Tag: Corporate Accounting Osmania University b.com Notes

Rebate on Bills Discounted is also known as Discount Received in Advance, or, Unexpired Discount or, Discount Received but not earned.

Its treatment is same as we do in the case of Interest Received in Advance.

Thus:

(i) If it is given only in the Trial Balance:

The same will be shown as a liability and will appear in the liability side of the Balance Sheet.

(ii) If it is given in adjustment:

In that case, the same is deducted from the Income from Interest and Discount in Profit and Loss Account and the same also will appear in the liability side of the Balance Sheet.

Method of Computation of Rebate on Bills Discounted:

For example, a customer discounts a bill of Rs. 60,000 for 3 months at 12% on 1st March 2000, it will be calculated as under:

Bank will earn discount @ 12% for 92 days i.e., = Rs. 60,000 x 12/100 x 92/365 = Rs. 1814.

But this amount of discount is meant for March, April and May. As accounts are prepared on 31st March each year, discount received for 61 days (30 + 31) for April and May is not actually earned. Thus, discount of 61 days i.e., Rs. 601 is called Rebate on Bill Discounted. So, actual income is Rs. 1213/- (i.e., 1814 – Rs. 601).

Treatment in Profit and Loss Account and Balance Sheet:

(i) Discount earned (up to 31.12.1992) will be credited to P & L A/c and unexpired discount will, however, be credited to Rebate on Bills Discounted A/c, and will appear in the liability side of the Balance Sheet.

(ii) Commissions earned will be credited to P & L A/c whereas customers’ liability for acceptance will appear on the asset side of the Balance Sheet and Acceptance on behalf of customer will appear in the liability side as contra items, and

(iii) Loans and advances will appear in the assets side of the Balance Sheet.

It is a method of rapid posting in books maintained under Double Entry principle. Under this system, posting is done from slips and not from journals or cash books.

Slips are loose leaves of journals and these are supplied either by the customers or by the bank staff.

Reasons for adoption of slip system

• Slip System of accounting/ posting is adopted for the following reasons:
• It ensures smooth flow of accounting.
• It can distribute the work of posting among many persons.
• It helps in keeping the accounts of customer upto date.
• This system saves a lot of clerical labour as most of the slips are filled in by the customers and provide an objective evidence of the records.

Features of slip system of posting

• Slip system of posting is based on the Double Entry System. Double Entry System is a system in which each entry affects the two accounts with same amount, i.e. debit is equals to the credit.
• The transactions are entered into by providing the details on the slips.
• It contains the different slips i.e. withdrawal slip, pay-in-slip and cheque for different types of transactions.
• It records the transactions in ledger book of accounts.
• Slips serves as the evidence for the transactions.

Advantages of Slip System:

(i) it reduces the possibility of errors and frauds;

(ii) it saves a lot of time since it is prepared by the customers themselves;

(iii) it provides a good system of internal check etc.

Disadvantages of Slip System:

Chances of Loss of Slips: Slips are just like the loose leaves of the paper. It may be lost, distorted or misappropriated very easily. Thus, it is unjustified to maintain the records in form of the slips.

No Verification: As the posting is done directly to the ledger accounts and no entry is made in the subsidiary books. So verification of accounts is not possible.

Types

Withdrawal Slip

Withdrawal Slip is the slip used for drawing the amount from the bank account. It is a document of bank on which a person writes the date, account number and amount of money to withdraw from the bank. These slips contain the following particulars to be filled:

• Name of the Drawer having bank account
• Account Number
• Date
• Branch of the Bank
• Signature of the Drawer

PAY-IN-SLIP

This is also known as deposit Slip. It is a form supplied by a bank for a depositor to fill out and to deposit the money in the bank. Pay-in-slip is used to deposit the amount in the bank. These slips contains the following particulars to be filled:

• Name of the Depositor having bank account
• Contact Number
• Account Number
• PAN Number
• Date
• Branch of the Bank
• Denominations of the money deposited
• Signature of the Depositor

CHEQUES

Cheque is a negotiable instrument which can be transferred by mere hand delivery. It is a document issued by an individual to his or her bank, directing them to pay the person whose name is mentioned in the document the sum specified in it for such a document to be valid, it is important that the person issuing it has an account in the said bank. An issuer of the cheque is called Drawer, and the one to whom it is issued is the Drawee. Cheque is used to make safe and convenient payment. It is less risky and danger of loss is minimized.

New set of books are opened

The following are the entries recorded by the purchasing company:

Note: If the purchase price exceeds the net assets, the excess amount is debited to Goodwill Account; and if the net assets exceeds the purchase price, the excess amount is credited to Capital Reserve.

Note: Any difference between the totals of debit and credit is debited to Goodwill Account or credited to Capital Reserve Account.

Sometimes the purchasing company does not take over the debtors and creditors of the vendor company but it agrees to collect book debts and pays off the creditors out of the collections from debtors. For this purpose, the company charges a commission by way of certain percentage both on the amount collected from debtors as well as the amount paid to creditors. Any profit or loss (in the form of discount and bad debts) should be borne by the vendor since the purchasing company does this work on behalf of the vendors.

The following entries are to be passed:

1. Entries in the Books of Vendors:

But if the company desires to continue with the same set of books, the following accounting treatment should be suggested for the purpose:

(i) Open Revaluation Account:

A Revaluation Account should be opened where increased and decreased values of assets and liabilities are to be adjusted as we have seen in case of an admission of a partner. The profit or loss so made should be transferred to capital accounts.

(ii) Close Reserve:

Any balance of accumulated or undistributed profits or reserves should be transferred to capital accounts in profit-sharing ratio.

(iii) Close assets and liabilities not taken over:

Any asset or liability which is not taken over by the purchasing company should be transferred to capital accounts in profit- sharing ratio. But when an asset is worth its book value, the same can be transferred to capital accounts according to the ratio of final claim till the value of the asset is fluctuating.

(iv) Close Capital Accounts:

The Capital Accounts are then closed by transferring to Share Capital Amount, or Debentures Account or Cash Account.

The person appointed for conducting the liquidation proceedings of the company is called ‘Liquidator’. (In case of Voluntary winding up an Insolvency Professional). The company must submit a statement of affairs to the liquidator. The general duties of the liquidator are to take into his custody all the property of the company and actionable claims and make the payments as per the order laid down in the Companies Act.

Preferential payments: Preferential creditors are those creditors who are paid in priority to creditors having a floating charge and other (non-preferential) unsecured creditors. As per Sec. 326 of the Companies Act, 2013, preferential creditors include the following:

1. All revenues, taxes, cesses and rates due to the Central, State Government or to a local authority which have become due and payable within twelve months before the date of winding up order.
2. All wages or salaries of any employee not exceeding ` 20,000 per claimant, in respect of services rendered to the company and due for a period not exceeding four months within the said twelve months before the date of winding up order.
3. All amounts due in respect of contribution payable during the twelve months under the Employees’ State Insurance Act, 1948 or any other law.
4. Compensation due under Workmen’s Compensation Act, 1923 in respect of death or disablement of any employee of the company.
5. Any amount due to any employee from provident fund, pension fund, gratuity fund for the welfare of the employees maintained by the company.
6. Accrued holiday remuneration becoming payable to the employee or in case of his death, to any other person in his right, on termination of his employment before, or by the effect of the winding up.
7. The expenses of any investigation held in pursuance of Sec. 213 or 216 in so far as they are payable by the company.

Overriding Preferential Payments (Section 326)

Overriding preferential payments are to be paid in priority to all other debts as per the said Act.

They include:

(a) Dues to workmen, and

(b) Debts due to secured creditors to the extent such debts rank to the security of every creditor shall be deemed to be subject to pari passu charge in favor of the workmen to the extent of workmen’s portion therein.

In a winding up, subject to the provisions of section 326, there shall be paid in priority to all other debts:

(a) all revenues, taxes, cesses and rates due from the company to the Central Government or a State Government or to a local authority at the relevant date, and having become due and payable within the twelve months immediately before that date;

(b) all wages or salary including wages payable for time or piece work and salary earned wholly or in part by way of commission of any employee in respect of services rendered to the company and due for a period not exceeding four months within the twelve months immediately before the relevant date, subject to the condition that the amount payable under this clause to any workman shall not exceed such amount as may be notified;

(c) all accrued holiday remuneration becoming payable to any employee, or in the case of his death, to any other person claiming under him, on the termination of his employment before, or by the winding up order, or, as the case may be, the dissolution of the company;

(d) unless the company is being wound up voluntarily merely for the purposes of reconstruction or amalgamation with another company, all amount due in respect of contributions payable during the period of twelve months immediately before the relevant date by the company as the employer of persons under the Employees’ State Insurance Act, 1948 or any other law for the time being in force;

(e) unless the company has, at the commencement of winding up, under such a contract with any insurer as is mentioned in section 14 of the Workmen’s Compensation Act, 1923, rights capable of being transferred to and vested in the workmen, all amount due in respect of any compensation or liability for compensation under the said Act in respect of the death or disablement of any employee of the company:

Provided that where any compensation under the said Act is a weekly payment, the amount payable under this clause shall be taken to be the amount of the lump sum for which such weekly payment could, if redeemable, be redeemed, if the employer has made an application under that Act;

(f) all sums due to any employee from the provident fund, the pension fund, the gratuity fund or any other fund for the welfare of the employees, maintained by the company; and

(g) the expenses of any investigation held in pursuance of sections 213 and 216, in so far as they are payable by the company.

(2) Where any payment has been made to any employee of a company on account of wages or salary or accrued holiday remuneration, himself or, in the case of his death, to any other person claiming through him, out of money advanced by some person for that purpose, the person by whom the money was advanced shall, in a winding up, have a right of priority in respect of the money so advanced and paid-up to the amount by which the sum in respect of which the employee or other person in his right would have been entitled to priority in the winding up has been reduced by reason of the payment having been made.

(3) The debts enumerated in this section shall:

(a) rank equally among themselves and be paid in full, unless the assets are insufficient to meet them, in which case they shall abate in equal proportions; and

(b) So far as the assets of the company available for payment to general creditors are insufficient to meet them, have priority over the claims of holders of debentures under any floating charge created by the company, and be paid accordingly out of any property comprised in or subject to that charge.

(4) Subject to the retention of such sums as may be necessary for the costs and expenses of the winding up, the debts under this section shall be discharged forthwith so far as the assets are sufficient to meet them, and in the case of the debts to which priority is given under clause (d) of sub-section (1), formal proof thereof shall not be required except in so far as may be otherwise prescribed.

(5) In the event of a landlord or other person distraining or having distrained on any goods or effects of the company within three months immediately before the date of a winding up order, the debts to which priority is given under this section shall be a first charge on the goods or effects so distrained on or the proceeds of the sale thereof:

• Provided that, in respect of any money paid under any such charge, the landlord
• Other person shall have the same rights of priority as the person to whom the payment is made.

(6) Any remuneration in respect of a period of holiday or of absence from work on medical grounds through sickness or other good cause shall be deemed to be wages in respect of services rendered to the company during that period.

According to Sec. 454, within 21 days of the date of the winding-up order to the appointment of the official liquidator as provisional liquidator, the company has to submit a statement to the official liquidator as to the affairs of the company unless the Court otherwise orders. The statement must be in the prescribed form.

Procedure of Preparation of Statement of Affairs

For the preparation of Statement of Affairs, the following points are to be followed:

1. First of all, take all assets which are not specifically pledged. These assets are taken at their realisable values. It may be noted that calls in arrears are also treated as an asset not specifically pledged to the extent of estimated realisable amount, but uncalled capital is not shown as an asset.
2. Add to the realisable value of the assets not specifically pledged, any surplus from assets specifically pledged.
3. From the total as obtained by adding (1) and (2) first deduct the amount of preferential creditors, then the amount of creditors having a floating charge (e.g., debentures) and the result will be surplus or deficiency as regards debenture holders.
4. Deduct the amount of unsecured creditors from the figure as obtained in (3) above; the resultant figure will be either surplus or deficiency as regards unsecured creditors.
5. Deduct the amount of paid-up share capital to the figure as obtained in (4) above; the result will be either surplus or deficiency as regards members or contributories.
6. Any unrecorded assets or liability should be shown both in the Statement of Affairs and the Deficiency or Surplus Account to make double entry complete.

Verified by affidavit and must contain the following particulars:

(i) The assets of the company, stating separately the cash in hand and cash at bank and negotiable securities.

(ii) The debts and liabilities of the company;

(iii) Names and addresses of its creditors, stating separately the amount of secured and unsecured debts;

(iv) In the case of secured debts, particularly of the securities held by the creditors, their value and dates on which they were given;

(v) The debts due to the company and names and addresses of the persons from whom they are due and the amount likely to be realized;

(vi) Such further information as may be required by the official liquidator.

Lists to be Attached to the Statement of Affairs

Following lists are attached to the Statement of Affairs:

• List A gives a complete list of assets not specifically pledged in favour of secured creditors. Creditors having a floating charge on the assets are considered as having assets not specifically pledged with them; so such assets are included in the list.
• List B gives the list of assets which are specifically pledged in favour of fully secured and partly secured creditors.
• List C gives the list of preferential creditors.
• List D gives the list of debenture holders and other creditors having a floating charge on the assets.
• List E gives the names, addresses and occupations of unsecured creditors and the amount due.
• List F gives the names and number and value of shares held by various preference shareholders.
• List G gives the names and holdings of equity shareholders.
• List H shows how Deficiency or Surplus in the Statement of Affairs has been arrived at, i.e., it explains the reasons responsible for the surplus or deficiency. According to the law, the period covered by Deficiency or Surplus must commence on a date not less than 3 years before the winding up order, or if the company has not been incorporated for the whole of that period, the date of incorporation of the company, unless the official Liquidator otherwise agrees.