Tag: Income Tax Osmania University B.com Notes

General insurance business means business other than life insurance business. General insurance companies operating in India were nationalised on 13th May, 1971 by the Ordinance of the President of India. The accounts of the General Insurance Companies were maintained according to the provisions of Insurance act 1938. Under the previous law, separate Revenue Account had to be prepared for each type of business-fire, marine, accident, etc.

(a) Revenue Account:

A separate revenue account is prepared for each type of business. Incomes and expenses of a particular business are recorded separately and profit or loss arising there from is transferred to Profit and Loss Account.

(b) Profit and Loss Account:

General incomes and expenses not belonging to a particular business are recorded in it and balance of profit or loss is transferred to Profit and Loss Appropriation Account.

(c) Profit and Loss Appropriation Account:

Appropriations of profit for various purposes are shown in it and it’s balance is transferred to balance sheet.

(d) Balance Sheet:

It shows various assets and liabilities of general insurance companies. Performa of Balance Sheet is same for general and life insurance companies.

Before the incorporation of IRDA Act, 2000 which allowed private players, general insurance business was conducted by General Insurance Corporation of India and its four subsidiaries.

Reserve for Unexpired Insurance:

According to the provisions of Insurance Act, 1938, provision for unexpired risks in case of fire, marine, cargo and miscellaneous business is to be created-@ 40% of the net premiums received and 100% in case for marine Hull. However, income determination of general insurance business is done as per section 44 of Income-tax Act, 1961 and Rule 6 E of the Income-tax Rules.

They provide for reserve for unexpired risk allowed as deduction up to 50% of net premium income in case of fire insurance and miscellaneous insurance and 100% of net premium in case of marine insurance.

As such, reserve is to be made at 50% of the net premium income in case of fire and other insurance businesses and at 100% of the net premium income in case of marine insurance business. A prudent insurance company may make additional reserve in case of fire and miscellaneous insurance business, if it considers it necessary.

Commission to Agents:

Commission on policies effected through insurance agents cannot exceed 5% of the premium in respect of fire and marine business and 10% in case of miscellaneous business. In case of policies effected through principal agents the maximum limits are 20% for fire and marine policies and 15% in the case of miscellaneous insurance less any commission payable to an insurance agent with respect to the policy concerned. Certain concessions are available in this respect to principal agents having a foreign domicile.

Claims:

Claims paid must include all expenses directly incurred in settling claims such as legal expenses, medical expenses, surveyor’s expenses etc.

No claim of Rs. 20,000 or more can be paid, except as the Controller of Insurance may otherwise direct, unless there is a report in respect thereof from an approved surveyor or loss assessor (licensed under the Insurance Act).

General Instructions for Preparation of Financial Statements:

1. The corresponding amount for the immediately preceding financial year for all items shown in the Balance Sheet, Revenue Account, and Profit and Loss Account shall be given.
2. The figures in the financial statements may be rounded off to the nearest thousands.
3. Interest, dividends and rentals receivable in connection with an investment should be stated at gross value; the amount of income tax deducted at source being included under ‘advance taxes paid’.
4. Income from rent shall not include any notional rent.

(I) For the purposes of financial statements, unless the context otherwise requires:

(a) The expression ‘provision’ shall, subject to note (II) below mean any amount written off or retained by way of providing for depreciation, renewals or diminution in value of assets, of retained by way of providing for any known liability or loss of which the amount cannot be determined with substantial accuracy.

(b)The expression ‘reserve’ shall not, subject to as aforesaid, include any amount written off or retained by way of providing for depreciation, renewals or diminution in value of assets or retained by way of providing for any known liability.

(c) The expression ‘capital reserve’ shall not include any amount regarded as free for distribution through the profit and loss account; and the expression ‘revenue reserve’ shall mean any reserve other than a capital reserve.

(d) The expression “liability” shall include all liabilities in respect of expenditure contracted for and all disputed or contingent liabilities.

(II) Where:

(a) Any amount written off or retained by way of providing for depreciation, renewals or diminution in value of assets, or

(b) Any amount retained by way of providing for any known liability is in excess of the amount which in the opinion of the directors is reasonably necessary for the purpose, the excess shall be treated for the purpose of these accounts as a reserve and not provision.

6. The company should make provision for damages under law suits where the management is of the opinion that the award may go against the insurer.
7. Extent of risk retained and reinsured shall be separately disclosed.
8. Any debit balance of the Profit and Loss Account shall be shown as deduction from uncommitted reserves and the balance, if any, shall be shown separately:
9. An insurer shall prepare the Revenue Account, Profit and Loss Account [Shareholders’ Account] and the Balance Sheet in Form B-RA, Form B-PL and Form B-BS, or as near thereto as the circumstances permit.

Provided that an insurer shall prepare Revenue Account and Balance Sheet for fire, marine and miscellaneous insurance business and separate schedules shall be prepared for Marine Cargo, Marine-other than Marine Cargo and the following classes of miscellaneous insurance business under miscellaneous insurance and accordingly application of AS-17 (Segment Reporting) shall stand modified.

(i) Motor

(ii) Workmen’s Compensation/Employers’ Liability

(iii) Public/Product Liability

(iv) Engineering

(v) Aviation

(vi) Personal Accident

(vii) Health Insurance

(viii) Others

2. An insurer shall prepare separate Receipts and Payments Account in accordance with the Direct Method prescribed in AS-3 “Cash Flow Statement” issued by the ICAI.

Formats

As per IRDA Regulation, a Balance Sheet is divided into two parts:

(a) Sources of Fund; and

(b) Application of Funds.

Sources of Fund (Schedule 5):

The first one under this head is the Shareholders’ Fund. Under the head, various classification of capital is to be shown separately (viz, Authorized Capital, Issued Capital, etc.).

Reserves and Surplus (Schedule 6):

All kinds of reserves (viz. Capital Redemption Reserve, General Reserve, Revaluation Reserve Securities Premium, etc.) will be shown separately.

Borrowings (Schedule 7):

All kinds of borrowings by way of Bonds, Debentures, Bank Loan, Loan from financial institutions etc. are to be shown separately. Similarly, unsecured borrowings and secured borrowings are to be shown separately.

Policyholders’ Fund:

Any kind of fund related to policyholders must be shown separately under the head Policyholders’ Fund.

Application of Funds Investments (Schedule 8):

It must be remembered that Shareholders’ Fund and Policyholders Fund are to be shown separately, i.e. Schedules 8 contains the investment of Shareholders’ Fund. On the contrary, Schedule 8A contains the Policyholders’ Fund.

Loans (Schedule 9):

Proper classifications of loan should be made first, i.e. as per security-wise, performance-wise, borrower- wise etc.

Fixed Assets (Schedule 10):

Detailed descriptions of all the, fixed assets must be made. They include: All tangible assets (viz. Plant and Machinery, Land and Building, etc.) and intangible assets (viz. patent, etc.).

Current Assets = Cash at Bank (Schedule 11):

Cash and Bank (balances should be shown separately)

Advances and Other Assets (Schedule 12):

These also include various kinds of advances made by the insurance company.

Current Liabilities (Schedule-13):

Current liabilities are those which need payment within one year, i.e. liabilities which are repayable within a short period of time, e.g., Creditors, Provisions for Tax, etc.

Provisions (Schedule 14):

All kinds of provisions .

Miscellaneous Expenditure (Schedule15):

These include – Discount on Issue of Shares or Debentures, Preliminary Expenses.

Valuation balance sheet is prepared by the life insurance company, or it is prepared by the actuary for the life insurance company. An Actuary is a person who evaluates risk in an insurance given by an insurance company. Valuation balance sheet is prepared by the life insurance company to evaluate the surplus or deficiency.

Ascertainment of Profit:

Ascertainment of profit in the case of life insurance is done after the expiration of a two-year period. For this purpose a valuation balance sheet is prepared. The balance of life insurance fund is compared with the amount of net liability as per actuarial valuation. In case the balance of life insurance fund on the valuation date is more than the net liability, there is said to be a surplus. In a reverse case there will be a deficiency.

Treatment of Profit:

According to section 28 of Life Insurance Corporation of India Act, 95% of the surplus as disclosed by the valuation Balance Sheet has to be allocated to or reserved for the policy-holders of the Corporation. The balance of the amount is to be paid either to the Central Government or utilised for such other purposes and in such manner the government may determine.

The following points should be kept in mind while determining the share of the policy holders:

(i) Any interim bonus paid to the policy holder should be added back to the surplus as disclosed by the valuation balance sheet since the interim bonus is really an advance payment of the bonus.

(ii) Any expenditure still to be incurred, e.g., dividends to shareholders should be deducted from the surplus as disclosed by the valuation balance sheet.

(iii) The share of the policy-holders will be 95% of the surplus left after any deduction made as above. Any interim bonus already paid should be deducted from the amounts as calculated.

The balance is the amount now due to the policy-holders.

If we subtract liabilities of a policyholder-owned insurance company from its assets, we get the Policyholder surplus. The financial strength of a company can be determined through its Policyholder surplus as it indicates the financial ability of a company. If an insurance company needs to pay a higher-than-expected amount of claims, this surplus serves as an additional source of funds other than the company’s reserves and reinsurance. In the case of a publicly owned insurance company, the Policyholder surplus is known as shareholder’s equity.

Loss of Stock:

When a fire occurs, it destroys a number of assets such as building, machinery, furniture, stock, etc. The books of account maintain accounts of all the assets except (usually) stock-in-trade. The value of stock on hand on the date of fire, therefore, has to be estimated.

This is done by ascertaining the cost of goods sold (sales minus the gross profit at the usual rate) and then deducting it from the total of opening stock, purchases, wages and other manufacturing expenses. All figures except relating to gross profit will be available from the books of account; gross profit will be the average rate of gross profit earned in the previous years adjusted for known changes.

Average Clause:

In order to discourage under-insurance, fire insurance policies often include an average clause. The effect of this clause is that if the amount of the policy is less than the value of the subject-matter insured, the insurer will be liable only for that proportion of the loss which the amount of policy bears to the total value of the subject-matter.

The Revenue Account of general insurance companies must be prepared in conformity with the regulations of IRDA, Regulations 2002, as per the requirements of Schedule B. It has already been stated above that separate Revenue Account is to be prepared for each individual unit i.e. for Marine, Fire, and Accident.

These individual revenue accounts will highlight the result of operation of each individual unit for a particular accounting period. It also reveals the incomes and expenditures of each individual unit. Like Revenue Account of a life insurance company, Revenue Account is prepared under Mercantile System of Accounting.

Items appearing in Revenue Account:

Premiums:

It has already been stated above that general insurance policies are issued for a short period, say, for a year. As a result, many of them may be unexpired at the end of the year. Therefore, the entire premium so received cannot be treated as an income for the current year only. A portion of that amount should be carried forward to the next year in order to cover the unexpired risks. This is what is known as Reserve for Unexpired Risks.

As per Schedule IIB of the IRDA the Reserve for Unexpired Risks should be provided for out of net premium so received as:

(a) 50% for Fire Insurance business;

(b) 50% for Miscellaneous Insurance business;

(c) 50% for Marine Insurance business other than Marine Hull business, and

(d) 100% for Marine Hull business.

In addition to the above, if any company wants to maintain more than this level, it can do so. The same is known as Additional Reserve.

Claims Incurred (Net):

It is the first item that appears in the expenditure side of the Revenue Account of an insurance company. Claims mean the amount which is payable by the insurer, to the insured for the loss suffered by the latter against which the insurance was made.

Claims can be divided into:

(a) Claims intimated but not yet accepted and paid;

(b) Claims intimated, accepted but not paid;

(c) Claims intimated, accepted and paid; and

(d) Claims rejected. But if there is only ‘Claims intimated’ the same is to be treated like (b). That is why, in order to find out the outstanding claims, claims that have been intimated (whether paid or unpaid) should be considered.

At the end of the year the entry for the purpose will be:

Claims A/c Dr.

To Claims Intimated Accepted but Not Paid A/c

Claims Intimated but Not Accepted and Not Paid A/c

A reverse entry should be passed at the beginning of the next year for which there will be no effect in Claims Account. But, if any claim is rejected subsequently, the amount is to be transferred to Profit and Loss Account and Claims Account must be credited for the purpose.

Books Section:

Cash Book:

For recording different types of cash transactions two types of cash books are recorded, viz.

(i) Rough Cash Book which deals with cash receipts and cash payments maintained by a receiving cashier and paying cashier, respectively.

It records serial number, depositor’s name, amount received etc. in cash, whereas, in case of cash payment, serial number, payee’s name, amount paid, number of token etc. are recorded,

(ii) A Fair Cash Book, on the other hand, is one when a separate person, after receiving the above information from the paying and receiving cashier, records the transactions in a separate book. Naturally, the transaction of the fair cash book must tally with the sum total of the above two rough cash books.

Cash Balance:

The cash balance at the close of the day is written in the book which is duly signed by the cashier and the manager.

Day Book:

It records day-to-day transactions of the book relating to cash transfers, clearings etc. Besides the above, Received Waste Book, Sectional Cash Book etc. are also to be maintained.

Ledger and Register Sections:

Ledger Section:

Current Account Ledger:

It records the transactions of those customers who open current account. Generally, the bank does not pay interest on the balance of this account but a nominal charge is taken by the bank for rendering the services. If there are many current accounts, those are to be serially numbered.

Savings Bank Ledger:

It records the transactions of those customers who open savings account in a bank. The detailed description of the customer, viz., name, address, occupation, are recorded along with an account number. If there are many Savings Account ledgers, they are to be serially numbered.

Fixed Deposit Ledger:

It contains transactions of those customers who have deposited their money into the bank for a fixed period. Generally, at the top of the account, depositor’s name and address, rates of interest, period of deposit, the amount so deposited etc. are to be recorded.

General Ledger:

It is actually the key ledger of the accounting system of a bank. It contains a total amount in respect of total Current Accounts, total Savings Bank Account, total Loans Account, total Bills Payable Account, total Expenses and total Revenue Accounts. Each ledger is kept under self-balancing system. A trial balance can easily be prepared which helps to prepare the final account as Well.

Besides the above ledgers overdue fixed deposit ledger, fixed deposit interest ledger, loan ledger, investment ledger may also be prepared.

Register Section:

The register section includes:

Bills for Collection Register, Securities Register, Document Register, Standing Order Register, Cheques Dishonoured Register, Drafts Issue Register, Drafts Payable Register, D.D. Register, Foreign Letters of Credit Register etc.

(a) Principal Books:

(i) Cash Book:

For recording different types of cash transactions two types of cash books are recorded, viz:

(i) Rough Cash Book which deals with cash receipts and cash payments maintained by a receiving cashier and paying cashier, respectively. It records serial number, depositors name, amount received etc. in cash, whereas, in case of cash payment, serial number, payee’s name, amount paid, number of token etc. are recorded,

(ii) A Fair Cash Book, on the other hand, is one when a separate person, after receiving the above information from the paying and receiving cashier, records the transactions in a separate book. Naturally, the transaction of the fair cash book must tally with the sum total of the above two rough cash books.

(ii) Day Books:

It records day-to-day transactions of the book relating to cash transfers, clearings etc. Besides the above, Received Waste Book, Sectional Cash Book etc. are also to be maintained.

(iii) General Ledger:

It is actually the key ledger of the accounting system of a bank. It contains a total amount in respect of total Current Accounts, total Savings Bank Account, total Loans Account, total Bills Payable Account, total Expenses and total Revenue Accounts. Each ledger is kept under self-balancing system. A trial balance can easily be prepared which helps to prepare the final account as well.

(b) Ledger Sections:

Personal Ledger:

(i) Current Account Ledger:

It records the transactions of those customers who open current account. Generally, the bank does not pay interest on the balance of this account but a nominal charge is taken by the bank for rendering the services. If there are many current accounts, those are to be serially numbered.

(ii) Savings Bank Ledger:

It records the transactions of those customers who open savings account in a bank. The detailed descriptions of the customer, viz., name, address, occupation, are recorded along with an account number. If there are many Savings Account ledgers, they are to be serially numbered.

(iii) Fixed Deposit Ledger:

It contains transactions of those customers who have deposited their money into the bank for a fixed period. Generally, at the top of the account, depositor’s name and address, rates of interest, period of deposit, the amount so deposited etc. are to be recorded.

(iv) Loan Ledger:

The loans which are sanctioned to the various parties are recorded in this ledger.

(v) Investment Ledger:

The amounts of investments which are made by the bank are recorded in this ledger.

(c) Register Sections:

The Register Section includes:

(i) Bill for Collections Register;

(ii) Securities Register;

(iii) Document Register;

(iv) Standing Order Register;

(v) Cheques Dishonoured Register;

(vi) Draft Issue Register;

(vii) Draft Payable Register;

(viii) D. D. (Demand Draft) Register;

(ix) Foreign Ledger of Credit Registers;

(x) Safe Deposit Vault Register.

Format of Profit and Loss Account of Banking Company

Banks are required to prepare final accounts for each financial year, i.e., its books are closed each year on 31st March. But for internal purpose, banks usually close their books on 30th September. A banking company is required to prepare its Profit and Loss Account according to Form B in the Third Schedule to the Banking Regulation Act, 1949. From B is in a summary form and the details of the various items are given in the schedules. From B is given as follows:

From ‘B’

Form of Profit and Loss Account

For the year ended 31^st March, (Year)

SCHEDULE 13: INEREST EARNED

SCHEDULE 14: OTHER INCOME

SCHEDULE 15: INTEREST EXPENDED

SCHEDULE 16: OPERATING EXPENSES

Format of Balance Sheet of a Banking Company

Preparation of Balance Sheet

The Balance sheet of a banking company is to be prepared in Form A given in third schedule to the Act. Unlike the previous form the present one is devoid of details, the latter being shown in the schedules. RBI has given guidelines for compiling the balance sheet. Below are given From A, the schedules there under and the instructions of RBI and in that order.

1. THE THIRD SCHEDULE

(See Section 29)

From ‘A’

FROM OF BALANCE SHEET

Balance Sheet of …………….. (Here enter name of the Banking Company)

Balance Sheet as on 31^st March (Year)

Schedule 1 – Capital

Schedules 2 – Reserve & Surplus

Schedule 3 – Deposits

Schedule 4 – Borrowings

Secured borrowings in I & II above – Rs.

Schedule 5: Other Liabilities and Provisions

Schedule 6: Cash and Balances with Reserve Bank of India

Schedule 7 – Balances with Banks & Money at Call & Short Notice

Schedule 8 – Investments

Schedule 9: Advances

Schedule 10: Fixed Assets

Schedule 11: Other Assets

Schedule 12: Contingent Liabilities