) From otners
II. Savings Bank Deposits
III. Term Deposits
(i) From banks
(ii) From others
Total (I + II + III)
B. (i) Deposits of branches in India
(ii)Deposits of branches outside
India
Total

SCHEDULE 4 - BORROWINGS
As on As on
Particulars 31.3. 31.3.(Pr
(Current evious
Year) Year)
I. Borrowings in India
(i) Reserve Bank of India
(ii) Other Banks
(iii) Other Institution and
agencies
II. Borrowings Outside India
1. Total (I + II )
Secured borrowings in I and II
above. `…..
SCHEDULE 5 - OTHER LIABILITIES AND

PROVISIONS
Particulars As on 31.3. As on
(Current 31.3.
Year) (Previous
Year)

I. Bills Payable
II. Inter-Office adjustments (net)
III. Interest accrued
IV. Others (Including Provisions)
Total
SCHEDULE 6 - CASH AND BALANCES WITH
RESERVE BANK OF INDIA
31.3.(Previou
As on 31.3.(Current
Particulars
s Year)
Year)
As on
I. Cash in hand (including foreign

currency notes)
II. Balances with RBI
(i) in Current Account
(ii) in Other Accounts
Total (I + II)

SCHEDULE 7 - BALANCES WITH BANKS AND

MONEY AT CALL & SHORT NOTICE
Particulars As on 31.3. As on 31.3
(Current (Previous
Year) Year)
I. In India
(i) Balances with Banks
(a) In Current Accounts
(b) In Other Deposit
Accounts
(ii) Money at Call and Short
Notice
(a) With Banks
(b) With other institutions
Total (i + ii)
II. Outside India
(i) in Current Accounts
(ii) in Other Deposit
Accounts
(iii) Money at Call and Short
Notice
Total (i, ii, iii) Grand
Total (I + II)

SCHEDULE 8 - INVESTMENTS
31.3. 31.3.
(Curre (Previ
nt ous
Year) Year)
I. Investments in India
(i) Government Securities
(ii) Other Approved Securities
(iii) Shares
(iv) Debentures and Bonds
(v) Subsidiaries and/or Joint
Ventures
(vi) Others (to be specified)
Total
II. Investments Outside India
(i) Government securities
(including local
authorities)
(ii) Subsidiaries and/or Joint
Ventures abroad
(iii) Other investments (to be

specified)
Total
Grand Total (I + II)
SCHEDULE 9 – ADVANCES
31.3. 31.3.
(Curren (Previo
t Year) us
Year)
A. (i) Bills Purchased and
Discounted
(ii) Cash Credits, Overdrafts
and Loans Payable on
Demand
(iii) Term Loans
Total
B. (i) Secured by Tangible
Assets
(i) Covered by

Bank/Government Guarantees
(iii) Unsecured
Total
C. I. Advances in India
(i) Priority Sectors
(ii) Public Sector
(iii) Banks
(iv) Others
Total
II. Advances Outside India
(i) Due from Banks
(ii) Due from others
(a) Bills Purchased and
Discounted
(b) Syndicated Loans
(c) Others
Total
Grand Total ( I + II)

SCHEDULE 10 - FIXED ASSETS

31.3. 31.3.
(Curren (Previou
t Year) s Year)
I. Premises
At cost as on 31st March of
the preceding year Additions
during the year Deductions
during the year Depreciation
to date
II. Other Fixed Assets (including
Furniture and Fixtures)
At cost as on 31st March of the
preceding year Additions during
the year Deductions during the
year Depreciation to date
Total (I + II)

SCHEDULE 11 - OTHER ASSETS

31.3. 31.3.
(Curre (Previo
nt us
Year) Year)
I. Inter-Office Adjustments (net)
II. Interest Accrued
III. Tax paid in Advance / Tax
deducted at source
IV. Stationery and Stamps
V. Non-banking assets acquired in
satisfaction of claims
VI. Others
Total

SCHEDULE 12 - CONTINGENT LIABILITIES

As on As on
Particulars 31.3. 31.3.
(Curre (Previ
nt ous
Year) Year)
I. Claims against the bank not
acknowledged as debts
II. Liability for partially paid
investments
III. Liability on account of
outstanding forward exchange
contracts
IV. Guarantees given on behalf of
constituents
(a) In India
(b) Outside India
V. Acceptances, endorsements and,
other obligations
VI. Other items for which the bank is
contingently liable
Total

SCHEDULE 13 -INTEREST EARNED

31.3. 31.3.
(Curre (Previo
nt us
Year) Year)
I. Interest /discount on advances
/bills
II. Income on investments
III. Interest on balances with
Reserve Bank of India and
other inter-bank funds
IV. Others
Total
SCHEDULE 14 - OTHER INCOME
31.3. 31.3.
(Curre (Previ
nt ous
Year) Year)

I. Commission, exchange and

brokerage
II. Profit on sale of investments
Less: Loss on sale of
investments
III. Profit on revaluation of
investments
Less: Loss on revaluation of
investments
IV. Profit on sale of land, buildings
and other assets
Less: Loss on sale of land,
buildings and other assets
V. Profit on exchange transactions
Less: Loss on exchange
transactions
VI. Income earned by way of
dividends etc., from subsidiaries/
companies and/or joint ventures
abroad / in India
VII. Miscellaneous Income
Total

SCHEDULE 15 - INTEREST EXPENDED

Particula As on As
rs 31.3. on
(Curre 31.3.
nt (Previ
Year) ous
Year)
I. Interest on deposits
II. Interest on Reserve Bank of
India / inter-bank borrowings
III. Others
Total
SCHEDULE 16 - OPERATING EXPENSES
31.3. 31.3.
(Curr (Previ
ent ous
Year) Year)

I. Payments to and provisions for

employees
II. Rent, taxes and lighting
III. Printing and stationery
IV. Advertisement and publicity
V. Depreciation on Bank’s property
VI. Directors’ fees, allowances and
expenses
VII. Auditors’ fees and
expenses (including branch
auditors fees and expenses)
VIII. Law Charges
IX. Postages, Telegrams,
Telephones, etc.
X. Repairs and maintenance
XI. Insurance
XII. Other expenditure
Total

In case there is any unadjusted balance of loss,

the same may be shown under this item with
appropriate footnote.
Disclosure of Accounting Policies
In order to show that the financial position of banks
represent a true and fair view, the Reserve Bank of India
has directed the banks to disclose the accounting policies
regarding the key areas of operations along with the notes
of account in their financial statements for the accounting
year ending 31.3.1991 and onwards, on a regular basis.
The accounting policies disclosed may contain the
following aspects subject to modification by individual
banks:
1. General
The accompanying financial statements have
been prepared on the historical cost and con-
form to the statutory provisions and practices
prevailing in the country.
2. Transactions involving Foreign Exchange
a. Monetary assets and liabilities have been
translated at the exchange rates, prevailing at the
close of the year. Non-monetary assets have been
carried in the books at the historical cost.
b. Income and expenditure items in respect of Indian

branches have been translated at the exchange rates,

ruling on the date of the transaction and in respect of
overseas branches at the exchange rates prevailing at
the close of the year.
c. Profit or loss on pending forward contracts has been
accounted for.
3. Investments
a. Investments in Governments and other approved
securities in India are valued at the lower of cost or
market value.
b. Investments in subsidiary companies and associate
companies (i.e., companies in which the bank holds at
least 25 per cent of the share capital) have been
accounted for on the historical cost basis.
c. All other investments are valued at the lower
of cost or market value.
4. Advances
a. Provisions for doubtful advances have been
made to the satisfaction of the auditors:
i. In respect of identified advances, based on a
periodic review of advances and after taking into
account the portion of advance guaranteed by the
Deposit Insurance and Credit Guarantee

Corporation, the Export Credit and Guarantee

Corporation and similar statutory bodies.
ii. In respect of general advances, as a
percentage of total advances taking into
account the guidelines issued by the
Government of India and the Reserve
Bank of India.
b. Provisions in respect of doubtful
advances have been deducted from the
advances to the extent necessary and the
excess have been included under “Other
Liabilities and Provisions”.
c. Provisions have been made on a gross
basis. Tax relief, which will be available
when the advance is written-off, will be
accounted for in the year of write-off.
5. Fixed Assets
a. Premises and other fixed assets have been
accounted for at their historical cost. Premises
which have been revalued are accounted for at the
value determined on the basis of such revaluation
made by the professional values, profit arising on
revaluation has been credited to Capital Reserve.
b. Depreciation has been provided for on the

straight line/diminishing balance method.

c. In respect of revalued assets, depreciation is
provided for on the revalued figures and an
amount equal to the additional depreciation
consequent of revaluation is transferred annually
from the Capital Reserve to the General
Reserve/Profit and Loss Account.
6. Staff Benefits
Provisions for gratuity/pension benefits to staff
have been made on an accrual/casual basis.
Separate funds for gratuity/pension have been
created.
7. Net Profit
a. The net profit disclosed in the Profit and Loss
Account is after:
i. Provisions for taxes on income, in accordance
with the statutory requirements.
ii. Provisions for doubtful advances.
iii. Adjustments to the value of “current
investments” in Government and other approved
securities in India, valued at lower of cost or
market value.
iv. Transfers to contingency funds.

v. Other usual or necessary provisions.

b. Contingency funds have been grouped in the
Balance Sheet under the head “Other Liabilities
and Provisions”.
SOME SPECIAL TRANSACTIONS
Interest on Doubtful Debts
When a debt is found to be doubtful at the end of the
accounting year, a question may arise whether the interest
on that should be credited to Interest Account or not.
There is no doubt that interest has accrued; but it is
equally clear that the realisation of this interest is
doubtful.
Therefore, as a prudent accounting policy, such
interest should be transferred to Interest Suspense
Account by means of the following entry:
Loan Account Dr.
To Interest Suspense Account
In the Balance Sheet, it should be shown on the
liability side.
Next year, if a part of interest is realised and the
balance becomes bad, the following entry should
be passed
Interest Suspense Account Dr.

[Total interest]
To Interest Account [Interest realised]
To Loan Account [Interest unrealized]
It should be noted that if a debtor becomes
insolvent, the bank should not take interest into
account after the date of insolvency.
Illustration 1:
When closing the books of a bank on 31.12.2012 you find
in the loan ledger an unsecured balance of `2,00,000 in
the account of a merchant whose financial condition is
reported to you as bad and doubtful. Interest on the same
account amounted to `20,000 during the year.
How would you deal with this item of interest in 2012
account?
During the year 2013, the bank accepts 75 paise in the
rupee on account of the total debt due up to 31.12.2012.
Show the entries and the necessary accounts showing
the ultimate effect of the transactions in 2013 books of
account under Interest Suspense Method.
Solution:
Under Interest Suspense Method
When preparing the 2012 accounts the sum of `
20,000 due from the merchant on account of interest

should not be carried to Profit and Loss Account,

because its recovery was doubtful. It should, therefore,
be transferred to an Interest Suspense Account which
would appear as a liability in Balance Sheet on
31.12.2012.
Date Particu L. Debit Credit

lars F. (`) (`)
2012 Merchant A/c 20,000
D
Dec. 31 To Interest Suspense r 20,000
A/c .
(Interest due transferred to

Interest Suspense A/c)
5,000
Interest Suspense
A/c 50,000
55,000
Dr
Bad Debts A/c
To Merchant A/c
(Interest not received and 1,65,000
balances transferred to Bad
1,65,000
Debts A/c)

Cash A/c Dr
To Merchant A/c
(Amount received @ 0.75 p 15,000
in the rupee from the 15,000
merchant.)
Interest Suspense A/c Dr
To Profit and Loss
A/c
(Interest received out of
Interest Suspense transferred)
In the Books of Bank Journal
In the Books of the Bank
Dr Merchant’s Account
Cr.
Date Particulars ` Date Particular `
s
2012 To Balance 2,00,000 201 By 2,20,000
b/d 2 Balance
c/d
Dec. Int. 20,000 Dec. 31
31 Suspense
A/c

2,20,000 2,20,000
2013 201
3 By Cash 1,65,000
(Dividend
Jan. 1 To Balance 2,20,000 Dec. @ 75p in
b/d 31 the rupee)
“ Int. 5,000
Suspense
A/c
(amount
of Int. not
covered)
“ Bad 50,000
Debts
2,20,000 2,20,000
Interest Suspense Account
Date Particulars ` Dat Particulars `

e
2012 To Balance 20,000 2012 By 20,000
Dec. c/d Merchant’s
20,000 Dec. 20,000
Notes:

31 31 A/c
5,000 20,000
To Merchant’s
2013 A/c 15,000 2013
Dec. Profit & Loss 20,000 Jan. 1 By Balance 20,000
31 A/c b/d
1. Interest amounting to `20,000 due from
customer has been debited to him by crediting
Interest Suspense Account (and not to Interest A/c
as its recovery is doubtful) and Interest Suspense
A/c will appear in the liability side of the Balance
Sheet.
2. Actual amount of interest which has been
received in cash, i.e. `15,000, is transferred to P&
L A/c.
Principal Accounting Policies :
i. Foreign Exchange Transactions
ii. Monetary assets and liabilities have
been translated at the exchange rate prevailing at
the close of year. Non-monetary assets have been
carried in the books at the historical cost.
iii. Income and Expenditure items in
respect of Indian branches need to be translated at

the exchange rates on the date of transactions and

in respect of foreign branches at the exchange rates
prevailing at the close of the year.
iv. Profit or Loss on foreign currency
position including pending forward exchange
contracts have been accounted for at the exchange
rates prevailing at the closing of the year.
v. Investment
Permanent category investments are valued at cost.
Valuation of investment in current category
depends on the nature of securities. While
valuation of government securities held as current
investments have been made on yield to maturity
basis, the investments in shares of companies are
valued on the basis of book value.
b. Advances
Advances due from sick nationalised units under
nursing programmes and in respect of various
sticky, suit filed and decreed accounts have been
considered good on the basis of–
i. Available estimated value of existing and
prospective primary and collateral securities
including personal worth of the borrowers and
guarantors.

ii. The claim lodged/to be lodged under various credit

guarantee schemes.
iii. Pending settlement of claims by Govt.
Provisions to the satisfaction of auditors have been made and
deducted from advances. Tax relief available when the
advance is written off will be accounted for in the year of
write off.
c. Fixed Assets
The premises and other fixed assets except for foreign
branches are accounted for at thei
historical cost. Depreciation has been provided on written
down value method at the rates specified in the Income Tax
Rules, 1962. Depreciation in respect of assets of foreign
branches has been provided as per the local laws.
Acceptance, Endorsement and Other Obligations
These are the liabilities of a bank which are taken by a bank on
behalf of its customers and appear in the liabilities side of the
Balance Sheet. For this purpose bank takes corresponding
indemnities from its customers to avoid anytrouble which may
appear in future. In addition to that bank also takes adequate
securities. These items are shown under the head Contingent
Liabilities in Schedule – 12. These items include: Bills
accepted by the bank on behalf of its customers, letter of credit
etc.

Illustration 2:
From the following details prepare “Acceptances,
Endorsements and other Obligation A/c” as would appear in
the general ledger.
On 1.4.12 Acceptances not yet satisfied stood at ` 33,45,000. Out
of which ` 30 lacs were subsequently paid off by clients and bank
had to honour the rest. A scrutiny of the Acceptance Register
revealed the following
Client Acceptances/ Remarks
Guarantees
(`)
P 15,00,000 Bank honoured on 10.6.12
Q 18,00,000 Party paid off on 30.9.12
R 7,50,000 Party failed to pay and
bank had to honour on
30.11.12
S 12,00,000 Not satisfied upto 31.3.13
T 7,50,000 -do-
X 4,05,000 -do-
Total 64,05,000
Acceptances, Endorsements and other Obligation Account
(in General Ledger)
Particul Amo Particular Amount

Date Date
ars unt s
2012- To 3,000 1.4.1 By, 3,345

13 Constituents’ 2 Balance
liabilities for b/d
acceptances/gua
rantees etc.
(Paid off by
clients)
To 345 2012 By,
Constituent’s -13 Constitue 6,405
liabilities for nts’
acceptances/ liabilities
guarantees etc. for
(Honoured by Acceptanc
bank 33.45 es /
lakhs less ` 30 guarantee
lakhs) s etc.
P 1,500
10.6.1 To 1,500 Q 1,800
2 Constituents’ R 750
liabilities for
acceptances/gua
rantees etc.
(Honoured by
bank)
30.9.1 To 1,800 S 1,200
2 Constituents’ T 750
liabilities for
acceptances/gua X 405
rantees etc.
(Paid off by
party)
30.11. To 750
12 Constituent’s
liabilities for
acceptances/gua
rantees etc.
(Honoured by
bank on party’s
failure to pay)
31.3.1 To Balance c/d 2,355
3 (Acceptances
not yet satisfied)
9,750 9,750
REBATE ON BILLS DISCOUNTED
One of the major functions of a bank is to discount customers’
bill. We know that when the bill is discounted by the bank Bill
Discounted and Purchased Account should be debited with full

amount and Customers’ Current Account is credited for such

discounting by the bank with net amount. In this way, total
amount of discount so earned during this year is credited to
Interest and Discount Account. Discount is calculated from the
period of discounting the bill to the date of maturity of the bill.
This is the usual transactions which are recorded in the books of
bank for discounting of the bill. No problem will arise if the entire
amount of discount is received during the period. In real world
situation, this is not happened as the bill may not have matured
for payment during the period of closing the accounts. Thus, an
adjustment is required for discounting of those bills which are
related to next accounting periods.
Entries For adjustment
Interest & Discount A/c Dr.
To rebates on bill discount Account Computation of
rebates on Bills discounted
Rebate on Bills Discounted = Amount of Bill × Rate of
Unexpired Period
Discount ×
12
Illustration 3:
In Calculate Rebate on Bills discounted as on 31 December,
2011 from the following data and show journal entries:

Date of Bill ` Period Rate of

Discount
(i) 15.10.2011 50,000 5 months 8%
(ii 10.11.2011 30,000 4 months 7%
)
(ii) 25.11.2011 40,000 4 months 7%
(iv) 20.12.2011 60,000 3 months 9%
Solution:
Calculation of Rebate on Bills Discounted
` Days after 31 `
Due Discount
December,
Date Rate
2013
50,000 18/03/2012 31+ 29 +18 = 8% 852.46
78
30,000 13/03/2012 31+29+13 = 73 7% 418.85
40,000 28/03/2012 31+29+28 = 88 7% 673.22
60,000 23/03/2012 31+29+23 = 83 9% 1,224.59
Total 3,169.12
Dec. Particulars Dr. ` Cr. `

31

Interest and Discount 3,169.12

Account 3,169.12
Dr.
To, Rebate on Bills
Discounted.
(Being the provision for
unexpired discount required
at the end of the year)
Illustration
On 31 March, 2011 Victory Bank Ltd. had a balance of `18
crores in “rebate on bill discounted” account. During the year
ended 31st March, 2012, Victory Bank Ltd. discounted bills of
exchange of ` 8,000 crores charging interest at 18% p.a., the
average period of discount being for 73 days. Of these, bills
of exchange of `1,200 crores were due for realization from the
acceptor/customers after 31st March, 2012, the average period
outstanding after 31st March, 2012 being 36.5 days. Victory
Bank Ltd. asks you to pass journal entries and show the ledger
accounts pertaining to:
i. Discounting of Bills of Exchange; and
ii. Rebate on bill D

In the books Victory bank Ltd.

Journal
D Particulars L.F.Debit Credit
at (``) (`)
e Crore Crore
Rebate on Bill Discounted A/c Dr 18.00
To, Discount on Bills A/c 18.00
10.2012
(Being the transfer of opening

balance to Rebate on Bill
Discounted Account)
Bills Purchased and Discounted 8,000
A/c Dr 7,712.
To, Client A/c 00
To, Discount on bills A/c 288.00
` 8,000 crores x 18 x 73
100 365
(Being the discounting of bills
during the year)
Discount on bills A/c Dr 21.60
To, Rebate on Bills 21.60
Discounted A/c
(Being the Provision for
unexpired discount as on
31.03.2012)
Discount on bills A/c Dr. 284.40

To, Profit and Loss 284.40
A/c
(Being the amount of income for
the year from discounting of
bills of exchange transferred to
Profit and Loss Account)
Ledger of Victory bank Ltd.
Rebate on Bills Discounted Account (` In Crores)
Date Particulars Amou Date Particulars Amou
nt (`) nt (`)
01.4 To, Discount 18.00 01.4. By balance 18.00
.11 on bills A/c 11 b/d
31.03 To balance 21.60 31.3. By Discount 21.60
.11 c/d 12 on bills A/c
(Rebate
required)
39.60 39.60
Discount on Bills Account (` In Crores)

Date Particulars Amount Date ParticularsAmount

() (`)
31.0 To Rebate 21.60 01.4.1 By rebate 18.00

3.12 on Bills 1 on Bills
Discount
A/c
,, To Profit 284.40 2011- By bills 288.00
and Loss 12 Purchased
A/c and
(Transfer) Discount
A/c
306.00 306.00
Secured and Unsecured Advance
Secured advance means where a bank grants advance to its
customers against any tangible security. Similarly, where as
advance is granted by a bank to its customers without taking any
tangible security, the same is called unsecured advance. It is
needless to mention here that when an advance is granted by a
bank to its customers against any tangible security, bank can
dispose of the said security for the realization of principle and
interest in case of default. The status of securities and the value
of such securities must be mentioned by every bank is Schedule
9. Before granting credit every bank must compare with the
market value of securities so pledged to the bank and the amount

of advance granted by the bank together with the amount of

interest.
RBI’s Prudential Accounting Norms
Just to control the lending activities, the recommendation of
Narasimhan Committee was accepted by RBI. As per the
recommendation, RBI’s Prudential Accounting Norms are:
(a) Recognition of Income;
(b) Classification of Assets; and
(c) Provision for Loans and Advances
A. Recognition of Income:
As per RBI’s norms, every bank must recognize
its income
i. Under Cash Basis (for income under non-
performing asset); and
ii. Under Accrual Basis (for income on
performing assets).
Illustration 6:
Given below are details of interest on advance of a
Commercial Bank as on 31.03.2013:(` in Crore)

Particulars Interest Interest

Earned (`) Received (`)
Performing Assets
Term Loan 240 160
Cash Credit and Overdraft 1,500 1,240
Bills Purchased and 300 300
Discounted
Non-Performing Assets 150 10
Term Loan 300 24
Cash Credit and Overdraft 200 40
Bills Purchased and Discounted
Find out the income to be recognized for the year ended 31st
March 2013
Solution:
As per RBI Circular, Interest on non-performing assets
are considered on Cash Basis whereas interest on
performing assets are considered on Accrual Basis.
Statement Showing the Recognition of Income (` in Crore)

Particulars Amou Amount

nt (`) (`)
1. Interest on
Term Loans 240
(i) Performing 10 250
Assets
(ii) Non-performing Assets
1,500
2. Interest on Cash Credit and
Overdraft 24 1,524
(i) Performing Assets 300
(ii) Non-performing Assets 40 340
3. Interest on Bills Purchased and

Discounted
(i) Performing Assets
(ii) Non-performing Assets
Income to be Recognised 2,114

Classification of Assets
Assets are classified as:
Assets
Performing or Standard Asset Non-

performing Assets
Sub-Standard Asset Doubtful Asset

Loss Asset
Standard or Performing Asset

Practically, these assets bear a little amount of risk like
normal risk. They do not create any trouble regarding
their realization.
Provision required = 0.40%
Restructured Advances:
 Restructured accounts classified as standard
advances will attract a provision (as prescribed
from time to time) in the first two years from the
date of restructuring. In cases of moratorium on
payment of interest/ principal after restructuring,

such advances will attract a provision for the

period covering moratorium and two years
thereafter;
 Restructured accounts classified as non-
performing advances, when upgraded to
standard category will attract a provision (as
prescribed from time to time) in the first year
from the date of upgradation.
Banks will hold provision against the restructured
advances as per the extant provisioning norms.
The above-mentioned higher provision on restructured
standard advances (2.75 per cent as prescribed vide
circular dated November 26, 2012) would increase to 5
per cent in respect of new restructured standard accounts
(flow) with effect from June 1, 2013 and increase in a
phased manner for the stock of restructured standard
accounts as on May 31, 2013 as under:
 per cent - with effect from March 31, 2014 (spread
over the four quarters of 2013-14)
 4.25 per cent - with effect from March 31, 2015
(spread over the four quarters of 2014-15)
 5.00 per cent - with effect from March 31, 2016
(spread over the four quarters of 2015-16)
1. Sub-Standard Advances:

Advances classified as “sub-standard” will attract a

provision of 15 per cent as against the 10 per cent. The
“unsecured exposures” classified as sub-standard assets
will attract an additional provision of 10 per cent, i.e., a
total of 25 per cent as against the 20 per cent. However,
“unsecured exposures” in respect of Infrastructure loan
accounts classified as sub-standard, in case of which
certain safeguards such as escrow accounts are available,
will attract an additional provision of 5 per cent only i.e.
a total of 20 per cent as against 15 per cent.
2. Doubtful Advances:
Doubtful Advances will continue to attract 100%
provision to the extent the advance is not covered by the
realisable value of the security to which the bank has a
valid recourse and the realisable value is estimated on a
realistic basis. However, in respect of the secured
portion, following provisioning requirements will be
applicable: The secured portion of advances which have
remained in “doubtful” category up to one year will
attract a provision of 25 per cent (as against 20 per cent);
The secured portion of advances which have remained
in “doubtful” category for more than one year but up to
3 years will attract a provision of 40 per cent (as against
30 per cent); and The secured portion of advances which
have remained in “doubtful” category for more than 3
years will continue to attract a provision of 100%

Rates of Provisioning for Non-Performing

Assets and Restructured Advances
Category of Advances Rate
(%)
Standard Advances
(a) Direct advances to agricultural and SME 0.25
(b) Advances to Commercial Real Estate (CRE) 1.00
Sector
(c) All other loans 0.40
Sub-standard Advances
Secured Exposures 15
Unsecured Exposures in respect of 20
Infrastructure loan accounts where certain
safeguards such as escrow accounts are
available.
Unsecured other loans 25
Doubtful Advances – Unsecured Portion 100
Doubtful Advances – Secured Portion
For Doubtful upto 1 year 25
For Doubtful > 1 year and upto 3 years 40
For Doubtful > 3 years 100

As per RBI DBOD Circular No. BP.BC

94/21.04.048/2011-12 dated 18/05/2011.
Loss Asset
The asset which are not realizable at all are known as loss
assets. The entire amount should be written off or full
provision should be made for the amount of outstanding
provision @ 100% for such assets.
HOW TO MAKE PROVISION IN RESPECT OF
ADVANCES COVERED BY THE GUARANTEES OF
DICGC/ECGC
In the case of advances guaranteed by Export Credit
Guarantee Corporation (ECGC) or by Deposit Insurance
and Credit Guarantee Corporation (DICGC), provision is
required to be made only for the balance in excess of the
amount guaranteed by these corporations. In case the bank
also holds a security in respect of an advance guaranteed
by ECGC/DICGC, the realizable value of the security
should be deducted from the outstanding balance before
the ECGC/ DICGC guarantee is off-set.
Where there is an upper limit to which the ECGC/ DICGC
guarantee applies; this fact should be duly recognized in
computing the amount of provision required. Statement
showing the calculation of Provision

`
A. Amount Outstanding xxx
B. Less: Realizable value of Security (if any (xxx)
held)
xxx
C. Less: ECGC/DICGC cover (% limited to ….) (xxx)
D. Unsecured Portion [A-B-C] xxx
E. Provision required for unsecured portion of xxx
Doubtful Asset @100%
F. Provision required for secured portion of Xxx
Doubtful Asset @ 25%,/40%/100%
G. Total Provision required [E+F] Xxx
Illustration
From the following information of details of advances of
X Bank Limited calculate the amount of provisions to be
made in Profit and Loss Account for the year ended
31.3.2012:
Asset classification ` in lakhs
Standard 6,000
Sub-standard 4,400

Doubtful:
For one year 1,800
For two years 1,200
For three years 800
For more than three years 600
Loss assets 1,600
Solution:
Statement showing provisions on various
performing and non-performing assets
Asset Amount Provision Amount of
Classification Provision
ìn Lakhs % ` In lakhs
Standard 6,000 0.40 24
Sub-standard 4,400 15 660
Doubtful
One year 1,800 25 450

2 years 1,200 40 480
3 years 800 40 320

More than 3 years 600 100 600

Loss assets 1,600 100 1,600
4,134
Illustration
From the particulars given below, ascertain the amount
of provision to be made against the advances
of SBI, Kolkata. (`
in ’00,000)
Particulars Amount
(`)
Total amount of Loans & Advances 120
Advance fully secured 70
Advance overdue for 15 months 20
Advance overdue for more than 2½ year 10
but less than 3 years
(Secured by mortgage of land & building —
valued ` 5 lakhs)
Unsecured Advance not recoverable 20

Solution:
Statement Showing the Ascertainment of
Provision (` in ’00,000)
Type of Amount Percentage Amount of
Advance (` in lakh) of Provision
Provisions (`)
(%)
Standard 70 0.40% 28,000
Asset
Sub-Standard 20 15% 3,00,000
Asset
Doubtful 10 (Unsecured 7,00,000*
Asset provision +
40% of
secured
provision)
Loss Asset 20 100% 20,00,000
30,28,000
* Unsecured Provision (` 10,00,000 - `
5,00,000) ` 5,00,000 + 40% of ` 5,00,000
= ` 5,00,000 + ` 2,00,000
= ` 7,00,000

Provisions covered by Guarantee of DICG/ECGC in

case of advance :
Illustration
Rajatapeeta Bank Ltd. had extended the following
credit lines to
a Small Scale Industry, which had not paid any
Interest
since March, 2006:
Particulars Term Loan Export Loan
Balance Outstanding on `35 lakhs `30 lakhs
31.03.2012
DICGC/ECGC cover 40% 50%
Securities held `15 lakhs `10 lakhs
Realisable value of ` 10 lakhs ` 08 lakhs
Securities
Particulars Term loan (` Export

in lakhs) credit (` in
lakhs)
Balance outstanding on 35.00 30.00
31.3.2012

Less: Realisable value of 10.00 8.00

Securities
Less: DICGC cover @ 40% 25.00 22.00
10.00 –
ECGC cover @ 50% - 11.00
Unsecured balance 15.00 11.00
Compute necessary provisions to be made for the year
ended 31st March, 2012.
Solution:
Required Provision:
Term loan Export
(` in credit
lakhs) (ìn
lakhs)
100%* for unsecured 15.00 11.00
portion
100% for secured portion 10.00 8.00
Total provision required 25.00 19.00

* The above solution has been provided based

on the latest NPA provisions (as per the Master
Circular issued by RBI.
Illustration
From the following information find out the amount of
provisions required to be made in the Profit & Loss
Account of a commercial bank for the year ended 31st
March, 2013:
i. Packing credit outstanding from Food Processors `90
lacs against which the bank holds securities worth `22.50
lacs. 50% of the above advance is covered by ECGC.
The above advance has remained doubtful for more than
3 years.
ii. Other advances :
Assets classification ` in lacs
Standard 4500
Sub-standard 3300
Doubtful :
For one year 1350
For two years 900
For three years 600
For more than 3 years 450

Loss assets 900

Solution (ìn lacs)
(`) (`)
Amount outstanding (packing 90.00
credit)
Less : Realisable value of 22.50
securities
67.50
Less : ECGC cover (50%) 33.75
Net Unsecured Balance 33.75

Required provision :
Provision for unsecured portion 33.75
(100%)
Provision for secured portion 22.50
(100%)*
56.25
Other advances: (` in lacs)
Assets Amount % of provision Provision
Standard 4500 0.40* 18

Sub-standard 3300 15 495

Doubtful :
For one year 1350 25 337.5
For two years 900 40 360
For three 600 40 240
years
For more than 450 100* 450
three years
Loss 900 100 900
Required 12,000 2,800.5
provision
Note : Doubtful advances have been taken as fully
secured. However, in case, the students assume that
no security cover is available for these advances,
provision will be made for 100%.
* As per the Master Circular issued by RBI
Preparation of Profit and Loss Account
Illustration
The following are the figures extracted from the books of
Y Bank Ltd. [Scheduled Commercial Bank] as on
31.3.2013.

Other information:(Amount in`)

Interest and 20,30,0 Directors’ fees and 12,000
Discount received 00 allowance
Interest paid on 12,02,0 Rent and taxes 54,000
Deposits 00 paid
Issued and 5,00,00 Stationery and 12,000
Subscribed Capital 0 printing
Reserve under 3,50,00 Postage and 25,000
Section 17 0 Telegram
Commission, 90,000 Other expenses 12,000
Exchange and
Brokerage
Rent received 30,000 Audit fees 4,000
Profit on sale of 95,000 Depreciation on 12,500
investment Bank’s properties
Salaries and 1,05,00
Allowances 0
i. Provision for bad and doubtful debts necessary `
2,00,000.
ii. Rebate on bills discounted as on 31.3.2013
`7,500.
iii. Provide ` 3,50,000 fo income tax.

iv. The directors desire to declare 10% dividend.

Make the necessary assumption and prepare the
Profit and Loss Account in accordance with the law
Solution:
In the books of Y Bank Ltd.
Profit and Loss Account for the year ended 31st
March, 2013
Year)ended
(Previous
31.3.2013
31.3.2012
(Current
Schedule
Year) `
ended
No.
Year
Year
I. Income
Interest earned 13 20,22,500
Other income 14 2,15,000
Total 22,37,500
II Expenditure
.
Interest 15 12,02,000
expended
Operating 16 2,36,500
expenses

Provisions and 5,50,000

contingencies
(Note 1)
Total 19,88,500
III. Profit / Loss
Net Profit / Loss 2,49,000
(–) for the year
Profit / Loss (–) —
brought forward
Total 2,49,000
IV. Appropriations
Transfer to 62,250
Statutory
Reserves
(25% of Net
Profit) (Note 3)
Transfer to —
Other Reserves
Proposed 50,000
dividend (10%
of ` 5,00,000)
(Note 4)

Balance carried 1,36,750

over to Balance
Sheet
Total 2,49,000
Working Notes :
 Calculation of Provisions and
Contingencies
`
 Provision for doubtful debts : 2,00,000
 Provision for Income tax 3,50,000
5, 50,000
 It is assumed that Rebate on Bill
Discounted as on 31.3.2012 was
nil.
 As per the provision of section 17 of
the Banking Regulation Act, 1949
amount to be transferred to
Statutory Reserve should not be less
than 25% of Net Profit.
 It is assumed that the dividend has been
proposed as per RBI guidelines
 Corporate Dividend tax is payable when

dividend is proposed / paid.

Schedule 13: Interest Earned
` `
I. Interest and Discount 20,30,000
received
Less: Rebate on bill 7,500 20,22,500
discounted as on 31.3.2013
II. Income on Investments
III. Interest on balances with
RBI and other inter-bank
fund
IV. Others
Total 20,22,500
Schedule 14: Other Income
I. Commission, exchange and brokerage 90,000
II. Rent received 30,000
III. Net Profit on sale of investments 95,000
IV. Net Profit on revaluation of —
investments
Less : Net Loss on revaluation of —

investments
V. Net Profit on sale of land, buildings —
& other assets
VI. Net Profit on exchange transactions —
VII Income earned by way of dividends —
. etc from subsidiaries/joint ventures
setup abroad/in India
VII Miscellaneous Income —
I.
Total 2,15,000
Schedule 15: Interest Expended
`
I. Interest on Deposits 12,02,000
II. Interest on RBI / Inter-bank —
borrowings
III. Others —
Total 12,02,000

Schedule 16 : Operating Expenses

`
I. Payment to and provision for 1,05,000
employees
II. Rent, taxes and lighting 54,000
III. Printing and stationery 12,000
IV. Advertisement and publicity —
V. Depreciation on Bank’s 12,500
property
VI. Directors’ fees and allowances 12,000
VII Auditor’s fees and expenses 4,000
VIII Law charges —
IX. Postage and telegram 25,000
X. Repairs and maintenane —
XI. Insurance —
XII Other expenditure 12,000
Total 2,36,500

Preparation
of Balance Sheet
Illustration
From the following trial balance and the additional
information, prepare a Balance Sheet of Lakshmi Bank
Ltd. a Scheduled Commercial Bank as at 31st March,
2013:
Debit balance ` (in Lakhs)
Cash Credits 1,218.15
Cash in hand 240.23
Cash with Reserve Bank of India 67.82
Cash with other Banks 132.81
Money at call and short notice 315.18
Gold 82.84
Government securities 365.25
Current Accounts 42.00
Premises 133.55
Furniture 95.18
Term Loan 1,189.32
3,882.33

Credit balance ` (in Lakhs)

Share Capital (29,70,000 equity 297.00
shares of ` 10 each, fully paid up)
Statutory Reserve 346.50
Net Profit for the year (before 225.00
appropriation)
Profit & Loss Account (Opening 618.00
balance)
Fixed deposit Accounts 775.50
Savings Deposit Accounts 675.00
Bills Payable 0.15
Borrowings from other Banks 165.00
3,882.33

Additional Information :
1) Bills for collection : `18,10,000
2) Acceptance and endorsements :
`14,12,000
3) Claims against the bank not
acknowledged as debts : `55,000
4) Depreciation charged on premises : `
1,10,000 and Furniture : `78,000
Solution:
Lakshmi Bank Ltd.
Balance Sheet as on 31.3.2013
Details Schedule Amount (`` in
No. Lakhs)
Capital and Liabilities:

Capital 1 297.00
Reserves and Surplus 2 1,189.50
Deposits 3 2,230.68
Borrowings 4 165.00
Other Liabilities and 5 0.15

Provisions
Total 3,882.33
Assets :
Cash and Balance with 6 308.05
RBI
Balances with Banks 7 489.99
and Money at Call and
Short Notice
Investments 8 448.09
Advances 9 2,407.47
Fixed Assets 10 228.73
Total 3,882.33
Contingent Liabilities 12 14.67
Bills for Collection 18.10
Schedules Schedule 1 - Capital

` (in lakh)
Issued, Subscribed and Called – up 297.00
Capital
(29,70,000 @` 10)

Schedule 2 - Reserves and Surplus

` (in lakh) ` (in lakh)
1. Statutory Reserve 346.50
Add: 20% of ` 2,25,00,000 56.25
(Assumed to be an unscheduled 402.75
Bank)
2. Profit & Loss A/c Opening 618.00
Add: Current Year
` (2,25,00,000 – 56,25,000) 168.75 786.75
1,189.50
Schedule 3 – Deposit
` (in lakh)
1. Demand Deposits 780.18
2. Savings Bank Deposits 675.00
3. Term Deposit 775.50
2,230.68
Schedule 4 - Borrowings
` (in lakh)
Borrowings from other Banks 165.00

Schedule 5 - Other Liabilities

` (in lakh)
Bills Payable 0.15
Schedule 6 - Cash and Balances with RBI
` (in lakh)
Cash in Hand 240.23
Balances with RBI 67.82
308.05
Schedule 7 - Balances with Banks and
Money at Call and Short Notice
` (in lakh)
Cash with other Banks 132.81
Money at Call and short Notice 315.18
4,89.99
Schedule 8 – Investment
` (in lakh)
Government securities 365.25
Gold 82.84
4,48.09
Schedule 9 – Advances

` (in lakh)
Cash Credit 1,218.15
Term Loans 1,189.32
2,407.47
Schedule 10 - Fixed Assets
Premises 1,34,65,000
Less : Depreciation (1,10,000) 133.55
Furniture 95,96,000
Less : Depreciation (78,000) 95.18
228.73
Schedule 11 - Other Assets — NIL
Schedule 12 - Contingent Liabilities
Acceptance and Endorsements 14.12
Claims against the Bank not 0.55
acknowledge as Debts
14.67

MODULE 3
ACCOUNTS OF LIFE INSURANCE COMPANIES
Insurance is a contract whereby one party agrees
for a consideration called premium to indemnify the other
against a possible loss or to pay a stated sum of money on
the happening of a particular event. This agreement or
contract when put in writing is known as policy. The
person whose risk is covered is called insured or assured
and the company or corporation which insures is known
as insurer, assurer or underwriter. The consideration in
return for which the insurer agrees to make good the loss
is known as premium.
Types of Insurance
From accounting point of view, the insurance may be
divided into two as follows:
1. Life Insurance
A life insurance contract is a long term contract in which
the assured must pay the premium at stated intervals and
the insurer guarantee to pay a certain sum of money to the
assured on the happening of the event which is certain
(either death or expiry of the fixed period). Section 2 of
Indian Insurance Act 1938 defines life insurance as “life

insurance business is the business of effecting contracts

upon human life”.
2. General Insurance
All insurance other than life insurance is general
insurance. Under this type of insurance, the insurer
undertakes to indemnify the loss suffered by the insured
on happening of a certain event in consideration for a
fixed premium. Usually all these are short term
agreements for a year. Fire insurance, marine insurance,
accident insurance, burglary insurance, third party
insurance etc. are the examples for general insurance.
FINANCIAL STATEMENTS OF INSURANCE
COMPANIES
Insurance Regulatory and Development Authority
(IRDA) has issued the regulations regarding the
preparation of financial statements.
Final Accounts of Life Insurance Companies
The final accounts of a life insurance company consist of
(a) Revenue Account, (b) P&L A/c and (c) Balance Sheet.
Revenue Account (Form A RA)
Revenue Account is prepared as per the provisions of
IRDA regulations 2002 and complies with the
requirements of Schedule A as follows:

FORM A – RA
Name of the insurer
Registration No. and Date of Registration with the IRDA
Revenue Account for the year ended 31st March, 20….
Policyholders’ Account (Technical Account)
N Particulars
Schedule
Previous
Current
O
year
year
.
Premiums earned – net
(a) Premium 1
(b) Reinsurance ceded
(c) Reinsurance accepted
Income from investments
(a) Interest, dividends & rent –
Gross
(b) Profit on sale/redemption of
investments
(c) (Loss on sale/redemption of
investments)
(d) Transfer/ Gain on
revaluation/change in

(a) fair value*

Other income (to be specified)
Total
(A)
Commission
Operating Expenses related to
insurance business
Provision for doubtful debts 3
Bad debts written off
Provision for tax
2
Provisions (other than taxation)
3
(a) For diminution in the value
of
investments (net)
(b) Others (to be specified)
Total
(B)
Benefits Paid (Net) 4 Interim
Bonuses paid

Change in valuation of liability in

respect of life policies
(a) Gross**
(b) Amount ceded in
Reinsurance
(c) Amount accepted in
Reinsurance
Total (C)
Surplus (Deficit) (D)=(A) (B)
(C)
4
Appropriations
Transfer to Shareholders’ Account
Transfer to Other Reserves (to be
specified
Balance being Funds for Future
Appropriations
Total (D)
Notes:
 Represents the deemed realized gain as per norms
specified by the Authority.
 Represents Mathematical Reserves after
allocation of bonus

The total surplus shall be disclosed separately with the

following details:
(a) Interim bonuses paid
(b) Allocation of bonus to policyholders
(c) Surplus shown in the Revenue Account
(d) Total Surplus: [(a)+(b)+(c)]
Profit And Loss Account (Form A PL)
The P&L A/c is prepared to calculate the overall profit
of the life insurance business. The incomes or expenses
that are not related to any particular fund are recorded in
the P&L A/c.
FORM A PL
Name of the insurer
Profit and Loss Account for the year ended 31 st March,
20….
Shareholders’ Account (Non technical Account)
N
Previous
Schedul
Current
year
year
o Particulars
e

Amounts transferred from/to the

Policyholders Account (Technical
Account )
Income from investments
a) Interest, dividends & rent –
Gross
b) Profit on sale/redemption of
investments
c) (Loss on sale/redemption of
investments)
Other income (to be specified)
Total (A)
Expenses other than those directly
related to the insurance business
Bad debts written off
Provision for tax
Provisions (other than taxation)
a) For diminution in the value
of
investments (net)
b) Provision for doubtful debts

c) Others (to be specified)

Total (B)
Profit (Loss) before tax (A-B)
Provision for taxation
Appropriations
a) Balance at the beginning of
the year
b) Interim dividends paid during
the year
c) Proposed final dividend
d) Dividend Distribution Tax
e) Transfer to Reserves/other
accounts (to be specified)
Notes to Form A RA and A PL:
 Premium income received from business
concluded in and outside India shall be separately
disclosed.
 Reinsurance premiums whether on business
ceded or accepted are to be brought into account

gross (i.e., before deducting commissions) under

the head reinsurance premiums
 Claims incurred shall comprise claims paid,

specific claims settlement costs wherever
applicable and change in the outstanding
provisions for claims at the year end.
 Items of expenses and income in excess of one

percent of the total premiums (less reinsurance)
or Rs.500000 whichever is higher, shall be shown
as a separate line item.
 Fees and expenses connected with claims shall be

included in claims.
 Under the sub head “Others” shall be included

items like foreign exchange gains or losses and
other items.
 Interest, dividends and rentals receivable in

connection with an investment should be stated at

gross amount, the amount of income tax deducted

at source being included under “advance taxes
paid and taxes deducted at source”.
 Income from rent shall include only the realized

rent. It shall not include any notional rent.
Balance Sheet (Form A BS)

Balance Sheet of Life Insurance Company is prepared in
vertical format. The form of Balance Sheet is as follows:
FORM A BS
Name of the insurer
Balance Sheet as at 31st March, 20….
No Particulars Schedule Current Previous
year year

Sources of
Funds 5
Shareholders’ 6
Funds:
Share Capital
Reserves and
Surplus
7
Credit/[Debit]
Fair Value
Change Account
Sub Total
Borrowings
Policyholders’
Funds:
Credit/[Debit]
Fair Value
Change Account
Policy
Liabilities
Insurance
Reserves

Provision for
Linked
Liabilities
Sub Total
Funds for Future
Appropriations
Total
Application of
Funds
Investments
Shareholders’ 8
Policyholders’
Assets held to 8A
Cover Linked
Liabilities
8B
Loans
Fixed Assets
9
Current Assets
Cash and Bank
Balances 10

Advances and
Other Assets 11
Sub Total (A)
Current
Liabilities
12
Provisions
Sub Total (B)
Net Current
Assets (C)=(A) 13
(B) 14
Miscellaneous
Expenditure (to
the extent not
written off or 15
adjusted)
Debit Balance in
Profit and Loss
Account
(Shareholders’
Account)
Total

CONTINGENT LIABILITIES
Current Previous
Particulars
year year
1. Partly paid-up investment
2. claims other than against
policies, not acknowledged as
debt by the company.
3. underwriting commitment
outstanding
4. guarantees given by or on
behalf of the company
5. statutory demands/liabilities in
dispute, not provided for
6. reinsurance obligations
7. others (to be specified)
SCHEDULES FORMING PART OF FINANCIAL
STATEMENTS
SCHEDULE 1 PREMIUM
Current Previous
No. Particulars
year year
1 First year premium

2 Renewal premium
3 Single premium
Total premium
SCHEDULE 2–COMMISSION EXPENSES

Current Previous
Particulars
year year
Commission paid
Direct First Year Premiums
Renewal Premiums
Single Premiums
Add: Commission on Re
insurance Accepted
Less: Commission on Re-
insurance Ceded
Net Commission
Note. The profit/commission if any are to be combined
with the reinsurance accepted or re-insurance ceded
figures

SCHEDULE 3 – OPERATING EXPENSES RELATED

TO INSURANCE BUSINESS
Current Previous
Particulars
year year
1. Employees remuneration &
welfare benefits
2. Travel, conveyance and vehicle
running expenses
3.. Rents, rates & taxes
4. Repairs
5. Printing & stationery
6. Communication expenses
7. Legal & Professional charges
8. Medical fees
9. . Auditors’ fees, expenses etc
 As auditor
 As adviser or in any other
capacity, in respect of:
 Taxation matters
 Insurance matters

 Management services;
and
 In any other capacity
10. Advertisement and publicity
11. Interest and bank charges
12. Others(to be specified)
13. Depreciation
Total
Note: Items of expenses and income in excess of one
percent of the total premiums (less reinsurance) or
Rs.500000 whichever is higher, shall be shown as a
separate line item.
SCHEDULE 4 – BENEFITS PAID [NET]
Current Previous
Particulars
year year
Insurance Claims:
(a) Claims by Death
(b) Claims by Maturity
(c) Annuities/Pension
payment

(d) Other benefits,

specify.
2. (Amount ceded in reinsurance):
(a) Claims by Death
payment
(d) Other benefits,
specify.
3. Amount accepted in
reinsurance:
(a) Claims by Death
payment
(d) Other benefits,
specify.
Total
Notes:
1. Claims include specific claims settlement costs,
wherever applicable.

2. Legal and other fees and expenses shall also form part
of the claims cost, wherever applicable.
SCHEDULE 5 – SHARE CAPITAL
1. Authorised capital
Equity shares of Rs…..each
2. Issued Capital
3. Subscribed Capital
4. Called up Capital
5. Less: Calls unpaid
Add: Shares forfeited (Amount
originally paid up)
Less: Par value of equity shares
bought back
Less: Preliminary Expenses
Expenses including
commission or brokerage

on underwriting or subscription of
shares
Total
Notes:
 Particulars of the different classes of capital
should be separately stated.
 The amount capitalized on account of issue of
bonus shares should be disclosed.
 In case any part of the capital is held by a holding
company, the same should be separately
disclosed.
SCHEDULE 5A – PATTERN OF
SHAREHOLDING

[As certified by the Management]
Current year Previous year
No.
No. of % of of % of
shares holdings shares holdings
Promoters
Indian

Foreign
Other
Total
SCHEDULE 6 – RESERVES AND SURPLUS
Current Previous
No Particulars
year year
1 Capital Reserve
2 Capital Redemption
3 Reserve
4 Share Premium
5 Revaluation Reserve
6 General Reserves
7 Catastrophe Reserve
8 Other Reserves (to be

specified)
Balance of Profit in P&L
A/c
Total
Note: Additions to and deductions from the reserves
shall be disclosed under each of the specified heads.

SCHEDULE 7 – BORROWINGS
Current Previous
Particulars
year year
1. Debentures/Bonds
2. Banks
3. Financial Institutions
4. Others (to be specified)
SCHEDULE 8 – INVESTMENTS SHAREHOLDERS
No. Current Previous
Particulars
year year
Long –term Investments
1 Government securities and
Government Guaranteed
Bonds including treasury
bill
2
Other approved securities
3
Other investments
(a) Shares
(aa)Equity
(bb)Preference

(b) Mutual Funds

(c) Derivative Instruments
(d) Debentures/Bonds
(e) Other securities (to be
specified)
4 (f) Subsidiaries
Investment Properties –
Real Estate
5
Investments in
Infrastructure and Social
1 sector
Other than Approved
Investments
Short –term Investments
2
Government securities and
3
bills
Other investments
(a) Shares

(aa)Equity
(bb)Preference
(b) Mutual Funds
4 (d) Debentures/Bonds
specified)
(f) Subsidiaries
Investment Properties –
Real Estate
4. Investments in
sector
5 Other than Approved
Investments
SCHEDULE 8 A– INVESTMENTS
POLICYHOLDERS
No Particulars Current Previous
. year year
. Long –term Investments
1


2 bills
3 Other approved securities
(a) Shares
 Equity
 Preference
(b) Mutual Funds
(c) Derivative
Instruments
(e) Other securities (to
be specified)
(f) Subsidiaries
4
(g) Investment
Properties – Real Estate
Investments in
1 Infrastructure and Social
sector Other than Approved
Investments

2 Short –term Investments

3 Government securities and
Bonds
including treasury bills
a. Shares
 Equity
 Preference
b. Mutual Funds
c. Derivative Instruments
4.
d. Debentures/Bonds
5.
e. Other securities (to be
specified)
f. Subsidiaries
g. Investment Properties –
Real Estate
Investments in
sector Other than Approved
Investments

Total
Investments
1. India
2. Outside india
Total
SCHEDULE 8 B– ASSETS HELD TO COVER

LINKED LIABILITIES
Current Previous
No. Particulars
year year
Long –term Investments
1. Government securities and
2 Government Guaranteed
3 bills
(a) Shares
 Equity
 Preference

(b) Mutual Funds

specified)
4. (f) Subsidiaries
(g) Investment Properties –
Real Estate
5
Investments in
1 sector
Other than Approved
Investments
2
Short –term Investments
3
bills
(a) Shares
 Equity

 Preference
b. Mutual Funds
4 c. Derivative Instruments
d. Debentures/Bonds
5 e. Other securities (to be
specified)
f. Subsidiaries
g. Investment Properties –
Real Estate
Investments in
sector
Other than Approved
Investments
Total
SCHEDULE 9– LOANS
Current Previous
No. Particulars
year year
1 Security wise
Classification
Secured

1. On mortgage of
property
 In India
 Outside India
2. On Shares, Bonds,
Govt. Securities, etc.
3. Others (to be
specified)
Unsecured
1. Loans against
2 policies
2. Other (to be
specified)
Total
Borrower wise
Classification
(a) Central and State
Governments
3 (b) Banks and Financial
Institutions
(c) Subsidiaries

(d) Companies
(e) Loans against
policies
(e) Others (to be
specified) Total
Performance wise
4 Classification
1) Loans classified as
standard
 In India
 Outside India
2) Non standard loans
less provisions
 In India
 Outside India
Total
Maturity wise
Classification
(a) Short Term
(b) Long Term

SCHEDULE 10– FIXED ASSETS

Cost/gross Net
Depreciation
block block
On sales/adjustments
Up-to last year
As at year end
Previous year
Particulars
For the year

Deductions
Additions
Opening
Closing
To date
Goodwill
Intangibles
(specify)
Land Freehold
Leasehold Property
Buildings
Furniture &
Fittings
Information
Technology
Equipment

Vehicles
Office Equipment
Others (Specify
nature)
Total
Work in progress
Total
Previous Year
SCHEDULE 11– CASH AND BANK BALANCES

Current Previous
Particulars
year year
1. cash (including cheques, drafts
and stamps)
2. bank balances
 Deposit account
 Short-term
 Others
 Current accounts
a. Others (to be specified)

 Money at call and short

notice
a. with banks
b. With other institutions
 Others (to be specified)
Total
Balances with non scheduled
banks in 2 and 3 above Cash
and Bank Balances
1. In India
2. Outside India
Total
SCHEDULE 12– ADVANCES AND OTHER ASSETS Previou
Current
s year
year
No Particulars
Advances
1 Reserve deposits with ceding
2 companies
3 Application money for

investments

4 Prepayments
5 Advances to Directors/Officers
Advance tax paid and taxes
6 deducted at source (Net
provision for taxation)
Others (to be specified)
1 Total (A)
2 Other Assets
3 Income accrued on investments
4 Outstanding Premiums
5 Agents’ balances
Foreign Agencies Balances
6 Due from other entities
7 carrying on insurance business
(including reinsurers)
Due from subsidiaries/holding
8
company
Deposit with Reserve Bank of
India [Pursuant to section 7 of
Insurance Act, 1938]


Total
(B)
Total (A+B)
SCHEDULE 13– CURRENT LIABILITIES
Previous
Current
year
year
No Particulars
1 Agents’ balances
2 Balances due to other insurance
3 companies
4 Deposits held on re insurance

ceded
5
Premiums received in advance
6
Unallocated premium
7
Sundry creditors
8
Due to subsidiaries/holding
9 company
10 Claims outstanding
11 Annuities due
Due to Officers/Directors


Total
SCHEDULE 14– PROVISIONS
Previou
Current
s year
year
No Particulars
1 For taxation (less payments

and taxes deducted at source)
2 For proposed dividends
3 For dividend distribution tax
4 Others (to be specified)
Total
SCHEDULE 15– MISCELLANEOUS EXPENDITURE
Previous
Current
year
year
No Particulars
1 Discount allowed on issue of

2 shares/debentures
Total

Explanation of some items in final accounts

1. Claims – Claim is the amount payable by the
insurance company. In life insurance business,
claims may arise due to two reasons i.e., by death
or maturity.
2. Annuity – It is an annual payment which a life
insurance company guarantees to pay for lump
sum money received in the beginning.
3. Surrender value – If an insured is unable to pay the
further premium, he can get his policy paid from
the company. It is the present cash value of the
policy which a holder gets from the company on
surrendering all the rights of the policy.
4. Bonus in reduction of premium – instead of paying
bonus in cash, the insurance company may deduct
the bonus from the premium due from the insured.
This is known as bonus in reduction of policy.
5. Consideration for annuities granted Any lump
sum payment received by the insurance company
in lieu of granting annuity is called consideration
for annuity granted.
6. Re insurance – When a company accepts a
business of more value and in order to reduce the

risk, may pass on some business to the other

company, it is called reinsurance.
7. Commission on Reinsurance Accepted or Ceded –
The Company which passes some business to the
other company gets some commission which is
known as commission on reinsurance business
ceded. Commission paid on reinsurance business
accepted is known as Commission on Reinsurance
Accepted.
Life insurance fund
Life insurance fund is maintained by life insurance
company. It represents the excess of revenue income
over revenue expenditure. The object of maintaining this
fund is to meet the aggregate liability on all outstanding
policies. This is shown in schedule 6
Adjusting entries
Following entries are recorded at the time of preparing
final accounts for recording unrecorded transactions in
the books of insurance company:
1. Premium outstanding at the end of the year:
Outstanding premium a/c Dr
Premium a/c
(Premium outstanding for the year)

2. for premium received in advance

Premium a/c Dr
To premium received in advance
(the premium received in advance)
3. for re-insurance premium
Premium A/c Dr
To re-insurer’s or other insurance company
a/c
(the premium covered under reinsurance)
4. for outstanding claims at the end of the year:
Claims A/c Dr
To claim outstanding a/c
(the claims outstanding at the end of the year)
5. For expenses relating to claims such as survey
expenses, legal expenses etc. but included in other
expenses
Claims a/c Dr
To management expenses a/c
To survey/legal expenses a/c

(The expenses relating to claims charged to

claims account)
6. For claims covered under re-insurance
Insurance claim / reinsurance company a/c Dr
To claims a/c
(The claims recovered under reinsurance)
7. For interest accrued but not due:
Interest accrued A/c Dr
To interest A/c
(The interest accrued but not due)
8. For interest due but not received
Outstanding interest a/c Dr
Interest A/ c
9. For bonus in reduction of premium
Bonus in reduction of premium a/c Dr
To premium a/c
(The bonus in reduction of premium adjusted)
10. For rent of own building
Rent A/c Dr
To rent of own building A/c

(The rent of own building charged)

11. For commission on reinsurance accepted due but not
paid
Commission on reinsurance Accepted A/c Dr
To reinsurance company
(Commission payable on reinsurance accepted)
12. For commission on reinsurance ceded due:
Reinsurance company A/c Dr
To commission on reinsurance ceded.
(The commission earned on reinsurance ceded,
made due)
Illustration
The following balances appeared in the books of
the happy mutual life Assurance Society ltd as on
31/03/2020.

` in ` in
Particulars Particulars
lakhs lakhs
Claims less Life assurance
reinsurance paid fund at the
during the year: beginning of the
Death 2200 year 50000
By 1500 Premiums less

maturity 6 reassurance 15000
Annuities Claims less
Furniture and reassurance
office equipment Outstanding at the
at cost (including beginning of the
` 40 lakhs bought 250 year: 900
during the year) 77 By death 600
Printing and By maturity
stationary
1350 Credit balances 60
Cash with bank pending
in current a/c adjustment
30 2
Cash and stamps Consideration for
in hand annuity granted
Surrenders less 40 1800
Interest dividend
reassurance 250 and rent

Commission Registration and 2

Expenses of 3100 other fees 100
management Sundry deposits 300
Sundry deposits Taxation 1150
with electricity provision
companies etc 1 350
Premium deposits
Advance 150
Sundry creditors
payment of 50
income tax Contingency
50 reserve
Sundry debtors
100 Furniture and 40
Agents balances office equipment
450
income tax
Depreciation a/c 300
Income tax on
interest 500 Building
depreciation a/c
Dividend and 150
rents 3250
loans on
mortgages
Loans on policies
52000
Investments
(`250 lakhs

deposited with 5400

the RBI)
House property
at cost (including
`80 lakhs added
during the year)
70754 70754
From the foregoing balances and the following
information, prepare balance sheet of the happy mutual
life assurance society ltd. As on 31st march, 2020 and its
revenue account for the year ended on that date.
1. Claims less reassurances outstanding at the end of
the year- by death: `. 600 lakhs, by maturity ` 400
lakhs
2. Expenses outstanding Rs. 6 lakhs and prepaid ` .
15 lakhs.
3. Provide ` 45 lakhs for depreciation on building; `
15 lakhs for depreciation on furniture and office
equipment ; and ` 110 lakhs for taxation.
4. Premiums outstanding ` 2028 lakhs ; commission
thereon
` 65 lakhs

5. Interest, dividend and rents outstanding (net) ` 30

lakhs and interest and rent accrued (net) ` 350
lakhs.
Happy mutual life assurance society ltd
Revenue account
For the year ended 31st march 2020
Schedule ìn
lakhs
Premiums earned-net 1 17028
Income from investments:
Interest, dividend and rent –gross 2180
Other income:
Annuities granted 2
Registration and other fees 2
Total (A) 19212
Commission 2 315
Operating expenses related to 3 3282
insurance 760
Provision for tax 4357
Total (B) 4 3246

Benefits paid (net) 3246

Total (C) 11609
Surplus/deficit (D)= A-B-C\
Provision for tax = 450+500+110+-
300
Happy mutual life assurance society ltd

Balance sheet as at 31st march 2020
schedule ìn ìn
lakhs lakhs
Sources of fund
Shareholders fund: 5
Share capital 6
Reserves and 7
surplus 61759
Borrowings 1250 63009

Applications of funds
Investments:
Shareholders 8 56805
Loans 9 3400
Fixed assets 10 195 60400
Current assets 11 1380
Cash and bank balances 12 2874
Advances and other 4254
assets 13 1535
Sub total 14 110
(A)
1645
Current liabilities
2609
Provisions
63009
Sub total (B)
Net Current Assets (C)
(A-B)
Total
Schedule 1: Premiums
Particulars ìn
lakhs

Premium 15000
Add: outstanding 2028
17028
Schedule 2: Commission expenses
Particulars ìn
lakhs
Commission paid 250
Add: Commission on reinsurance 65
accepted
315
Schedule 3: operating expenses

Particulars ìn
lakhs
Expenses of management paid 3100 .
Add: unpaid 60
3145
Less prepaid 77

Printing and stationary 3160

Depreciation: Building 15
Furniture
Total 45 60
15
3282
Schedule 4: benefits paid

Particulars ìn
lakhs
Insurance claims:
Claims by death
Paid 2200
Add: outstanding 600
2800
Less: outstanding at the 900
beginning 1900

Claims by maturity 1500

Paid 400
Add: outstanding at the end 1900
600 1300
Less: outstanding at the
beginning
6
Other benefits:
40
Annuities
Surrender less re-insurance
Schedule 6: Reserves and surplus
Particulars ìn
lakhs
Contingency reserve 150
Life insurance fund 50000
Balance of P/L a/c 11609
Total 61759
Schedule 7: borrowings
Particulars ìn
lakhs

Premium deposits 1150

Sundry deposits 100
1250
Schedule 8 investment
Particulars ìn
lakhs
Sundry other investments 51750
Investment in house property 5315
Add: addition 85
5400
Less: depreciation (300+45) 345 5055
Total 56805
Schedule 9 loans
Particulars ìn
lakhs
On mortgage 150
On policies 3250
3400
Schedule 10: Fixed asset

Particulars ìn
lakhs
Furniture cost less depreciation (250-55) 195
Schedule 11: Cash and bank balances
Particulars ìn
lakhs
Cash in hand including stamp 30
Cash with banks in current account 1350
1380
Schedule 12: Advances and other assets
Particulars ìn
lakhs
Prepaid expenses 15
Interest, dividends and rent outstanding 30
Interest, dividends and rent accruing 350
Advance payment of income tax 50
Agents balances 100
Outstanding premium 2028
Deposit with RBI 250
Deposit with electricity companies 1

Sundry debtors 50
2874
Schedule 13: Current liabilities
Particulars ìn
lakhs
Sundry creditors 350
Claims outstanding 1000
Credit balances pending adjustments 60
Outstanding expenses 60
Commission due but not paid 65
Total
1535
Schedule 14: Provisions
Particulars ìn
lakhs
Provision for tax 110
Determination of profit in life insurance business
A life insurance policy is usually taken for a number
of years. This means that life insurance is a long term
contact. The premium received on such long term

contract cannot be treated as income for ascertaining

the profit for the year in which the premiums are
received. The claim will arise either on death or on the
expiry of the period of the policy. This implies that the
future premium on the policy may or may not be
received depends on the existence of the insured.
There is a gap between claims which are expected to
arise and premiums which are expected to be received.
This gap is known as the net liability of the insurance
company. Net liability is the excess of present value
of future claims of current policies over the present
value of premiums to be received in future in respect
of current policies. This net liability on all outstanding
policies must be ascertained in order to find out the
profit of life insurance business. This calculation is
done by experts called actuaries. This process by
which the net liability is ascertained by actuaries is
called actuarial valuation. The net liability is
ascertained by actuaries once in two years in case of
LIC of india
In order to ascertain the profit or loss of life
insurance business, the net liability is to be compared
with life assurance fund on a particular date. This
comparison is done ina separate statement called
valuation balance sheet. If the amount of life
assurance fund is more than net liability, excess is

treated as surplus (profit). If net liability is more than

the life assurance fund, the difference represents loss.
The following is the form of valuation balance sheet.
Valuation balance sheet as on ……………..
` `
To net liability as By life insurance
per fund as per B/S
Actuary’s ‘’ deficiency
valuation
‘’ surplus
Illustration
A life insurance company gets its valuation made in
every two years. Its life assurance fund on 31st
December 2020 amounted to ` 8000000 before
providing `80000 for the shareholders dividend for
the year 2020. Its actuarial valuation done on 31st
December 2020, disclosed a net liability of `
7600000 under assurance annuity contracts. An
interim bonus of ` 100000 was paid to the policy
holders during the two years ending 31st December
2020.

Prepare a statement showing the amount now

available as bonus to policy holders.
Valuation balance sheet as on 31st December 2020
` `
To net By life
liability as per 7600000 assurance 8000000
actuarial fund as per
valuation B/S
To surplus 400000
8000000 8000000
Statement showing the amount due to policy
holders `
Surplus as per valuation B/S 400000
Less: Dividend payable to shareholders 80000
320000
Add: interim bonus paid 100000
Net surplus (profit) 420000
Policy holders will get 95% of ` 420000 399000
Less: interim bonus already paid 100000
Amount due to the policy – holders
299000

MODULE 4
CONSOLIDATED FINANCIAL STATEMENT
(IND AS 110)
Sometimes a company purchases or acquires more
than 50% or majority or all the shares of another company
for securing control. Many big companies today have a
subsidiary or subsidiaries over which the company has
control. In other words, today, companies started working
in groups. A company which acquires more than 50% of
the shares of another company is called parent company
(or holding company). A company whose majority of
shares are acquired by parent company is known as
subsidiary company. Suppose A Ltd. acquires 75% of the
equity shares of B Ltd. Here A Ltd. is the parent company
and B Ltd is the subsidiary company.
Meaning of Consolidated Financial Statements
The information contained in the individual
financial statements of a parent company and each of its
subsidiaries does not give a picture of the group's total
activities. When the financial statements of a parent and
its subsidiaries are combined together, we shall get a
picture of the group's total activities. Such financial
statements are called consolidated financial statements.
Consolidated financial statements can be prepared from
the individual ones. Consolidated financial statements are

required when one company (parent) acquires a

controlling proportion (more than 50%) of equity of
another (subsidiary). Both companies continue their
separate legal identities. In other words, a group has no
separate legal existence, except for accounting purposes.
Thus, consolidated financial statements should be
prepared when the parent company has control over the
subsidiary or subsidiaries.
Ind AS 110 lays down the accounting principles
and procedures for the presentation and preparation of
consolidated financial statements. In India, the
Companies Act, 2013 requires holding company to
present consolidated financial statements of the holding
company and its subsidiaries. SEBI requires a holding
company to publish consolidated financial statements.
Thus, consolidated financial statements refer to the
combined or aggregated financial statements of a parent
company and its subsidiaries. In short, these are the
financial statements of a group presented as those of a
single enterprise. Consolidated financial statements are
also known as group financial statements. The Standard
requires an entity (the parent or the acquirer) that controls
one or more other entities (subsidiaries or acquirees) to
present consolidated financial statements.
Definitions in the Ind AS 110

1. Consolidated financial statements: Consolidated

financial statements are financial statements of a
group in which the assets, liabilities, equities,
income, expense and cash flows of the parent and
its subsidiaries are presented as those of a single
economic entity.
2. Parent: Parent is an entity that controls one or
more entities. In other words, it is an enterprise that
has one or more subsidiaries. It is a company
which holds the majority (more than 50%) of
equity shares of another company. Parent
company is also known as holding company.
3. Subsidiary: A subsidiary is a company whose
majority of equity shares are held by another
company (parent or holding company). If the
parent has purchased 100% of the outstanding
equity shares, the subsidiary is called wholly
owned subsidiary.
4. controls of an investee
An investor controls an investee when it is exposed
or has rights, to variable returns from its
involvement with the investee and has the ability
to affect those returns through its power over the
investee.

Group companies
If one company owns more than 50% of the equity shares
of another company, it gives the first company (parent)
control of the second company (subsidiary). The parent
company has enough voting power to appoint all the
directors of the subsidiary company in strict legal terms,
parent and subsidiary remains distinct. But in economics
substance, they can be regarded as single unit, ie, a group.
Thus, the parent company and its subsidiary companies
are collectively called group.
Group structure
There are different group structures. Important group
structures are:
1. Direct holding:
The simplest structure is one in which a parent
company has only a direct interest in the shares of its
subsidiary companies. For example
P
100% 80% 90%
S1 S2 S3
Here S1 is a wholly owned subsidiary of P. S2 and S3 are
partly owned subsidiaries of P. in these subsidiary

companies a proportion (less than 50% )of the share is

hold by outside investors
2. Indirect holding
A parent may have indirect holdings in its subsidiaries.
This can lead to more complex group structure. Following
are the various complex group structures:
a. one type of indirect group structure is one in which a
parent company holds more than 50% of the shares of
another company. This subsidiary company holds more
than 50% of the share of another company. For example
P
51%
S
51%
SS
In the above example, P company owns 51% of the
equity shares in S company. Thus S company is the
subsidiary of P company. S company in turns owns 51%
of the equity shares in SS company. Thus SS company is
the subsidiary of S company. Consequently, SS company
becomes the subsidiary of P company. SS company
would describe S company as its parent company and P
company as its ultimate parent company.

b. another type of group structure is that a company

(owns) 100% of the equity of another company (second
company). Besides, the first company owns 50% of the
equity of another company (third company). The second
company and third company each own 50% of the equity
of another company (fourth company). For example
W
100% 50%
X Y
50% 50%
Z
Thus W company owns 100% of the equity of X company
and 50% of the equity of Y Company. X company and Y
Company each owns 50% of the equity of Z Company.
Non-Controlling Interest
Non-controlling interest or minority interest
situation occurs when an organization does not own 100%
of a subsidiary organization. The organization only owns
a part of the subsidiary. The joint partnership agreement
details the official relationship is between the two or more
organizations that own the subsidiary.
The agreement outlines what ownership relationship is
and thus how to account for the subsidiary when

consolidating subsidiaries. As a result, there are several

different consolidation approaches when accounting for a
subsidiary that isn’t 100% owned.
Controlling Interest
Controlling Interest occurs when an organization
owns more than 50% but less than 100% of the
subsidiary. This means that control of the subsidiary lies
in the hands of that organization. The organization will
need to consolidate 100% of the financial results (by line
item) with a factor for the portion of income and equity
owned by a 3rd party. This controlling interest can also be
achieved if the organization has substantial operational
influence even if the ownership is below 50%.
Non-controlling Interest (Minority Interest)
calculation
Income Statement
To calculate the NCI of the income statement, take the
subsidiaries net income and multiply by the NCI
percentage. For example, if the organization owns 70%
of the subsidiary and a minority partner owns 30% and
subsidiaries net income say $1M. The non-controlling
interest would be calculated as $1M x 30% = $300k. This
$300k would be placed on a non-operating line item on
the Income Statement. Minority Interest $300k this

would reduce the organizations Net Income by the

amount of Net Income that is not owned by the
organization.
Balance Sheet
To calculate the non-controlling interest of the balance
sheet, take the subsidiaries book value and multiply by the
non-controlling interest percentage. For example, if the
organization owns 70% of the subsidiary and a minority
partner owns 30% and subsidiaries book value is
$8M. The non-controlling interest would be calculated as
$8M x 30% = $2.4M. This $2.4 would be placed on in
either a non-current liability (US GAAP) or within equity
in it’s own distinct section separate from the rest of the
parent’s equity (US GAAP, IFRS).
Methods of calculating NCI
Method 1
Value of shares held by minority share holders
xxx
Add: share in the pre acquisition profit of subsidiary xxx
Share in the post acquisition profit of sub co xxx
xxx
NCI XXX

Note: share in the pre acquisition loss or post acquisition

loss (if any ) should be deducted
Method 2
Share of minority shareholders in the net assets of
subsidiary co. xxx
Net assets acquired = share capital + reserves and surplus,
or
Total assets acquired – total liabilities
assumed
Calculation of goodwill
For acquiring the shares in a subsidiary the parent
company has to pay the price or consideration. This is the
cost of investment made by the parent co apny in the
subsidiary company. When the parent company acquires
the shares in the subsidiary company, the parent company
will be entitled to a proportion of the net assets of the
subsidiary company.
The method of calculation of goodwill varies
according to situations.
Situation 1
When consideration transferred and net assets acquired
are given and 100% shares are acquired by the acquirer

In this situation, 100% shares are acquired. Hence.

There is no non controlling interest. Goodwill is
calculated by using the following formula.
Goodwill = consideration transferred+ reserves and
surplus, or
Total assets acquired – total liabilities assumed.
Situation 2
When consideration transferred and net assets acquired
are gien and the acquirer acquired less than 100% shares
of subsidiary.
In this situation there is non –controlling interest.
This, is because a portion of the shares (less than 50% ie,
non –controlling shares) is held by outsiders. In this
situation goodwill is calculated as below.
Goodwill = consideration paid + non controlling
interest – net assets acquired
Goodwill can be calculated in an alternative was as below
Goodwill = consideration paid – proportionate share of
parent in the net assets of the subsidiary.
Gain from bargain purchase (negative goodwill)
In a business combination, bargain
purchase occurs when the fair value of net assets of the
acquiree exceeds the purchase consideration paid by the

acquirer plus fair value of any non controlling interest.

The difference is recognized as a gain by the acquirer. It
is also called negative goodwill. before recording
negative goodwill ,it is necessary to review all assets,
liabilities and contingent liabilities to ensure that they
have been properly accounted for.also ,the acquirer shall
determine whether there exists clear evidence of the
underlying reasons for classifying the business
combination as a bargain purchase.if there exists such
clear evidence ,the acquirer shall recognize the resulting
gain.this gain from bargain purchase should be included
in’ other comprehensive income ‘ in the statement of
profit and loss .this should be treated as capital reserve
and accumulated in equity.
In short ,bargain purchase (or negative goodwill )
arises when the fair value of the net assets acquired
exceeds the consideration paid for them.
When one company acquires another, it pays the company

or its shareholders an amount referred to as purchase
consideration. It is either cash or stock or it can be any
other asset. In return the acquirer gets net assets of the
acquiree or stock of the acquiree representing his control.
In most cases, the consideration paid by the acquirer is
more than the fair value of the net assets. It is because not

all assets appear in the books of accounts, but there are

certain other characteristics of the business such as its
customer satisfaction, brand value, repute, synergy,
culture, etc. which cause the fair value of the business to
be higher than the fair value of its net assets. A bargain
purchase is exactly opposite. In case of a bargain
purchase, the fair value of individual assets is higher than
the combined worth of the business as measured by the
amount paid to acquire it
Preparation of consolidated financial statements
When a company has one or more subsidiaries,
consolidated financial statements should be prepared.
Consolidated financial statements presents the
performance and financial position of the group, as if it is
a single economic entity. All the results and the assets and
liabilities that are under the control of the parent are
combined together to show single totals for each line
items in the consolidated financial statements.
Importance of consolidated financial statements
Consolidated financial statements are an essential part of
the accounting process for group companies. This key
information provides perspective on the entire business,
something that is often lost when looking only at figures
for the parent or a single subsidiary.

Given that each company within the group prepares its

own set of financial statements, is it really necessary to go
to the trouble of compiling a consolidated version for the
entire group? The short answer is: yes. There are a
number of reasons why it remains important for any group
of companies to continue to prepare consolidated
financial statements.
 Broad perspective. Insights offered by
consolidated financial statements relate to the
entire business. This may be crucial, whether for
potential investors, the owner of the business or for
analysts. The consolidated version of financial
statements indicates the health of the business as a
whole and will also show how each subsidiary
within the group impacts on the parent business.
 Reducing the volume of paperwork involved.
Without consolidated financial statements, anyone
looking to get an overview of the group as a whole
would need to go through an individual set of
paperwork for each of the companies. That could
be multiple documents – for example if a parent
company owns seven subsidiaries the total will be
32 separate financial reports (four for each of the
subsidiaries and the parent company). Where
consolidated financial statements are prepared

only a single document is required. This makes it

quicker to access data and much easier to grasp the
state of the business as a whole.
 Simplifying the process. Consolidated financial
statements – especially where prepared using
software – enable the process of analysis to be
considerably simplified. For example, it can
exclude those transactions that occur between
subsidiaries and a parent company that in effect
already cancel each other out. This produces a
much more simplified version of financial
statements that focus on the key data that is
necessary for analysis and decision-making.
Procedure to prepare to Consolidated financial
Statement
IFRS 10 (or Ind AS 110) lays down the basic
procedures for preparing consolidated financial
statements. The financial statements of a parent and
its subsidiaries are combined on a line by-line basis by
adding together like items of assets, liabilities, equity,
income and expenses. Then the following steps are
taken:

1. Offset (eliminate) the carrying amount of the

parent's investment in each subsidiary (asset)
2. Eliminate or cancel the parent's portion of equity of
each subsidiary (liability).
3.Adjust the non-controlling interests in the net
income of subsidiaries against the income of the
group, to determine the net income attributable to the
shareholders (owners) of the parent
4.Determine the non-controlling interests in the net
assets of the subsidiaries.
5. Present the non-controlling interests (as per step 4)
separately from the parent shareholders' equity in the
consolidated balance sheet.
6. Eliminate in full all intra group assets and liabilities
and transactions, and the resulting unrealized profits.
7. Other matters to be dealt with include the following:
a) Goodwill on consolidation should be dealt with
according to IFRS 3 or Ind AS 103
b) Dividends paid by a subsidiary must be accounted
for. Unrealized losses resulting from intra-group
transactions should also be eliminated unless cost can
be recovered.

The basic principle of a consolidated balance sheet is

that it shows all assets and liabilities of the parent and
subsidiaries. The cost of investment in subsidiaries
(appearing on the asset side of the balance sheet of the
parent) is cancelled with the share capital of the
subsidiary .This means that the share capital of the
subsidiary is never taken in the consolidated balance
sheet. Only the parent company's share capital is
taken. Similarly, the retained profits shown in the
consolidated balance sheet comprises of parent's
profits plus parent's share in the post-acquisition profit
of the subsidiary. The parent's share of pre-acquisition
profit of the subsidiary is adjusted in the amount of
goodwill / bargain purchase.
Consolidated financial statement shall be prepared
using uniform accounting policies for the transactions
and other events in similar circumstances.
Illustration
The consolidate statement of financial position of H ltd,
and its subsidiary S ltd, are as follows:
Particulars H ltd` S ltd `

Equity and liabilities

Equity
Equity share capital (Rs. 100 400000 150000
each)
Non-current liabilities 50000
Debentures
Current liabilities 200000 100000
Trade payables 650000 250000
Assets
Non –current assets
275000 140000.
Tangible assets
160000
Investment in S ltd at cost
(1500 equity shares S ltd)
Current assets
180000 95500
Trade receivables
35000 14500
Cash and cash equivalents
650000 250000

Prepare consolidated statement of financial position of H

ltd., and its subsidiary S ltd
Solution
Consolidated balance sheet as on 31/03/2020
Equity and liabilities
Equity
Share capital 4000 shares of Rs. 100 each
400000
Non Current liabilities
Debentures 50000
Current liabilities
Trade payables (200000+100000) 300000
Total equity and liabilities 750000
Assets
Non current Assets
Tangible assets (275000+140000) 415000
Goodwill 10000
Current Assets
Trade receivables (180000+95500)
2MODULE 575500

Cash and cash equivalents(35000+14500)

49500
Total assets 750000
Working note:
Calculation of cost of control or goodwill
Consideration paid (Cost of investment) 160000
Less: Nominal value of shares held (1500*100)
150000
Cost of control/goodwill 10000

MODULE 5
IMPORTANT DISCLOSURE BASED
ACCOUNTING STANDARDS
The adoption of internationally accepted financial
reporting standards is a necessary measure to facilitate
transparency and contribute to proper interpretation of
financial statements.
1. Earnings per share( basic and diluted ( Ind AS 33))
2. Segment Reporting (Ind AS 108)
3. Events after reporting period (Ind AS 10)
4. Related party Transactions (Ind AS 24)
5. Changes in Accounting policies, Accounting
Estimates and Errors (Ind AS 8)
6. Interim financial reporting.( Ind AS 34)
Accounting for Basic and Diluted EPS(IAS 33 and
Ind AS 33)
EPS is an important measure of performance of a
company. It is disclosed on the face of the statement of
profit or loss. Ind AS 33 specifies the requirements
relating to EPS.
Objectives

The principal objective of this standard is to prescribe

principles for determining and presenting earnings per
share amounts in order to improve performance
comparisons between different entities in the same period
and between different accounting periods for the same
entity. However, the prime focus of this standard is on the
denominator of the earnings per share calculation.
Scope
This standard is not mandatory on all entities. However
entities whose share are listed or are in process of listing
for trading in public and any other entity voluntarily
presents EPS must comply with this standard. When an
entity presents both consolidated financial statements and
separate financial statements, the required disclosures
should be presented in both the statement.
Measurement of basic Earnings Per Share
Basic EPS should be calculated by dividing profit or loss
from continuing operations attributable to ordinary equity
shareholders of the parent entity (the numerator) by the
weighted average number of ordinary shares outstanding
(denominator) during the period.
Basic EPS=

Segment reporting
Large companies produce a wide range of products and
services, in several different countries. Thus, large
companies engage in different business activities and
operate in different economic environments. Information
on the overall results of companies from each of these
products or geographical areas will help th users of the
financial statements. This is the reason for segmenting
reporting. Segment reporting is covered by IFRS 8 or Ind
AS 108.
Objectives
IFRS 8 establishes principles for reporting information by
operating segments, that is, information about the
different business activities of an entity and the different
economic environments in which it operates. IFRS 8
requires the identification of operating segments on the
basis of internal reports that senior management (also
referred to as the chief operating decision maker) use
when determining the allocation of resources to a segment
and assessing its performance. Scope This standard
applies to the stand-alone financial statements of
individual entities and the consolidated financial
statements of a group with a parent, whose equity or debt
securities are traded in a public securities market or that
are in the process of issuing such instruments. Other

entities that voluntarily choose disclosure under this

standard should comply fully with the requirements of
IFRS 8. A parent entity is required to present segment
information only on the basis of its consolidated financial
statements. If a subsidiary's own securities are publicly
traded, it will present segment information in its own
separate financial report.
Events after reporting period (AS 10&Ind AS 10)
There is always a time gap between the balance sheet
date and the date on which the financial statements are
approved. During this gap of time, some events shall
take place. Such events are called events after reporting
period. Thus, events after reporting period happen in the
period starting immediately after the balance sheet date
and ending at the date of approval of financial
statements.
Objectives
 When an entity should adjust its financial
statements for events after the reporting period
 The disclosure that an entity should give about
the date when the financial statement is approved
and about events after reporting period.

Scope
 Accounting treatment of events after the reporting
period
 Disclosure of events after the reporting period
Disclosure of related party transactions
Related party relationships are a normal feature of
commerce and business. A related party relationship
could have an effect on the profit or loss and financial
position of an entity. Related parties may enter into
transactions that unrelated parties would not.
Objectives
The objectives of this standard is to ensure that an entity’s
financial statements contain the disclosure necessary to
draw attention to the possibility that its financial position
and profit or loss may have been affected by the existence
of related parties and by transactions and outstanding
balances, including commitments, with such parties.
Scope
 Identifying related party relationships and
transactions
 Identifying outstanding balances between an
entity and its related parties

 Identifying the circumstances in which disclosure

is required in the financial statements and
 Determining the disclosure to be made
Accounting policies, changes in accounting estimates
and errors (IAS 8 and Ind AS 8)
An entity may be required to change accounting policies
and accounting estimates. Similarly, some errors might
have committed in financial statements. The IAS (Ind
AS)8 guides an entity in selecting and changing
accounting policies, changing its accounting estimates
and in correction of errors.
Objectives
The objective of this standard is to prescribe the criteria
for selecting and changing accounting policies, together
with the accounting treatment and disclosure of changes
in accounting policies, changes in accounting estimates
and corrections of errors.
Scope
 Selection and application of accounting policies
 Accounting for changes in accounting polices
 Changes in accounting estimates
 Corrections of prior period errors

Interim reporting
In order to make economic decisions, users require the
latest financial information of an entity. They cannot wait
a full year for the annual report. Therefore, companies
generally publish interim financial report usually at the
end of 6 months. Interim financial reporting improves the
ability of investor, creditors, and other to understand an
entity’s capacity to generate earnings and cash flows and
its financial conditions and liquidity.
Objectives
The objectives of this standard is to prescribe the
minimum content of an interim financial report and the
recognition and measurement principles for an interim
financial report.
Scope
IAS 34 or Ind AS 34 is not mandatory. However,
regulators (like SEBI) often require entities whose debt or
equity securities are publicly traded to publish interim
financial reports. Ind AS 34 is applicable with Indian
accounting standards.

Reference Books:
1. Chintal Patel, Bhupendra Mantri, India
Accounting Standards, Taxmann Publications.
2. T.P. Ghosh, Illustrated Guide to India Accounting
Standards, Taxmann Publications.
3. M.C. Shukla, T.S. Grewal and S.C. Gupta,
Advanced Accounts, S.Chand& Co., New Delhi.
4. S.N. Maheshwari and S.K. Maheshwari, Financial
Accounting. 5
5. R.L. Gupta and Radhaswamy, Advanced
Accounting, Sultan Chand &Sons, New Delhi.
6. Dr Goyal V.K., Financial Accounting, Excel
Books, New Delhi.
7. Ashok Sehgal and Deepak Sehgal, Advanced
Accounting, Kalyani Publishers.
8. Jain and Narang, Financial Accounting, Kalyani
Publishers.
9. B.S. Raman, Advanced Accountancy.
10. P.C. Tulasian, Introduction to Accounting,
Pearson Education.

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CORPORATE ACCOUNTING.

Core Course (BCM3 B04)

since the benefit of the debentures would accrue to the

IVth 400 IVth 400

Year Amount (Rs.) Ratio Amount (Rs)

2 80,000 4 4/15 6,000 =

4 40,000 2 2/15 6,000 =

Disclosure of discount or loss on issue of debentures

as un amortised expenses under the heading “ other non

(expiry) as per the terms of the issue. In other words, the

Premium on redemption a/c Dr

Redemption of Debentures of out of profit/surplus

not be less than 15 per cent of the amount of its

5. The amount credited to the Debenture

3. For realising the amount invested in debenture

Redemption of debentures by annual drawings or

profits, then it should always be supposed to be out of

15% the face of value of

30/4/16 Statement of profit and loss 100000

(creation of DRR @ 25% of

31/3/18 To Debenture 110000

11% Debentures A/C Dr. 100000

redemption fund) is invested in outside securities (like

1. There may be losses in realising the investments

may be paid from sinking fund or out of profit or out of

Purchase of Own Debentures for Immediate

Premium on redemption of Debentures A/c Dr.

Purchase of debentures for investment (own

c. On transfer of profit on redemption

"Interest on Own Debentures" (income) is credited to

the debentures depends on the type of quotation. There

(b) When the debentures are purchased for holding as

c. When own debentures purchased for investment

either at par or at premium but not at discount. However,

E. When debentures are redeemed (by conversion)

Debenture a/c Dr.

REDEMPTION OF PREFERENCE SHARES

dividend or out of the proceeds of fresh issue of

(c) Redemption partly out of fresh issue and partly

(b) When Redemption is at Premium

Illustration 1 (Fresh Issue of Shares at Par and

Proceeds per new share = Rs. 25

Illustration (Issue of Fresh Equity Shares)

Illustration 5 (Issue of Fresh Equity Shares)

Preference Shareholders Dr 10,00,000

Date Particulars Dr. (`) Cr. (`)

dividend. The examples of divisible or undistributed

Note: For calculating CRR, the premium on redemption

2. When Shares are Redeemed at Premium

order to facilitate the redemption of preference shares at

To Equity Share Capital 31,250

(For sale of investments at a

On 1st January 2019, the Board of Directors decided to

General Reserve A/c Dr. 75,000

Preference Shareholders A/c Dr. 3,30,000

Illustration10 (Partly Paid up Shares)

31st March, 2019 with the corresponding figures as on

Note: Amount received (excluding premium) on fresh

2. When the company has not sufficient cash reserves,