Chapter 9 - Accounts of Companies Concepts

 Chapter 9 - Accounts of Companies Concepts

Chapter 9 of the "Accounts of Companies" in the CA (Chartered Accountant) curriculum typically deals with the preparation, presentation, and statutory requirements related to the financial statements of companies under the Companies Act, 2013. This chapter is essential for understanding how companies must maintain their accounts, the different types of financial statements required, and the various provisions concerning the accuracy, transparency, and compliance of corporate financial records.

Key Topics Covered in Chapter 9: Accounts of Companies

1. Introduction to Financial Statements of Companies

  • Financial Statements: The primary financial statements that companies must prepare are:
    • Balance Sheet: Shows the company’s assets, liabilities, and shareholders' equity as of a specific date.
    • Profit and Loss Account (or Statement of Profit and Loss): Shows the company's revenues, expenses, and profits or losses over a period.
    • Cash Flow Statement: Shows the inflows and outflows of cash during a period, categorized by operating, investing, and financing activities.
    • Statement of Changes in Equity: Reflects changes in the equity portion of the balance sheet due to various activities like issuance of shares, dividends, and profit or loss.

2. Regulations Governing Accounts of Companies

  • The Companies Act, 2013: The main statute that governs the preparation, maintenance, and auditing of accounts for companies in India.
  • Accounting Standards (Ind AS): The accounting standards that companies need to follow, with listed companies and large companies generally following the Indian Accounting Standards (Ind AS), which are converged with International Financial Reporting Standards (IFRS).
  • Schedule III of the Companies Act, 2013: This schedule prescribes the format for the presentation of the balance sheet and profit & loss account of a company, detailing the specific line items to be included.

3. Books of Accounts

  • Books to be maintained: Every company is required to maintain the following books of accounts:
    • Journal and ledger accounts.
    • Record of assets and liabilities.
    • Cash book, bank book, and other necessary books.
  • Prescribed Period for Keeping Books: Companies must maintain their books of accounts for a minimum period of 8 years from the end of the financial year to which they relate.

4. Types of Companies and Accounting Requirements

  • Private Companies: Generally follow the same accounting principles and standards as public companies, with certain exceptions like limited disclosure requirements.
  • Public Companies: Must comply with all statutory requirements under the Companies Act, 2013 and follow prescribed accounting standards.
  • One Person Companies (OPC): While accounting standards apply, OPCs have certain relaxations due to their simpler structure.
  • Small Companies: A small company, as defined under the Companies Act, has a reduced compliance burden, including simplified financial statements.

5. Preparation and Presentation of Accounts

  • Balance Sheet: It must include the following broad categories:
    • Equity and Liabilities: Shareholders’ equity, liabilities, long-term and short-term borrowings, and other liabilities.
    • Assets: Non-current assets (like property, plant, equipment), current assets (like inventories, receivables, cash), and intangible assets.
  • Profit and Loss Account: This statement should disclose:
    • Revenue from operations.
    • Other income.
    • Cost of goods sold, operating expenses, and other expenses.
    • Profit before tax, income tax expense, and net profit after tax.
  • Cash Flow Statement: It reflects how a company’s cash position has changed over a period and categorizes cash flows into:
    • Operating Activities: Cash flows from the core business operations.
    • Investing Activities: Cash flows from the acquisition or disposal of long-term assets.
    • Financing Activities: Cash flows from transactions related to borrowing and equity.
  • Statement of Changes in Equity: This shows changes in the equity during the period due to the issuance of shares, dividends, profit or loss, and other adjustments.

6. Auditing and Approval of Accounts

  • Audit of Accounts: The financial statements of every company must be audited by a statutory auditor. The auditor’s report must accompany the financial statements, stating whether they present a true and fair view.
  • Approval by Board of Directors: The financial statements are approved by the Board of Directors before being presented in the Annual General Meeting (AGM) of shareholders.
  • Filing with Registrar of Companies (RoC): After approval by the AGM, the financial statements must be filed with the RoC in e-forms (e.g., Form AOC-4 for filing balance sheets and profit and loss statements).

7. Dividends and Reserves

  • Declaration of Dividend: The company can declare dividends only out of profits, as per the provisions of the Companies Act. The balance sheet reflects the retained earnings and reserves from which dividends are paid.
  • Reserves: Companies are required to create specific reserves, including:
    • Statutory Reserves: Such as the debenture redemption reserve.
    • General Reserves: For future needs or contingencies.
    • Capital Reserves: Created from certain non-operating income (e.g., premium on share issues).

8. Provisions and Contingencies

  • Provisions: Companies need to make provisions for expenses that are likely to be incurred but for which the exact amount or timing is uncertain (e.g., provision for bad debts, provision for taxation).
  • Contingent Liabilities: These are potential liabilities that depend on the occurrence of a future event. Contingent liabilities must be disclosed in the notes to the financial statements.

9. Financial Statement Disclosure Requirements

  • The Companies Act, 2013 prescribes various disclosures that need to be made in the notes to the financial statements, such as:
    • Accounting policies followed.
    • Details of borrowings.
    • Related party transactions.
    • Details of contingent liabilities and commitments.
  • Ind AS and IFRS Disclosures: The financial statements should also comply with additional disclosures under Indian Accounting Standards (Ind AS), particularly for listed companies and large entities.

10. Consolidated Financial Statements

  • Consolidation Requirements: If a company has subsidiaries, joint ventures, or associates, it must prepare consolidated financial statements, showing the combined financial position and performance of the group.
  • Consolidation Methods: The consolidation process generally uses methods such as full consolidation for subsidiaries and equity method for associates and joint ventures.

11. Accounting Records and Internal Controls

  • Internal Control: Effective internal controls must be implemented to ensure that financial records are accurate and reliable. This includes procedures for safeguarding assets, monitoring compliance with laws, and ensuring financial data integrity.
  • Fraud Prevention: Companies must take steps to prevent fraud and maintain transparency in financial reporting.

12. Penalties and Legal Consequences for Non-Compliance

  • Penalties for Failure to Maintain Proper Accounts: Non-compliance with the accounting provisions of the Companies Act can result in fines and penalties for both the company and its officers.
  • Penalty for Non-Filing of Financial Statements: Companies failing to file their financial statements with the RoC may face penalties under the Companies Act, 2013.

Conclusion

Chapter 9 on Accounts of Companies covers the comprehensive legal framework, accounting standards, and practical requirements for the preparation and presentation of financial statements of companies in India. It provides in-depth knowledge about the structure of financial statements, the disclosure requirements, the importance of auditing, and compliance with various regulations. For aspiring chartered accountants, this chapter is essential for understanding how companies must maintain their financial records and ensure transparency in reporting.

 
















Chapter 9: Accounts of Companies

1. Books of Accounts to be Maintained by a Company

  • Section 128 of the Companies Act, 2013 mandates every company to maintain books of accounts and other relevant records. These records must be kept in the company's registered office and must cover the following:
    • Journals (book of transactions)
    • Ledger (record of account entries)
    • Cash book
    • Bank book
  • Companies must keep books for eight years from the end of the financial year to which they relate.

2. Types of Financial Statements

  • Balance Sheet: A snapshot of a company’s financial position, showing assets, liabilities, and equity.
  • Profit and Loss Account (Income Statement): Reflects the company’s performance over a period, showing revenues, expenses, and net profit or loss.
  • Cash Flow Statement: Shows the movement of cash and cash equivalents during a period (operating, investing, and financing activities).
  • Statement of Changes in Equity: Highlights changes in the company’s equity during the reporting period.

3. Format of Accounts – Schedule III

  • Schedule III of the Companies Act, 2013 provides the format for preparing the balance sheet and profit and loss account.
  • Companies must follow the prescribed format for presentation of accounts (classified under current and non-current categories).

4. Accounting Standards

  • Ind AS (Indian Accounting Standards): Public companies, large private companies, and listed companies follow Ind AS, aligned with IFRS (International Financial Reporting Standards).
  • Accounting Standards (AS): Other companies may follow the Accounting Standards issued by ICAI (Institute of Chartered Accountants of India).

5. Audit of Accounts

  • Section 139 requires that every company must get its accounts audited by a qualified auditor.
  • The auditor provides an Audit Report that expresses an opinion on whether the financial statements represent a true and fair view.
  • Companies must file their financial statements with the Registrar of Companies (RoC) in prescribed forms after approval by the Board and shareholders.

6. Approval and Filing of Financial Statements

  • Financial statements must be approved by the Board of Directors before being presented to shareholders in the Annual General Meeting (AGM).
  • After approval, the financial statements must be filed with the Registrar of Companies (RoC).

7. Dividends and Reserves

  • Section 123 deals with the declaration of dividends. Dividends can only be declared out of profits, and the company must create necessary reserves.
  • Statutory Reserves: Companies must maintain a statutory reserve, such as the debenture redemption reserve, as mandated by law.

8. Consolidated Financial Statements

  • If a company has subsidiaries or associates, it is required to prepare Consolidated Financial Statements under Ind AS 110.
  • Consolidated statements reflect the financial position and performance of the parent and its subsidiaries as a single entity.

9. Penalty for Non-Compliance

  • Section 450 provides penalties for not maintaining accounts properly or failing to file financial statements.
  • Penalties may include fines or even imprisonment for officers in default.

10. Provisions Related to Small Companies

  • Small companies have certain exemptions regarding compliance with financial statements and filing, such as simplified formats for balance sheets and profit and loss accounts.

Key Takeaways:

  • Companies must maintain proper books of accounts and file their financial statements with the RoC.
  • Financial statements should be audited and approved by the Board and shareholders before filing.
  • The format of the balance sheet and profit & loss account is governed by Schedule III.
  • Ind AS governs accounting for large and listed companies, while AS applies to others.
  • Consolidated Financial Statements are required for group companies.
  • Non-compliance can lead to penalties under the Companies Act.

This is a condensed and direct outline of the key points in Chapter 9 of the CA curriculum. Let me know if you need further clarification or a deeper dive into any specific topic.

 


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