by Corporate final accounts are financial statements prepared at the end of an accounting period to determine a company’s financial performance and financial position. They generally include the Statement of Profit and Loss, Balance Sheet, and Notes to Accounts. These statements are prepared in accordance with the Companies Act, 2013, Schedule III, and applicable Accounting Standards or Indian Accounting Standards (Ind AS).
The preparation of corporate final accounts involves recording income and expenses, calculating depreciation, adjusting outstanding and prepaid items, recognising provisions, determining current tax, and presenting assets, liabilities, and equity correctly. Certain company-specific adjustments require particular attention, including current corporate tax provisions, transfers to statutory reserves where legally required, managerial remuneration limits, and restrictions on dividend distribution.
These adjustments are important because accounting profit is not always the same as taxable profit or the amount legally available for distribution as dividends. A company must consider accounting standards, tax legislation, the Companies Act, and applicable rules before finalising its accounts or distributing profits.
Objectives of Corporate Final Accounts
1. Determining Financial Performance
Corporate final accounts aim to determine the financial performance of a company during a particular accounting period. The Statement of Profit and Loss records revenue, income, expenses, and taxes to calculate the final profit or loss. This information helps management evaluate operational efficiency and cost control. It also enables shareholders and investors to understand whether the company is generating adequate profits and achieving its financial objectives. Accurate financial performance measurement supports future planning and business improvement.
2. Assessing Financial Position
One important objective of corporate final accounts is to determine the financial position of a company on a specific date. The Balance Sheet presents assets, liabilities, and shareholders’ equity in a systematic manner. It helps identify the resources owned or controlled by the company and its obligations to creditors and other parties. This information enables stakeholders to assess financial stability, solvency, and capital structure. Understanding the financial position supports decisions regarding investment, borrowing, and business expansion.
3. Ensuring Legal Compliance
Corporate final accounts aim to ensure compliance with applicable legal and accounting requirements. Companies must prepare financial statements according to the Companies Act, 2013, Schedule III, and relevant Accounting Standards or Indian Accounting Standards, as applicable. Proper preparation and presentation help companies meet statutory reporting obligations and provide the disclosures required by law. Compliance also supports auditing and regulatory examination. Maintaining accurate accounts reduces the risk of reporting errors, penalties, and disputes while strengthening corporate accountability.
4. Providing Information to Stakeholders
Corporate final accounts provide reliable financial information to shareholders, investors, creditors, employees, management, and regulatory authorities. Shareholders examine profitability and returns, while lenders assess repayment capacity and financial risk. Management uses accounting information to monitor operations and evaluate performance. Employees and other stakeholders may also use published financial statements to understand the company’s stability. By presenting relevant information systematically, corporate final accounts help different stakeholders make informed decisions and understand the company’s financial condition.
5. Facilitating Business Planning and Decision-Making
Corporate final accounts help management formulate business plans and make informed decisions. Information about revenue, expenses, profits, assets, and liabilities supports budgeting, resource allocation, cost management, and expansion planning. Financial results also help management identify underperforming activities and evaluate the effectiveness of existing strategies. By examining financial trends and comparing actual results with targets, companies can develop corrective measures and establish realistic objectives. Thus, final accounts serve as an important foundation for strategic planning and operational control.
6. Evaluating Liquidity and Solvency
Another objective of corporate final accounts is to assess a company’s ability to meet its financial obligations. Information about current assets and current liabilities helps evaluate short-term liquidity, while long-term liabilities and equity provide insight into solvency. Creditors and lenders use this information to assess creditworthiness and repayment capacity. Management can also identify potential cash shortages and financial risks. Proper analysis of liquidity and solvency supports responsible borrowing, effective working capital management, and long-term financial stability.
7. Supporting Tax Calculation and Dividend Decisions
Corporate final accounts provide an accounting basis for determining profit and preparing tax computations. However, taxable income must be calculated separately under the applicable income-tax legislation. Financial statements also help determine the financial capacity for dividend distribution. Companies must consider the provisions of the Companies Act, 2013, including Section 123, before declaring dividends. Accurate accounts help distinguish accounting profit, tax expense, retained earnings, and legally distributable profits, thereby supporting compliant tax reporting and responsible decisions regarding the distribution of profits.
8. Promoting Transparency and Accountability
Corporate final accounts promote transparency by presenting financial information in a structured and understandable form. Proper classification, supporting notes, comparative figures, and statutory disclosures help users examine the company’s activities and financial results. These practices improve accountability by enabling shareholders, auditors, and regulators to evaluate management’s stewardship of corporate resources. Transparent reporting can strengthen stakeholder confidence and reduce uncertainty regarding financial performance. Consequently, corporate final accounts contribute to sound corporate governance, responsible management, and reliable financial communication.
Comprehensive Adjustments in Corporate Final Accounts
1. Depreciation on Fixed Assets
Depreciation represents the systematic allocation of the depreciable amount of an asset over its useful life. It is charged to the Statement of Profit and Loss and reduces the carrying amount of the asset in the Balance Sheet. Companies must apply the relevant accounting standard and Schedule II of the Companies Act, 2013, where applicable. Depreciation affects accounting profit, taxable income calculations, and the amount potentially available for distribution as dividends.
2. Outstanding Expenses and Prepaid Expenses
Outstanding expenses are expenses incurred during the accounting period but not yet paid. They are recognised as expenses and shown as liabilities. Prepaid expenses are payments made for benefits relating to future periods and are generally carried as assets until the benefits are received. These adjustments follow the accrual basis of accounting and ensure that expenses are recorded in the appropriate period rather than merely when cash is paid.
3. Accrued Income and Income Received in Advance
Accrued income is income earned during the accounting period but not yet received. It is recognised as income and recorded as an asset or receivable where appropriate. Income received in advance relates to services or benefits to be provided in a future period and is generally recognised as a liability until earned. These adjustments help ensure that income is recognised in the correct reporting period under applicable accounting standards.
4. Provision for Doubtful Debts
A company may be unable to collect some of its trade receivables. Where required under the applicable accounting framework, expected credit losses or impairment must be recognised. The resulting expense reduces profit, while the corresponding allowance reduces the carrying amount of receivables. The amount should be based on an appropriate assessment of credit risk rather than an arbitrary percentage. This adjustment helps prevent assets and profits from being overstated.
5. Inventory Valuation
Inventory is measured according to the applicable accounting standard, generally at the lower of cost and net realisable value under AS 2 or Ind AS 2, as applicable. Cost includes appropriate purchase, conversion, and other costs incurred to bring inventory to its present location and condition. Inventory valuation affects both the cost of goods sold and closing assets. An incorrect valuation can materially overstate or understate profit and the financial position of the company.
6. Provisions and Contingent Liabilities
A provision is recognised when the applicable accounting criteria are met, including the existence of a present obligation and the relevant probability and measurement requirements. Examples may include qualifying legal claims, warranties, or restructuring obligations. Contingent liabilities are generally disclosed rather than recognised when the relevant standard requires disclosure but not recognition. Proper treatment ensures that financial statements reflect appropriate obligations without recording uncertain liabilities indiscriminately.
Current Corporate Tax Provisions
1. Determination of Taxable Income
Accounting profit and taxable income are not necessarily identical. Taxable income is calculated under the applicable income-tax legislation after considering permitted deductions, disallowances, exemptions, depreciation rules, and other adjustments. For example, an expense recognised in the financial statements may not be deductible for tax purposes, or tax depreciation may differ from accounting depreciation. Therefore, companies should prepare a tax computation separately from the accounting profit calculation.
2. Calculation of Current Tax
Current tax is the amount of income tax payable or recoverable in respect of taxable profit or loss for the relevant period. It is calculated using the tax provisions and rates applicable to the company, considering any valid tax-regime election and relevant surcharges and cess. The current tax expense is recognised in the financial statements in accordance with the applicable accounting standard. Tax payments made in advance are adjusted against the amount payable.
3. Corporate Tax Rates in India
For reference, the Income-tax Department’s published rates for domestic companies for Assessment Year 2026–27 include the following headline rates, subject to eligibility and conditions:
| Tax regime or category | Headline rate |
|---|---|
| Section 115BAA, subject to conditions | 22% |
| Section 115BAB, subject to conditions | 15% |
| Eligible domestic companies meeting the specified turnover condition | 25% |
| Other domestic companies under the general rate | 30% |
Applicable surcharge and health and education cess must also be considered. These are not universal rates for every company: the correct treatment depends on the relevant tax year, eligibility, elections, and statutory provisions. Companies preparing accounts should verify the legislation applicable to their reporting and tax periods.
4. Recognition of Current Tax in Final Accounts
Current tax expense is recognised in the Statement of Profit and Loss, subject to the applicable accounting requirements. Any unpaid tax liability is shown in the Balance Sheet under the appropriate liability heading. If advance tax and tax deducted at source exceed the assessed amount, the excess may be recognised as a tax asset or receivable where the relevant criteria are met. Proper adjustment ensures that tax expense and outstanding tax obligations are reported accurately.
5. Deferred Tax Adjustment
Deferred tax arises from temporary differences between the carrying amounts of assets and liabilities in financial statements and their tax bases, subject to applicable recognition rules and exceptions. For example, accounting depreciation and tax depreciation may differ, creating a temporary difference. Deferred tax is accounted for under AS 22 or Ind AS 12, depending on the company’s applicable framework. It is distinct from current tax, which relates to taxable income for the current period.
Transfer to Statutory Reserves and Other Reserves
Reserves are amounts included in equity for specified purposes or arising from accumulated profits and other recognised transactions. They strengthen the financial structure of a company and may support expansion, future contingencies, or compliance with particular statutory requirements. The nature of a reserve determines how it can be used. Companies must distinguish statutory reserves from general reserves, securities premium, capital redemption reserves, and other balances because the legal restrictions applicable to them may differ.
1. Transfer to General Reserve
A general reserve is created by transferring a portion of profits to reserves instead of retaining the entire amount in accumulated earnings. It can strengthen the company’s financial position and provide flexibility for future business requirements, subject to applicable legal restrictions. Under the Companies Act, 2013, a general transfer to reserves before declaring a dividend is not universally mandatory; a company may transfer an appropriate amount voluntarily, subject to applicable requirements and its governing documents.
2. Statutory Reserves Required by Specific Laws
Certain companies must maintain statutory reserves under legislation or regulations applicable to their industry. The requirement depends on the type of company and the governing law. Such reserves cannot automatically be treated as freely distributable profits. The company must comply with the applicable rules regarding the amount transferred, permitted uses, and conditions for withdrawal. In preparing final accounts, the required transfer should be recorded and disclosed according to the relevant statutory and accounting framework.
3. Accounting Treatment of Reserve Transfers
When a transfer from retained earnings to a general reserve is approved and required to be recorded, it is generally an appropriation within equity rather than an operating expense. A typical entry is:
-
Retained Earnings / Statement of Profit and Loss Appropriation A/c Dr.
-
To General Reserve A/c
The transfer reduces the balance available in retained earnings and increases the general reserve by the same amount. It does not reduce total equity merely because the amount is transferred between reserve accounts. The exact presentation depends on the applicable accounting framework and the nature of the transfer.
4. Numerical Illustration of Reserve Transfer
Suppose a company has profit after tax of ₹10,00,000 and decides to transfer 10% of that profit to its general reserve. The transfer will be ₹1,00,000, calculated as ₹10,00,000 × 10%. The remaining ₹9,00,000 stays in retained earnings before other appropriations. The transfer is shown as a movement within equity rather than an expense in the Statement of Profit and Loss. The percentage is illustrative, not a universal statutory requirement.
Managerial Remuneration Adjustments
Managerial remuneration includes payments made to directors and specified managerial personnel for their services. It may comprise salary, commission, allowances, perquisites, and other benefits, depending on the appointment terms and applicable law. In preparing corporate final accounts, remuneration must be recognised as an expense when required by the applicable accounting framework. Companies must also ensure that remuneration payable by public companies complies with the Companies Act, 2013, including Sections 197 and 198 and Schedule V where relevant.
1. Overall Maximum Limit
Under Section 197, the total managerial remuneration payable by a public company to its directors, including managing and whole-time directors, and its manager is generally subject to an overall limit of 11% of net profits, computed under Section 198. The Act provides for specified exceptions and mechanisms for remuneration beyond the ordinary limits. The provision should not be treated as a universal 11% cap for every type of company or every payment to management; the company’s status and applicable legal conditions must be examined.
2. Individual Remuneration Limits
Section 197 also provides limits for particular categories of managerial personnel, subject to the statutory framework and applicable approvals. Generally, the limit for one managing director, whole-time director, or manager is 5% of net profits, while the aggregate limit for such personnel when there is more than one is generally 10%. Remuneration payable to directors who are neither managing nor whole-time directors is also governed by separate limits. These provisions must be read with the Act, Schedule V, and relevant approvals or exceptions.
3. Calculation of Net Profits for Remuneration
For determining the statutory remuneration limits, net profits are calculated according to Section 198 rather than simply taking the final profit after tax shown in the Statement of Profit and Loss. The section specifies which income items are credited and which expenses or items are deducted or excluded. Therefore, a company may need a separate computation for remuneration purposes. This prevents an incorrect conclusion based solely on accounting profit and supports compliance with the prescribed statutory limits.
4. Accounting Treatment of Managerial Remuneration
Managerial remuneration recognised as an expense reduces the company’s profit before tax, subject to the applicable accounting requirements. If remuneration is earned but remains unpaid at the reporting date, the company generally recognises an expense and a corresponding liability. Where a payment or provision is not legally permitted or exceeds an applicable limit, its treatment must be assessed carefully in light of the facts, approvals, and legal requirements. Accounting recognition does not itself establish that the payment is legally authorised.
5. Numerical Illustration of the Remuneration Limit
Suppose a public company’s net profits computed under Section 198 for remuneration purposes are ₹50,00,000. An overall 11% limit would be ₹5,50,000, before considering the specific provisions, exceptions, approvals, and individual limits applicable to the company. This calculation is only an illustration of the overall percentage; it does not automatically establish that a proposed remuneration package of ₹5,50,000 is permissible. The company must separately verify the relevant managerial category and compliance requirements.
Dividend Distribution Constraints
Dividend distribution refers to the payment of a portion of a company’s profits to its shareholders. A dividend may be declared from profits of the current financial year after providing for depreciation, eligible undistributed profits of previous financial years after providing for depreciation, or a combination of these sources, subject to Section 123 of the Companies Act, 2013. Dividend distribution is not an ordinary operating expense; it is an appropriation of profits and must comply with the applicable legal requirements.
1. Availability of Profits for Dividend
A company cannot assume that its entire accounting profit is available for dividend distribution. Depreciation, accumulated losses, applicable statutory restrictions, and other relevant provisions must be considered. Section 123 establishes the permitted sources of dividend and related conditions. The company should also consider whether its financial position permits distribution without compromising its ability to meet obligations. A dividend should not be declared merely because the Statement of Profit and Loss reports a positive profit for the year.
2. Transfer to Reserves Before Dividend
The Companies Act, 2013 does not generally require every company to transfer a fixed percentage of profits to a general reserve before declaring a dividend. A company may voluntarily transfer a portion of its profits to reserves, subject to applicable requirements. However, where a specific law, regulation, or binding requirement applies to the company, it must be followed. The amount transferred to reserves affects the amount of profits retained for other purposes, including potential dividend distribution.
3. Restrictions on Interim and Final Dividends
Final dividends are declared through the applicable corporate approval process, while interim dividends are subject to the provisions governing their declaration by the Board of Directors. Section 123 contains specific conditions, including restrictions relevant to companies that have incurred losses during the current financial year when declaring interim dividends. Companies must verify the relevant statutory conditions, approvals, and available profits before making a declaration.
4. Dividend from Free Reserves and Accumulated Profits
When current-year profits are insufficient or unavailable, a company may be permitted to declare a dividend from accumulated profits transferred to free reserves, subject to the applicable rules and conditions. The company must distinguish free reserves from balances that cannot legally be used for dividends. Capital reserves, securities premium, and other restricted balances should not automatically be treated as distributable profits. The source and amount of any proposed dividend must be examined under Section 123 and the applicable rules.
5. Unpaid and Unclaimed Dividends
Companies must comply with statutory requirements for paying declared dividends within the prescribed period and dealing with amounts that remain unpaid or unclaimed. Section 124 of the Companies Act, 2013 provides requirements concerning unpaid dividend accounts and the transfer of qualifying amounts to the Investor Education and Protection Fund (IEPF). Proper accounting records, shareholder details, and payment procedures are necessary to ensure compliance and protect shareholders’ rights.
Integrated Numerical Illustration of Corporate Final Accounts
Consider the following simplified illustration of a company’s accounts before final adjustments:
| Particulars | Amount |
|---|---|
| Profit before tax adjustments | ₹12,00,000 |
| Depreciation adjustment | ₹1,00,000 |
| Managerial remuneration adjustment | ₹50,000 |
| Profit before tax after adjustments | ₹10,50,000 |
| Illustrative current tax provision | ₹2,50,000 |
| Profit after tax | ₹8,00,000 |
| Transfer to general reserve (10%) | ₹80,000 |
| Balance after reserve transfer | ₹7,20,000 |
Explanation: The illustration assumes that the depreciation and managerial remuneration adjustments are additional expenses not already included in the starting profit. It also assumes an illustrative tax provision of ₹2,50,000; this is not a tax-rate calculation and should not be used as an actual corporate tax estimate. The general reserve transfer is voluntary in this example, not a universal statutory requirement. The remaining ₹7,20,000 is not automatically available for distribution: the company must still examine accumulated losses, the legally permissible source of dividends, applicable restrictions, approvals, and its financial position.
Procedure for Preparing Corporate Final Accounts
Step 1. Preparation of the Trial Balance
The accountant begins by preparing a trial balance from the company’s ledger accounts. It lists debit and credit balances and helps identify arithmetic discrepancies. Agreement of the trial balance does not guarantee that every transaction is correctly recorded, so supporting records and account reconciliations must also be examined.
Step 2. Recording Year-End Adjustments
The company records adjustments for depreciation, outstanding expenses, prepaid expenses, accrued income, inventory, provisions, impairment, and other relevant items. These adjustments ensure that income, expenses, assets, and liabilities are recognised in the appropriate accounting period.
Step 3. Determination of Accounting Profit
After recording adjustments, the company prepares the Statement of Profit and Loss in accordance with Schedule III and the applicable accounting standards. It calculates profit or loss after recognising relevant expenses, finance costs, and other items, including tax expense as required.
Step 4. Calculation of Current and Deferred Tax
The company prepares its tax computation under the applicable tax legislation, identifies differences between accounting and taxable profit, and determines current tax and deferred tax where applicable. The resulting amounts are recognised and disclosed according to the relevant accounting framework.
Step 5. Adjustment for Reserves and Remuneration
The company verifies whether managerial remuneration complies with the applicable statutory limits and approval requirements. It then records authorised reserve transfers as appropriate. These transfers must be distinguished from operating expenses and other charges that affect the calculation of profit.
Step 6. Preparation of the Balance Sheet
The company classifies assets, liabilities, and equity under the prescribed headings. It reconciles closing balances with supporting schedules and ensures that required disclosures are included in the notes to accounts.
Step 7. Examination of Dividend Eligibility
Before declaring a dividend, the company examines the permitted sources of profits, depreciation requirements, accumulated losses, applicable restrictions, and approval procedures. The final decision must comply with Section 123 and other applicable statutory provisions.
Step 8. Review, Audit, and Approval
The completed financial statements are reviewed for accuracy, consistency, and compliance. They are then subject to the applicable audit, Board approval, and shareholder-related procedures under the Companies Act, 2013. Required filings and disclosures must be completed within the prescribed deadlines.
Illustrative Examples: Preparation of Corporate Final Accounts with Modern Adjustments
The following examples explain how current corporate tax, transfers to reserves, managerial remuneration, and dividend restrictions are applied while preparing corporate final accounts. All amounts are illustrative, and the statutory requirements applicable to the particular company must be verified.
Example 1: Preparation of Final Accounts with Adjustments
Question: ABC Ltd. provides the following information for the year ended 31 March 2026.
| Particulars | Amount |
|---|---|
| Revenue from operations | ₹15,00,000 |
| Other income | ₹50,000 |
| Operating and administrative expenses (excluding depreciation) | ₹8,00,000 |
| Depreciation | ₹1,00,000 |
| Finance costs | ₹50,000 |
Assume the illustrative current tax provision is ₹1,50,000. Prepare the profit calculation.
Solution:
| Particulars | Amount |
|---|---|
| Revenue from operations | ₹15,00,000 |
| Add: Other income | ₹50,000 |
| Total income | ₹15,50,000 |
| Less: Operating and administrative expenses | ₹8,00,000 |
| Less: Depreciation | ₹1,00,000 |
| Less: Finance costs | ₹50,000 |
| Profit before tax | ₹6,00,000 |
| Less: Current tax provision | ₹1,50,000 |
| Profit after tax | ₹4,50,000 |
Explanation: ABC Ltd. earns a profit before tax of ₹6,00,000. After deducting the assumed tax provision, profit after tax is ₹4,50,000. The tax figure is given for illustration and is not calculated using an actual corporate tax rate.
Example 2: Current Corporate Tax Adjustment
Question: XYZ Ltd. reports accounting profit before tax of ₹10,00,000. For tax purposes, it has an expense of ₹50,000 that is not deductible in the current year. Assume no other tax adjustments and an illustrative applicable tax rate of 25%, excluding surcharge and cess. Calculate taxable income and current tax.
Solution:
| Particulars | Amount |
|---|---|
| Accounting profit before tax | ₹10,00,000 |
| Add: Non-deductible expense | ₹50,000 |
| Illustrative taxable income | ₹10,50,000 |
| Tax at assumed rate of 25% | ₹2,62,500 |
Accounting entry:
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Current Tax Expense A/c Dr. ₹2,62,500
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To Current Tax Payable A/c ₹2,62,500
Explanation: The non-deductible expense increases taxable income above accounting profit. The tax provision is recognised as an expense, and the unpaid amount is recognised as a liability. The assumed rate is purely illustrative; actual tax depends on the company’s eligible tax regime and applicable law.
Example 3: Transfer to General Reserve
Question: PQR Ltd. earns profit after tax of ₹8,00,000. The Board decides to transfer 10% of profit after tax to the general reserve. Calculate the transfer and the remaining balance.
Solution:
Transfer to Reserve = ₹8,00,000 x 10%
= ₹80,000
| Particulars | Amount |
|---|---|
| Profit after tax | ₹8,00,000 |
| Less: Transfer to general reserve | ₹80,000 |
| Remaining retained profit | ₹7,20,000 |
Accounting entry:
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Retained Earnings A/c Dr. ₹80,000
-
To General Reserve A/c ₹80,000
Explanation: The transfer moves ₹80,000 from retained earnings to the general reserve. It is an appropriation within equity, not an operating expense, and does not reduce total equity by itself. The 10% transfer is voluntary in this example, not a universal statutory requirement.
Example 4: Managerial Remuneration Limit
Question: A public company has net profits of ₹40,00,000 calculated under Section 198 of the Companies Act, 2013. Calculate the general overall remuneration limit of 11%, assuming no special approval or exception is involved.
Solution:
Overall Limit = ₹40,00,000 x 11%
= ₹4,40,000
The general overall limit is ₹4,40,000.
For context, the ordinary individual limits for one managing director, whole-time director, or manager and the aggregate limits for multiple such personnel must also be considered. The overall 11% calculation alone does not establish that any proposed remuneration package is legally permissible. The company must verify the applicable provisions of Sections 197 and 198, Schedule V, and any necessary approvals.
Example 5: Dividend Distribution Constraint
Question: LMN Ltd. has the following balances:
| Particulars | Amount |
|---|---|
| Current-year profit after depreciation and tax | ₹5,00,000 |
| Accumulated losses requiring consideration | ₹1,00,000 |
| Proposed dividend | ₹3,00,000 |
For this simplified illustration, assume the accumulated losses must be considered before determining the amount available for distribution and that no other restrictions or adjustments apply.
Solution:
| Particulars | Amount |
|---|---|
| Current-year profit | ₹5,00,000 |
| Less: Accumulated losses considered | ₹1,00,000 |
| Illustrative balance before dividend | ₹4,00,000 |
| Proposed dividend | ₹3,00,000 |
| Illustrative balance remaining | ₹1,00,000 |
Explanation: The proposed dividend of ₹3,00,000 is within the illustrative balance of ₹4,00,000. However, this arithmetic alone does not prove that the dividend can legally be declared. LMN Ltd. must verify the permitted source of dividend under Section 123, applicable depreciation and reserve rules, approvals, and other statutory conditions.
Example 6: Combined Illustration of Profit, Tax, Reserve, and Dividend
Question: MNO Ltd. reports profit before tax of ₹12,00,000. Assume current tax of ₹3,00,000, a voluntary transfer of 10% of profit after tax to general reserve, and a proposed dividend of ₹4,00,000. Assume no other adjustments.
Solution:
| Particulars | Amount |
|---|---|
| Profit before tax | ₹12,00,000 |
| Less: Assumed current tax | ₹3,00,000 |
| Profit after tax | ₹9,00,000 |
| Less: Transfer to general reserve (10%) | ₹90,000 |
| Balance after reserve transfer | ₹8,10,000 |
| Less: Proposed dividend | ₹4,00,000 |
| Illustrative balance remaining | ₹4,10,000 |
Explanation: The company earns profit after tax of ₹9,00,000. After the voluntary reserve transfer, ₹8,10,000 remains before the proposed dividend. Deducting the proposed dividend leaves ₹4,10,000 arithmetically. The dividend is not automatically authorised merely because the balance is sufficient; the company must meet the statutory conditions and approval requirements.
Example 7: Outstanding Managerial Remuneration
Question: A company owes its managing director remuneration of ₹60,000 at the end of the financial year. The amount relates to services already received and is legally payable. Show the accounting entry.
Solution:
Journal entry:
-
Managerial Remuneration Expense A/c Dr. ₹60,000
-
To Outstanding Remuneration Payable A/c ₹60,000
Treatment in final accounts:
-
The ₹60,000 expense is included in the Statement of Profit and Loss.
-
The unpaid ₹60,000 is shown as a liability in the Balance Sheet under the appropriate heading.
Explanation: Since the remuneration relates to the current accounting period, it is recognised on an accrual basis even though payment has not yet been made. The company must separately confirm that the remuneration complies with the applicable statutory limits and approval requirements.
Example 8: Depreciation Adjustment
Question: RST Ltd. owns machinery costing ₹5,00,000. Depreciation for the year, calculated under the applicable accounting requirements, is ₹50,000. Show the accounting entry and closing carrying amount, assuming no other changes.
Solution:
Journal entry:
-
Depreciation Expense A/c Dr. ₹50,000
-
To Accumulated Depreciation A/c ₹50,000
| Particulars | Amount |
|---|---|
| Machinery cost | ₹5,00,000 |
| Less: Accumulated depreciation for the year | ₹50,000 |
| Closing carrying amount | ₹4,50,000 |
Explanation: Depreciation reduces the company’s accounting profit by ₹50,000 and reduces the carrying amount of machinery. Tax depreciation may be different, so the company must calculate taxable income separately and consider deferred tax where required.
