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Company Accounts

Part of the CA Foundation study roadmap. Accounting topic accoun-007 of Accounting.

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Company Accounts

🟢 Lite — Quick Review (1h–1d)

Rapid summary for last-minute revision before your exam.

Company Accounts under CA Foundation Accounting is the preparation of a company’s Statement of Profit and Loss and Balance Sheet strictly in the vertical format mandated by Schedule III (Division I) of the Companies Act, 2013. The two pillars you must master are Share Capital (Equity + Preference, face value ₹10 default, ₹1 permitted for DVRs) and Debentures (issue at par/premium/discount, redemption out of profits or fresh issue). Assets split into Non-Current (held >12 months) and Current (within the operating cycle), and every liability is either a Provision (recognised, timing/amount uncertain) or a Contingent Liability (disclosed only, not provided for). Three formulas carry the most marks: Net Profit = Revenue from Operations + Other Income − Total Expenses, EPS = (PAT − Preference Dividend) / Equity Shares, and Securities Premium = (Issue Price − Face Value) × Number of Shares. Remember: discount on share issue is prohibited, preliminary expenses must be written off to Securities Premium (Section 52), and long-term borrowings maturing within 12 months of balance sheet date reclassify as Current Liabilities.

🟡 Standard — Regular Study (2d–2mo)

Standard content for students with a few days to months.

Format of Financial Statements

Schedule III prescribes the vertical format for the Balance Sheet (equity and liabilities on the left in Schedule III’s “Balance Sheet” form, but conventionally shown with capital on top followed by non-current and current liabilities; assets arranged as Non-Current then Current). The Statement of Profit and Loss classifies expenditure by nature (not by function): Materials consumed, Purchases of Stock-in-Trade, Changes in inventory, Employee Benefits Expense, Finance Costs, Depreciation & Amortisation, Other Expenses.

Classification Logic

The operating cycle determines current vs non-current. Where it cannot be identified, 12 months is the default. Non-current assets are further split into Tangible (PPE), Intangible (goodwill, patents), Capital Work-in-Progress, and Intangible Assets under Development. Current assets include inventories, trade receivables, cash & cash equivalents, and short-term loans/advances.

Share Capital Accounting

  • Authorised Capital: maximum nominal amount the company can issue.
  • Issued Capital: shares actually offered to the public.
  • Subscribed & Paid-up Capital: shares applied for and paid. A subscriber must pay at least the amount called up, with calls-in-arrears deducted and calls-in-advance shown separately under Current Liabilities.
  • Equity shares carry residual ownership; Preference shares carry a fixed dividend paid before equity, and are cumulative unless stated otherwise.
  • Securities Premium (a reserve, not income) arises on issue above face value and is used per Section 52 — notably to write off preliminary expenses, issue discount, or buy-back of shares.

Debenture Accounting

Interest on debentures accrues time proportionately even if unpaid (shown as “Interest accrued and due” under Current Liabilities). Redemption may be lump-sum on maturity (DRR of 25% of nominal value of outstanding debentures required for listed companies) or by instalments. Discount on issue is a capital loss amortised over debenture life.

Key Distinction: Provision vs Contingent Liability

A provision is a present obligation arising from a past event where outflow is probable and amount can be reliably estimated — recognised in P&L. A contingent liability is only a possible obligation depending on a future event outside the entity’s control — disclosed by note, never recognised.

🔴 Extended — Deep Study (3mo+)

Comprehensive coverage for students on a longer study timeline.

Edge Cases and Exam Traps

Reclassification of borrowings: A term loan maturing within 12 months from the balance sheet date and not refinanced on a long-term basis before approval of accounts must be shifted from “Long-term Borrowings” to “Other Current Liabilities” — a frequent MCQ trap. Similarly, a debenture maturing in 6 months is shown as current.

Preliminary expenses: Costs of incorporation, legal fees for drafting MOA/AOA, and stamp duty on MOA must be written off against Securities Premium under Section 52(2); if premium is insufficient, the balance is charged to Statement of Profit and Loss in the year of issue. Treating them as a fictitious asset is a classic mistake.

Underwriting commission: Payable only on shares or debentures issued to the public, capped at 2.5% of issue price for shares and 2.5% of issue price for debentures (Rule 13 of Companies (Prospectus and Allotment of Securities) Rules, 2014). It is a capital expense debited to Securities Premium or charged to P&L.

Depreciation: Schedule II useful lives (e.g., Buildings 30/60 years, Plant & Machinery 15 years, Furniture 10 years, Computers 3 years, Vehicles 8 years). Method is consistently SLM or WDV; change requires Schedule II compliance.

Connection to Other Papers

This topic directly underpins CA Inter Financial Reporting (where Schedule III is tested in depth alongside Ind AS) and CA Final Financial Reporting. Mastering the vertical format here saves weeks later.

Common Mistakes

  • Showing Proposed Dividend as a Current Liability — it is only a proposed appropriation shown in Notes to Accounts until declared.
  • Crediting discount on issue of shares to P&L — discount on shares is illegal, so this entry should never appear.
  • Netting off trade receivables against trade payables — Schedule III prohibits set-off unless a legal right exists.
  • Showing contingent liabilities as “Nil” without checking pending court cases and disputed tax demands.

Practice Prompts

  1. A company issued 50,000 equity shares of ₹10 each at a premium of ₹5, payable as: Application ₹3, Allotment ₹7 (including premium), First & Final Call ₹5. Calls-in-arrears amounted to ₹40,000 on Allotment and ₹25,000 on Call. Prepare the Share Capital and Securities Premium schedule as on the date of the final call.
  2. From the following balances of X Ltd., prepare the Balance Sheet in Schedule III vertical form: Equity Share Capital ₹20,00,000; 9% Debentures ₹10,00,000 (₹2,00,000 maturing within 12 months); Trade Payables ₹6,00,000; PPE ₹18,00,000; Inventory ₹4,00,000; Trade Receivables ₹5,00,000; Cash ₹1,00,000; Provision for Tax ₹1,50,000; Contingent Liability: disputed income-tax demand ₹3,00,000.

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