Final Accounts of Companies

The final accounts of a company consist of two basic financial statements -such as Statement of Profit and
Loss and Balance sheet. As per section 210 of the Companies Act-1956, it is mandatory on the part of all the
companies to prepare their final accounts and present them before the shareholders for their approval at every annual
general-meeting of the company_ The auditor's report and Director's report are to be presented along with the final
statements of the company. Section 211 of the Companies Act 1956 states that the Statement of profit and loss and
the Balance sheet shall give clear picture on the state of affairs of the-company and shall be in the prescribed form
given in Revised Schedule VI. The new form of Balance sheet has been given in PART I of Revised Schedule VI_ The
new form of Statement of Profit and Loss has been given in Part II of Revised Schedule VI. These two
statements have to be prepared on 31 st March every year as per the Amendments in the income Tax Act, 1961.
The Revised schedule VI for preparing Statement of Profit and Loss and the Balance _sheet came into force from the
financial year commencing on or after 1st April, 2011. As per the Revised 'schedule VI, the Statement of Profit and
Loss and Balance sheet have to be presented in vertical format.

Statement of Profit and Loss

Statement of Profit and Loss is a statement that indicates the financial performance of a company by showing net
result i.e., profit earned or loss incurred during the accounting period. It begins with revenue (i.e.,revenue from operations
plus other income) and deduct from it the expenses incurred. Expenses are classified into cost of materials consumed,
purchase of stock-in — trade, change in inventories of finished goods, work-in-progress and stock—in-trade,
Employees Benefit expenses, Finance costs, Depreciation and amortisation expenses and other expenses. The
difference between the two is profit earned or loss incurred during the accounting period.

Contents of Statement of Profit and Loss

1. Revenue from operations: It refers to revenue earned by the company from its operating activities. It may be net
sales or gross profit of the manufacturing company or trading company or fee earned by a service company and interest
and dividend earned by a financial company.
2. Other income: It indicates income earned from non operating activities of a company. It may include profit on sale
affixed assets, excess provision written back, interest earned on fixed deposits with banks by non- finance
company, interest on investments, dividend earned by non- finance company, discount received commission
received, export subsidy and duty drawback , refund of income tax. miscellaneous income.
3. Cost of materials consumed: It is the cost of raw materials and other material consumed in manufacturing the goodq.
It is , opening inventory of materials +purchases + carriage inwards + other expenses incurred on purchase of
materials — closing inventory of materials.

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4. Purchase of stock-in-trade: Stock in trade means goods purchased for reselling. If the company carries out Anther
processing on the goods purchased, they do not remain stock in trade but become part of the cost of materials
consumed.

5. Changes in inventories of finished goods, work-is- progress and stock-in-trade: If the opening inventories of
finished goods, work- in progress and - 'stock- in- trade are greater than closing inventories of finished goods, work- in-
progress- and stock- in- trade, the difference is positive. In case;--the closing inventories of finished goods, work- in-
progress and stock- in- trade are greater than opening inventories of finished goods, work- in- progress and stock- in-
trade, the difference is negative-The changes in inventories of finished goods, work- in- progress and stock- in- trade
are shown separately in the notes to accounts and the balance in each inventory is added to show one amount
against the entry in the statement of profit and loss.

6. Employees Benefit Expenses: All the expenses incurred by the company on its employees are brought under
this head and shown as a part of Expenses in the Statement of profit and loss. They include wages, salaries, bonus,
leave encashment, gratuity paid, medical expenses.

7. Finance costs: Costs incurred by the company on its borrowings come under this head. They include interest on
overdraft, interest on debentures, interest on public deposits, interest on bonds, interest or cash credit, interest
on term loans, discount on issue of debentures written off

8. Depreciation and amortization Expenses: Depreciation is the fall in the value of fixed assets due to their usage
or- afflux of tiine or obsolescence. Amortization like depreciation, is the cost of intangible assets written of over their
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useful life. Depreciation on building, plant machinery, loose tools, furniture, computer software, goodwill
written off patents written off are some of the items shown under this head. Preliminary expenses written off are
also shown under this head.

9. Other expenses: Expenses that do not find place in the above mentioned heads, are brought under this head.
They include administrative expenses, selling and marketing expenses, carriage outwards, telephone expenses,
electricity expenses, rent and rates, sundry expenses.

10. Extraordinary items: These may an expense or income that arises from events or transactions that are clearly
distinct from ordinary activities of the company and therefore, are not expected to recur frequently or regularly. Examples
Are:
(i) Speculation loss or gain if speculation is not stated objective of the company.
(ii) Loss on account of fire
(iii) Loss due to natural calamities like floods, earthquakes
(iv) Salaries and wages paid for previous periods due to agreements with retrospective effects.

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11. Tax: As it is not possible to determine the amount of tax payable at the time of preparing final accounts of the
company, it is necessary to create a pro-vision for taxation on the basis of an estimate. The provision for taxation is
subtracted from the profit before extraordinary items and tax to find profit or loss for the period. Such provision for
taxation is also shown under short term provisions which appear in-the balance sheet under the head current liabilities'.
The journal -entry for current provision for taxation is as follows: -
Profit & Loss A/c Dr.
To Provision for taxation A/c .
Just as provision is made in the current year, provision for taxation would have been in the previous year and such
provision ,called, 'Existing provision' would appear in the credit side of trial balance. When such provision exists, income
tax paid must be debited to provision account. If the existing provision is in excess of the income tax paid, such
excess provision should be added to the profit for the current period. In case the existing provision is insufficient, it is
necessary to make further provision which is to be deducted from the profit for the period.
Advance tax
Under section•208 of the Income Tax Act,' 961, a company is required to pay its estimated income tax liability in the year in
which income is earned by it. Advance tax shall be payable during the financial year in every case where the amount of
such tax payable by the company during that year, as computed in accordance with the provisions of advance tax, is
Rs.10,000 or more. The following journal, entry is passed when advance tax is paid:
Advance tax A/c Dr.
To Bank A/c '-
Advance tax is shown as ' short term loans and advances' which comes under the head current assets' in the balance
sheet and it can later be adjusted towards income tax payable after the assessment is over.
Tax deducted at source
Whenever a company pays interest on securities, dividends, salaries to employees etc., it has to deduct tax on the
amount paid. Deduction of income tax on the amount payable will be made ' at the rate in force'. While making payment for
interest on debentures, the TDS is shown on the liabilities side of the balance sheet as an item of 'other current liabilities' till it
is paid by the company to the Government. On the other hand,, while receiving interest on securities or dividends., the
TDS is shown as ' short term loans and advances' which comes under the head current assets' in the balance sheet. The
TDS can later be adjusted towards income tax payable after the assessment is over. It can also be reduced from current Year's
provision for income tax on the liabilities side of the balance sheet.
Income tax
Income tax payable should be debited to income tax account and- TDS and advance tax should be adjusted in this
account. For example, if the tax payable On assessed income is Rs.1,50,000 and the company has already paid in advance
Rs.1,00,000, the balance tax amount payable only is RS.50,000. The journal entry will be:
If the assessment is not completed, both 'advance tax' and `TDS' remain unadjusted and would appear as ' short term
loans and advances' which comes under the head ' current assets' in the balance sheet .
Balance Sheet

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Balance sheet is a financial statement that summarizes company's Equity (shareholders' funds), liabilities and assets.
These three Balance sheet segments i.e., Equity (shareholders’ funds), liabilities and assets shows what the company
owns and what it owes. In the first part of the balance sheet, equity and liabilities are shown and in the second part, assets
are shown. Shareholders' funds, noncurrent liabilities and current liabilities are brought under equity and liabilities.
Similarly, non-current assets and current assets are brought under assets. The specimen of balance sheet of the company
is as follows: