Some important point related to final account in financial statement
1. Divisible Profit and Dividend- Divisible profits
means the maximum amount of profit which are legally available for distribution as dividend to the shareholders. Divisible profit is arrived afterdeduction of depreciation and income tax.
Dividend is that part of divisible profit which is distributed to the shareholders. Dividend is paid to the preference shareholders at a pre-determined rate while rate of divi-
dend for equity shares depends upon the earnings of the company. Dividend shall be declared by the directors in the annual general meeting. Normally, rate of dividend is deter-
mined on the basis of paid up capital of the company but at times dividend are distributable on the basis of number of shares or on the basis of face value of shares. Dividend is not paid on calls-in advance. Treatment of dividend in the
final accounts is as following:
(a) Interim Dividend- Dividend declared during the
year is known as interim dividend. Interim dividend disclosed in the trial balance is always shown on the debit side of the Profit & Loss Appropriation A/c.
(b) Proposed Dividend-Proposed dividend on equity or preference shares shall be shown on the debit side of Profit & -Loss Appropriation A/c and on the liability side of the balance sheet under the head “Current Liabilities and Provisions.”
(c) Unclaimed Dividend- Unclaimed dividend given in the trial balance is shown on the liabilities side of the balance sheet under the head ‘Current Liabilities’.
(d) Arrears of Preference Share Dividend- Prefer-
ence shareholders are given dividend at a predetermined rate. In case, preference dividends are not paid due to some reason, the cumulative preference shareholders have a right
to get the balance preference dividend. It is shown on the liabilities side of the balance sheet under the head ‘Contingent Liabilities’.
2. Bonus Shares- Bonus shares issued to the shareholders shall be included separately to the share capital and Securities Premium Account or the General Reserve or the Capital Redemption Reserve A/c shall be reduced by the amount of bonus shares. Bonus shares can be issued either at premium, discount or at par.
3.Closing Stock- Normally, closing stock is given
as an adjustment. In this case, closing stock is shown on the credit side of Trading/Profit Loss A/c and on the asset’s side of the balance sheet under the head Current Assets. If. the closing stock is given in the trial balance it should be
shown only on the assets side of the balance sheet.
4. Outstanding or Unpaid Expenses- Outstanding
or unpaid expenses such as salaries, rent, wages, etc. given in the adjustments should be shown on the liabilities side of the balance sheet under the head ‘Current Liabilities’ and is debited to the Profit & Loss A/c. If outstanding expenses
are given in the trial balance it should only be shown on the pobalance sheet.
5.Prepaid Expenses- Prepaid expenses such as prepaid Rent, Insurance, etc. given in the adjustments should be shown in the balance sheet under the head ‘Loans and Advances’ and it should be shown on the debit side at the profit & loss A/c by reducing the prepaid amount from the concerned head, if the trial balance shows the prepaid expenses, then those expenses should be shown on the balance sheet.
6. Accrued Income- Accrued income such as in-
come accrued on investments, etc. given in the adjustments should be shown on the assets side of the balance sheet under the head ‘Loans and Advances. The amount is also shown on the credit side of the Profit & Loss Account. If accrued income is given in the trial balance, it should only be shown on the balance sheet in the manner mentioned above.
7. Unearned Income- Unearned income such as rent, commission, etc. received for the coming year are shown on the liabilities side of the balance sheet under ‘Current Liabilities and unearned income should be shown on the credit side of Profit & Loss A/c by deducting the amount from the concerned head. If unearned income is shown in the trial balance, it should be shown on the balance sheet only.
8. Managerial Remuneration- The amount pay-
able to the Managing Director, Directors and Managers is known as managerial remuneration. These remunerations as per the provisions of the Company Act should not be more than 11% of the net profit of the company. It does not in-clude the fees payable to the directors for attending the meeting of the directors or any other committee meetings. If the profits are not sufficient in a particular year, then the company may pay the minimum managerial remuneration. Remuneration of Managing Director and Full time
Directors- Remuneration of Managing Director and full time Directors are based on monthly basis or partly on monthly basis and partly on percentage basis. But the remuneration for individual director should not be more than 5% of the net profit of the company. In case, there are more than one director, the total remuneration should not be more than 10% of the net profit of the company.
Remuneration of other Directors- Remuneration of
Directors other then the Managing Directors and full timeDirectors, are paid either monthly, quarterly or annually with the permission of the Central Government. Their commission should not be more than 1% of the net profit of the organisation. If there are no full time Directors, Managing Director or Directors, then the total remuneration to such directors should not exceed 3% of the net profit of the company.
Remuneration of the Manager- Remuneration to
managers may be paid on a monthly basis or a fixed percentage of the net profit or a combination of both. However, the remuneration to the manager should not be more than 5% of net profit. Remuneration to manager can be increased withthe permission of the Central Government.