Company accounts and Ind AS basics

In short

Company accounts is the branch of financial accounting that deals with the books, statements and statutory disclosures of a company incorporated under the Companies Act, 2013 — share and debenture capital, divisible profits and dividends, and the Schedule III format of the balance sheet and statement of profit and loss. "Ind AS basics" covers the framework that governs those statements: who must apply Indian Accounting Standards, how they differ from the older Accounting Standards, and the presentation rules of Ind AS 1. It matters because every limited company in India files audited accounts in exactly this format with the Registrar of Companies, and lenders, SEBI and investors read nothing else. It is examined in B.Com Financial Accounting and Corporate Accounting papers, CA/CS/CMA foundation and inter levels, and in campus tests for analyst, audit, finance and shared-services roles. Employers test it because a fresher's first job is usually schedule preparation, ledger scrutiny or statement mapping.

Explained

The company as an accounting entity

• A company is a separate legal person with perpetual succession and limited liability; its capital is divided into shares, and ownership (shareholders) is separate from management (board of directors).
• Types: public / private; limited by shares or guarantee; One Person Company (OPC); small company (paid-up capital up to ₹4 crore and turnover up to ₹40 crore, as amended in 2021–22); listed / unlisted; government company; Section 8 (non-profit) company.
• Section 128: every company keeps books of account on accrual basis and double entry at its registered office (or another place intimated to the ROC), retains them for 8 financial years, and may keep them electronically with a daily back-up on servers located in India.
• Section 129: financial statements must give a true and fair view and follow Schedule III; Section 2(40) defines financial statements as balance sheet, statement of profit and loss, cash flow statement, statement of changes in equity (where applicable) and notes.
• Cash flow statement is not required for an OPC, small company or dormant company; statement of changes in equity applies only to Ind AS companies.
• Section 134: statements are approved by the board and signed (chairperson or two directors, one being MD, plus CEO, CFO and company secretary where appointed), with the Board's Report attached; Section 137: filed in e-form AOC-4 within 30 days of the AGM.
• Section 133: accounting standards are prescribed by the Central Government as recommended by the ICAI (through its Accounting Standards Board), in consultation with and after examination of the recommendations of NFRA (National Financial Reporting Authority).

Share capital and its accounting

• Categories: authorised (nominal) → issued → subscribed → called-up → paid-up capital; reserve capital is a part not callable except on winding up. Calls in arrears are deducted from called-up capital; calls in advance are a liability, not capital.
• Classes: equity shares (with or without differential voting rights) and preference shares (cumulative/non-cumulative, redeemable — a company cannot issue irredeemable preference shares, and redemption term is normally within 20 years, 30 years for infrastructure projects).
• Modes of issue: public issue (prospectus), private placement, preferential allotment, rights issue, bonus issue, ESOP, sweat equity. Minimum application money is 5% of nominal value under Section 39 (SEBI requires 25% of issue price); minimum subscription is 90% of the issue, else money is refunded.
• Instalments: application → allotment → first call → final call. Entries route through Share Application, Share Allotment and Share Call accounts, all closed to Share Capital (and Securities Premium for the premium portion).
• Issue at premium (Section 52): the premium is credited to Securities Premium and may be used only for fully paid bonus shares, writing off preliminary expenses, writing off share/debenture issue expenses, commission or discount, premium payable on redemption of preference shares or debentures, and buy-back. It is not a free reserve for dividend. Issue of shares at a discount is prohibited (Section 53), except sweat equity.
• Over-subscription is handled by rejection, pro-rata allotment, or both; excess application money is adjusted against allotment and calls, and any surplus refunded (it cannot be retained beyond calls).
• Forfeiture: on non-payment of calls, after notice as per the articles, Share Capital is debited with the called-up amount, unpaid calls are credited, and amounts already received go to Share Forfeiture (a temporary capital reserve). Premium already received is not reversed; premium not received is debited back to Securities Premium.
• Reissue: forfeited shares may be reissued at a discount, but the discount allowed cannot exceed the amount forfeited on those shares; the balance left in Share Forfeiture after reissue is transferred to Capital Reserve.
• Shares for consideration other than cash (against assets or on business purchase) and shares to promoters/underwriters are recorded at the agreed value, with any excess over net assets debited to Goodwill.

Debentures and borrowed capital

• A debenture is an acknowledgement of debt; interest is a charge against profit (not an appropriation) and attracts TDS. Debentures may be secured/unsecured, convertible/non-convertible, registered/bearer, redeemable/perpetual.
• Issue combinations: at par, premium or discount, redeemable at par or premium. Loss on issue of debentures arises when there is a premium payable on redemption; it is written off against Securities Premium or Statement of Profit and Loss.
• Redemption may be in lump sum, by instalments/draw of lots, by purchase in the open market or by conversion. A Debenture Redemption Reserve (DRR) of 10% of outstanding debentures is required for specified unlisted companies; listed companies, NBFCs and HFCs are exempt under the 2019 amendment to the rules. Only a company that must create DRR also has to keep the prescribed Debenture Redemption Investment (by 30 April, 15% of debentures maturing during the next year ending 31 March); the exempt companies need not maintain it.
• Interest accrued and due is a current liability; debentures maturing beyond 12 months are shown under non-current borrowings.

Schedule III: the prescribed format

• Division I — companies applying AS; Division II — companies applying Ind AS; Division III — NBFCs applying Ind AS. Figures are rounded off consistently, and the previous year's comparatives are mandatory.
• Balance sheet (vertical form only): Equity and liabilities = equity share capital + other equity (Division II) or shareholders' funds + non-current liabilities + current liabilities; Assets = non-current (PPE, capital work-in-progress, intangibles, investments, deferred tax asset, other) + current (inventories, financial assets, receivables, cash and cash equivalents, other).
• Current vs non-current is decided by the 12-month / operating-cycle test; "Reserves and Surplus" of Division I becomes "Other equity" in Division II, and a debit balance of retained earnings is shown as a negative figure, not on the assets side.
• Statement of profit and loss: revenue from operations, other income, expenses (cost of materials, purchases of stock-in-trade, changes in inventories, employee benefits, finance costs, depreciation and amortisation, other expenses), profit before tax, tax expense (current + deferred), profit for the period, and — under Ind AS — other comprehensive income and total comprehensive income.
• No extraordinary items are permitted; disclosure of exceptional items is by way of a separate line or note. Schedule III also requires ageing of trade receivables/payables, CWIP and intangibles, and ratio disclosures (added by the 2021 amendment).
• Notes to accounts carry the share capital reconciliation, shareholders holding more than 5%, promoter shareholding changes, contingent liabilities and commitments, related party and CSR disclosures.

Profits, dividends and statutory appropriations

• Divisible profits (Section 123): dividend is paid out of the profits of the year, out of accumulated profits (free reserves), or both, after providing depreciation as per Schedule II (useful-life based). Capital profits and unrealised gains are not available for dividend.
• Transfer to reserves is now voluntary under the 2013 Act. Dividend out of accumulated profits in a loss year follows the Dividend Rules: rate not above the average of the last three years' rates, withdrawal capped at 10% of paid-up capital plus free reserves, and the reserve balance must not fall below 15% of paid-up capital.
• Interim dividend may be declared by the board out of surplus or current-year profits; final dividend is declared by members at the AGM on the board's recommendation and cannot exceed it.
• Dividend must be deposited in a separate bank account within 5 days and paid within 30 days of declaration; unpaid amounts go to an Unpaid Dividend Account within 7 days thereafter, and remain unclaimed for 7 years before transfer to the IEPF.
• Dividend Distribution Tax was abolished from FY 2020-21: dividend is taxable in the shareholder's hands and the company deducts TDS under Section 194 (10%, above a threshold of ₹10,000 from FY 2025-26, earlier ₹5,000).
• Managerial remuneration (Section 197): 11% of net profit computed under Section 198 for all directors together; within that, 5% to one managing/whole-time director, 10% if more than one, and 1% to other directors (3% if there is no MD/WTD). Excess is now permitted with shareholders' approval; where profits are inadequate, Schedule V limits apply.
• CSR (Section 135): applies if net worth ≥ ₹500 crore, or turnover ≥ ₹1,000 crore, or net profit ≥ ₹5 crore in the immediately preceding financial year; spend at least 2% of the average net profit (Section 198) of the three preceding years. Unspent amounts of ongoing projects go to an Unspent CSR Account (to be used in 3 years), other unspent amounts to a fund in Schedule VII within 6 months.
• Audit: statutory auditor appointed under Section 139 (rotation applies to listed and prescribed companies), reporting under Section 143 with CARO 2020 and, for listed and prescribed companies, an opinion on internal financial controls.

Ind AS basics: applicability and framework

• Ind AS are the Indian Accounting Standards notified under the Companies (Indian Accounting Standards) Rules, 2015 — converged with IFRS but not identical, because India retains carve-outs (for example, the option to use previous GAAP carrying amounts of PPE as deemed cost on transition, and treatment of certain foreign exchange differences).
• Roadmap: Phase I from FY 2016-17 for listed and unlisted companies with net worth ≥ ₹500 crore; Phase II from FY 2017-18 for other listed companies and unlisted companies with net worth ≥ ₹250 crore. NBFCs followed from FY 2018-19 (≥ ₹500 crore) and FY 2019-20 (listed or ≥ ₹250 crore). Implementation for banks and insurers remains deferred by the RBI and IRDAI.
• Once Ind AS applies, it applies to standalone and consolidated statements, to holding, subsidiary, associate and joint venture companies of a covered company, and the company cannot revert to AS. Companies outside the roadmap follow AS under the Companies (Accounting Standards) Rules, 2021.
• Conceptual framework: objective is to give useful information to investors, lenders and other creditors; underlying assumptions are accrual and going concern; fundamental qualities are relevance and faithful representation, enhanced by comparability, verifiability, timeliness and understandability, bounded by cost.
• Measurement bases: historical cost, fair value (Ind AS 113 — market-based exit price, three-level hierarchy), value in use/fulfilment value, and current cost. Substance over form and the time value of money matter far more than under AS.
• Ind AS 1 presentation: a complete set is balance sheet, statement of profit and loss (with OCI), statement of changes in equity, cash flow statement, notes, and the opening balance sheet when a policy is applied retrospectively. OCI is split into items that will be reclassified to profit or loss (e.g. cash flow hedge reserve) and items that will not (e.g. revaluation surplus, actuarial gains/losses on defined benefit plans, equity instruments elected at FVTOCI).
• Ind AS 101 (first-time adoption): choose a date of transition (beginning of the earliest comparative period), prepare an opening Ind AS balance sheet with all adjustments to retained earnings/other equity, apply mandatory exceptions and optional exemptions, and give reconciliations of equity and total comprehensive income from previous GAAP.
• Individual standards (revenue, leases, financial instruments, employee benefits, income taxes and so on) carry their own recognition rules; the orientation point is that Ind AS is principle-based, fair-value-tilted and disclosure-heavy compared with the rule-based, cost-based AS.

Key points

• Section 128 - books on accrual and double entry, preserved 8 years, electronic records backed up on Indian servers.
• Section 2(40) - financial statements include cash flow and (for Ind AS companies) statement of changes in equity; small companies, OPCs and dormant companies are exempt from cash flow.
• Schedule III - the only permitted format; Division I for AS, Division II for Ind AS, Division III for Ind AS NBFCs.
• Capital ladder - authorised ≥ issued ≥ subscribed ≥ called-up ≥ paid-up; calls in arrears reduce it, calls in advance do not.
• Securities premium (Sec 52) - restricted-use reserve, never available for dividend.
• Section 53 - issue of shares at a discount is void, except sweat equity shares.
• Pro-rata allotment - excess application money is applied to allotment and then to calls; only the balance is refunded.
• Forfeiture - debit Share Capital with called-up value; credit unpaid calls; received amount sits in Share Forfeiture.
• Reissue rule - discount on reissue ≤ amount forfeited on those shares; surplus goes to Capital Reserve.
• Debenture interest - a charge against profit and payable even in a loss year; dividend is an appropriation.
• Section 123 - dividend only after Schedule II depreciation; no mandatory transfer to reserves under the 2013 Act.
• DDT abolished from FY 2020-21 - dividend is taxed in the shareholder's hands with TDS by the company.
• Section 197 - 11% overall cap on managerial remuneration of net profit computed under Section 198.
• Section 135 - CSR trigger of ₹500 crore net worth / ₹1,000 crore turnover / ₹5 crore net profit; spend 2% of three-year average net profit.
• Ind AS roadmap - net worth ₹500 crore (FY 2016-17), then listed or ₹250 crore (FY 2017-18); banks and insurers deferred.
• OCI - an Ind AS-only concept, split into recyclable and non-recyclable items; total comprehensive income = PAT + OCI.
• Ind AS 101 - transition adjustments hit other equity, with equity and TCI reconciliations disclosed.
• NFRA - examines the standards the ICAI recommends under Section 133 and oversees audit quality of large and listed companies.

Formulas and examples

Example 1 — Pro-rata allotment, forfeiture and reissue. A company issues 50,000 equity shares of ₹10 at a premium of ₹2, payable ₹3 on application, ₹5 on allotment (including the ₹2 premium) and ₹4 on first and final call. Applications are received for 65,000 shares; 5,000 applications are rejected and the rest are allotted pro-rata.

1. Pro-rata ratio = 50,000 : 60,000 = 5 : 6. Application money received = 65,000 × 3 = ₹1,95,000; refund = 5,000 × 3 = ₹15,000.
2. Retained on application = 50,000 × 3 = ₹1,50,000; excess carried to allotment = ₹1,80,000 − ₹1,50,000 = ₹30,000.
3. Allotment due = 50,000 × 5 = ₹2,50,000; cash receivable on allotment = ₹2,20,000.
4. X, allotted 1,000 shares, had applied for 1,200 (1,000 × 6/5) and pays nothing after application. Excess available = (1,200 − 1,000) × 3 = ₹600; allotment unpaid = ₹5,000 − ₹600 = ₹4,400; call unpaid = ₹4,000.
5. Forfeiture entry: Share Capital Dr ₹10,000, Securities Premium Dr ₹2,000 (premium never received); To Calls in Arrears ₹8,400; To Share Forfeiture ₹3,600 (= 1,200 × ₹3 actually received).
6. The 1,000 shares are reissued at ₹8 fully paid: Bank ₹8,000 + Share Forfeiture ₹2,000 = Share Capital ₹10,000. Discount ₹2,000 < ₹3,600, so it is allowed.
7. Transfer to Capital Reserve = ₹3,600 − ₹2,000 = ₹1,600.

Example 2 — Schedule III (Division II) balance sheet extract. Given: equity share capital ₹20,00,000; securities premium ₹3,00,000; retained earnings ₹7,50,000; 9% debentures redeemable in 2031 ₹10,00,000; trade payables ₹4,20,000; provision for tax ₹1,30,000; PPE (net) ₹28,00,000; capital work-in-progress ₹2,00,000; inventories ₹6,00,000; trade receivables ₹5,50,000; cash and cash equivalents ₹4,50,000.

Example 3 — Dividend, EPS and CSR. A company earns PAT ₹80,00,000 on 10,00,000 equity shares of ₹10 fully paid, declares a 25% final dividend, and had average net profit under Section 198 of ₹6,00,00,000 over the three preceding years (turnover ₹1,200 crore, so Section 135 applies).

1. EPS = 80,00,000 ÷ 10,00,000 = ₹8.00.
2. Dividend = 25% × ₹1,00,00,000 = ₹25,00,000; DPS = ₹2.50.
3. Payout ratio = 2.50 ÷ 8.00 = 31.25%; retained earnings addition = ₹55,00,000.
4. CSR obligation = 2% × ₹6,00,00,000 = ₹12,00,000 for the year; any shortfall must be explained in the Board's Report and transferred as prescribed.
5. The proposed final dividend is not a liability at the year-end; it is disclosed in the notes and accounted when approved at the AGM.

Example 4 — Managerial remuneration and commission. Net profit computed under Section 198 before any remuneration is ₹60,00,000.

1. One managing director: maximum = 5% × 60,00,000 = ₹3,00,000; all directors together = 11% × 60,00,000 = ₹6,60,000.
2. If a manager's commission is 5% of profit after charging such commission: 60,00,000 × 5/105 = ₹2,85,714 (check: 60,00,000 − 2,85,714 = 57,14,286; 5% of it = ₹2,85,714).
3. Any amount beyond the statutory limit requires shareholders' approval by resolution; where profits are inadequate, Schedule V ceilings apply instead.

Example 5 — AS compared with Ind AS, same facts.

Where it is used

• Statutory reporting and audit: Big Four and Indian firms (Deloitte, PwC, EY, KPMG, SRBC, BSR, Walker Chandiok) staff audit and financial-reporting teams largely on Schedule III mapping and Ind AS adjustments.
• Corporate finance and controllership: listed companies such as Infosys, Reliance, TCS and HUL publish Ind AS standalone and consolidated statements quarterly under SEBI LODR; analysts read exactly these line items.
• Secretarial and compliance roles: company secretaries handle AOC-4 and MGT-7 filings, dividend declaration, unpaid dividend transfers to the IEPF and CSR reporting.
• Banking and credit appraisal: credit analysts at SBI, HDFC Bank and rating agencies (CRISIL, ICRA, CARE) spread Schedule III statements to compute leverage and coverage ratios.
• Shared services and GCC roles: record-to-report teams in Bengaluru, Pune and Hyderabad prepare Ind AS schedules, OCI workings and consolidation packs for Indian and global entities.
• Equity markets and IPOs: merchant bankers restate three years of accounts under Ind AS for the offer document; share-issue accounting feeds directly into capital structure disclosures.

Interview questions

• Q: What is the difference between called-up and paid-up capital? A: Called-up capital is the portion of subscribed capital the company has demanded; paid-up capital is what shareholders have actually paid, i.e. called-up capital less calls in arrears.
• Q: Can securities premium be used to pay dividend? A: No. Section 52 restricts it to specified uses such as fully paid bonus shares, writing off preliminary and issue expenses, premium on redemption and buy-back.
• Q: On forfeiture, why is Securities Premium sometimes debited and sometimes not? A: It is debited only if the premium was never received; a premium already collected cannot be cancelled.
• Q: How much of the forfeited amount goes to Capital Reserve? A: Only the amount relating to shares actually reissued, reduced by the discount allowed on that reissue; the rest stays in Share Forfeiture.
• Q: Why is debenture interest treated differently from preference dividend? A: Interest is a contractual charge against profit, payable even in a loss year and deductible for tax; dividend is an appropriation of divisible profit.
• Q: Which companies need not prepare a cash flow statement? A: One Person Companies, small companies and dormant companies under Section 2(40).
• Q: What are the three Divisions of Schedule III? A: Division I for companies applying AS, Division II for Ind AS companies and Division III for NBFCs applying Ind AS.
• Q: What is other comprehensive income and give two examples? A: Income and expense not routed through profit or loss — for instance actuarial gains or losses on defined benefit plans (never reclassified) and the effective portion of cash flow hedges (later reclassified).
• Q: Which companies must apply Ind AS today? A: Listed companies and unlisted companies with net worth of ₹250 crore or more (₹500 crore from FY 2016-17, the rest from FY 2017-18), their group companies, and NBFCs above the same thresholds; banks and insurers remain deferred.
• Q: Is Ind AS the same as IFRS? A: No — Ind AS is converged with IFRS but retains carve-outs and carve-ins, so a few treatments and options differ.
• Q: How is proposed final dividend treated in the accounts? A: It is not a liability at the reporting date; it is disclosed in the notes and recognised when shareholders approve it.
• Q: What happens to dividend that remains unclaimed? A: It is moved to an Unpaid Dividend Account and, if unclaimed for seven years, transferred with the underlying shares to the Investor Education and Protection Fund.

Common mistakes

• Refunding the whole excess application money in a pro-rata issue instead of adjusting it against allotment and calls first.
• Crediting the full called-up amount to Share Forfeiture on forfeiture, instead of only the amount actually received.
• Transferring the entire forfeited balance to Capital Reserve even when only some shares have been reissued.
• Allowing a reissue discount greater than the amount forfeited on those shares, or forgetting that the reissued shares are credited as fully paid.
• Showing a debit balance of retained earnings on the assets side, or presenting a horizontal balance sheet — Schedule III allows only the vertical format.
• Treating securities premium or capital reserve as free reserves available for dividend, and providing for proposed dividend as a current liability.
• Mixing up AS and Ind AS presentation — writing "Reserves and Surplus" in a Division II balance sheet, or routing OCI items through profit or loss.

Related topics

Share capital transactions: bonus, rights and buy-back · Key Ind AS standards explained · Consolidated financial statements · Final accounts · Amalgamation and reconstruction · Accounting principles and the accounting cycle