Special Items related to Final Accounts
1. Provisions- As per the Companies Act, 1956, the expression ‘provision’ means any amount written off or retained by providing for depreciation, renewals or diminition in value of assets, or retained by way of providing for any known liability of which the amount cannot be determined with substantial accuracy. Main provisions of a companies are:
(i) Provision for Bad and Doubtful Debts- At the time of preparing balance sheet, there are some debtors from whom possibility of realising cash is less so, provision made for such debtors is known as provision for bad and doubtful debts. Amount of provision given in adjustments shall be deduct from debtors at the asset side of the balance sheet and shall be shown at the debit side of the profit and loss account but if it is given within trial balance then it shall be shown in the balance sheet only..
Sometimes, provision for bad and doubtful debts is given in the trial balances as well as in the adjustments. In such case, amount given in adjustment shall be deducted from debtors in the balance sheet and shall be shown at the debit side of profit and loss account whereas the amount of provision given in the trial balance may be shown at the credit side or may be deducted from the bad debts at the debit side.
(ii) Provision for Discount on Debtors- This provi-
sion is created for quick realisation of cash from debtors.
The amount of this provision given in adjustment shall be deducted from debtors in the balance sheet after adjustingnbad and doubtful debts and shall be shown at the debit sidebof profit and loss account.
(iii) Provision for Discount on Creditors- Provision
for discount on creditors shall be deducted from creditors atbthe liabilities side of the balance sheet and at the same time it shall also be shown at the credit side of the profit and loss account.
(iv) Provision for Depreciation- The Companies Act makes depreciation a legal compulsion. If depreciation is given in adjustment then it shall be deducted from the respective assets in the balance sheet and shall appear in the debit side of the profit and loss account. But if it is givenbonly in the trial balance then it shall appear only in the debit side of the profit and loss account.
In case, if original cost of the asset is given and provision for depreciation is also given then the existing provision alongwith the current annual depreciation shall be deducted from the assets.
(v) Provision for Repairs and Renewals- This provision is created to have equal charge of expenses incurred on annual repairs and renewals. Average annual repairs and renewal expenses are debited to Profit & Loss A/c and provision for Repairs and Renewals A/c shall be credited. Actual amount of repairs and renewals shall be deducted from the provision for Repairs and Renewal A/c and the balance is shown on the liability side of the balance sheet.
(vi) Provision for Fluctuation in Investment- The
objective of this provision is to maintain stability in the value of investments. Expected fluctuation in investment is debited to the profit and loss account and the corresponding credit is given to the provision for Fluctuation in Investment A/c. Actual decline in value of investments is debited to provision for Fluctuation Investments A/c and the balance is shown on the liability side of the balance sheet.
(vii) Provision for Taxation- In the year of provision for taxation, it shall appear in the debit side of profit and loss account and provision for Taxation Account shall be credit and shall be shown as a current liability under the head Current Liability and Provisions. In the subsequent year, actual tax paid shall be deducted from this provision and the balance amount shall be transferred to the profit and loss appropriation account.
Payment of Advance Income Tax- According to the Income Tax Act, a company has to pay advance income tax if earnings of the company is expected to exceeds a specified limit. In such case, advance Income Tax Account shall be debited and Bank Account shall be credited in the year of payment. Finally, at the time of assessment of tax, advance tax paid shall be adjusted. But if it is not adjusted then it shall be shown at the asset side of the balance sheet under ‘Current Assets, Loans and Advances’.
2. Reserves- Reserve has not been defined clearly in the Companies Act. According to this act, reserve shall not 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. Main reserves of a company are as following:
(a) Capital Reserve-Capital reserve shall not include any amount regarded as free for distribution through the profit and loss account. The following amounts are transferred to the capital reserve:
(i) Profit prior to incorporation, Premium un issue of shares and debentures,
(iii) Profit on forfeiture of share,
(iv) Profit on revaluation of assets, Profit on sale of fixed assets,
(vi) Profit on acquisition of business,
(vii) Profit on redemption of debentures,
(viii) Amount transferred from Capital Redemption Reserve, etc.
Capital reserve can be utilised in payment of bonus shares, for writting capital losses and fictitious assets like discount/commission on issue of shares and debentures, preliminary expenses, goodwill, etc. but it is not available for, the distribution of dividends.
(b) Revenue Reserve- Reserve mean any reserve other than a capital reserve and is available for the distribution of dividends are known as Revenue Reserve; It may be of following three types:
(1) General Reserve- General reserve is created out of the divisible profit of the company to strengthen the financial position of the firm. General reserve given in the adjustment shall be shown under ‘Reserves and Surplus’ on the liability side of the balance sheet and it shall be debited to the Profit & Loss Appropriation A/c. General Reserve given in the trial balance shall appear on the liability side of the balance sheet.
(ii) Specific Reserve- If a part of the profit is trans-
ferred to a reserve with a specific purpose, it is known as a Specific Reserve. Even if, specific reserves are created out of divisible profits, normally, these reserves are not utilised directly towards payment of dividend. Important Specific Reserves are as follows:
(a) Dividend Equalisation Reserve- This reserve is
created to maintain the rate of dividend. Dividend Equalistion Reserve is shown on the liability side of the balance sheet under the head ‘Reserves and Surplus’ and is debited to the Profit & Loss Appropriation A/c.
(b) Contingency Reserve- Contingency Reserve is
created to meet contingent liabilities in the business. It is shown on the liabilities side of the balance sheet and is debited to the Profit & Loss Appropriation A/c.
(c) Taxation Equalisation Reserve- This reserve is
created to maintain an even impact of taxes on the company over different years.
(iii) Reserve Fund- When general or specific reserves are invested in external securities, they are known as Reserve Funds.