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Preparation of Final Accounts – Adjustments & Closing Entries

Introduction

Building the Balance Sheet and P&L requires handling "Adjustments" given outside the Trial Balance.

1. Common Adjustments

A. Provision for Tax

  • P&L: Debit (Tax Expense).
  • Balance Sheet: Current Liabilities (Short-term Provisions).

B. Proposed Dividend

  • AS-4 (Revised): It is NOT a liability until declared in AGM.
  • Treatment: Do NOT show in Balance Sheet. Show in Notes to Accounts as Contingent Liability.

C. Dividend Payment (Interim/Final)

  • Interim Dividend: Paid during the year. Shown in P&L Appropriation (Reserves & Surplus).
  • Corporate Dividend Tax (CDT): Abolished in India (w.e.f 2020), but if syllabus includes old rules, it's paid by company. (We assume current rules: No CDT).

D. Transfer to Reserves

  • P&L: Reduction from Surplus.
  • Balance Sheet: Addition to General Reserve.

2. Managerial Remuneration (Section 197)

Remuneration payable to Directors/Managers is an Expense (Employee Benefits).

Maximum Limits (as % of Net Profit):

  1. Overall Limit: 11% of Net Profits.
  2. One Managing Director/Whole Time Director: 5%.
  3. More than one MD/WTD: 10% (Aggregate).
  4. Part-Time Directors (If NO MD/WTD): 3%.
  5. Part-Time Directors (If Company has MD/WTD): 1%.

Calculation of "Net Profit" for Remuneration (Sec 198):

  • Start with Gross Profit.
  • Add: Subsidies, Profit on Sale of Assets (Original Cost basis).
  • Less: All normal charges, salaries, repairs, Interest.
  • Do NOT Deduct: Income Tax, Provision for Tax, Transfer to Reserves, Voluntary Compensation.

3. Important Closing Entries

1. For Provision for Tax:

Statement of P&L ...Dr             (Amount)
    To Provision for Tax A/c       (Amount)

2. For Transfer to General Reserve:

Surplus i.e. Balance in SPL ...Dr  (Amount)
    To General Reserve A/c         (Amount)

3. For Dividends Paid:

Retained Earnings ...Dr            (Amount)
    To Bank A/c                    (Amount)

Exam Notes: Writing the Answer

Problem Tip: If the question asks to "Prepare Final Accounts":

  1. Start with Notes to Accounts.
  2. Calculate Share Capital, Reserves, Long-term Borrowings, etc. in Notes.
  3. Then fill the Main Format (Schedule III).
  4. Managerial Remuneration: Always check if Net Profit is sufficient. If Loss, minimum remuneration rules (Schedule V) apply (Usually ignored in basic B.Com problems).

Summary

  • Tax: Short-term Provision.
  • Dividend: Contingent Liability (Proposed).
  • Managerial Remuneration: Max 11% of Net Profit (Sec 198).

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