Explain the following adjustments in the Final Accounts of a Company.
Interest on Debentures: Interest on debentures is a charge against profit and as such it is debited to Profit and Loss Account. While paying the interest on debentures, it is the obligation of the company concerned to detect the income tax before making payment of interest to debenture holders.
Interest for the full period for which the debentures have been outstanding during the accounting year has to be provided. At the time of preparation of company final accounts calculate the total interest payable on debentures in the accounting year and the amount actually paid for the year. The difference between the two figures represents outstanding interest, outstanding interest to extent ‘accrued and due’ is shown in the balance sheet with the debenture under the heading ‘secured loan’.
The remaining portion of interest is shown in the balance sheet under “Current Liabilities and Provisions” as “interest accrued but not due”.
Income tax on Debenture Interest : The treatment of debenture interest while preparing final accounts must be noted carefully especially when it is given less tax at a specified rate. For example, if the trial balance shows “half year’s debenture interest less tax at 10%, Rs. 9,000′ then the profit and loss account will be debited with the gross amount Rs. 10,000 (i.e., Rs. 9,000 x 100/90) and Rs. 1,000 (i.e., 10,000 x 10/100) will be shown in the balance sheet as liability under the heading income tax payable account.
The accounting entries are :
Calls-in-Arrear : If any amount has been called by the company either as allotment or call money and a shareholder has not paid that money, such amount not received is known as calls-in-arrear.
Calls-in-Arrear is generally given in the trial balance and it is shown in the balance sheet by way deduction from called-up capital. Sometimes, this item is given in adjustments and only the paid-up capital is given in the trial balance. In such a case, the amount of calls-in-arrear is added to the paid-up capital to make the latter as called up capital and then deducted again.
Unclaimed Dividend : Unclaimed Dividend represents the amount of dividend not collected by the shareholders. According to Section 205 A of the Companies Act.
where a dividend has been declared by a company but not has been paid or claimed within 30 days from the date of declaration, to or by any shareholder entitled to the payment of the dividend, the company shall within 7 days from the date of expiry of the said period of 30 days to a special account transfer the total amount of dividend which remains unpaid or unclaimed to a special account to be opened by the company in that behalf in any scheduled bank to be called ‘Unpaid Dividend Account’.
Unclaimed Dividend would always be found on the credit side of trial balance and is shown on the liabilities side of the balance sheet under the heading “current liabilities”. But if the amount remains unpaid for a period of 7 years from the date of such transfer, the same shall be transferred to investor Education and Protection fund.
Dividend or Interest Received : This item represents income of company on investments made by it in shares, debentures or bonds of other companies. This is shown on the credit side of profit and loss account. It is important to note that dividend or interest received by the company is less of tax deducted at source.
Forfeited Share Account : For non-payment of allotment money or call money or both, a company forfeit share by giving proper notice to the shareholder.
In the Trial Balance Forfeited Shares Account will appear on the credit side. It is shown as an addition to the paid-up share capital on the liabilities side of the company’s balance sheet.
Depreciation : As per Section 205 of the Companies Act, dividend can be declared or paid by a company for any financial year only out of the profit arrived at after providing for depreciation in accordance with the provision of this Act. The Companies Act, 1956, provides that the original cost, the accumulated depreciation to date and the written-down value of each assets should be shown in the balance sheet of the company.
Depreciation is recorded in the books of the company by passing the following accounting entries :
Depreciation A/c Dr. To Provision for Depreciation /Accumulated Dep. A/c
Depreciation Account is a nominal account so it is transferred to Profit & Loss Account.
The accounting entry is:
Profit and Loss A/c Dr. To Depreciation A/c
Accumulated Depreciation (total) is shown in the Balance Sheet as a deduction from the original cost of the asset.
At the time of preparing final accounts of the following points must be noted:
If the depreciation is given in the trial balance, it should be debited to Profit & Loss Account,(i) If the depreciation is given in the trial balance, it should be debited to Profit & Loss Account,
If the depreciation appears as an adjustment, first calculate the amount of depreciation. Debit this depreciation to profit and loss account and add it with the opening balance of accumulated depreciation if any. Now, deduct the total depreciation from the original cost of the asset in the balance sheet.
If any asset is acquired during the accounting period then in the absence of any instruction to the contrary, depreciation will be provided only for the period the asset was in use.